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Exhibit 13
SELECTED FINANCIAL DATA
The selected consolidated financial data for the years ended June 30, 1998, 1999
and 2000 have been derived from the Company's financial statements included
elsewhere in this Annual Report which have been audited by Deloitte and Touche,
LLP, independent certified public accountants, whose report thereon is also
included elsewhere in this Annual Report. The selected consolidated financial
data for the six months ended June 30, 1996 and the years ended December 31,
1995 and 1997 have been derived from audited financial statements of the Company
which are not included in this Annual Report. To assist the reader in the
analysis of results of operations, unaudited results of operations for the
twelve months ended June 30, 1996 and the six months ended June 30, 1995 are
also provided. The selected consolidated financial data set forth below should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements
and Notes thereto elsewhere in this Annual Report. The earnings per share
amounts prior to fiscal year 1998 have been restated to comply with Statement of
Financial Accounting Standards No. 128 "Earnings per Share" (SFAS 128) as
required. For further discussion of earnings per share and the impact of SFAS
128, see Note 1 to the consolidated financial statements. The financial
information for the periods presented below includes all adjustments necessary
for a fair presentation of results of operations.
TWELVE
MONTHS SIX MONTHS ENDED
YEAR ENDED ENDED JUNE 30, YEAR ENDED JUNE 30,
DECEMBER 31, JUNE 30, ------------------- -------------------------------------------
1995 1996 1995 1996 1997 1998 1999 2000
-------- --------- ------- --------- --------- -------- -------- --------
STATEMENT OF OPERATIONS:
Revenues:
Processing, servicing and
merchant discount ............. $ 49,330 $ 59,053 $23,581 $ 33,305 $ 104,522 $159,255 $201,059 $261,621
License fees ..................... -- 10,970 -- 10,970 33,088 28,952 15,975 16,818
Maintenance fees ................. -- 1,978 -- 1,978 22,567 25,848 17,746 18,752
Other ............................ -- 4,788 -- 4,787 16,268 19,809 15,351 13,004
-------- --------- ------- --------- --------- -------- -------- --------
Total revenues ........... 49,330 76,789 23,581 51,040 176,445 233,864 250,131 310,195
Expenses
Cost of processing, servicing and
support ....................... 30,258 51,236 14,461 35,438 102,721 129,924 146,704 182,540
Research and development ......... 6,876 13,765 3,019 9,907 32,869 36,265 21,085 35,631
Sales and marketing .............. 7,242 21,349 3,060 17,167 32,670 28,839 32,354 44,782
General and administrative ....... 4,134 9,598 1,915 7,338 18,707 20,677 31,466 40,931
Depreciation and amortization .... 2,485 8,246 1,194 6,997 24,919 24,999 24,630 42,830
In-process research and
development ................... -- 122,358 -- 122,358 140,000 719 2,201 6,900
Charge for stock warrants ........ -- -- -- -- -- 32,827 -- --
Exclusivity amortization ......... -- -- -- -- 5,958 2,963 -- --
-------- --------- ------- --------- --------- -------- -------- --------
Total expenses ........... 50,995 266,552 23,649 199,205 357,844 277,213 258,440 353,614
Net gain on dispositions
of assets ..................... -- -- -- -- 6,250 36,173 4,576 --
-------- --------- ------- --------- --------- -------- -------- --------
Income (loss) from operations .... (1,665) (149,763) (68) (148,165) (175,149) (7,176) (3,733) (43,419)
Interest:
Income ......................... 2,135 3,104 535 1,695 2,153 3,464 2,799 7,689
Expense ........................ (645) (484) (330) (325) (834) (632) (618) (8,027)
-------- --------- ------- --------- --------- -------- -------- --------
Income (loss) before income tax .. (175) (147,143) 137 (146,831) (173,830) (4,344) (1,522) (43,757)
Income tax expense (benefit) ..... 40 (8,650) 62 (8,628) (12,017) (641) (12,009) (11,437)
-------- --------- ------- --------- --------- -------- -------- --------
Income (loss) before
extraordinary item ............ (215) (138,493) 75 (138,203) (161,813) (3,703) 10,457 (32,320)
Extraordinary item ............... -- (364) -- (364) -- -- -- --
-------- --------- ------- --------- --------- -------- -------- --------
Net income (loss) ................ $ 215 $(138,857) $ 75 $(138,567) $(161,813) $ (3,703) $ 10,457 $(32,320)
======== ========= ======= ========= ========= ======== ======== ========
Diluted income (loss) per common
share before extraordinary
item ............................ $ (0.01) $ (4.14) $ -- $ (3.69) $ (3.44) $ (0.07) $ 0.18 $ (0.61)
Diluted income (loss) per
common share .................... $ (0.01) $ (4.15) $ -- $ (3.70) $ (3.44) $ (0.07) $ 0.18 $ (0.61)
Equivalent number of shares
outstanding ..................... 28,219 33,435 29,299 37,420 46,988 55,087 56,529 53,367
BALANCE SHEET DATA:
Working capital .................. $ 81,792 $ 45,496 $10,481 $ 45,496 $ 20,002 $ 78,238 $ 24,245 $178,761
Total assets ..................... 115,642 196,230 31,696 196,230 223,836 250,112 252,761 713,114
Long-term obligations,
less current portion .......... 7,282 8,324 7,735 8,324 8,401 6,467 3,882 173,236
Total stockholder's equity ....... 99,325 137,675 16,493 137,675 148,644 183,854 186,903 445,894
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
We are the leading provider of electronic billing and payment services.
We operate our business through three independent but inter-related divisions:
- - Electronic Commerce;
- - Investment Services; and
- - Software
Our Electronic Commerce business provides services that allow consumers
to:
- - Receive electronic bills through the internet;
- - Pay any bill - electronic or paper - to anyone; and
- - Perform customary banking transactions, including balance inquiries,
transfers between accounts and on-line statement reconciliations.
We currently provide electronic billing and payment services for over
3.5 million consumers. Our services are available through over 350 sources,
including:
- - 23 of the 25 largest banks in the United States;
- - 8 of the top 10 brokerage firms in the United States;
- - Internet portals;
- - Internet-based banks;
- - Internet financial sites such as Quicken.com; and
- - Personal financial management software such as Quicken and Microsoft
Money.
We have developed contracts with over 1,100 merchants nationwide that
enable us to remit 58% of all of our bill payments electronically. As of June
30, 2000, we were processing approximately 16 million transactions per month and
for the year ended June 30, 2000, we processed nearly 170 million transactions.
In March 1997, we introduced electronic billing - "E-Bill" - which
enables merchants to deliver billing information as well as marketing materials
to their customers electronically over the Internet. Through June 30, 2000, we
have placed 93 billers into production and are now delivering in excess of
94,000 electronic bills monthly through E-Bill. We derive revenue from our
billers on a per bill presented basis.
Currently, when a customer instructs us to pay a bill, we have the
ability to process the payment either by electronic funds transfer, by paper
check, or by draft drawn on the customer's account. Our patented bill payment
processing system in Norcross, Georgia determines the preferred method of
payment based on a credit analysis of the customer, assessment of the customer's
payment history, the amount of the bill to be paid and other relevant factors.
If the results of the credit analysis are favorable, we will assume the
risk of collection of the funds from the customer's account, and if we have an
electronic connection to the merchant, the remittance will be sent
electronically. Otherwise, the remittance will be sent to the merchant by a
paper check or draft drawn directly on the customer's checking account. In an
electronic remittance, the funds are transmitted electronically to the merchant
with a customer's account number included as an addenda record. For a paper
draft, the customer's name, address, and account number are printed on the face
of the check. In addition, our processing system provides the ability to
aggregate multiple electronic and paper remittances due to merchants. Thus, if
multiple payments are going to the same merchant on the same day, we may send
one check for the sum of these payments and include a remittance statement that
provides the customers' names, addresses, account numbers, and payment amounts.
Our strategy is to drive operational efficiency and improve profitability by
increasing the percentage of transactions we process electronically. Since June
1998, we have increased our electronic payments ratio from 32% of total payments
processed to 58% by June 2000.
Our traditional financial institution pricing structure was based
primarily on subscriber fees, which grew roughly proportionally to the number of
subscribers added, regardless of activity. During fiscal 2000, we announced a
new pricing structure available to our largest financial institution customers.
The new pricing program includes a
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fee per transaction processed, a small per subscriber fee and a fixed monthly
fee to cover our infrastructure costs. Both programs provide for monthly minimum
fees. Until we see significant increases in the number of electronic billing and
payment customers enrolling through financial institutions, we do not anticipate
that this pricing change will have a significant impact on our revenues. Once
the subscriber growth rates begin to accelerate and financial institutions adopt
the new pricing program, revenue growth will become more dependent upon customer
usage of our services. As of June 30, 2000, less than five financial
institutions had adopted the new pricing program.
We are also a leading provider of institutional portfolio management
and information services and financial application software. Our Investment
Services business offers portfolio accounting and performance measurement
services to investment advisors, brokerage firms, banks and insurance companies
and financial planning application software to financial planners.
Our portfolio management systems solution includes:
- - data conversion;
- - personnel training;
- - trading system;
- - graphical client reporting;
- - performance measurement;
- - technical network support and interface setup; and
- - Depository Trust Corporation processing.
Our financial planning software applications include:
- - retirement and estate planning modules;
- - cash flow, tax and education planning modules;
- - an asset allocation module; and
- - an investment manager performance database system.
Our Software businesses provide electronic commerce and financial
applications software and services for businesses and financial institutions. We
design, market, license and support the following software applications, among
others:
- - i-Solutions
The i-Solutions product line, a set of electronic billing software
products developed for various industry segments, was added through the
acquisition of BlueGill Technologies, Inc. in April 2000. These
products allow billers to install and launch an electronic billing
product, send e-mail notifications and present electronic bills through
the Internet, and connect to a variety of bill aggregators and payment
methods. Each product includes an electronic billing web site template
that is unique to a specific industry segment. Using the template as a
sample design of their Internet billing site, our customers spend less
time developing and designing the look and feel of their Internet
billing sites, which accelerates the product implementation process.
The billing software is tightly integrated with our electronic payment
processing system, thereby providing synergy with our Electronic
Commerce products as well.
- - Electronic Funds Transfer.
Through our Paperless Entry Processing System Plus software, we offer
an online, real-time system providing an operational interface for
originating and receiving payments through the automated clearinghouse.
The automated clearinghouse is a nationwide electronic clearing and
settlement system that processes electronically originated credit and
debit transactions among participating depository institutions. These
electronic transactions are substitutes for paper checks and are
typically used for recurring payments like direct deposit payroll
payments and corporate payments to contractors and vendors, debit
transfers that consumers make to pay insurance premiums, mortgages,
loans and other bills, and business to business payments. You may
obtain additional information at http://www.federalreserve.gov. We do
not maintain a direct connection with the automated clearinghouse, but
rather, clear our transactions through KeyBank, N.A., under the terms
of an automated clearinghouse agreement.
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- - Reconciliation
Through our RECON-PLUS software, we provide United States banks,
international banks and corporate treasury operations with automated
check and non-check reconciliations in high volume, multi-location
environments. Some of the services provided by RECON-PLUS are automated
deposit verification, consolidated bank account reconciliation and cash
mobilization, immediate and accurate funds availability data, and
improved cash control.
- - Other
We also provide software solutions such as regulatory compliance
software for Form 1099 processing, safe box accounting and other
applications.
During the fiscal year ended June 30, 2000, Electronic Commerce
accounted for 69% of our revenues, Investment Services for 17% and Software for
the remaining 14%.
Our current business was developed through expansion of our core
Electronic Commerce business and the acquisition of companies operating in
similar or complementary businesses. Our major acquisitions include Servantis
Systems Holdings, Inc. in February 1996, Security APL, Inc. in May 1996, Intuit
Services Corporation in January 1997, Mobius Group, Inc. in March 1999, and
BlueGill Technologies, Inc. in April 2000. On February 15, 2000, we announced
the planned acquisition of MSFDC, L.L.C (TransPoint), which closed in September
2000. On April 27, 2000, we announced a 10-year strategic agreement with Bank of
America that includes our purchase of the bank's electronic bill payment assets.
We expect this agreement to close early in the quarter ended December 31, 2000.
During fiscal 1998, we made the decision to sell some of our software
businesses that did not directly promote our strategic direction. These
divestitures included the sale of our recovery management business in August
1997, our item processing business in March 1998, our wire and electronic
banking businesses in April 1998, our leasing business in July 1998, our
mortgage business in September 1998 and our imaging business in October 1998.
While we have no pending agreements to dispose of any other of our software
businesses, we do receive offers to purchase these businesses from time to time.
RESULTS OF OPERATIONS
The following table sets forth percentages of revenue represented by
consolidated statements of operations data:
YEAR ENDED JUNE 30,
-----------------------------
1998 1999 2000
----- ----- -----
Total revenues .............................. 100.0% 100.0% 100.0%
Expenses:
Cost of processing, servicing and
support ................................ 55.6 58.7 58.8
Research and development ................ 15.5 8.4 11.5
Sales and marketing ..................... 12.3 12.9 14.4
General and administrative .............. 8.8 12.6 13.2
Depreciation and amortization ........... 10.7 9.8 13.8
In-process research and development ..... 0.3 0.9 2.2
Charge for stock warrants................ 14.0 -- --
Exclusivity amortization................. 1.3 -- --
----- ----- -----
Total expenses ..................... 118.5 103.3 114.0
Net gain on dispositions of assets ...... 15.4 1.8 --
----- ----- -----
Loss from operations..................... (3.1) (1.5) (14.0)
Interest:
Income ............................... 1.5 1.1 0.2
Expense............................... (0.3) (0.2) (0.3)
----- ----- -----
Loss before income taxes................. (1.9) (0.6) (14.1)
Income tax benefit....................... (0.3) (4.8) (3.7)
----- ----- -----
Net income (loss)........................ (1.6)% 4.2% (10.4)%
===== ===== =====
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YEARS ENDED JUNE 30, 1999 AND 2000
Revenues. Our total reported revenue increased by 24%, from $250.1
million for the year ended June 30, 1999, to $310.2 million for the year ended
June 30, 2000. On a pro forma basis, net of the divestitures of our mortgage
business in September 1998 and our imaging business in October 1998, and
adjusting for the acquisition of Mobius Group in March 1999 and BlueGill in
April 2000, revenue increased 22%, from $252.9 million for the year ended June
30, 1999, to $308.5 million for the year ended June 30, 2000. The increase in
pro forma revenue was driven by increases of 26% in our Electronic Commerce
segment, 25% in our Investment Services segment, and 1% in our Software segment.
Growth in Electronic Commerce revenue is driven primarily by an increase in
subscribers from nearly 3.0 million at June 30, 1999 to over 3.5 million at June
30, 2000. It should be noted that the 3.5 million subscriber number is net of
approximately 0.4 million subscribers utilizing old legacy or non Year 2000
compliant front ends that were purged by financial institutions during the six
months ended December 31, 2000. Pro forma growth in Investment Services revenue
is driven primarily by an increase in portfolios managed from approximately
700,000 at June 30, 1999 to approximately 950,000 at June 30, 2000. In spite of
dampened demand caused by customer focus on Year 2000 projects early in the
fiscal year, the Software segment was able to achieve nominal growth on a pro
forma basis for the year ended June 30, 2000.
Reported processing and servicing revenue increased by 30%, from $201.1
million for the year ended June 30, 1999, to $261.6 million for the year ended
June 30, 2000. On a pro forma basis, adjusting for the acquisition of Mobius
Group in March 1999, processing and servicing revenue increased by 27%, from
$205.4 million for the year ended June 30, 1999, to $261.9 million for the year
ended June 30, 2000. Pro forma growth in processing and servicing revenue is
primarily the result of the previously mentioned growth in subscribers in our
Electronic Commerce segment and portfolios managed in our Investment Services
segment. Our processing agreements with portals allow for a free trial period
for subscribers who enroll through the portal. Because these subscribers are not
generating revenue during this free period, we do not count them in our active
subscriber base. Additionally, we now have 93 billers in production that
presented approximately 94,000 bills in the month ended June 30, 2000. The
number of bills we presented electronically has increased by 52% since the month
ended March 31, 2000 and is up significantly from just over 13,000 per month at
June 30, 1999. When combined with a new transaction based pricing model that we
have made available to our largest customers, it will become increasingly more
difficult to correlate Electronic Commerce revenue solely to the number of
subscribers, with transactions processed becoming an additional indicator. We
exited the quarter ended June 30, 2000 processing about 16 million transactions
on a monthly basis, compared to about 12 million as of June 30, 1999.
Reported license fee revenue increased by 5%, from $16.0 million for
the year ended June 30, 1999 to $16.8 million for the year ended June 30, 2000.
On a pro forma basis, adjusting for the impact of divested software businesses
and the acquisition of BlueGill in April 2000, license revenue declined by 3%
from $15.7 million for the year ended June 30, 1999 to $15.3 million for the
year ended June 30, 2000. In spite of dampened demand caused by customer focus
on Year 2000 projects early in the fiscal year, the Software segment was able to
generate fairly consistent license sales on a year over year basis. With the
addition of BlueGill's i-Solutions product line to the Software segment, we are
expecting license revenue to grow again in fiscal 2001.
Reported maintenance fee revenue increased by 6%, from $17.7 million
for the year ended June 30, 1999, to $18.8 million for the year ended June 30,
2000. On a pro forma basis, adjusting for the impact of divested software
businesses and the acquisition of BlueGill, maintenance revenue increased by
10%, from $16.9 million for the year ended June 30, 1999, to $18.6 million for
the year ended June 30, 2000. This increase is due to first year maintenance
fees from new maintenance paying customers added late in fiscal 1999 and
throughout fiscal 2000 and moderate price increases, offset by maintenance
retention rates in the mid to upper 80% range for the renewal maintenance base
in the Software segment.
Reported other revenue, consisting mostly of consulting fees, decreased
by 16%, from $15.4 million for the year ended June 30, 1999, to $13.0 million
for the year ended June 30, 2000. On a pro forma basis, adjusting for the impact
of divested software businesses and the acquisitions of Mobius Group and
BlueGill, other revenue decreased by 15%, from $14.9 million for the year ended
June 30, 1999, to $12.7 million for the year ended June 30, 2000. The decrease
in pro forma revenue is due primarily to the decline in software implementations
and other software consulting engagements resulting from customer software
implementation freezes earlier in fiscal 2000 in preparation for and follow up
from the Year 2000.
Cost of Processing, Servicing and Support. Our processing, servicing
and support costs consist primarily of data processing costs, customer care,
technical support, third party transaction fees and consulting delivery costs.
Our cost of processing, servicing and support was $146.7 million or 58.7% of
total revenue for the year ended June
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30, 1999, and was $182.5 million or 58.8% of total revenue for the year ended
June 30, 2000. Cost of processing, servicing and support as a percentage of
servicing only revenue (all revenue except license) was 62.7% for the year ended
June 30, 1999, and was 62.2% for the year ended June 30, 2000. From an
efficiency perspective, our ratio of electronic payments to total payments has
improved from 49% at June 30, 1999 to 58% at June 30, 2000. Electronic payments
carry a significantly lower variable cost per unit than paper based payments.
Additionally, we have seen improvements from the leverage inherent in converting
two-thirds of our subscribers from two legacy systems to our Genesis processing
system. These improvements, however, are offset by E-Bill implementation costs
as we continue to move an increasing number of billers into live production and
by transaction costs generated by portal subscribers operating within their free
period. Additionally, throughout the year ended June 30, 2000, we invested
significantly in quality improvement and infrastructure improvement initiatives
to prepare for future growth.
