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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Year Ended June 30, 2003
Commission File Number: 0-26802
CHECKFREE CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 58-2360335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4411 EAST JONES BRIDGE ROAD
NORCROSS, GEORGIA 30092
(Address of principal executive offices,
including zip code)
(678) 375-3000
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b)
of the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, $.01
par value
Preferred Stock
Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of our Common Stock held by our
non-affiliates was approximately $1,318,566,032 on December 31, 2002.
There were 89,540,390 shares of our Common Stock outstanding on
September 8, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the 2003 Annual Meeting of
Stockholders are incorporated by reference in Part III.
THIS PAGE INTENTIONALLY LEFT BLANK.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business.................................................................................. 4
Item 2. Properties................................................................................ 22
Item 3. Legal Proceedings......................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders....................................... 22
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................. 23
Item 6. Selected Financial Data................................................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................ 51
Item 8. Financial Statements and Supplementary Data............................................... 52
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 89
Item 9A. Controls and Procedures................................................................... 89
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 90
Item 11. Executive Compensation.................................................................... 90
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters............................................................... 90
Item 13. Certain Relationships and Related Transactions............................................ 90
Item 14. Principal Accountant Fees and Services.................................................... 90
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 91
Signatures........................................................................................... 96
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PART I
ITEM 1. BUSINESS.
All references to "we," "us," "our," "CheckFree" or the "Company" in
this Annual Report on Form 10-K mean CheckFree Corporation and all entities
owned or controlled by CheckFree Corporation, except where it is made clear that
the term only means the parent company.
OVERVIEW
CheckFree was founded in 1981 as an electronic payment processing
company and has become a leading provider of financial electronic commerce
products and services. Our current business was developed through the expansion
of our core electronic payments business and the acquisition of companies
operating in similar or complementary businesses.
Through our Electronic Commerce Division, we enable consumers to
receive and pay bills electronically. For the year ended June 30, 2003, we
processed approximately 434 million transactions, and delivered approximately 32
million electronic bills. For the quarter ended June 30, 2003, we processed
approximately 120 million transactions and delivered approximately 11.5 million
electronic bills. During the quarter ended June 30, 2003, over 10 million
consumers initiated a payment through CheckFree-managed services. The number of
transactions we process each year continues to grow. For the year ended June 30,
2003, growth in the number of transactions exceeded 37%. The Electronic Commerce
Division accounts for approximately 73% of our annual revenue.
Through our Investment Services Division, we provide a range of
portfolio management services to financial institutions, including broker
dealers, money managers and investment advisors. As of June 30, 2003, our
clients used the CheckFree APL portfolio accounting system to manage over 1.2
million portfolios, totaling more than $700 billion in assets. The Investment
Services Division accounts for approximately 15% of our annual revenue.
Through our Software Division, we deliver software, maintenance,
support and professional services to large financial service providers and other
companies across a range of industries. Our Software Division is comprised of
three units, each with its own distinct set of software products. The ACH
Solutions unit provides software and services that are used to process more than
two-thirds of the nation's nine billion Automated Clearing House ("ACH")
payments. The CheckFree Financial and Compliance Solutions ("CFACS") unit
enables organizations to manage their reconciliation and compliance
requirements. The i-Solutions unit provides software and services that enable
end-to-end e-billing and e-statement creation, delivery and payment. The
Software Division accounts for approximately 12% of our annual revenue.
ELECTRONIC COMMERCE DIVISION
Introduction. The Electronic Commerce Division enables consumers to
receive and pay bills electronically. Its products enable consumers to:
- receive electronic bills through the Internet;
- pay any bill - whether it arrives over the Internet or through
traditional mail - to anyone;
- make payments not related to bills - to anyone; and
- perform customary banking transactions, including balance
inquiries, transfers between accounts and online statement
reconciliations.
The majority of consumers using our services access the CheckFree
system through Consumer Service Providers ("CSPs"). These are organizations,
such as banks, brokerage firms, Internet portals and content sites,
Internet-based banks, Internet financial sites and personal financial management
software providers, that use our products to enable consumers to receive and/or
pay bills electronically. We have relationships with hundreds of CSPs. Some of
our largest CSPs, as determined by type of CSP and number of consumers using
CheckFree's products, are Bank of America, U.S. Bank, Charles Schwab & Co., Navy
Federal Credit Union, SunTrust, U.S.
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Postal Service, Wachovia, Wells Fargo and Yahoo!. This list of our CSPs is not
exhaustive and may not fully represent our customer base.
Industry Background. On average more than 17 billion paper bills are
produced each year, with the cost to a biller of submitting a paper bill,
including printing, postage and billing inserts, averaging anywhere from $0.50 -
$2.00 per bill (Gartner Group 2002). In addition, it is estimated that 42.5
billion checks are written in the United States every year. The use of checks
for bill payment imposes significant costs on financial services organizations,
businesses and their customers. These costs include the writing, mailing,
recording and manual processing of checks. The majority of today's consumer bill
payments are completed using traditional paper-based methods. According to a
March 2002 TowerGroup study of the estimated 17 billion consumer bills produced
each year, 74% are paid by paper check, 11% are paid by electronic means and the
remainder are paid by other means (cash, payroll deduction, money order, etc.).
This compares to PSI Global statistics for 1990 which indicated that 90% of
consumer bills were paid by check and 2% to 3% were paid electronically. Today,
many traditional financial transactions can be completed electronically due to
the emergence of new communications, computing and security technologies. Many
financial services organizations and businesses have invested in these
technologies and are creating the infrastructure for recording, reporting and
executing electronic transactions. We believe the broad impact of the Internet,
the relatively high cost of producing, printing and mailing a paper bill and the
cost to financial services organizations, businesses and customers of processing
paper checks will continue the trend toward increased usage of electronic
methods to execute financial transactions.
Products and Services. We have developed an open infrastructure, known
as Genesis, to process electronic bills and payments. The Genesis system is
accessed by CSPs using various web-based applications. In March 2001, we
introduced our latest application for electronic billing and payments - "WebPay
for Consumers" (or WebPay), which added to our core product the ability for
consumers to receive and pay e-bills over e-mail and to exchange money with each
other using e-mail "invitations" to receive money. WebPay helps consumers
automate the complete process of viewing and paying bills - they can receive
bills online as well as pay those bills online. WebPay also allows the consumer
to "Pay Anyone" - from a child in college, to a lawn care or other service
provider, to a friend - electronically, using the Genesis system.
- ELECTRONIC BILLING OR e-BILL SERVICES. As of June 30, 2003,
consumers could view 279 different e-bills through CSP websites
or directly at our website. The following billers are some of our
largest e-billing customers, as determined by the number of
consumers viewing and paying their e-bills: Bank of America
Credit Card, JC Penney Card Services, Sam's Club Credit, Macy's,
Home Depot Consumer Accounts, Lowe's Consumer Credit Card, Sprint
PCS, Verizon Corporation and Texaco. Actual e-bills delivered in
the fourth quarter ended June 30, 2003, exceeded 11.5 million,
which is an increase of 24% over the 8.8 million e-bills
distributed in the third quarter ended March 31, 2003, and an
increase of more than 200% over the 3.8 million e-bills delivered
in the fourth quarter ended June 30, 2002. For the year, we
delivered about 32 million e-bills. The number of CSPs where
consumers can both view and pay bills grew by approximately 63%
in 2003, with 949 CSPs now offering full electronic billing and
payment.
- ELECTRONIC PAYMENT OR THE CHECKFREE PAYANYONE(SM) SERVICE. Our
PayAnyone(SM) service allows consumers to literally pay anyone
electronically using a variety of devices such as personal
computers. Once a consumer has accessed the system, he or she can
either elect to pay an electronic bill delivered by us or can
instruct the system to pay any individual or company within the
United States. We complete this payment request either
electronically, using the Federal Reserve's Automated Clearing
House, or in some instances other electronic methods such as Visa
e-pay, or by issuing a paper check or draft.
- Automated Clearing House. The Federal Reserve's
Automated Clearing House (ACH) is the primary
batch-oriented electronic funds transfer system
financial services organizations use to move funds
electronically through the banking system. We access
the ACH through an agreement with SunTrust Bank.
Additional information on the ACH can be found at
the Federal Reserve Commission's website at
www.federalreserve.gov. Like other users of the ACH,
we bear credit risk resulting from returned
transactions caused by insufficient funds, stop
payment orders, closed accounts, frozen accounts,
unauthorized use, disputes, theft or fraud.
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- Paper Checks or Drafts. When we are unable to move
the funds electronically, we will issue a paper
check, drawn on our bank account, or a paper draft,
drawn on the consumer's bank account. When we issue
a check, we bear the risk of insufficient funds,
stop payment orders, closed accounts or frozen
accounts.
- Payment Method Selection. Our Genesis system
contains patented technology that determines the
preferred method of payment to balance processing
costs, operational efficiencies and risk of loss. We
have been able to manage our risk of loss by using
this technology to adjust the mix of electronic and
paper transactions in individual cases such that,
overall, we have not incurred losses in excess of
0.41% of our revenues in any of the past five years.
We also maintained a reserve for these risks of
$600,000 at June 30, 2003.
Usage Metrics. We report usage metrics in several ways. First we report
global numbers showing the total number of transactions and the total number of
consumers who initiate a payment in any quarter. For the year ended June 30,
2003, we processed more than 434 million transactions and delivered about 32
million e-bills. For the fourth quarter ended June 30, 2003, more than 10
million consumers initiated a payment through CheckFree-managed services. We
also report usage based on the relationship we have with the CSP, either a "Full
Service" relationship or a "Payment Services" relationship. A Full Service
relationship is one with a CSP that outsources the complete electronic billing
and payment process to us. A Payment Services relationship is one with a CSP
that utilizes only a subset of our electronic billing and payment services or
uses one of our other Electronic Commerce Division products. Using these
metrics, for the year ended June 30, 2003, we processed approximately 309.8
million transactions related to Full Service consumers and recorded revenues of
approximately $310.8 million for these services. We also processed approximately
124.0 million transactions in the Payment Services category and recorded revenue
of approximately $53.7 million for these services. Growth in transactions in the
Electronic Commerce Division exceeded 37% for the year and growth in revenue
exceeded 15% for the year.
The CheckFree Advantage. We have developed numerous systems and
programs to enhance our electronic billing and payment products.
- SCALABLE GENESIS PLATFORM. The Genesis platform is an open
infrastructure created to process electronic bills and payments.
Genesis has the built-in scale to handle transactions from more
than 30 million consumers. Between 1999 and 2002, we successfully
migrated all transaction processing for all consumers using
CheckFree services to the Genesis platform, enabling us to
improve our economies of scale.
- SIGMA QUALITY. In fiscal year 2000, we began an internal program
called the "Sigma Challenge," which ties employee performance
evaluations and compensation to the achievement of process and
system improvements. Sigma is a measure of quality typically used
by manufacturing firms to minimize defects. The Sigma Challenge
applies Sigma measurements as a barometer of our performance on
our key metrics of system availability and payment timeliness,
and focuses our attention on critical tasks and peak performance.
The Sigma Challenge was designed to take our quality performance
to 99.9%, or 4.6 Sigma. A 4.6 Sigma is the quality standard set
by the telecommunications industry for delivering their services
to businesses and consumers, and signifies "dial-tone" quality.
Meeting the Sigma Challenge has allowed us to provide a higher
level of quality service to our clients. As a result of our Sigma
Challenge program, in 2003, we voluntarily raised our service
level agreements across our entire base of CSPs.
- ELECTRONIC PAYMENT RATE. Electronic payments are more efficient
than paper payments, which are made by check or draft. Electronic
payments are less expensive to process initially, result in fewer
errors and result in fewer customer inquiries. As of June 30,
2003, we completed over 75% of our payments electronically. This
compares to 71% as of June 30, 2002. In addition to sending a
large majority of our payments electronically, we also have
developed a process by which we include with the payment
additional information the receiving merchant has given us about
how its payment should be transmitted. We have established
connectivity with over 6,000 merchants to provide this additional
information. This additional information allows merchants to
quickly and more accurately process the electronic payments they
receive from us and reduces the number of customer inquiries we
receive on these payments.
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- EXPERIENCED CUSTOMER CARE. We have approximately 780 trained,
experienced customer care and merchant services staff located in
facilities in Dublin, Ohio; Aurora, Illinois; and Phoenix,
Arizona. The level and types of customer care services we provide
vary depending upon the customer's or CSP's requirements. We
provide both first- and second-tier support. When we provide
first-tier customer care, we handle all inbound customer calls,
in some cases under the CSP's name. When we provide second-tier
customer support, we provide payment research and support, and
the CSP handles its own inbound customer calls. To maintain our
customer care standards, we employ extensive internal monitoring
systems, conduct ongoing customer surveys and provide
comprehensive training programs. We use the feedback from these
sources to identify areas of strength and opportunities for
improvement in customer care, and to help us adjust resources to
respond efficiently.
Our Business Strategy. Our business strategy is to provide an expanding
range of convenient, secure and cost-effective electronic commerce services and
related products to financial services organizations, Internet-based information
sites, businesses that generate recurring bills and statements, and their
customers. We have designed our services and products to take advantage of
opportunities we perceive in light of current trends and our fundamental
strategy. The key elements of our business strategy are to:
- DRIVE INCREASED ADOPTION OF ELECTRONIC COMMERCE SERVICES BY
CONSUMERS. We believe that consumers will move their financial
transactions from traditional paper-based to electronic methods
if they have an easy-to-access, easy-to-use, secure, and
cost-effective method for receiving and paying their bills
electronically. To drive this transition, we make our e-bill and
payment services available directly, through CSPs and through
biller sites so that e-bills are available wherever consumers
feel most comfortable viewing and paying them. We also price our
services to our customers in such a way as to facilitate their
offering electronic billing and payment to a broad array of
consumers. CSPs and billers pay us based on the number of their
consumers enabled to use our system, the number of transactions
we process, or some combination of both. The price charged for
each consumer or each transaction is negotiated individually with
each CSP and may vary depending on:
- the services provided to the consumers;
- the nature of the transactions processed; and
- the volume of consumers, transactions, or both.
We believe this flexibility equips our CSPs and billers to
provide their consumers with services that will meet their needs,
and that this flexibility makes it more attractive for CSPs and
billers to more heavily promote the CheckFree electronic billing
and payment service.
- CONTINUE TO IMPROVE OPERATIONAL EFFICIENCY AND EFFECTIVENESS. We
believe that as our business grows and the number of transactions
we process increases, we will be able to take advantage of
operating efficiencies associated with increased volumes, thereby
reducing our unit costs. Our Sigma Challenge program, our high
electronic rate, our consolidation of platforms, the scalability
of the Genesis system and our high quality customer care centers
all help us achieve greater efficiencies.
- DRIVE NEW FORMS OF ELECTRONIC COMMERCE SERVICES. Our electronic
commerce services are currently applied to banking, billing and
payment transactions. We believe that new applications will be
developed as a result of the growth in electronic commerce
generally, and Internet-based commerce specifically. We intend to
leverage our infrastructure and distribution to address the
requirements of consumers and businesses in these new
applications. For example, our core payment and processing
network can manage person-to-person and small business payments,
as well as payments made at Internet merchant sites. In 2003, we
updated our website, www.checkfree.com, to provide an education
site where consumers can go to learn about and experience
electronic billing.
Technology, Research and Development. Our core technology capabilities
were developed to handle settlement services, merchant database services and
online inquiry services on a traditional mainframe system with direct
communications to businesses. We have implemented a logical, nationwide "n-tier"
internetworking infrastructure. In other words, our infrastructure networks
together any number of other networks, passing
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transaction data among them. For example, we internetwork together networks of
billers, consumers, CSPs and financial institutions to complete electronic
billing and payment transactions. Consumers, businesses and financial services
organizations access this internetworking infrastructure through the Internet,
dial-up telephone lines, privately leased lines or various types of
communications networks. Our computing complex in Norcross, Georgia, houses a
wide variety of application servers that capture transactions and route them to
our back-end banking, billing and payment applications for processing. The
back-end applications are run on IBM mainframes, Tandems or Unix servers. We
have developed databases and information files that allow accurate editing and
initiation of payments to billers. These databases have been constructed over
the past 22 years as a result of our transaction processing experience.
In 2003, we implemented a project to enhance our disaster recovery
systems. As part of this new project, we utilize IBM Business Recovery Services
and EMC's remote disk mirroring technology. We replicate and transmit our data
twice a day to our disaster recovery site so that we have a restartable system
in the event of a disaster. Using this system, we are able to recover technical
infrastructure, client communications, in-flight payments and tier-one customer
care within 24 hours.
We maintain a research and development group with a long-term
perspective of planning and developing new services and related products for the
electronic commerce, financial application software and investment services
markets. As of June 30, 2003, our research and development group consisted of
approximately 180 employees. Additionally, we use independent third party
software development contractors as needed.
Sales, Marketing and Distribution. Our marketing and distribution
strategy has been to create and maintain distribution alliances that maximize
access to potential customers for our services. We do not, for the most part,
market to, or have a direct relationship with, consumers or end-users of our
products and services. We believe that these alliances enable us to offer
services and related products to a larger customer base than can be reached
through stand-alone marketing efforts. We seek distribution alliances with
companies who have maximum penetration and leading reputations for quality with
our target customers. These alliances include our relationship with CSPs; with
billers; with Biller Service Providers (or BSPs) such as Kubra Data Transfer,
Ltd., CSG Systems, Inc. and DST Output; and with value-added resellers such as
Fiserv, Certegy, Digital Insight, PSCU Financial Services and S1 Corporation.
This list of BSPs and resellers is not exhaustive and may not fully represent
our customer base.
In order to foster a better understanding of the needs of our CSPs,
billers, BSPs and resellers, we employ a number of relationship managers
assigned to each of these specific customers. We also employ marketing personnel
to facilitate joint consumer acquisition programs with each of these customer
groups, and to share our industry knowledge and previously developed campaigns
with their marketing departments. Our alliance partners market our services in
numerous ways, including television, radio and print advertising, in some cases
offering bill payment services for free.
Competition. We face significant competition for all of our electronic
commerce products. Our primary competition is the continuance of traditional
paper-based methods for receiving and paying bills, both on the part of
consumers and billers. In addition, the possibility of billers and CSPs using
internal development and management resources to create in-house systems to
handle electronic billing and payment remains a competitive threat.
Metavante, a division of Marshall and Ilsley Corporation, competes with
us most directly from the perspective of providing pay anyone solutions to
financial services organizations. In 2000, Metavante announced that it had
signed an agreement to provide processing to Spectrum, a joint venture formed by
J.P. Morgan Chase, First Union (now Wachovia Corporation) and Wells Fargo & Co.
to allow individuals and businesses to receive and pay bills electronically.
According to Metavante, this agreement contained guaranteed minimum transactions
from each of the three joint venture banks. Since 2001, Metavante has either
purchased or announced the purchase of four companies associated with some
aspect of electronic billing or payment: Cyberbills, Derivion, Paytrust and
Spectrum.
A number of other companies compete with us by providing some, but not
all, of the services that make up our complete e-bill and electronic pay anyone
service. For example, MasterCard International provides a service which allows
electronic payment to certain merchants.
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Other Products and Services. In addition to the electronic billing and
payment service products, the Electronic Commerce Division also offers a credit
card account balance transfer product, a credit card refund balance product, an
automated recurring payments and software service, which is primarily installed
at health clubs throughout the United States, and other forms of wholesale and
retail payment solutions.
Acquisitions. 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 related to the
Electronic Commerce Division include Servantis Systems Holdings, Inc. in
February 1996, Intuit Services Corporation in January 1997, and MSFDC, L.L.C.
(TransPoint) in September 2000. In October 2000, we completed the strategic
agreement we entered into with Bank of America in April 2000, under which we
acquired certain of Bank of America's electronic billing and payment assets.
INVESTMENT SERVICES DIVISION
Introduction. The Investment Services Division provides a range of
outsourced portfolio management services to help more than 270 institutions
deliver portfolio management, performance measurement and reporting services to
their clients, primarily for processing separately managed accounts ("SMAs").
Our institutional client base includes investment advisors, brokerage
firms, banks and insurance companies. Our fee-based money manager clients are
typically sponsors or managers of "wrap," or separately managed accounts, money
management products, or traditional money managers, managing investments of
institutions and high net worth individuals. We also support a growing number of
third party vendors providing quick-to-market turnkey solutions.
Investment Services' primary product is a real-time portfolio
management system called CheckFree APL, which is used by 39 of the top 50
brokers in the United States and 36 of the top 40 money managers. Our clients
use the APL system to manage over 1.2 million portfolios representing more than
$700 billion in assets.
Industry Background. Industry analysts (including Forrester Research
and Financial Research Corporation 2001) predict a compound annual growth in the
separately managed account business to exceed 20% over the next several years.
This projected growth is due primarily to the marketing of fee-based services,
like SMAs by brokerage companies, and consumers' desire to more efficiently
manage the tax implications of their holdings by investing in SMAs.
Products and Services. Our portfolio management products and services
are marketed under the product names CheckFree APL and CheckFree APL Wrap, and
provide the following functions:
- account open and trading capabilities;
- graphical client reporting;
- performance measurement;
- decision support tools;
- account analytics;
- tax lot accounting;
- multiple strategy portfolios;
- straight through processing;
- Depository Trust Corporation interfacing;
- billing functions; and
- system and data security.
In fiscal 2003, we enhanced our CheckFree APL Wrap product by creating
a Multiple Strategy Portfolio solution. This solution allows our clients to
track, on a combined basis, the portfolios of their customers, even when
multiple portfolios are managed by different asset managers. We currently have
14 clients using this solution and another 17 clients in pre-production.
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In addition, our Investment Services team provides data conversion
services, trains personnel on system use, and provides technical network support
and computer system interface set-up. Our APL System currently maintains 1,100
interfaces across 89 vendors. Our M-Search product manages data for 1,300
managers and 5,600 investment products.
Revenues in our portfolio management services are generated per
portfolio under management through multiple year agreements that provide for
monthly revenue on a volume basis. Revenue from our information services and
software is typically generated through annual agreements.
Technology. Our Investment Services Division utilizes IBM RS/6000s to
run the portfolio management software. Services are provided primarily as a
service bureau offering with the data center residing in Chicago, Illinois.
Clients obtain access either through a dedicated circuit or through dial-up
applications. The Chicago data center is the communication center for more than
160 dedicated links together with four concentration hub sites located in New
Jersey, New York, Boston and San Diego. Each of these hub sites supports the
concentration of local dedicated links plus dial-up access. In addition to the
dedicated private network, clients use frame relay services from several
companies to access services. Our integrated outsourced solution utilizes a Unix
platform.
Sales, Marketing and Distribution. We market CheckFree APL through our
direct sales force. We generate new customers through direct solicitation, user
groups and advertisements. We also participate in trade shows and sponsor
industry seminars for distribution alliances.
Competition. One source of competition Investment Services faces is
from potential customers building their own internal portfolio accounting
systems. We also compete with providers of portfolio accounting software and
services like Advent Software, DST and IDS, and service bureau providers like
SunGard Portfolio Solutions and Financial Models Company.
Other Products and Services. In addition to our APL and APL Wrap
portfolio management products, the Investment Services Division also offers
investment performance measurement and reporting products and services. Marketed
under M-Search and M-Watch, these products are a result of the acquisition of
Mobius Group, Inc. in March 1999. In 2003, we launched a new product, M-Pact,
which is a proposal generation system that provides product analysis and client
proposals.
Acquisitions. Our current business was developed through the
acquisition of Security APL, Inc. in May 1996, and Mobius Group, Inc. in March
1999.
SOFTWARE DIVISION
The Software Division operates three units, each of which delivers
software, maintenance, support and professional services. These units are ACH
Solutions, Financial and Compliance Solutions, and i-Solutions.
- ACH SOLUTIONS. Our ACH Solutions unit provides Automated Clearing
House (ACH) software and services. ACH is the primary
batch-oriented electronic funds transfer system financial
services organizations use to move funds electronically through
the banking system. More than 80 percent of the nation's top 50
ACH originators use our solutions for ACH processing, and more
than two-thirds of the nation's nine billion ACH payments are
processed each year through institutions using our software
systems. In addition to the United States, we have provided
electronic payment technology in Australia, Barbados, Chile,
Colombia, Dominican Republic, Guatemala, Jamaica, Malaysia and
Panama.
ACH Solutions markets software under the product name PEP+
(Paperless Entry Processing System). PEP+ is an online, real-time
system that enables the originating and receiving of payments
through the ACH system. These electronic transactions are
substitutes for paper checks, and are typically used for
recurring payments such as direct deposit payroll payments;
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. In fiscal
2003, we launched a new product, marketed as
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reACH, that can be used with our PEP+ software. This product
allows returned checks, checks at the point-of-sale, and checks
sent to a lockbox to be converted to electronic payments.
CHECKFREE FINANCIAL AND COMPLIANCE SOLUTIONS (CFACS). CFACS
provides software and professional services that enable
organizations to perform automated reconciliation and maintain
compliance with federal and state regulations. Banks, bank
holding companies, securities and insurance firms, corporations,
and government agencies use our reconciliation and compliance
products and services. Our reconciliation solutions are marketed
under the CheckFree RECON-Plus(TM) and CheckFree RECON
Securities(TM) brand. These systems reconcile high volumes of
complex transactions that are spread across multiple internal and
external systems and include securities transaction processing,
automated deposit verification, consolidated bank account
reconciliation and cash mobilization, and improved cash control.
In fiscal 2002, we released RECON-Plus Frontier(TM), a multi-tier
reconciliation system that operates over the Internet. The CFACS
compliance products support:
- unclaimed property management;
- 1099 reporting;
- fraud detection;
- the Bank Secrecy Act;
- corporate accountability; and
- retirement reporting.
- i-SOLUTIONS. i-Solutions provides end-to-end business-to-consumer
and business-to-business software and services for e-billing and
e-statement creation, delivery and payment.
CheckFree i-Solutions software enables billers to create online
bills and statements and distribute them to their customers for
viewing and payment. Online bills can be delivered to the
biller's customers through any or all of the following options:
through CheckFree's network of CSPs; directly at the biller's
website; through e-mail; and through CheckFree's website,
www.checkfree.com, all of which are serviced through our
Electronic Commerce Division. Our software and outsourced
application hosting services deliver: e-bill and e-statement
creation; e-bill and e-statement delivery; e-bill payment
transaction management and security; e-bill payment tracking and
history; online marketing from the biller to its customers; and
customer care.
i-Solutions markets the CheckFree i-Series product line, which is
a set of e-billing and e-statement software solutions. Each
product in the i-Series includes a template for creating e-bills
and e-statements unique to a specific industry segment, reducing
development and deployment time. These solutions are offered in
both licensed and outsourced application service provider (ASP)
agreements. These products are marketable in international
markets as well. i-Solutions software has been sold in 23
countries.
Licenses. We generally grant non-exclusive, non-transferable perpetual
licenses to use our application software at a single site. Our standard license
agreements contain provisions designed to prevent disclosure and unauthorized
use of our software. License fees vary according to a number of factors,
including the types and levels of services we provide. Multiple site licenses
are available for an additional fee. In our license agreements, we generally
warrant that our products will function in accordance with the specifications
set forth in our product documentation. License fees are generally due upon
product documentation and software delivery to the customer.
Maintenance and Support. Maintenance includes enhancements to our
software. Customers who obtain maintenance generally retain maintenance service
from year to year. To complement customer support, we frequently participate in
user groups with our customers. These groups exchange ideas and techniques for
using our products and provide a forum for customers to make suggestions for
product acquisition, development and enhancement.
Professional Services. We offer implementation services building
customer applications around our products.
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Sales, Marketing and Distribution. We market software products through
our direct and indirect sales force. Salespersons have specific product
responsibility and receive support from technical personnel as needed. We
generate new customers through direct solicitations, user groups,
advertisements, direct mail campaigns and strategic alliances. We also
participate in trade shows and sponsor industry technology seminars for
prospective customers. Existing customers are often candidates for sales of
additional products or for enhancements to products they have already purchased.
We also market through resellers for certain geographies and vertical markets.
Competition. The computer application software industry is highly
competitive. We believe that there is at least one direct competitor for most of
our software products, but no competitor competes with us in all of our software
product areas.
In the electronic statement creation and financial applications
software markets, we compete directly or indirectly with a number of firms,
including large diversified computer software service companies and independent
suppliers of software products. CheckFree i-Solutions' electronic statement and
billing creation software products compete primarily with edocs, Inc., Avolent
Software and with billers building their own solutions rather than buying
software or outsourcing the service. The RECON-Plus products compete with
Chesapeake, Accurate and SmartStream. Our PEP+ products compete with Transaction
Systems Architects, Inc.
Acquisitions. Our current business was developed through the
acquisition of Servantis Systems Holdings, Inc. in February 1996 and BlueGill
Technologies, Inc. in April 2000.
GOVERNMENT REGULATION
We believe that we are not required to be licensed by the Office of the
Comptroller of the Currency, the Federal Reserve Board, or other federal or
state agencies that regulate or monitor banks or other types of providers of
electronic commerce services. The Federal Financial Institutions Examination
Council ("FFIEC"), however, periodically audits us, because we are a supplier of
products and services to financial services organizations. The FFIEC is made up
of the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the National Credit Union Administration, the Office of
the Comptroller of the Currency and the Office of Thrift Supervision. In
addition, because we use the ACH to process many of our transactions, we are
subject to the rules of the Federal Reserve Board, which currently allow us to
use the ACH by using a routing number assigned to a bank.
In conducting our business, however, we are subject to various laws and
regulations relating to the electronic movement of money. In 2001, the USA
Patriot Act amended the Bank Secrecy Act to expand the definition of money
services businesses so that it may include businesses such as CheckFree. Several
states have also passed legislation regulating or licensing check sellers, money
transmitters or service providers to banks, and we have registered under this
legislation in specific instances. In addition, as are all U.S. citizens, we are
subject to the regulations of the Office of Foreign Assets Control targeted at
money laundering. Further, we are a "financial institution" within the meaning
of the Gramm-Leach-Bliley Act, which governs notice to consumers about the
financial institution's policies with respect to use of customer data and
restricts certain use and disclosure of customer data. Finally, we are also
subject to the electronic funds transfer rules embodied in Regulation E,
promulgated by the Federal Reserve Board. The Federal Reserve's Regulation E
implements the Electronic Fund Transfer Act, which was enacted in 1978.
Regulation E protects consumers engaging in electronic transfers, and sets forth
the basic rights, liabilities, and responsibilities of consumers who use
electronic money transfer services and of financial services organizations that
offer these services.
INTELLECTUAL PROPERTY RIGHTS
We regard our financial transaction services and related products as
proprietary and rely on a combination of patent, copyright, trademark and trade
secret laws, employee and third party nondisclosure agreements, and other
intellectual property protection methods to protect our services and related
products. We have been issued 22 patents in the United States and abroad. The
majority of these patents cover various facets of electronic billing and/or
payment. We also have a large number of pending patent applications. We own over
30 domestic and foreign trade and service mark registrations related to products
or services and have additional registrations pending.
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EMPLOYEES
As of June 30, 2003, we employed approximately 2,700 full-time
employees, including approximately 475 in research and development, including
software development, approximately 750 in customer care, approximately 285 in
sales and marketing and approximately 1,190 in administration, financial
control, corporate services, human resources and other processing and service
personnel. We are not a party to any collective bargaining agreement and are not
aware of any efforts to unionize our employees. We believe that our relations
with our employees are good. We believe our future success and growth will
depend in large measure upon our ability to attract and retain qualified
management, technical, marketing, business development and sales personnel.
