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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, 1998
Commission File Number: 0-26802
CHECKFREE HOLDINGS 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)
(770) 441-3387
(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
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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. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $404,038,440 on September 9,
1998.
There were 55,571,546 shares of the Registrant's Common Stock
outstanding on September 9, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended June 30, 1998 are incorporated by reference in Part II.
Portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting of Stockholders are incorporated by reference in Part III.
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TABLE OF CONTENTS
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Page
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PART I
Item 1. Business 3
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 25
Item 6. Selected Financial Data 25
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and Management 27
Item 13. Certain Relationships and Related Transactions 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 28
Signatures 33
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PART I
ITEM 1. BUSINESS.
GENERAL
As used in this report, "CheckFree" is generally used to indicate
CheckFree Holdings Corporation(1) prior to its acquisition of Servantis Systems
Holdings, Inc. on February 21, 1996 (the "Servantis Acquisition"), prior to its
acquisition of Security APL, Inc. on May 9, 1996 (the "Security APL
Acquisition"), and prior to its acquisition of Intuit Services Corporation on
January 27, 1997 (the "ISC Acquisition") (the Servantis Acquisition, the
Security APL Acquisition, and the ISC Acquisition are collectively referred to
as the "Acquisitions"). "Servantis" is generally used to indicate Servantis
Systems Holdings, Inc. prior to its acquisition by CheckFree, "Security APL" is
generally used to indicate Security APL, Inc. prior to its acquisition by
CheckFree, "ISC" is generally used to indicate Intuit Services Corporation prior
to its acquisition by CheckFree, and the term the "Company" is used to indicate
the combined company following the Acquisitions.
CheckFree Holdings Corporation (the "Company") is a leading provider of
electronic commerce services, institutional portfolio management services, and
financial application software for financial institutions and businesses and
their customers. The Company services approximately 2.4 million consumers, 1,000
businesses, and 850 financial institutions (including the 500 largest banks in
the United States). The Company has also signed agreements with over 350
financial institutions to provide electronic home banking services for the
customers of those financial institutions.
This report contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Business
- - -- Business Risks."
The business of the Company is pursued through three independent but
inter-related divisions: Electronic Commerce, Institutional Investment Services,
and Software. All three divisions market their services and products to
financial institutions, the investment industry, and to their customers, both
consumer and business. The Company's current business has been developed through
expansion of its core electronic commerce business and the acquisition of
companies operating businesses similar to, or complementary with, that business.
EVOLUTION OF CURRENT BUSINESS
The Company was incorporated in Ohio in 1981 and reincorporated in
Delaware in 1986. The Company has three direct and indirect wholly owned
subsidiaries: CheckFree Corporation, a Delaware corporation; CheckFree
Investment Corporation, a Delaware corporation; and RCM Systems, Inc., a
Wisconsin corporation. The Company's principal executive offices are located at
4411 East Jones Bridge Road, Norcross, Georgia 30092 and its telephone number is
(770) 441-3387. The Company's Internet address is http://www.checkfree.com.
5B CAPABILITY
Prior to the Acquisitions, the Company operated its business in one
business segment, electronic bill payment. Through the Acquisitions the Company
obtained the customer relationships, technology, skilled personnel, and other
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(1)The business was founded in 1981, and following a number of
acquisitions and divestitures, reorganized its corporate structure on December
22, 1997. CheckFree Holdings Corporation is the parent corporation of CheckFree
Corporation, the principal operating company of the business. In connection with
the restructuring, holders of Common Stock of CheckFree Corporation became
holders of an identical number of shares of Common Stock of CheckFree Holdings
Corporation. The restructuring was effected by a merger conducted pursuant to
Section 251(g) of the Delaware General Corporation Law, which provides for the
formation of a holding company structure without a vote of the stockholders of
the Company. (For more detailed information concerning the restructuring, please
refer to the Company's Form 8-K filed on December 30, 1997.)
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resources required to fulfill its strategy of diversifying its offerings in
electronic commerce to embrace each of the 5Bs: electronic bill payment, bill
presentment, banking, brokerage, and business payments ("5Bs"). These
acquisitions also helped to enable the Company to extend the application of its
expertise and relationships in electronic commerce to two related areas,
investment services and software.
THE SERVANTIS ACQUISITION
On February 21, 1996, CheckFree acquired Servantis for approximately
$165.1 million, consisting of the issuance of 5.7 million shares of the
Company's Common Stock valued at $20.00 per share and $42.5 million in cash to
repay Servantis' long-term debt. The Company accounted for the Servantis
Acquisition using the purchase method of accounting.
THE SECURITY APL ACQUISITION
On May 9, 1996, CheckFree acquired Security APL for approximately $53.3
million, consisting of the issuance of 2.8 million shares of the Company's
Common Stock valued at $18.50 per share. The Company accounted for the Security
APL Acquisition using the purchase method of accounting.
THE ISC ACQUISITION
On January 27, 1997, CheckFree acquired ISC for approximately $199.0
million, consisting of the issuance of 12.6 million shares of the Company's
Common Stock and $20.0 million payable in two equal cash payments to the seller,
Intuit Inc. ("Intuit"). The Company accounted for the ISC Acquisition using the
purchase method of accounting.
INTEGRATION OF ACQUISITIONS
The Acquisitions further CheckFree's strategy of providing an expanding
range of convenient, secure, and cost-effective electronic commerce services and
related products to financial institutions and businesses and their customers.
Servantis' experience and relationships developed as a provider of electronic
commerce and financial applications software and services to financial
institutions substantially enhances the Company's presence in the financial
institutions market of the electronic commerce industry. Security APL's
experience as a vendor of portfolio management and software services to
institutional investment managers and consumers permits the Company to continue
to enhance these service offerings to institutional investment managers and for
consumers through the Company's financial institution distribution channels.
ISC's base of financial institution banking customers expanded the Company's
home banking and bill payment offering, and made the Company's services more
readily available to a wider base of financial institutions and their customers.
The integration of each of the Acquisitions with the original core business has
created a single vendor of electronic commerce services and related products to
an expanded customer base of financial institutions and businesses and their
customers.
POST-ACQUISITIONS STRATEGY
The Acquisitions support CheckFree's attainment of its overall goal of
providing an expanding range of convenient, secure, and cost-effective
electronic commerce services and related products to financial institutions,
businesses and their customers. The Company has designed its services and
products to take advantage of opportunities it perceives in light of current
trends and the Company's fundamental strategy. The components of the Company's
strategy are to:
Offer Services to Consumers and Businesses Through Financial
Institutions. The Company believes that the public will most readily adopt
electronic methods for financial transactions when they are offered with the
imprimatur of a trusted financial institution. The Company believes that this
strategy enhances user confidence in the underlying technology and encourages
financial institutions to promote use of the Company's services.
Exploit Multiple Distribution Channels. In addition to distributing
directly through financial institutions, the Company maintains alliances with
market-leading companies to achieve deeper market penetration. To better reach
smaller financial institutions, the Company has entered into distribution
agreements with certain independent firms
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which the Company believes can more efficiently address the needs of this
segment of the industry. Additionally, by making its services available to users
of personal financial management software, such as Quicken, and of business
management software, such as QuickBooks, the Company expands public access to,
and awareness of, its services. Similarly, the Company offers web-based products
to both bank and non-bank financial institutions for their own and for their
customers' use. The Company also sponsors the Electronic Banking Association, a
non-profit organization, which promotes electronic banking and related services.
Leverage Customers and Alliances Across Markets. The Company's efforts
in each target market are designed to increase its successor opportunities in
its other markets. The products and customer bases of the acquired companies
substantially increase the Company's offerings to financial institutions, which
the Company expects will enhance its opportunity to expand its electronic
commerce services through them to businesses and ultimately to the end users.