Research and Development. Our research and development costs consist
primarily of salaries and consulting fees paid to software engineers and
business development personnel and are stated net of capitalized software
development costs. Research and development costs were $21.1 million or 8.4% of
total revenue for the year ended June 30, 1999, and were $35.6 million or 11.5%
of total revenue for the year ended June 30, 2000. Adjusted for capitalized
development costs of $7.4 million for the year ended June 30, 1999 and $7.9
million for the year ended June 30, 2000, our gross research and development
costs were $28.5 million, or 11.4% of total revenue for the year ended June 30,
1999, and $43.5 million, or 14.0% of total revenue for the year ended June 30,
2000. While $0.9 million of the increase is attributable to BlueGill, we have
continued to invest a significant portion of our revenue into research and
development activities in all business segments in anticipation and support of
revenue growth, quality enhancement and efficiency improvement opportunities.
Sales and Marketing. Sales and marketing costs were $32.4 million or
12.9% of total revenue for the year ended June 30, 1999, and were $44.8 million
or 14.4% of total revenue for the year ended June 30, 2000. While BlueGill
accounts for $2.3 million of the increase, we have increased our sales staff to
sign additional billers in support of our electronic billing offerings and we
have increased program management staff in support of new non-subscriber based
products designed to leverage our existing electronic payment infrastructure. We
expect to incur increased promotional expenses in support of electronic billing
and payment offerings through financial institutions and Internet portals in a
continuing effort to accelerate the growth of subscribers in our Electronic
Commerce segment.
General and Administrative. Our general and administrative expenses
consist primarily of salaries for administrative, executive, accounting and
finance, legal, and human resource associates. General and administrative
expenses were $31.5 million or 12.6% of total revenue for the year ended June
30, 1999, and were $40.9 million or 13.2% of total revenue for the year ended
June 30, 2000. Aside from the $0.9 million of added cost directly attributable
to BlueGill and a full year of Mobius Group operations, the increase in general
and administrative expense is due principally to an increase in facilities costs
resulting from upgraded facilities in Dublin, Ohio and Jersey City, New Jersey
and a new facility in Phoenix, Arizona; an increase in our allowance for
estimated doubtful accounts consistent with realized revenue growth; and
increased administrative staff required to manage growth in all areas of the
company.
Depreciation and amortization. Our depreciation and amortization costs
increased from $24.6 million for the year ended June 30, 1999, to $42.8 million
for the year ended June 30, 2000. The increase was primarily the result of
amortization of intangible assets resulting from the Mobius Group and BlueGill
acquisitions. The amount of the increase directly attributable to BlueGill alone
was $10.2 million. The remaining increase is the result of capital spending in
support of continued growth and quality improvement initiatives. With the
acquisitions of BlueGill and TransPoint, and the completion of the asset
purchase from Bank of America, we expect significant increases in depreciation
and amortization from the resulting increase in tangible and intangible assets.
In-Process Research and Development. The in-process research and
development charge of $2.2 million for the year ended June 30, 1999 resulted
from our purchase of the Mobius Group in March 1999 and the charge of $6.9
million for the year ended June 30, 2000 resulted from our purchase of BlueGill
in April 2000. Please refer to the Notes to Consolidated Financial Statements
included herein for a detailed discussion of these charges.
Interest. Our interest income increased from $2.8 million for the year
ended June 30, 1999 to $7.7 million for the year ended June 30, 2000. The
increase was primarily due to an increase in average cash and investments from
$43.3 million for the year ended June 30, 1999 to $115.5 million for the year
ended June 30, 2000. The increase in average cash and investments is primarily
the result of proceeds from the convertible subordinated debenture offering in
November of 1999.
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Our interest expense increased from $0.6 million for the year ended
June 30, 1999, to $8.0 million for the year ended June 30, 2000. The increase is
due primarily to $172.5 million of 6 1/2% convertible subordinated notes that we
issued in November 1999. None of the convertible debt had been converted into
shares of our common stock as of June 30, 2000.
Income Taxes. For the year ended June 30, 1999 we recorded an income
tax benefit of $12.0 million (effective rate not meaningful), and for the year
ended June 30, 2000 we recorded an income tax benefit of $11.4 million with an
effective rate of 26%. In the year ended June 30, 1999 we recorded a one-time
tax benefit of approximately $12.2 million arising out of our medical benefits
management subsidiary. Net of this one-time benefit, the effective rates in both
years differ from the statutory rate of 35% due to goodwill, in-process research
and development and other non deductible expenses; jobs credits; state income
taxes; and tax exempt interest income.
YEARS ENDED JUNE 30, 1998 AND 1999
Revenues. Our total reported revenue increased by 7%, from $233.9
million for the year ended June 30, 1998 to $250.1 million for the year ended
June 30, 1999. This increase in revenue was due to growth in our Electronic
Commerce and Investment Services segments, offset by a decrease in our Software
segment. The decrease in our Software segment revenue was the result of our
divestitures of certain of our software businesses. We divested our recovery
management business in August 1997, our item processing business in March 1998,
our wire and electronic banking businesses in April 1998, our leasing business
in July 1998, our mortgage business in September 1998 and our imaging business
in October 1998.
On a pro forma basis, excluding the impact of our divested software
businesses, the discontinuance of our web investor business in our Electronic
Commerce segment in June 1998, and revenue from the Mobius Group acquisition in
our Investment Services segment in March 1999, our total revenue increased 21%,
from $204.4 million for the year ended June 30, 1998, to $246.4 million for the
year ended June 30, 1999. The increase in our pro forma revenue from fiscal 1998
to fiscal 1999 was driven by increases of 23% in our Electronic Commerce
segment, 26% in our Investment Services segment and 6% in our Software segment.
Our growth in pro forma Electronic Commerce revenue was driven primarily by
subscriber growth from approximately 2.4 million at June 30, 1998 to nearly 3.0
million at June 30, 1999. Our growth in pro forma Investment Services revenue
was driven primarily by an increase in portfolios managed from approximately
500,000 at June 30, 1998 to approximately 715,000 at June 30, 1999, offset by
lower average revenue per portfolio, as marketing efforts have shifted the mix
of new business toward retail versus institutional portfolios. Although demand
was somewhat dampened due to customer focus on Year 2000 projects, in our
Software segment we had moderate pro forma revenue growth, primarily due to
increased implementations in our automated clearinghouse product line.
Our reported processing and servicing revenue increased by 26%, from
$159.3 million for the year ended June 30, 1998, to $201.1 million for the year
ended June 30, 1999. On a pro forma basis, adjusted for revenue contributed by
our acquisition of Mobius Group in our Investment Services segment in March 1999
and the discontinuance of our web investor business in our Electronic Commerce
segment in June 1998, revenue increased by 26% from $158.4 million for the year
ended June 30, 1998, to $199.2 million for the year ended June 30, 1999. This
growth was primarily the result of increases in our subscribers in our
Electronic Commerce segment and the number of portfolios managed in our
Investment Services segment as discussed in the foregoing paragraph.
Our reported license revenue declined by $13.0 million, from $29.0
million for the year ended June 30, 1998, to $16.0 million for the year ended
June 30, 1999. This decline was primarily due to previously described
divestitures of certain of our software businesses. On a pro forma basis,
excluding the impact of the divested software businesses, our license fee
revenue declined by $1.3 million, from $17.0 million for the year ended June 30,
1998, to $15.7 million for the year ended June 30, 1999. The pro forma decline
in license fee revenue was primarily due to softness in our software sales
resulting from purchasing moratoriums imposed by customers and potential
customers focusing on their Year 2000 issues.
Our reported maintenance revenue declined by $8.1 million, from $25.8
million for the year ended June 30, 1998, to $17.7 million for the year ended
June 30, 1999. On a pro forma basis, excluding the impact of the divestiture of
certain of our software businesses, previously mentioned, our maintenance fee
revenue increased by $0.7 million, from $16.1 million for the year ended June
30, 1998, to $16.8 million for the year ended June 30, 1999. The increase in our
pro forma maintenance revenue was primarily due to first year maintenance
revenue related to new software sales generated in the second half of fiscal
1998 combined with high retention rates and moderate price increases related to
renewal maintenance revenues.
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Our reported other revenue, consisting mainly of consulting fees,
declined by $4.4 million from $19.8 million for the year ended June 30, 1998, to
$15.4 million for the year ended June 30, 1999. On a pro forma basis, excluding
the impact of our divested software businesses, our other revenue increased by
$1.8 million, from $12.9 million for the year ended June 30, 1998, to $14.7
million for the year ended June 30, 1999. The increase was primarily due to
implementations related to new software sales in the second half of fiscal 1998
and early fiscal 1999 and consulting projects related to implementations and
client requested Year 2000 contract-based assistance in our Investment Services
segment.
Cost of Processing, Servicing and Support. The cost of processing,
servicing and support was $129.9 million or 55.6% of total revenue for the year
ended June 30, 1998, and $146.7 million or 58.7% of total revenue for the year
ended June 30, 1999. Our processing, servicing and support cost as a percentage
of servicing only revenue (which includes all revenue except license revenue)
was 63.4% for the year ended June 30, 1998, and 62.7% for the year ended June
30, 1999.
Our revenue growth in our Electronic Commerce segment had slowed as
financial institutions had been focusing on converting our electronic billing an
payment offerings from a PC software-based to a web-based product. Although we
continued to realize cost savings as a result of our successful efforts to
increase the percentage of our bill payment transactions processed
electronically versus paper, during this period we continued to invest in added
capacity in anticipation of expected revenue growth as our customers continue
their web-based conversions and refocus their efforts on marketing these
products to achieve higher subscriber growth. While subscriber growth during the
third and fourth quarters of fiscal 1999 was approximately 6%, Internet-based
subscriber growth in the same quarters exceeded 20%. Additionally, were
incurring the costs of implementing customers from electronic billing and
payment for E-Bill without receiving adequate revenue to fully offset the costs.
Finally, our Yahoo! distribution agreement resulted in an increase in our
operating expenses during the second half of fiscal 1999. These additional
operating costs for professional service programs to support timely and
effective electronic billing and payment offerings by billers, investments in
hardware, software and technical staff to deliver dial-tone quality to an
increasing subscriber base and additional customer care staff and related
training, continued into fiscal year 2000.
Research and Development. Our research and development costs were $36.3
million or 15.5% of total revenue for the year ended June 30, 1998, and $21.1
million or 8.4% of total revenue for the year ended June 30, 1999. The divested
software businesses incurred research and development costs of $8.5 million in
the year ended June 30, 1998. Additionally, upon completion of the base Genesis
Platform in late fiscal 1998 and the transition of resources from year
2000-related projects that may not be capitalized for GAAP purposes, we
capitalized software development costs of $0.7 million for the year ended June
30, 1998, and $7.4 million in the year ended June 30, 1999. As a result, on an
absolute dollar basis and net of divested business units, our total research and
development expenditures and capitalized software development costs remained
consistent at $28.5 million for the years ended June 30, 1998 and 1999. We are
continuing to invest significantly in research and development in all three of
our business segments in anticipation and support of expected revenue growth,
quality improvement and efficiency enhancement opportunities.
Sales and Marketing. Our sales and marketing costs were $28.8 million
or 12.3% of total revenue for the year ended June 30, 1998, and $32.4 million or
12.9% of total revenue for the year ended June 30, 1999. Reduced sales and
marketing expenses resulting from our divested software businesses were replaced
by increased sales expenses related to activities in our electronic billing area
and funding for the creation and launch of a new trade group, the Electronic
Banking association, which is expected to increase the general population's
awareness of, and interest in, the electronic banking industry. Additionally,
during the fourth quarter of fiscal 1999, we experienced a system error that led
some users of our electronic bill payment service to experience intermittent
problems accessing and using the system. In response to this situation, we
provided service fee credits of approximately $1.9 million, over and above
contractually determined penalties, to our financial institution customers.
General and Administrative. Our general and administrative expenses
were $20.7 million, or 8.8% of total revenue for the year ended June 30, 1998,
and $31.5 million or 12.6% of total revenue for the year ended June 30, 1999.
During the year ended June 30, 1999 we recognized several non-recurring charges
including: $1.3 million in real estate expenses related to the sale of a
facility in Columbus, Ohio and a separate move to a new facility in Jersey City,
New Jersey, $0.9 million in charges related to an uncompleted follow-on stock
offering, $0.6 million in charges related to the establishment of a benefits
company intended to better manage future benefit expenses in anticipation of
growth in associates, and charges to third parties to support various other tax
and legal related matters. The divestiture of our various software businesses
has not resulted in a corresponding reduction in existing
9
infrastructure since business specific systems and administrative functions must
remain to support our retained software businesses and our growing Electronic
Commerce and Investment Services businesses.
Depreciation and Amortization. Our depreciation and amortization
expenses were $25.0 million for the year ended June 30, 1998, and $24.6 million
for the year ended June 30, 1999. Our divestiture of several software businesses
resulted in a significant reduction in depreciation and amortization from the
elimination of both tangible and intangible assets. These reductions have been
offset by incremental depreciation resulting from significant capital
investments throughout fiscal 1998 and 1999 in support of the data center
migration to our Norcross, Georgia facility, the development of the Genesis
project and the support of new business initiatives.
In-Process Research and Development. The in-process research and
development charge of $2.2 million incurred in fiscal 1999 resulted from our
purchase of the Mobius Group in March 1999. Please refer to the Notes to
Consolidated Financial Statements included herein for a detailed discussion of
this charge. The in-process research and development charge of $0.7 million in
fiscal 1998 resulted from our acquisition of Advanced Mortgage Technology, Inc.
in October 1997. The related development projects from the AMTI acquisition
continued as planned until the time the software and assets of the mortgage
product line, including these products, were sold in September 1998.
Charge for Stock Warrants. The $32.8 million of charge for stock
warrants in the year ended June 30, 1998 resulted from two separate
transactions. A $32.4 million charge resulted from the vesting of three million
warrants in March 1998 related to a ten year processing agreement with a
strategic partner that we announced in October 1997. A $0.4 million charge
resulted from the vesting of 25,000 warrants in June 1998 related to a five year
consulting agreement with a third party. These non-cash charges were based on a
Black-Scholes option pricing model valuation of the warrants at the date of
vesting. An additional seven million warrants will vest incrementally upon
achievement of a series of certain strategic targets and each incremental
vesting will result in a future non-cash charge based on the fair market value
of our warrants and common stock at the date of vesting.
Exclusivity Amortization. The exclusivity amortization of $3.0 million
in the year ended June 30, 1998 was the final amortization related to an
exclusivity arrangement we entered into with Intuit, Inc. in conjunction with
our purchase of Intuit Services Corporation in January 1997.
Net Gain on Dispositions of Assets. The net gain of $36.2 million in
the year ended June 30, 1998 was the result of several transactions. We recorded
gains on the sales of our recovery management business of $28.2 million, our
item processing business of $3.2 million, and our wire and electronic banking
businesses of $14.7 million. The gains in 1998 were offset by a loss on the sale
of our leasing business of $4.7 million, expected losses on non-cancelable
contracts and real and related costs totaling $1.0 million resulting from the
decision to exit our web investor business and charges totaling $4.2 million for
certain equipment and other assets related primarily to data center
consolidations where we determined that the book value of the assets exceeded
their net realizable value. The net gain of $4.6 million in the year ended June
30, 1999 was also the result of several transactions. We recorded gains on the
sale of our mortgage business of $6.4 million and the sale of a building in
Columbus, Ohio of $1.1 million and offset these gains with a loss on the sale of
our imaging business of $2.9 million.
Interest. Our interest income decreased from $3.5 million for the year
ended June 30, 1998, to $2.8 million for the year ended June 30, 1999. The
reduction was primarily due to a decrease in average cash and investments from
$49.3 million for the year ended June 30, 1998, to $43.3 million for the year
ended June 30, 1999. Cash proceeds from the various software divestitures in
fiscal 1998 and early in fiscal 1999 were significantly offset by a share
repurchase in the first and second quarters of fiscal 1999.
Our interest expense remained constant at $0.6 million for the years
ended June 30, 1998 and 1999. At the end of fiscal 1999 we paid off
approximately $2.5 million in debt related to the sale of our building in
Columbus, Ohio.
Income Taxes. Our effective tax rate was 14.8% for the year ended June
30, 1998 and was not meaningful in the year ended June 30, 1999. The difference
in our effective rate and our statutory rate of 35% in fiscal 1998 was primarily
due to non-deductible in-process research and development expenses,
non-deductible intangible amortization and state and local taxes. In fiscal
1999, we recorded a one-time tax benefit of approximately $12.2 million arising
out of the medical benefits management subsidiary. Net of this one-time benefit,
the resulting tax would have been $0.2 million against a pre-tax loss of $1.6
million. The difference between this adjusted number and the statutory rate of
35% is primarily due to non-deductible in-process research and development
expenses, non-deductible intangible amortization and state and local taxes.
10
SEGMENT INFORMATION
The following table sets forth our operating revenue and operating
income by industry segment for the periods noted. Charges identified as
exclusivity amortization, in-process research and development, charge for stock
warrants, and net gain on dispositions of assets were separated from the
operating results for a better understanding of the underlying performance of
each segment. Explanations of these charges can be found in the discussions
above.
YEAR ENDED JUNE 30,
--------------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
Operating Revenue:
Electronic Commerce ............................. $137,972 $169,443 $213,391
Investment Services ............................. 29,749 39,304 54,792
Software ........................................ 66,143 41,384 42,012
-------- -------- --------
Total Operating Revenue ............... $233,864 $250,131 $310,195
======== ======== ========
Operating Income (Loss):
Operating Income (Loss) Excluding Specific Items:
Electronic Commerce ........................ $ (1,342) $ (5,490) $(20,619)
Investment Services ........................ 6,225 8,093 10,910
Software ................................... 8,393 14,637 (690)
Corporate .................................. (20,116) (23,348) (26,120)
Specific Items:
Exclusivity Amortization .................. (2,963) -- --
In-Process Research and Development ....... (719) (2,201) (6,900)
Charge for Stock Warrants ................. (32,827) -- --
Net Gain on Dispositions of Assets ........ 36,173 4,576 --
-------- -------- --------
Total Operating Income (Loss) ...... $ (7,176) $ (3,733) $(43,419)
======== ======== ========
YEARS ENDED JUNE 30, 1999 AND 2000
Revenue in our Electronic Commerce segment increased by 26%, from
$169.4 million for the year ended June 30, 1999, to $213.4 million for the year
ended June 30, 2000. This increase was primarily due to an increase in
subscribers from nearly 3.0 million at June 30, 1999 to over 3.5 million at June
30, 2000. During the quarter ended September 30, 1999, a few of our financial
institution customers removed approximately 200,000 subscribers from our system
that were either utilizing our low fee maintenance only processing services
through proprietary PC-based front ends or that no longer promoted certain
legacy financial manager software. Additionally, in the quarter ended December
31, 1999, we assisted our financial institution customers in removing another
200,000 subscribers who were utilizing personal financial management software
that was not Year 2000 compliant. The majority of these combined reductions were
on older contracts with lower than average associated monthly fees.
To date, we have signed 157 billers to our E-Bill electronic billing
product offering, and we now have 93 billers in production that presented
approximately 94,000 bills in the month ended June 30, 2000. The number of bills
we presented electronically has increased by 52% since the month ended March 31,
2000 and is up significantly from just over 13,000 per month at June 30, 1999.
Our acquisition of BlueGill is expected to facilitate our efforts to provide
quality billing content, and by simplifying and accelerating the process of
taking bills from paper to electronic. We believe that a complete, round trip
electronic billing and payment experience for an average of four to ten bills
per month per consumer is an important factor in driving subscriber growth. As
of June 30, 2000, we have the potential to process an average of four to five
bills per month for our existing customer base. When combined with a new
transaction based pricing model that we have made available to our largest
customers, it will become increasingly more difficult to correlate Electronic
Commerce revenue solely to the number of subscribers, with transactions
processed becoming an additional indicator. We exited the quarter ended June 30,
2000 processing about 16 million transactions on a monthly basis, compared to
about 12 million as of June 30, 1999.