BUSINESS RISKS
We desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Many of the following
important factors discussed below have been discussed in our prior filings with
the Securities and Exchange Commission. In addition to the other information in
this report, readers should carefully consider that the following important
factors, among others, in some cases have affected, and in the future could
affect, our actual results and could cause our actual consolidated results of
operations for the fiscal year ending June 30, 2004, and beyond, to differ
materially from those expressed in any forward-looking statements made by us, or
on our behalf.
RISKS RELATED TO OUR BUSINESS
THE MARKET FOR OUR ELECTRONIC COMMERCE SERVICES IS EVOLVING AND MAY NOT CONTINUE
TO DEVELOP OR GROW RAPIDLY ENOUGH FOR US TO OBTAIN PROFITABILITY.
If the number of electronic commerce transactions does not continue to
grow or if consumers or businesses do not continue to adopt our services, it
could have a material adverse effect on our business, financial condition and
results of operations. We believe future growth in the electronic commerce
market will be driven by the cost, ease-of-use and quality of products and
services offered to consumers and businesses. In order to consistently increase
and maintain our profitability, consumers and businesses must continue to adopt
our services.
WE HAVE NOT OPERATED PROFITABLY IN THE PAST AND EXPECT TO EXPERIENCE NET LOSSES
IN THE FUTURE.
We have not consistently operated profitably to date. Since our
inception, our accumulated losses have totaled approximately $1.18 billion. We
incurred:
- a loss from operations of $464.7 million and a net loss of $363.1
million for the fiscal year ended June 30, 2001;
- a loss from operations of $535.5 million and net loss of $440.9
million for the fiscal year ended June 30, 2002; and
- a loss from operations of $73.5 million and net loss of $52.1
million for the fiscal year ended June 30, 2003.
We anticipate approaching break-even from operations in fiscal 2004 but
may continue to experience additional net losses or may not be able to sustain
profitability in the future. For the fiscal year ended June 30, 2003, we
invested about $53 million in research and development and $57 million in sales
and marketing. We intend to continue to make significant investments in research
and development and sales and marketing. If the investment of our capital is not
successful to grow our business, it will have a material adverse effect on our
business and financial condition, as well as negatively impact an investment in
our business and limit our ability to pay dividends in the future to our
stockholders.
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OUR FUTURE PROFITABILITY DEPENDS UPON OUR ABILITY TO IMPLEMENT OUR STRATEGY
SUCCESSFULLY TO INCREASE ADOPTION OF ELECTRONIC BILLING AND PAYMENT METHODS.
Our future profitability will depend, in part, on our ability to
implement our strategy successfully to increase adoption of electronic billing
and payment methods. Our strategy includes investment of time and money during
fiscal 2004 in programs designed to:
- drive consumer awareness of electronic billing and payment;
- encourage consumers to sign up for and use our electronic billing
and payment services offered by our distribution partners;
- continue to refine our infrastructure to handle seamless
processing of transactions;
- continue to develop state-of-the-art, easy-to-use technology; and
- increase the number of bills we can present and pay
electronically.
If we do not successfully implement our strategy, revenue growth may be
minimal, and expenditures for these programs will not be justified.
Our investment in these programs will have a negative impact on our
short-term profitability. Additionally, our failure to implement these programs
successfully or to substantially increase adoption of electronic commerce
billing and payment methods by consumers who pay for the services could have a
material adverse effect on our business, financial condition and results of
operations.
COMPETITIVE PRESSURES WE FACE MAY HAVE A MATERIAL ADVERSE EFFECT ON US.
We face significant competition in our each of our business units,
Electronic Commerce, Investment Services and Software. Increased competition or
other competitive pressures may result in price reductions, reduced margins or
loss of business, any of which could have a material adverse effect on our
business, financial condition and results of operations. Further, competition
will persist, and may increase and intensify in the future.
In Electronic Commerce, our primary competition remains the traditional
paper-based methods of paying and receiving bills. In addition, a number of
banks have developed or have announced their intent to develop their own
internal solutions for all or portions of the electronic bill presentment and
payment process. Wells Fargo & Co., J.P. Morgan Chase and Wachovia currently
have in-house solutions for all or a portion of the integrated services we
provide, and Bank One is working on a similar solution. We do not know whether
other banks that currently outsource the bill presentment and payment process to
us will decide to construct in-house solutions in the future. Although we
believe that most of the banks who decide to use an in-house solution will
continue to use our services for some portion of their electronic bill
presentment and payment product, we may not provide the same range of services
as we currently do and, therefore, we may not receive the same amount of revenue
from these banks.
We also compete directly with Metavante, a division of Marshall and
Ilsley Corporation, which currently offers a pay anyone solution to financial
service organizations. In 2000, Metavante announced that it had executed a
long-term contract with Spectrum, a joint venture formed by J.P. Morgan Chase,
First Union (now Wachovia) and Wells Fargo & Co., to provide electronic payment
processing. According to Metavante, this contract contained guaranteed minimum
transaction amounts from each of the three joint venture banks. Over the past
several years, Metavante has completed or announced several acquisitions in the
electronic bill presentment and payment area, including the purchase of
CyberBills, Derivion, Paytrust and Spectrum. We also face potential competition
from MasterCard International, which has announced a product to offer online
bill presentment to enable people to receive and pay bills over the Internet. We
cannot assure you that we will be able to compete effectively against Metavante
and MasterCard, or against the action of financial services organizations and
billers building their own electronic billing and payment solutions internally,
or against other current and future electronic commerce competitors.
In addition, we cannot assure you that we will be able to compete
effectively against current and future competitors in the investment services
and software products markets. The markets for our investment services and
software products are also highly competitive. In Investment Services, our
competition comes primarily from providers of portfolio accounting software and
from in-house solutions developed by large financial institutions. In
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Software, our competition comes from several different market segments,
including large diversified computer software and service companies and
independent suppliers of software products.
SECURITY AND PRIVACY BREACHES IN OUR ELECTRONIC TRANSACTIONS MAY DAMAGE CUSTOMER
RELATIONS AND INHIBIT OUR GROWTH.
Any failures in our security and privacy measures could have a material
adverse effect on our business, financial condition and results of operations.
We electronically transfer large sums of money and store personal information
about consumers, including bank account and credit card information, social
security numbers, and merchant account numbers. If we are unable to protect, or
consumers perceive that we are unable to protect, the security and privacy of
our electronic transactions, our growth and the growth of the electronic
commerce market in general could be materially adversely affected. A security or
privacy breach may:
- cause our customers to lose confidence in our services;
- deter consumers from using our services;
- harm our reputation;
- expose us to liability;
- increase our expenses from potential remediation costs; and
- decrease market acceptance of electronic commerce transactions.
While we believe that we utilize proven applications designed for
premium data security and integrity to process electronic transactions, there
can be no assurance that our use of these applications will be sufficient to
address changing market conditions or the security and privacy concerns of
existing and potential subscribers.
WE RELY ON THIRD PARTIES TO DISTRIBUTE OUR ELECTRONIC COMMERCE AND INVESTMENT
SERVICES PRODUCTS, WHICH MAY NOT RESULT IN WIDESPREAD ADOPTION.
In Electronic Commerce, we rely on our contracts with financial
services organizations, businesses, billers, Internet portals and other third
parties to provide branding for our electronic commerce services and to market
our services to their customers. Similarly, in Investment Services, we rely upon
investment advisors, brokerage firms, banks and insurance companies to market
investment accounts to consumers and thereby increase portfolios on our APL
system. These contracts are an important source of the growth in demand for our
electronic commerce and investment service products. If any of these third
parties abandons, curtails or insufficiently increases its marketing efforts, it
could have a material adverse effect on our business, financial condition and
results of operations.
CONSOLIDATION IN THE FINANCIAL SERVICES INDUSTRY MAY ADVERSELY AFFECT OUR
ABILITY TO SELL OUR ELECTRONIC COMMERCE SERVICES, INVESTMENT SERVICES AND
SOFTWARE.
Mergers, acquisitions and personnel changes at key financial services
organizations have the potential to adversely affect our business, financial
condition and results of operations. This consolidation could cause us to lose:
- current and potential customers;
- business opportunities, if combined financial services
organizations were to determine that it is more efficient to
develop in-house services similar to ours or offer our
competitors' products or services; and
- revenue, if combined financial services organizations were able
to negotiate a greater volume discount for, or to discontinue the
use of, our products and services.
ONE CUSTOMER ACCOUNTS FOR A SIGNIFICANT PERCENTAGE OF OUR REVENUE.
We have one customer, Bank of America, that accounts for 17% of our
total revenue, which reflects their use of products in all three of our business
segments. The loss or renegotiation of our contract with Bank of America or a
significant decline in the number of transactions we process for them could have
a material adverse effect on our business, financial condition and results of
operations.
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IF WE DO NOT SUCCESSFULLY RENEW OR RENEGOTIATE OUR AGREEMENTS WITH OUR
CUSTOMERS, OUR BUSINESS MAY SUFFER.
Our agreements for electronic commerce services with financial services
organizations generally provide for terms of two to five years. Similarly, our
agreements with our portfolio management customers are generally long term. If
we are not able to renew or renegotiate these agreements on favorable terms as
they expire, it could have a material adverse effect on our business, financial
condition and results of operations.
The profitability of our Software Division depends, to a substantial
degree, upon our software customers electing to annually renew their maintenance
agreements. If a substantial number of our software customers declined to renew
these agreements, our revenues and profits in this business segment would be
materially adversely affected.
OUR FUTURE PROFITABILITY DEPENDS ON A DECREASE IN THE COST OF PROCESSING
TRANSACTIONS.
If we are unable to continue to decrease the cost of processing
transactions, our margins could decrease, which could have a material adverse
effect on our business, financial condition and results of operations. Many
factors contribute to our ability to decrease the cost of processing
transactions, including our Sigma Challenge program, our customer care
efficiency program, our processing technology optimization program, and our
focus on continually increasing the number of transactions we process
electronically. Our electronic rate, or percentage of transactions processed
electronically, was 64% at the end of the fiscal year 2001, more than 71% at the
end of fiscal year 2002 and 75% at the end of fiscal year 2003. As a result of
the combined effects of programs focused on quality and process improvements,
maximizing efficiency, and improving electronic processing rates, our total
Electronic Commerce cost per transaction processed decreased more than 20% as of
June 30, 2003, as compared to June 30, 2002. Our future profitability will
depend, in part, on our ability to continue to decrease this cost.
THE TRANSACTIONS WE PROCESS EXPOSE US TO FRAUD AND CREDIT RISKS.
Any losses resulting from returned transactions, merchant fraud or
erroneous transmissions could result in liability to financial services
organizations, merchants or subscribers, which could have a material adverse
effect on our business, financial condition and results of operations. The
electronic and conventional paper-based transactions we process expose us to
credit risks. These include risks arising from returned transactions caused by:
- insufficient funds;
- unauthorized use;
- stop payment orders;
- payment disputes;
- closed accounts;
- theft;
- frozen accounts; and
- fraud.
We are also exposed to credit risk from merchant fraud and erroneous
transmissions.
WE MAY EXPERIENCE BREAKDOWNS IN OUR PROCESSING SYSTEMS THAT COULD DAMAGE
CUSTOMER RELATIONS AND EXPOSE US TO LIABILITY.
We depend heavily on the reliability of our processing systems in both
the Electronic Commerce and Investment Services Divisions. A system outage or
data loss could have a material adverse effect on our business, financial
condition and results of operations. Not only would we suffer damage to our
reputation in the event of a system outage or data loss but we may also be
liable to third parties. Many of our contractual agreements with financial
institutions require the payment of penalties if our systems do not meet certain
operating standards. In addition, in our Electronic Commerce Division, we
guarantee the delivery of payments and any failure on our part to perform may
result in late payments or penalties to third parties on behalf of our
subscribers. In our Investment Services Division, a failure of our system could
result in incorrect or mistimed stock trades that may result in third party
liability. To successfully operate our business, we must be able to protect our
processing and other systems from interruption by events that are beyond our
control. For example, our system may be subject to loss of service
-16-
interruptions caused by hostile third parties or other instances of deliberate
system sabotage. Other events that could cause system interruptions include:
- fire;
- natural disaster;
- unauthorized entry;
- power loss;
- telecommunications failure;
- computer viruses; and
- terrorist acts.
Although we have taken steps to protect against data loss and system
failures, there is still risk that we may lose critical data or experience
system failures. Furthermore, our property and business interruption insurance
may not be adequate to compensate us for all losses or failures that may occur.
WE MAY EXPERIENCE SOFTWARE DEFECTS AND DEVELOPMENT DELAYS, DAMAGING CUSTOMER
RELATIONS, DECREASING OUR POTENTIAL PROFITABILITY AND EXPOSING US TO LIABILITY.
Our products are based on sophisticated software and computing systems
that often encounter development delays, and the underlying software may contain
undetected errors or defects. Defects in our software products and errors or
delays in our processing of electronic transactions could result in:
- additional development costs;
- diversion of technical and other resources from our other
development efforts;
- loss of credibility with current or potential customers;
- harm to our reputation; or
- exposure to liability claims.
In addition, we rely on technologies supplied to us by third parties
that may also contain undetected errors or defects that could have a material
adverse effect on our business, financial condition and results of operations.
Although we attempt to limit our potential liability for warranty claims through
disclaimers in our software documentation and limitation-of-liability provisions
in our license and customer agreements, we cannot assure you that these measures
will be successful in limiting our liability.
WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR NET SALES CAUSING OUR OPERATING
RESULTS TO FLUCTUATE.
We have historically experienced seasonal fluctuations in our
electronic commerce and software sales, and we expect to experience similar
fluctuations in the future, which could cause our stock price to decrease
unexpectedly. Our growth in electronic commerce transactions is affected by
seasonal factors, such as holiday-based resolutions consumers make to manage
finances better, and the fact that most financial institutions traditionally
conduct their largest consumer marketing campaigns in the fall months. These
seasonal factors may impact our operating results by concentrating consumer
acquisition and set-up costs, which may not be immediately offset by revenue
increases primarily due to introductory service price discounts. Additionally,
online interactive service consumers generally tend to be less active users
during the summer months, resulting in lower revenue during this period. Our
software sales have historically been affected by calendar year end, buying
patterns of financial services organizations and our sales compensation
structure which measures sales performance at our June 30 fiscal year end.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGE OR CHANGES IN INDUSTRY
STANDARDS, OUR SERVICES COULD BECOME OBSOLETE AND WE COULD LOSE OUR CUSTOMERS.
If competitors introduce new products and services embodying new
technologies, or if new industry standards and practices emerge, our existing
product and service offerings, proprietary technology and systems may become
obsolete. Further, if we fail to adopt or develop new technologies or to adapt
our products and services to emerging industry standards, we may lose current
and future customers, which could have a material adverse effect on our
business, financial condition and results of operations. The electronic commerce
industry is changing rapidly. To
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remain competitive, we must continue to enhance and improve the functionality
and features of our products, services and technologies.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND TECHNOLOGY, PERMITTING
COMPETITORS TO DUPLICATE OUR PRODUCTS AND SERVICES.
Our success and ability to compete depends, in part, upon our
proprietary technology, which includes several patents for our electronic
billing and payment processing system, our source code information for our
software products, and our operating technology. We rely primarily on patent,
copyright, trade secret and trademark laws to protect our technology. We also
enter into confidentiality and assignment agreements with our employees,
consultants and vendors and generally control access to and distribution of our
software documentation and other intellectual property. We cannot assure you
that these measures will provide the protection that we need.
Because our means of protecting our intellectual property rights may
not be adequate, it may be possible for a third party to copy, reverse engineer
or otherwise obtain and use our technology without authorization. In addition,
the laws of some countries in which we sell our products do not protect software
and intellectual property rights to the same extent as the laws of the United
States. Unauthorized copying, use or reverse engineering of our products could
have a material adverse effect on our business, financial condition and results
of operations.
A third party could also claim that our technology infringes its
proprietary rights. As the number of software products in our target markets
increases and the functionality of these products overlap, we believe that
software developers may increasingly face infringement claims. These claims,
even if without merit, can be time-consuming and expensive to defend. A third
party asserting infringement claims against us in the future may require us to
enter into costly royalty arrangements or litigation.
OUR BUSINESS COULD BECOME SUBJECT TO INCREASED GOVERNMENT REGULATION, WHICH
COULD MAKE OUR BUSINESS MORE EXPENSIVE TO OPERATE.
Although our business is currently subject to numerous rules and
regulations of governmental entities, it is possible that this regulation may
increase or change in the future and such increase or change might make our
business more expensive to operate and our products less desirable to use. In
particular, due to increased focus by the government on terrorist activities, we
may see additional regulation targeted at money laundering or making payments to
certain prohibited individuals. In recent years, various governmental entities
have become even more interested in further regulating the use and sharing of
data and protection of the privacy of this data. It is also possible that new
laws and regulations may be enacted with respect to the Internet, including
taxation of electronic commerce activities. Because electronic commerce in
general, and most of our products and services in particular, are so new, the
effect of an increase in regulation or amendment to existing regulation is
uncertain and difficult to predict. Any such changes, however, could lead to
increased operating costs and reduce the convenience and functionality of our
products or services, possibly resulting in reduced market acceptance. It is
also possible that new laws and regulations involving the Internet might
decrease the growth of consumers using the Internet, which could in turn
decrease the demand for our products or services, increase our cost of doing
business or could otherwise have a material adverse effect on our business,
financial condition and results of operations.
The Federal Reserve rules provide that we can only access the Federal
Reserve's Automated Clearing House through a bank. If the Federal Reserve rules
were to change to further restrict our access to the Automated Clearing House or
limit our ability to provide automated clearing house transaction processing
services, it could have a material adverse effect on our business, financial
condition and results of operations.
A CONTINUED WEAK ECONOMY COULD HAVE A MATERIALLY ADVERSE IMPACT ON OUR BUSINESS.
A continued weak United States economy could have a material adverse
impact on our business. In a weak economy, companies may postpone or cancel new
software purchases or limit the amount of money they spend on technology and
marketing. In the Investment Services Division, growth depends upon individuals
and companies continuing to invest in the United States equity markets. To the
extent the United States stock markets see a decrease in investment, we may see
a decrease in portfolio accounts.
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OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND MAY NOT ACCURATELY PREDICT OUR
FUTURE PERFORMANCE.
Our quarterly results of operations have varied significantly and
probably will continue to do so in the future as a result of a variety of
factors, many of which are outside our control. These factors include:
- changes in our pricing policies or those of our competitors;
- loss of customers due to competitors or in-house solutions;
- relative rates of acquisition of new customers;
- seasonal patterns;
- delays in the introduction of new or enhanced services, software
and related products by us or our competitors or market
acceptance of these products and services; and
- other changes in operating expenses, personnel and general
economic conditions.
As a result, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful, and you should not rely on
them as an indication of our future performance. In addition, our operating
results in a future quarter or quarters may fall below expectations of
securities analysts or investors and, as a result, the price of our common stock
may fluctuate.
THE MARKETING AGREEMENT WITH FIRST DATA AND THE COMMERCIAL ALLIANCE AGREEMENT
WITH MICROSOFT MAY LIMIT THE FLEXIBILITY OF MANAGEMENT.
The marketing agreement we executed with First Data requires us to
purchase payment processing and other products from First Data under specified
circumstances, even if our management has other reasons for choosing a different
supplier. In addition, the commercial alliance agreement with Microsoft requires
us to develop our products that are used with products made by Microsoft in ways
that conform to specified standards. Accordingly, as a result of these
arrangements with Microsoft and First Data, both of which were entered into as
part of our acquisition of MSFDC, L.L.C. (TransPoint), our management's
flexibility to make business decisions may be limited in various respects.
RISKS RELATED TO OUR COMMON STOCK
OUR COMMON STOCK HAS BEEN VOLATILE SINCE DECEMBER 31, 2000.
Since December 31, 2000, our stock price has been volatile, trading at
a high of $58.25 per share and a low of $7.45 per share. The volatility in our
stock price has been caused by:
- actual or anticipated fluctuations in our operating results;
- actual or anticipated fluctuations in our subscriber growth;
- announcements by us, our competitors or our customers;
- announcements of the introduction of new or enhanced products and
services by us or our competitors;
- announcements of joint development efforts or corporate
partnerships in the electronic commerce market;
- market conditions in the banking, telecommunications, technology
and other emerging growth sectors;
- rumors relating to our competitors or us; and
- general market or economic conditions.
AVAILABILITY OF SIGNIFICANT AMOUNTS OF OUR COMMON STOCK FOR SALE IN THE FUTURE
COULD ADVERSELY AFFECT OUR STOCK PRICE.
The availability for future sale of a substantial number of shares of
our common stock in the public market, or issuance of common stock upon the
exercise of stock options, warrants or conversion of the notes or otherwise
could adversely affect the market price for our common stock. As of September 8,
2003, we had outstanding 89,540,390 shares of our common stock, of which
83,223,036 shares of our issued and outstanding common stock were held by
non-affiliates. The holders of the remaining 6,317,354 shares were entitled to
resell them only by a registration statement under the Securities Act of 1933 or
an applicable exemption from registration. As of September 8, 2003, we had an
additional 27,275,910 shares of our common stock available for future sale,
including:
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- up to 10,313,367 shares available for issuance under our stock
option and stock incentive plans, under which there are
outstanding options to purchase 5,780,524 shares of our common
stock, of which options for 3,038,052 shares were fully vested
and exercisable at an average weighted exercise price of
approximately $28.84 per share;
- issued warrants to purchase 12,500,000 shares of our common
stock, of which warrants for 2,500,000 shares were fully vested
and exercisable at a weighted exercise price of approximately
$28.26 per share;
- up to 1,032,033 shares available for issuance under our Associate
Stock Purchase Plan;
- up to 1,073,953 shares available for issuance under our 401(k)
Plan; and
- up to 2,356,557 shares of our common stock issuable upon
conversion of our convertible notes.
As of September 8, 2003, the following entities hold shares or warrants
to purchase shares of our common stock in the following amounts:
- Microsoft Corporation, which holds 8,567,250 shares;
- The former members of Integrion Financial Network, L.L.C.
collectively hold warrants to purchase up to 1,500,000 shares
which are fully vested and exercisable;
- Bank One, which holds warrants to purchase 1,000,000 shares,
which are fully vested and exercisable; and
- Bank of America, which holds 6,271,184 shares of record and
warrants to purchase up to 10,000,000 shares, which warrants are
not currently vested.
Each of Bank One, Bank of America and the former members of Integrion
may be entitled to registration rights. If the former members of Integrion, Bank
One or Bank of America, by exercising their registration rights, cause a large
number of shares to be registered and sold in the public market, these sales may
have an adverse effect on the market price of our common stock.
In connection with the TransPoint acquisition, we filed a shelf
registration statement on behalf of Microsoft, First Data and Citibank that
allows continuous resales of the shares that each received as a result of the
TransPoint acquisition. Citibank was not restricted in its ability to transfer
its shares of our common stock, and we believe it has sold all of the shares
that it acquired as a result of this acquisition. Microsoft and First Data were
limited in their ability to transfer their shares of our common stock through
September 1, 2002, pursuant to stockholder agreements with us. Since September
1, 2002, First Data has sold a significant number of its shares and no longer
holds in excess of 5% of our common stock. Microsoft continues to hold its
shares of our common stock but as of September 1, 2003, could sell up to the
greater of 1% of our average weekly trading volume or 1% of our outstanding
common stock in reliance on registration exemptions. In addition, Microsoft and
First Data are permitted to a limited extent to engage in hedging transactions
with respect to our common stock.
As of September 28, 2001, Bank of America could sell up to the greater
of 1% of our average weekly trading volume or 1% of our outstanding common stock
in reliance on registration exemptions.
Sales of substantial amounts of our common stock by any of the parties
described above, or the perception that these sales could occur, may adversely
affect prevailing market prices for our common stock.
ANTI-TAKEOVER PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS AND DELAWARE LAW MAKE
ANY CHANGE IN CONTROL MORE DIFFICULT.
Our certificate of incorporation and by-laws contain provisions that
may have the effect of delaying or preventing a change in control, may
discourage bids at a premium over the market price of our common stock and may
adversely affect the market price of our common stock and the voting and other
rights of the holders of our common stock. These provisions include:
-20-
- division of our board of directors into three classes serving
staggered three-year terms;
- removal of our directors by the stockholders only for cause upon
80% stockholder approval;
- prohibiting our stockholders from calling a special meeting of
stockholders;
- ability to issue additional shares of our common stock or
preferred stock without stockholder approval;
- prohibiting our stockholders from unilaterally amending our
certificate of incorporation or by-laws except with 80%
stockholder approval; and
- advance notice requirements for raising business or making
nominations at stockholders' meetings.
We also have a stockholder rights plan that allows us to issue
preferred stock with rights senior to those of our common stock without any
further vote or action by our stockholders. The issuance of our preferred stock
under the stockholder rights plan could decrease the amount of earnings and
assets available for distribution to the holders of our common stock or could
adversely affect the rights and powers, including voting rights, of the holders
of our common stock. In some circumstances, the issuance of preferred stock
could have the effect of decreasing the market price of our common stock.
We also are subject to provisions of the Delaware corporation law that,
in general, prohibit any business combination with a beneficial owner of 15% or
more of our common stock for five years unless the holder's acquisition of our
stock was approved in advance by our board of directors.
In addition, both the commercial alliance agreement with Microsoft and
the marketing agreement with First Data, each of which we executed in connection
with the closing of the TransPoint acquisition, allow the termination of the
agreement by Microsoft or First Data, as the case may be, under specific change
of control circumstances. If either Microsoft or First Data terminates under
these circumstances, we will lose a portion of the future revenue guarantees
under the applicable agreement. This potential termination event could
discourage third parties from acquiring us.
WE ARE SUBJECT TO SIGNIFICANT INFLUENCE BY SOME STOCKHOLDERS THAT MAY HAVE THE
EFFECT OF DELAYING OR PREVENTING A CHANGE IN CONTROL.
At September 8, 2003, our directors, executive officers, Bank of
America and Microsoft collectively owned approximately 24% of the outstanding
shares of our common stock. As a result, these stockholders are able to exercise
significant influence over matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing a
change in control.
AVAILABLE INFORMATION
We make available free of charge on our Internet website,
www.checkfreecorp.com, our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and, if applicable, amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably practicable after such
reports are electronically filed with or furnished to the Securities and
Exchange Commission.
-21-
ITEM 2. PROPERTIES.
We lease the following office facilities:
- approximately 229,000 square feet in Norcross, Georgia;
- approximately 150,000 square feet in Dublin, Ohio;
- approximately 100,000 square feet in Phoenix, Arizona;
- approximately 78,000 square feet in Aurora, Illinois;
- approximately 35,000 square feet in Raleigh, North Carolina;
- approximately 33,000 square feet in Jersey City, New Jersey;
- approximately 29,000 square feet in Waterloo, Ontario, Canada;
- approximately 26,000 square feet in Owings Mills, Maryland;
- approximately 22,000 square feet in Worthington, Ohio;
- approximately 21,000 square feet in Newark, New Jersey;
- approximately 15,000 square feet in Chicago, Illinois;
- approximately 5,000 square feet in San Diego, California;
- approximately 2,000 square feet in Slough, Berkshire, United
Kingdom;
- approximately 2,000 square feet in Boston, Massachusetts; and
- approximately 2,000 square feet in Henderson, Nevada.
We own a 51,000 square foot conference center in Norcross, Georgia that
includes lodging, training, and fitness facilities for our customers and
employees. Although we own the building, it is on land that is leased through
June 30, 2015. We believe that our facilities are adequate for current and
near-term growth and that additional space is available to provide for
anticipated growth.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-22-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock is traded on the Nasdaq National Market under the
symbol "CKFR." The following table sets forth the high and low sales prices of
our common stock for the periods indicated as reported by the Nasdaq National
Market.
COMMON STOCK
PRICE
-----
FISCAL PERIOD HIGH LOW
- ------------- ------ ------
FISCAL 2002
First Quarter .................................... $35.40 $14.55
Second Quarter ................................... $22.69 $12.20
Third Quarter .................................... $20.20 $10.93
Fourth Quarter ................................... $25.40 $13.28
FISCAL 2003
First Quarter .................................... $15.83 $ 7.45
Second Quarter ................................... $20.35 $ 8.96
Third Quarter .................................... $23.65 $16.12
Fourth Quarter ................................... $30.13 $20.60
FISCAL 2004
First Quarter (through September 8, 2003) ........ $30.10 $19.75
On September 8, 2003, the last reported bid price for our common stock
on the Nasdaq National Market was $23.75 per share. As of September 8, 2003,
there were approximately 925 holders of record of our common stock.
We currently anticipate that all of our future earnings will be
retained for the development of our business and do not anticipate paying cash
dividends on our common stock for the foreseeable future. Our board of directors
will determine future dividend policy based on our results of operations,
financial condition, capital requirements and other circumstances. During the
last ten years, we have not paid cash dividends.
-23-
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction
with Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations and Item 8. Financial Statements and Supplementary Data.
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS:
Revenues:
Processing and servicing ....................... $ 476,416 $ 422,237 $ 362,051 $ 261,621 $ 201,059
License fees ................................... 24,163 25,020 30,180 16,818 15,975
Maintenance fees ............................... 25,733 24,298 21,332 18,752 17,746
Other .......................................... 25,334 18,922 19,757 13,004 15,351
------------ ------------ ------------ ------------ ------------
Total revenues ....................... 551,646 490,477 433,320 310,195 250,131
Expenses:
Cost of processing, servicing and support ...... 237,978 262,105 255,528 182,540 146,704
Research and development ....................... 52,717 55,172 55,621 35,631 21,085
Sales and marketing ............................ 57,170 58,030 90,283 44,782 32,354
General and administrative ..................... 39,030 43,687 50,474 40,931 31,466
Depreciation and amortization .................. 226,638 435,565 427,495 42,830 24,630
In-process research and development ............ - - 18,600 6,900 2,201
Impairment of intangible assets ................ 10,228 155,072 - - -
Reorganization charge .......................... 1,405 16,365 - - -
------------ ------------ ------------ ------------ ------------
Total expenses ....................... 625,166 1,025,996 898,001 353,614 258,440
Net gain on dispositions of assets ............. - - - - 4,576
------------ ------------ ------------ ------------ ------------
Loss from operations ........................... (73,520) (535,519) (464,681) (43,419) (3,733)
Interest:
Income ....................................... 7,327 8,486 15,415 7,689 2,799
Expense ...................................... (12,975) (12,788) (13,154) (8,027) (618)
Loss on investments ............................ (3,228) - (16,077) - -
------------ ------------ ------------ ------------ ------------
Loss before income taxes and cumulative
effect of accounting change ................... (82,396) (539,821) (478,497) (43,757) (1,552)
Income tax benefit ............................. (33,106) (98,871) (115,362) (11,437) (12,009)
------------ ------------ ------------ ------------ ------------
Income (loss) before cumulative effect of
accounting change ............................. (49,290) (440,950) (363,135) (32,320) 10,457
Cumulative effect of accounting change ......... (2,894) - - - -
------------ ------------ ------------ ------------ ------------
Net income (loss) .............................. $ (52,184) $ (440,950) $ (363,135) $ (32,320) $ 10,457
============ ============ ============ ============ ============
Diluted net income (loss) per common share ....... $ (0.59) $ (5.04) $ (4.49) $ (0.61) $ 0.18
Equivalent number of shares outstanding .......... 88,807 87,452 80,863 53,367 56,529
BALANCE SHEET DATA:
Working capital ................................ $ 304,286 $ 201,741 $ 142,661 $ 178,761 $ 24,245
Total assets ................................... 1,587,270 1,637,477 2,183,953 713,114 252,761
Long-term obligations, less current portion .... 176,692 176,377 176,541 173,236 3,882
Total stockholders' equity ..................... 1,268,149 1,305,661 1,732,186 445,894 186,903
-24-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
CheckFree was founded in 1981 as an electronic payment processing
company and has become a leading provider of financial electronic commerce
products and services. Our current business was developed through the expansion
of our core electronic payments business and the acquisition of companies
operating in similar or complementary businesses.