Expand Customer Care and Technical Support. The Company supports and
services its customers through numerous activities, including annual user group
meetings and customer satisfaction surveys, technical and non-technical support
(through help desk, e-mail, facsimile, and bulletin board), service
implementation, and training. The Company is enhancing its ability to provide
first and second-tier support of its services through advanced communications
technologies which enable the Company to efficiently respond, either directly or
as part of financial institutions' customer support systems, to end-user
inquiries on the World Wide Web. The Company believes that providing superior
quality and accessible and reliable customer care is essential to establishing
and maintaining successful relationships with its customers.
ELECTRONIC COMMERCE
INTRODUCTION
Over the last decade, electronic execution of financial transactions
has increased substantially. Increased use of credit cards, automated teller
machines ("ATMs"), electronic funds transfer and direct payroll deposit have
automated, simplified and reduced the costs of financial transactions for
financial institutions and businesses and their customers. The Company believes
that increasing public awareness and acceptance of electronically-effected
transactions creates an expanding market for its services. Electronic commerce
offers the potential to complete financial transactions more quickly, with
greater accuracy, and at a lower cost than traditional paper-based methods.
OPPORTUNITIES
The Company considers activities traditionally conducted on paper or in
person as offering it opportunities to sell its services. The Company believes
that the greater the volume of such activities, and the higher chance for error,
or the imposition of inconvenience, the greater will be the Company's
opportunity.
Continued Use of Paper Checks. A substantial portion of financial
transactions in the U.S. are still executed by paper check. Checks impose
significant costs on financial institutions and businesses and their customers.
Time costs include the writing, mailing, recording, and processing of checks.
Financial costs include postage, processing costs and costs associated with the
"float" created between the time checks are written and cleared.
Paper Billing. Many financial transactions are initiated by the
rendering of a paper bill or invoice which is delivered to the payer by U.S.
mail. It is estimated that over 15 billion paper bills are produced each year,
and that the cost of submitting a printed bill, including printing, postage, and
advertisements, ranges between $0.65 and $1.25. Additional costs inherent in the
system include delays, opportunity for losses in the mail, misplaced bills,
printing errors, and accessibility limited to a single physical mail-drop.
Moreover, merchants continue to seek better means of marketing to their
customers than can be accomplished through mailings.
Conventional Banking. Many financial transactions are currently
conducted in person at bank branches. For many bank customers, conducting
banking requires a physical visit to a branch in order to check balances,
transfer sums from one account to another, inquire on the status of an item, to
make deposits, or to obtain assistance in reconciling accounts. Banks incur
substantial expenses in providing personnel and physical plants to service these
requirements.
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Bank customers incur transportation costs and personal inconvenience and delay
by traveling to a branch location to complete these transactions.
Conventional Brokerage. Traditional investment brokerage houses render
statements of account to customers on paper conveyed to their clients through
the U.S. mail. For active account-holders, or in rapidly-changing markets, by
the time the paper statement is received and reviewed, the information may be
seriously out-of-date. Tax lot accounting, and comparison to historical balances
is often unavailable through the paper statement. There are considerable costs
involved in preparing and mailing paper statements, and in providing personnel
at the brokerage to respond to inquiries regarding the status of accounts.
Business Payments. In addition to the costs and inconvenience borne by
consumers in receiving and paying paper bills, businesses often receive multiple
invoices from the same vendor comprising periodic statements. Issues such as
discounts for prompt payment, returns, allowances, disputed charges, and other
adjustments, as well as reconciliation to the business's own records, increase
the costs of payment. It is estimated that businesses issue more than 28 billion
checks annually.
TRENDS
Notwithstanding the current predominant usage of conventional methods
of conducting financial transactions, there are a number of current trends that
are driving increasing acceptance of electronic commerce in the U.S.:
- Increase in Electronic Financial Transactions. Over the last
decade, electronic execution of financial transactions has
increased substantially. Increased use of credit cards, ATMs,
electronic funds transfer, and direct payroll deposit have
automated, simplified, and reduced the costs of financial
transactions for consumers, businesses, and financial
institutions.
- Continuing Penetration of Personal Computers and Modems into
U.S. Households.
- Rapid Growth in On-line Interactive Services, Particularly in
the Internet. A presence on the World Wide Web is
increasingly being viewed as a necessity by companies of all
sizes. At the same time, security concerns in using the
Internet to conduct financial transactions appear to have been
substantially allayed.
- Growth in Small Business Use of Personal Computers.
- Continuing Automation of Financial Institutions' Operations.
Financial institutions are facing increasing competition as a
result of banking deregulation and technological innovation.
The competition is not only from within the financial
institution industry, but also from new competitors in related
industries, such as insurance companies and mutual funds. The
Company believes that in an increasingly competitive
environment, financial institutions will seek opportunities to
automate their operations by providing electronic banking,
electronic bill payment and automated portfolio services to
their customers, and by investing in cost-saving software.
These services, the Company believes, will enable financial
institutions to reduce costs, generate fee-based income and
strengthen their customer relationships.
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- Competition Between Banks and Non-Bank Financial Institutions
for Customers. The traditional supremacy of banks as the
provider of financial services is being increasingly
challenged by others such as brokerage houses, mortgage
brokers, software companies, and web-based portals and
specialty financial sites on the World Wide Web.
THE COMPANY'S RESPONSE
The Company believes there is a significant opportunity to expand the
market for electronic commerce among financial institutions, businesses, and
their customers. Paper transactions impose significant costs that can be reduced
through electronic execution. The continuing penetration of personal computers
and modems into U.S. households, along with the rapid growth in on-line
interactive services, are providing the technical infrastructure required to
accelerate the acceptance of electronic commerce. In addition, the Company
believes the key requirements that must be addressed to increase acceptance of
electronic commerce applications include: (i) maintenance of industry-wide
quality levels for security, accuracy, reliability and convenience; (ii)
reduction in transaction processing costs; (iii) application of easy-to-use
interfaces; and (iv) development of seamless integration with the existing
financial infrastructure and existing relationships among all parties to a
financial transaction. As a result, the Company believes that the opportunity
exists to provide an integrated set of electronic services that further automate
financial transactions for financial institutions and businesses and their
customers.
PRODUCTS, SERVICES, AND COMPETITION
ELECTRONIC COMMERCE SERVICES
The Company has adopted a "5B" response to the electronic commerce
market, comprising Bill Payment, Bill Presentment, Banking, Brokerage, and
Business Payment services. The Company's electronic commerce services and
related products are targeted to financial institutions, businesses, and their
customers. To ensure the security of all the electronic commerce transactions
that the Company processes, the Company utilizes a combination of measures,
including various proprietary security technologies and existing industry
security standards such as encryption and multiple authorization and
authentication technologies. The Company is continually developing new
electronic commerce services and enhancing its existing services for each of its
target markets.
(1) Bill Payment. The Company's origins were in offering electronic
bill payment to consumers. In keeping with the Company's primary strategy of
offering electronic commerce alternatives through financial institutions, the
Company accommodates several alternative means for consumers to pay bills. The
Company designs and develops private label services for financial institutions,
which in turn offer electronic payment as one component of home banking services
available to their customers. Interfaces with personal financial management
software, such as Quicken, Managing Your Money and Microsoft Money are available
to users of most versions. Additionally, the Company provides bill payment
services to users of Intuit's financial services website, Quicken.com.
The Company also offers bill payment services in conjunction with bill
presentment through the Internet to consumers whose financial institutions are
not yet able to offer such services. The Company believes that its services
offer significant benefits to financial institutions, including lower
transaction processing costs, additional fee income, potential new customers,
and attractive additional services to offer existing customers. By providing
access to its services through widely-sold PFMs, through proprietary financial
institution software, and through the Internet, the Company intends to encourage
the greatest use of its services.