Our operating loss in our Electronic Commerce segment has increased
from $5.5 million for the year ended June 30, 1999, to $20.7 million for the
year ended June 30, 2000. Last year, in April 1999, we experienced a system
11
error that led some users of our electronic payment service to experience
intermittent problems accessing and using the system. As a result of this
outage, we recorded charges totaling $2.7 million. Net of this charge, the
operating loss in our Electronic Commerce segment would have been $2.8 million
in the year ended June 30, 1999. During the year ended June 30, 2000, we
invested heavily in the following four areas:
- - marketing and price incentives to spur industry growth;
- - compressing the time from E-Bill contract execution to live billing;
- - improved infrastructure and programs that improve quality and
performance; and
- - extension of payment offerings through leverage of our existing payment
infrastructure.
From an efficiency perspective, our ratio of electronic payments to total
payments has improved from 49% at June 30, 1999, to 58% at June 30, 2000.
Electronic payments carry a significantly lower variable cost per unit than
paper based payments. Additionally, we have seen improvements from the leverage
inherent in converting two-thirds of our subscribers from two legacy systems to
our Genesis processing system. However, as subscribers sign up for electronic
billing and payment offerings through portals and other sponsors that offer free
trial periods, we will incur the variable costs associated with processing
transactions from these customers with no revenue to offset the costs. In spite
of the underlying efficiency improvements, these combined investments will
continue to place downward pressure on operating margins into the upcoming
fiscal year.
We have recently made several strategic announcements that will further
enhance the opportunity to facilitate accelerated market adoption of our
electronic billing and payment services. On February 15, 2000, we announced
plans to acquire MSFDC L.L.C (TransPoint), a joint venture involving Microsoft,
First Data Corporation, and Citibank, NA, and we closed the acquisition in
September 2000. With this acquisition, we become the preferred provider of
electronic billing an payment services to customers of Microsoft offered through
its MSN and Money Central offerings, with guaranteed revenue of $120 million
over the next five years. Additionally, we received $60 million of guaranteed
revenue and/or costs savings opportunities through First Data Corporation in the
transaction. On April 5, 2000, we announced a strategic agreement with the U.S.
Postal Service whereby we will become the provider of electronic billing and
payment services through its Internet portal www.usps.com. Finally, on April 27,
2000 we announced a strategic agreement with Bank of America, the largest bank
in the U.S., to offer electronic billing and payment services to its 30
million-customer base. This 10 year agreement comes with annual revenue
guarantees of $50 million, and Bank of America has agreed to invest $45 million
to promote the adoption of our electronic billing and payment services by Bank
of America's customers. The agreement is expected to close early in the quarter
ended December 31, 2000. While there are no guarantees as to the timing or
extent of accelerated adoption of electronic billing and payment services, we
believe that upon completion of the aforementioned transactions, we are better
positioned to maintain our market leadership throughout the accelerated growth
cycle when it occurs.
Revenue in our Investment Services segment increased by 39%, from $39.3
million for the year ended June 30, 1999, to $54.5 million for the year ended
June 30, 2000. On a pro forma basis, assuming that Mobius Group had been in
place for a full year in fiscal 1999, revenue increased by 25%, from $43.9
million for the year ended June 30, 1999, to $54.8 million for the year ended
June 30, 2000. Growth in pro forma revenue is primarily the result of an
increase in portfolios managed from approximately 715,000 at June 30, 1999 to
over 950,000 at June 30, 2000. A significant portion of portfolio growth over
the past year has occurred in retail versus institutional accounts that carry a
lower unit price. In October 1999, we launched our new M-Plan product from
Mobius Group. Consultants, plan sponsors, investment managers and financial
planners use M-Plan for integrating retirement, capital needs, tax, education
and real estate planning needs for their customers. Additionally, in March 2000,
we released revisions to our M-Search product from Mobius Group that allows
Internet based data collection capabilities to the product which will make data
collection on money manager returns and asset allocations more timely.
Reported operating income in our Investment Services segment increased
from $8.1 million for the year ended June 30, 1999, to $10.9 million for the
year ended June 30, 2000. On a pro forma basis, adjusting for the Mobius Group
acquisition, operating income increased from $8.6 million for the year ended
June 30, 1999, to $10.9 million for the year ended June 30, 2000. At mid-year we
reduced the useful lives on three of the intangible assets resulting from the
Mobius Group acquisition, and the accelerated amortization had a pre-tax impact
on earnings of approximately $0.4 million for the year. Additionally, as
indicated earlier, much of the portfolio growth over the past year has occurred
in retail versus institutional accounts that carry a lower unit price, which
places downward pressure on margins as the cost to process this business is not
proportionally lower.
Reported revenue in our Software segment increased by 2%, from $41.4
million for the year ended June 30, 1999, to $42.0 million for the year ended
June 30, 2000. On a pro forma basis, net of the impact of divestitures in
12
fiscal 1999 and the acquisition of BlueGill in fiscal 2000, revenue increased by
1%, from $39.6 million for the year ended June 30, 1999, to $40.1 million for
the year ended June 30, 2000. The revenue results were expected, given
purchasing moratoriums by customers concerned with Year 2000 issues through
calendar year 1999 and into calendar year 2000.
Reported operating income in our Software segment declined from income
of $14.7 million for the year ended June 30, 1999, to a loss of $0.7 million for
the year ended June 30, 2000. On a pro forma basis, net of the impact of
divestitures in fiscal 1999 and the acquisition of BlueGill in fiscal 2000,
operating income declined from $16.2 million for the year ended June 30, 1999,
to $12.4 million for the year ended June 30, 2000. The decrease in pro forma
operating income reflects investments in new initiatives such as the recent
launch of missingmoney.com, a state-sponsored Internet site developed with the
National Association of Unclaimed Property Administrators designed to enable
individuals to find and claim money owed to them from non-refunded deposits,
unclaimed securities and other accounts held by states. Also, incremental
resources have been assigned to our new automated clearinghouse alliance
services program that carries a profit margin that is inherently lower than that
of our traditional product offerings in this area.
The Corporate segment represents charges for legal, human resources,
accounting and finance, and various other unallocated overhead charges. Our
corporate segment operating loss increased from $23.3 million, or 9.3% of total
revenue for the year ended June 30, 1999, to $26.1 million, or 8.4% of total
revenue for the year ended June 30, 2000. During the year ended June 30, 1999 we
incurred $1.9 million of non-recurring costs related to a terminated follow-on
stock offering, the creation of a special-purpose employee medical benefits
management subsidiary, and the sale of a building in Columbus, Ohio. Net of
these one-time charges, our operating loss for the year ended June 30, 1999
would have been $21.4 million, or 8.6% of total revenue. Our adjusted corporate
costs have remained fairly consistent as a percentage of revenue. As subscriber
price promotions allowing for free trial periods begin to expire, and related
customers begin paying for various related electronic billing and payment
services, we believe our corporate costs will begin to decline as a percentage
of revenue as we regain the leverage inherent in our normalized business model.
YEARS ENDED JUNE 30, 1998 AND 1999
Revenue in our Electronic Commerce segment increased by 23%, from
$138.0 million for the year ended June 30, 1998, to $169.4 million for the year
ended June 30, 1999. This increase was primarily due to an increase in
subscribers from approximately 2.4 million at June 30, 1998, to approximately
3.0 million at June 30, 1999.
Our operating loss in our Electronic Commerce segment increased from
$1.3 million for the year ended June 30, 1998, to $5.5 million for the year
ended June 30, 1999. This increase in our operating loss was due to the
temporary slowing of revenue growth caused by financial institutions converting
their PC-based systems to our new web-based platform. At the same time, we
continued to invest in our payment processing infrastructure to enhance our
future quality and efficiency in anticipation of the revenue growth expected
when financial institutions complete their technology conversions and refocus
their marketing efforts on new subscriber growth. These investments included
additional customer care resources geared toward improved quality and
significant E-Bill implementation costs, which were not offset by additional
revenue during the year ended June 30, 1999.
As of June 30, 1999, we had activated 29 billers for our E-Bill product
offering, had an additional 21 billers actively engaged in the implementation
process and had another 14 awaiting implementation. As we continue to activate
additional billers for our complete electronic billing and payment offering, we
expect the number of users to increase, which should drive increased revenue and
operating income growth in the future.
In January 1999, we announced a distribution agreement with Yahoo!
designed to promote on-line billing, payment and electronic banking to Internet
users. Our investments related to this agreement placed downward pressure on
margins in the second half of fiscal 1999 as we prepared for up to one million
additional subscribers to for our services. These investments allowed us to grow
our professional services and customer care staff to support greater deployment
of electronic billing and payment services by billers, as well as expand our
sales and marketing and related training activities.
In April 1999, we experienced a system error that led some users of our
electronic payment service to experience intermittent problems accessing and
using the system. As a result of this outage, we recorded charges totaling $2.7
million. Net of this charge, the operating loss in our Electronic Commerce
segment would have been $2.8 million in the year ended June 30, 1999.
13
Revenues in our Investment Services segment increased by 32%, from
$29.7 million for the year ended June 30, 1998, to $39.3 million for the year
ended June 30, 1999. On March 8, 1999, we acquired Mobius Group to augment the
product line of this segment. Investment consultants and asset managers now use
Mobius Group's M-Vest service to determine the ideal asset allocation for their
clients; use M-Search to determine the idea investment manager candidates' use
CheckFree APL and APL wrap products to provide investment platform and trading
tools; and use either M-Watch or CheckFree APL for their investment oversight
and reporting to the end client. Excluding the effects of the acquisition,
revenue increased by 26%, from $29.7 million for the year ended June 30, 1998,
to $37.4 million for the year ended June 30, 1999. The increase was due
primarily to an increase in the number of institutional portfolios managed from
approximately 500,000 at June 30, 1998, to approximately 715,000 at June 30,
1999, offset somewhat by an increase in the number of retail brokerage accounts
managed which carry a lower unit price.
Operating income in our Investment Services segment increased from $6.2
million for the year ended June 30, 1998, to $8.1 million for the year ended
June 30, 1999. Excluding the effects of the acquisition of Mobius Group,
operating income increased from $6.2 million for the year ended June 30, 1998,
to $8.7 million for the year ended June 30, 1999. This increase was due to the
greater number of portfolios managed, offset somewhat by costs of approximately
$0.9 million related to the moving of the segment's main office in fiscal 1999.
Revenues in our Software segment declined by 37%, from $66.1 million
for the year ended June 30, 1998, to $41.4 million for the year ended June 30,
1999. This decline reflects the impact of the divestiture of several of our
software businesses. Excluding the effects of the divestitures, revenue in our
Software segment increased 6%, from $37.4 million for the year ended June 30,
1998, to $39.6 million for the year ended June 30, 1999. Despite this increase,
our license revenue was lower than anticipated due primarily to purchasing
moratoriums imposed by potential customers who deferred new software purchases
as a result of addressing their internal Year 2000 issues. This slowdown in
license sales was offset by greater maintenance and consulting revenue resulting
form prior license sales.
Operating income in our Software segment increased from $8.4 million
for the year ended June 30, 1998, to $14.6 million for the year ended June 30,
1999. Excluding the effects of the divestitures, operating income increased from
$10.7 million for the year ended June 30, 1998, to $16.4 million for the year
ended June 30, 1999. Of the increase in retained business operating income of
$5.7 million, $2.2 million was the result of the revenue growth previously
described and approximately $2.4 million was a reporting anomaly related to
allocated corporate fixed costs in the fiscal 1998 results. Our pro forma
operating income in the year ended June 30, 1998 was carrying a full burden of
allocated overhead from our Software segment to avoid unreasonably impacting
other segment on a restated pro forma basis. When the effects of the allocations
are ignored, underlying operating profit margins in our Software segment
remained fairly consistent from year to year.
Expenses in our Corporate segment were $20.1 million for the year ended
June 30, 1998 and were $23.3 million for the year ended June 30, 1999. The
fiscal 1999 results included one-time charges of $0.6 million for the formation
of a special-purpose subsidiary created to administer our employee medical
benefits program; $0.4 million in real estate charges incurred in the sale of a
building in Columbus, Ohio; and $0.9 million in charges incurred in the
preparation of a follow-on stock offering that was terminated in June 1998. Net
of these one-time charges, our corporate charges remained relatively consistent
at 8.6% of total revenue in both years.
14
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth a summary of cash flow activity and
should be referred to in conjunction with statements regarding our liquidity and
capital resources:
SUMMARY OF CASH FLOWS FOR
YEAR ENDED JUNE 30,
-------------------------------------
1998 1999 2000
-------- -------- ---------
(In thousands)
Cash flow provided by (used in) operating activities .... $(11,673) $ 25,571 $ 21,016
Cash flow provided by (used in) investing activities .... 12,767 (16,217) (108,935)
Cash flow provided by (used in) financing activities .... 3,355 (33,443) 203,547
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents $ 4,449 $(24,089) $ 115,628
======== ======== =========
As of June 30, 2000, we have $184.6 million in cash, cash equivalents
and short-term investments on hand. Our balance sheet reflects a current ratio
of 3.06 and working capital of $178.8 million. We believe that existing cash,
cash equivalents, and investments will be more than sufficient to meet our
presently anticipated requirements for the foreseeable future. To the extent
that additional capital resources are required, we have access to an untapped
$30.0 million line of credit.
For the year ended June 30, 2000, we generated $21.0 million of cash
flow from operations. Of this amount, $3.6 million represented net proceeds from
trading securities transactions, which GAAP requires us to reflect in cash flow
from operations.
From an investing perspective, we used $39.5 million of cash for the
purchase of property and software, and capitalized $7.6 million of software
development costs. We used $61.0 million for the net purchase of
held-to-maturity securities and another $10.0 million in the purchase of common
stock. Finally, we received $9.2 million in cash and cash equivalents through
the purchase of BlueGill, net of related acquisition costs.
From a financing perspective, we received $166.9 million of net
proceeds from the issuance of $172.5 million in 6 1/2% convertible subordinated
notes and another $25.5 million in proceeds from the exercise of common stock
warrants and the purchase of our common stock by third parties. We received
additional cash of $9.7 million from the exercise of options from our employee
stock option plans and $2.9 million from the purchase of stock from our employee
stock purchase plan. Finally, we used $1.5 million of cash for principal
payments under capital lease obligations.
For the year ended June 30, 1999, we generated $25.6 million of cash
flow from operations. Of this amount, $14.3 represented net proceeds from
trading securities transactions, which are reflected as operating in nature for
accounting purposes.
From an investing perspective, we used $40.4 million of cash for the
purchase of property and software, of which approximately $14.9 million was for
the purchase of land and a building in Dublin, Ohio and another $6.4 million in
leasehold improvements to ready the building for occupancy. The remaining $19.1
million was used for computer equipment, software and leasehold improvements in
support of initiatives to grow the business and improve quality. We received
$18.4 million from the net sale of the various software business divestitures
during the year and the sale of a building in Columbus, Ohio and $14.9 million
from the repayment of a note receivable established in fiscal 1998 related to
the purchase of the Dublin, Ohio facility. We capitalized $8.0 million in
software development costs related to new business initiatives in all three of
our business segments. Additionally, we spent approximately $0.2 million in cash
in connection with the acquisition of Mobius Group, purchased $1.9 million in
held-to-maturity securities and received $1.0 million in proceeds from the sale
of held-to-maturity securities.
From a financing perspective, we used $31.3 million in the purchase of
approximately 4.7 million shares of treasury stock for an average price of
approximately $6.65 per share. We used $3.3 million of cash for principal
payments under capital leases and another $3.6 million to fund an escrow account
to release our obligation for bonds with the Department of Economic Development
of the State of Ohio to facilitate the sale of land an a building in Columbus,
Ohio. We received $2.9 million in proceeds from the exercise of options under
the employee stock option plan and $1.9 million from the purchase of shares
under the employee stock purchase plan.
15
For the year ended June 30, 1998, we used $11.7 million of cash flow in
operating activities. During this year, $24.5 million in net investments in
trading securities were reflected as cash used in operations. From an investing
perspective, we generated $54.9 million of cash from the sale of various
software businesses, $24.0 million from sales and maturities of
available-for-sale investments, $8.9 million from receipt of a purchase price
adjustment related to our Intuit Services Corporation acquisition and $0.3
million from the sales of other assets. Investing receipts were offset by $27.9
million in investment in property additions, primarily for computer and
operational equipment and facilities related to completion of the Genesis
platform, $20.3 million in the purchase of investments, $14.9 million of
investment in a note receivable in conjunction with the purchase of a building
in Dublin, Ohio, $10.0 million as final payment on the purchase of Intuit
Services Corporation; payment of $1.0 million for the purchase of Advanced
Mortgage Technologies, Inc., and $0.7 million in capitalization of software
development costs. From a financing perspective, $5.4 million of cash was
provided by stock option exercises under our employee stock option plans and
stock purchases under our employee stock purchase plan, which was offset by
payments of $1.1 million in satisfaction of an outstanding note payable and $0.9
million in capital lease obligations.
INFLATION
We believe the effects of inflation have not had a significant impact
on our results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In the quarter ended September 30, 1999, we adopted Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." The Statement distinguishes accounting for costs
of computer software developed or obtained for internal use from guidance under
FAS 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed." The adoption of SOP 98-1 did not result in a material
impact on reported results.
In 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." The SAB provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. Although SAB No. 101 does not change any of the accounting
profession's existing rules on revenue recognition, it draws upon existing rules
and explains how the SEC staff applies these rules, by analogy, to other
transactions that existing rules do not specifically address. SAB No. 101, as
amended by SAB No. 101B, becomes effective for the fourth quarter of our fiscal
year 2001. We are in the process of assessing the impact of SAB No. 101 on our
financial statements; however, we do not expect the adoption of SAB No. 101 will
have a material impact on results of operations or financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
that all derivative financial instruments be recognized as either assets or
liabilities in the balance sheet. In June 1999, the FASB issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133", which defers the effective date of
SFAS 133 until the fiscal quarters of all fiscal years beginning after June 15,
2000. In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amends the accounting and
reporting standards of SFAS 133 for certain derivative instruments and certain
hedging activities.
SFAS 133, as amended, requires the Company to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives are either
offset against the change in fair value of assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value is immediately recognized in earnings.
The Company's Investment Policy currently prohibits the use of
derivatives for trading or hedging purposes. Additionally, the Company completed
a review of its contracts and determined that they contained no "imbedded
derivatives" that require separate reporting and disclosure under SFAS 133, as
amended. As such, the adoption of SFAS 133, as amended, on July 1, 2000 will not
have a material impact on results of operations or other comprehensive income.
16
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in our Annual Report include certain forward-looking statements within
the meaning of Section 27A of the Securities Act, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. Those statements include, but may
not be limited to, all statements regarding our and management's intent, belief
and expectations, such as statements concerning our future profitability, and
our operating and growth strategy. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, the factors set forth under the caption "Business - Business Risks"
in the Annual Report on Form 10-K for the year ended June 30, 2000 and other
factors detailed from time to time in our filings with the Securities and
Exchange Commission. One or more of these factors have affected, and in the
future could affect, our businesses and financial results in the future and
could cause actual results to differ materially from plans and projections.
Although we believe that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate. Therefore, there can be no assurance that the forward-looking
statements included in this Annual Report will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as
representations by us or any other person that our objectives and plans will be
achieved. All forward-looking statements made in this Annual Report are based on
information presently available to our management. We assume no obligation to
update any forward-looking statements.