We operate our business through three independent but inter-related
divisions:
- Electronic Commerce;
- Investment Services; and
- Software.
Through our Electronic Commerce Division, we enable consumers to
receive and pay bills electronically. For the year ended June 30, 2003, we
processed approximately 434 million electronic payment transactions and
delivered approximately 32 million electronic bills. For the quarter ended June
30, 2003, we processed nearly 120 million transactions and delivered
approximately 11.5 million electronic bills. During the quarter ended June 30,
2003, over ten million consumers initiated a payment through CheckFree managed
services. The number of transactions we process each year continues to grow. For
the year ended June 30, 2003, growth in the number of transactions processed
exceeded 37%. The Electronic Commerce Division accounted for approximately 73%
of our annual revenue.
Our Electronic Commerce Division's products allow consumers to:
- receive electronic bills through the Internet;
- pay any bill -- whether it arrives over the Internet or
through traditional mail -- to anyone;
- make payments not related to bills -- to anyone; and
- perform customary banking transactions, including balance
inquiries, transfers between accounts and online statement
reconciliations.
Through our Investment Services Division, we provide a range of
portfolio management services to financial institutions, including broker
dealers, money managers and investment advisors. As of June 30, 2003, our
clients used the CheckFree APL portfolio accounting system to manage over 1.2
million portfolios, totaling more than $700 billion in assets. The Investment
Services Division accounts for approximately 15% of our annual revenue.
Our institutional client base includes investment advisors, brokerage
firms, banks and insurance companies. Our fee-based money manager clients are
typically sponsors or managers of "wrap" or separately managed accounts, money
management products, or traditional money managers, managing investments of
institutions and high net worth individuals. We also support a growing number of
third party vendors providing quick-to-market turnkey solutions.
Our portfolio management products and services are marketed under the
product names CheckFree APL and CheckFree APL Wrap, and provide the following
functions:
- account open and trading capabilities;
- graphical client reporting;
- performance measurement;
- decision support tools;
- account analytics;
- tax lot accounting;
- multiple strategy portfolios;
- straight through processing;
-25-
- Depository Trust Corporation interfacing;
- billing functions; and
- system and data security.
In addition to our APL portfolio management products, our Investment
Services Division also offers proposal generation, investment performance, and
reporting products and services. Marketed under M-Pact, M-Search and M-Watch,
these products are a result of the acquisition of Mobius Group, Inc. in March
1999.
Through our Software Division, we deliver software, maintenance,
support and professional services to large financial service providers and other
companies across a range of industries. Our Software Division is comprised of
three units, each with its own distinct set of software products. The ACH
Solutions unit provides software and services that are used to process more than
two-thirds of the nation's nine billion ACH payments. The CFACS unit enables
organizations to manage their reconciliation and compliance requirements. The
i-Solutions unit provides software and services that enable end-to-end e-billing
and e-statement creation, delivery and payment. The Software division accounted
for approximately 12% of our fiscal 2003 revenue.
RESULTS OF OPERATIONS
The following table sets forth as percentages of total operating
revenues, certain consolidated statements of operations data:
YEAR ENDED JUNE 30,
-------------------------
2003 2002 2001
----- ----- -----
Total revenues .................................................... 100.0% 100.0% 100.0%
Expenses:
Cost of processing, servicing and support ..................... 43.1 53.4 59.0
Research and development ...................................... 9.6 11.3 12.8
Sales and marketing ........................................... 10.4 11.8 20.8
General and administrative .................................... 7.1 8.9 11.7
Depreciation and amortization ................................. 41.1 88.8 98.7
In-process research and development ........................... - - 4.3
Impairment of intangible assets ............................... 1.8 31.6 -
Reorganization charge ......................................... 0.2 3.3 -
----- ------ ------
Total expenses ............................................ 113.3 209.2 207.2
----- ------ ------
Loss from operations .............................................. (13.3) (109.2) (107.2)
Interest:
Interest income ............................................... 1.3 1.7 3.6
Interest expense .............................................. (2.3) (2.6) (3.1)
Loss on investments ............................................... (0.6) - (3.7)
----- ------ ------
Loss before income taxes and cumulative effect of accounting change (14.9) (110.1) (110.4)
Income tax benefit ................................................ (6.0) (20.2) (26.6)
----- ------ ------
Loss before cumulative effect of accounting change ................ (8.9) (89.9) (83.8)
Cumulative effect of accounting change ............................ (0.5) - -
----- ------ ------
Net loss .......................................................... (9.4)% (89.9)% (83.8)%
===== ====== ======
YEARS ENDED JUNE 30, 2003 AND 2002
Revenue. Total revenue increased by 12%, from $490.5 million for the
year ended June 30, 2002, to $551.6 million for the year ended June 30, 2003.
Total company revenue growth was driven by 15% growth in our Electronic Commerce
business, 10% growth in our Software business and 2% growth in our Investment
Services business.
-26-
Growth in our Electronic Commerce business is driven primarily by
growth in total transactions processed from approximately 316 million for the
year ended June 30, 2002, to over 434 million for the year ended June 30, 2003.
Please refer to the SEGMENT INFORMATION section of this report, Electronic
Commerce Division, for an analysis of changes in the mix of business inherent in
our transaction growth. Additionally, revenue related to minimum guarantees from
Microsoft and First Data Corporation have increased in total by $9.0 million on
a year over year basis. Growth in Electronic Commerce revenue has been dampened
somewhat by a decrease in interest rates, which has negatively impacted our
interest-sensitive offerings, such as our account balance transfer product,
by certain of our larger customers transferring payment volume to in-house
solutions during the most recent fiscal year, and by a large customer
reaching pricing tier discounts during the year due to significant volume
growth.
Our Software business has continued to grow in spite of customers
taking longer than normal to evaluate discretionary investment-spending
alternatives, such as third party software product offerings. We experienced
relatively strong software license sales in our seasonally high June and
December quarters and we were engaged in a significant software services
agreement during the year, which combined to provide a near term boost to
Software revenue; however, until the economy rebounds, we expect to experience
modest growth in our Software business.
Growth in our Investment Services business has been dampened by poor
stock market conditions. Portfolios managed have remained relatively flat over
the past year or so, as investors reducing stock holdings have offset new
portfolio growth. Pricing in Investment Services is primarily based on
portfolios managed, and as a result, we have experienced less than historical
revenue growth in this business. We expect this trend to continue until stock
market performance improves.
Across all segments of our business, for the year ended June 30, 2003,
Bank of America generated total revenue of $94.3 million, which exceeds 10% of
our total revenue, and remains the only customer that exceeds 10% of our total
revenue. The agreement with Bank of America has a ten-year term, includes annual
minimum guarantees of $50 million and includes tiered pricing which is
competitive with pricing we offer our other customers, based on volumes of
activity provided by Bank of America.
Our processing and servicing revenue increased by $54.2 million, or
13%, from $422.2 million for the year ended June 30, 2002, to $476.4 million for
the year ended June 30, 2003. Processing and servicing revenue occurs in both
our Electronic Commerce and Investment Services businesses. As previously
mentioned, portfolios managed have remained fairly flat year over year, and as a
result, we have seen only modest growth in processing and servicing revenue from
our Investment Services business. Growth in processing and servicing revenue has
therefore come primarily from growth in transactions processed within our
Electronic Commerce business. Additionally, we delivered almost 32 million
electronic bills in the year ended June 30, 2003, as compared to approximately
11 million bills in the previous year. In conjunction with our acquisition of
TransPoint in September 2000, we entered into agreements with Microsoft and
First Data Corporation, both of which include monthly minimum revenue guarantees
that increase annually over the five-year term of the agreements.
The following table represents the total annual minimum revenue
guarantees throughout the five-year contract period with Microsoft and First
Data Corporation (in thousands):
FISCAL YEAR ENDED JUNE 30, MICROSOFT FIRST DATA TOTAL
-------------------------- ---------- ---------- ----------
2001 ............................................. $ 6,000 $ 5,000 $ 11,000
2002 ............................................. 15,000 8,500 23,500
2003 ............................................. 21,000 11,500 32,500
2004 ............................................. 27,000 14,500 41,500
2005 ............................................. 33,000 17,500 50,500
2006 ............................................. 18,000 3,000 21,000
---------- ---------- ----------
Total ....................................... $ 120,000 $ 60,000 $ 180,000
========== ========== ==========
We are operating below the minimum levels in both agreements and, as a
result of increased minimum levels, revenue from Microsoft and First Data grew
by $9.0 million from the year ended June 30, 2002, to the year
-27-
ended June 30, 2003. Reductions in interest yields from this time last year have
had a dampening effect on our interest-sensitive products such as our account
balance transfer offering, which has offset further growth in Electronic
Commerce processing and servicing revenue. Furthermore, our largest customer
reached cliff-based pricing milestones in the quarters ended December 31, 2002,
and June 30, 2003, which reduced our revenue per subscriber for that customer by
between 10% and 15%. While much less in magnitude, we expect the same customer
to reach an additional pricing milestone around the end of the 2003 calendar
year.
At the end of our 2002 fiscal year, we introduced transaction-based
metrics designed to help investors better understand trends in our business. We
offer two basic levels of electronic billing and payment services to our
customers. Customers that use our Full Service offering generally outsource
their electronic billing and payment process to us. For instance, a Full Service
customer might not use a CheckFree-hosted user interface, but still use our full
array of services, including payment processing, payment warehouse, claims
processing, e-bill, online proof of payment, customer care, and other aspects of
our service. Also, while a Full Service customer may build its own payment
warehouse, we may maintain a customer record and payment history within our
payment warehouse to support the Full Service customer's servicing needs.
Customers in the Full Service category may contract to pay us either on a
per-subscriber basis, a per-transaction basis, or a blend of both. Customers
that utilize our Payment Services offering receive a limited subset of our
electronic billing and payment services. Additionally, within Payment Services,
we provide services to billers for electronic bill delivery and hosting, as well
as other payment services, such as account balance transfer. A third category of
revenue we simply refer to as Other Electronic Commerce. Other Electronic
Commerce includes our Health and Fitness business and other ancillary revenue
sources, such as CSP and biller implementation and consulting services.
As we have previously reported, three of our larger customers, all of
whom were original principals of a consortium known as Spectrum, have created
and begun using in-house payment warehouses for routing electronic bill payment
transactions, and each is in various stages of this transition process. For
payment processing services, each of the three principal banks signed a
multi-year transaction processing agreement with Metavante, a payment processing
division of Marshall and Ilsley Corporation ("M&I"), which included guaranteed
minimum transaction levels during the contract period. As a result, each of
these banks is routing payment transactions to Metavante in order to meet these
minimum requirements. J.P. Morgan Chase, which has historically maintained an
in-house payment warehouse as a Payment Services customer of CheckFree, moved
all of its Internet-based bill payment transactions, except for those processed
through personal financial management ("PFM") programs such as Intuit's Quicken
or Microsoft Money, to Metavante during the quarter ended December 31, 2002.
Wells Fargo has begun directing new electronic bill payment customers onto its
in-house system and has been routing some payments from existing customers to
Metavante over the second half of fiscal 2003. We expect to see a significant
volume of Wells Fargo transactions diverted during the quarter ending September
30, 2003. Wachovia initiated its in-house payment warehouse at the end of the
quarter ended December 31, 2002, and has been migrating legacy Wachovia bill pay
customers, on a state-by-state basis, onto its in-house system. Their migration
was effectively completed by June 30, 2003. We are not aware of any plans in
place at this time to migrate legacy First Union customers to the Wachovia
in-house system. We are working with Wells Fargo to integrate their payment
systems with CheckFree in order to continue to process transactions for them.
Wells Fargo announced in April 2003 that, together, we have enabled their
in-house system with e-bill capability. For reference purposes, Wells Fargo
currently operates as a Payment Services customer while Wachovia operates as a
Full Service customer.
A fourth bank customer, Bank One, has announced intentions to move its
electronic payment processing to an in-house payment solution as well. Bank One
started processing payments late in fiscal 2003, and we expect the remainder of
its electronic payment transaction volumes to decrease significantly beginning
in the quarter ended September 30, 2003, as it fully enables its system and
takes payment processing in-house.
We believe that the complexity and costs of building, supporting, and
hosting an in-house payment warehouse and user interface are substantial, and
execution is likely limited to a few large banks. Regardless, we expect to
compete for payment transaction volume from banks that ultimately choose an
in-house payment routing alternative.
-28-
Our license fee revenue decreased $0.8 million, or 3%, from $25.0
million for the year ended June 30, 2002 to $24.2 million for the year ended
June 30, 2003. License revenue is derived from our Software business. The
economy continues to cause potential customers to extend their evaluation time
on discretionary spending for such things as software products, which has
resulted in slower than normal software license sales. We expect this trend to
continue until the economy begins to rebound.
Our maintenance fee revenue increased by $1.4 million, or 6%, from
$24.3 million for the year ended June 30, 2002, to $25.7 million for the year
ended June 30, 2003. Maintenance revenue, which represents annually renewable
product support for our software customers, is isolated to our Software
business. A combination of a decrease in new license sales, customer retention
rates of at least 80% across all of our Software business units, and moderate
price increases on a year over year basis, resulted in a moderately increasing
maintenance base. We defer revenue recognition on maintenance billings until
cash is collected, which can cause quarter-to-quarter fluctuations in
maintenance revenue. Until license sales regain historical growth rates, we
expect to see moderate growth in maintenance.
Our other revenue increased by $6.4 million, or 34%, from $18.9 million
for the year ended June 30, 2002 to $25.3 million for the year ended June 30,
2003. Other revenue consists of consulting and implementation fees across all
three of our business segments. The primary driver of growth in this area is a
consulting services project we were engaged in with a large bank customer within
our ACH software business unit in fiscal 2003.
Cost of Processing, Servicing and Support. Our cost of processing,
servicing and support was $262.1 million, or 53.4% of total revenue, for the
year ended June 30, 2002, and was $238.0 million, or 43.1% of total revenue, for
the year ended June 30, 2003. Cost of processing, servicing and support as a
percentage of processing and servicing only revenue (total revenue less license
fees) was 56.3% for the year ended June 30, 2002, versus 45.1% for the year
ended June 30, 2003. The largest single factor resulting in the decline in
processing and servicing costs, in light of growth in processing and servicing
revenue, was platform consolidation in our Electronic Commerce business late in
fiscal 2002. For most of fiscal 2002, we maintained three redundant
payment-processing platforms. Through December 2001, we were converting Bank of
America subscribers from the legacy Bank of America processing platform we
purchased in October 2000 and, through March 2002, we maintained the redundant
system to close out remaining customer care inquiries and claims, at which time
we retired the redundant processing platform. Through this period, we paid Bank
of America to run and maintain the platform for us. Once we retired the Bank of
America system, we were able to close our customer care facility in San
Francisco on April 30, 2002, and our Houston customer care facility in the month
ended June 30, 2002. Additionally, as we migrated all but a few CSPs off of our
legacy Austin processing platform onto Genesis by the end of June 2002, we
closed our Austin office as well. The combination of platform consolidation and
office closings eliminated approximately $6.0 million of redundant quarterly
processing and servicing costs in the Electronic Commerce business.
Additionally, our electronic payment rate has improved from approximately 71%
for the year ended June 30, 2002, to over 75% for the year ended June 30, 2003.
Electronic payments carry a significantly lower variable cost per unit than do
paper-based payments and are far less likely to result in a costly customer care
claim. We continue to invest in additional efficiency and quality improvements
within our customer care processes and our information technology infrastructure
to drive improvements in our total cost per transaction. We expect these efforts
to result in further improvement in cost per transaction in future periods.
Research and Development. Our research and development costs were $55.2
million, or 11.3% of total revenue, for the year ended June 30, 2002, and were
$52.7 million, or 9.6% of total revenue, for the year ended June 30, 2003. Last
fiscal year, on March 19, 2002, we announced a company reorganization that
resulted in a reduction in workforce that impacted all areas of the company,
including research and development. The reduction resulted in savings on a year
over year basis. However, we continue to invest significantly in product
enhancement and quality improvement programs in all three of our businesses.
Sales and Marketing. Our sales and marketing costs were $58.0 million,
or 11.8% of total revenue, for the year ended June 30, 2002, and were $57.2
million, or 10.4% of total revenue, for the year ended June 30, 2003. During the
current fiscal year, we introduced new relationship management and account
management positions in our Investment Services business, however, the
previously mentioned reorganization, announced on March 19, 2002, also impacted
sales and marketing expenses resulting in a year over year reduction of costs.
-29-
General and Administrative. Our general and administrative costs were
$43.7 million, or 8.9% of total revenue, for the year ended June 30, 2002, and
were $39.0 million, or 7.1% for the year ended June 30, 2003. In addition to
reduced rental and related overhead expense from facilities closed late in
fiscal 2002 and improved collection experience resulting in favorable bad debt
expenses year over year, we continue to carefully manage our corporate expenses,
resulting in expected leverage in our overhead costs.
Depreciation and Amortization. Depreciation and amortization costs
decreased from $435.6 million for the year ended June 30, 2002, to $226.6
million for the year ended June 30, 2003. In July 2002, we adopted Statement of
Financial Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible
Assets." Upon adoption, goodwill is no longer subject to amortization over its
estimated useful life. Instead, goodwill is subject to at least an annual
assessment for possible impairment. We will continue to amortize all other
intangible assets, such as acquired technology, strategic agreements,
tradenames, and the like, over their respective useful lives. As a result of the
change, amortization from acquisition related intangible assets has decreased
from $394.0 million for the year ended June 30, 2002, to $183.3 million for the
year ended June 30, 2003. Underlying depreciation and amortization from
operating fixed assets and internally developed product costs has increased from
$41.6 million for the year ended June 30, 2002, to $43.3 million for the year
ended June 30, 2003. The increase in non-acquisition related depreciation and
amortization is the result of continued investment in new product innovations
and fixed assets necessary to support the continued growth of the company.
Impairment of Intangible Assets. Charges for the impairment of
intangible assets have decreased from $155.1 million for the year ended June 30,
2002, to $10.2 million for the year ended June 30, 2003. In the quarter ended
December 31, 2001, we recorded intangible asset impairment charges totaling
$155.1 million. This was the combined result of a charge of $107.4 million for
the impairment of goodwill associated with our acquisition of BlueGill
Technologies in April 2000 (currently known as CheckFree i-Solutions), and of
$47.7 million for the retirement of certain technology assets we acquired from
TransPoint in September 2000. In the quarter ended June 30, 2003, we recorded
intangible asset impairment charges totaling approximately $10.2 million
associated with our annual assessment of the recoverability of goodwill and
other intangible asset balances, particularly in our i-Solutions business unit.
Upon adoption of SFAS 142 in the quarter ended September 30, 2002, we incurred
an additional $2.9 million impairment of intangible assets that is described in
the coming paragraph labeled Cumulative Effect of Accounting Change, which is
reflected separately in our Consolidated Statement of Operations.
Upon successful integration of BlueGill Technologies into the
operations of our Software business, during fiscal 2001, we established a
revenue outlook for fiscal 2002 that anticipated continued rapid growth in
software license sales. We experienced a drop in demand for electronic billing
software during the quarter ended September 30, 2001; however, we did not
believe this would impact our longer-term expectations for this product line
and, therefore, in our estimation, there was no impairment at that time. When
software sales declined again in the quarter ended December 31, 2001, we
reevaluated our long-term expectations and viewed this as a triggering event
that required evaluation of possible impairment per the guidelines of SFAS 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of." Our
tests relative to the total tangible and intangible assets related to the
i-Solutions product line revealed that the assets were in fact impaired. This
resulted in a charge of $107.4 million to write down the value of goodwill
related to the acquisition of BlueGill.
As part of the acquisition of TransPoint in September 2000, we were
contractually required to maintain the TransPoint operating technology for up to
three years for any customer that wished to remain on the system. When valuing
the TransPoint assets, we established an intangible asset for current technology
and assigned it a three-year life. By December 31, 2001, we had migrated all of
the subscribers, billers and CSPs to our Genesis platform and the last of our
international partners gave notice of their intention to cancel their
maintenance agreement with us during the December 2001 quarter. Additionally, we
had recently concluded that components of the TransPoint technology were not
compatible with current or future planned initiatives. We viewed these as
triggering events that required the evaluation of possible impairment per SFAS
121. Our overall testing indicated that there was no impairment of the
TransPoint assets in general; however, we then evaluated SFAS 121 requirements
related to the retirement of assets and identified two technologies for which we
had no future use. We retired these two technologies, resulting in a charge of
$47.7 million in the quarter ended December 31, 2001.
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Throughout fiscal 2003, there were no triggering events that caused us
to evaluate the recoverability of our intangible asset balance. In April 2003,
we performed our annual evaluation of intangible asset recoverability. Our
initial tests indicated a potential impairment of goodwill in our i-Solutions
reporting unit. Our follow up tests included an SFAS 86 recoverability test of
our technology assets, which indicated no issues, and a SFAS 144 test, which
resulted in an impairment of $4.2 million in one of our non-goodwill intangible
assets. The final SFAS 142 test resulted in a further impairment of $6.0 million
in our i-Solutions goodwill balance for a total charge of $10.2 million.
Reorganization charge. Our reorganization charges decreased from $16.4
million for the year ended June 30, 2002, to $1.4 million for the year ended
June 30, 2003. In January 2002, we announced plans to close our customer care
facility in San Francisco, effective April 30, 2002, which resulted in the
termination of employees at that facility. At that time we also announced our
intent to eliminate certain of our financial planning products within our
Investment Services division, which also resulted in a small reduction of
employees in our Raleigh, North Carolina office. On March 19, 2002, we further
announced the closing of our Houston and Austin, Texas offices, our Ann Arbor,
Michigan office and our Singapore office, combined with a net reduction in force
totaling 450 employees. As a result of those actions, we incurred charges
totaling $16.4 million consisting primarily of severance and related employee
benefits and lease termination fees. We accounted for these actions in
accordance with Emerging Task Force (EITF) abstract number 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." Due primarily to our inability to sublease abandoned office space as
originally expected, in the quarter ended June 30, 2003, we recorded $1.4
million of additional reorganization charges to true-up our estimates from the
actions we initiated in fiscal 2002.
Interest. Interest income declined from $8.5 million for the year ended
June 30, 2002, to $7.3 million for the year ended June 30, 2003. An increase in
invested balances of cash, short-term and long-term investments from 2002 to
2003 was offset by reduced yields from lower interest rates during fiscal 2003.
Interest expense has increased from $12.8 million for the year ended
June 30, 2002, to $13.0 million for the year ended June 30, 2003. The increase
is due primarily to an increase in long-term lease obligations during fiscal
2003. Anchored by the fixed rate on our $172.5 million of outstanding
convertible debt, average interest rates have remained stable for us over these
periods.
Loss on Investments. In the year ended June 30, 2003, we incurred a
charge of $3.2 million for losses in investments. Due primarily to a decline in
the market value of one of our investments in a private imaging company, which
had been below our book value for over six months, we judged this to be an
"other than temporary" decline in the market value and, accordingly, in the
quarter ended March 31, 2003, we recorded a charge of $1.3 million to reflect
the loss. Due to a decline in the market value of our investment in Payment Data
Systems, Inc. (formerly Billserv, Inc.), which had been below our book basis for
over six months at the time, we also judged this to be an "other than temporary"
decline in the investment and in the quarter ended December 31, 2002, we
recorded a charge of $1.9 million to reflect the loss.
Income Taxes. We recorded an income tax benefit of $98.9 million, with
an effective rate of 18.3%, for the year ended June 30, 2002, and an income tax
benefit of $33.1 million, with an effective rate of 40.2%, for the year ended
June 30, 2003. Our June 30, 2002, pre-tax income included the impact of
non-deductible goodwill amortization expense. With our adoption of SFAS 142 in
July 2002, we stopped amortizing goodwill. Our resulting effective tax rate in
fiscal 2003 is now more in line with a blended statutory rate of about 40%, with
the exception of federal and state tax credits that have more than offset other
non-deductible expense.
Cumulative Effect of Accounting Change. On July 1, 2002, we adopted
SFAS 142, "Goodwill and Other Intangible Assets." SFAS 142 changes the
accounting for goodwill and other intangible assets. Goodwill is no longer
subject to amortization over its estimated useful life. Rather, goodwill is
subject to at least an annual assessment for impairment by applying a
fair-value-based test.
In accordance with SFAS 142, we were required to perform a transitional
impairment test. The test was performed as of July 1, 2002. This impairment test
required us to (1) identify our reporting units, (2) determine the carrying
value of each reporting unit by assigning assets and liabilities, including
existing goodwill and intangible
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assets, to those reporting units, and (3) determine the fair value of each
reporting unit. If the carrying value of any reporting unit exceeded its fair
value, then the amount of any goodwill impairment was determined through fair
value analysis of each of the assigned assets (excluding goodwill) and
liabilities.
As a result of the transitional impairment test, we determined that
goodwill associated with our i-Solutions reporting unit was impaired. We
recorded an impairment charge of $2.9 million, which is reflected as a
cumulative effect of a change in accounting principle in the Consolidated
Statement of Operations for the year ended June 30, 2003. Refer to Note 7.
"Goodwill and Other Intangible Assets" in the accompanying Notes to Consolidated
Financial Statements, for further discussion regarding the current year and
expected future impact of this change on our depreciation and amortization
expense.
YEARS ENDED JUNE 30, 2002 AND 2001
Revenues. Our total revenue increased by 13%, from $433.3 million for
the year ended June 30, 2001 to $490.5 million for the year ended June 30, 2002.
Total company revenue growth was driven by 17% growth in our Electronic Commerce
business and 14% growth in our Investment Services business, offset by a 5%
decline in our Software business. Growth in Electronic Commerce revenue was
driven primarily by growth in total transactions processed from 231 million for
the year ended June 30, 2001, to over 316 million for the year ended June 30,
2002. The impact of growth in transactions processed was offset by a decline in
revenue from interest rate sensitive products, such as our account balance
transfer product, caused by significant decreases in interest rates from fiscal
2001. In October 1999, we entered into an agreement with a third party in which
we issued warrants on one million shares of our stock, exercisable on September
15, 2002, contingent upon maintaining the existence of our agreement through
that date. During the quarter ended June 30, 2002, we recorded a non-cash charge
of $2.7 million against revenue resulting from the probable vesting of those
warrants to the third party.
Growth in Investment Services was driven primarily by an increase in
portfolios managed from over 1.1 million at June 30, 2001, to about 1.2 million
at June 30, 2002, offset by industry consolidations which resulted in the loss
of over 0.1 million portfolios in fiscal 2002. The majority of these portfolios
processed at a lower price point than average, based on the service level
provided, resulting in a reduced negative impact. Also, in the quarter ended
March 31, 2002, we announced the elimination of certain of our financial
planning software products within Investment Services, resulting in a modest
decrease in revenue as the product line was in existence the full year in fiscal
2001 and less than three quarters of the year in fiscal 2002. As a result of the
difficult stock market conditions that worsened since late September 2001,
portfolio growth slowed significantly, and we remained short of historic growth
rates in this part of our business. Due also to poor economic conditions in
fiscal 2002, we experienced a decline in revenue in our Software business on a
year over year basis. Although revenue from our more mature ACH processing and
Reconciliation products had remained relatively stable, sales of our i-Solutions
electronic billing and statement software were lower than expected as the
recession continued.
Across all segments of our business, for the year ended June 30, 2002,
Bank of America generated total revenue of $60.0 million, which represented in
excess of 10% of our total revenue in fiscal 2002, and they were the only
customer to exceed 10% of our total revenue. Because they owned approximately 10
million shares of our stock at the time, Bank of America was considered a
related party.
Our processing and servicing revenue increased by $60.2 million, or
17%, from $362.1 million for the year ended June 30, 2001, to $422.2 million for
the year ended June 30, 2002. Within Electronic Commerce, growth in underlying
processing and servicing revenue was driven by the previously mentioned growth
in subscribers and transactions. Our acquisition of TransPoint in September 2000
included a five-year strategic agreement with Microsoft and a five-year
marketing agreement with First Data Corporation, each of which includes minimum
quarterly revenue guarantees, as does our ten-year strategic agreement with Bank
of America. Through June 30, 2002, the agreements with Microsoft and First Data
were operating below the minimum guarantee level. The Bank of America contract
operated under minimums until the December 31, 2001 quarter. As a result of
these minimum guarantees, overall subscriber-based revenue correlated less
directly with subscriber growth. Additionally, we processed over 1.3 million
electronic bills in the month ended June 30, 2002, which was a significant
increase from the 1.1 million electronic bills processed in the month ended
March 31, 2002, and the 500,000 electronic bills processed in the month ended
June 30, 2001. This growth was offset by a decline in revenue from interest rate
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sensitive products and the previously mentioned $2.7 million non-cash charge we
recorded against revenue related to warrants we issued to a third party in 1999.
In the quarter ended June 30, 2002, J.P. Morgan Chase announced plans to utilize
in-house technologies to build and manage their own electronic billing and
payment user interface and payment warehouse.
Our license fee revenue decreased by $5.2 million, or 17%, from $30.2
million for the year ended June 30, 2001 to $25.0 million for the year ended
June 30, 2002. License sales had dropped off during the recessionary period that
began toward the end of fiscal 2001 and continued throughout fiscal 2002. While
sales in our more mature ACH processing and Reconciliation software products had
remained fairly stable, sales of our i-Solutions electronic billing and
statement software have continued to fall short of our expectations. The
reduction in expected license sales in our i-Solutions business unit resulted in
our recording an impairment charge relative to the intangible assets we recorded
as part of our acquisition of BlueGill. The charge is explained in the paragraph
labeled Impairment of Intangible Assets later in this analysis.
Our maintenance fee revenue increased by $3.0 million, or 14%, from
$21.3 million for the year ended June 30, 2001 to $24.3 million for the year
ended June 30, 2002. Maintenance tends to grow with incremental software license
sales from the last four quarters, combined with annual retention rates of
existing customers that exceed 80% across all product lines. Although software
sales have declined on a year over year basis, because of the annuity effect of
a renewing customer base, we have continued to experience growth in maintenance
revenue. Pricing did not have a material impact on maintenance revenue growth.
Our other revenue decreased by $0.8 million, or 4%, from $19.8 million
for the year ended June 30, 2001, to $18.9 million for the year ended June 30,
2002. The decline in other revenue was the combined result of lower biller
implementation fees in our Electronic Commerce business, lower software
implementation engagements from lower software sales in our Software business
and lower implementation and custom reporting fees in our Investment Services
business.
Cost of Processing, Servicing and Support. Our cost of processing,
servicing and support was $255.5 million, or 59.0% of total revenue, for the
year ended June 30, 2001, and was $262.1 million, or 53.4% of total revenue, for
the year ended June 30, 2002. Cost of processing, servicing and support, as a
percentage of processing only revenue, was 63.4% for the year ended June 30,
2001, versus 56.3% for the year ended June 30, 2002. We achieved improved
efficiency and processing quality within our Genesis processing platform in our
Electronic Commerce business. Our ratio of electronic payments to total payments
improved from 64% at June 30, 2001, to over 71% at June 30, 2002. Electronic
payments carry a significantly lower variable cost per unit than paper based
payments and are far less likely to result in a costly customer inquiry or
claim. The full underlying impact of improved efficiency and quality, however,
is not fully explained in these results. We acquired TransPoint in September
2000 and the electronic billing and payment assets of Bank of America in October
2000. As a result of these transactions, we supported two additional billing and
payment platforms for much of the year ended June 30, 2001, and one additional
platform through March 31, 2002, as we worked to migrate subscribers and billers
over to Genesis. The acquired platforms were less efficient than our Genesis
processing platform, and therefore much more expensive to operate. As an
example, during fiscal 2002 alone, we incurred approximately $18.0 million in
costs paid to Bank of America for their support of the Bank of America West
processing platform during the conversion process. We completed the conversion
of the TransPoint subscribers and billers onto our Genesis platform in the
quarter ended June 30, 2001. We completed the conversion of a portion of the
Bank of America East operations in the quarter ended March 31, 2001, and the
remainder of the Bank of America subscribers, referred to as Bank of America
West, to Genesis in the quarter ended December 31, 2001. After resolving the
backlog of open customer care inquiry and claims during the quarter ended March
31, 2002, we retired the Bank of America processing platform and were no longer
required to reimburse Bank of America for running the platform on our behalf.