Revenues are generated through contracts that the Company signs with
individual financial institutions. Although the structure of contracts vary, the
Company typically negotiates with the institution an implementation fee, a
monthly base fee per customer account on the service provided by the Company,
plus a variable per transaction fee which decreases based on the volume of
transactions. Contracts typically have one-to-three year terms and generally
provide for minimum fees if certain transaction volumes are not met. The Company
utilizes direct sales and distribution alliances to market to financial
institutions and has the ability to customize services for each institution.
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The Company has contracts with more than 350 financial institutions
through which electronic payment services are provided to customers of the
financial institutions. Some of the financial institutions served by the Company
include: Bank of America, Bank One, Chase Manhattan, KeyCorp, NationsBank, Wells
Fargo, Charles Schwab, and Merrill Lynch.
The Company's bill payment services enable financial institution
customers and direct consumer subscribers to pay bills electronically using a
variety of devices such as personal computers and touch-tone telephones. Bills
paid by consumers using the Company's bill payment services typically include
payments such as credit card statements, monthly mortgage payments, and utility
bills, but a cornerstone of the Company's offering is that it can facilitate
payment to anyone. Consumers can use the Company to make any payments from any
checking account at any financial institution in the United States. Recurring
bills such as mortgages can be paid automatically and scheduled in advance for
an indefinite period of time, as specified by the user. As of June 30, 1998, the
Company had approximately 2.4 million consumers benefitting from its bill
payment and/or home banking services.
(2) Bill Presentment. In March 1997, the Company announced the market
release of its electronic bill presentment and payment product, CheckFree
E-Bill. Offered originally as a world-wide web based service, it permits billing
companies to deliver full-color electronic bills to their customers' personal
computers, together with detailed information and the electronic equivalent of
promotional inserts. The recipients can use the service to electronically make
payment. Pursuant to its strategy of offering services through financial
institutions, the Company is marketing the service to banks to be incorporated
into their electronic banking and bill payment services. The Company enters into
a variety of arrangements with banks and billing companies to provide such
services and, in some cases, will share revenue derived from billing companies
with banks. The Company believes that billing companies could eventually achieve
substantial savings by utilizing the Company's bill presentment service, but the
Company believes that an even stronger incentive for billers to present bills
electronically is the opportunity such a system offers for more effective
marketing to customers.
(3) Banking. The Company supports home electronic banking services for
financial institutions and their customers. Using a variety of PFMs, institution
proprietary software, and other front ends, customers can access their accounts
through personal computers, the Internet, or telephone-based voice recognition
unit (VRU) systems, to effect a wide variety of banking transactions. Among
these are balance inquiries, fund transfers, customer service, customer billing,
and marketing. The service facilitates on-line reconciliation to PC-based
account registers, matching cleared items with previously-entered transactions.
Revenues are generated through contracts that the Company signs with individual
financial institutions. The Company typically negotiates with the institution an
implementation fee, a base monthly fee per customer account on the service
provided by the Company, plus a variable per transaction fee which decreases
based on the volume of transactions. Contracts typically have three-to-five-year
terms and generally provide for minimum fees if certain transaction volumes are
not met. The Company utilizes direct sales and distribution alliances to market
to financial institutions and has the ability to customize services for each
institution.
The Company believes that banks that offer electronic banking increase
customer retention, have a superior marketing channel, and experience fewer
time-consuming customer service problems.
(4) Brokerage. The Company provides customized solutions for financial
service providers either for internal use, or to support offerings to their
customers. The Company's services provide fully integrated, on-line trading,
portfolio accounting, quotes, news services, research, and fundamental data. The
Company believes the service offers significant benefits to financial
institutions, including lower costs, additional fee income, potential new
customers, and attractive additional services to offer to existing customers.
A web-based product enables financial institutions to add to their own
web sites services which include a cost basis tax lot accounting tool that
allows financial institution customers to keep track of the investments they
own, and provides the customers with enough information to make informed
decisions about generating gains or losses from their portfolios when required.
It also provides a seamless connection to electronic brokerage via various order
entry screens. The system also allows for integration of third party information
(e.g,. research reports, financial news, fundamental data, etc.). These products
and services permit banks to offer many of the services required for them to
compete effectively with non-bank financial institutions. Although the Company
has discontinued the sale of its web-based product, it will continue to service
existing customers under contracts through December 31, 1999.
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(5) Business Payments. The Company facilitates electronic payments for
businesses through its offerings of business bill payment and banking, ACH
processing, and automatic accounts receivable processing services. As it does
for consumers, the Company enables businesses to make payments to anyone. The
business bill payment system accommodates the special requirements of businesses
which can obtain the service through their financial institution. The Company
employs a direct sales force to market the service through banks, and others.
Subject to certain non-compete obligations assumed in conjunction with the
termination of the Company's joint venture with ADP, the Company offers its
business bill payment capability directly to developers of business accounting
systems. ADP continues to utilize the Company's services to provide bill payment
capability to its customers. The Company's ACH processing offering affords
financial institutions the opportunity to outsource their ACH processing which
has traditionally been handled in-house. The Company's service provides a more
cost efficient solution to financial institutions and allows the institutions to
focus on their higher profitability core competencies. The Company provides
automatic accounts receivable collections for businesses in the on-line
interactive services, Internet access, health and fitness and various other
industries, enabling these businesses to collect monthly membership or access
fees through links to the customer's credit card or bank account. Services are
typically provided under exclusive contracts for three years with automatic
renewals. For providing collection services, businesses pay the Company
implementation fees, transaction fees and credit card discount fees.
Competition. Portions of the electronic commerce market are becoming
increasingly competitive. The Company faces significant competition in all of
its customer markets. A number of banks have developed, and others may in the
future develop, home banking services in-house. A number of relatively small
companies, such as Travelers Express (a division of Viad), compete with the
Company in electronic bill payment. In the business market, the Company competes
with ACH processors. The Federal Reserve's ACH is the national payment clearance
system through which any bank can effect debit transactions to any authorized
consumer checking account. The Company also faces competition in ACH processing
from numerous banks. Microsoft Corporation and First Data Corporation have
formed a joint venture, originally known as MSFDC, which competes aggressively
with the Company in the area of bill payment and bill presentment. In September
1998, it was announced that MSFDC had changed its name to TransPoint and had
accepted an equity investment from Citibank which will perform bill payment
processing for the venture.
In the brokerage segment, the Company competes with Shaw Data and
Advent, and the Company competes for business bill payment customers with ACI
and Deluxe Data, which provide ACH processing.
Because the electronic commerce industry is expected to grow
substantially in the coming years, the Company anticipates continued strong
competition, but it believes that the increased attention and credibility such
competition will bring to the industry may broaden the market and increase the
percentage of financial transactions which are effected by electronic means.
INVESTMENT SERVICES
Generally. The Company offers portfolio accounting and performance
measurement to investment advisors, brokerage firms, banks, and insurance
companies. Clients are able to leverage their systems and streamline their
operations. The Company designs custom solutions with clients, allowing
investment managers the kind of functionality that dramatically increases
productivity. The full-range of portfolio management system solutions include
data conversion, personnel training, trading system, graphical client reporting,
performance measurement, technical network support, interface setup, and DTC
processing on behalf of clients. The Company supports money managers who charge
a flat fee for their services (the "Wrap Industry") and is a leading supplier to
such money managers.
Competition. Competition for portfolio services includes two main
segments. The Company competes with providers of portfolio accounting software,
including Advent Software, and PORTIA (a division of Thomson Financial). The
Company also competes with service bureau providers such as Shaw Data (a
Sunguard Company) and FMC Service Bureau.
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SOFTWARE
Generally. The Company is a leading provider of electronic commerce and
financial applications software and services for businesses and financial
institutions. The Company designs, markets, licenses, and supports software
products for electronic corporate banking, financial lending, regulatory
compliance, and document imaging. In addition, the Company offers software
consulting and remote processing services.
The Company's financial application software revenues are derived
primarily from the sale of software licenses and software maintenance fees. The
Company's software is sold under perpetual licenses, and maintenance fees are
received through renewable agreements. The Company also derives revenues from
project consulting services and from remote transaction processing fees.