17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CheckFree Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of CheckFree
Corporation (the "Company") and its subsidiaries as of June 30, 1999 and 2000,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended June 30, 1998, 1999, and 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries at
June 30, 1999 and 2000, and the results of their operations and their cash flows
for the years ended June 30, 1998, 1999, and 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
- -------------------------
Atlanta, Georgia
August 7, 2000
F-1
18
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 2000
1999 2000
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 12,446 $ 128,074
Investments .................................................................. 10,266 56,548
Accounts receivable, net ................................................ 45,660 58,308
Prepaid expenses and other assets........................................ 7,800 12,813
Deferred income taxes.................................................... 6,513 9,733
--------- ---------
Total current assets ..................................... 82,685 265,476
PROPERTY AND EQUIPMENT, Net .................................................. 69,823 93,214
OTHER ASSETS:
Capitalized software, net ............................................... 20,059 37,189
Goodwill, net ........................................................... 32,280 213,305
Other intangible assets, net ............................................ 13,595 37,975
Investments.............................................................. 1,875 23,003
Deferred income taxes ................................................... 21,920 29,248
Other noncurrent assets ................................................. 10,524 13,704
--------- ---------
Total other assets ....................................... 100,253 354,424
--------- ---------
$ 252,761 $ 713,114
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................ $ 9,634 $ 10,158
Accrued liabilities ..................................................... 26,971 43,958
Current portion of long-term obligations................................. 1,640 5,955
Deferred revenue ........................................................ 20,195 26,644
--------- ---------
Total current liabilities ................................ 58,440 86,715
ACCRUED RENT AND OTHER........................................................ 3,536 7,269
OBLIGATIONS UNDER CAPITAL LEASES- Less current portion........................ 3,882 736
CONVERTIBLE SUBORDINATED NOTES................................................ -- 172,500
COMMITMENTS (Note 20)
STOCKHOLDERS' EQUITY:
Preferred stock- 15,000,000 authorized shares, $.01 par value;
no amounts issued or outstanding ..................................... -- --
--------- ---------
Common stock- 150,000,000 authorized shares, $.01 par value; issued
57,305,659 and 63,957,859 shares, respectively; outstanding 51,756,278
and 58,414,035 shares, respectively................................... 518 584
Additional paid-in-capital .............................................. 480,385 771,892
Less:
Accumulated deficit .................................................. (294,000) (326,320)
Unearned compensation................................................. -- (262)
--------- ---------
Total stockholders' equity ............................... 186,903 445,894
--------- ---------
$ 252,761 $ 713,114
========= =========
See notes to consolidated financial statements
F-2
19
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
-----------------------------------------------
1998 1999 2000
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
REVENUES:
Processing and servicing ................... $ 159,255 $ 201,059 $ 261,621
License fees ............................... 28,952 15,975 16,818
Maintenance fees ........................... 25,848 17,746 18,752
Other ...................................... 19,809 15,351 13,004
----------- ----------- -----------
Total revenues .............. 233,864 250,131 310,195
EXPENSES:
Cost of processing, servicing and support .. 129,924 146,704 182,540
Research and development ................... 36,265 21,085 35,631
Sales and marketing ........................ 28,839 32,354 44,782
General and administrative ................. 20,677 31,466 40,931
Depreciation and amortization .............. 24,999 24,630 42,830
In-process research and development ........ 719 2,201 6,900
Charge for stock warrants .................. 32,827 -- --
Exclusivity amortization ................... 2,963 -- --
----------- ----------- -----------
Total expenses .............. 277,213 258,440 353,614
Net gain on dispositions of assets ......... 36,173 4,576 --
----------- ----------- -----------
LOSS FROM OPERATIONS ............................ (7,176) (3,733) (43,419)
OTHER:
Interest income ............................ 3,464 2,799 7,689
Interest expense ........................... (632) (618) (8,027)
----------- ----------- -----------
LOSS BEFORE INCOME TAXES ........................ (4,344) (1,552) (43,757)
INCOME TAX BENEFIT .............................. (641) (12,009) (11,437)
----------- ----------- -----------
NET INCOME (LOSS) ............................... $ (3,703) $ 10,457 $ (32,320)
=========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) per common share ......... $ (0.07) $ 0.20 $ (0.61)
=========== =========== ===========
Equivalent number of shares ................ 55,086,742 52,444,375 53,367,339
=========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) per common share ......... $ (0.07) $ 0.18 $ (0.61)
=========== =========== ===========
Equivalent number of shares ................ 55,086,742 56,529,165 53,367,339
=========== =========== ===========
See notes to consolidated financial statements
F-3
20
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NUMBER OF NUMBER OF
SHARES OF COMMON ADDITIONAL SHARES OF TREASURY TOTAL
COMMON STOCK AT PAID-IN TREASURY STOCK AT UNEARNED ACCUMULATED STOCKHOLDERS'
STOCK PAR CAPITAL STOCK COST COMPENSATION DEFICIT EQUITY
---------- ---- -------- ---------- -------- ----------- ------------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE- JUNE 30, 1997 ............... 55,546,321 $555 $454,850 (1,041,552) $ (6,007) $ -- $(300,754) $148,644
Net loss ........................... -- -- -- -- -- -- (3,703) (3,703)
Stock options exercised ............ 708,661 8 2,204 -- (47) -- -- 2,165
Employee stock purchases ........... 109,857 1 1,572 -- -- -- -- 1,573
401(k) match ....................... -- -- -- 78,257 1,692 -- -- 1,692
Warrants issued .................... -- -- 32,827 -- -- -- -- 32,827
Tax benefit associated with
exercise of stock options .. -- -- 656 -- -- -- -- 656
---------- ---- -------- ---------- -------- ----- --------- --------
BALANCE- JUNE 30, 1998 ............... 56,364,839 564 492,109 (963,295) (4,362) (304,457) 183,854
Net income ......................... 10,457 10,457
Stock options exercised ............ 354,758 3 1,605 -- -- -- -- 1,608
Employee stock purchases ........... 48,748 1 968 48,631 1,070 -- -- 2,039
401(k) match ....................... -- -- -- 74,981 963 -- -- 963
Treasury stock acquired ............ -- -- -- (4,709,698) (31,336) -- -- (31,336)
Treasury stock retired ............. (5,549,381) (55) (33,610) 5,549,381 33,665 -- -- --
Issuance of common stock pursuant
to acquisition ............. 537,314 5 17,995 -- -- -- -- 18,000
Tax benefit associated with
exercise of stock options .. -- -- 1,318 -- -- -- -- 1,318
---------- ---- -------- ---------- -------- ----- --------- --------
BALANCE- JUNE 30, 1999 ............... 51,756,278 518 480,385 -- -- -- (294,000) 186,903
Net loss ........................... -- (32,320) (32,320)
Stock options and warrants
exercised .................. 1,795,785 18 35,224 -- -- -- -- 35,242
Employee stock purchases ........... 99,010 1 2,285 -- -- -- -- 2,286
401(k) match ....................... 36,226 -- 1,059 -- -- -- -- 1,059
Issuance of common stock pursuant
to acquisition ............ 4,713,736 47 239,447 -- -- -- -- 239,494
Issuance of restricted stock ....... 13,000 -- 333 -- -- (333) -- --
Amortization of unearned
compensation .............. -- -- -- -- -- 71 -- 71
Tax benefit associated with
exercise of stock options
and warrants ............... -- -- 13,159 -- -- -- -- 13,159
---------- ---- -------- ---------- -------- ----- --------- --------
BALANCE- JUNE 30, 2000 ............... 58,414,035 $584 $771,892 -- $ -- $(262) $(326,320) $445,894
========== ==== ======== ========== ======== ===== ========= ========
See notes to consolidated financial statements
F-4
21
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
-------------------------------------
1998 1999 2000
-------- -------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss) ..................................................... $ (3,703) $ 10,457 $ (32,320)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Write off of in-process research and development ...................... 719 2,201 6,900
Issuance of warrants .................................................. 32,827 -- --
Exclusivity amortization .............................................. 2,963 -- --
Depreciation and amortization ......................................... 24,999 24,630 42,830
Deferred income tax provision ......................................... (5,499) 854 (11,437)
Net gain on dispositions of assets .................................... (36,173) (4,576) --
Purchases of investments- Trading ..................................... (28,799) (10,416) (19,002)
Proceeds from maturities and sales of investments, net- Trading ....... 4,267 24,683 22,608
Change in certain assets and liabilities (net of acquisitions and
dispositions):
Accounts receivable .............................................. (5,095) (6,976) (14,499)
Prepaid expenses and other ....................................... (1,834) 1,434 644
Accounts payable ................................................. 1,492 988 (4,153)
Accrued liabilities .............................................. (568) (2,194) 20,259
Deferred revenue ................................................. 239 1,739 9,188
Income tax accounts .............................................. 2,492 (17,253) (2)
-------- -------- ---------
Net cash provided by (used in) operating activities .... (11,673) 25,571 21,016
INVESTING ACTIVITIES:
Purchase of property and software ...................................... (27,939) (40,444) (39,495)
Proceeds from sale of assets ........................................... 54,990 18,435 --
Purchase of note receivable ............................................ (14,882) -- --
Proceeds from repayment of note receivable ............................. -- 14,882 --
Proceeds from purchase price adjustment ................................ 8,889 -- --
Capitalization of software development costs ........................... (731) (8,031) (7,576)
Purchase of business, net of cash acquired ............................. (11,000) (190) 9,152
Purchases of investments- Held to maturity ............................. (1,006) (1,875) (70,796)
Proceeds from maturities and sales of investments- Held to maturity .... -- 1,006 9,780
Purchase of other investments .......................................... -- -- (10,000)
Purchases of investments- Available for sale ........................... (19,311) -- --
Proceeds from maturities and sales of investments- Available for sale .. 23,757 -- --
-------- -------- ---------
Net cash provided by (used in) investing activities .... 12,767 (16,217) (108,935)
FINANCING ACTIVITIES:
Repayment of notes payable and other debt extinguishment .............. (1,144) -- --
Principal payments under capital lease obligations .................... (931) (3,327) (1,495)
Escrow deposit associated with capital lease obligation ............... -- (3,637) --
Proceeds from stock options exercised ................................. 2,165 2,926 9,721
Proceeds from employee stock purchase plan ............................ 1,573 1,931 2,903
Proceeds from employee 401(k)plan ..................................... 1,692 -- --
Purchase of treasury stock ............................................ -- (31,336) --
Proceeds from sale of stock and exercise of warrants .................. -- -- 25,515
Proceeds from issuance of convertible subordinated notes .............. -- -- 166,903
-------- -------- ---------
Net cash provided by (used in) financing activities .... 3,355 (33,443) 203,547
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ...................................................... 4,449 (24,089) 115,628
CASH AND CASH EQUIVALENTS:
Beginning of period ................................................... 32,086 36,535 12,446
-------- -------- ---------
End of period ......................................................... $ 36,535 $ 12,446 $ 128,074
======== ======== =========
See notes to consolidated financial statements
F-5
22
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - CheckFree Corporation (the "Company") is the parent company
of CheckFree Services Corporation ("CFSC"), the principal operating
company of the business. In April, 2000, CFSC changed its name from
CheckFree Corporation to CheckFree Services Corporation. Following that
change, in August, 2000, CheckFree Holdings Corporation changed its name
to CheckFree Corporation. CFSC was organized in 1981 and is a leading
provider of transaction processing services, software and related products
to financial institutions and businesses and their customers throughout
the United States. See Note 18 for a description of the Company's business
segments. Following a number of acquisitions and divestitures, CFSC
reorganized its corporate structure on December 22, 1997. In connection
with the reorganization, holders of common stock ("Common Stock") of CFSC
became holders of an identical number of shares of Common Stock of the
Company. The restructuring was effected by a merger conducted pursuant to
Section 251(g) of the Delaware General Corporation Law, which provides for
the formation of a holding company structure without a vote of the
stockholders of the Company.
Principles of Consolidation - The accompanying consolidated financial
statements include the results of operations of the Company, its
wholly-owned subsidiaries, and CheckFree Management Corporation, of which
the Company is the majority owner. All significant intercompany
transactions have been eliminated.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP"). The
preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Processing Agreements - The Company has agreements with transaction
processors to provide origination and settlement services for the Company.
Under the agreements, the Company must fund service fees and returned
transactions when presented. These agreements expire at various dates.
Transaction Processing - In connection with the timing of the Company's
financial transaction processing, the Company is exposed to credit risk in
the event of nonperformance by other parties, such as returns and
chargebacks. The Company utilizes credit analysis and other controls to
manage its credit risk exposure. The Company also maintains a reserve for
future returns and chargebacks.
Cash and Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with maturities of three months or less to be cash
equivalents.
Investments - The Company classifies its investments as
available-for-sale, trading or held-to-maturity securities in accordance
with Statement of Financial Accounting Standards ("SFAS") 115, "Accounting
for Certain Investments in Debt and Equity Securities". Investments
classified as available-for-sale are carried at fair value, with
unrealized holding gains and losses reported as a separate component of
stockholders' equity. Trading securities are carried at market value and
unrealized holding gains and losses are included in income.
Held-to-maturity securities are carried at amortized cost.
Property and Equipment - Property and equipment are stated at cost.
Property and equipment are depreciated using the straight-line method over
the estimated useful lives as follows: land improvements, building and
building improvements, 15 to 30 years; computer equipment, software, and
furniture, 3 to 7 years. Equipment under capital leases are amortized
using the straight-line method over the lesser of their estimated useful
lives or the terms of the leases. Leasehold improvements are amortized
over the lesser of the estimated useful lives or remaining lease periods.
Capitalized Software Costs - On July 1, 1999, the Company adopted
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Statement
distinguishes accounting for costs of computer software developed or
obtained for internal use from guidance under SFAS 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." The
F-6
23
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
Company determines whether software costs fall under the provisions of
SFAS 86 or SOP 98-1 and accounts for them as follows:
- SFAS 86- Software development costs incurred prior to the
establishment of technological feasibility are expensed as
incurred. Software development costs incurred after the
technological feasibility of the subject software product has
been established are capitalized in accordance with SFAS 86.
Capitalized software development costs are amortized on a
product-by-product basis using either the estimated economic life
of the product on a straight-line basis over three to five years,
or the ratio of current year gross product revenue to current and
anticipated future gross product revenue, whichever is greater.
Unamortized software development costs in excess of estimated
future net revenues from a particular product are written down to
estimated net realizable value.
- SOP 98-1- Software costs incurred in the preliminary project
stage are expensed as incurred. Software costs incurred after the
preliminary project stage is complete, management has committed
to the project, and it is probable the software will be used to
perform the function intended are capitalized in accordance with
SOP 98-1. Capitalized software costs are amortized on a
product-by-product basis using the estimated economic life of the
product on a straight-line basis over three to five years.
Capitalized software costs not expected to be completed and
placed in service are written down to estimated net realizable
value.
Amortization of software costs totaled $5,198,000, $2,567,000 and
$4,589,000, for the years ended June 30, 1998, 1999 and 2000,
respectively.
Intangible Assets - The costs of identified intangible assets are
amortized on a straight-line basis over periods from 8 months to 10 years.
Goodwill is amortized on a straight-line basis over 5 to 10 years. The
company periodically reviews goodwill to evaluate whether changes have
occurred that would suggest that goodwill may be impaired based on the
estimated undiscounted cash flows of the assets to which goodwill relates
over the remaining amortization period. If this review indicates that the
remaining useful life of goodwill requires revision or that the goodwill
is not recoverable, the carrying amount of the goodwill is reduced by the
estimated shortfall of cash flows on a discounted basis. Other intangible
assets are also evaluated periodically for impairment using undiscounted
cash flows over the remaining useful life of the respective asset. If this
review indicates that the remaining useful life of the respective
intangible asset requires revision, the carrying amount of the asset is
reduced by the estimated shortfall of cash flows on a discounted basis.
Capital Stock - The Company is authorized to issue up to 150,000,000
shares of $.01 par value Common Stock. In addition, the Company is
authorized to issue up to 15,000,000 shares of $.01 par value preferred
stock in one or more series and to establish such relative voting,
dividend, redemption, liquidation, conversion and other powers,
preferences, rights, qualifications, limitations and restrictions as the
Board of Directors may determine without further stockholder approval. No
preferred shares have been issued.
Basic and Diluted Earnings (Loss) Per Share -The Company reports Basic and
Diluted Earnings (Loss) Per Share in accordance with the provisions of
SFAS 128 "Earnings Per Share". Basic earnings (loss) per common share is
determined by dividing income (loss) available to common shareholders by
the weighted average number of common shares outstanding. Diluted
per-common-share amounts assume the issuance of common stock for all
potentially dilutive equivalent shares outstanding.
Impairment of Long-Lived Assets - In accordance with SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," the Company periodically assesses the likelihood of
recovering the cost of long-lived assets based on its expectations of
future profitability and undiscounted cash flows of the related business
operations. These factors, along with management's plans with respect to
the operations, are considered in assessing the recoverability of
property, equipment and purchased intangibles. During 1998, in conjunction
with the Company's platform integration efforts referred to as project
Genesis, the Company consolidated three processing centers from Chicago,
Illinois, Austin, Texas, and Columbus, Ohio, into one processing center
located in Norcross, Georgia. As a result of this consolidation and a
physical inventory of fixed
F-7
24
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
assets at the related business units, all identified assets, totaling $4.0
million, which were determined to have no alternative use or value were
written off.
Comprehensive Income - On July 1, 1998, the Company adopted SFAS 130,
"Reporting Comprehensive Income." The Statement requires disclosure of
total non-shareowner changes in equity and its components. Total
non-shareowner changes in equity includes all changes in equity during a
period except those resulting from investments by and distributions to
shareowners. The only component of other comprehensive income applicable
to the Company would be unrealized holding gains or losses on the
Company's available-for-sale securities. There were no available-for-sale
securities held during the years ended June 30, 1999 and 2000, and the
carrying value of available-for-sale securities held during the year ended
June 30, 1998 approximated market value. As a result, there were no
reported unrealized gains or losses on available-for-sale securities
during the years ending June 30, 1998, 1999 and 2000.
Business Segments - The Company reports information about its business
segments in accordance with SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information". The Statement defines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. See Note 18
for the Company's segment information.
Foreign Currency Translation- Effective with the acquisition of BlueGill
Technologies, Inc. on April 28, 2000, certain wholly-owned subsidiaries of
the Company have foreign operations. The financial statements of these
foreign subsidiaries are measured using the U.S. dollar as the functional
currency. Assets, liabilities, revenues, and expenses are remeasured using
current and historical exchange rates in accordance with SFAS No. 52,
"Foreign Currency Translation". Transaction gains and losses resulting
from the remeasurement process are included the determination of net
income. The net transaction loss for the period from April 28, 2000 to
June 30, 2000 was not significant.
Recent Accounting Pronouncements.- In June 1998, the Financial Accounting
Standards Board issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," which requires that all derivative financial
instruments be recognized as either assets or liabilities in the balance
sheet. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities- Deferral of the Effective Date of FASB
Statement No. 133", which defers the effective date of SFAS 133 until the
fiscal quarters of all fiscal years beginning after June 15, 2000. In June
2000, the FASB issued SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amends the accounting
and reporting standards of SFAS 133 for certain derivative instruments and
certain hedging activities.
SFAS 133, as amended, requires the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of
derivatives are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is immediately
recognized in earnings.
The Company's Investment Policy currently prohibits the use of derivatives
for trading or hedging purposes. Additionally, the Company completed a
review of its contracts and determined that they contained no "imbedded
derivatives" that require separate reporting and disclosure under SFAS
133, as amended. As such, the adoption of SFAS 133, as amended, on July 1,
2000 will not have a material impact on results of operations or other
comprehensive income.
In 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." The SAB provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. Although SAB No. 101 does not change any of
the accounting profession's existing rules on revenue recognition, it
draws upon existing rules and explains how the SEC staff applies these
rules, by analogy, to other transactions that existing rules do not
specifically address. SAB No. 101, as amended by SAB No. 101B, becomes
effective for the fourth quarter of our fiscal year 2001. The Company is
in the process of assessing the impact of SAB No. 101 on its financial
statements; however, the adoption of SAB No. 101 is not expected to have a
material impact on results of operations or financial position.
F-8
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CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
Reclassifications - Certain amounts in the prior years' financial
statements have been reclassified to conform to the 2000 presentation.