Additionally, we migrated all but a few CSPs off of our Austin processing
platform and relocated the remaining technologies to our Norcross, Georgia
facility. As a result of these retirements, we closed our San Francisco customer
care facility effective April 30, 2002, our Houston customer care facility
effective June 30, 2002, and closed our Austin office effective September 30,
2002. The retirement of the Bank of America platform and the resulting closing
of the San Francisco, Houston and Austin offices resulted in a recurring
reduction in our quarterly processing cost of almost $5.0 million beginning in
the quarter ended June 30, 2002, and increasing to approximately $6.0 million in
the quarter ended September 30, 2002. The net impact of the above programs and
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actions resulted in a decrease of over 20% in our direct cost per transaction
processed in the year ended June 30, 2002. Refer to the Reorganization Charge
paragraph below and Note 17 in the Notes to Consolidated Financial Statements
within this report for further information regarding the one-time charge we
recorded as a result of the reorganization actions.
Research and Development. Our research and development costs were $55.6
million, or 12.8% of total revenue, for the year ended June 30, 2001, and $55.2
million, or 11.3% of total revenue, for the year ended June 30, 2002. Adjusted
for capitalized development costs, our gross research and development costs were
$60.5 million, or 14% of total revenue, for the year ended June 30, 2001, and
$59.6 million, or 12.2% of total revenue, for the year ended June 30, 2002.
During fiscal years 2000 and 2001, we invested heavily in research and
development activities to enhance our product offerings and further distance
ourselves from our competition. We continued to invest consistently in research
and development activities on a gross dollar basis in all of our business
segments during fiscal 2002 in anticipation and support of revenue growth,
quality enhancement and efficiency improvement opportunities. On March 19, 2002,
we announced a company reorganization that resulted in a reduction in workforce
that impacted all areas of the company, including research and development.
Sales and Marketing. Our sales and marketing costs were $90.3 million,
or 20.8% of total revenue, for the year ended June 30, 2001, and were $58.0
million, or 11.8% of total revenue, for the year ended June 30, 2002. The terms
of our strategic agreement with Bank of America in October 2000 called for us to
provide $25.0 million toward a two year, $45.0 million marketing campaign to be
administered by Bank of America. Because we had no direct influence or control
over the specific nature, timing or extent of the use of funds, we expensed the
$25.0 million as a period cost in the quarter ended December 31, 2000. Net of
this one-time charge, sales and marketing costs were $65.3 million, or 15.1% of
total revenue, for the year ended June 30, 2001. Fiscal year 2002 commission
expenses were lower than prior year due to lower overall software sales and
lower biller signings than in the prior year. We reduced the number of
i-Solutions sales and marketing staff in the quarter ended June 30, 2001 and
sales and marketing staff across the company were also impacted by the reduction
in force announced on March 19, 2002. Because our electronic billing and payment
services are offered as a private labeled service through our bank customers, we
do not incur the cost of direct advertising and promotion campaigns. However,
our existing marketing staff provided assistance to our consumer service
provider customers in identifying best practice programs that were successful in
driving increased subscriber adoption and activation.
General and administrative. Our general and administrative costs were
$50.5 million, or 11.7% of total revenue, for the year ended June 30, 2001, and
were $43.7 million, or 8.9% of total revenue, for the year ended June 30, 2002.
Our general and administrative costs as a percentage of revenue continued to
decline due to leverage inherent in our business model and efforts to curtail
discretionary spending in a recessionary economy throughout fiscal 2002.
Depreciation and Amortization. Depreciation and amortization costs
increased from $427.5 million for the year ended June 30, 2001, to $435.6
million for the year ended June 30, 2002. The significant depreciation and
amortization costs relative to the other costs of our business are composed
primarily of amortization expenses related to the intangible assets we recorded
as a result of the acquisition of BlueGill Technologies in April 2000, the
acquisition of TransPoint in September 2000, and our purchase of the electronic
billing and payment assets of Bank of America in October 2000. Net of intangible
amortization from acquisitions, our depreciation costs related primarily to
fixed assets used in ongoing operations, increased from $34.1 million for the
year ended June 30, 2001 to $41.6 million for the year ended June 30, 2002. The
increase in fixed asset depreciation was the result of continued capital
spending for data processing equipment, related software, and facility
improvements in support of the continued growth of the business. As a result of
our decision to close our San Francisco, Houston and Austin offices, we had
certain fixed assets that had no future use to us, and we accelerated the
remaining depreciation on those assets to reduce their book value to zero to
reflect the timing of the office closings and their resulting shorter useful
life.
In-Process Research and Development. In the three months ended
September 30, 2000, we incurred $18.6 million of in-process research and
development costs in relation to our acquisition of TransPoint. For a detailed
discussion of this charge, please refer to the Notes to Consolidated Financial
Statements included in our June 30, 2001 Annual Report.
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Impairment of Intangible Assets. In the quarter ended December 31,
2001, we recorded charges totaling $155.1 million for the impairment of
intangible assets. As previously explained, this was the combined result of a
charge of $107.4 million for the impairment of goodwill associated with our
acquisition of BlueGill Technologies in April 2000 (currently referred to as
CheckFree i-Solutions), and of $47.7 million for the retirement of certain
technology assets we acquired from TransPoint in September 2000.
Reorganization Charge. We previously discussed our fiscal 2002
reorganization charge of $16.4 million in the years ended June 30, 2003 and 2002
section of this report. Please refer back to the Reorganization Charge caption
for a full discussion of the charges.
Interest. Interest income decreased from $15.4 million for the year
ended June 30, 2001, to $8.5 million for the year ended June 30, 2002. The
decrease is a result of the combined effect of a decrease in our average annual
yield, offset by an increase in our average invested assets of $34.1 million.
Interest expense declined from $13.2 million for the year ended June
30, 2001, to $12.8 million for the year ended June 30, 2002. The decrease is due
to a modest drop in average interest rates combined with a reduction in our
average outstanding debt and other long-term obligations of approximately $0.3
million. Note that the interest rate on our $172.5 million convertible debt
balance is fixed at 6.5% and this debt has remained in place throughout fiscal
2001 and fiscal 2002.
Loss on Investments. Due to overall market conditions, certain of our
investments incurred an "other than temporary" decline in market value. As a
result, in the year ended June 30, 2001, we recorded charges of $16.1 million to
appropriately reflect the decline in value of these investments. No additional
charge was required in the year ended June 30, 2002.
Income Taxes. We recorded an income tax benefit of $115.4 million, at
an effective rate of 24.1%, for the year ended June 30, 2001, and an income tax
benefit of $98.9 million, at an effective rate of 18.3%, for the year ended June
30, 2002. The reported effective rates differ from the blended statutory rate of
40% in all periods due to certain non-deductible goodwill amortization,
impairment charges related to goodwill, non-deductible in-process research and
development expenses and other non-deductible expenses, offset somewhat by
eligible tax credits.
SEGMENT INFORMATION
The following table sets forth our operating revenue and operating
income by industry segment for the periods noted. Items identified as purchase
accounting amortization, impairment of intangible assets, a one time marketing
charge, reorganization charge, in-process research and development, and charge
associated with warrants issued to third parties, were separated from operating
income for a better understanding of each segment. Explanations for these
charges can be found in the discussion above.
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YEAR ENDED JUNE 30,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
(In thousands)
Operating revenue:
Electronic Commerce - underlying ............... $ 404,729 $ 354,802 $ 301,532
Impact of warrants issued to third party ....... 644 (2,748) -
---------- ---------- ----------
Electronic Commerce ............................... 405,373 352,054 301,532
Investment Services ............................... 81,562 79,574 69,613
Software .......................................... 64,711 58,849 62,175
---------- ---------- ----------
Total operating revenue ....................... $ 551,646 $ 490,477 $ 433,320
========== ========== ==========
Operating income (loss):
Electronic Commerce ............................... $ 115,539 $ 39,010 $ (13,083)
Investment Services ............................... 21,062 24,376 20,347
Software .......................................... 18,008 5,789 837
Corporate ......................................... (33,798) (36,500) (35,746)
Specific items:
Purchase accounting amortization .................. (183,342) (394,009) (393,436)
Impairment of intangible assets ................... (10,228) (155,072) -
Reorganization charge ............................. (1,405) (16,365) -
Impact of warrants issued to third party .......... 644 (2,748) -
One-time marketing charge ......................... - - (25,000)
In-process research and development ............... - - (18,600)
---------- ---------- ----------
Total operating loss .......................... $ (73,520) $ (535,519) $ (464,681)
========== ========== ==========
YEARS ENDED JUNE 30, 2003 AND 2002
Electronic Commerce. Revenue in our Electronic Commerce business
increased by $53.3 million, or 15%, from $352.1 million for the year ended June
30, 2002, to $405.4 million for the year ended June 30, 2003. In the quarter
ended June 30, 2002, we recorded a non-cash charge of $2.7 million against
Electronic Commerce revenue associated with the probable vesting of warrants we
issued to a third party. The warrants vested in the quarter ended September 30,
2002, and at that time, we recorded a true-up of $0.6 million which reduced the
original charge. Net of this one-time charge and its subsequent true-up,
underlying revenue in Electronic Commerce increased by $49.9 million, or 14%,
from $354.8 million for the year ended June 30, 2002, to $404.7 million for the
year ended June 30, 2003. The increase in revenue is driven primarily by an
increase in year over year transaction volume.
At the end of our 2002 fiscal year, we introduced transaction-based
metrics designed to help investors better understand trends in our business. We
offer two levels of electronic billing and payment services to our customers.
Customers that utilize our Full Service offering generally outsource their
electronic billing and payment process to us. For instance, a Full Service
customer might not use a CheckFree hosted user interface, but still use our full
array of services, including payment processing, claims processing, e-bill,
on-line proof of payment, customer care, and other aspects of our service. Also,
while a Full Service customer might build its own payment warehouse, we maintain
a customer record and payment history within our payment warehouse to support
the Full Service customer's servicing needs. Customers in the Full Service
category may contract to pay us either on a per-subscriber basis, a
per-transaction basis, or a combination of both. Customers that utilize our
Payment Services offering receive a limited subset of our electronic billing and
payment services. An example of a Payment Services customer may be a bank that
uses CheckFree primarily to process its payments. While we maintain payment
records necessary to answer payment inquiries, in this situation we would not
maintain full subscriber or payment initiation data in our payment warehouse.
Additionally, within Payment Services, we provide services to billers who
compensate us for electronic bill delivery and hosting services, as well as
other payment services such as account balance transfer.
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A third category of revenue we simply refer to as Other Electronic
Commerce. Other Electronic Commerce includes our Health and Fitness business and
other ancillary revenue sources, such as CSP and biller implementation and
consulting services. The following tables provide a historical trend of revenue,
underlying transaction metrics, and subscriber metrics where appropriate, for
the Electronic Commerce business:
QUARTER ENDED
-------------------------------------
9/30/02 12/31/02 3/31/03 6/30/03
------- -------- ------- -------
(In thousands)
FISCAL 2003:
FULL SERVICE
Revenue .................................. $71,596 $ 75,089 $81,467 $82,602
Active subscribers ....................... 3,224 3,514 3,905 4,222
Transactions processed ................... 67,164 74,900 80,267 87,454
PAYMENT SERVICES
Revenue .................................. $14,677 $ 13,923 $12,808 $12,263
Transactions processed ................... 29,519 30,131 31,591 32,738
OTHER ELECTRONIC COMMERCE
Revenue .................................. $ 9,737 $ 9,160 $10,260 $11,147
Non-cash revenue impact of warrants ...... $ 644 - - -
QUARTER ENDED
-----------------------------------------
9/30/01 12/31/01 3/31/02 6/30/02
-------- -------- -------- --------
(In thousands)
FISCAL 2002:
FULL SERVICE
Revenue .................................. $ 64,968 $ 67,161 $ 71,155 $ 74,132
Active subscribers ....................... 2,620 2,749 2,930 3,122
Transactions processed ................... 56,055 60,947 65,531 69,045
PAYMENT SERVICES
Revenue .................................. $ 9,878 $ 10,243 $ 10,285 $ 10,669
Transactions processed ................... 13,385 15,509 16,866 18,942
OTHER ELECTRONIC COMMERCE
Revenue .................................. $ 9,981 $ 8,236 $ 8,332 $ 9,762
Non-cash revenue impact of warrants ...... - - - $ (2,748)
We experienced generally steady growth in Full Service revenue, active
subscribers, and transactions processed until the September 30, 2002, quarter.
During the quarter ended September 30, 2002, one of our larger customers, Wells
Fargo, converted from Full Service to Payment Services, and, accordingly,
approximately 300,000 active subscribers and their related transactions switched
categories. Although Payment Services transactions generate less revenue per
transaction, because we provide less service, our cost per transaction is less
as well. While the shift of a customer to Payment Services from Full Service
will reduce revenue, we do not expect such a shift to have a significant impact
on our operating margin over time. Although Bank of America accounts for over
one third of our active Full Service subscribers, growth in active subscribers
and transactions processed are the result of broad growth throughout the
channel. CSP customer pricing in this category can be based on transactions
processed, the number of subscribers, or a combination of both, and
additionally, in order to share the benefits associated with scale efficiencies,
pricing is tiered in nature, whereby a customer exceeding predetermined volumes
is eligible for a lower price on a going forward basis. In addition, the mix of
customers utilizing transaction-based versus subscriber-based pricing will have
an impact on revenue per transaction. In the latter half of the quarter ended
December 31, 2002,
-37-
and again in the early part of the quarter ended June 30, 2003, Bank of America
reached pricing tier discount levels, and we expect it to reach a third pricing
tier discount sometime late in the 2003 calendar year, or early in the quarter
ending March 31, 2004. Because of the significance of our relationship with Bank
of America, when it reaches a pricing tier discount, the implied revenue per
transaction in this category will decline accordingly. Additionally, we saw
reductions in subscribers and/or transactions from Full Service customers
Wachovia and Bank One throughout the second half of fiscal 2003, and we expect
Bank One to take a significant volume of its transactions in-house in the
quarter ended September 30, 2003.
We experienced moderate quarterly growth in revenue and transactions
processed in the Payment Services category throughout fiscal 2002, a significant
increase in the quarter ended September 30, 2002, followed by a declining
revenue trend beginning in the quarter ended December 31, 2002. As previously
mentioned, Wells Fargo converted from a Full Service relationship to a Payment
Services relationship, which caused the significant increase in revenue and
transactions in this category. We had anticipated that J.P. Morgan Chase,
another large customer already included in the Payment Services category, would
begin moving transactions to a competitor in order to meet contractually
guaranteed minimum transaction levels with that competitor. This shift did not
take place as quickly as expected, but by December 31, 2002, all of J.P. Morgan
Chase's non-PFM volume was moved off our system. We started to see signs of the
anticipated drop in transactions processed from Wells Fargo in the quarters
ended March 31, 2003 and June 30, 2003, as they also are required to meet
guaranteed minimum transaction levels with a competitor. We expect to experience
a significant reduction in transactions from Wells Fargo in the quarter ended
September 30, 2003. Wells Fargo, however, is e-bill enabled and their in-house
system is integrated with our processing system. All electronic bills that we
present to Wells Fargo customers, at a minimum, will be routed back to us for
payment purposes. We delivered 31.9 million bills in the year ended June 30,
2003; almost three times the 10.8 million bills delivered in the year ended June
30, 2002. We also report miscellaneous payment only transactions from
complementary products such as our account balance transfer business in this
category. Pricing in our account balance transfer business is interest
sensitive, whereby we share inherent float from the product with our customers.
Fluctuations in prevailing interest rates will therefore have an impact on the
average revenue per transaction we will receive and, as a result, the drop in
interest rates over the past year has had a dampening effect on our revenue and
revenue per transaction during fiscal 2003.
Our Other Electronic Commerce revenue includes our Health and Fitness
product, which grew modestly, and other non-transaction related services such
implementation and consulting, which increased on a quarter over quarter basis.
We expect one of our largest Health and Fitness customers to migrate to an
internally developed health club management system beginning in the quarter
ending September 30, 2003. We expect this to result in an immediate decline in
quarterly revenue in this category of about $1.0 million. During the quarter
ended June 30, 2002, we recorded a non-cash charge of $2.7 million against
Electronic Commerce revenue associated with the probable vesting of warrants we
issued to a third party. In the quarter ended September 30, 2002, the warrants
actually vested. On the date of vesting, however, the fair value of our stock
was lower than when we calculated the initial charge. As a result, a true-up of
the value of the warrants resulted in a credit to revenue of $0.6 million in the
quarter ended September 30, 2002.
Operating income in our Electronic Commerce business, net of purchase
accounting amortization, intangible asset impairment charges, reorganization
charges, and the impact of warrants, has improved from $39.0 million for the
year ended June 30, 2002, to $115.5 million for the year ended June 30, 2003.
Our ratio of electronic payments to total payments continues to improve, from
approximately 71% as of June 30, 2002, to over 75% as of June 30, 2003.
Electronic payments carry a significantly lower variable cost per unit than
paper payments and are far less likely to result in a costly customer care
inquiry or claim. The full underlying impact of improved efficiency and quality,
however, is not fully explained by a change in electronic rate. Throughout
fiscal 2002, we supported two additional payment-processing platforms over and
above our Genesis platform. We paid Bank of America to run the legacy Bank of
America platform through March 2002, as we migrated consumers onto our more
efficient Genesis platform, and cleared outstanding customer care claims
initiated on the Bank of America platform. By March 31, 2002, we eliminated this
redundant payment platform and were able to close our San Francisco customer
care facility in April 2002 and our Houston customer care facility by June 2002.
In addition, we had been operating a legacy Austin payment processing platform.
When all but a few CSPs had migrated onto Genesis by June 2002, we were able to
close our Austin facility as well. In March 2002, we announced a corporate wide
reorganization that resulted in a reduction in workforce, over and above the
employees impacted by office closings and platform
-38-
consolidation. In total, we eliminated between $7.0 million and $8.0 million of
quarterly costs starting in the quarter ended June 30, 2002. Finally, we
continue to emphasize quality improvement, which we expect to result in further
reduction in cost per transaction as we leverage the fixed costs already
invested in our Electronic Commerce business. Our focus in Electronic Commerce
in fiscal 2003 and into 2004 has been toward improved profitability through
programs designed to:
- drive increased consumer adoption and activation among our
partners;
- improve product design and usability;
- improve overall customer satisfaction; and
- reduce variable costs per transaction.
Investment Services. Revenue in our Investment Services business
increased by $2.0 million, or 2%, from $79.6 million for the year ended June 30,
2002, to $81.6 million for the year ended June 30, 2003. The total number of
portfolios managed has remained relatively flat at approximately 1.2 million on
a year over year basis. Current revenue growth has not matched historical
performance as the depressed stock market has had a direct impact on our ability
to grow revenue in the business. Our pricing is based primarily on portfolios
managed and portfolio additions continue to be offset by investors reducing
stock holdings. We have focused attention on leveraging our economies of scale
leadership position to secure multi-year contract extensions with certain
customers. As a result, although we are starting to see signs of portfolio
growth, we anticipate experiencing similar growth into fiscal 2004 until the
stock market improves.
Operating income in Investment Services, net of purchase accounting
amortization, has decreased by $3.3 million, or 14%, from $24.4 million for the
year ended June 30, 2002, to $21.1 million for the year ended June 30, 2003. The
decline in operating income is due to investment spending on new product
offerings and quality improvement initiatives in anticipation of a positive turn
in the economy. Throughout fiscal 2003, key initiatives in our Investment
Services business have included:
- new product offerings (e.g., Multiple Strategy Portfolios /
M-Pact) with a shortened time to market;
- additional web-based products with increased functionality and
ease of use;
- build out of relationship-based service offerings in our
operations; and
- investments to improve quality.
Software. Revenue in our Software business increased by $5.9 million,
or 10%, from $58.8 million for the year ended June 30, 2002, to $64.7 million
for the year ended June 30, 2003. The downturn in the economy throughout fiscal
2002 and 2003 has caused many businesses to curtail discretionary expenditures,
which has resulted in an overall dampening of demand for licensed software
solutions. While our newer i-Solutions electronic statement and billing software
has been impacted most, short-term demand for our reconciliation and ACH
processing licenses has been impacted as well. However, during the quarter ended
December 31, 2002, we began work on a consulting services agreement with a large
bank customer in our ACH business unit that provided greater than normal
consulting revenue over the past two quarters. Resulting services revenue was
the driving factor behind growth in the Software segment. We believe software
license sales in general will continue to be somewhat challenging until economic
conditions improve.
Operating income in our Software business, net of purchase accounting
amortization, intangible asset impairment charges and reorganization charges,
has increased from $5.8 million for the year ended June 30, 2002, to $18.0
million for the year ended June 30, 2003. In March 2002, we announced a company
wide reorganization that resulted in a net reduction in staff. As part of these
actions, we announced the closing of our Ann Arbor, Michigan office. In addition
to the recurring savings that resulted from these actions, improvements in
operating income are also the result of continued efforts to closely manage
discretionary expenses in light of economic conditions.
Corporate. Our Corporate segment represents expenses for legal, human
resources, finance and other various unallocated overhead expenses. In
Corporate, we incurred operating expenses of $36.5 million, or 7% of total
revenue, for the year ended June 30, 2002, and operating expenses of $33.8
million, or 6% of total revenue, for
-39-
the year ended June 30, 2003. We continue to closely manage our expenses,
resulting in expected leverage in overhead costs.
Purchase Accounting Amortization. The purchase accounting amortization
line represents amortization of intangible assets resulting from all of our
various acquisitions from 1996 forward. The total amount of purchase accounting
amortization has decreased from $394.0 million for the year ended June 30, 2002,
to $183.3 million for the year ended June 30, 2003. In July 2002, we adopted
SFAS 142, "Goodwill and Other Intangible Assets." Upon adoption, goodwill is no
longer subject to amortization over its estimated useful life. Instead, goodwill
is subject to at least an annual assessment for possible impairment. All other
intangible assets, such as acquired technology, strategic agreements, trade
names, and the like, will continue to be amortized over their respective useful
lives. For comparative purposes, the following table breaks out the intangible
asset amortization by segment:
YEAR ENDED JUNE 30,
------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Electronic Commerce .................... $175,028 $358,476 $328,072
Investment Services .................... 2,300 5,665 5,369
Software ............................... 6,014 29,868 59,995
-------- -------- --------
Total .............................. $183,342 $394,009 $393,436
======== ======== ========
Impairment of Intangible Assets. In the quarter ended June 30, 2003, we
recorded charges totaling $10.2 million for the impairment of intangible assets.
Our annual review for possible impairment of goodwill as required by SFAS 142
resulted in a charge of $4.2 million for the impairment of our customer base
intangible asset and another $6.0 million for the impairment of goodwill, both
from intangible assets we established upon the acquisition of BlueGill
Technologies in April 2000 (currently referred to as CheckFree i-Solutions). In
the quarter ended December 31, 2001, we recorded charges totaling $155.1 million
for the impairment of intangible assets. This was the combined result of a
charge of $107.4 million for the impairment of goodwill associated with our
acquisition of BlueGill Technologies and of $47.7 million for the retirement of
certain technology assets we acquired from TransPoint in September 2000. Please
refer to Impairment of Intangible Assets in the years ended 2003 and 2002
Results of Operations section of this report for a detailed explanation of these
charges.
Reorganization Charge. In January 2002, we announced our plans to close
our customer care facility in San Francisco, California, effective April 30,
2002, which resulted in the termination of employees at that facility. At that
time we also announced our intent to eliminate certain of our financial planning
products within our Investment Services division, which also resulted in a small
reduction of employees in our Raleigh, North Carolina office. In March 2002, we
further announced the closing of our Houston, Austin, Ann Arbor and Singapore
offices, along with a net reduction in force totaling approximately 450
employees. As a result of these actions, we incurred a charge of $15.9 million
in the quarter ended March 31, 2002, a true-up charge of $0.5 million in the
quarter ended June 30, 2002, and a second true-up charge of $1.4 million in the
quarter ended June 30, 2003. The first true-up consisted primarily of severance
and related employee benefits and lease termination fees. The second true-up of
$1.4 million was due primarily to our inability to sub-lease vacated property as
originally anticipated. We accounted for these actions in accordance with
Emerging Issues Task Force (EITF) abstract number 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity."
The following table provides a breakdown of our reorganization charges by
segment:
YEAR ENDED JUNE 30,
--------------------
2003 2002
-------- --------
(In thousands)
Electronic Commerce .................... $ 307 $ 11,041
Investment Services .................... (68) 2,309
Software ............................... 1,183 2,812
Corporate .............................. (17) 203
-------- --------
Total .............................. $ 1,405 $ 16,365
======== ========
-40-
Impact of Warrants. During the quarter ended June 30, 2002, we recorded
a non-cash charge of $2.7 million against revenue resulting from the probable
vesting of warrants issued to a third party. In the quarter ended September 30,
2002, the warrants vested. On the date of vesting, however, the fair value of
our stock was lower than at June 30, 2002, when we calculated the initial
charge. As a result, a true-up of the value of the warrants resulted in a credit
to revenue of $0.6 million in the quarter ended September 30, 2002. The charge,
and the true-up credit, were based on a Black-Scholes valuation of the warrants
and were accounted for as a net charge to revenue in accordance with Emerging
Issues Task Force ("EITF") 01-09, "Accounting for Consideration Given by a
Vendor to a Customer."
YEARS ENDED JUNE 30, 2002 AND 2001
Electronic Commerce. Revenue in our Electronic Commerce business
increased by $50.5 million, or 17%, from $301.5 million for the year ended June
30, 2001, to $352.1 million for the year ended June 30, 2002. In the quarter
ended June 30, 2002, we recorded a non-cash charge of $2.7 million against
Electronic Commerce revenue associated with the probable vesting of warrants we
issued to a third party. Net of this one-time non-cash charge, underlying
revenue was $354.8 million for the year ended June 30, 2002, for an increase of
18%. Underlying growth in this business is driven primarily by an increase in
subscribers from just over 5.2 million at June 30, 2001, to over 6.6 million as
of June 30, 2002, an increase of 27%. While significant, this growth rate was
lower than we had seen in recent years due to a difficult economic environment.
With our acquisition of TransPoint in September 2000, we became the
preferred provider of electronic billing and payment services to customers
through Microsoft's MSN and Money Central product offerings. The agreement with
Microsoft provides guaranteed revenue of $120 million over a five-year period
that commenced in January 2001. Additionally, as part of the TransPoint
acquisition, we received $60 million of guaranteed revenue and/or cost savings
opportunities through First Data Corporation over a five-year period that began
in September 2000. Effective October 21, 2000, we completed a strategic
agreement with Bank of America, the largest bank in the United States, to offer
electronic billing and payment services to its customer base. This ten-year
agreement provides annual revenue guarantees of $50 million, or $12.5 million on
a quarterly basis. We had been processing certain transactions for Bank of
America prior to the strategic agreement and, therefore, the $50 million
guarantee was not entirely incremental to our underlying revenue. However, we
did add approximately 300,000 incremental subscribers to our subscriber base
upon completion of the strategic agreement. Underlying revenue for each of these
agreements had been below our guaranteed minimum level, until the quarter ended
December 30, 2001, when Bank of America exceeded their minimums.
When combining subscriber growth with guaranteed minimums, an
increasing number of businesses opting for a transaction based pricing structure
versus a traditional subscriber based pricing structure, other payment
transactions which we effect, a couple of large banks that have built their own
in-house user interface and payment warehouse, an emerging electronic billing
revenue stream, and volatile interest based revenue sources that fluctuate with
interest rate changes, it became too difficult to correlate revenue solely to
the number of subscribers, with transactions processed becoming a more
meaningful indicator. For the year ended June 30, 2002, we processed in excess
of 316 million transactions, compared to 231 million processed for the year
ended June 30, 2001. Historically, we provided the total number of subscribers
and total number of transactions processed on a quarterly basis.
Underlying operating results in our Electronic Commerce business,
excluding a non-cash charge to revenue related to warrants, purchase accounting
amortization, intangible asset impairment charges, in-process research and
development, a one-time marketing charge and reorganization charges, have
improved from an operating loss of $13.1 million for the year ended June 30,
2001, to operating income of $39.0 million for the year ended June 30, 2002. We
continued to drive improved efficiency and processing quality within our Genesis
processing platform. Our ratio of electronic payments to total payments improved
from 64% as of June 30, 2001, to over 71% as of June 30, 2002. Electronic
payments carry a significantly lower variable cost per unit than paper payments
and are far less likely to result in a costly customer inquiry or claim. We
acquired TransPoint in September 2000 and the electronic billing and payment
assets of Bank of America in October 2000. As a result of these transactions, we
supported two additional billing and payment processing platforms for much of
the year ended June 30, 2001, and one additional platform through March 2002.
The acquired platforms were less efficient than our Genesis processing platform
and,
-41-
therefore, much more expensive to operate. During the year ended June 30, 2002,
we incurred approximately $18.0 million of expense to Bank of America for their
support of the Bank of America processing platform. We completed the conversion
of the TransPoint subscribers and billers onto Genesis in the quarter ended June
30, 2001. We completed the conversion of the Bank of America subscribers onto
Genesis in the quarter ended December 31, 2001. After processing the remaining
pre-conversion customer inquiries and claims during the quarter ended March 31,
2002, we retired the Bank of America platform. As a result of the successful
conversion of Bank of America subscribers to Genesis and our ability to retire
the Bank of America platform, we announced the closing of our San Francisco
customer care facility effective April 30, 2002, and our Houston customer care
facility effective June 30, 2002. In March 2002, we also announced an overall
company reorganization that resulted in a net reduction in force of
approximately 450 employees across the company, including the closing of offices
mentioned. Additionally, upon retirement of our legacy Austin processing
platform, we closed our Austin, Texas office during the quarter ended September
30, 2002. The combined impact of these various actions reduced our quarterly
costs by approximately $7.0 million to $8.0 million starting in the quarter
ended June 30, 2002.
Investment Services. Revenue in our Investment Services business
increased by $10.0 million, or 14%, from $69.6 million for the year ended June
30, 2001, to $79.6 million for the year ended June 30, 2002. Growth in this
business was due primarily to an increase in portfolios managed from more than
1.1 million at June 30, 2001, to about 1.2 million at June 30, 2002. Much of the
revenue growth occurred in fee-based versus institutional accounts, mirroring
the movement of the investment industry towards fee-based products and away from
the transactional commission-based model. The lower annual growth in both
revenue and portfolios compared to prior periods is due primarily to the decline
in economic conditions, particularly in the financial services sector, as well
as industry consolidations, which have resulted in the loss of over 100,000
portfolios. However, the majority of these portfolios possessed a much lower
price point than average, based on the services provided, resulting in a reduced
negative impact. We completed a rationalization of our Raleigh, North Carolina
office and discontinued our financial planning products during the year ended
June 30, 2002, which had a modestly negative impact on revenue going forward.
During the quarter ended March 31, 2002, the division released two
product offerings: a new trading and reporting tool for multiple strategy
portfolios, which was released to complement CheckFree APL and the APL Browser,
which offers clients access via the Internet to the division's portfolio
accounting and reporting product, creating a highly visible new distribution
channel for money managers and brokers.