In April 1998, the Company announced its intention to divest itself of
many of its software businesses. By September 1998, it had sold its item
processing, wire transfer and cash management, leasing, and mortgage businesses.
The Company's planned sale of its imaging business is expected to close by
mid-October 1998, but the contemplated divestiture of its Safe Box Accounting
software business has been indefinitely postponed because received offers were
considered inadequate.
Retained software products licensed by the Company provide systems that
range from back office operations to front-end interface with the clients of the
Company's customers. Applications include reconciliation, regulatory compliance,
ACH origination and processing, and safe deposit box accounting.
The Company's software products are sold under individual brand names.
Its most significant products include:
BRAND NAME FUNCTION CUSTOMERS
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PEP+ Automated Clearing House Processing Businesses and financial institutions
RECON-PLUS Group Account Reconciliation Businesses and financial institutions
ARP/SMS Financial Account Reconciliation Financial institutions
ACH. The ACH network was developed in the 1970s to permit the
electronic transfer of funds and thus curtail the growth in the number of paper
checks in circulation. The ACH network acts as the clearing facility for routing
electronic funds transfer entries between financial institutions. All ACH
transfers are handled in a standard format established through the National
Automated Clearing House Association ("NACHA"). More than 15,000 financial
institutions participate in the ACH system. There are 31 ACHs, which
geographically coincide with the 12 Federal Reserve Banks, their branches and
processing centers. The Company's electronic funds transfer products are
inter-related and may be used by either businesses or financial institutions
depending on the services they offer their customers and employees.
The Company developed the most widely used, comprehensive ACH
processing system in the United States, the Paperless Entry Processing System
Plus ("PEP+"). PEP+ is an on-line, real-time system providing an operational
interface for originating and receiving electronic payments through the ACH. The
Company continues to support the Paperless Entry Processing System ("PEP"),
which was the predecessor to PEP+.
Reconciliation. The Company's reconciliation products provide U.S.
banks, international banks and corporate treasury operations with automated
check and non-check reconciliations in high volume, multi-location environments.
These systems are often tailored so that banks and multi-bank holding companies
may deliver reconciliation services meeting the specific needs of corporate
customers. Those reconciliation products are also designed for non-banking
corporations that perform account reconciliation in-house as well as companies
with many branch locations. Some of the services the Company's reconciliation
products provide are automated deposit verification, consolidated bank account
reconciliations and cash mobilization, immediate and accurate funds availability
data, and improved cash control.
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In 1995, the Company introduced RECON-Plus for Windows a client/server
based "horizontal" reconciliation system. RECON-Plus for Windows is most
frequently used for internal reconciliation by large businesses, financial
service firms, and utilities, including the reconciliation of debit and credit
card transactions, checks, ATM transactions, ACH transfers, and securities
transactions.
The Company's Account Reconciliation Package ("ARP"), is one of the
most widely used account reconciliation systems in the U.S. banking industry.
The ARP/Service Management System ("ARP/SMS"), developed in 1995 to replace and
augment the existing ARP package, is a fully integrated on-line and real time
system that enables banks to immediately process their customer transactions to
produce accurate, timely reconciliations while streamlining back-office
processes. ARP/SMS also groups accounts across banks within bank holding
companies and allows banks to streamline their operations by reconciling their
intra-bank transactions.
Other. The Company also offers software products and services in the
following areas: safe box accounting and compliance with certain IRS
regulations.
Licenses. The Company generally grants non-exclusive, non-transferable
perpetual licenses to use its application software at a single site. The
Company's standard license agreements contain provisions designed to prevent
disclosure and unauthorized use of its software. License fees vary according to
a number of factors, including the services to be provided by the Company.
Multiple site licenses are available for an additional fee. In its license
agreements, the Company generally warrants that its products will function in
accordance with the specifications set forth in its product documentation. A
significant portion of the license fee payable under the Company's standard
license agreement is payable upon the delivery of the product documentation and
software to the customer, with the balance of the license fee due upon
installation. The standard license fee for most products covers the installation
of the Company's software and maintenance for the first three to twelve months.
Installation, Maintenance, and Support. Maintenance includes certain
enhancements to the software. Customers who obtain maintenance generally retain
maintenance service from year to year. To complement customer support, the
Company and many of its customers frequently participate in user groups. These
groups exchange ideas and techniques for using the Company's products and
provide a forum for customers to make suggestions for product acquisition,
development, and enhancement.
Competition. The computer application software industry is highly
competitive. In the financial applications software market, the Company competes
directly or indirectly with a number of firms, including large diversified
computer software service companies and independent suppliers of software
products. Management believes there is at least one direct competitor for most
of its software products. Nonetheless, no competitor of the Company competes
with it in all software product areas.
The Company's product lines also face competition from numerous
competitors. The Company's Imaging/COLD product lines compete with the products
of several companies, including IBM, IIC, and Computron, and its RECON-Plus
product competes with Chesapeake, Driscoll and GEAC.
Management believes that the major factors affecting customer
decisions in its market, in addition to price, are product availability,
flexibility, the comprehensiveness of offered products, and the availability and
quality of product maintenance, customer support and training. The Company's
ability to compete successfully also requires that it continue to develop and
maintain software products and respond to regulatory change and technological
advances. Management believes that it currently competes favorably in the
marketplace with respect to these criteria. See "Business -- Risk Factors
(Intense Competition)."
DISTRIBUTION ALLIANCES
An element of the Company's strategy is the creation and maintenance
of distribution alliances that maximize access to potential customers for the
Company's electronic commerce services and related products. The Company
believes that these partnerships enable the Company to offer its services and
related products to a larger customer base
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than can be reached through stand-alone marketing efforts. The Company seeks
distribution alliance partners which have maximum penetration and leading
reputations for quality with the Company's target customers. To date, the
Company has entered into or is negotiating distribution alliances with several
companies, including Automatic Data Processing, Inc. ("ADP"), AT&T Corporation
("AT&T"), Alltel, EDS, Fiserv, Inc. ("Fiserv"), FiTech, Inc. ("FiTech"), Five
Paces, Inc. ("Five Paces"), and Home Financial Network. The Company also has
arrangements with Optika in connection with its imaging offerings, and with
MicroBank for RECON-Plus for Windows. On October 29, 1997, the Company entered
into a 10-year processing partnership with Integrion Financial Network, L.L.C.
("Integrion") to provide financial institutions with a fully integrated,
end-to-end, cost effective electronic billing and payment processing service
employing Integrion's Gold Message Standard for Electronic Commerce, its
Interactive Financial Services platform and the Company's processing
infrastructure. (For more detailed information concerning the Integrion
partnership, please refer to the Company's Form 8-K filed on November 12, 1997.)
RESEARCH AND DEVELOPMENT
The Company maintains 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. The Company has established the following
guidelines for pursuing the development of new services:
- Distinctive benefits to customers
- Ability to establish a leadership position in the market
served
- Sustainable technological advantages
- First to market
The Company believes that in the emerging electronic commerce market
it will be critical to rapidly develop, test and offer new services and
enhancements. To that end, the Company's goal for the time period from
conceptualization to commercial availability of new services is less than one
year. As of June 30, 1998, the research and development group consisted of
approximately 250 employees. Additionally, the Company uses independent third
party software development contractors as needed. During calendar 1995,
transition fiscal 1996, fiscal 1997, and fiscal 1998, the Company spent 13.9%,
17.9%, 18.6%, and 15.5% of revenues, respectively, on research and development.
The Company anticipates that it will continue to commit substantial resources to
research and development activities for the foreseeable future.
TECHNOLOGY
The Company's historical approach to technology has been to utilize a
combination of hardware, networks, proprietary software and databases to solve
customer needs and to meet the varying requirements of the electronic commerce
market.