REVENUE RECOGNITION
- Processing and Servicing - Processing and servicing revenues
include revenues from transaction processing, electronic funds
transfer and monthly service fees on consumer funds transfer
services. The Company recognizes revenue when the services are
performed.
As part of processing certain types of transactions, the Company
earns interest from the time money is collected from its
customers until the time payment is made to the applicable
merchants. These revenues, which are generated from trust account
balances not included on the Company's balance sheet, are
included in processing and servicing and totaled $9,676,000,
$11,846,000 and $21,485,000 for the years ended June 30, 1998,
1999 and 2000, respectively.
- License Fees - The Company recognizes revenue on software
transactions in accordance with SOP 97-2, "Software Revenue
Recognition". In accordance with the provisions of SOP 97-2, the
Company recognizes revenue from software license agreements when
there is persuasive evidence that an arrangement exists, the fee
is fixed and determinable, collectibility is probable and the
software has been shipped, provided that no significant
obligation remains under the contract.
- Maintenance Fees - Maintenance fee revenue is recognized ratably
over the term of the related contractual support period,
generally 12 months.
- Other - Other revenue consists primarily of consulting and
training services. Consulting revenue is recognized principally
on a percentage-of-completion basis and training revenue is
recognized upon delivery of the related service.
Estimated losses, if any, on contracts are provided for when probable.
Estimated loss provisions are based on excess costs over the revenues
earned from the contract. Credit losses, if any, are contemplated in the
establishment of our allowance for doubtful accounts.
EXPENSE CLASSIFICATION
- Processing, Servicing and Support - Processing, servicing and
support costs consist primarily of data processing costs,
customer care and technical support, and third party transaction
fees, which consist primarily of ACH transaction fees.
- Research and Development - Research and development expenses
consist primarily of salaries and consulting fees paid to
software engineers and business development personnel, and are
reported net of applicable capitalized development costs.
- Sales and Marketing - Sales and marketing expenses consist
primarily of salaries and commissions of sales employees, public
relations and advertising costs, customer acquisition fees and
royalties paid to distribution partners.
- General and Administrative - General and administrative expenses
consist primarily of salaries for administrative, executive,
finance, and human resource employees.
- Depreciation and Amortization - Depreciation and amortization on
capitalized assets is recorded on a straight-line basis over the
appropriate useful lives.
- In-process Research and Development - In-process research and
development consists of charges resulting from acquisitions
whereby the purchase price allocated to in-process software
development was based on the determination that in-process
research and development had no alternative future use after
taking into
F-9
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CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
consideration the potential for usage of the software in
different products, resale of the software, or other internal
use.
- Charge for Stock Warrants - Charge for stock warrants consists of
noncash charges for vested warrants issued to third parties under
agreements whereby issued warrants vest upon achievement of
certain strategic objectives.
- Exclusivity Amortization - Exclusivity amortization consists of
the amortization of an intangible asset established in
conjunction with a marketing agreement with a strategic partner
whereby the Company retains certain exclusive rights to bill
payment processing through the partner's financial management
software over a specific period of time.
2. ACQUISITIONS AND DISPOSITIONS
BLUEGILL
On April 28, 2000, the Company acquired BlueGill Technologies, Inc.
("BlueGill") for a total of $239.9 million, consisting of 4,713,736 shares
of common stock valued at $221.5 million, the issuance of 637,746 employee
stock options valued at $18.5 million and $0.6 million of acquisition
costs less $0.7 million of cash received for the release of shares placed
in escrow per the merger agreement. The acquisition was treated as a
purchase for accounting purposes, and, accordingly, the assets and
liabilities were recorded based on their fair market values at the date of
the acquisition. The values ascribed to acquired intangible assets and
their respective useful lives are as follows:
INTANGIBLE USEFUL
ASSET LIFE
-------------- --------------
(IN THOUSANDS)
Goodwill .................................. $191,072 5.0 yrs
Tradename ................................. 15,100 1.0 yr
Existing product technology ............... 13,700 3.7 yrs
Customer list ............................. 10,600 5.0 yrs
Workforce in place ........................ 2,600 3.0 yrs
Covenants not to compete .................. 1,200 1.0 yr
Amortization of intangible assets is on a straight-line basis over the
assets' respective useful life. BlueGill's operations are included in the
consolidated statements of operations from the date of acquisition.
At the acquisition date, BlueGill had five general technologies that had
not demonstrated technological or commercial feasibility. They included
print and extraction technology, data management engine technology, API
technology, Web Applications and payment or OFX technology. The in-process
technology has no alternative use in the event that the products do not
prove to be feasible. These development efforts fall within the definition
of In-Process Research and Development ("IPR&D") contained in SFAS 2.
Print and extraction technology. Print and extraction technology allows
for the extraction and print parsing of a biller's legacy billing
information through to BlueGill's products. The following features of the
print and extraction technology are under development:
- SmartXpress 3.0.0 that comprises updates to accommodate core
changes to BlueGill's DME 2.2.0;
- Record Data Loader, which is an input module that allows for
Record Data Type management by converting flat file data into
XML-s for storage in the DME.
Data Management Engine Technology. The DME technology allows for archiving
of transactions and linkage of data to the necessary environment within
the BlueGill network. The DME is the main translator of input data to our
output data. The following features are under development:
F-10
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CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
- Xerox Metacode Support, which is Xerox print support on the
AIX, Solaris and HP-UX platforms;
- AFP to PDF performance, which provides three time improvement
in the throughput of data through the DME; and
- MVS Port (OS/390), which ports the source code to the MVS
platform.
APIs. The API technology encompasses knowledge engineering procedures and
expert system analysis, design and development. The API technology works
in between the print and extraction and parsing modules and the web
applications or templates. The API "surrounds" the DME as its interface to
these other technologies. The following features are under development:
- BlueGill Engine 3.0.0 - Pure JAVA Front End Interface, which
provides a pure JAVA version of the public API set;
- BlueGill Engine 4.0.0 - Pure JAVA Back End Interface, which
provides a pure JAVA version of the data base engine; and
- CheckFree E-Bill 3.1 Format Support, which provides batch mode
support for the CheckFree Services Corporation E-Bill 3.1
format.
Web Applications. The web application technologies help in the design of
industry specific templates for electronic billing and statement
presentation. The following features are under development:
- i-Insurance Template for the insurance industry billing
statement templates; and
- Market Direct 2.0, which provides one-to-one marketing
capabilities with end users.
Payments or OFX. The payments or OFX technology will allow for bill
publishing services to be integrated with the i-Series products and bill
consolidators. The following features are under development:
- OFX Bill Publisher Server, which is the core OFX engine
integrated with the i-Series engine support and Bill Publisher
component to link to consolidators; and
- Payment Infrastructure, which is the underpinnings for
interfacing with various payment solutions (e.g. ACH,
PaymenTech, Cybercash).
The following table presents information regarding the status of various
in-process research and development projects acquired in connection with
the BlueGill acquisition:
ESTIMATED EXPECTED
STAGE OF ESTIMATED COST TO
COMPLETION COMPLETION DATE COMPLETE VALUATION
--------------------------------------------------
(IN THOUSANDS)
Print / Extraction ............ 38% December 2000 $ 748 $1,900
Data Management Engine ........ 19% November 2000 110 1,300
APIs .......................... 46% November 2000 703 2,300
Web Applications .............. 50% July 2000 183 1,400
Payments / OFX ................ 10% December 2000 333 0
------ ------
Total .................... $2,077 $6,900
====== ======
The method used to allocate the purchase consideration to IPRD was the
modified income approach. Under the income approach, fair value reflects
the present value of the projected free cash flows that will be generated
by the IPRD projects and that is attributable to the acquired technology,
if successfully completed. The modified income approach takes the income
approach, modified to include the following factors:
- analysis of the stage of completion of each project;
- exclusion of value related to research and development
yet-to-be completed as part of the on-going IPRD projects; and
- the contribution of existing technologies and applications.
F-11
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CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
The projected revenues used in the income approach are based upon the
incremental revenues associated with a portion of the project related to
BlueGill's technology likely to be generated upon completion of the
project and the beginning of commercial sales, as estimated by management.
The projections assume that the projects will be successful and the
project's development and commercialization are as set forth by
management. The discount rate used in this analysis is an after tax rate
of 25%.
Certain risks and uncertainties are associated with the completion of the
development with a reasonable projected period of time. These risks
include:
- Not Technologically Feasible. The acquired IPRD had not
demonstrated technological or commercial feasibility as of the
acquisition date for BlueGill. Significant risks exist because
BlueGill is unsure of the obstacles it will encounter in the form
of market acceptance, time and cost necessary to produce a
technologically feasible product. SFAS No. 2 does not
specifically require an analysis of the development effort
expended relative to an acquisition date. It is reasonable to
assume, however, that an IPRD project would require a significant
amount of time and cost in order to modify for the Company's use
in the marketplace. Should the proposed technology fail to become
viable, it is unlikely that the Company would be able to realize
any value from the sale of the technology to another party.
- No Alternative Future Use. The acquired IPRD consists of
BlueGill's work to date on its products. The products are very
specific to the tasks and markets for which it is intended. As is
typically the case with software, there are no alternative future
uses for the in-process work in the event that the product does
not become feasible for CheckFree. The development effort for the
acquired IPRD does not possess an alternative future use for
CheckFree under the terms of SFAS No. 2.
- If the BlueGill project underway fails, there will be a
very limited life to the existing product because the
continuing pace of technological developments in the
marketplace will have rendered them non-competitive. In
the event of a failure, the technology acquired, as
embodied in either current or in-process products, will
have no alternative use and would be written off as a
loss by the Company.
- As of the valuation date, all of the IPRD technologies
were subject to numerous technological, timing, cost and
market risks. In addition to these risks already
mentioned, another major risk associated with the
technologies pertains to the language it is written in.
According to BlueGill's management, all of the base code
may go to the JAVA computer language, causing large
sections of the code to be re-written.
MOBIUS
On March 8, 1999, the Company acquired Mobius Group, Inc. ("Mobius Group")
for a total of $19.1 million, consisting of 537,314 shares of common stock
valued at $18 million, $0.2 million of acquisition costs, and $0.9 million
of assumed debt. The acquisition was treated as a purchase for accounting
purposes, and, accordingly, the assets and liabilities were recorded based
on their fair values at the date of the acquisition. The values ascribed
to acquired intangible assets and their respective useful lives are as
follows:
INTANGIBLE USEFUL
ASSET LIFE
-------------- --------
(In thousands)
Goodwill .................................. $10,552 10.0 yrs
Customer base ............................. 4,429 8.0 yrs
Tradenames ................................ 3,709 10.0 yrs
Existing product technology ............... 1,864 5.0 yrs
Workforce ................................. 940 3.0 yrs
Amortization of intangible assets is on a straight-line basis over the
assets' respective useful life. Mobius Group's operations are included in
the consolidated statements of operations from the date of acquisition.
F-12
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CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
At the acquisition date, Mobius Group had four products under development
that had not demonstrated technological or commercial feasibility. These
products included M-Plan Retirement & Estate Planning Modules, M-Plan Cash
Flow, Tax and Education Planning Modules, a new version of M-Search and a
new version of M-Vest. The in-process technology has no alternative use in
the event that the proposed products do not prove to be feasible. These
development efforts fall within the definition of In-Process Research and
Development ("IPR&D") contained in SFAS 2.
M-Plan Integrated Financial Planning System. M-Plan is a Windows based
integrated financial planning system for retirement and estate planning,
cash flow, tax and educational planning and capital needs analysis. It
will produce over 100 reports for retirement, new investments, estate
planning, and other analysis, as well as provide historical returns and
standard deviations for various asset allocations integrated with
extensive modeling to provide detailed and usable analysis. M-Plan's
wizards will give users the ability to produce and to analyze alternative
scenarios quickly. M-Plan will consist of five main disciplines:
Retirement and Estate Planning, Cash Flow, Tax and Education modules.
M-Plan Retirement and Estate Planning are the core disciplines; a user
must own one of these two in order to add future disciplines.
- M-Plan Retirement & Estate Planning Modules. Significant
development is required to convert trust and gift tax
calculations from formulas to C++ programming language.
Additionally, work must be performed to create necessary database
fields to capture a variety of user scenario analyses. These
modules will be used by sophisticated financial planners that
will be expected to produce reports for a variety of individuals
with specific circumstances and therefore, calculations must
produce results under all possible scenarios. In addition, there
are over 100 reports to be programmed and customized into usable
and readable format and Mobius Group does not currently have the
ability to insert data into all of the reports. Finally,
developed technology is not in a modular format and, as M-Plan
will be sold in modules, additional work must be performed to
divide code into modules.
- Cash Flow, Tax and Education Planning Modules. Reports for the
Cash Flow Planning module had not yet been developed. Mobius
Group had not yet determined how it would integrate tax tables
into its tax calculations, as only tax rate calculations are
currently available in the Tax Planning module and significant
work remained to complete reports and database fields. There had
been no significant data gathering for the Education Planning
module and therefore the code had not yet been written for the
calculations, the database fields and the reports.
The technology utilized in the M-Plan is based entirely on new technology.
Although the Company has been selling another comprehensive financial
planning program, it operated on a DOS platform and the new programs are
being developed in C++ for Windows.
M-Search Revision - M-Search is Mobius Group's Investment Manager Database
System, containing comprehensive qualitative and quantitative data on over
1,300 investment management firms and 5,000 composites. In-process
development is designed to allow the user to customize reports based on
selection criteria, which the current version does not offer. This effort
requires a rewrite of a significant portion of the source code. Based on
software engineers' estimates of the percentage of reuse of developed
technology within particular components of the product, 25% of its value
is attributable to core technology.
M-Vest Revision - M-Vest is Mobius Group's 16-bit asset allocation system
that is under development to port the entire program over to 32-bit. This
development effort requires significant changes to the user interface, a
revision of most of the reports and changes to core algorithms. Management
estimates that it would have taken six man months to recreate the code
from the beginning and the entire porting would take 12 man months and as
a result, 30% of its value is attributable to core technology.
F-13
30
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
The following table presents information regarding the status of various
in-process research and development projects acquired in connection with
the Mobius Group acquisition:
ESTIMATED STAGE EXPECTED EXPECTED COST
OF COMPLETION RELEASE TO COMPLETE VALUATION
--------------- ------------- ------------- ---------
(IN THOUSANDS)
M-Plan:
Retirement and Estate Planning Module.. 92% May 1999 $ 49 $ 693
Cash Flow, Tax and Education Module ... 64% December 1999 208 183
M-Search Revision ........................ 56% September 1999 176 1,218
M-Vest Revision .......................... 20% September 1999 220 107
---- ------
Total ......................... $653 $2,201
==== ======
The method used to allocate the purchase consideration to IPR&D was the
modified income approach. The projected revenues used in the income
approach are based upon the incremental revenues associated with a portion
of the project related to Mobius Group's technology likely to be generated
upon completion of the project and the beginning of commercial sales, as
estimated by the Company's management. The projections assume that the
product will be successful and the products' development and
commercialization are as set forth by management. The discount rate used
in this analysis is an after-tax rate of 20%
Certain risks and uncertainties were associated with the completion of the
development with a reasonable projected period of time. These risks
include:
- The Retirement and Estate Planning module had been sent to a
development partner for testing and identification of errors. Due
to the nature of the product and the necessity that all
calculations work correctly in order for the product to be
commercially viable and to function as designed, this testing is
considered a significant part of the development effort.
- The cash flow module reports had not been developed. As the
reports are the only output seen by the end user, this represents
a major development effort.
- The Company had not yet determined how it will integrate tax
tables into its tax calculation in the tax module. Significant
work remains to complete reports and database fields.
- For the education module, significant data gathering had not
occurred and, therefore, the code had not yet been written for
the calculations, the database fields, and the reports.
- Significant risks still exist related to the completion and
reintegration of the M-Plan Modules (Retirement and Estate
Planning and Cash Flow, Tax, and Education Modules). For example,
a user who borrows for education purposes from his retirement
fund should see his retirement decrease (in the Retirement
Module) and education investment increase (in the Education
Module).
- The M-Plan Modules are based entirely on new technology, since
they are written in C++ for a windows platform and utilize no
existing technology.
- M-Vest is Mobius Group's current asset allocation system. There
is an on-going development program to migrate this program to run
on 32-bit hardware. This effort requires significant changes to
interfaces, to reports and some core algorithms.
- Each of the acquired IPR&D projects had not demonstrated their
technological or commercial feasibility as of the valuation date.
Significant risks exist because of uncertainties the Company may
face in the form of time and costs necessary to produce
technologically feasible products.
- If the proposed products fail to become viable, there is
uncertainty that the Company would be able to realize any value
from the sale of the technology to another party.
AMTI
On October 3, 1997, the Company acquired certain assets of Advanced
Mortgage Technologies, Inc. ("AMTI") for cash of $1.0 million. The
acquisition was treated as a purchase for accounting purposes, and
accordingly, the assets and liabilities were recorded based on their fair
values at the date of the acquisition. Of the total purchase price,
F-14
31
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
$0.2 million was allocated to goodwill and $0.1 million to other
identifiable intangible assets. Additionally, $0.7 million was allocated
to in-process research and development, which was charged to operations at
the time of the acquisition.
The unaudited pro forma results of operations of the Company for the year
ended June 30, 1999 and 2000, assuming the acquisitions occurred at the
beginning of each period are as follows (in thousands):
YEAR ENDED JUNE 30,
---------------------------
1999 2000
-------- --------
Total revenues .............................. $258,917 $316,812
Net income (loss) ........................... $(42,285) $(80,171)
Basic and Diluted earnings per share:
Net income (loss) per common share ..... $ (0.74) $ (1.38)
======== ========
Equivalent number of shares ............ 57,529 58,078
======== ========
This information is presented to facilitate meaningful comparisons to
on-going operations and to other companies. The unaudited pro forma
amounts above do not include a charge for in-process research and
development of $6.9 million arising from the BlueGill acquisition in 2000
and $2.2 million arising from the Mobius acquisition in 1999. The
unaudited pro forma information is not necessarily indicative of the
actual results of operations had the transactions occurred at the
beginning of the periods presented, nor should it be used to project the
Company's results of operations for any future periods.
DISPOSITIONS
On October 1, 1998 the Company sold certain software and other assets
related to its imaging line of business for $0.8 million consisting of a
note receivable of $0.5 million and future services of $0.3 million. Loss
on the sale amounted to $2.9 million.
On September 11, 1998 the Company sold certain software and other assets
related to its mortgage line of business for $19.1 million, net of a
working capital adjustment. As part of the sales agreement, the Company
retained responsibility for certain customer obligations and agreed to
subcontract with the acquiring company to perform consulting services at
retail hourly rates for these retained obligations. The Company received
cash of $15 million, net of $4.0 million of prepaid subcontract services
due the acquiring company. Net gain on the sale amounted to $6.4 million.
On July 6, 1998 the Company divested itself of certain software related to
its leasing line of business. The Company paid the acquiring party
$639,000 in cash and agreed to five additional quarterly installments of
$60,000 each. Additionally, in conjunction with this transaction, the
Company agreed to pay $3.0 million to a customer to relieve the Company
and acquiring party of further obligations relating to a product related
consulting agreement. The loss of $4.7 million was recorded in the fourth
quarter of the year ended June 30, 1998.
On April 20, 1998, the Company sold certain software and related assets of
its wire transfer and cash management businesses for cash of $18.25
million resulting in a net gain on the sale of $14.7 million.
On March 24, 1998, the Company sold certain software and related assets of
its item processing business for cash of $3.4 million resulting in a net
gain on the sale of $3.2 million.
On August 29, 1997, the Company sold certain software and related assets
of its recovery management business for cash of $33.5 million resulting in
a net gain on the sale of $28.2 million.
The gain or loss on sale of assets described above is included in Net Gain
on Dispositions of Assets in the Company's Consolidated Statements of
Operations.