Operating income in our Investment Services segment, net of purchase
accounting amortization and reorganization charges, increased by $4.0 million,
or 20%, from $20.3 million for the year ended June 30, 2001, to $24.4 million
for the year ended June 30, 2002. As previously indicated, much of our revenue
growth has occurred in fee-based versus institutional accounts that may carry a
lower unit price, which in turn places downward pressure on margins as the cost
to process this business is not proportionally lower. We initiated a quality
program that focuses attention on improved system reliability, particularly
trading availability, which is critical to the business unit, and we enhanced
our disaster recovery capabilities.
Software. Revenue in our Software business declined by $3.4 million, or
5%, from $62.2 million for the year ended June 30, 2001, to $58.8 million for
the year ended June 30, 2002. The downturn in economic conditions in calendar
2001 that continued throughout fiscal 2002 caused many businesses to curtail
discretionary expenditures, which resulted in an overall dampening of demand for
software solutions. To help address the economic concerns within our i-Solutions
business unit, we released two new product offerings in fiscal 2002:
- i-Solutions Select, which is a series of industry-tailored
packaged software choices at lower price points; and
- new options for billers to host economically priced electronic
billing and payment services at CheckFree, which streamlines
implementation cycles and lowers costs to billers while
delivering both biller direct and e-bill distribution and
payment across our network.
Operating results in our Software business, net of purchase accounting
amortization, impairment of intangible assets and reorganization charges,
improved from operating income of $0.8 million for the year ended
-42-
June 30, 2001, to operating income of $5.8 million for the year ended June 30,
2002. Improvement in operating results is primarily the result of continued
efforts to manage discretionary costs in light of current economic conditions.
In March 2002, we announced a company-wide reorganization that resulted in a net
reduction in force of approximately 450 employees. As part of these actions, we
announced the closing of our Ann Arbor, Michigan office. As a result of this
reorganization, we experienced a recurring savings in underlying costs in the
quarter ended June 30, 2002.
Corporate. Our Corporate segment incurred operating expenses of $35.7
million, or 8% of total revenue, for the year ended June 30, 2001, and of $36.5
million, or over 7% of total revenue, for the year ended June 30, 2002. Although
our total overhead expenses increased slightly, as a percentage of revenue they
continue to improve, reflecting the leverage inherent in our business model. In
March 2002, we announced a company-wide reorganization. However, we had been
reducing corporate costs through attrition and discretionary cost management
throughout the year and, therefore, we did not incur significant additional
reductions in staff in this segment.
Purchase Accounting Amortization. The purchase accounting amortization
line represents amortization of intangible assets resulting from all of our
various acquisitions from 1996 forward. The total amount of purchase accounting
amortization has increased from $393.4 million for the year ended June 30, 2001,
to $394.0 million for the year ended June 30, 2002. The increase is the result
of intangible assets established by the acquisitions of TransPoint in September
2000 and the purchase of the electronic billing and payment assets of Bank of
America in October 2000, offset by shorter-term intangible assets that fully
amortized in the quarter ended December 31, 2001, and the decline in
amortization expense resulting from the intangible asset impairment charge we
recorded in the quarter ended December 31, 2001.
One-Time Marketing Charge. The one-time marketing charge took place in
the three-month period ended December 31, 2000. Our strategic agreement with
Bank of America called for us to provide $25.0 million of cash at closing to
help support an agreed upon two year $45.0 million marketing campaign by Bank of
America. Because we had no direct influence or impact on the specific nature,
timing or extent of the use of the funds, we expensed the $25.0 million as a
period cost in the quarter ended December 31, 2000. Because we do not typically
market directly to subscribers, we segregated this charge from ongoing
operations as a one-time event.
In-Process Research and Development. In the three month period ended
September 30, 2000, we incurred $18.6 million of in-process research and
development costs in relation to our acquisition of TransPoint. For a detailed
discussion of this charge, please refer to the Notes to Consolidated Financial
Statements included in our June 30, 2001, Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
The following chart provides a summary of our Consolidated Statements
of Cash Flows for the appropriate periods:
YEAR ENDED JUNE 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
(In thousands)
Cash flow provided by (used in) operating activities ............ $ 157,793 $ 45,869 $ (234)
Cash flow used in investing activities .......................... (61,172) (58,189) (26,888)
Cash flow provided by (used in) financing activities ............ (2,272) 3,207 23,170
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ........ $ 94,349 $ (9,113) $ (3,952)
========== ========== ==========
As of June 30, 2003, we had $282.0 million of cash, cash equivalents
and short-term investments on hand, and an additional $121.6 million in
long-term investments. Our balance sheet reflects a current ratio of 3.8 and
working capital of $304.3 million. Due to process efficiency improvement
initiatives, the retirement of redundant processing platforms and the
restructuring actions we initiated during fiscal 2002, we have seen a
significant increase in operating cash flow. Due to state and federal operating
loss and credit carryforwards, we do not expect
-43-
to incur other than alternative minimum taxes for up to two more years. As a
result, when combined with existing balances, we believe we have sufficient cash
to meet our presently anticipated requirements for the foreseeable future. Our
board of directors has approved up to $40 million for the purpose of
repurchasing shares of our common stock or repurchases of our convertible debt
between now and August 2004. At this time, no such repurchases have taken place.
As of June 30, 2003, we had a $30.0 million line of credit facility, which we
later cancelled in anticipation of obtaining a new line of credit facility.
There were no outstanding balances on the original line of credit as of June 30,
2003 or 2002.
For the year ended June 30, 2003, we generated $157.8 million of cash
from operating activities. We typically have a seasonally low September quarter
due to the payout of annual incentive bonuses and commissions related to
seasonally high sales from the previous quarter, and as a result, we expect
operating cash flow to be relatively low in the quarter ended September 30,
2003, but as a result of efforts to improve efficiency, we have been able to
generate an increasing amount of cash from operating activities and we believe
this trend will continue into fiscal 2004.
From an investing perspective, we used $61.2 million of cash for the
year ended June 30, 2003. Of this amount, $33.1 million was used for the net
purchase of investments and another $24.3 million was used for the purchase of
property and equipment. The remaining $3.8 million is the net of a $4.3 million
use of cash for the capitalization of software development costs, offset by $0.5
million in proceeds from the sale of fixed assets. None of these items are
significantly different from what we incurred in fiscal 2002, when we used $58.2
million of cash in investing activities. We expect to spend approximately $30
million on purchases of property and equipment for the coming fiscal year.
From a financing perspective, we used $2.3 million of cash for the year
ended June 30, 2003. We used $12.2 million for principal payments under capital
leases and other long-term obligations. We received $9.9 million in combined
proceeds from the exercise of employee stock options and the purchase of stock
under our employee stock purchase plan.
While the timing of cash payments and collections can cause
fluctuations from quarter to quarter and the level of expected capital
expenditures could change, we expect to generate as much as $160 million of free
cash flow for the fiscal year ending June 30, 2004. We define free cash flow as
cash flow from operating activities less capital expenditures.
The following table represents a summary of our contractual obligations
and commercial commitments over the next several years which provides added
information in understanding expected cash commitments from various obligations
we have entered into over time:
PAYMENTS DUE
YEAR ENDED JUNE 30,
-----------------------------------------------------
2005 TO 2007 TO
CONTRACTUAL OBLIGATIONS TOTAL 2004 2006 2008 THEREAFTER
----------------------- -------- -------- -------- -------- ----------
(In thousands)
Long-term debt .............................. $172,500 $ - $ - $172,500 $ -
Capital lease obligations ................... 3,151 1,610 1,541 - -
Operating leases ............................ 109,763 18,998 23,292 19,594 47,879
Other long-term obligations ................. 7,040 3,863 3,177 - -
-------- -------- -------- -------- ----------
Total contractual cash obligations .......... $292,454 $ 24,471 $ 28,010 $192,094 $ 47,879
======== ======== ======== ======== ==========
RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the FASB issued SFAS 141, "Business Combinations" and
SFAS 142, "Goodwill and Other Intangible Assets." SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting. In addition, it requires application of the
provisions of SFAS 142 for
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goodwill and other intangible assets related to any business combinations
completed after June 30, 2001, but prior to the adoption date of SFAS 142. SFAS
142 changes the accounting for goodwill and other intangible assets. Upon
adoption, goodwill is no longer subject to amortization over its estimated
useful life. Rather, goodwill will be subject to at least an annual assessment
for impairment by applying a fair-value-based test. All other acquired
intangibles will be separately recognized if the benefit of the intangible asset
is obtained through contractual or other legal rights, or if the intangible
asset can be sold, transferred, licensed, or exchanged, regardless of the our
intent to do so. Other intangibles will be amortized over their useful lives.
SFAS 142 became effective for us on July 1, 2002 and had the following impacts:
- We reclassified approximately $1,350,000 million of
unamortized workforce in place intangible assets, net of the
associated deferred income taxes, into goodwill.
- After the reclassification above, goodwill was no longer
amortized.
- We performed a transitional impairment test as of July 1,
2002. This impairment test requires us to (1) identify its
reporting units, (2) determine the carrying value of each
reporting unit by assigning assets and liabilities, including
existing goodwill and intangible assets, to those reporting
units, and (3) determine the fair value of each reporting
unit. If the carrying value of any reporting unit exceeds its
fair value, then the amount of any goodwill impairment will be
determined through a fair value analysis of each of the
assigned assets (excluding goodwill) and liabilities.
We recorded a charge of $2,894,000 for impairment of goodwill
associated with our i-Solutions reporting unit upon the adoption of SFAS 142.
This charge is reflected as a cumulative effect of a change in accounting
principle in the accompanying Consolidated Statement of Operations for the year
ended June 30, 2003. Following the transitional impairment test, our goodwill
balances are subject to annual impairment tests using the same process described
above. We will perform our annual evaluation under the requirements of SFAS 142
as of April 30 of each year. Refer to Footnote 7 where the results of our annual
impairment test are discussed.
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS 143, "Accounting for Asset Retirement Obligations." SFAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated retirement costs. We
adopted SFAS 143 as of July 1, 2002. The adoption of this statement had no
impact on our results of operations or financial position for the year ended
June 30, 2003.
On July 1, 2002, we adopted SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 superseded SFAS 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
the accounting and reporting provisions of Accounting Principles Board ("APB")
Opinion 30, "Reporting Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for the disposal of a segment of a business. SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The initial adoption of SFAS 144 did not result in an
impairment of any kind. However, in conjunction with our annual test for
impairment of goodwill as of April 30, 2003, follow-up testing under SFAS 144
indicated a required impairment charge of $4.2 million related to our customer
base intangible asset that resulted from our acquisition of BlueGill
Technologies, Inc. in April 2000. We recorded this impairment charge in the
quarter ended June 30, 2003.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement eliminates the current requirement that gains and
losses on extinguishment of debt must be classified as extraordinary items in
the income statement. Instead, the statement requires that gains and losses on
extinguishment of debt be evaluated against the criteria in APB Opinion 30,
"Reporting the Results of Operations-- Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" to determine whether or not it should be classified as
an extraordinary item. In addition, the statement contains other corrections to
authoritative accounting literature in SFAS 4, 44 and 64. The changes in SFAS
145 related to debt extinguishment are effective for our 2003
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fiscal year and the other changes were effective beginning with transactions
after May 15, 2002. In August 2003, we announced that our board of directors
renewed its 2002 authorization of a repurchase program under which we may
purchase up to $40 million of shares of our common stock and convertible notes
before August 2004. Should we purchase any of our convertible notes and realize
a gain or loss on the transaction, SFAS 145 will require us to evaluate the
transaction against the criteria in APB Opinion 30 to determine if the gain or
loss should be classified as an extraordinary item. If classification as an
extraordinary item is not appropriate, the gain or loss would be included as
part of income before income taxes. We have not purchased any of our convertible
notes and, therefore, adoption of this statement has had no impact on our
results of operations or financial position during our 2003 fiscal year.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting for
reorganization and similar costs. SFAS 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force ("EITF") 94-03, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)." SFAS 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-03, a
liability for an exit cost was recognized at the date of a company's commitment
to an exit plan. SFAS 146 also establishes that the liability should initially
be measured and recorded at fair value. Accordingly, SFAS 146 may affect the
timing of recognizing any future reorganization costs as well as the amount
recognized. The provisions of SFAS 146 were effective for reorganization
activities initiated after December 31, 2002, and we have had no such material
activities since that time.
In November 2002, the EITF reached a consensus on Issue 00-21,
"Multiple Deliverable Revenue Arrangements." EITF 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. It also addresses when and how
an arrangement involving multiple deliverables should be divided into separate
units of accounting. The guidance in EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003, with
early application permitted. Companies may elect to report the change in
accounting as a cumulative effect of a change in accounting principle in
accordance with APB Opinion 20, "Accounting Changes" and SFAS 3, "Reporting
Accounting Changes in Interim Financial Statements (an amendment of APB Opinion
No. 28)." We believe that our current practices are consistent with the
provisions of EITF 00-21 and, therefore, expect no impact on our results of
operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The initial recognition and initial measurement provisions of
FIN 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123," which provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. SFAS 148 requires prominent disclosure about the effects
on reported net income of an entity's accounting policy decisions with respect
to stock-based employee compensation and amends APB Opinion 28, "Interim
Financial Reporting," to require disclosure about those effects in interim
financial information. We included the required disclosure, including
comparisons to the same periods in the prior year, in the Notes to Interim
Condensed Consolidated Unaudited Financial Statements beginning with our quarter
ended March 31, 2003.
FIN 46 "Consolidation of Variable Interest Entities" ("VIE") was
issued in January 2003 to address the consolidation issues around certain types
of entities, including special purpose entities ("SPE"). FIN 46 requires a
variable interest entity to be consolidated if the company's variable interest
(i.e., investment in the entity) will absorb a majority of the entity's expected
losses and/or residual returns if they occur. FIN 46 is applicable immediately
to any VIE formed after January 31, 2003 and must be applied beginning July 1,
2003 to any such entity created before February 1, 2003. We do not expect the
implementation of FIN 46 to have a material effect on our financial position or
results of operations.
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In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Statement 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is
effective for contracts entered into or modified after June 30, 2003. We are in
the process of evaluating any effects of this new statement.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,"
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption. We do not expect that the
adoption of this statement will have an impact on our results of operations and
financial position.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us 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. Critical accounting policies are those policies that are both
important to the portrayal of our financial condition and results of operations,
and they require our most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. We believe the policies and estimates described below
relating to intangible assets, equity instruments issued to customers, and
deferred income taxes are our critical accounting policies.
Discussion with the Audit Committee of the Board of Directors. In
determining which of our accounting policies warranted disclosure as critical in
nature, our senior financial management team prepared an analysis of our
accounting policies and reviewed the policies in detail with our Audit
Committee. After discussing the level of management judgment required to comply
with our accounting policies, we agreed with the Audit Committee that the
following accounting policies are deemed to be critical in nature and should be
disclosed as such.
Accounting for Goodwill. Over the past several years, we have acquired
a number of businesses and the electronic billing and payment assets of Bank of
America, which resulted in significant goodwill balances. As of June 30, 2003,
the balance of goodwill on our balance sheet totaled $523.2 million and is
spread across our three business segments as follows:
- Electronic Commerce of $503.7 million;
- Software of $8.1 million; and
- Investment Services of $11.4 million.
Upon adoption of SFAS 142, we were required to perform a transitional
impairment test related to our goodwill balances. We performed the test as of
July 1, 2002. The impairment test requires us to (1) identify our various
reporting units, (2) determine the carrying value of each reporting unit by
assigning assets and liabilities, including existing goodwill and intangible
assets, to those reporting units, and (3) determine the fair value of each
reporting unit. If we determine that the carrying value of a reporting unit
exceeds its fair value, additional testing is required to see if the goodwill
carried on the balance sheet is impaired. Depending on the nature of the
non-goodwill intangible asset in question, we will prepare a SFAS 86 analysis to
test the recoverability of capitalized software, or a SFAS 144 analysis to test
the recoverability of other non-goodwill intangible assets. Any resulting
impairments from the non-goodwill intangible tests would be applied to the fair
value balance sheet. Then, the amount of any goodwill impairment is determined
through an analysis similar to that of a purchase price allocation, where the
fair value of each of the tangible and intangible assets (excluding goodwill)
and liabilities is compared to the fair value of the reporting unit. The fair
value of goodwill is estimated using the residual method and compared
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to the carrying value of goodwill. The amount of the goodwill impairment was
equal to the carrying amount less the fair value of goodwill.
We determined two of our reporting units to correlate directly with our
Electronic Commerce and our Investment Services business segments. Although our
i-Solutions Software reporting unit has the same operating characteristics of
our other Software reporting unit, because it is a fairly new product and
therefore not as mature as our other Software units, we split our software
segment into two reporting units, i-Solutions Software and CFACS/ACH Software.
We applied significant judgment in determining the fair value of each
of our reporting units as such an analysis includes projections of expected
future cash flow related specifically to the reporting unit. Our projections
included, but were not limited to, expectations of product sales and related
revenues, cost of sales, and other operating expenses supporting the reporting
unit five years into the future. Additionally, we estimated terminal values for
the reporting units, which represented the present value of future cash flow
beyond the five-year period. Finally, we assumed a discount rate that we
believed fairly represented the risk-free rate and a risk premium appropriate
for the reporting unit. Upon completion of this analysis, only one reporting
unit, i-Solutions Software, had a carrying value exceeding its fair value. This
indicated the possibility of goodwill impairment within the i-Solutions Software
reporting unit. For our Electronic Commerce, Investment Services, and ACH/CFACS
Software reporting units, we determined that a 10% fluctuation in our underlying
value drivers, either positive or negative, would not have indicated a possible
impairment in goodwill within the respective reporting unit that would have
resulted in additional transition testing.
As a result of the possible impairment of the i-Solutions reporting
unit goodwill, we took the next step in the transitional impairment test and
assigned fair value to each of the individual assets and liabilities of the
reporting unit. We applied significant judgment in determining the fair value of
each identified intangible asset as such an analysis includes projections of
expected future cash flows related specifically to the intangible asset. The
fair value of the i-Solutions reporting unit was estimated using a combination
of the cost, market, and income approaches. Specifically, the discounted cash
flow and market multiples methodologies were utilized to determine the fair
value of the reporting unit by estimating the present value of future cash flows
of the reporting unit along with reviewing revenue and earnings multiples for
comparable publicly traded companies and applying these to the reporting unit's
projected cash flows. Fair value of each of the assigned assets and liabilities
was determined using either a cost, market or income approach, as appropriate,
for each individual asset or liability. Upon completion of the analysis, we
determined the goodwill associated with the i-Solutions Software reporting unit
to be impaired by $2.9 million and we recorded this charge as a cumulative
effect of an accounting change in the three-month period ended September 30,
2002. We performed a sensitivity analysis and determined that a 10% decrease in
the underlying estimates driving the fair value of intangible assets would have
increased the impairment charge to approximately $4.2 million. An increase of
10% in the underlying estimates driving the fair value of intangible assets
would have decreased the impairment charge to approximately $2.1 million.
We completed our annual test for impairment of goodwill effective April
30, 2003. We used the same methodology in the annual test as we did in the prior
transition review. Our initial testing again resulted in our Electronic
Commerce, Investment Services, ACH/CFACS reporting units passing the original
tests, but we noted another indicator of possible impairment with our remaining
i-Solutions goodwill balance. Upon completion of our analysis, we determined our
i-Solutions goodwill balance to be impaired by $6.0 million, which we recorded
in the quarter ended June 30, 2003. A 10% positive or negative change in our
estimated revenues would have had a $750,000 impact on the amount of the
ultimate impairment charge.
Intangible Assets Exclusive of Goodwill. Over the past several years,
we have acquired a number of businesses and the electronic billing and payment
assets of Bank of America, which resulted in significant non-goodwill related
intangible assets. As of June 30, 2003, the balance of such intangible assets on
our balance sheet totaled $411.6 million and is spread across our three business
segments as follows:
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- Electronic Commerce of $404.1 million;
- Software of $4.6 million; and
- Investment Services of $2.9 million.
We adopted SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" on July 1, 2002, which replaced SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
among other authoritative standards.
During the year ended June 30, 2003, there were no events that provided
a reason to believe any of our non-goodwill related intangible assets were
impaired. However, our annual test for the impairment of goodwill caused us to
perform additional procedures to test the recoverability of intangible assets
within our i-Solutions reporting unit. We first tested for the recoverability of
our capitalized software. Per the terms of SFAS 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," we compared the
undiscounted net realizable value for projected i-Solutions sales for the period
representing the remaining useful life of the capitalized software intangible
asset. Because the undiscounted net realizable value exceeded the carrying value
of the asset, no impairment was indicated. We then tested for impairment of all
intangible assets other than goodwill and capitalized software under the terms
of SFAS 144. The undiscounted cash flows from our i-Solutions projections was
lower than the carrying value of our intangible assets and, as a result, we
recorded a charge of $4.2 million to write down to fair value our customer base
asset, which was the only remaining intangible asset. A 10% swing in our cash
flow projections, either up or down, would not have materially impacted the
amount of the charge that we recorded.
Through June 30, 2002, we evaluated our intangible assets for
impairment whenever indicators of impairment existed. SFAS 121 required that if
the sum of the future cash flows expected to result from a company's asset,
undiscounted and without interest charges, is less than the reported value of
the asset, impairment must be recognized in the financial statements. The amount
of impairment to recognize is calculated by subtracting the fair value of the
asset from the reported value of the asset.
In our Software segment, we reviewed our i-Solutions intangible assets
for impairment during the quarter ended December 31, 2001, due to a trend in
lower than expected license sales during the extended recessionary economy. We
determined that the book value of intangible assets within i-Solutions exceeded
the undiscounted sum of the expected future cash flows from the assets related
to the i-Solutions business unit, which indicated that the intangible assets
were impaired. The actual amount of impairment was then determined by
subtracting the fair value of the expected cash flows from the i-Solutions
business unit from the related long-lived assets. As a result, in accordance
with GAAP, we recorded an impairment charge of $107.4 million against the
balance of i-Solutions goodwill in the quarter ended December 31, 2001. We
applied judgment in developing projections of future cash flows from our
i-Solutions business. Our projections included, but were not limited to,
expectations of product sales and related future product maintenance revenues,
cost of sales, and other operating expenses supporting this business five years
into the future. Additionally, we estimated a terminal value, which represented
the present value of future cash flow beyond the five-year period. Finally, we
assumed a discount rate that we believed fairly represented the risk-free rate
and a risk premium appropriate for this business. Variances from our projected
cash flows, and the related terminal value, could have had a significant impact
on the amount of the impairment charge we recorded. If we had assumed a 10%
increase in our estimated annual cash flows from the i-Solutions business unit,
we would have passed the SFAS 121 undiscounted cash flow test and not recorded
an impairment charge at all. If, however, we reduced our estimated annual cash
flows for the i-Solutions business unit by 10%, our impairment charge would have
increased by approximately $3.6 million.
In our Electronic Commerce segment, we reviewed our TransPoint related
technology assets for impairment during the quarter ended December 31, 2001, due
to the termination of a maintenance agreement for this technology from the last
of our international partners and an evaluation of the service potential of the
related technology assets against our current and future initiatives. We
determined that there was no alternative future use for two of the technology
assets, and in accordance with GAAP, we recorded a charge of $47.7 million to
retire these assets. The retirement of the TransPoint technology assets was an
indicator of potential impairment for other intangible assets associated with
this acquisition. SFAS 121 required us to test for impairment at the lowest
level of
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separately identifiable cash flows, which we determined in this case, was our
Electronic Commerce Division. We performed the initial impairment test by
comparing the sum of expected future cash flows from the assets related to our
Electronic Commerce Division, on an undiscounted basis, to the book value of the
Electronic Commerce Division long-lived assets. Because the sum of the
undiscounted future cash flows exceeded the long-lived assets' book value, there
was no impairment. There were several areas of management judgment used in
performing this analysis. Initially, our projections of future cash flow from
the Electronic Commerce Division required management's judgment regarding our
expectations of future revenues, costs, and other operating expenses supporting
this business five years into the future. Additionally, we estimated a terminal
value, which represented the present value of future cash flow beyond the
five-year period. Finally, we assumed a discount rate that we believed fairly
represented the risk-free rate and a risk premium appropriate for this business.
Variances, both positive and negative, from our projected cash flows, and the
related terminal value, would not have had a significant impact on our analysis.
If we had assumed a 10% increase in our estimated annual cash flows from the
Electronic Commerce Division, we would have simply passed the SFAS 121
undiscounted cash flow test by a greater margin. If we had assumed a 10%
reduction in our estimated annual cash flows we still would have passed the
undiscounted cash flow test, and therefore, still not incurred an impairment
charge.
In January 2002, we announced the intent to eliminate certain of our
financial planning products within our Investment Services Division. The
elimination of those products was an indicator of potential impairment for our
long-lived assets associated with that M-Solutions business unit within our
Investment Services segment. We determined that the lowest level of separately
identifiable cash flows at which to test for impairment was our M-Solutions
business unit. We performed the initial impairment test by comparing the sum of
expected future cash flows from the assets related to M-Solutions, on an
undiscounted basis, to the book value of the M-Solutions division's long-lived
assets. Because the sum of the undiscounted future cash flows exceeded the
long-lived assets book value, there was no impairment. As with our other
analyses, there were several areas of management judgment used in performing
this analysis such as our projections of future cash flows from this business,
the estimated terminal value and the discount rate we used. Variances from our
projected cash flows, and the related terminal value, would not have had a
significant impact on our analysis. If we had assumed a 10% increase on our
estimated annual cash flows from the M-Solutions business, we would have simply
passed the SFAS 121 undiscounted cash flow test by a greater margin. Had we had
assumed a 10% reduction in our estimated annual cash flows, we still would have
passed the undiscounted cash flow test and, therefore, still not incurred an
impairment charge.
Equity Instruments Issued to Customers. Within our Electronic Commerce
segment, from time to time, we have determined it appropriate to issue warrants
to certain of our customers to provide an incentive for them to achieve mutually
beneficial long-term objectives. These objectives can take the form of
performance against long-term growth targets, such as the number of the
third-party's customers that become active bill paying subscribers of our
service or the number of bills distributed electronically to the third party's
customers, or more relationship oriented, such as simply remaining a customer at
a specified future date. Accounting standards for these types of warrants
require us to record a charge when it becomes probable that the warrants will
vest. For milestone based warrants the amount of the charge would be the fair
value of the portion of the warrants earned by the customer based on their
progress towards achieving the milestone(s) required to vest in the warrants. At
each reporting date, we would determine the current fair value of the portion of
the warrants previously earned and true-up the charges previously recorded. In
addition, we would record a charge for the fair value of the additional portion
of the warrants earned during that period, again based on the customer's
progress towards the vesting milestones. This would continue until the warrants
vest, at which time a final fair value is determined and the charge is adjusted
accordingly. At the time we issued these warrants, accounting standards in place
indicated that the charge for these type warrants be recorded as an expense.
Since then, the Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board ("FASB") issued EITF 01-09, "Accounting for Consideration by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)." This
guidance became effective for financial statements issued after December 15,
2001, and is retroactively applied to existing equity instruments previously
issued. It requires that the charge for the fair value of these types of
warrants be recorded against revenue up to the cumulative amount of revenue
recognized for a customer instead of to expense as was previously the case.
Management must use judgment in determining when the vesting of a warrant
becomes probable. As of June 30, 2003, we had 12 million unvested warrants
outstanding that could potentially result in significant charges against our
revenue, two million of which expire in June 2009 and ten million of which
expire in October 2010.
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Deferred Income Taxes. As of June 30, 2003, we have $91.1 million of
deferred income tax assets recorded on our balance sheet, $41.2 million of which
are recorded in the current asset section of our balance sheet, and $49.9
million of which are netted against long-term deferred tax liabilities, in
accordance with GAAP. Deferred income tax assets represent future tax benefits
we expect to be able to apply against future taxable income, and consist
primarily of net operating loss benefits carried forward to future periods. Our
ability to utilize the deferred tax benefits is dependent upon our ability to
generate future taxable income. SFAS 109, "Accounting for Income Taxes" requires
us to record a valuation allowance against any deferred income tax benefits that
we believe may expire before we generate sufficient taxable income to use them.
If we were to record a deferred tax benefit valuation allowance, it would have
the effect of increasing our tax expense thereby decreasing our net income and
decreasing our deferred tax asset balance on our balance sheet. We use current
estimates of future taxable income to determine whether a valuation allowance is
needed. Projecting our future taxable income requires us to use significant
judgment regarding the expected future revenues and expenses in each of our
business segments. In addition, we must assume that tax laws will not change
sufficiently enough to materially impact the expected tax liability associated
with our expected taxable income. While our current projections indicate we will
be able to fully utilize our deferred income tax benefits, should the economic
recession continue for an extended period of time, or competitive pressures or
other business risks result in a significant variance to our projected taxable
income, we could be required to record a valuation allowance up to the full
value of our deferred tax asset balances.
INFLATION
We believe the effects of inflation have not had a significant impact
on our results of operations.
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 on Form 10-K include certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 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" included
elsewhere in this Annual Report on Form 10-K 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
on Form 10-K 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 a representation by us
or any other person that our objectives and plans will be achieved. All
forward-looking statements made in this Annual Report on Form 10-K are based on
information presently available to our management. We assume no obligation to
update any forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
With the acquisition of BlueGill in April 2000, we obtained operations
in Canada and have opened an office in the United Kingdom. As a result, we have
assets and liabilities outside the United States that are subject to
fluctuations in foreign currency exchange rates. Due to the early stage of each
of these operations, however, we currently utilize the U.S. dollar as the
functional currency for all international operations. As these operations begin
to generate sufficient cash flow to satisfy for their own cash flow
requirements, we will convert to local currency as the functional currency in
each related operating unit as appropriate. Because we utilize the U.S. dollar
as the functional currency and due to the immaterial nature of the amounts
involved, our economic exposure from fluctuations in foreign exchange rates is
not significant enough at this time to engage in forward foreign exchange and
other similar instruments.
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While our international sales represented less than 2% of our revenue
for the year ended June 30, 2003, we now market, sell and license our products
throughout the world. As a result, our future revenue could be somewhat affected
by weak economic conditions in foreign markets that could reduce demand for our
products.