Electronic Commerce. The Company's original core technology
capabilities were developed to handle settlement services, merchant database
services, and on-line inquiry services on a traditional mainframe system with
direct bi-synchronous communications to businesses. As business
telecommunication requirements increased, the Company utilized links to an X.25
Value-Added Network.
Today, the Company has implemented a logical, nationwide client-server
system. Consumer, business, and financial institution customers all act as
clients communicating across dial-up telephone lines, private leased lines, a
private X.25 network, a frame relay network, or the Internet to the Company's
computing complex. Within this complex, there is a wide variety of application
servers seamlessly connected via TCP/IP across switched Ethernet. The Company
currently is able to support virtually any communication method required in a
secure manner.
Proprietary applications have been developed for the client-server
system on a variety of platforms with each platform selected and optimized for
specific electronic commerce needs. Applications to effect settlement services,
merchant database services, financial institution database services, and
heuristic risk management services have been implemented on an IBM mainframe,
optimized for high volume batch processing. Applications to confirm payment
instructions, enhance data integrity and security, and reduce fraud have been
implemented on Digital Equipment Alpha servers, optimized for high volume,
device independent, real-time data communication across a private X.25 network.
To handle financial transactions across the Internet, applications have been
implemented on Sun Microsystems servers
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designed for premium data security and integrity. Applications to effect
electronic bill presentment have been implemented on Hewlett-Packard Unix
servers, designed for efficient real-time processing and data integrity and
applications to effect real-time connections to banks, ATM networks, and credit
card networks have been implemented on a Tandem Himalaya server. Other special
purpose application servers are deployed to handle unique electronic commerce
requirements such as electronic payments direct to merchant institutions, VRUs
to telephone customers, and electronic mail with customers and real-time
connections to ATM networks.
The Company has implemented appropriate backup and recovery procedures
to ensure against any loss of data on any platform. Archival storage is kept on
site as well as off site in fireproof facilities. To maximize availability, the
Company has redundant computer systems to ensure that financial transaction
requests can always be honored. Diesel generators provide power to the computing
facilities in the event of a power disruption.
The Company's operations are dependent on its ability to protect its
computer equipment against damage from fire, earthquake, power loss,
telecommunications failure or similar event. Although the Company has contracted
for the emergency provision of an alternate site to aid in disaster recovery,
this measure will not eliminate the significant risk to the Company's operations
from a natural disaster or system failure. Any damage or failure that causes
interruptions in the Company's operations could have a material adverse effect
on the Company's business, operating results and financial condition. The
Company's property and business interruption insurance may not be adequate to
compensate the Company for all losses that may occur. See "Business -- Business
Risks (Risk of System Failure)."
With the growth anticipated for electronic commerce, the Company's
architecture has been designed to address incremental capacity requirements as
needed. The entire infrastructure and set of product technologies allow the
Company to efficiently service and support its three customer markets. Although
the Company's principal business is to provide electronic commerce services
rather than sell or license software products, the consumer financial software
products offered by the Company to access such services could contain errors or
"bugs" that could adversely affect the performance of the service or damage a
user's data. In addition, as the Company increases its share of the electronic
commerce services market, software reliability and security demands will
increase. The Company attempts to limit its potential liability for warranty
claims through disclaimers in its software documentation and limitation of
liability provisions in its shrinkwrap license and customer agreements. There
can be no assurance that the measures taken by the Company will prove effective
in limiting the Company's exposure to warranty claims. Additionally, despite the
existence of various security precautions, the Company's computer infrastructure
may be also vulnerable to viruses or similar disruptive problems caused by its
customers or third parties gaining access to the Company's processing system.
See "Business -- Business Risks (Risk of Product Defects)."
The Company has developed proprietary databases within the
client-server system, including a financial institution file that allows
accurate editing and origination of ACH and paper transactions to financial
institutions. The Company has also developed a merchant information file
consisting of over one million companies that allows accurate editing and
initiation of payments to merchants. These databases have been constructed over
the past 15 years as a result of the Company's transaction processing
experience.
Platform Integration: The Genesis Project. The Company intends to
integrate the existing data processing sites and platforms formerly operated at
Columbus, Ohio, Aurora, Illinois, and Austin, Texas, into a central processing
site at the Company's headquarters in Norcross, Georgia, and to migrate its
customers to the new platform. The Company has designated this integration the
Genesis Project. The integration has required the acquisition of, and investment
in, extensive hardware and in operating and system software, as well as
extensive communications links and systems. The Genesis Project requires
substantial engineering and development of proprietary software. Redundancy,
anomaly monitoring, and off-site backup and recovery systems are planned as a
part of the project. Communications, in addition to the technology described
above, will be aided by the installation of a SONET network provided through
BellSouth.
Significant numbers of high-level employees have and will be hired to
facilitate the accomplishment of the project, and to manage the integrated site.
Management intends to operate the existing sites without substantial disruption
until the central site is completed and tested, and only then will a staged
migration be effected. The integrated site began accepting operations processing
in September 1998, and the cost expended during the fiscal year ending June 30,
1998 was approximately $18 million. As of September 15, 1998, the project had
met its interim deadlines and targets and management expects the project to be
completed on time and within budget. Nonetheless, because of the
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magnitude of the project, and an aggressive schedule, no assurance can be given
that the project will be completed on time or successfully. See "Business --
Business Risks (Rapid Technological Change; Risk of Delays)."
Financial Application Software. Financial application suite of
software products offers a wide range of software addressing both end user
access and back room operational systems located in the customer data centers.
Every effort is taken to insure that each system is targeted for the appropriate
platform to optimize the characteristics of available technology with the
business requirements of each application and its market. This strategy utilizes
large IBM mainframes as the platform for high volume batch oriented systems,
IBM's RS/6000 UNIX Servers and Hewlett-Packard UNIX Servers for high volume OLTP
systems, Microsoft Windows NT for medium volume OLTP systems and Windows for
client connectivity.
Investment Services. Investment Services employs advanced technology
for its portfolio management services and utilizes IBM RS/6000's to process the
portfolio management software. Services are provided primarily as a service
bureau offering with the data center residing at the Company's Chicago office.
This data center functions seven days a week, twenty-four hours a day. Clients
can obtain access across a private TCP/IP Wide Area Network (WAN) either via
dedicated circuit or via dial-up methodologies. The Chicago data center is the
communication center for more than 70 dedicated links together with four
concentration hub sites located in New Jersey, New York, Boston, and San Diego.
Each of these hub sites support the concentration of local dedicated links plus
dial-up access. In addition to the dedicated private network, clients use frame
relay services from LDDS, MFS, MCI, and AT&T to access services. These services
are also available through AT&T Frame Relay national network with local numbers
in major cities across the U.S.
The system has been exclusively UNIX since 1991 and consists of 26 IBM
RS/6000 machines running AIX. In addition, there are another 11 IBM RS/6000
machines in various client sites. The Company's investment advisory clients
receive hardcopy reporting for either internal usage or for quarterly reports.
Hardcopy, either ASCII or graphical PostScript, is produced on four Xerox
DocuPrints 90 page per minute duplexed laser printers.
SALES, MARKETING, AND DISTRIBUTION
The Company's sales, marketing, and distribution efforts are designed
to maximize access to potential customers. The Company markets and supports its
services both directly and indirectly through a direct sales and technical sales
support force of over 100 employees and, to achieve deeper market penetration,
through select distribution alliances with companies who are involved in the
Company's target customer markets. In order to foster a better understanding of
the needs of its larger bank customers, and to help the Company respond to
identified needs, the Company employs a number of account managers assigned to
specific banks. The Company solicits billers for its electronic bill presentment
services through a regionally-assigned sales force.