F-15
32
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
3. INVESTMENTS
Investments consist of the following (in thousands):
JUNE 30,
-----------------------
1999 2000
------- ---------
Held-to-Maturity ................................ $ 7,819 $ 162,989
Trading ......................................... 10,266 6,660
Other investments ............................... -- 11,171
Less: Amounts classified as cash equivalents ... (5,944) (101,269)
------- ---------
Total investments ........... $12,141 $ 79,551
======= =========
The following is a summary of Held-to-Maturity investment securities (in
thousands):
GROSS UNREALIZED
AMORTIZED ---------------- FAIR
COST GAINS LOSSES VALUE
--------- ----- ------ ---------
JUNE 30, 1999:
Corporate bonds ..................... $ -- $ -- $-- $ --
Commercial paper .................... -- -- -- --
Certificates of deposit ............. -- -- -- --
U.S. Government and federal agency
obligations ...................... 1,875 -- (14) 1,861
Money market funds .................. 5,944 -- -- 5,944
--------- ----- ----- ---------
Held-to-Maturity investments ..... 7,819 -- (14) 7,805
Less: amounts classified as cash
equivalents ...................... (5,944) -- -- (5,944)
--------- ----- ----- ---------
Total Held-to-Maturity Investments ....... $ 1,875 $ -- $ (14) $ 1,861
========= ===== ===== =========
JUNE 30, 2000:
Corporate bonds ..................... $ 50,824 $ -- $(148) $ 50,676
Commercial paper .................... 68,886 211 -- 69,097
Certificates of deposit ............. 29,981 (86) 29,895
U.S. Government and federal agency
obligations ...................... 2,824 4 (18) 2,810
Money market funds .................. 10,474 -- 10,474
--------- ----- ----- ---------
Held-to-Maturity investments ..... 162,989 215 (252) 162,952
Less: amounts classified as cash
equivalents ...................... (101,269) (215) 19 (101,465)
--------- ----- ----- ---------
Total Held-to-Maturity Investments ....... $ 61,720 $ -- $(233) $ 61,487
========= ===== ===== =========
The fair value of Held-to-Maturity securities is based on quoted market
values.
The amortized cost and fair value of held-to-maturity investment
securities at June 30, 2000 by contractual maturity or repricing date are
as follows:
AMORTIZED COST FAIR VALUE
-------------- ----------
Due in one year or less ................ $49,888 $49,722
Due after one year through five years .. 11,832 11,765
------- -------
$61,720 $61,487
======= =======
Expected maturities may differ from contractual maturities because debt
issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
F-16
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CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
Other investments include a $10,000,000 strategic investment in
BillServ.com common stock, which is subject to certain trading
restrictions, and $1,171,000 of warrants to acquire common shares of
Derivion, Inc., a non-publicly traded e-billing application service
provider. The fair value of the Company's investment in BillServ.com at
June 30, 2000, based on quoted market price, was approximately $8,077,000
and the carrying value of the investment in Derivion, Inc. approximated
its fair value.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
JUNE 30,
-------------------
1999 2000
------- -------
Trade accounts receivable ..................... $31,366 $46,609
Unbilled trade accounts receivable ............ 16,334 10,302
Other receivables ............................. 2,390 5,400
------- -------
Total ...................... 50,090 62,311
Less allowance for doubtful accounts .......... 4,430 4,003
------- -------
Accounts receivable, net .. $45,660 $58,308
======= =======
Trade accounts receivable represents amounts billed to customers. Unbilled
trade accounts receivable result from extended payment terms on software
license agreements or services agreements and are recorded at the time of
contract execution. Revenue is recognized and customers are billed under
service agreements as the services are performed. For software contracts,
revenue is recognized under the provisions of SOP 97-2 as described in
Note 1, and unbilled amounts under those software contracts are billed on
specific dates according to contractual terms. Other receivables are
comprised primarily of interest receivable and amounts due from employees
for travel and other advances. The allowance for doubtful accounts
represents management's estimate of uncollectible accounts receivable.
5. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes," which requires an asset and liability
approach to financial accounting and reporting for income taxes. In
accordance with SFAS 109, deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable
income. Income tax expense (benefit) is the tax payable or refundable for
the period plus or minus the change during the period in deferred tax
assets and liabilities.
The Company's income tax benefit consists of the following (in thousands):
YEAR ENDED JUNE 30,
-----------------------------------
1998 1999 2000
------- -------- --------
Current:
Federal ............................. $ 3,795 $(10,555) $ --
State and local ..................... 1,063 (2,308) --
------- -------- --------
Total current ............. 4,858 (12,863) --
Deferred federal and state ............... (5,499) 854 (11,437)
------- -------- --------
Total income tax benefit .. $ (641) $(12,009) $(11,437)
======= ======== ========
F-17
34
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
Income tax expense differs from the amounts computed by applying the U.S.
federal statutory income tax rate of 35 percent to income before income
taxes as a result of the following (in thousands):
YEAR ENDED JUNE 30,
------------------------------------
1998 1999 2000
-------- -------- --------
Computed "expected" tax benefit ................... $ (1,520) $ (543) $(15,315)
Nondeductible in-process research and
development of acquired businesses ............. 252 770 2,415
Nondeductible intangible amortization ............. 1,189 1,137 3,572
State and local taxes, net of federal income tax
benefits ....................................... 21 (1,741) (1,636)
Loss from medical benefits subsidiary ............. -- (10,665) --
Other, net ........................................ (583) (967) (473)
-------- -------- --------
Total income tax benefit ........... $ (641) $(12,009) $(11,437)
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 1999 and 2000 are as follows (in thousands):
JUNE 30,
----------------------
1999 2000
------- --------
Deferred tax assets:
Federal and state net operating loss carryforwards .. $12,739 $ 32,219
Federal and state tax credit carryforwards .......... 2,145 3,867
Allowance for bad debts and returns ................. 1,996 1,774
Accrued compensation and related items .............. 2,028 5,429
Stock warrants ...................................... 12,964 19,331
Reserve accruals .................................... 3,410 3,558
------- --------
Total deferred tax assets ............ 35,282 66,178
Deferred tax liabilities:
Capitalized software ................................ (2,246) (12,792)
Property and equipment .............................. (2,327) (1,850)
Deferred revenue .................................... (128) (49)
Intangible assets ................................... (1,354) (11,526)
Prepaid expenses .................................... (794) (980)
------- --------
Total deferred tax liabilities ....... (6,849) (27,197)
------- --------
Net deferred tax asset ............... $28,433 $ 38,981
======= ========
At June 30, 2000, the Company has approximately $95,038,000 of state and
$73,654,000 of federal net operating loss carryforwards available,
expiring in 2009 to 2014 and 2009 to 2020, respectively. Additionally, at
June 30, 2000, the Company has approximately $488,000 of state and
$3,379,000 of federal tax credit carryforwards available, expiring in 2008
to 2010 and 2009 to 2020, respectively.
The realization of the Company's deferred tax assets, which relate
primarily to net operating loss carryforwards and temporary differences is
dependent on generating sufficient taxable income in future periods.
Although realization is not assured, management believes it is more likely
than not that the net deferred tax assets will be realized.
F-18
35
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
6. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
JUNE 30,
---------------------
1999 2000
-------- --------
Land and land improvements ...................... $ 4,341 $ 4,944
Building and building improvements .............. 31,226 39,992
Computer equipment and software licenses ........ 72,138 101,662
Furniture and equipment ......................... 11,404 14,071
-------- --------
Total ............................ 119,109 160,669
Less accumulated depreciation and amortization .. 49,286 67,455
-------- --------
Property and equipment, net ..... $ 69,823 $ 93,214
======== ========
7. INTANGIBLE ASSETS
The components of intangible assets are as follows (in thousands):
JUNE 30,
-------------------
1999 2000
------- -------
Workforce ................................ $ 6,171 $ 8,771
Tradenames ............................... 4,568 19,668
Customer base ............................ 5,758 16,358
Covenants not to compete ................. -- 1,200
------- -------
Total ..................... 16,497 45,997
Less accumulated amortization ............ 2,902 8,022
------- -------
Intangible assets, net ... $13,595 $37,975
======= =======
8. ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in thousands):
JUNE 30,
--------------------
1999 2000
------- -------
Compensation and benefits .............. $10,307 $25,288
Processing fees ........................ 908 3,065
Reserve for returns and chargebacks .... 1,664 2,405
Other .................................. 14,092 13,200
------- -------
Total .................. $26,971 $43,958
======= =======
9. LINE OF CREDIT
In May, 1997 the Company obtained a working capital line-of-credit, which
enabled the Company to borrow up to $20 million, based on the collateral
of eligible accounts receivable. The line expired in October 1999.
On October 25, 1999, the Company executed an amendment to its working
capital line-of-credit agreement. The amendment extended the term of the
line through December 31, 1999, and changed certain financial covenants
contained in the agreement. In January 2000, the Company completed a new
line-of credit agreement, which
F-19
36
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
matures on December 30, 2002. The new agreement, which carries an interest
rate of LIBOR plus 200 basis points or Prime, enables the Company to
borrow up to $30 million and contains certain financial and operating
covenants and does not allow for the payment of cash dividends.
No amounts were outstanding under the line at June 30, 1999 and 2000.
10. CONVERTIBLE SUBORDINATED NOTES
On November 29, 1999, the Company issued $172.5 million of 6 1/2%
convertible subordinated notes that are due on December 1, 2006. Interest
on the notes is payable on June 1 and December 1 of each year, commencing
June 1, 2000. The notes may be converted, at the holder's option, into
13.6612 shares of common stock per $1,000 of note value and the Company
may redeem the notes at any time on or after December 1, 2002. At June 30,
2000, none of the notes had been converted to common stock. Interest
expense on the notes amounted to $7,307,000 for the year ended June 30,
2000.
11. OBLIGATIONS UNDER CAPITAL LEASES
During 1993, the Company entered into a 20-year lease with the Department
of Development of the State of Ohio for land and an office building
located in Columbus, Ohio. The Company had the option to purchase the land
and building for $1 at the termination of the lease and thus, the Company
recorded the transaction as a capital lease. In June, 1999, the Company
completed a tax-free exchange of property involving the land and building
under this capital lease. In order to exercise its purchase option and
complete the transaction, the Company paid $2.5 million of principal
obligations under the lease, and placed an additional $3.6 million in
escrow. The Company and the State of Ohio entered into an escrow agreement
whereby the funds deposited are being used to make scheduled principal and
interest payments through September 1, 2000, and retire the remaining
principal obligation at that date. The net gain resulting from the sale of
the property amounted to $1.1 million and is included in the Net Gain on
Dispositions of Assets in the Company's 1999 Consolidated Statement of
Operations. Amounts deposited with the escrow trustee are included in
current and noncurrent assets and liabilities, based on the respective
principal repayment dates, in the Company's June 30, 1999 and 2000
Consolidated Balance Sheets.
The Company also leases certain equipment and software licenses under
capital leases. The Company is required to pay certain taxes, insurance
and other expenses related to the leased property.
The following is a summary of property under capital leases included in
the accompanying consolidated balance sheets (in thousands):
JUNE 30,
-----------------
1999 2000
------ ------
Equipment and software licenses ..................... $3,654 $3,654
Less accumulated depreciation and amortization ...... 2,266 2,585
------ ------
Property under capital leases, net .. $1,388 $1,069
====== ======
Future minimum lease payments required by the capital leases and the net
future minimum lease payments are as follows (in thousands):
FISCAL YEAR
ENDING JUNE 30,
---------------
2001 ................................................ $3,253
2002 ................................................ 390
2003 ................................................ 373
2004 ................................................ 62
------
Total future minimum lease payments .. 4,078
Less amount representing interest ................... 101
------
Net future minimum lease payments .... $3,977
======
F-20
37
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
12. OPERATING LEASES
The Company leases certain office space and equipment under operating
leases. Certain leases contain renewal options and generally provide that
the Company shall pay for insurance, taxes and maintenance. In addition,
certain leases include rent escalations throughout the terms of the
leases. Total expense under all operating lease agreements for the years
ended June 30, 1998, 1999 and 2000, was $5,800,000, $13,413,000 and
$19,095,000, respectively.
Minimum future rental payments under these leases are as follows (in
thousands):
FISCAL YEAR
ENDING JUNE 30,
---------------
2001 .............................................. $ 18,600
2002 .............................................. 16,784
2003 .............................................. 12,975
2004 .............................................. 11,389
2005 .............................................. 9,888
Thereafter ........................................ 76,170
--------
Net future minimum lease payments .. $145,806
========
13. EMPLOYEE BENEFIT PLANS
Retirement Plan - The Company has a defined contribution 401(k) retirement
plan covering substantially all of its employees. Under the plan eligible
employees may contribute a portion of their salary until retirement and
the Company, at its discretion, may match a portion of the employee's
contribution. Total expense under the plan amounted to $859,000,
$1,218,000 and $2,886,000, for the years ended June 30, 1998, 1999 and
2000, respectively.
Deferred Compensation Plan - In January, 1999, the Company established a
deferred compensation plan (the "DCP") covering highly-compensated
employees as defined by the DCP. Under the plan, eligible employees may
contribute a portion of their salary on a pre-tax basis. The DCP is a
non-qualified plan, therefore the associated liabilities are included in
the Company's June 30, 1999 and 2000 Consolidated Balance Sheets. In
addition, the Company has established a rabbi trust to finance obligations
under the DCP with corporate-owned life insurance policies on
participants. The cash surrender value of such policies is also included
in the Company's June 30, 1999 and 2000 Consolidated Balance Sheets. Total
expense under the DCP for the periods ended June 30, 1999 and 2000
amounted to $40,000 and $162,000, respectively.
Group Medical Plans - Effective January 1,2000, the Company converted all
of its employees to a group medical self-insurance plan. The Company has
employed an administrator to manage this plan. Under terms of this plan,
both the Company and eligible employees are required to make contributions
to this plan. The administrator reviews all claims filed and authorizes
the payment of benefits. The Company has stop-loss insurance coverage on
all individual claims exceeding $75,000. Prior to January 1, 2000, the
Company had a group medical self-insurance plan covering certain of its
employees, and medical insurance coverage under managed care health plans
covering the remaining employees. Total expense for medical insurance
coverage amounted to $3,752,000, $4,430,000, and $7,359,000, for the years
ended June 30, 1998, 1999 and 2000, respectively. Under the self-insurance
plans, the Company expenses amounts as claims are incurred and recognizes
a liability for incurred but not reported claims. At June 30, 1999 and
2000, the Company accrued $315,000 and $2,513,000 respectively, as a
liability for costs incurred but not paid under these plans.
In December, 1998, a subsidiary, CheckFree Management Corporation, was
created to administer the Company's employee medical benefits program (See
Note 21). The Company owns a controlling interest in the subsidiary, and
therefore, the accompanying consolidated financial statements include the
subsidiary's results of operations.
F-21
38
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
14. COMMON STOCK
Employee Plans
During 1995, the company adopted the 1995 Stock Option Plan (the "1995
Plan). The 1995 Plan replaces in its entirety the 1993 Stock Option Plan
(the "1993 Plan"). The options granted under the 1995 and 1993 Plans may
be either incentive stock options or non-statutory stock options. The
terms of the options granted under the 1995 and 1993 Plans are at the
sole discretion of a committee of members of the Company's Board of
Directors, not to exceed ten years. Generally, options vest at either 33%
or 20% per year from the dated of grant. The 1995 Plan originally
provided that the Company may grant options for not more than 5,000,000
shares of common stock to certain key employees, officers and directors.
In November of 1998, the 1995 Plan was amended by a vote of the Company's
shareholders to extend the maximum option grants to not more than
8,000,000 shares. Options granted under the 1995 and 1993 Plans are
exercisable according to the terms of each option, however, in the event
of a change in control or merger as defined, the options shall become
immediately exercisable. At June 30, 2000, 1,774,580 additional shares
are available for grant in the aggregate for all Plans.
Previously, the Company had adopted the 1983 Incentive Stock Option Plan
and the 1983 Non-Statutory Stock Option Plan (collectively, the "1983
Plans"), which provided that the Board of Directors may grant options for
shares of common stock to certain employees and directors. Under the
terms of the 1983 Plans, options are exercisable over a period up to ten
years from the grant date. In the event the Company is sold, options
outstanding under the 1983 Plans must be repurchased at a price
calculated as if the options had been fully exercised.
All options granted under the 1983 Plans, the 1993 Plan and the 1995 Plan
were granted at exercise prices not less than the fair market value of
the underlying common stock at the date of grant. In the event that
shares purchased through the exercise of incentive stock options are sold
within one year of exercise, the Company is entitled to a tax deduction.
The tax benefit of the deduction is not reflected in the consolidated
statements of operations but is reflected as an increase in additional
paid-in capital.
The following table summarizes stock option activity from July 1, 1997 to
June 30, 2000:
YEAR ENDED
--------------------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 2000
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding - Beginning of period ..... 4,441,161 $ 9.59 4,365,562 $15.23 5,196,600 $18.69
Granted ............................... 1,377,334 25.60 1,575,057 36.40 1,476,957 74.45
Assumed with BlueGill acquisition ..... -- -- -- -- 637,746 4.31
Exercised ............................. (708,661) 3.17 (354,758) 4.56 (794,778) 12.32
Cancelled ............................. (744,572) 12.63 (389,261) 16.12 (354,740) 27.16
--------- --------- ---------
Outstanding - End of period ........... 4,365,562 $15.23 5,196,600 $18.69 6,161,785 $30.86
========= ====== ========= ====== ========= ======
Options exercisable at end of period .. 1,352,516 $ 6.81 1,394,269 $ 9.00 1,850,887 $13.58
========= ====== ========= ====== ========= ======
Weighted average per share fair value
of options granted during the year .... $10.77 $17.65 $48.16
====== ====== ======
F-22
39
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
The following table summarizes information about options outstanding at
June 30, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- --------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
-------------------------- --------------------
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICE NUMBER CONTRACTUAL LIFE PRICE NUMBER PRICE
----------------------- --------- ---------------- -------- --------- --------
$ 0.01 - $ 15.00 ................. 3,125,547 6.8 $ 8.38 1,322,634 $ 4.62
$15.01 - $ 30.00 ................. 517,989 7.5 21.25 194,033 22.76
$30.01 - $ 60.00 ................. 1,713,631 9.1 43.80 334,220 43.72
$60.01 - $ 90.00 ................. 252,950 9.5 80.15 -- --
$90.01 - $120.00 ................. 551,668 9.5 104.50 -- --
--------- ---------
6,161,785 $ 30.86 1,850,857 $13.58
========= ======= ========= ======
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the years ended June 30,
1998, 1999 and 2000, respectively: dividend yield of 0% in all periods;
expected volatility of 48%, 49% and 83%; risk-free interest rates of
5.21%, 5.87%, and 6.30%; and expected lives of five to seven years.
The Company agreed to assume responsibility for the 1997 and 1998
Employee Incentive Stock Option Plans of BlueGill Technologies, Inc. in
conjunction with the acquisition of BlueGill in April 2000. All
outstanding options were converted to equivalent CheckFree options as
specifically prescribed in the Asset Purchase Agreement. The fair value
of the options assumed of $18.5 million was estimated on the acquisition
date using the Black-Scholes option pricing model with the following
weighted-average assumptions used: dividend yield of 0%, expected
volatility of 83%; risk-free interest rate of 6.60% and expected lives of
one half to seven years. The estimated fair value of the assumed option
plans was added to the fair value of Company stock issued in determining
the purchase price of BlueGill.
In September 1998, the Company offered an option repricing program to its
employees. Under the terms of the offer, employees had one week to return
any outstanding option grant in its entirety and replace it on a
share-for-share basis for an option grant with an exercise price equal to
the fair market value of the Company's Common Stock at the new grant
date. Only those exchanges received within one day of the designated
grant date were accepted and any vested options in such returned grants
were forfeited. The lives of returned historical grants typically ranged
from three to five years with straight line vesting beginning one year
from the original grant date. All newly issued option grants had a life
of five years with vesting to occur at 40% beginning two years from the
new grant date and 20% for each year thereafter. A total of 1,418,403
options were returned and had the offer taken place at June 30, 1998, the
options exercisable would have decreased by 95,614.