Our exposure to interest rate risk is limited to the yield we earn on
invested cash, cash equivalents and investments and interest based revenue
earned on products such as our account balance transfer business. Our
convertible debt carries a fixed rate, as do any outstanding capital lease
obligations. Although our Investment Policy currently prohibits the use of
derivatives for trading or hedging purposes, we believe that our limited
interest rate risk currently does not warrant the use of such instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Independent Auditors' Report of Deloitte & Touche LLP and the
Consolidated Financial Statements of the Company as of June 30, 2003 and 2002,
and for each of the years in the three year period ended June 30, 2003, follow:
-52-
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 and subsidiaries (the "Company") as of June 30, 2003 and 2002, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 2003. Our audits
also included the consolidated financial schedule listed in the Index at Item 8.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule 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 subsidiaries at
June 30, 2003 and 2002, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 2003, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As described in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," effective July 1, 2002.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
August 5, 2003
-53-
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
---------------------------------
2003 2002
--------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................... $ 209,358 $ 115,009
Investments ................................................................. 69,674 90,958
Restricted investments ...................................................... 3,000 -
Accounts receivable, net .................................................... 81,626 88,030
Prepaid expenses and other assets ........................................... 9,708 8,355
Deferred income taxes ....................................................... 41,202 11,816
--------------- ---------------
Total current assets .............................................. 414,568 314,168
PROPERTY AND EQUIPMENT, Net....................................................... 94,853 95,625
OTHER ASSETS:
Capitalized software, net ................................................... 23,612 71,845
Goodwill, net ............................................................... 523,231 530,758
Strategic agreements, net ................................................... 395,332 519,275
Other intangible assets, net ................................................ 4,801 24,609
Investments ................................................................. 121,615 69,788
Restricted investments ...................................................... - 3,000
Other noncurrent assets ..................................................... 9,258 8,409
--------------- ---------------
Total other assets ................................................ 1,077,849 1,227,684
--------------- ---------------
Total assets ............................................ $ 1,587,270 $ 1,637,477
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 9,705 $ 10,049
Accrued liabilities ......................................................... 59,140 54,914
Current portion of long-term obligations .................................... 4,894 5,054
Deferred revenue ............................................................ 36,543 42,410
--------------- ---------------
Total current liabilities ......................................... 110,282 112,427
ACCRUED RENT AND OTHER ........................................................... 3,419 3,019
DEFERRED INCOME TAXES ............................................................ 28,728 39,993
LONG-TERM OBLIGATIONS- Less current portion ...................................... 4,192 3,877
CONVERTIBLE SUBORDINATED NOTES ................................................... 172,500 172,500
COMMITMENTS (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock- 50,000,000 authorized shares, $0.01 par value;
no amounts issued or outstanding ......................................... - -
Common stock- 500,000,000 authorized shares, $0.01 par value;
issued and outstanding 89,266,370 and 88,085,894 shares, respectively .... 893 881
Additional paid-in-capital .................................................. 2,449,374 2,435,310
Accumulated other comprehensive income ...................................... 471 -
Accumulated deficit ......................................................... (1,182,589) (1,130,405)
Unearned compensation ....................................................... - (125)
--------------- ---------------
Total stockholders' equity ........................................ 1,268,149 1,305,661
--------------- ---------------
Total liabilities and stockholders' equity .............. $ 1,587,270 $ 1,637,477
=============== ===============
See notes to consolidated financial statements
-54-
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
REVENUES:
Processing and servicing ........................................ $ 476,416 $ 422,237 $ 362,051
License fees .................................................... 24,163 25,020 30,180
Maintenance fees ................................................ 25,733 24,298 21,332
Other ........................................................... 25,334 18,922 19,757
------------ ------------ ------------
Total revenues ................................... 551,646 490,477 433,320
EXPENSES:
Cost of processing, servicing and support ....................... 237,978 262,105 255,528
Research and development ........................................ 52,717 55,172 55,621
Sales and marketing ............................................. 57,170 58,030 90,283
General and administrative ...................................... 39,030 43,687 50,474
Depreciation and amortization ................................... 226,638 435,565 427,495
In-process research and development ............................. - - 18,600
Impairment of intangible assets ................................. 10,228 155,072 -
Reorganization charge ........................................... 1,405 16,365 -
------------ ------------ ------------
Total expenses ................................... 625,166 1,025,996 898,001
------------ ------------ ------------
LOSS FROM OPERATIONS ................................................. (73,520) (535,519) (464,681)
OTHER:
Interest income ................................................. 7,327 8,486 15,415
Interest expense ................................................ (12,975) (12,788) (13,154)
Loss on investments ............................................. (3,228) - (16,077)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE .................................... (82,396) (539,821) (478,497)
INCOME TAX BENEFIT ................................................... (33,106) (98,871) (115,362)
------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE .............................................. (49,290) (440,950) (363,135)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE ............................... (2,894) - -
------------ ------------ ------------
NET LOSS ............................................................. $ (52,184) $ (440,950) $ (363,135)
============ ============ ============
BASIC AND DILUTED LOSS PER SHARE:
Loss per share before cumulative effect of accounting
change ..................................................... $ (0.56) $ (5.04) $ (4.49)
Cumulative effect of accounting change .......................... (0.03) - -
------------ ------------ ------------
Net loss per common share ....................................... $ (0.59) $ (5.04) $ (4.49)
============ ============ ============
Equivalent number of shares ..................................... 88,807,069 87,452,339 80,863,100
============ ============ ============
See notes to consolidated financial statements
-55-
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NUMBER OF ACCUMULATED
SHARES OF COMMON ADDITIONAL OTHER
COMMON STOCK AT PAID-IN COMPREHENSIVE
STOCK PAR CAPITAL INCOME
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE- JUNE 30, 2000 ...................... 58,414,035 $ 584 $ 771,892 $ -
Net loss ................................... - - - -
Stock options and warrants exercised ....... 1,369,885 14 22,609 -
Tax benefit associated with exercise
of stock options and warrants ........ - - 18,623 -
Employee stock purchases ................... 92,721 1 3,623 -
401(k) match ............................... 51,834 - 2,487 -
Issuance of common stock pursuant
to acquisition ....................... 27,000,000 270 1,601,723 -
Amortization of unearned
compensation ......................... - - - -
---------- ------------- ------------- -------------
BALANCE- JUNE 30, 2001 ...................... 86,928,475 869 2,420,957 -
Net loss ................................... - - - -
Stock options and warrants exercised ....... 808,163 9 2,964 -
Tax benefit associated with exercise
of stock options and warrants ........ - - 568 -
Employee stock purchases ................... 216,369 2 4,453 -
401(k) match ............................... 132,887 1 3,620 -
Impact of warrants ......................... - - 2,748 -
Amortization of unearned
compensation ......................... - - - -
---------- ------------- ------------- -------------
BALANCE- JUNE 30, 2002 ...................... 88,085,894 881 2,435,310 -
Net loss ................................... - - - -
Unrealized gain on available-for-sale
securities, net of tax ............... - - - 471
Total comprehensive loss
Stock options and warrants exercised ....... 532,841 5 6,942 -
Tax benefit associated with exercise
of stock options and warrants ......... - - 1,550 -
Employee stock purchases ................... 257,533 3 3,291 -
401(k) match ............................... 402,102 4 3,225 -
Return of restricted stock ................. (12,000) - (300) -
Impact of warrants ......................... - - (644) -
---------- ------------- ------------- -------------
BALANCE- JUNE 30, 2003 ...................... 89,266,370 $ 893 $ 2,449,374 $ 471
========== ============= ============= =============
See notes to consolidated financial statements
-56-
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TOTAL
UNEARNED ACCUMULATED STOCKHOLDERS'
COMPENSATION DEFICIT EQUITY
------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE- JUNE 30, 2000 ...................... $ (262) $ (326,320) $ 445,894
Net loss ................................... - (363,135) (363,135)
Stock options and warrants exercised ....... - - 22,623
Tax benefit associated with exercise
of stock options and warrants ........ - - 18,623
Employee stock purchases ................... - - 3,624
401(k) match ............................... - - 2,487
Issuance of common stock pursuant
to acquisition ....................... - - 1,601,993
Amortization of unearned
compensation ......................... 77 - 77
------------ ------------ ------------
BALANCE- JUNE 30, 2001 ...................... (185) (689,455) 1,732,186
Net loss ................................... - (440,950) (440,950)
Stock options and warrants exercised ....... - - 2,973
Tax benefit associated with exercise
of stock options and warrants ........ - - 568
Employee stock purchases ................... - - 4,455
401(k) match ............................... - - 3,621
Impact of warrants ......................... - - 2,748
Amortization of unearned
compensation ......................... 60 - 60
------------ ------------ ------------
BALANCE- JUNE 30, 2002 ...................... (125) (1,130,405) 1,305,661
Net loss ................................... - (52,184) (52,184)
Unrealized gain on available-for-sale
securities, net of tax ............... - - 471
------------
Total comprehensive loss ......... (51,713)
Stock options and warrants exercised ....... - - 6,947
Tax benefit associated with exercise
of stock options and warrants ......... - - 1,550
Employee stock purchases ................... - - 3,294
401(k) match ............................... - - 3,229
Return of restricted stock ................. 125 - (175)
Impact of warrants ......................... - - (644)
------------ ------------ ------------
BALANCE- JUNE 30, 2003 ...................... $ - $ (1,182,589) $ 1,268,149
============ ============ ============
See notes to consolidated financial statements
-57-
CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net loss .................................................................. $ (52,184) $ (440,950) $ (363,135)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................. 226,638 435,565 427,495
Deferred income tax benefit ............................................... (35,147) (99,152) (115,362)
Impairment of intangible assets ........................................... 10,228 155,072 -
Impact of warrants ........................................................ (644) 2,748 -
Loss on investments ....................................................... 3,228 - 16,077
Cumulative effect of accounting change .................................... 2,894 - -
Net loss on disposition of property and equipment ......................... 471 55 56
Non-cash portion of reorganization charge ................................. - 1,640 -
Write off of in-process research and development .......................... - - 18,600
Purchases of investments - Trading ........................................ - - (12,369)
Proceeds from maturities and sales of investments, net - Trading .......... - - 19,029
Change in certain assets and liabilities (net of acquisitions and
dispositions):
Accounts receivable .................................................. 6,404 788 (30,510)
Prepaid expenses and other ........................................... (2,604) 2,676 1,688
Accounts payable ..................................................... (344) (9,035) 8,926
Accrued liabilities and other ........................................ 4,720 (1,035) 18,573
Deferred revenue ..................................................... (5,867) (2,503) 10,698
------------ ------------ ------------
Net cash provided by (used in) operating activities ........ 157,793 45,869 (234)
INVESTING ACTIVITIES:
Purchase of property and software .......................................... (24,324) (21,980) (41,701)
Proceeds from sale of assets ............................................... 580 - 2,257
Capitalization of software development costs ............................... (4,296) (4,435) (4,927)
Purchases of investments - Held-to-maturity ................................ (38,522) (100,715) (145,997)
Proceeds from maturities of investments - Held-to-maturity ................. 118,527 72,329 79,041
Purchases of investments - Available-for-sale .............................. (137,921) - -
Proceeds from maturities of investments - Available-for-sale ............... 24,936 - -
Purchase of other investments .............................................. (152) (388) (1,881)
Increase in restricted investments ......................................... - (3,000) -
Purchase of business, net of cash acquired ................................. - - 96,599
Capitalization of strategic agreement costs ................................ - - (10,279)
------------ ------------ ------------
Net cash used in investing activities ...................... (61,172) (58,189) (26,888)
FINANCING ACTIVITIES:
Principal payments under capital lease and other
long-term obligations ................................................. (12,212) (3,553) (3,847)
Proceeds from stock options exercised ..................................... 6,947 2,285 6,940
Proceeds from employee stock purchase plan ................................ 2,993 3,787 4,374
Proceeds from sale of stock and exercise of warrants ...................... - 688 15,703
------------ ------------ ------------
Net cash provided by (used in) financing activities ........ (2,272) 3,207 23,170
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... 94,349 (9,113) (3,952)
CASH AND CASH EQUIVALENTS:
Beginning of period ....................................................... 115,009 124,122 128,074
------------ ------------ ------------
End of period ............................................................. $ 209,358 $ 115,009 $ 124,122
============ ============ ============
See notes to consolidated financial statements
-58-
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - CheckFree Corporation (the "Company") is the parent company of
CheckFree Services Corporation ("CheckFree Services"), the principal operating
company of the business. In April 2000, CheckFree Services 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. CheckFree Services was organized in 1981 and is a leading provider
of financial electronic commerce products and services. See Note 20 for a
description of the Company's business segments.
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.
USE OF ESTIMATES - The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("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.
BUSINESS COMBINATIONS - For business combinations that have been accounted for
under the purchase method of accounting, the Company includes the results of
operations of the acquired business from the date of acquisition. Net assets of
the companies acquired are recorded at their fair value at the date of
acquisition. The excess of the purchase price over the fair value of tangible
and identifiable intangible net assets acquired is included in goodwill.
Statement of Financial Accounting Standards ("SFAS") 141, "Business
Combinations," eliminated the pooling-of-interest method of accounting for
business combinations and requires all business combinations initiated after
June 30, 2001, to be accounted for using the purchase method. There have been no
acquisitions completed since June 30, 2001. All previous acquisitions have been
accounted for using the purchase method.
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 has certain investments in marketable debt securities
that are classified as either available-for-sale, trading or held-to-maturity in
accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company began investing in available-for-sale securities during
the quarter ended September 30, 2002. All new non-collateral securities
purchased after September 1, 2002, have been classified as available-for-sale.
At June 30, 2002, all investments were classified as held-to-maturity.
Held-to-maturity securities are carried at amortized cost and are adjusted only
for other than temporary declines in fair value. Available-for-sale investments
are recorded at fair value and changes in fair value are recorded as unrealized
gains and losses in accumulated other comprehensive income, a component of
stockholders' equity. Restricted investments represent amounts that are
restricted as to their use in accordance with leasing arrangements.
The Company has certain other investments in equity and debt securities that are
accounted for under the cost method. Under the cost method of accounting,
investments are carried at cost and are adjusted only for other-than-temporary
declines in fair value, distributions of earnings and additional investments.
The Company periodically evaluates whether any declines in fair value of its
investments are other than temporary. In performing this evaluation, the Company
considers various factors including any decline in market price, where
available, the investee's financial condition, results of operations, operating
trends and other financial ratios.
The Company has received equity instruments in connection with agreements with
certain partners. In such cases, the Company's initial cost is determined based
on the estimated fair value of the equity instruments received. Subsequent
changes in the fair value of these equity instruments are accounted for in
accordance with the investment policies described above.
-59-
CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially subject
the Company to concentrations of credit risks consist of cash, investments and
trade accounts receivable. Excess cash is invested through banks, mutual funds
and brokerage houses primarily in highly liquid securities. The Company has
investment policies and procedures that limit any concentration of credit risk
with single issuers. With respect to accounts receivable, the Company does not
generally require collateral and believes that any credit risk is substantially
mitigated by the nature of our customers and reasonably short collection terms.
The Company maintains reserves for potential credit losses on customer accounts
when deemed necessary.
DERIVATIVE FINANCIAL INSTRUMENTS - On July 1, 2000, the Company adopted SFAS
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which requires that all derivative financial instruments be
recognized as either assets or liabilities in the balance sheet. 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 performs reviews of its
contracts and has determined that they contain no "embedded derivatives" that
require separate reporting and disclosure under SFAS 133, as amended. As such,
the adoption of SFAS 133, as amended, did not have a material impact on the
Company's financial position or results of operations.
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, 18 months to 7
years. Equipment under capital leases is 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 - Capitalized software includes purchased technology
intangible assets associated with acquisitions and capitalized internal
development costs. Purchased technology intangibles are initially recorded based
on the fair value ascribed at the time of acquisition. Internal development
costs are capitalized in accordance with the provisions of either SFAS 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed," or Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The 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 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
current year gross product revenue to the current and anticipated
future gross product revenue, whichever is greater. Unamortized
software development costs in excess of estimated future net realizable
value 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,
generally three to five years. Capitalized software costs not expected
to be completed and placed in service are written down to estimated net
realizable value.
-60-
GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill represents the excess of the
purchase price over the fair value of net assets acquired in business
combinations accounted for under the purchase method. Goodwill was amortized on
a straight-line basis over 5 to 10 years prior to July 1, 2002. Effective July
1, 2002, goodwill was no longer amortized.
Other intangibles represent identifiable intangible assets purchased by the
Company in connection with business combinations. The costs of identified
intangible assets are generally amortized on a straight-line basis over periods
from 8 months to 10 years.
IMPAIRMENT OF LONG-LIVED ASSETS - In accordance with SFAS 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," ("SFAS 144"), effective July
1, 2002, and its predecessor SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("SFAS 121")
prior thereto, long-lived assets are reviewed for impairment whenever events
indicate that their carrying amount may not be recoverable. In such reviews,
estimated undiscounted future cash flows associated with these assets or
operations are compared with their carrying value to determine if a write-down
to fair value (normally measured by the expected present value technique) is
required. During the year ended June 30, 2003, the Company performed a review of
certain of its long-lived assets, determined that certain assets were impaired
and recorded a charge of $4,245,000 related to the impairment of other
intangible assets. The charge is included in the accompanying Consolidated
Statement of Operations. See Note 7 for a description of this review.
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 charge backs. The
Company utilizes credit analysis and other controls to manage its credit risk
exposure. The Company also maintains a reserve for future returns and charge
backs. This reserve is included in accrued liabilities in the accompanying
Consolidated Balance Sheets.
COMPREHENSIVE INCOME - The Company reports comprehensive income in accordance
with 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 include all changes in equity during a period
except those resulting from investments by and distributions to shareowners. The
components of other comprehensive income applicable to the Company are
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, 2002 and 2001. As a result, there were no components of other
comprehensive income applicable to the Company during the years ending June 30,
2002 and 2001. The Company began investing in available-for-sale securities
during the quarter ended September 30, 2002. The gross unrealized gains of
$767,000 and gross unrealized losses of $129,000 have been recorded net of
deferred taxes of $167,000, in the accompanying Consolidated Statement of
Stockholders' Equity as a component of accumulated other comprehensive income.
STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation expense is not required to be recorded when stock
options are granted to employees as long as the exercise price is not less than
the fair market value of the stock when the option is granted, and in connection
with our Associate Stock Purchase Plan as long as the purchase price is not less
than 85% of the lower of the fair market value at the beginning or end of each
offer period. In October 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 allows the
Company to continue to follow the present APB Opinion 25 guidelines, but
requires pro-forma disclosures of net income and earnings per share as if the
Company had adopted the provisions of the Statement. In December 2002, the FASB
issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123," which provides alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. SFAS 148
requires prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation and amends APB Opinion 28, "Interim Financial Reporting," to
require disclosure about those effects in interim financial information. These
disclosure requirements became effective for the Company's third quarter of
fiscal 2003. The Company has continued to account for stock-based compensation
under the provisions of APB Opinion 25, using the intrinsic value method.
-61-
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, the Company's net loss and
net loss per share would have been as follows (in thousands, except per share
data):
YEAR ENDED JUNE 30,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net loss, as reported ............................ $ (52,184) $ (440,950) $ (363,135)
Stock-based compensation included in net loss .... (175) 60 77
Stock-based compensation under SFAS 123 .......... (27,764) (35,182) (30,826)
------------ ------------ ------------
Pro forma net loss .......................... $ (80,123) $ (476,072) $ (393,884)
============ ============ ============
Pro forma net loss per share:
Basic and diluted ........................... $ (0.90) $ (5.44) $ (4.87)
============ ============ ============
STOCK-RELATED TRANSACTIONS WITH THIRD PARTIES - The Company accounts for stock
warrants issued to third parties, including customers, in accordance with the
provisions of the Emerging Issues Task Force ("EITF") Issue 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services," and EITF 01-9, "Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)." Under the provisions of EITF 96-18, because none of the
Company's agreements have a disincentive for non-performance, the Company
records a charge for the fair value of the portion of the warrants earned from
the point in time when vesting of the warrants become probable. Final
determination of fair value of the warrants occurs upon actual vesting. EITF
01-9, which became effective during the quarter ended March 31, 2002, requires
that the fair value charge for certain types of warrants issued to customers be
recorded as a reduction of revenue to the extent of cumulative revenue recorded
from that customer.
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.
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." Translation gains and losses resulting from the remeasurement
process are included in the determination of net income. The net translation
losses for the years ended June 30, 2003, 2002 and 2001, were not significant.
REVENUE RECOGNITION - In 1999, the Securities and Exchange Commission ("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 existing accounting
standards 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, became effective for the fourth quarter of the Company's 2001 fiscal year.
The adoption of SAB No. 101 did not have an impact on the Company's results of
operations or financial position.
- - 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
consolidated balance sheets, are included in processing and servicing
revenue and totaled $20,258,000, $25,090,000 and $30,186,000 for the
years ended June 30, 2003, 2002 and 2001, respectively.
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- - License fees - The Company recognizes revenue on software transactions
in accordance with SOP 97-2, "Software Revenue Recognition," as amended
by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions." 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 - Upon receipt of payment, 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 as services are performed
and training revenue is recognized upon delivery of the related
service.
Customers are billed in accordance with contract terms. Maintenance revenue is
generally billed on an annual basis. The Company records any unrecognizable
portion of billed fees as deferred revenue until such time as revenue
recognition is appropriate.
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 the
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 product 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 consideration the potential
for usage of the software in different products, resale of the software
or other internal use.
- - Impairment of intangible assets - Impairment of intangible assets
consists of charges resulting from the review of certain of the
Company's long-lived assets as described in Note 7.
- - Reorganization charge - Reorganization charge resulted from the
Company's decision in 2002 to streamline certain of its operations as
more fully described in Note 17. Employee and other related exit costs
were accounted for in accordance with EITF 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." EITF
94-3 requires
-63-
recognition of a liability for employee termination benefits and other
costs directly associated with exiting an activity at the point in time
management has committed to the exit plan, informed employees of
termination benefits to be received and where the plan can be carried
out without the likelihood of significant change.
ADVERTISING COSTS - The Company expenses advertising costs as incurred in
accordance with SOP 93-7, "Reporting on Advertising Costs." Advertising expense
for the years ended June 30, 2003, 2002 and 2001 were $3,227,000, $2,744,000 and
$29,925,000, respectively, including $25,000,000 provided to Bank of America
during the year ended June 30, 2001 in connection with the Strategic Agreement
described in Note 3. Advertising expenses are included in sales and marketing
costs in the accompanying Consolidated Statements of Operations.
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.
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 20 for the Company's
segment information.
RECENT ACCOUNTING PRONOUNCEMENTS - On July 20, 2001, the FASB issued SFAS 141,
"Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting. In addition, it requires
application of the provisions of SFAS 142 for goodwill and other intangible
assets related to any business combinations completed after June 30, 2001, but
prior to the adoption date of SFAS 142. SFAS 142 changes the accounting for
goodwill and other intangible assets. Upon adoption, goodwill is no longer
subject to amortization over its estimated useful life. Rather, goodwill will be
subject to at least an annual assessment for impairment by applying a
fair-value-based test. All other acquired intangibles will be separately
recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, or exchanged, regardless of the Company's intent to do
so. Other intangibles will be amortized over their useful lives.
SFAS 142 became effective for the Company on July 1, 2002 and had the following
impacts:
- The Company reclassified approximately $1,350,000 million of
unamortized workforce in place intangible assets, net of the
associated deferred income taxes, into goodwill.
- After the reclassification above, goodwill was no longer
amortized.
- The Company performed a transitional impairment test as of
July 1, 2002. This impairment test requires the Company to (1)
identify its reporting units, (2) determine the carrying value
of each reporting unit by assigning assets and liabilities,
including existing goodwill and intangible assets, to those
reporting units, and (3) determine the fair value of each
reporting unit. If the carrying value of any reporting unit
exceeds its fair value, then the amount of any goodwill
impairment will be determined through a fair value analysis of
each of the assigned assets (excluding goodwill) and
liabilities.
The Company recorded a charge of $2,894,000 for impairment of goodwill
associated with its i-Solutions reporting unit upon the adoption of SFAS 142.
This charge is reflected as a cumulative effect of a change in accounting
principle in the accompanying Consolidated Statement of Operations for the year
ended June 30, 2003. Following the transitional impairment test, the Company's
goodwill balances are subject to annual impairment tests using the same process
described above. The Company will perform its annual evaluation under the
requirements of SFAS 142 as of April 30th of each year. Refer to Footnote 7
where the results of the Company's annual impairment test are discussed.
-64-
In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. The Company adopted SFAS 143 as of July 1, 2002.
The adoption of this statement had no impact on the Company's results of
operations or financial position for the year ended June 30, 2003.
On July 1, 2002, the Company adopted SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 superseded SFAS 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
the accounting and reporting provisions of Accounting Principles Board ("APB")
Opinion 30, "Reporting Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for the disposal of a segment of a business.
SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The adoption of this statement had no impact on
the Company's results of operations or financial position for the year ended
June 30, 2003.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This
statement eliminates the current requirement that gains and losses on
extinguishment of debt must be classified as extraordinary items in the income
statement. Instead, the statement requires that gains and losses on
extinguishment of debt be evaluated against the criteria in APB Opinion 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" to determine whether or not it should be classified as
an extraordinary item. In addition, the statement contains other corrections to
authoritative accounting literature in SFAS 4, 44 and 64. The changes in SFAS
145 related to debt extinguishment are effective for the Company's 2003 fiscal
year and the other changes were effective beginning with transactions after May
15, 2002. In August 2002, the Company announced that its board of directors had
authorized a repurchase program under which the Company may purchase up to $40
million of shares of its common stock and convertible notes. Should the Company
purchase any of its convertible notes and realize a gain or loss on the
transaction, SFAS 145 will require the Company to evaluate the transaction
against the criteria in APB Opinion 30 to determine if the gain or loss should
be classified as an extraordinary item. If classification as an extraordinary
item is not appropriate, the gain or loss would be included as part of income
before income taxes.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities," which addresses accounting for reorganization and
similar costs. SFAS 146 supersedes previous accounting guidance, principally
Emerging Issues Task Force ("EITF") 94-03, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)." SFAS 146 requires that the
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF 94-03, a liability for an exit cost
was recognized at the date of a company's commitment to an exit plan. SFAS 146
also establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS 146 may affect the timing of recognizing any
future reorganization costs as well as the amount recognized. The provisions of
SFAS 146 are effective for reorganization activities initiated after December
31, 2002. The Company has not initiated any reorganization activities since the
January 1, 2003, adoption of SFAS 146.
In November 2002, the EITF reached a consensus on Issue 00-21, "Multiple
Deliverable Revenue Arrangements." EITF 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. It also addresses when and how an arrangement
involving multiple deliverables should be divided into separate units of
accounting. The guidance in EITF 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003, with early
application permitted. Companies may elect to report the change in accounting as
a cumulative effect of a change in accounting principle in accordance with APB
Opinion 20, "Accounting Changes" and SFAS 3, "Reporting Accounting Changes in
Interim Financial Statements (an amendment of APB Opinion No. 28)." The Company
believes that its current accounting is consistent with the provisions of EITF
00-21 and, therefore, expects no impact on its results of operations or
financial position.
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN 45") was issued. This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the
-65-
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The initial recognition and initial measurement provisions of
FIN 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123," which provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. SFAS 148 requires prominent disclosure about the effects
on reported net income of an entity's accounting policy decisions with respect
to stock-based employee compensation and amends APB Opinion 28, "Interim
Financial Reporting," to require disclosure about those effects in interim
financial information. These disclosure requirements became effective for the
Company's third quarter of fiscal 2003. The Company has continued to account for
stock-based compensation under the provisions of APB Opinion 25, "Accounting for
Stock Issued to Employees," using the intrinsic value method. Accordingly, the
adoption of SFAS 148 had no impact on the Company's results of operations or
financial position for the year ended June 30, 2003.
FIN 46 "Consolidation of Variable Interest Entities" ("VIE") was issued in
January 2003 to address the consolidation issues around certain types of
entities, including special purpose entities ("SPE"). FIN 46 requires a variable
interest entity to be consolidated if the Company's variable interest (i.e.,
investment in the entity) will absorb a majority of the entity's expected losses
and/or residual returns if they occur. FIN 46 is applicable immediately to any
VIE formed after January 31, 2003 and must be applied beginning July 1, 2003 to
any such entity created before February 1, 2003. The Company does not expect the
implementation of FIN 46 to have a material effect on the Company's financial
position or results of operations.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Statement 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is
effective for contracts entered into or modified after June 30, 2003. The
Company is in the process of evaluating any effects of this new statement.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption. The Company does not expect
that the adoption of this statement will have an impact on its results of
operations and financial position.
RECLASSIFICATIONS - Certain amounts in the prior years' financial statements
have been reclassified to conform to the 2003 presentation.
NOTE 2. ACQUISITIONS
TRANSPOINT - On September 1, 2000, the Company acquired MSFDC, L.L.C.
("TransPoint") for a total of $1.4 billion, consisting of 17,000,000 shares of
common stock valued at $1.4 billion and $2 million of acquisition costs. 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 future lives are as follows (in thousands):
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INTANGIBLE USEFUL
ASSET LIFE
---------- ----------
Goodwill ............................... $ 780,545 5.0 yrs
Strategic agreements ................... 495,000 5.0 yrs
Existing product technology ............ 209,300 3.0 yrs
Customer list .......................... 29,000 3.0 yrs
Tradename .............................. 28,300 1.0 yr
Amortization of intangible assets is on a straight-line basis over the assets'
respective useful life. TransPoint's operations are included in the Consolidated
Statements of Operations from the date of acquisition.
In connection with the acquisition of TransPoint, the Company recorded a charge
of $18.6 million for purchased in-process research and development ("IPR&D").
This charge related to four technologies under development that had not
demonstrated technological feasibility as of the transaction date. These
technologies were Biller Integration System and Communications, Service Center,
Delivery Applications and Payment Systems Interface. As of the acquisition date,
the Company estimated that these projects were 80% complete, that an aggregate
of $717,000 would be required to complete these four projects, and that revenues
would begin in late 2000. An after-tax rate of 24% was used in this analysis. As
of June 30, 2002, these projects were complete.
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 (in
thousands):
INTANGIBLE USEFUL
ASSET LIFE
---------- ---------
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.
In connection with the acquisition of BlueGill, the Company recorded a charge of
$6.9 million for purchased IPR&D. This charge related to five technologies,
which had not demonstrated technological or commercial feasibility as of the
transaction date. They were print and extraction technology, data management
engine technology, API technology, web application technologies and payment/OFX
technology. As of the acquisition date, the Company estimated that these
projects ranged from 10% to 50% complete, that an aggregate of $2.1 million
would be required to complete these five projects, and that, depending upon the
project, product revenues would begin in mid-to-late 2000. An after-tax discount
rate of 25% was used in this analysis. As of June 30, 2002, these projects were
complete.
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PRO FORMA INFORMATION - The unaudited pro forma results of operations of the
Company for the year ended June 30, 2001, assuming the acquisitions occurred at
the beginning of the period are as follows (in thousands):
YEAR ENDED
JUNE 30, 2001
---------------
Total revenues........................................ $ 433,329
Net income (loss)..................................... $ (402,193)
Basic and diluted earnings per share:
Net income (loss) per common share............... $ (4.80)
Equivalent number of shares...................... 83,797
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 $18.6 million
arising from the TransPoint acquisition in 2001. 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.
NOTE 3. STRATEGIC AGREEMENT
Effective October 1, 2000, the Company completed a ten-year strategic agreement
with Bank of America, whereby the Company acquired the electronic billing and
payment assets of Bank of America and will provide electronic billing and
payment services to Bank of America's customer base in exchange for ten million
shares of the Company's common stock, valued at approximately $253 million, and
$35 million of cash. Of the cash portion of the purchase price, $25 million was
provided to help support an agreed upon two year $45 million marketing campaign
by Bank of America. Because the Company could not directly impact the specific
nature, timing or extent of the use of the marketing funds, the entire $25
million was expensed upon completion of the agreement. This amount is included
in sales and marketing expense in the accompanying Consolidated Statement of
Operations for the year ended June 30, 2001.
The values ascribed to intangible assets acquired as a result of the agreement
and their respective useful lives are as follows (in thousands):
INTANGIBLE USEFUL
ASSET LIFE
---------- --------
Strategic agreement............................................. $ 249,424 10.0 yrs
Existing product technology..................................... 7,659 1.5 yrs
Workforce....................................................... 3,173 3.0 yrs
The agreement provides for a revenue guarantee of $500 million to the Company
over the next 10 years. Bank of America also has the ability to earn warrants on
up to 10 million additional shares upon achievement of certain milestones more
fully described in Note 14.