In the electronic commerce segment, the Company offers its services
and related products to the nations largest financial institutions directly
through its sales force, and markets to smaller institutions through its
strategic alliances with companies such as EDS, Fiserv, FiTech, Alltel, and Gold
Leaf. The Company offers its services and related products to the business
market directly through its sales force, through an arrangement with ADP, and
through the integration of the Company's services and related products into
major commercial accounting software programs. The Company currently offers
substantially all of its services and related products only to the domestic
marketplace.
Additionally, the Company's distribution of its home banking and
electronic consumer and business bill payment services is widened though
inclusion or access through front ends, such as Quicken, QuickBooks, Managing
Your Money, and Microsoft Money.
The Company markets its financial application software products
through its direct sales force and indirect sales through Alltel banking
services. Salespersons have specific product responsibility and receive support
from technical personnel as needed. The Company generates new customers through
direct solicitations, user groups, responses to advertisements, direct mail
campaigns and strategic alliances. The Company also participates in trade shows
and sponsors 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.
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The Company markets its investment services through its direct sales
force. The Company generates new customers through direct solicitation, user
groups, and responses to advertisements. The Company also participates in trade
shows and sponsors industry seminars for distribution alliances.
CUSTOMER CARE AND TECHNICAL SUPPORT
The provision of high quality customer care, technical support and
operations is an integral component of the Company's strategy in each of its
customer markets. To meet the needs of the Company's customers most efficiently,
the customer care staff is organized into vertical teams that support each
customer market. However, these teams share common resources, training and
orientation to ensure cost efficiency and consistency of quality standards and
measures. From an accessibility standpoint, all customer care teams provide
service by phone, e-mail, and facsimile. The Company has provided, through
advanced communications technology, a virtual call center enabling incoming
calls to be transparently routed to various physical support sites as volume
demands dictate. An important driver of profit margins for the Company is the
percentage of transactions completed through electronic means. Experience has
shown that the demand on customer care resources reduces substantially as the
percentage of electronic remittances grows. The Company has long been a leader
in electronic remittance, and its merchant systems group continually establishes
and maintains electronic links directly to the internal systems of payees.
The level and types of services provided vary by customer market. The
customer care group, consisting of more than 475 employees, supports payment
inquiry, customer service and technical support and interfaces with the merchant
systems group to improve posting efficiencies. Representatives in the business
customer care group are individually assigned to business customers in order to
provide high level customer service and technical support. The retail services
customer care group provides various levels of support that depend upon the
individual institution's requirements. This includes providing direct customer
care on a private label basis as well as research and support.
To maintain its customer care standards, the Company employs extensive
internal monitoring systems and conducts ongoing customer surveys. The feedback
from these sources is used to identify areas of strength and opportunities for
improvement in customer care and to aid in adjusting resources to a level
commensurate with efficient response.
GOVERNMENT REGULATION
Management believes that the Company is 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 Company, however, is periodically
audited by the Office of the Comptroller of the Currency since it is a supplier
of products and services to financial institutions. There can be no assurance
that a federal or state agency will not attempt to regulate providers of
electronic commerce services such as the Company which could impede the
Company's ability to do business in the regulator's jurisdiction. A number of
states have legislation regulating or licensing check sellers or money
transmitters, and the Company has registered under such legislation in specific
instances. Management does not believe that any state or federal legislation of
this type materially affects the Company. In addition, through its processing
agreements, the Company agrees to comply with the data, recordkeeping,
processing, and other requirements of applicable federal and state laws and
regulations, Federal Reserve Bank operating letters, and the National Automated
Clearing House Association Operating Rules imposed on the Company's processing
banks. The Company may be subject to audit or examination under any of these
requirements. Violations by the Company of these requirements could limit or
further restrict the Company's access to the payment clearance systems or the
Company's ability to obtain access to such systems from banks. Further, the
Federal Reserve rules provide that the Company can only access the Federal
Reserve's ACH through a bank. If the Federal Reserve rules were to change to
further restrict access to the ACH or limit the Company's ability to provide ACH
transaction processing services, the Company's business could be materially
adversely affected. See "Business -- Business Risks" and "-- Payment Clearance
Systems."
In conducting various aspects of its business, the Company is subject
to laws and regulations relating to commercial transactions generally, such as
the Uniform Commercial Code, and is 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
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consumers engaging in electronic transfers, and sets forth basic rights,
liabilities, and responsibilities of consumers who use electronic money transfer
services and of financial institutions that offer these services. For the
Company, Regulation E sets forth disclosure and investigative procedures. For
consumers, Regulation E establishes procedures and time periods for reporting
unauthorized use of electronic money transfer services and limitations on the
consumer's liability if the notification procedures are followed within
prescribed periods. Such limitations on the consumer's liability may result in
liability to the Company.
Given the expansion of the electronic commerce market, it is possible
that the Federal Reserve might revise Regulation E or adopt new rules for
electronic funds transfer affecting users other than consumers. Because of
growth in the electronic commerce market, Congress has held hearings on whether
to regulate providers of services and transactions in the electronic commerce
market, and it is possible that Congress or individual states could enact laws
regulating the electronic commerce market. If enacted, such laws, rules, and
regulations could be imposed on the Company's business and industry and could
have a material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Business Risks (Government Regulation)."
PAYMENT CLEARANCE SYSTEMS
Payment Systems. Across the Company's various electronic commerce
service offerings, the Company utilizes the Federal Reserve's ACH for electronic
funds transfers, and the conventional paper check clearing systems for
settlement of payments by check or draft. Like other users of these payment
clearance systems, the Company accesses these systems through contractual
arrangements with processing banks. For access to conventional paper check
clearing systems, the Company does not need a special contractual relationship,
except for its contractual relationships with its processing bank and its
customers. Such users are subject to applicable federal and state laws and
regulations, Federal Reserve Bank operating letters, and the National Automated
Clearing House Association Operating Rules. There are certain risks typically
faced by companies utilizing each of these payment clearance systems, and the
Company has its own set of operating procedures and proprietary risk management
systems and practices to mitigate credit-related risks. See "Business --
Business Risks (Risk of Loss from Returned Transactions, Merchant Fraud or
Erroneous Transmissions)," " -- Business Risks (ACH Access)," and " -- Business
Risks (Government Regulation)."
ACH. The ACH is used by banks, corporations and governmental entities
for electronic settlement of transactions, direct deposits of payroll and
government benefits, and payment of bills such as mortgages, utility payments,
and loans. The Company uses the ACH to execute certain of its customers' payment
instructions. Like other users of the ACH, the Company bears credit risk
resulting from returned transactions caused by insufficient funds, stop payment
orders, closed accounts, frozen accounts, unauthorized use, disputes, theft or
fraud.
Paper Drafts. The Company uses conventional check clearance methods
for paper drafts to execute certain of its customers' payment instructions using
its bank and its customers' banks. The Company bears no credit risk with paper
drafts written on a customer's checking account returned for insufficient funds,
stop payment orders, closed accounts or frozen accounts. Nonetheless, the
Company may bear other risks for theft or fraud associated with paper drafts due
to unauthorized use of the Company's services. When a customer instructs the
Company to pay a bill, the Company has the ability to process the payment either
by electronic funds transfer or by paper draft, drawn on the customer's checking
account, on which the customer's pre-authorized signature is laser imprinted.
The Company manages the risk it assumes by adjusting the mix of electronic and
paper draft transactions in individual cases and overall. Regardless whether the
Company uses paper drafts or electronic funds transfers, the Company retains all
risks associated with transmission errors when it is unable to have erroneously
transmitted funds returned by an unintended recipient.
Other Clearance Systems. While the Company presently primarily
utilizes the two principal payment clearance systems, the Company intends to use
other clearance systems such as ATM networks to provide balance inquiry and fund
transfers functions, and such other clearance systems that may develop in the
future.