Under the 1997 Associate Stock Purchase Plan, effective for the six-month
period beginning January 1, 1997, the Company is authorized to issue up
to 1,000,000 shares of Common Stock to its full-time employees, nearly
all of whom are eligible to participate. Under the terms of the Plan,
employees can choose, every six months, to have up to 15% of their salary
withheld to purchase the Company's Common Stock. The purchase price of
the stock is 85% of the lower of its beginning-of-period or end-of-period
market price. Participation in the plan by eligible employees has ranged
from 30% to 50% in any given six-month period. Under the Plan, 56,844
shares were issued in January of 1998, 48,631 in July of 1998, 48,748 in
January of 1999 and 46,819 in July of 1999, 52,191 in January of 2000 and
34,880 in July of 2000 from employees' salary withholdings from the
respective previous six-month period. As of June 30, 2000 there were
693,754 shares available for future issuance to the Associate Stock
Purchase Plan. Following is a summary of the weighted average fair market
value of this look-back option estimated on the grant date using the
Black-Scholes option pricing model, and the related assumptions used:
F-23
40
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
December 31, June 30, December 31, June 30, December 31, June 30,
1997 1998 1998 1999 1999 2000
------------ -------- ------------ -------- ------------ --------
Fair value of options ......... $14.10 $9.68 $7.18 $5.51 $8.93 $29.15
Assumptions:
Risk-free interest rate .... 5.0% 5.0% 4.9% 4.9% 5.8% 5.8%
Expected life .............. 3 months 3 months 3 months 3 months 3 months 3 months
Volatility ................. 48.0% 48.0% 49.0% 49.0% 83.4% 83.4%
Dividend yield ............. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for its stock option
plans and employee stock purchase plan. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans in accordance with
the provisions of SFAS 123, "Accounting for Stock-Based Compensation," the
Company's net income (loss) and net income (loss) per share would have
been as follows (in thousands, except per share data):
YEAR ENDED JUNE 30,
-----------------------------------
1998 1999 2000
------- ------ --------
Pro forma net income (loss) ............ $(9,521) $1,032 $(54,030)
======= ====== ========
Pro forma net income (loss) per share;
Basic and Diluted ................ $ (0.17) $ 0.02 $ (1.01)
======= ====== ========
The pro forma amounts are not representative of the effects on reported
net income (loss) for future years.
In the year ended June 30, 2000 the Company issued 13,000 shares of
restricted stock to certain of its key employees. Under the terms of the
grants the shares vest annually over a five-year period and full vesting
is dependent upon the continued employment of the employee for the
duration of the vesting period. Shares issued were recorded at fair market
value on the date of the grant with a corresponding charge to
stockholders' equity. The unearned portion is being amortized as
compensation expense on a straight-line basis over the related vesting
period.
In January 1997 the Board of Directors approved an amendment to the
Company's 401(k) plan which authorized up to 1,000,000 shares of Common
Stock for the Company's matching contribution. The Company issued 74,981
shares in August 1998 and 36,226 shares in August of 1999 to fund its
401(k) match that had accrued during the years ended June 30, 1998 and
1999, respectively. As of June 30, 2000 there were 810,536 shares
available for future contributions to the 401(k) plan.
Stock Related Transactions With Third Parties
As described below, the Company has issued certain stock warrants to third
parties and has accounted for the issuance of such warrants in accordance
with the provisions of EITF 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."
In October 1999, the Company entered into an agreement with one of its
customers. Under the terms of the agreement, the customer purchased
250,000 shares of the Company's stock, has been issued warrants on one
million shares, and has the ability to earn warrants on up to two million
additional shares. All warrants are exercisable on September 15, 2002
contingent upon achievement of various annual revenue targets and
maintaining the continued existence of the agreement through that date.
Upon vesting, the Company will record a charge for the fair value of the
warrants, based on a Black-Scholes valuation which will take into
consideration the market value of our stock, the $39.25 strike price, the
volatility of our stock and the applicable risk-free interest rate at that
time.
In January 1998 the Company entered into a 10-year processing agreement
with a strategic partner. Under the terms of the agreement, the partner
acquired 10-year warrants exercisable at $20 15/16 for 10 million shares
of the Company's Common Stock. Three million warrants vested upon the
execution of a related processing outsourcing agreement on March 9, 1998
which resulted in the Company recording a non-cash charge of $32.4
million. The
F-24
41
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
charge was based on a Black-Scholes option pricing model valuation of
$10.80 per share using the following assumptions: risk-free rate of 5.7%,
expected life of 10 years, and volatility rate of 56.4%. The remaining
seven million warrants are to vest upon achievement of specific
performance targets set forth in the agreement. Any shares acquired by the
strategic partner under the terms of this agreement are subject to certain
transfer and other restrictions. During the fiscal year ended June 30,
2000 the strategic partner exercised 750,000 of the vested options and
2,250,000 remain outstanding.
In March 1997 the Company entered into a consulting agreement with a third
party. Under the terms of the agreement the consultant acquired 5-year
options exercisable at $13.00 for up to 50,000 shares of the Company's
Common Stock. In June of 1998, upon the execution of a processing
agreement with a key customer, 25,000 of the options vested, which
resulted in the Company recording a non-cash charge of $418,000. The
charge was based on a Black-Scholes option pricing model valuation of
$16.73 per vested share using the following assumptions: risk-free rate of
5.6%, expected life of 4 years, and volatility rate of 56.4%. The
remaining 25,000 options are to vest upon achievement of specific
performance targets by key customers set forth in the agreement. Any
shares acquired by the consultant under the terms of the agreement are
subject to certain transfer restrictions.
Convertible Subordinated Notes
In November 1999 the Company issued $172.5 million of convertible
subordinated notes. Each $1,000 note may be converted, at the holder's
option, into 13.6612 shares of common stock at a conversion rate of $73.20
per share. The fair market value of the Company's stock on June 30, 2000
was $51.56 per share. Please refer to Note 10 for further information
regarding the convertible subordinated notes.
15. PREFERRED STOCK
In January 1997, the Company's Board of Directors declared a dividend
distribution of Preferred Share Purchase Rights to protect its
stockholders in the event of an unsolicited attempt to acquire the
Company. On February 14, 1997, the Rights were issued to the Company's
stockholders of record, with an expiration date of 10 years. Until a
person or group acquires 15% or more of the Company's Common Stock, the
Rights will automatically trade with the shares of Common Stock. Only when
a person or group has acquired 15% or more of the Company's Common Stock,
will the Rights become exercisable and separate certificates issued. Prior
to the acquisition by a person or group of beneficial ownership of 15% or
more of the Company's Common Stock, the Rights are redeemable for $.001
per Right at the option of the Board of Directors.
16. EARNINGS PER SHARE
The following table reconciles the differences in income and shares
outstanding between basic and dilutive for the periods indicated (in
thousands, except per share data):
Year Ended June 30, 1998 Year Ended June 30, 1999 Year Ended June 30, 2000
----------------------------------- ----------------------------------- -----------------------------------
Income Shares Per-Share Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ----------- ------------- ----------- -------------
Basic EPS ............ $(3,703) 55,087 $(0.07) $10,457 52,444 $0.20 $(32,320) 53,367 $(0.61)
====== ===== ======
Effective of dilutive
securities:
Options and
warrants ....... -- -- -- 4,085 -- --
Convertible
notes .......... -- -- -- -- -- --
------- ------ ------- ------ -------- ------
Diluted EPS........... $(3,703) 55,087 $(0.07) $10,457 56,529 $0.18 $(32,320) 53,367 $(0.61)
======= ====== ====== ======= ====== ===== ======== ====== ======
Anti-dilution provisions of SFAS 128 require consistency between diluted
per-common-share amounts and basic per-common-share amounts in loss
periods. The number of anti-dilutive equivalent shares excluded from the
per-share calculations are 1,725,000 and 6,157,241 for the years ended
June 30, 1998 and 2000, respectively. The after-tax effect of interest
expense on the convertible subordinated notes of $4,384,000 has not been
added back to the numerator as its effect would be anti-dilutive.
F-25
42
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
17. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
YEAR ENDED JUNE 30,
-------------------------------
(IN THOUSANDS)
1998 1999 2000
------ ------- --------
Interest paid ....................................... $ 632 $ 618 $ 5,982
====== ======= ========
Income taxes paid (received), net ................... $1,434 $ 1,688 $ (229)
====== ======= ========
Supplemental disclosure of non-cash investing and
financing activities:
Capital lease additions and purchase of other
long-term assets .......................... $ 650 $ 3,379 $ 5,688
====== ======= ========
Stock funding of 401(k) match .................. $ -- $ 963 $ 1,059
====== ======= ========
Purchase price of business acquisitions ........ $1,000 $19,100 $239,900
Less: Issuance of common stock and stock
options pursuant to acquisitions .......... -- 18,000 240,000
Liabilities assumed ....................... 145 887 --
Cash acquired in acquisitions ............. -- 23 (9,052)
------ ------- --------
Net cash paid (received) ............. $ 855 $ 190 $ (9,152)
====== ======= ========
18. BUSINESS SEGMENTS
The Company operates in three business segments - Electronic Commerce,
Software, and Investment Services. These reportable segments are
strategic business units that offer different products and services. A
further description of each business segment along with the Corporate
services area follows:
- Electronic Commerce - Electronic commerce provides services that
allow consumers to receive electronic bills through the Internet,
pay bills received electronically or in paper form to anyone, and
perform ordinary banking transactions including balance inquiries,
transfers between accounts and on-line statement reconciliation.
These services are primarily directed to financial institutions,
Internet financial sites, personal financial management software
providers and the customers of these businesses.
- Software - Software includes software products and related services
for electronic billing, ACH processing and account reconciliation.
These products and services are primarily directed to large
corporations and financial institutions.
- Investment Services - Investment services includes investment
portfolio management services and investment trading and reporting
services. These products and services are primarily directed to fee
based money managers and financial planners who manage investments
of institutions and high net worth individuals.
- Corporate - Corporate services include human resources, legal,
accounting and various other of the Company's unallocated overhead
charges.
The accounting policies of the segments are the same as those described
in Note 1 "Summary of Significant Accounting Policies". The Company
evaluates performance based on revenues and operating income (loss) of
the respective segments. No single customer accounted for 10% or more of
consolidated revenues for the years ended June 30, 1998, 1999 and 2000.
Foreign sales for the periods presented are insignificant. There are no
intersegment sales.
F-26
43
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
The following sets forth certain financial information attributable to
the Company's business segments for the years ended June 30, 1998, 1999
and 2000 (in thousands):
YEAR ENDED JUNE 30,
--------------------------------------
1998 1999 2000
-------- -------- --------
Revenues:
Electronic Commerce ....................................... $137,972 $169,443 $213,391
Software .................................................. 66,143 41,384 42,012
Investment Services ....................................... 29,749 39,304 54,792
-------- -------- --------
Total ............................................ $233,864 $250,131 $310,195
======== ======== ========
Operating income (loss):
Electronic Commerce ...................................... $(39,423) $ (5,490) $(20,619)
Software - including charges for acquired in-process
research and development of $719 in 1998 and $6,900
in 2000 .............................................. 48,854 18,083 (7,590)
Investment Services - including charge for acquired
in-process research and development of $2,201 in
1999 ................................................. 5,040 5,892 10,910
Corporate ................................................ (21,647) (22,218) (26,120)
-------- -------- --------
Total ............................................ $ (7,176) $ (3,733) $(43,419)
======== ======== ========
Identifiable assets:
Electronic Commerce ....................................... $ 70,192 $ 80,223 $102,220
Software .................................................. 39,346 34,194 273,120
Investment Services ....................................... 21,187 49,098 47,246
Corporate ................................................. 119,387 89,246 290,528
-------- -------- --------
Total ............................................... $250,112 $252,761 $713,114
======== ======== ========
Capital expenditures:
Electronic Commerce ....................................... $ 19,532 $ 9,258 $ 18,299
Software .................................................. 2,197 1,189 1,773
Investment Services ....................................... 895 4,764 2,868
Corporate ................................................. 5,315 25,233 16,555
-------- -------- --------
Total ............................................... $ 27,939 $ 40,444 $ 39,495
======== ======== ========
Depreciation and amortization:
Electronic Commerce ....................................... $ 9,964 $ 14,214 $ 19,282
Software .................................................. 6,051 2,069 12,317
Investment Services ....................................... 4,558 5,336 7,634
Corporate ................................................. 4,426 3,011 3,597
-------- -------- --------
Total ............................................... $ 24,999 $ 24,630 $ 42,830
======== ======== ========
F-27
44
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following quarterly financial information for the years ended June 30,
1999 and 2000 includes all adjustments necessary for a fair presentation
of quarterly results of operations: (In thousands, except per share data):
QUARTER ENDED
----------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- -------
FISCAL 1999
Total revenue ............................ $56,814 $59,605 $62,960 $70,752
Income (loss) from operations ............ (3,462) (1,408) 349 788
Net income (loss) ........................ (1,468) 11,375 (308) 858
Basic earnings per share:
Net income (loss) per common share .. $ (0.03) $ 0.22 $ (0.01) $ 0.02
======= ======= ======= =======
Equivalent number of shares ......... 55,510 52,326 51,218 51,695
======= ======= ======= =======
Diluted earnings per share:
Net income (loss) per common share .. $ (0.03) $ 0.22 $ (0.01) $ 0.02
======= ======= ======= =======
Equivalent number of shares ......... 55,510 52,553 51,218 56,839
======= ======= ======= =======
FISCAL 2000
Total revenue ............................ $69,020 $72,969 $79,706 $88,500
Income (loss) from operations ............ (6,365) (6,275) (5,773) (25,006)
Net income (loss) ........................ (3,936) (3,969) (3,873) (20,542)
Basic earnings per share:
Net income (loss) per common share .. $ (0.08) $ (0.08) $ (0.07) $ (0.36)
======= ======= ======= =======
Equivalent number of shares ......... 51,848 52,200 52,716 56,721
======= ======= ======= =======
Diluted earnings per share:
Net income (loss) per common share .. $ (0.08) $ (0.08) $ (0.07) $ (0.36)
======= ======= ======= =======
Equivalent number of shares ......... 51,848 52,200 52,716 56,721
======= ======= ======= =======
The sum of the quarterly income (loss) per share does not equal the
year-to-date income (loss) per share for the respective fiscal periods,
due to changes in the number of shares outstanding at each quarter-end.
Significant Fourth Quarter Transactions - During the week of April 26,
1999, the Company experienced a system error that led users of its
electronic billing and payment services to experience intermittent
problems accessing and using the system. As a result of this situation,
the Company incurred charges of $2,681,000, of which $800,000 is reflected
as a reduction in processing and servicing revenue and $1,881,000 as sales
and marketing expense in the Company's Consolidated Statements of
Operations for the year ended June 30, 1999.
During the fourth quarter of 1999, the Company incurred $890,000 of costs
associated with a recalled secondary offering of stock. The costs are
reflected in general and administrative expense in the Consolidated
Statements of Operations for the year ended June 30, 1999.
20. COMMITMENTS
In June 1999, the Company entered into a five-year agreement for software
to be used in conjunction with its electronic commerce business. The
software is to be licensed in incremental units over the term of the
agreement to coincide with the growth of the Company's business. Total
commitments under the agreement amount to $10 million over the five-year
term.
On April 27, 2000 the Company announced a 10-year strategic agreement with
Bank of America ("BofA"), whereby the Company will acquire the electronic
billing and payment assets of BofA and will provide electronic billing and
payment services to BofA's customer base in exchange for 10 million shares
of the Company's common stock. The agreement provides for a revenue
guarantee of $500 million to the Company over the next 10 years. BofA has
the
F-28
45
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
ability to earn warrants on up to 10 million additional shares, eight
million of which vest incrementally upon achievement of specific levels of
subscriber adoption of electronic billing and payment services and
separately, the other two million of which vest upon achievement of
specific levels of electronic bills presented to those subscribers. Upon
vesting of the warrants, the Company will record a charge for the fair
value of the warrants, based on a Black-Scholes valuation which will take
into consideration the market value of our stock, the $32.50 strike price
of the warrants, the volatility of our stock and the applicable risk-free
interest rate at that time. Additionally, the agreement requires the
Company to invest $25 million into a joint marketing development fund
designed to accelerate adoption of electronic billing and payment services
through BofA's customer base. The agreement is pending shareholder
approval of the issuance of shares, which is expected before September 30,
2000.
21. GUARANTOR FINANCIAL INFORMATION
CheckFree Management Corporation is a guarantor of the Company's
$172,500,000 convertible subordinated notes that were issued November 29,
1999. CheckFree Management Corporation was formed as a medical claims
management subsidiary in order to appropriately minimize, control, and
manage the medical claims liabilities of the Company and its subsidiaries.
As of June 30, 1999 and 2000, the Company and its subsidiaries own
approximately 63% and 89%, respectively of CheckFree Management
Corporation. The following table sets forth-consolidating financial
statements of the Company, CheckFree Management Corporation, and other
wholly owned guarantor subsidiaries:
F-29
46
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
FISCAL 1999:
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
JUNE 30, 1999
(IN THOUSANDS)
Combined
CheckFree Wholly-owned CheckFree
CheckFree Management Guarantor Corporation
Corporation Corporation Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ ------------
Current Assets:
Cash and cash equivalents ........ $ 120 $ 291 $ 12,035 $ -- $ 12,446
Investments ...................... -- -- 10,266 10,266
Accounts receivable, net ......... -- 1,970 45,660 (1) (1,970) 45,660
Prepaid expenses and other
assets ....................... -- -- 7,800 -- 7,800
Deferred income taxes ............ -- -- 6,513 -- 6,513
-------- ------- -------- --------- --------
Total current assets ......... 120 2,261 82,274 (1,970) 82,685
Property and equipment, net ......... -- -- 69,823 -- 69,823
Capitalized software, net ........... -- -- 20,059 -- 20,059
Intangible assets, net .............. -- -- 45,875 -- 45,875
Investment in subsidiaries .......... 186,922 -- -- (3) (186,922) --
Other investments ................... -- -- 1,875 -- 1,875
Deferred income taxes ............... -- -- 21,920 -- 21,920
(1) (27,798)
(2) (29,400)
Other noncurrent assets ............. -- 27,798 40,158 (4) (234) 10,524
-------- ------- -------- --------- --------
$187,042 $30,059 $281,984 $(246,324) $252,761
======== ======= ======== ========= ========
Current Liabilities:
Accounts payable ................. $ -- $ 318 $ 9,634 (4) $ (318) $ 9,634
(1) (1,970)
(3) 126
Accrued liabilities .............. 139 -- 28,840 (4) (164) 26,971
Current portion of long-term
obligations .................. -- 1,970 1,640 (2) (1,970) 1,640
Deferred revenue ................. -- -- 20,195 -- 20,195
-------- ------- -------- --------- --------
Total current liabilities ..... 139 2,288 60,309 (4,296) 58,440
(1) (27,798)
(2) (27,430)
Accrued rent and other .............. -- 27,430 31,086 (4) 248 3,536
Obligations under capital leases -
less current portion ............ -- -- 3,882 -- 3,882
Redeemable Preferred Stock .......... -- 114 -- (3) (114) --
Stockholders' equity ................ 186,903 227 186,707 (3) (186,934) 186,903
-------- ------- -------- --------- --------
$187,042 $30,059 $281,984 $(246,324) $252,761
======== ======= ======== ========= ========
1. Elimination of note receivable between CheckFree Services Corporation, a
wholly owned subsidiary of CheckFree Corporation, and CheckFree Management
Corporation.