As a result of the agreement, as of June 30, 2003 and 2002, Bank of America
owned 8.4% and 11.4% of the Company, respectively. The following amounts related
to Bank of America are included in the Company's consolidated financial
statements for the periods indicated (in thousands):
JUNE 30,
-----------------------------
2003 2002
------------ ------------
Current assets:
Accounts receivable, net........................................... $ 19,341 $ 22,632
------------ ------------
Total current assets........................................ $ 19,341 $ 22,632
============ ============
Current liabilities:
Accrued liabilities................................................ $ 3,595 $ 808
Deferred revenues.................................................. 499 824
------------ ------------
Total current liabilities................................... $ 4,094 $ 1,632
============ ============
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YEAR ENDED JUNE 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Revenues from Bank of America:
Processing and servicing .......... $ 86,842 $ 59,313 $ 42,503
License fees ...................... 904 40 1,187
Maintenance fees .................. 641 521 460
Other ............................. 5,878 148 337
---------- ---------- ----------
Total revenues .......... $ 94,265 $ 60,022 $ 44,487
========== ========== ==========
YEAR ENDED JUNE 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Expenses paid to Bank of America:
Cost of processing, servicing and support .. $ 4 $ 20,020 $ 23,154
Sales and marketing ........................ - - 25,000
---------- ---------- ----------
Total expenses .................... $ 4 $ 20,020 $ 48,154
========== ========== ==========
Revenues and accounts receivable relate to all segments of the Company but
primarily to electronic billing and payment services provided to Bank of
America. Accrued liabilities for the year ended June 30, 2003, relate to
payments to be made to Bank of America under contractual obligations. Accrued
liabilities and cost of processing expenses for the year ended June 30, 2002,
relate to reimbursements to Bank of America in connection with a transition
services agreement in place while the Company completed the conversion of Bank
of America customers to its processing platform. That conversion was completed
during the year ended June 30, 2002. The Company subleased office space from
Bank of America for two customer care facilities. Amounts paid under the
sublease agreements are included in cost of processing, servicing and support in
the table above.
NOTE 4. INVESTMENTS
Investments consist of the following (in thousands):
JUNE 30,
-----------------------
2003 2002
---------- ----------
Available-for-sale ............................... $ 113,624 $ -
Held-to-maturity ................................. 251,851 254,074
Other investments ................................ 660 3,683
Less: amounts classified as cash equivalents ..... 171,846 94,011
---------- ----------
Total investments ........................ $ 194,289 $ 163,746
========== ==========
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AVAILABLE-FOR-SALE - The following is a summary of available-for-sale investment
securities (in thousands):
GROSS UNREALIZED
AMORTIZED ----------------------- FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
JUNE 30, 2003:
Corporate bonds ............................... $ 29,718 $ 228 $ (6) $ 29,940
Asset-backed securities ....................... 25,480 183 (6) 25,657
Collateralized mortgage obligations ........... 1,447 18 - 1,465
Commercial paper .............................. 5,350 - - 5,350
U.S. Government and federal agency
obligations ................................ 50,115 338 (116) 50,337
Mortgage pass-through securities .............. 876 - (1) 875
---------- ---------- ---------- ----------
Available-for-sale investments ................ 112,986 767 (129) 113,624
Less: amounts classified as cash
equivalents ................................ - - - -
---------- ---------- ---------- ----------
Total available-for-sale investments ..... $ 112,986 $ 767 $ (129) $ 113,624
========== ========== ========== ==========
There were no available-for-sale investment securities held as of June 30, 2002.
No sales of available-for-sale securities occurred during 2003.
The fair value of available-for-sale securities is based on quoted market
values.
The amortized cost and fair value of available-for-sale securities at June 30,
2003, by contractual maturity or repricing date are as follows (in thousands):
AMORTIZED
COST FAIR VALUE
---------- ----------
Due in one year or less .......................... $ 41,069 $ 41,216
Due after one year through five years ............ 71,917 72,408
---------- ----------
Total ..................................... $ 112,986 $ 113,624
========== ==========
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.
HELD-TO-MATURITY - The following is a summary of Held-to-Maturity investment
securities (in thousands):
GROSS UNREALIZED
AMORTIZED ----------------------- FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
JUNE 30, 2003:
Corporate bonds ............................... $ 28,466 $ 606 $ (425) $ 28,647
Asset-backed securities ....................... 21,648 238 (414) 21,472
Commercial paper .............................. 3,550 - - 3,550
Certificates of deposit ....................... 3,000 - - 3,000
U.S. Government and federal agency
obligations ................................ 22,079 287 - 22,366
Mortgage pass-through securities .............. 8,082 73 - 8,155
Money market funds ............................ 165,026 - - 165,026
---------- ---------- ---------- ----------
Held-to-maturity investments .................. 251,851 1,204 (839) 252,216
Less: amounts classified as cash
equivalents ................................ 171,846 - - 171,846
---------- ---------- ---------- ----------
Total held-to-maturity investments ....... $ 80,005 $ 1,204 $ (839) $ 80,370
========== ========== ========== ==========
- 70 -
GROSS UNREALIZED
AMORTIZED ----------------------- FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
JUNE 30, 2002:
Corporate bonds ............................... $ 96,951 $ 490 $ (523) $ 96,918
Asset-backed securities ....................... 39,142 428 (10) 39,560
Commercial paper .............................. 15,939 - - 15,939
Certificates of deposit ....................... 3,000 - - 3,000
U.S. Government and federal agency
obligations ................................ 23,460 148 - 23,608
Money market funds ............................ 75,582 - - 75,582
---------- ---------- ---------- ----------
Held-to-maturity investments .................. 254,074 1,066 (533) 254,607
Less: amounts classified as cash
equivalents ................................ 94,011 - - 94,011
---------- ---------- ---------- ----------
Total held-to-maturity investments ....... $ 160,063 $ 1,066 $ (533) $ 160,596
========== ========== ========== ==========
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, 2003 by contractual maturity or repricing date are as follows (in
thousands):
AMORTIZED
COST FAIR VALUE
---------- ----------
Due in one year or less .......................... $ 31,458 $ 31,744
Due after one year through five years ............ 48,547 48,626
---------- ----------
Total .................................... $ 80,005 $ 80,370
========== ==========
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.
OTHER INVESTMENTS - Other investments are accounted for under the cost method
and include the following (in thousands):
JUNE 30,
-----------------------
2003 2002
---------- ----------
Common stock and warrants ........................ $ 111 $ 2,239
Convertible debenture ............................ - 1,000
Preferred stock .................................. - 98
Venture capital partnership ...................... 549 346
---------- ----------
Total other investments .................. $ 660 $ 3,683
========== ==========
Common stock and warrants at June 30, 2003, consists of preferred stock warrants
in a non-publicly traded e-billing related company. Common stock and warrants at
June 30, 2002, consists primarily of the Company's strategic investment in
Payment Data Systems, Inc. (formerly Billserv, Inc.) common stock, which was
written off in 2003 due to an other than temporary decline in fair market value.
The remainder of common stock and warrants, convertible debenture and preferred
stock investments are in non-publicly traded e-billing related companies. The
convertible debenture was converted into shares of common stock of a
non-publicly traded company during the year ended June 30, 2003, due to that
company's inability to pay in accordance with terms. Based on the available
information, the investment in common stock was determined to have no value, and
the Company reduced its carrying value accordingly. The venture capital
partnership invests in early to mid-stage financial solutions and technology
companies. The Company has made a commitment to invest $1 million in the
partnership. Actual contributions are made at the point in time the partnership
identifies a specific company in which to invest. The fair value of other
investments was approximately $660,000 and $3,064,000 as of June 30, 2003 and
2002, respectively.
During the years ended June 30, 2003 and 2001, the Company recorded losses on
certain of its other investments. No losses were recorded during the year ended
June 30, 2002. The losses were the result of the Company's evaluation of
- 71 -
any other-than-temporary decline in the value of these investments. In
performing this evaluation, the Company considered various factors including any
decline in market price, where available, the investee's financial condition,
results of operations, operating trends and other financial ratios. Based on
these factors, the Company recorded a loss of $3,228,000 and $16,077,000 for the
years ended June 30, 2003 and 2001, respectively.
PLEDGED INVESTMENTS - The Company has pledged certain held-to-maturity
investments as collateral for payments due under operating leases and for a
standby letter of credit related to an operating lease. The total amount of
securities pledged as collateral at June 30, 2003 and 2002 was approximately
$5,438,000 and $5,828,000, respectively, of which $3,000,000 is classified as a
restricted investment. The operating leases expire at various dates through
December 31, 2004. The standby letter of credit expires on September 30, 2003,
but is automatically renewable through the underlying lease expiration date of
September 30, 2004.
NOTE 5. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
JUNE 30,
-----------------------
2003 2002
---------- ----------
Trade accounts receivable .................................. $ 71,352 $ 80,292
Unbilled trade accounts receivable ......................... 7,246 4,746
Other receivables .......................................... 4,698 4,992
---------- ----------
Total .......................................... 83,296 90,030
Less: allowance for doubtful accounts .......... 1,670 2,000
---------- ----------
Accounts receivable, net ....................... $ 81,626 $ 88,030
========== ==========
Trade accounts receivable represents amounts billed to customers. Revenue is
recognized and customers are billed under service agreements as the services are
performed. Unbilled trade accounts receivable result primarily from extended
payment terms not in excess of one year on software license agreements. 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. The allowance for doubtful accounts
represents management's estimate of uncollectible accounts receivable.
NOTE 6. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
JUNE 30,
-----------------------
2003 2002
---------- ----------
Land and land improvements ........................................... $ 4,944 $ 4,944
Building and building improvements ................................... 50,736 51,162
Computer equipment and software licenses ............................. 181,872 148,962
Furniture and equipment .............................................. 19,838 19,830
---------- ----------
Total ................................................. 257,390 224,898
Less: accumulated depreciation and amortization ...... 162,537 129,273
---------- ----------
Property and equipment, net ........................... $ 94,853 $ 95,625
========== ==========
Depreciation expense totaled $36,631,000, $36,430,000 and $30,442,000 for the
years ended June 30, 2003, 2002 and 2001, respectively.
- 72 -
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
IMPAIRMENT OF INTANGIBLE ASSETS
CHECKFREE i-SOLUTIONS
During the year ended June 30, 2002, the Company identified certain indicators
of possible impairment of its long-lived assets, primarily goodwill and other
acquired intangible assets, related to its acquisition of BlueGill Technologies,
Inc. (currently referred to as CheckFree i-Solutions). The main indicators of
impairment were recent economic conditions, accompanied by internet-based
software industry trends that negatively impacted both i-Solutions current
operations, as well as its expected future growth rates. The Company first
evaluated recoverability under the provisions of SFAS 121 by comparing the
projected undiscounted cash flows of the i-Solutions business, including an
estimated terminal value, to the related carrying value of its long-lived
assets. As a result of this comparison, the Company determined that the
i-Solutions assets were impaired. The amount of the impairment was then
determined by comparing the estimated fair value of the i-Solutions assets to
the related carrying value. The fair value was determined using a discounted
cash flow approach for the net cash flows of the i-Solutions business and an
estimated terminal value. The assumptions supporting the estimated cash flows,
including the discount rate and estimated terminal value, reflect management's
best estimates at the time. As a result of the fair value test, the Company
recorded a charge reducing the carrying value of CheckFree i-Solutions goodwill
by $107,405,000. This amount is included in impairment of intangible assets in
the Company's Consolidated Statement of Operations. CheckFree i-Solutions is
included in the Company's Software business segment.
Upon adoption of SFAS 142, the Company performed a transitional impairment test
and recorded a charge of $2,894,000 for impairment of goodwill associated with
i-Solutions. The transitional impairment charge is reflected as a cumulative
effect of a change in accounting principles in the accompanying Consolidated
Statement of Operations for the year ended June 30, 2003.
During the fourth quarter of the fiscal year ended June 30, 2003, the Company
performed its annual impairment review for goodwill and other intangible assets.
The conditions which gave rise to indications of impairment during the year
ended June 30, 2002, continued to be present during the year ended June 30,
2003. As a result of its assessment, the Company recorded an additional charge
of $10,228,000, which represents a SFAS 142 goodwill impairment of $5,983,000
and a SFAS 144 impairment of other intangible assets of $4,245,000 both related
to the Company's i-Solutions reporting unit. This amount is included in
impairment of intangible assets in the Company's Consolidated Statement of
Operations.
TRANSPOINT
During the year ended June 30, 2002, the Company performed a review of the
carrying value of technology assets it acquired as part of the TransPoint
acquisition in September 2000. The review was prompted by the termination of the
maintenance agreement for this technology from the last of our international
partners, and the conclusions reached by the Company in evaluating the service
potential of the technology against our present and future initiatives. As a
result of the review, the Company identified two technologies for which there is
no future use and recorded a SFAS 121 charge of $47,667,000 to retire these
assets. The charge is included in impairment of intangible assets in the
Company's Consolidated Statement of Operations.
The retirement of the TransPoint technology assets noted above was an indicator
to the Company of possible impairment of its long-lived assets, primarily
goodwill and other acquired intangible assets, related to its acquisition of
TransPoint. The Company evaluated the recoverability of all its Electronic
Commerce Division long-lived assets by comparing the projected undiscounted cash
flows of the division, including an estimated terminal value, to the carrying
value of its long-lived assets. The assumptions supporting the estimated cash
flows, including the estimated terminal value, reflect management's best
estimates at the time. The result of this test indicated that there was no
impairment of the Company's Electronic Commerce Division long-lived assets.
- 73 -
As of June 30, 2003, the Company's only non-amortizing intangible asset is
goodwill. The changes in the carrying value of goodwill by segment for the year
ended June 30, 2003, were as follows (in thousands):
ELECTRONIC INVESTMENT
COMMERCE SOFTWARE SERVICES TOTAL
---------- ---------- ---------- ----------
Balance as of June 30, 2001 ...................... $ 661,308 $ 45,307 $ 13,554 $ 820,169
Amortization ..................................... (158,053) (21,786) (2,167) (182,006)
SFAS 121 impairment loss ......................... - (107,405) - (107,405)
---------- ---------- ---------- ----------
Balance as of June 30, 2002 ...................... 503,255 16,116 11,387 530,758
Reclassification of workforce, net of tax ........ 483 867 - 1,350
Impairment loss from adoption of SFAS 142 ........ - (2,894) - (2,894)
Fourth quarter impairment loss ................... - (5,983) - (5,983)
---------- ---------- ---------- ----------
Balance as of June 30, 2003 ...................... $ 503,738 $ 8,106 $ 11,387 $ 523,231
========== ========== ========== ==========
The components of the Company's various amortized intangible assets are as
follows (in thousands):
JUNE 30,
-----------------------
2003 2002
---------- ----------
Capitalized software:
Product technology from acquisitions and strategic agreement ....... $ 166,578 $ 166,578
Internal development costs ......................................... 29,170 24,946
---------- ----------
Total ..................................................... 195,748 191,524
Less: accumulated amortization ............................ 172,136 119,679
---------- ----------
Capitalized software, net ................................. $ 23,612 $ 71,845
========== ==========
Strategic agreements:
Strategic agreements ............................................... $ 744,424 $ 744,424
Less: accumulated amortization .................................... 349,092 225,149
---------- ----------
Strategic agreements, net ................................. $ 395,332 $ 519,275
========== ==========
Other intangible assets:
Workforce(1) ....................................................... $ - $ 11,944
Tradenames ......................................................... 47,968 47,968
Customer base ...................................................... 34,758 45,358
Covenants not to compete ........................................... 1,200 1,200
---------- ----------
Total ..................................................... 83,926 106,470
Less: accumulated amortization .................................... 79,125 81,861
---------- ----------
Other intangible assets, net .............................. $ 4,801 $ 24,609
========== ==========
(1) As of July 1, 2002, in accordance with SFAS 142, the Company reclassified
its workforce intangibles, net of accumulated amortization, into goodwill.
Amortization of intangible assets totaled $190,007,000, $399,135,000 and
$397,053,000 for the years ended June 30, 2003, 2002 and 2001, respectively.
Amortization expense for the next five fiscal years is estimated to be as
follows (in thousands):
FISCAL YEAR ENDING JUNE 30,
2004............................. $ 136,112
2005............................. 125,850
2006............................. 42,526
2007............................. 25,435
2008............................. 25,309
- 74 -
The Company's results of operations for the years ended June 30, 2002 and 2001
do not reflect the provisions of SFAS 142. The following table adjusts net loss
and net loss per share for the impact of the implementation of SFAS 142 as
follows (in thousands, except per share data):
YEAR ENDED JUNE 30,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
Loss before cumulative effect of accounting change ......... $ (49,290) $ (440,950) $ (363,135)
Cumulative effect of accounting change ..................... (2,894) - -
------------ ------------ ------------
Net loss ................................................... (52,184) (440,950) (363,135)
Add back: goodwill amortization ........................... - 184,464 174,027
------------ ------------ ------------
Adjusted net loss .......................................... $ (52,184) $ (256,486) $ (189,108)
============ ============ ============
Basic and diluted net loss per share:
Basic and diluted net loss per common share before
cumulative effect of accounting change ............. $ (0.56) $ (5.04) $ (4.49)
Cumulative effect of accounting change .................. (0.03) - -
------------ ------------ ------------
Net loss per common share ............................... (0.59) (5.04) (4.49)
Goodwill amortization ................................... - 2.11 2.15
------------ ------------ ------------
Adjusted basic and diluted net loss per share ........... $ (0.59) $ (2.93) $ (2.34)
============ ============ ============
NOTE 8. ACCRUED LIABILITIES
The components of accrued liabilities are as follows (in thousands):
JUNE 30,
-----------------------
2003 2002
---------- ----------
Compensation and benefits ........................ $ 34,933 $ 28,147
Reorganization reserve ........................... 1,537 7,800
Other ............................................ 22,670 18,967
---------- ----------
Total ............................ $ 59,140 $ 54,914
========== ==========
NOTE 9. FINANCING AGREEMENTS
The Company had a line-of credit agreement, which was terminated by the Company
in August 2003 in anticipation of obtaining a new line of credit facility. The
agreement, which carried an interest rate of LIBOR plus 200 basis points or
Prime, enabled the Company to borrow up to $30 million and contained certain
financial and operating covenants. No amounts were outstanding under the line at
June 30, 2003 and 2002.
In August 2003, CheckFree Corporation's wholly owned subsidiaries, CheckFree
Services and Bastogne, Inc., a bankruptcy-remote, special purpose entity
("Bastogne"), entered into a Master Agreement with SunTrust Bank, Atlanta,
Georgia with respect to the activities of CheckFree Services' Electronic
Commerce Division. Under this Master Agreement, SunTrust provides ACH and other
electronics funds transfer services, on behalf of Bastogne in connection with
the receipt, investment, custody and transmission of subscriber funds. In
addition, SunTrust Bank and its affiliates provide various deposit accounts and
investment accounts and services to Bastogne. CheckFree Services provides
processing and administrative services to Bastogne to facilitate transactions
under the Master Agreement. SunTrust has agreed to provide a facility to
Bastogne to cover overdrafts occurring from time to time due to timing
differences between transmission of subscriber funds and movement of funds from
Bastogne's investment accounts to the zero balance demand deposit account
maintained by Bastogne with SunTrust. In addition, SunTrust provides automated
clearinghouse services, and maintains and permits Bastogne to use SunTrust's
MasterCard ICA transit
- 75 -
number and VISA bank identification numbers to facilitate transactions in the
MasterCard and VISA systems. The obligations of Bastogne under the Master
Agreement to SunTrust are guaranteed by CheckFree Services, which has pledged
substantially all the assets of its Electronic Commerce Division to secure such
guarantee.
NOTE 10. CONVERTIBLE SUBORDINATED NOTES
On November 29, 1999, the Company issued $172,500,000 of 6.5% 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 on 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, 2003, none of the notes had been
converted to common stock. Interest expense on the notes for the years ended
June 30, 2003, 2002 and 2001, was $12,023,000, $12,023,000, and $12,119,000,
respectively. The fair value of the notes was approximately $175,400,000 and
$148,500,000 as of June 30, 2003 and 2002, respectively.
NOTE 11. CAPITAL LEASE AND OTHER LONG-TERM OBLIGATIONS
The Company leases certain equipment under capital leases and purchases certain
software licenses under long-term agreements. 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,
-----------------------
2003 2002
---------- ----------
Equipment and software licenses ...................... $ 17,599 $ 8,122
Less: accumulated depreciation and amortization ...... 7,425 5,059
---------- ----------
Property under capital leases, net ... $ 10,174 $ 3,063
========== ==========
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,
2004 .................................................. $ 1,610
2005 .................................................. 1,364
2006 .................................................. 177
----------
Total future minimum lease payments .... 3,151
Less: amount representing interest ..... 335
----------
Net future minimum lease payments ...... $ 2,816
==========
Additionally, the Company has purchased software licenses under agreements with
extended payment terms. Total amounts due under these agreements are as follows
(in thousands):
FISCAL YEAR ENDING JUNE 30,
2004 ....................................................... $ 3,863
2005 ....................................................... 3,177
----------
Total future minimum lease payments ......... 7,040
Less: amount representing interest ......... 770
----------
Net future minimum payments ................. $ 6,270
==========
- 76 -
NOTE 12. COMMITMENTS
OPERATING LEASES - The Company leases 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 lease. Total expense
under all operating lease agreements for the years ended June 30, 2003, 2002 and
2001 was $23,917,000, $27,997,000 and $26,519,000, respectively.
Future minimum rental payments under these leases are as follows (in thousands):
FISCAL YEAR ENDING JUNE 30,
2004 ............................................. $ 18,998
2005 ............................................. 12,749
2006 ............................................. 10,543
2007 ............................................. 9,770
2008 ............................................. 9,824
Thereafter ....................................... 47,879
----------
Net future minimum lease payments ... $ 109,763
==========
The Company has pledged certain held-to-maturity investments as collateral for
payments due under operating leases and for a standby letter of credit related
to an operating lease. The total amount of securities pledged at June 30, 2003
and 2002 was approximately $5,438,000 and $5,828,000, respectively, of which
$3,000,000 is classified as a restricted investment. The operating leases expire
at various dates through December 31, 2004. The standby letter of credit expires
on September 30, 2003, but is automatically renewable through the underlying
lease expiration date of September 30, 2004.
NOTE 13. CAPITAL STOCK
On November 1, 2000, the Company's stockholders approved an increase in the
number of authorized shares of the Company from 165,000,000 to 550,000,000,
consisting of 500,000,000 shares of common stock, $.01 par value, 48,500,000
shares of preferred stock, $.01 par value, and 1,500,000 shares of Series A
Junior Participating Cumulative Preferred Stock, $.01 par value. The preferred
stock may be issued in one or more series and may be established with 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 through June 30, 2003.
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.
NOTE 14. TRANSACTIONS INVOLVING EQUITY INSTRUMENTS
EMPLOYEE PLANS
During 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan").
The options granted under the 1995 Plan may be either incentive stock options or
non-statutory stock options. The terms of the options granted under the 1995
Plan 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 date 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 and again in
November of 2000, the 1995 Plan was amended by a vote of
- 77 -
the Company's shareholders to extend the maximum option grants to not more than
8,000,000 shares and not more than 12,000,000 shares, respectively. Options
granted under the 1995 Plan 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.
In November 2002, the Company's stockholders approved the 2002 Stock Incentive
Plan (the "2002 Plan"). Under the provisions of the 2002 Plan, the Company may
grant incentive or non-qualified stock options, stock appreciation rights
("SARs"), restricted stock, performance units or performance shares for not more
than 6,000,000 shares of common stock to certain key employees, officers and
non-employee directors. The terms of the options, SARs, restricted stock,
performance units or performance shares granted under the 2002 Plan are
determined by a committee of the Company's Board of Directors, however, in the
event of a change in control as defined in the 2002 Plan, they shall become
immediately exercisable. The 2002 Plan will replace the Company's 1995 Stock
Option Plan (the "1995 Plan"), going forward, except that the 1995 Plan will
continue to exist to the extent that options granted prior to the effective date
of the 2002 Plan continue to remain outstanding. At June 30, 2003, 5,091,864
additional shares are available for grant under the 2002 Plan.
All options granted under the 2002 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, 2000 to June
30, 2003:
YEAR ENDED
------------------------------------------------------------------------------
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2001
------------------------ ------------------------ ------------------------
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 ................ 8,084,673 $ 34.25 7,128,141 $ 36.96 6,161,785 $ 30.86
Granted .......................................... 1,195,168 15.89 2,818,928 22.10 2,049,049 46.71
Exercised ........................................ (533,263) 13.01 (761,750) 3.09 (635,205) 10.92
Cancelled ........................................ (1,510,362) 39.37 (1,100,646) 41.35 (447,488) 34.24
--------- ---------- ---------
Outstanding - End of period ...................... 7,236,216 $ 31.72 8,084,673 $ 34.25 7,128,141 $ 36.96
========= ========== ========== ========== ========= ==========
Options exercisable at end of period ............. 3,972,477 $ 37.79 3,122,949 $ 38.84 2,588,418 $ 26.40
========= ========== ========== ========== ========= ==========
Weighted average per-share fair value of
options granted during the year ................ $ 12.25 $ 14.81 $ 32.06
========== ========== ==========
The following table summarizes information about options outstanding at June 30,
2003:
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 ......................... 2,027,724 6.7 $ 12.92 969,425 $ 11.70
$15.01 - $ 30.00 ......................... 1,847,185 8.1 18.03 645,843 19.14
$30.01 - $ 60.00 ......................... 2,921,417 6.5 43.48 1,963,819 44.26
$60.01 - $ 90.00 ......................... 107,540 6.6 77.08 61,040 77.87
$90.01 - $ 120.00 ......................... 332,350 5.7 104.50 332,350 104.50
--------- ---------
7,236,216 6.9 $ 31.72 3,972,477 $ 37.79
========= ========== ========= ==========
- 78 -
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, 2003, 2002 and 2001,
respectively: dividend yield of 0% in all periods; expected volatility of 95%,
98% and 98%; risk-free interest rates of 3.47%, 4.00%, and 5.62%; and expected
lives of two 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 June 2003, the Company made an offer (the "Tender Offer") to certain
employees to exchange options with exercise prices greater than or equal to
$44.00 per share currently outstanding under the Company's 1983 Incentive Stock
Option Plan, 1983 Non-Statutory Stock Option Plan, 1993 Stock Option Plan, Third
Amended and Restated 1995 Stock Option Plan, BlueGill Technologies, Inc. 1997
Stock Option Plan, BlueGill Technologies, Inc. 1998 Incentive and Non-Qualified
Stock Option Plan, and 2002 Stock Incentive Plan, for restricted stock units of
the Company's Common Stock, and in certain cases, cash payments. Restricted
stock units issued under the Tender Offer will vest ratably over a three-year
period. The offer period closed on July 17, 2003, and employees holding
1,165,035 options participated in the Tender Offer. The Company made cash
payments totaling $586,000 in July 2003 representing the cash consideration
portion of the Tender Offer and will issue approximately 253,000 shares of
restricted stock under the 2002 Stock Incentive Plan over the next three years.
There was no financial impact to the Company related to the Tender Offer for the
year ended June 30, 2003. The Company will record an expense for cash payments
as incurred and will record an expense for restricted shares, subject to
cancellation, ratably over the vesting period.
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. In November 2002, the Company's stockholders approved
an increase in the number of shares reserved and available for sale under the
1997 Associate Stock Purchase Plan from 1,000,000 shares to 2,000,000 shares.
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, 98,741
shares were issued in July 2003, 128,033 in January 2003, 128,443 in July 2002,
135,721 in January 2002, 79,055 in July 2001 and 56,901 in January 2001 from
employees' salary withholdings from the respective previous six-month period. As
of June 30, 2003 there were 1,130,774 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:
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
2003 2002 2002 2001 2001 2000
---------- ------------ ---------- ------------ ---------- ------------
Fair value of options ........ $ 7.73 $ 5.08 $ 4.17 $ 4.95 $ 9.28 $ 11.63
Assumptions:
Risk-free interest rate ... 1.2% 1.8% 4.0% 4.0% 4.4% 4.4%
Expected life ............. 3 months 3 months 3 months 3 months 3 months 3 months
Volatility ................ 107.9% 71.8% 98.0% 98.0% 98.2% 98.2%
Dividend yield ............ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
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, full
vesting of the shares was 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 was amortized as compensation expense
on a straight-line basis over the related vesting period. In the year ended June
30, 2003, 12,000 shares of restricted stock were forfeited and returned when a
key employee left the Company.
- 79 -
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 Board of Directors authorized an additional
1,000,000 shares of Common Stock for the Company's matching contribution in
November 2002. The Company issued 402,102 shares in August 2002, 132,887 shares
in August 2001 and 51,834 shares in August 2000 to fund its 401(k) match that
had accrued during the years ended June 30, 2002, 2001 and 2000, respectively.
As of June 30, 2003, there were 1,223,797 shares available for future
contributions to the 401(k) plan.
STOCK RELATED TRANSACTIONS WITH THIRD PARTIES - In October 2000, the Company
completed an agreement to acquire various electronic billing and payment assets
from Bank of America in exchange for ten million shares of the Company's Common
Stock. Bank of America has the ability to earn warrants on up to ten million
additional shares, eight million of which vest upon achievement of specific
levels of active subscriber adoption of electronic billing and payment services
and separately, two million upon achievement of specific levels of electronic
bills presented to those subscribers. The warrants have a strike price of
$32.50. At the time that vesting of a portion of these warrants becomes
probable, the Company will record a charge for the fair value of the portion of
the warrants earned to date based on Bank of America's progress towards
achieving the milestones set forth in the agreement. The Company will continue
to record a charge each period for any additional portion of the warrants
earned, plus any change in fair value of the cumulative amount of warrants
earned to date, up to the point in time that the milestones are achieved and
actual vesting occurs. Under the provisions of EITF 01-9, any charge associated
with these warrants will be recorded as a reduction of revenue up to the
aggregate amount of revenue received from Bank of America.
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 reflect a strike price of $39.25 and became exercisable on September
15, 2002, contingent upon achievement of various annual revenue targets and
maintaining the continued existence of the agreement through that date. During
the quarter ended June 30, 2002, vesting of the warrants for one million shares
became probable. As such, the Company recorded a non-cash charge of $2,748,000
for the fair value of the portion of the warrants earned through June 30, 2002
based on a Black-Scholes option pricing model valuation. At September 15, 2002,
upon actual vesting, the Company determined the final fair value of the one
million warrants taking into consideration the market value of our stock at that
date. During the quarter ended September 30, 2002, the Company recorded a
non-cash increase in revenue of $644,000, reflecting the portion of the warrants
earned during the quarter and the final fair value of the one million warrants
that vested on September 15, 2002. Fair value was determined based on a
Black-Scholes option pricing model valuation. Under the provisions of EITF 01-9,
"Accounting for Consideration by a Vendor to a Customer (Including a Reseller of
the Vendor's Products)," the non-cash charge of $2,748,000 was recorded as a
reduction of revenue, and the non-cash increase of $644,000 was recorded as an
increase to revenue.
In January 1998, the Company entered into a ten-year processing agreement with a
strategic partner. Under the terms of the agreement, the partner acquired
ten-year warrants exercisable at $20 15/16 for ten 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. During the year ended
June 30, 2001, the strategic partner's business was dissolved, and therefore, it
does not have the ability to earn any of the remaining seven million warrants.
During each of the fiscal years ended June 30, 2000 and 2001, the strategic
partner exercised 750,000 of the vested options and 1,500,000 remain outstanding
at June 30, 2003.
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 1998, upon the execution of a processing agreement with a key customer,
25,000 of the options vested. The remaining 25,000 options vested in March 2002.
In March 2002, the consultant exercised all 50,000 options. 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
$172,500,000 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, 2003 was $28.00 per share. Please refer to Note 10 for further
information regarding the convertible subordinated notes.