Risk Mitigation. The Company's patented bill payment processing system
determines the preferred method of payment to balance processing costs,
operational efficiencies, and risk of loss. The Company manages its risks
associated with its use of the various payment clearance systems through its
risk management systems, internal controls, and system security. The Company
also maintains a reserve for such risks, which reserve was $1.9 million as of
June
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30, 1998, and the Company has not incurred losses in excess of 0.76% of its
revenues in any of the past five years. As further protection against losses due
to transmission errors, the Company maintains errors and omissions insurance.
See "Business -- Risk Factors (Risk of Loss from Returned Transactions, Merchant
Fraud or Erroneous Transactions)."
PROPRIETARY RIGHTS
The Company owns the following federally registered trademarks and
service marks: CHECKFREE(R), CHECKFREE and Design(R), CHECKFREE (Stylized
Letters)(R), CHECKFREE EASY(R), CHECKFREE EXTRA(R), CHECKFREE MANAGER(R),
CHECKFREE WALLET(R), CHECKFREE-BILL and design(R), CLUB HOOCH(R), DECISION
MANAGER(R), DISC and Design(R), DISC CHECKBOOK PLUS(R), DISC WORLD$NET(R),
ECP(R), MOBILEPAY(R), PAWWS(R), PAWTRACKS(R), PEP+(R), PEP PAPERLESS ENTRY
PROCESSING(R), PTT(R), SERVANTIS WORLD$NET(R), and THE WAY MONEY MOVES and
Design(R). Additionally, the Company has applied to federally register the
following service marks: CHARITY NET(SM), CHECKFREE CONNECT(SM), CHECKFREE
E-BILL(SM), CHECKFREE ELECTRIC MONEY(SM), CHECKFREE FREES YOU FROM CHECKS(SM),
CHECKFREE RECON SELECT(SM), CHECKFREE YES/PC(SM), DEFAULT NAVIGATOR(SM),
ECX(SM), and RCM 2001...THE NEXT GENERATION(SM). The Company is awaiting further
information to file applications for the following marks: CHECKFREE APECS,
CHECKFREE A.R.M., CHECKFREE ARP, CHECKFREE ARP/SMS, CHECKFREE DIRECTCOLLECT,
CHECKFREE IRS, CHECKFREE IRS/SRS, CHECKFREE LCR, CHECKFREE RRS, CHECKFREE RECON,
CHECKFREE RECON-PLUS, CHECKFREE RECON TRADE, CHECKFREE RPS, CHECKFREE WEB RECON,
ECENTER, JOIN THE CLUB, and REVOLUTIONIZING THE WAY MONEY WORKS.
The Company regards its financial transaction services and related
products such as its software as proprietary and relies 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 its services and related products. Although the Company believes its
consumer financial software to be proprietary, it does not depend on its
software to compete, but rather on its services to which the software provides
access.
The Company also copyrights certain of its programs and software
documentation and trademarks certain product names. Management believes that
these actions provide appropriate legal protection for the Company's
intellectual property rights in its software products. Furthermore, management
believes that the competitive position for some of the Company's products
depends primarily on the technical competence and creative ability of its
personnel and that its business is not materially dependent on copyright
protection or trademarks. See "Business -- Business Risks (Limited Protection of
Proprietary Technology; Risk of Third Party Infringement Claims)."
The Company's United States Letters Patent No. 5,383,113, issued on
January 17, 1995, relates to its system and method for electronically providing
services including payment of bills and financial analysis. Incorporating the
system described in the patent, the Company can pay any bill from any checking
account at any financial institution in the United States on the consumer's
behalf by selecting a preferred means of payment from various options described
above. See "Business -- Payment Clearance Systems." The Company's patent expires
on January 17, 2012. See "Business -- Competition," "-- Business Risks (Intense
Competition)," and "-- Business Risks (Limited Protection of Proprietary
Technology; Risk of Third Party Infringement Claims)."
Existing intellectual property laws afford only limited protection,
and it may be possible for unauthorized third parties to copy the Company's
services and related products or to reverse engineer or obtain and use
information that the Company regards as proprietary. There can be no assurance
that the Company's competitors will not independently develop services and
related products that are substantially equivalent or superior to those of the
Company. As the technology used by the Company evolves, however, its dependence
upon the patented technology continues to decrease.
EMPLOYEES
As of June 30, 1998, the Company employed 1,659 full-time employees,
including 530 in systems and development (including software development), 475
in customer care, and 145 in administration, financial control, corporate
services, and human resources. The Company is not a party to any collective
bargaining agreement and is not aware of any efforts to unionize its employees.
The Company believes its relations with its employees are
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good. The Company believes its future success and growth will depend in large
measure upon its ability to attract and retain qualified technical, management,
marketing, business development, and sales personnel.
BUSINESS RISKS
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Many
of the following important factors discussed below have been discussed in the
Company's 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, the Company's actual results and could cause the
Company's actual consolidated results of operations for the fiscal year ended
June 30, 1998, and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Emerging Electronic Commerce Market; Security and Privacy Concerns.
The electronic commerce market is a relatively new and growing service industry.
If the electronic commerce market fails to grow or grows more slowly than
anticipated, or if the Company, despite an investment of significant resources,
is unable to adapt to meet changing customer requirements or technological
changes in this emerging market or if the Company's services and related
products do not maintain a proportionate degree of acceptance in this growing
market, the Company's business, operating results, and financial condition could
be materially adversely affected. Additionally, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
electronic commerce market in general and the Company's customer base and
revenues in particular. Similar to the emergence of the credit card and ATM
industries, the Company and other organizations serving the electronic commerce
market must educate users that electronic transactions use encryption technology
and other electronic security measures that make electronic transactions more
secure than paper-based transactions. While the Company believes that it is
utilizing proven applications designed for premium data security and integrity
to process electronic transactions, there can be no assurance that the Company's
use of such applications will be sufficient to address the changing market
conditions or the security and privacy concerns of existing and potential
customers. Adverse publicity raising concerns about the safety or privacy of
electronic transactions, or widely reported breaches of the Company's or another
providers security have the potential to undermine consumer confidence in the
technology and thereby have a materially adverse effect on the Company's
business. See "Business -- General" and "-- Services and Related Products."
Additionally, the Company's growth and acceptance in the electronic
commerce market is dependent on its continued growth in its target markets. See
"Business -- Services and Related Products." Although demand for the Company's
services and related products continues to grow, there can be no assurance that
the Company will be successful in each of its target markets. Accordingly, the
Company's inability to grow in any one of these markets could have a material
adverse effect on the Company's business, operating results, and financial
condition.
Because the Company's strategy is focused on relationships with
financial institutions, mergers, acquisitions, and personnel changes within key
financial institutions have the potential to adversely affect the Company's
business. Moreover, an important source of growth in demand for the Company's
services is generated by financial institutions marketing to their customer
base. Were these financial institutions to insufficiently increase, abandon, or
curtail their marketing efforts, a material adverse effect on the Company's
business, operating results, and financial condition would likely result.
Integration of Servantis, Security APL, and ISC. On February 21, 1996,
the Company acquired Servantis for approximately $165.1 million, consisting of
the issuance of 5.7 million shares of the Company's Common Stock valued at
$20.00 per share (approximately 16% of the Company's total shares outstanding
following the Servantis Acquisition) and $42.5 million in cash to repay
Servantis' long-term debt. In addition, on May 9, 1996, the Company acquired
Security APL for approximately $53.3 million, consisting of the issuance of 2.8
million shares of the Company's Common Stock valued at $18.50 per share
(approximately 7% of the Company's total shares outstanding following the
Security APL Acquisition). Finally, on January 27, 1997, the Company acquired
ISC for approximately $199.0 million, consisting of the issuance of 12.6 million
shares of the Company's Common Stock and $20.0 million payable in cash to
Intuit. In addition, in fiscal 1997, the Company wrote-off $140.0 million of the
purchase price for ISC as in process research and development, which had a
material adverse impact on the Company's results in 1997.