2. Elimination of claims liability deposit between CheckFree Services
Corporation, a wholly owned subsidiary of CheckFree Corporation, and
CheckFree Management Corporation.
3. Elimination of CheckFree Corporation's investment in subsidiaries,
including the minority interest of CheckFree Management Corporation.
4. Elimination of other intercompany balances
F-30
47
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1999
(IN THOUSANDS)
Combined
CheckFree Wholly-owned CheckFree
CheckFree Management Guarantor Corporation
Corporation Corporation Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ ------------
Revenues:
Processing and servicing .......... $ -- $ -- $201,059 $ -- $201,059
License fees ...................... -- -- 15,975 -- 15,975
Maintenance fees .................. -- -- 17,746 -- 17,746
Other ............................. 117 -- 15,351 (1) (117) 15,351
------- ------- -------- -------- --------
Total revenues ................ 117 -- 250,131 (117) 250,131
Expenses:
Cost of processing, servicing
and support ................... -- -- 146,704 -- 146,704
Research and development .......... -- -- 21,085 -- 21,085
Sales and marketing ............... -- -- 32,354 -- 32,354
(1) (117)
General and administrative ........ -- 117 31,450 (2) 16 31,466
Depreciation and amortization ..... -- -- 24,630 -- 24,630
In-process research and
development .................... -- -- 2,201 -- 2,201
------- ------- -------- -------- --------
Total expenses ................ -- 117 258,424 (101) 258,440
Net gain on disposition of assets .... -- -- 4,576 -- 4,576
------- ------- -------- -------- --------
Income (loss) from operations ........ 117 (117) (3,717) (16) (3,733)
(3) (1,300)
Interest income ...................... 1,343 3,941 (4) (1,185) 2,799
(3) 1,300
Interest expense ..................... -- (1,185) (1,918)(4) 1,185 (618)
------- ------- -------- -------- --------
Income (loss) before income taxes .... 117 41 (1,694) (16) (1,552)
Income tax benefit ................... -- -- (12,009) -- (12,009)
------- ------- -------- -------- --------
Income before equity in earnings of
subsidiaries ..................... 117 41 10,315 (16) 10,457
Equity in earnings of subsidiaries ... 10,340 -- -- (2) (10,340) --
------- ------- -------- -------- --------
Net income (loss) .................... $10,457 $ 41 $ 10,315 $(10,356) $ 10,457
======= ======= ======== ======== ========
1. Elimination of administrative fee between CheckFree Corporation and
CheckFree Management Corporation.
2. Elimination of CheckFree Corporation's investment in subsidiaries,
including the minority interest of CheckFree Management Corporation.
3. Elimination of the interest income / expense from the note receivable
between CheckFree Services Corporation, a wholly-owned subsidiary of
CheckFree Corporation, and CheckFree Management Corporation.
4. Elimination of the interest income / expense from the claims liability
deposit between CheckFree Services Corporation, a wholly-owned subsidiary
of CheckFree Corporation and CheckFree Management Corporation.
F-31
48
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 1999
(IN THOUSANDS)
Combined
CheckFree Wholly-owned CheckFree
CheckFree Management Guarantor Corporation
Corporation Corporation Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ ------------
Operating activities:
Net income ............................................... $ 10,457 $ 41 $ 10,315 (1) $(10,356) $ 10,457
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in earnings of subsidiaries ................... (10,340) -- -- (1) 10,340 --
Net inter-subsidiary cash transfers .................. (2,733) -- 2,733 -- --
Write-off of in-process research and development ..... -- -- 2,201 -- 2,201
Depreciation and amortization ........................ -- -- 24,630 -- 24,630
Deferred income tax provision ........................ -- -- 854 -- 854
Net gain on disposition of assets .................... -- -- (4,576) -- (4,576)
Purchases of investments-Trading ..................... -- -- (10,416) -- (10,416)
Proceeds from sales and maturities of
investments-Trading ............................... -- -- 24,683 -- 24,683
Change in certain assets and liabilities (net
of acquisitions and dispositions):
Accounts receivable ............................ -- -- (6,976) -- (6,976)
Prepaid expenses and other ..................... -- -- 1,434 -- 1,434
Accounts payable ............................... -- -- 988 -- 988
Accrued liabilities ............................ -- -- (2,320)(1) 126 (2,194)
Deferred revenues .............................. -- -- 1,739 -- 1,739
Income tax accounts ............................ -- -- (17,253) -- (17,253)
-------- -------- -------- ------- --------
Net cash provided by (used in) operating
activities ............................................. (2,616) 41 28,036 110 25,571
Investing activities:
Purchase of property and software ....................... -- -- (40,444) -- (40,444)
Proceeds from sale of assets ............................ -- -- 18,435 -- 18,435
Proceeds from repayment of note receivable .............. -- -- 14,882 -- 14,882
Capitalization of software development costs ............ -- -- (8,031) -- (8,031)
Purchase of business, net of cash acquired .............. (190) -- -- -- (190)
Purchase of investments- held to maturity ............... -- -- (1,875) -- (1,875)
Proceeds from maturities and sales of
investments- held to maturity ........................ -- -- 1,006 -- 1,006
Loan to related party ................................... -- (30,512) 30,512 -- --
Principal payments on related party loan ................ -- 743 (743) -- --
-------- -------- -------- ------- --------
Net cash provided by (used in) investing
activities .............................................. (190) (29,769) 13,742 -- (16,217)
Financing Activities:
Principal payments on capital lease obligations ......... -- -- (3,327) -- (3,327)
Escrow deposit associated with capital
lease obligation ..................................... -- -- (3,637) -- (3,637)
Proceeds from stock options exercised,
including related tax benefits ....................... 2,926 -- -- 2,926
Proceeds from employee stock purchase plan .............. -- -- 1,931 -- 1,931
Inter-subsidiary cash transfer for purchase
of treasury stock ...................................... 31,336 (31,336) -- --
Purchase of treasury stock ............................... (31,336) -- -- -- (31,336)
Issuance of stock ........................................ -- 300 (190)(1) (110) --
Assumption of health plan liabilities .................... -- 30,474 (30,474) -- --
Payments on health plan liabilities ...................... (755) 755 -- --
-------- -------- -------- ------- --------
Net cash provided by (used in) financing
activities .............................................. 2,926 30,019 (66,278) (110) (33,443)
-------- -------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents ............................................. 120 291 (24,500) -- (24,089)
Cash and cash equivalents:
Beginning of period ..................................... -- -- 36,535 -- 36,535
-------- -------- -------- ------- --------
End of period ........................................... $ 120 $ 291 $ 12,035 $ -- $ 12,446
======== ======== ======== ======= ========
(1) Elimination of CheckFree Corporation's investment in subsidiaries,
including the minority interest of CheckFree Management Corporation.
FISCAL 2000:
F-32
49
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
FISCAL 2000:
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
Combined
CheckFree Wholly-owned CheckFree
CheckFree Management Guarantor Corporation
Corporation Corporation Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ ------------
Current Assets:
Cash and cash equivalents ........ $ 63 $ 4 $128,007 $ -- $128,074
Investments ...................... -- -- 56,548 56,548
Accounts receivable, net ......... -- 3,678 58,308 (1) (3,678) 58,308
Prepaid expenses and other
assets ....................... -- -- 16,491 (2) (3,678) 12,813
Deferred income taxes ............ -- -- 9,733 9,733
-------- ------- -------- --------- --------
Total current assets ......... 63 3,682 269,087 (7,356) 265,476
Property and equipment, net ......... -- -- 93,214 -- 93,214
Capitalized software, net ........... -- -- 37,189 -- 37,189
Intangible assets, net .............. -- -- 251,280 -- 251,280
Investment in subsidiaries .......... 620,955 (3) (620,955) --
Other investments ................... -- -- 23,003 -- 23,003
Deferred income taxes ............... -- -- 29,248 -- 29,248
(1) (23,873)
Other noncurrent assets ............. 5,180 23,873 29,232 (2) (20,708) 13,704
-------- ------- -------- --------- --------
$626,198 $27,555 $732,253 $(672,892) $713,114
======== ======= ======== ========= ========
Current Liabilities:
Accounts payable ................. $ 6,791 $ 250 $ 3,117 $ -- $ 10,158
Accrued liabilities .............. 1,013 2,572 40,373 -- 43,958
Current portion of long-term ..... (1) (3,678)
obligations .................. -- 3,678 9,633 (2) (3,678) 5,955
Deferred revenue ................. -- -- 26,644 -- 26,644
-------- ------- -------- --------- --------
Total current liabilities ..... 7,804 6,500 79,767 (7,434) 86,715
(1) (23,873)
Accrued rent and other .............. -- 20,708 31,142 (2) (20,708) 7,269
Convertible subordinated notes ...... 172,500 -- 172,500
Obligations under capital leases -
less current portion ............ -- -- 736 -- 736
Redeemable Preferred Stock .......... -- 114 (3) (114) --
Stockholders' equity ................ 445,894 233 620,608 (3) (620,841) 445,894
-------- ------- -------- --------- --------
$626,198 $27,555 $732,253 $(672,892) $713,114
======== ======= ======== ========= ========
1. Elimination of note receivable between CheckFree Services Corporation, a
wholly owned subsidiary of CheckFree Corporation, and CheckFree Management
Corporation.
2. Elimination of claims liability deposit between CheckFree Services
Corporation, a wholly owned subsidiary of CheckFree Corporation, and
CheckFree Management Corporation.
3. Elimination of CheckFree Corporation's investment in subsidiaries,
including the minority interest of CheckFree Management Corporation.
F-33
50
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 2000
(IN THOUSANDS)
Combined
CheckFree Wholly-owned CheckFree
CheckFree Management Guarantor Corporation
Corporation Corporation Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ ------------
Revenues:
Processing and servicing .......... $ -- $ -- $261,621 $ -- $261,621
License fees ...................... -- -- 16,818 -- 16,818
Maintenance fees .................. -- -- 18,752 -- 18,752
Other ............................. 235 -- 13,004 (1) (235) 13,004
-------- ------- -------- ------- --------
Total revenues ................ 235 -- 310,195 (235) 310,195
Expenses:
Cost of processing, servicing
and support ................... -- -- 182,540 -- 182,540
Research and development .......... -- -- 35,631 -- 35,631
Sales and marketing ............... -- -- 44,782 -- 44,782
General and administrative ........ -- 235 40,931 (1) (235) 40,931
Depreciation and amortization ..... -- -- 42,830 -- 42,830
In-process research and
development .................... -- -- 6,900 -- 6,900
-------- ------- -------- ------- --------
Total expenses ................ -- 235 353,614 (235) 353,614
-------- ------- -------- ------- --------
Income (loss) from operations ........ 235 (235) (43,419) -- (43,419)
(3) (2,457)
Interest income ...................... -- 2,475 9,898 (4) (2,227) 7,689
(3) 2,457
Interest expense ..................... (7,307) (2,227) (3,177)(4) 2,227 (8,027)
-------- ------- -------- ------- --------
Income (loss) before income taxes .... (7,072) 13 (36,698) -- (43,757)
Income tax benefit ................... -- -- (11,437) -- (11,437)
-------- ------- -------- ------- --------
Income (loss) before equity in
earnings (loss) of subsidiaries .. (7,072) 13 (25,261) -- (32,320)
Equity in loss of subsidiaries ....... (25,248) -- -- (2) 25,248 --
-------- ------- -------- ------- --------
Net income (loss) .................... $(32,320) $ 13 $(25,261) $25,248 $(32,320)
======== ======= ======== ======= ========
1. Elimination of administrative fee between CheckFree Corporation and
CheckFree Management Corporation.
2. Elimination of CheckFree Corporation's investment in subsidiaries,
including the minority interest of CheckFree Management Corporation.
3. Elimination of the interest income / expense from the note receivable
between CheckFree Services Corporation, a wholly owned subsidiary of
CheckFree Corporation, and CheckFree Management Corporation.
4. Elimination of the interest income / expense from the claims liability
deposit between CheckFree Services Corporation, a wholly owned subsidiary
of CheckFree Corporation, and CheckFree Management Corporation.
F-34
51
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 2000
(IN THOUSANDS)
Combined
CheckFree Wholly-owned CheckFree
CheckFree Management Guarantor Corporation
Corporation Corporation Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ ------------
Operating activities:
Net income (loss) ....................................... $ (32,320) $ 13 $ (25,261)(1) $ 25,248 $ (32,320)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in loss of subsidiaries ...................... 25,248 -- -- (1) (25,248) --
Net inter-subsidiary cash transfers ................. 555 -- (555) --
Write-off of in-process research
and development .................................. -- -- 6,900 -- 6,900
Depreciation and amortization ....................... -- -- 42,830 -- 42,830
Deferred income tax provision ....................... -- -- (31) -- (31)
Purchases of investments-Trading .................... -- -- (19,002) -- (19,002)
Proceeds from sales and
maturities of investments-Trading ................ -- -- 22,608 -- 22,608
Change in certain assets and liabilities (net of
acquisitions and dispositions)
Accounts receivable ........................... -- -- (14,499) -- (14,499)
Prepaid expenses and other .................... -- -- 644 -- 644
Accounts payable .............................. -- -- (4,153) -- (4,153)
Accrued liabilities ........................... 874 -- 19,385 -- 20,259
Deferred revenues ............................. -- -- 9,188 -- 9,188
Income tax accounts ........................... -- -- (11,408) -- (11,408)
--------- ------- --------- -------- ---------
Net cash provided by (used in) operating
activities ............................................ (5,643) 13 26,646 -- 21,016
Investing activities:
Purchase of property and software ...................... -- -- (39,495) -- (39,495)
Capitalization of software development costs ........... -- -- (7,576) -- (7,576)
Purchase of business, net of cash acquired ............. (3,713) -- 12,865 -- 9,152
Purchase of investments- held to maturity .............. -- -- (70,796) -- (70,796)
Proceeds from maturities and sales of
investments- held to maturity ....................... -- -- 9,780 -- 9,780
Purchase of other investments .......................... -- (10,000) -- (10,000)
Principal payments on related party loan ............... -- 2,218 (2,218) -- --
--------- ------- --------- -------- ---------
Net cash provided by (used in) investing
activities ............................................. (3,713) 2,218 (107,440) -- (108,935)
Financing Activities:
Principal payments on capital lease obligations ........ -- -- (1,495) -- (1,495)
Proceeds from stock options exercised,
including related tax benefits ...................... 9,721 -- -- -- 9,721
Proceeds from employee stock purchase plan ............ -- -- 2,903 -- 2,903
Proceeds from sale of stock and exercise
of warrants ......................................... 25,515 -- -- -- 25,515
Inter-subsidiary cash transfer of stock and
warrant exercise proceeds ........................... (25,515) 25,515
Proceeds from issuance of convertible
subordinated notes .................................. 166,903 -- -- -- 166,903
Capital contribution to subsidiary ..................... (167,325) -- 167,325 --
Loan to related party .................................. -- 242 (242) -- --
Payments on health plan liabilities .................... -- (2,760) 2,760 -- --
--------- ------- --------- -------- ---------
Net cash provided by (used in) financing
activities ............................................. 9,299 (2,518) 196,766 -- 203,547
--------- ------- --------- -------- ---------
Net increase (decrease) in cash and cash
equivalents ............................................ (57) (287) 115,972 -- 115,628
Cash and cash equivalents:
Beginning of period .................................... 120 291 12,035 -- 12,446
--------- ------- --------- -------- ---------
End of period .......................................... $ 63 $ 4 $ 128,007 $ -- $ 128,074
========= ======= ========= ======== =========
(1) Elimination of CheckFree Corporation's investment in subsidiaries,
including the minority interest of CheckFree Management Corporation.
F-35
52
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
The following table represents the equity structure of CheckFree Management
Corporation as of June 30, 1999 and 2000 (In thousands, except share data):
JUNE 30,
---------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
1999 2000
---- ----
REDEEMABLE PREFERRED STOCK:
Class C, 350 authorized shares, $100 par value;
350 shares issued and outstanding ................................ $ 36 $ 36
Class D, 750 authorized shares, $100 par value;
750 shares issued and outstanding ................................ 78 78
---- ----
Total redeemable preferred stock ..................... $114 $114
==== ====
STOCKHOLDERS' EQUITY:
Preferred stock- Class B, 600 authorized shares, $100 par value;
600 shares issued, no amounts outstanding ........................ $ -- $ --
Common stock- Class A, 1,900 authorized shares, $100 par value;
1,900 shares issued and outstanding .............................. 190 190
Retained earnings ................................................... 37 42
---- ----
Total stockholders' equity ........................... $227 $232
==== ====
Redeemable Preferred Stock - The holders are entitled to receive
dividends before any dividend is declared or paid on shares of Class A
Common Stock. Such dividends are cumulative and are payable at times
determined by the CheckFree Management Corporation's Board of
Directors. The holders are entitled to one vote per share and each
class has certain rights with respect to election of the Company's
Board of Directors. On or after January 1, 2004, the Company may, at
its option, redeem the shares of Class C and Class D preferred stock
for cash, the amount of which is determined by the "Formula Value",
plus any accrued but unpaid dividends. The "Formula Value" provides for
the price to be par value plus a percentage of the increase in the
Company valuation from the inception date, not to exceed a per share
price of $500. On or after January 1, 2005, the holders of Class C and
Class D preferred stock may require the Company to redeem their shares
for cash, the amount of which is determined by the Formula Value
defined above, plus any accrued but unpaid dividends. At June 30, 1999
and 2000, the redemption value of the preferred stock is approximately
equal to its carrying value. In the event of liquidation, dissolution
or winding up of the Company, holders of Class C and Class D preferred
stock are entitled to receive, prior to and in preference to any
distributions to the holders of Class B preferred stock or Class A
common stock, an amount determined by the Formula Value, plus any
accrued but unpaid dividends.
Capital Stock - Holders of class A Common Stock are entitled to one
vote per share and have certain rights with respect to election of the
Company's Board of Directors. The holders of Class B, Preferred Stock
have certain additional rights, privileges and preferences. The holders
are entitled to one vote per share and each class has certain rights
with respect to election of the Company's Board of Directors. The
holders are entitled to receive dividends before any dividend is
declared or paid on shares of Class A Common Stock. Such dividends are
cumulative and are payable at times determined by the Board of
Directors. In the event of liquidation, dissolution or winding up of
the Company, subject to the redeemable preferred stock preferences,
holders of Class B preferred stock are entitled to receive an amount
equal to the par value plus any accrued but unpaid dividends.
In December 1998, the Company entered into a Stockholders' Agreement
with each holder of common and preferred stock. The agreement restricts
the sale or transfer of any shares of stock without express written
consent of all stockholders. In addition, the agreement provides that
the holder of the Class A Common Stock, CheckFree Corporation, is
subject to capital calls when and if the Board of Directors determines
that the
F-36
53
CHECKFREE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
Company will have a cash shortfall for any quarter. Through
June 30, 1999 and 2000, no additional capital contributions were
required.
22. SUBSEQUENT EVENTS
In the first quarter of fiscal 2001, the Company completed the
previously announced agreement to purchase MSFDC L.L.C ("TransPoint")
in exchange for 17 million shares of the Company's common stock valued
at approximately $1.3 billion. TransPoint is a joint venture between
Microsoft, First Data Corporation and Citibank. The acquisition will be
accounted for under the purchase method of accounting and is expected
to include a charge for in process research and development. The
purchase price will be allocated primarily to Goodwill, with an
estimated value of $825 million, and Strategic Agreements, with an
estimated value of $495 million, both of which will be amortized over a
5-year period. As part of the agreement, the selling parties funded the
joint venture with $97.2 million of cash immediately prior to closing.
Additionally, a related commercial agreement with Microsoft provides
for a revenue guarantee of $120 million over the next five years and a
related marketing agreement with First Data Corporation provides for a
revenue and/or expense savings guarantee of $60 million over the next
five years. TransPoint provides electronic billing and payment
processing services.
F-37