- 80 -
NOTE 15. 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, 2003 YEAR ENDED JUNE 30, 2002
------------------------------------ -------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
Basic EPS .................... $ (52,184) 88,807 $ (0.59) $(440,950) 87,452 $ (5.04)
========= =========
Effective of dilutive
securities:
Options and warrants ..... - - - -
Convertible notes ........ - - - -
--------- ------ --------- ------
Diluted EPS .................. $ (52,184) 88,807 $ (0.59) $(440,950) 87,452 $ (5.04)
========= ====== ========= ========= ====== =========
YEAR ENDED JUNE 30, 2001
-------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Basic EPS .................... $(363,135) 80,863 $ (4.49)
=========
Effective of dilutive
securities:
Options and warrants ..... - -
Convertible notes ........ - -
--------- ------
Diluted EPS .................. $(363,135) 80,863 $ (4.49)
========= ====== =========
Anti-dilution provisions of SFAS 128 require consistency between diluted
per-common-share amounts and basic per-common-share amounts in loss periods. Had
the Company recognized net income for the periods presented, an additional
3,567,000, 3,333,000 and 6,769,000 of in-the-money options and warrants would
have been included in the diluted earnings per share calculation for the years
ended June 30, 2003, 2002 and 2001, respectively. Using the treasury stock
method prescribed by SFAS 128, this would have increased diluted shares
outstanding by 747,000, 899,000 and 3,205,000 for the years ended June 30, 2003,
2002 and 2001, respectively.
The weighted average diluted common shares outstanding for the years ended June
30, 2003, 2002 and 2001, also exclude the effect of approximately 6,411,000,
6,565,000 and 2,051,000 of out-of-the-money options and warrants, respectively,
and the 2,357,000 share effect for the assumed conversion of the convertible
subordinated notes, as their effect would be anti-dilutive. In addition, the
after-tax effect of interest expense on the convertible subordinated notes of
approximately $7,541,000, $9,498,000 and $9,198,000 for the years ended June 30,
2003, 2002 and 2001, respectively, has not been added back to the numerator, as
its effect would be anti-dilutive.
NOTE 16. EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN - The Company has a defined contribution 401(k) retirement plan
covering substantially all of its U.S.-based 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.
In January 2002, the Company added a similar plan covering substantially all its
non U.S.-based employees. Total expense under both plans amounted to $3,476,000,
$3,035,000, and $3,528,000 for the years ended June 30, 2003, 2002 and 2001,
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, 2003 and 2002
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, 2003 and 2002 Consolidated Balance Sheets.
Total expense under the DCP for the years ended June 30, 2003, 2002 and 2001
amounted to $131,000, $176,000 and $77,000, respectively.
GROUP MEDICAL PLANS - Effective January 1, 2000, the Company converted all of
its U.S.-based 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. The
administrator reviews all claims filed and authorizes the payment of benefits.
The Company has stop-loss insurance coverage on all individual claims exceeding
$250,000. 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. The
Company provides supplemental medical insurance coverage to its non U.S.-based
employees. Total expense for medical insurance coverage amounted to $11,454,000,
$11,588,000 and $11,116,000 for the years ended June 30, 2003, 2002 and 2001,
respectively. Under the self-insurance plan, the Company expenses amounts as
claims are incurred and recognizes a liability for incurred but not reported
claims. At June 30, 2003 and 2002, the Company accrued $3,425,000 and
$4,153,000, respectively, as a liability for costs incurred but not paid under
this plan.
- 81 -
In December 1998, a subsidiary, CheckFree Management Corporation, was created to
administer the Company's employee medical benefits program. The Company owns a
controlling interest in the subsidiary and, therefore, the accompanying
consolidated financial statements include the subsidiary's results of
operations.
NOTE 17. REORGANIZATION CHARGE
During the year ended June 30, 2002, the Company announced it would streamline
operations in its Electronic Commerce Division, refine its strategy for the
i-Solutions business unit of its Software Division, and discontinue certain
product lines associated with its Investment Services Division. As a result of
these actions, the Company closed or consolidated operations in several
locations and eliminated certain other positions in the Company. The
streamlining of its Electronic Commerce Division operations results from
efficiencies gained from the consolidation of three legacy transaction
processing platforms to its Genesis platform and resulted in the closing of its
San Francisco, California location on April 30, 2002; its Houston, Texas
location on June 30, 2002; and its Austin, Texas location on September 30, 2002.
The refinement in strategy for the i-Solutions business resulted in the closing
of its Ann Arbor, Michigan and Singapore locations on March 19, 2002. Revenues
and operating income related to the discontinued product lines in the Investment
Services Division are immaterial to the Company.
As a result of these actions, the Company recorded $16,365,000 of reorganization
charges for the year ended June 30, 2002, which included $1,640,000 of non-cash
asset impairment charges, $10,962,000 of severance and related benefits costs
for the termination of 707 employees, and $3,763,000 of other exit costs,
including lease termination fees and other closure, employee and professional
costs. For the year ended June 30, 2003, the Company reviewed its estimated
remaining liabilities under this reorganization plan and recorded an additional
charge of $1,405,000, which includes $165,000 of severance and related benefits
and $1,240,000 of other exit costs, including lease termination fees and other
closure, employee and professional costs. These amounts are included in
reorganization charge in the Company's Consolidated Statement of Operations. The
Company's reorganization plan was substantially complete at June 30, 2003.
A summary of activity related to the reorganization reserve is as follows (in
thousands):
OFFICE
SEVERANCE CLOSURE
AND OTHER AND
EMPLOYEE BUSINESS OTHER EXIT
COSTS EXIT COSTS COSTS TOTAL
---------- ---------- ---------- -----------
Initial reorganization charge.................................. $ 10,962 $ 3,677 $ 86 $ 14,725
Cash payments, year ended June 30, 2002........................ (6,261) (649) (15) (6,925)
---------- ---------- -------- -----------
Reorganization reserve at June 30, 2002........................ 4,701 3,028 71 7,800
Additional reorganization charge............................... 165 1,248 (8) 1,405
Cash payments, year ended June 30, 2003........................ (4,866) (2,739) (63) (7,668)
---------- ---------- -------- -----------
Balance as of June 30, 2003.................................... $ - $ 1,537 $ - $ 1,537
========== ========== ======== ===========
In conjunction with the reorganization activities described above, the Company
revised the estimated useful lives of the Existing Product Technology and
Customer Base intangible assets related to the product lines that were to be
discontinued from its Mobius Group acquisition, the Workforce intangible asset
from its strategic agreement with Bank of America, and certain property and
equipment assets associated with office locations that were to be closed. This
resulted in additional amortization expense of $1,035,000 for the year ended
June 30, 2003, which represents an after-tax impact of $621,000 and an impact to
earnings per share of $(0.01) for the year ended June 30, 2003, and additional
depreciation and amortization expense of $3,318,000 for the year ended June 30,
2002, which represents an after-tax impact of $2,710,000 and an impact to
earnings per share of $(0.03) for the year ended June 30, 2002.
- 82 -
NOTE 18. 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,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Current:
Federal ..................................... $ 1,700 $ - $ -
State and local ............................. - - -
Foreign ..................................... 341 281 -
---------- ---------- ----------
Total current ..................... 2,041 281 -
Deferred federal and state ....................... (35,147) (99,152) (115,362)
---------- ---------- ----------
Total income tax benefit .......... $ (33,106) $ (98,871) $ (115,362)
========== ========== ==========
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,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Computed "expected" tax benefit ....................... $ (28,838) $ (188,937) $ (167,243)
Nondeductible in-process research and
development of acquired businesses ................. - - 6,510
Nondeductible intangible charges ...................... 2,094 101,294 60,346
State and local taxes, net of federal and foreign
income tax benefits ................................ (4,715) (10,321) (14,793)
Federal and state tax credits ......................... (2,080) (1,364) (687)
Other, net ............................................ 433 457 505
---------- ---------- ----------
Total income tax benefit ................ $ (33,106) $ (98,871) $ (115,362)
========== ========== ==========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 2003 and
2002 are as follows (in thousands):
- 83 -
JUNE 30,
------------------------
2003 2002
---------- ----------
Deferred tax assets:
Federal and state net operating loss carryforwards ......... $ 48,008 $ 80,692
Federal and state tax credit carryforwards ................. 12,289 5,311
Allowance for bad debts and returns ........................ 845 951
Accrued compensation and related items ..................... 1,369 1,227
Stock warrants ............................................. 17,433 18,298
Property and equipment ..................................... 518 451
Other investments .......................................... 3,964 3,143
Deferred revenue ........................................... 1,786 2,254
Reserve accruals ........................................... 4,891 7,188
---------- ----------
Total deferred tax assets ................... 91,103 119,515
Deferred tax liabilities:
Capitalized software ....................................... (5,246) (24,063)
Intangible assets .......................................... (73,383) (123,629)
---------- ----------
Total deferred tax liabilities .............. (78,629) (147,692)
---------- ----------
Net deferred tax assets/(liabilities) ....... $ 12,474 $ (28,177)
========== ==========
At June 30, 2003, the Company has approximately $141,400,000 of state and
$118,600,000 of federal net operating loss carryforwards available, expiring in
2009 to 2023 and 2019 to 2023, respectively. Additionally, at June 30, 2003, the
Company has approximately $1,000,000 of state and $11,600,000 of federal tax
credit carryforwards available, expiring in 2007 to 2013 and 2007 to 2023,
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.
NOTE 19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
YEAR ENDED JUNE 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
(In thousands)
Interest paid .............................................. $ 12,028 $ 12,041 $ 12,119
========== ========== ==========
Income taxes paid (received), net .......................... $ 2,770 $ 49 $ (1,442)
========== ========== ==========
Supplemental disclosure of non-cash investing and
financing activities:
Capital lease additions and acquisitions of other
long-term assets ................................. $ 13,105 $ 1,539 $ 5,716
========== ========== ==========
Stock funding of 401(k) match ......................... $ 3,229 $ 3,621 $ 2,487
========== ========== ==========
Stock funding of Associate Stock Purchase Plan ........ $ 3,274 $ 4,433 $ 3,587
========== ========== ==========
Purchase price of business acquisitions ............... $ - $ - $1,351,649
Issuance of common stock and stock
options pursuant to acquisitions ............... - - (1,350,083)
Cash acquired in acquisitions .................... - - (97,200)
Acquisition costs paid in prior period ........... - - (965)
---------- ---------- ----------
Net cash received ........................... $ - $ - $ (96,599)
========== ========== ==========
- 84 -
NOTE 20. 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, finance
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. Segment operating income (loss) excludes intangible asset
amortization, in-process research and development costs and significant one-time
charges related to various business and asset acquisitions. There are no
intersegment sales.
The following sets forth certain financial information attributable to the
Company's business segments for the years ended June 30, 2003, 2002 and 2001:
YEAR ENDED JUNE 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
(In thousands)
Revenues:
Electronic Commerce ............... $ 405,373 $ 352,054 $ 301,532
Software .......................... 64,711 58,849 62,175
Investment Services ............... 81,562 79,574 69,613
---------- ---------- ----------
Total .................... $ 551,646 $ 490,477 $ 433,320
========== ========== ==========
- 85 -
YEAR ENDED JUNE 30,
--------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
(In thousands)
Segment operating income (loss):
Electronic Commerce ..................................... $ 115,539 $ 39,010 $ (13,083)
Software ................................................ 18,008 5,789 837
Investment Services ..................................... 21,062 24,376 20,347
Corporate ............................................... (33,798) (36,500) (35,746)
-------------- -------------- --------------
Total ............................................ 120,811 32,675 (27,645)
Purchase accounting amortization ........................... (183,342) (394,009) (393,436)
Impairment of intangible assets ............................ (10,228) (155,072) -
Reorganization charge ...................................... (1,405) (16,365) -
Impact of warrants ......................................... 644 (2,748) -
One-time marketing charge .................................. - - (25,000)
In-process research and development ........................ - - (18,600)
Loss on investments ........................................ (3,228) - (16,077)
Interest, net .............................................. (5,648) (4,302) 2,261
-------------- -------------- --------------
Total loss before income taxes and cumulative
effect of accounting change .................... $ (82,396) $ (539,821) $ (478,497)
============== ============== ==============
Identifiable assets:
Electronic Commerce ..................................... $ 1,046,063 $ 1,218,340 $ 1,603,069
Software ................................................ 39,782 63,792 206,746
Investment Services ..................................... 37,696 41,347 50,113
Corporate ............................................... 463,729 313,998 324,025
-------------- -------------- --------------
Total ............................................ $ 1,587,270 $ 1,637,477 $ 2,183,953
============== ============== ==============
Capital expenditures:
Electronic Commerce ..................................... $ 31,963 $ 15,654 $ 28,355
Software ................................................ 381 2,074 2,938
Investment Services ..................................... 4,857 2,643 6,771
Corporate ............................................... 228 3,148 9,317
-------------- -------------- --------------
Total ............................................ $ 37,429 $ 23,519 $ 47,381
============== ============== ==============
Depreciation and amortization:
Electronic Commerce ..................................... $ 202,313 $ 385,729 $ 350,277
Software ................................................ 10,665 32,887 62,485
Investment Services ..................................... 8,126 10,706 9,421
Corporate ............................................... 5,534 6,243 5,312
-------------- -------------- --------------
Total ............................................ $ 226,638 $ 435,565 $ 427,495
============== ============== ==============
For the years ended June 30, 2003, 2002, and 2001, one customer accounted for
$94,265,000, $60,022,000 and $44,500,000 of consolidated revenues, respectively.
Revenues for that customer were generated through the Electronic Commerce,
Software and Investment Services segments for the years ended June 30, 2003 and
2002 and through the Electronic Commerce and Software segments for the year
ended June 30, 2001. Foreign sales based on the location of the customer, for
the years ended June 30, 2003, 2002 and 2001 were $9,491,000, $10,772,000 and
$7,636,000, respectively.
- 86 -
Long-lived assets by geographic area are as follows (in thousands):
YEAR ENDED JUNE 30,
----------------------------
2003 2002
------------ ------------
United States ................ $ 1,037,213 $ 1,238,961
Other ........................ 4,616 3,151
------------ ------------
Total ................ $ 1,041,829 $ 1,242,112
============ ============
NOTE 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, 2003 and 2002,
the Company and its subsidiaries own approximately 89% of CheckFree Management
Corporation. As of June 30, 2003 and 2002, the assets of CheckFree Management
Corporation represent less than 2% of the total consolidated assets of the
Company and, therefore, separate financial statements and financial disclosures
are not deemed significant.
NOTE 22. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following quarterly financial information for the years ended June 30, 2003
and 2002 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 2003
Total revenue ............................... $ 130,235 $ 135,505 $ 141,301 $ 144,605
Loss from operations ........................ (21,151) (17,437) (11,695) (23,237)
Net loss .................................... (16,176) (11,207) (7,830) (16,971)
Basic earnings per share:
Net loss per common share .............. $ (0.18) $ (0.13) $ (0.09) $ (0.19)
============ ============ ============ ============
Equivalent number of shares ............ 88,378 88,694 88,949 89,215
============ ============ ============ ============
Diluted earnings per share:
Net loss per common share .............. $ (0.18) $ (0.13) $ (0.09) $ (0.19)
============ ============ ============ ============
Equivalent number of shares ............ 88,378 88,694 88,949 89,215
============ ============ ============ ============
QUARTER ENDED
---------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- ------------ ------------
FISCAL 2002
Total revenue ............................... $ 116,675 $ 121,338 $ 124,586 $ 127,878
Loss from operations ........................ (112,045) (258,251) (95,337) (69,886)
Net loss .................................... (88,947) (215,133) (77,459) (59,411)
Basic earnings per share:
Net loss per common share .............. $ (1.02) $ (2.47) $ (0.89) $ (0.67)
============ ============ ============ ============
Equivalent number of shares ............ 87,090 87,217 87,446 88,063
============ ============ ============ ============
Diluted earnings per share:
Net loss per common share .............. $ (1.02) $ (2.47) $ (0.89) $ (0.67)
============ ============ ============ ============
Equivalent number of shares ............ 87,090 87,217 87,446 88,063
============ ============ ============ ============
The sum of the quarterly loss per share does not equal the year-to-date loss per
share for the respective fiscal periods, due to changes in the number of shares
outstanding at each quarter-end.
- 87 -
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001
BALANCE AS
OF CHARGES TO BALANCE AS
BEGINNING COSTS AND OF END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ------------ ------------ ------------
(In thousands)
Allowance for Doubtful Accounts
2003 ............................. $ 2,000 $ (232) $ 98 $ 1,670
2002 ............................. $ 2,963 $ 689 $ 1,652 $ 2,000
2001 ............................. $ 4,003 $ 50 $ 1,090 $ 2,963
Reserve for Returns and Chargebacks
2003 ............................. $ 1,706 $ 1,235 $ 1,679 $ 1,262
2002 ............................. $ 4,663 $ (514) $ 2,443 $ 1,706
2001 ............................. $ 2,405 $ 3,847 $ 1,589 $ 4,663
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, our management
carried out an evaluation, with the participation of our principal executive
officer and principal financial officer, of the effectiveness of our disclosure
controls and procedures pursuant to Rule 13a-15 promulgated under the Securities
Exchange Act of 1934, as amended. Based upon this evaluation, our principal
executive officer and our principal financial officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
As of the end of the period covered by this report, there has been no
change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934,
as amended) during our fiscal quarter ended June 30, 2003, that has materially
affected or is reasonably likely to materially affect, our internal control over
financial reporting.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included under the captions
"ELECTION OF DIRECTORS," "EXECUTIVE OFFICERS" and "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE" in our Proxy Statement relating to our 2003
Annual Meeting of Stockholders to be held on October 29, 2003, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the captions
"INFORMATION CONCERNING THE BOARD OF DIRECTORS" and "EXECUTIVE COMPENSATION" in
our Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required by this item is included under the captions
"OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS," "OWNERSHIP OF
COMMON STOCK BY PRINCIPAL STOCKHOLDERS" and "EQUITY COMPENSATION PLAN
INFORMATION" in our Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the captions
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION" in our Proxy Statement and is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this item is included under the caption
"FEES OF THE INDEPENDENT PUBLIC ACCOUNTANTS FOR FISCAL 2003" in our Proxy
Statement and is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) The following financial statements are included
herein in Item 8:
Independent Auditors' Report.
Consolidated Balance Sheets as of June 30, 2003 and 2002.
Consolidated Statements of Operations for each of the three
years in the period ended June 30, 2003.
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended June 30, 2003.
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 2003.
Notes to the Consolidated Financial Statements.
(2) The following financial statement schedule is
included in this Annual Report on Form 10-K and should be read
in conjunction with the Consolidated Financial Statements
contained in Item 8:
Schedule II -- Valuation and Qualifying Accounts.
Schedules not listed above are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the financial statements or the notes thereto.
(3) Exhibits:
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2(a) Agreement and Plan Merger and Contribution Agreement, dated as of February 15,
2000, among Microsoft Corporation, First Data Corporation, Citibank, N.A., MS
II, LLC, First Data, L.L.C., H & B Finance, Inc., First Data International
Partner, Inc., MSFDC International, Inc., Citicorp Electronic Commerce, Inc.,
CheckFree Holdings Corporation, Chopper Merger Corporation, and CheckFree
Corporation. (Reference is made to Exhibit 2(b) of the Registration Statement
on Form S-4 (Registration No. 333-32644) filed with the Securities and
Exchange Commission on March 16, 2000, and incorporated herein by reference.)
2(b) Amended and Restated Agreement and Plan of Merger, dated as of July 7, 2000,
among CheckFree Holdings Corporation, Microsoft Corporation, First Data
Corporation, Citibank, N.A., H&B Finance, Inc., FDC International Partner,
Inc., FDR Subsidiary Corp., MS FDC International, Inc., Citi TransPoint
Holdings Inc., TransPoint Acquisition Corporation, Tank Acquisition
Corporation, Chopper Merger Corporation, CheckFree Corporation, Microsoft II,
LLC and First Data, L.L.C. (Reference is made to Appendix A of the
Registration Statement on Form S-4 (Registration No. 333-41098) filed with the
Securities and Exchange Commission on July 10, 2000, and incorporated herein
by reference.)
- 91 -
2(c) Amended and Restated Strategic Alliance Master Agreement, dated as of April
26, 2000, among CheckFree Holdings Corporation, CheckFree Services Corporation
and Bank of America, N.A. (Reference is made to Appendix A to the Company's
Proxy Statement for the Special Meeting of Stockholders held on September 28,
2000, and incorporated herein by reference.)
3(a) Amended and Restated Certificate of Incorporation of the Company. (Reference
is made to Exhibit 4(e) to the Registration Statement on Form S-8
(Registration No. 333-50322), filed with the Securities and Exchange
Commission on November 20, 2000, and incorporated herein by reference.)
3(b) Certificate of Ownership and Merger Merging CheckFree Corporation into
CheckFree Holdings Corporation. (Reference is made to Exhibit 3(b) to the
Company's Form 10-K for the year ended June 30, 2000, filed with the
Securities and Exchange Commission on September 26, 2000, and incorporated
herein by reference.)
3(c) By-Laws of the Company. (Reference is made to Exhibit 3(b) to the Current
Report on Form 8-K, dated December 22, 1997, filed with the Securities and
Exchange Commission on December 30, 1997, and incorporated herein by
reference.)
3(d) Form of Specimen Stock Certificate. (Reference is made to Exhibit 3(d) to the
Company's Form 10-K for the year ended June 30, 2000, filed with the
Securities and Exchange Commission on September 26, 2000, and incorporated
herein by reference.)
4(a) Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND ELEVENTH of the Company's
Amended and Restated Certificate of Incorporation (contained in the Company's
Amended and Restated Certificate of Incorporation filed as Exhibit 3(a)
hereto) and Articles II, III, IV, VI and VIII of the Company's By-Laws
(contained in the Company's By-Laws filed as Exhibit 3(b) hereto.)
4(b) Rights Agreement, dated as of December 16, 1997, by and between the Company
and The Fifth Third Bank, as Rights Agent. (Reference is made to Exhibit 4.1
to Registration Statement on Form 8-A, filed with the Securities and Exchange
Commission on December 19, 1997, and incorporated herein by reference.)
4(c) Amendment No. 1 to the Rights Agreement, dated as of February 5, 1999, between
CheckFree Corporation and the Fifth Third Bank, as Rights Agent. (Reference is
made to Exhibit 4.2 to Amendment No. 1 to Registration Statement on Form 8-A
(File No. 0-26802), filed with the Securities and Exchange Commission on May
12, 1999, and incorporated herein by reference.)
4(d) Amendment No. 2 to the Rights Agreement, dated as of August 3, 2000, between
CheckFree Corporation and the Fifth Third Bank, as Rights Agent. (Reference is
made to Exhibit 4.3 to Amendment No. 2 to Registration Statement on Form 8-A
(File No. 0-26802), filed with the Securities and Exchange Commission on
October 3, 2000, and incorporated herein by reference.)
4(e) Amendment No. 3 to the Rights Agreement, dated as of January 25, 2002, between
CheckFree Corporation and Wells Fargo Bank Minnesota, National Association, as
Rights Agent. (Reference is made to Exhibit 4.4 to Amendment No. 3 to
Registration Statement on Form 8-A (File No. 0-26802), filed with the
Securities and Exchange Commission on January 28, 2002, and incorporated
herein by reference.)
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10(a) CheckFree Corporation Second Amended and Restated Associate Stock Purchase
Plan. (Reference is made to Exhibit 4(a) to the Registration Statement on Form
S-8 (Registration No. 333-101284), filed with the Securities and Exchange
Commission on November 18, 2002, and incorporated herein by reference.)
10(b) CheckFree Corporation 401(k) Plan. (Reference is made to Exhibit 10.1 to the
Registration Statement on Form S-8 (Registration No. 333-91490), filed with
the Securities and Exchange Commission on June 28, 2002, and incorporated
herein by reference.)
10(c) CheckFree Corporation 2002 Stock Incentive Plan. (Reference is made to
Appendix B to the Company's Definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders held on November 6, 2002, filed with the Securities
and Exchange Commission on October 3, 2002, and incorporate herein by
reference.)
10(d) CheckFree Corporation Third Amended and Restated 1995 Stock Option Plan.
(Reference is made to Exhibit 4(d) to Registration Statement on Form S-8, as
amended (Registration No. 333-50322), filed with the Securities and Exchange
Commission on November 20, 2000, and incorporated herein by reference.)
10(e) CheckFree Corporation Amended and Restated 1993 Stock Option Plan. (Reference
is made to Exhibit 4(a) to Post-Effective Amendment No. 1 to Form S-8, as
amended (Registration No. 33-98442), filed with the Securities and Exchange
Commission on January 9, 1998, and incorporated herein by reference.)
10(f) CheckFree Corporation Amended and Restated 1983 Non-Statutory Stock Option
Plan. (Reference is made to Exhibit 4(a) to Post-Effective Amendment No. 1 to
Form S-8, as amended (Registration No. 33-98440), filed with the Securities
and Exchange Commission on January 9, 1998, and incorporated herein by
reference.)
10(g) CheckFree Corporation Second Amended and Restated 1983 Incentive Stock Option
Plan. (Reference is made to Exhibit 4(a) to Post-Effective Amendment No. 1 to
Form S-8, as amended (Registration No. 33-98444), filed with the Securities
and Exchange Commission on January 9, 1998, and incorporated herein by
reference.)
10(h) Form of Indemnification Agreement. (Reference is made to Exhibit 10(a) to
Registration Statement on Form S-1, as amended (Registration No. 33-95738),
filed with the Securities and Exchange Commission on August 14, 1995, and
incorporated herein by reference.)
10(i) * Schedule identifying material details of Indemnification Agreements
substantially identical to Exhibit 10(h).
10(j) * Confidentiality and Noncompetition Agreement, dated May 7, 1999, between
Peter J. Kight and the Company.
10(k) * Noncompetition Agreement, dated February 11, 2003, between Mark A. Johnson
and the Company.
10(l) * Confidentiality and Nonsolicitation Agreement, dated February 11, 2003,
between Mark A. Johnson and the Company.
10(m) Executive Employment Agreement between the Company and Peter J. Kight.
(Reference is made to Exhibit 10(z) to the Company's Form 10-K for the year
ended June 30, 1997, filed with the Securities and Exchange Commission on
September 26, 1997, and incorporated herein by reference.)
- 93 -
10(n) Loan and Security Agreement, dated as of May 13, 1997, among KeyBank National
Association, the Company, CheckFree Software Solutions, Inc., CheckFree
Services Corporation, Security APL, Inc., Servantis Systems, Inc., and
Servantis Services, Inc. (Reference is made to Exhibit 10(ee) to the Company's
Form 10-K for the year ended June 30, 1997, filed with the Securities and
Exchange Commission on September 26, 1997, and incorporated herein by
reference.)
10(o) First Amendment to Loan and Security Agreement by and between KeyBank National
Association, as Lender, and CheckFree Corporation, as Borrower, dated as of
December 9, 1998. (Reference is made to Exhibit 10.1 to the Company's Form
10-Q for the quarter ended March 31, 1999, filed with the Securities and
Exchange Commission on May 17, 1999, and incorporated herein by reference.)
10(p) CheckFree Corporation Incentive Compensation Plan. (Reference is made to
Exhibit 10(ff) to the Company's Form 10-K for the year ended June 30, 1997,
filed with the Securities and Exchange Commission on September 26, 1997, and
incorporated herein by reference.)
10(q) Form of Stockholder Agreement entered into between the Company and each of
Microsoft Corporation and First Data Corporation. (Reference is made to
Exhibit 10(ff) of the Company's Registration Statement on Form S-4
(Registration No. 333-41098) filed with the Securities and Exchange Commission
on July 10, 2000 and incorporated herein by reference.)**
10(r) Form of Registration Rights Agreement entered into between the Company and
each of Microsoft Corporation and First Data Corporation. (Reference is made
to Exhibit 10(gg) of the Company's Registration Statement on Form S-4
(Registration No. 333-41098) filed with the Securities and Exchange Commission
on July 10, 2000 and incorporated herein by reference.)**
10(s) Form of Registration Rights Agreement entered into between the Company and
Citibank, N.A. (Reference is made to Exhibit 10(hh) of the Company's
Registration Statement on Form S-4 (Registration No. 333-41098) filed with the
Securities and Exchange Commission on July 10, 2000 and incorporated herein by
reference.)**
10(t) Form of Commercial Alliance Agreement entered into between the Company and
Microsoft Corporation. (Reference is made to Exhibit 10(ff) of the Company's
Amendment No. 1 to the Registration Statement on Form S-4 (Registration No.
333-32644) filed with the Securities and Exchange Commission on April 18, 2000
and incorporated herein by reference.)**
10(u) Form of Marketing Agreement entered into between the Company and First Data
Corporation. (Reference is made to Exhibit 10(gg) of the Company's Amendment
No. 1 to the Registration Statement on Form S-4 (Registration No. 333-32644)
filed with the Securities and Exchange Commission on April 18, 2000 and
incorporated herein by reference.)**
10(v) * Master Agreement, dated August 5, 2003, among Bastogne, Inc., CheckFree
Services Corporation and SunTrust Bank.***
21 Subsidiaries of the Company. (Reference is made to Exhibit 21 to Annual Report
on Form 10-K for the fiscal year ended June 30, 2003, filed with the
Securities and Exchange Commission on September 26, 2002, and incorporated
herein by reference.)
- 94 -
23 * Consent of Deloitte & Touche LLP.
24 * Power of Attorney.
31(a) * Certification of Chief Executive Officer under Section 302 of Sarbanes-Oxley
Act of 2002.
31(b) * Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley
Act of 2002.
32(a) * Certification of Chief Executive Officer under Section 906 of the Sarbanes
Oxley Act of 2002.
32(b) * Certification of Chief Financial Officer under Section 906 of the Sarbanes
Oxley Act of 2002.
- ---------------------
* Filed with this report.
** Portions of this Exhibit have been given confidential treatment by the
Securities and Exchange Commission.
*** We have requested that the Securities and Exchange Commission give
confidential treatment to portions of this exhibit.
(b) REPORTS ON FORM 8-K.
We filed the following Current Reports on Form 8-K since March
31, 2003:
(1) Form 8-K dated June 17, 2003, pursuant to Items 5 and
7 in connection with our June 17, 2003 press release
announcing our stock option exchange offer program
for our employees.
(2) Form 8-K dated April 22, 2003, pursuant to Items 7
and 12 (furnished under Item 9) in connection with
our April 22, 2003 press release announcing our
financial results for the third quarter ended March
31, 2003.
(c) EXHIBITS.
The exhibits to this report follow the Signature Page.
(d) FINANCIAL STATEMENT SCHEDULES.
The financial statement schedule is included in Item 8 to this
Annual Report on Form 10-K.
- 95 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CHECKFREE CORPORATION
Date: September 15, 2003 By: /s/ David E. Mangum
--------------------------------------------
David E. Mangum, Executive Vice
President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on our behalf and in
the capacities indicated on the 15th day of September, 2003.
Signature Title
*Peter J. Kight Chairman of the Board and Chief
- --------------------------------------- Executive Officer
Peter J. Kight (Principal Executive Officer)
*David E. Mangum Executive Vice President and
- --------------------------------------- Chief Financial Officer
David E. Mangum (Principal Financial Officer)
*John J. Browne, Jr. Vice President, Controller, and
- --------------------------------------- Chief Accounting Officer
John J. Browne, Jr. (Principal Accounting Officer)
*William P. Boardman Director
- ---------------------------------------
William P. Boardman
*James D. Dixon Director
- ---------------------------------------
James D. Dixon
*Henry C. Duques Director
- ---------------------------------------
Henry C. Duques
*Mark A. Johnson Director
- ---------------------------------------
Mark A. Johnson
*Lewis C. Levin Director
- ---------------------------------------
Lewis C. Levin
*Eugene F. Quinn Director
- ---------------------------------------
Eugene F. Quinn
*Jeffrey M. Wilkins Director
- ---------------------------------------
Jeffrey M. Wilkins
*By: /s/ Curtis A. Loveland
-----------------------------------
Curtis A. Loveland,
Attorney-in-Fact
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