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Intense Competition. Portions of the electronic commerce market are
becoming increasingly competitive. The Company faces significant competition in
all of its customer markets. A number of banks have developed, and others in the
future may develop, home banking services in-house. Additionally, Microsoft has
individually, and as part of a joint venture with First Data, announced its own
alliances with financial institutions to offer on-line home banking and
financial services as well as bill presentment and bill payment services to
consumers. In the business market, the Company competes with other ACH
processors. The Federal Reserve's ACH is the national payment clearance system
through which any bank can effect debit or credit transactions to any authorized
consumer checking account. The Company also faces competition in ACH processing
from numerous banks. The financial application software segment also faces
significant competition.
The Company's product lines also face competition from competitors
which include TSAI, Fiserv, FiTech, EDS, Alltel, Computer Power, Inc. ("CPI"),
Associated Software Consultants, Inc. ("ASC"), and Gallagher Financial Systems,
Inc. ("GFS") in products offered to the mortgage services industry; the
Company's Imaging/COLD product lines compete with the products of several
companies, including IBM, IIC, and Computron, and its RECON-Plus product
competes with Chesapeake and Driscoll. Competitors for mortgage-related products
include CPI (an Alltell Company). Competition for portfolio services includes
two main segments. The Company competes with providers of portfolio accounting
software, including Advent Software, PORTIA (a division of Thomson Financial),
and Shaw Data (a SunGard Company) . The Company also competes with service
bureau providers such as Shaw Data and FMC Service Bureau. In the brokerage
segment the Company's primary competitor is Shaw Data, and the Company competes
for business bill payment customers with ACI and Deluxe Data, which provide ACH
processing.
The Company expects competition to increase from both established and
emerging companies and that such increased competition will result in price
reductions and may result in a reduction of the Company's market share, either
or both of which could materially adversely affect the Company's business,
operating results, and financial condition. Moreover, the Company's current and
potential competitors, many of whom have significantly greater financial,
technical, marketing, and other resources than the Company, may respond more
quickly than the Company to new or emerging technologies or could expand to
compete directly against the Company in any or all of its target markets.
Accordingly, it is possible that current or potential competitors could rapidly
acquire significant market share. There can be no assurance that the Company
will be able to compete against current or future competitors successfully or
that competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results, and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- General," and "-- Products, Services, and
Competition."
Today, the Company is the leading provider of electronic payment
services to users of personal finance software. The Company believes that as
consumer-based on-line interactive and telecommunications services continue to
grow, and as financial institutions offer their own proprietary or licensed
front-ends, retail-marketed personal financial software will become a less
important channel for the Company in acquiring new customers.
Management of Growth. The Company is currently experiencing a period
of rapid growth which has placed, and could continue to place, a significant
strain on its resources. The Company's ability to manage growth successfully
will require the Company to continue to improve its operational, management and
financial systems and controls as well as to expand its work force. A
significant increase in the Company's customer base would necessitate the hiring
of a significant number of additional customer care and technical support
personnel as well as computer software developers and technicians, qualified
candidates for which, at the present time, are in short supply. In addition, the
expansion and adaptation of the Company's computer and administrative
infrastructure will require substantial operational, management, and financial
resources. Although the Company believes that its current infrastructure is
adequate to meet the needs of its customers in the foreseeable future, there can
be no assurance that the Company will be able to expand and adapt its
infrastructure to meet additional demand on a timely basis, at a commercially
reasonable cost, or at all. If the Company's management is unable to manage
growth effectively, hire needed personnel, expand and adapt its computer
infrastructure or improve its operational, management, and financial systems and
controls, the Company's business, operating results, and financial condition
could be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Acquisition-Related Risks. In the future, the Company may pursue
additional acquisitions of complementary service or product lines, technologies,
or businesses. Future acquisitions by the Company could result in potentially
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dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities, and amortization expenses related to goodwill and other intangible
assets, any of which could materially adversely affect the Company's business,
operating results, and financial condition. In addition, acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies, services, and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or limited direct prior experience, and the
potential loss of key employees of the acquired company. From time to time, the
Company evaluates potential acquisitions of businesses, services, products, or
technologies. The Company has no present commitments or agreements with respect
to any material acquisition of other businesses, services, products, or
technologies. In the event that such an acquisition were to occur, however,
there can be no assurance that the Company's business, operating results, and
financial condition would not be materially adversely affected.
Potential Fluctuations in Quarterly Results; Seasonality. The
Company's quarterly results of operations may fluctuate significantly as a
result of a number of factors, including changes in the Company's pricing
policies or those of its competitors, relative rates of acquisition of new
customers, delays in the introduction of new or enhanced services, software, and
related products by the Company or by its competitors or market acceptance of
such services and products, other changes in operating expenses, personnel
changes, and general economic conditions. In addition, the Company's growth in
new consumer customers is impacted by certain seasonal factors such as
holiday-based personal computer sales. These seasonal factors may impact
operating results by concentrating customer acquisition and set-up costs, which
may not be immediately offset by revenue increases primarily due to introductory
service price discounts. Additionally, on-line interactive service customers
generally tend to be more active users during the non-summer seasons,
potentially causing revenue fluctuations during the summer months. Software
sales have historically displayed seasonal variation, with sales and earnings
generally stronger in the quarters ended December 31 and June 30 of each year
and generally weaker in the quarters ended September 30 and March 31 of each
year. The seasonality is due, in part, to calendar year-end buying patterns of
financial institution customers and software sales compensation structure, which
is based on fiscal year (June 30) sales performance. Moreover, the Company's
intention to aggressively promote the acceptance of its electronic commerce
services and rapidly expand its customer base may adversely impact the Company's
short-term profitability. These factors will impact the Company's operating
results. Fluctuations in operating results could result in volatility in the
price of the Company's Common Stock. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Risk of Product Defects. The software products offered by the Company
could contain errors or "bugs" that could adversely affect the performance of
the Company's software or services or damage a user's data. In addition, as the
Company increases its share of the electronic commerce services market, software
reliability and security demands will increase. Additionally, the Company
attempts to limit its potential liability for warranty claims through
disclaimers in its software documentation and limitation-of-liability provisions
in its license and customer agreements. There can be no assurance that the
measures taken by the Company will prove effective in limiting the Company's
exposure to warranty claims. Additionally, despite the existence of various
security precautions, the Company's computer infrastructure may be also
vulnerable to viruses or similar disruptive problems caused by its customers or
third parties gaining access to the Company's processing system. See "Business
- - -- Technology."
Erosion of Maintenance Base; License Revenue. The profitability of the
Software segment of the Company's business depends, to a substantial degree,
upon users of products electing to continue to periodically renew contracts for
maintenance. In the event that a substantial number of these customers were to
decline to renew these contracts, because use of the software product has been
abandoned, or for any other reason, the Company's revenues and profits would be
adversely affected. Sales of software licenses are dependent upon customer
demand for the product, which is affected by pricing decisions, the competition
of similar products, and reputation of the products for performance. Most of the
Company's software products are sold within the financial services industry, and
poor performance by one product has the potential to undermine the Company's
reputation and affect future sales of other products. A substantial decrease in
software license revenue would have a material adverse effect upon the Company's
business, operating results, and financial condition.
Proportion of Electronic Remittances. The Company's future financial
performance will be materially affected by the percentage of bill payments which
can be cleared electronically. As compared with making payment by paper check or
by draft, electronic payments: (i) cost much less to complete; (ii) give rise to
far fewer errors, which are costly to resolve; (iii) generate far fewer customer
inquiries and therefore consume far fewer customer care resources.
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Accordingly, the Company's inability to continue to decrease the percentage of
remittances effected by paper documents will result in flat or decreased
margins, and a reversal of the current trend toward a smaller proportion of
paper-based payments would have a material adverse effect upon the Company's
business, operating results, and financial condition.
Rapid Technological Change; Risk of Delays. The Company's success is
highly dependent on its ability to develop new and enhanced software, services,
and related products that meet changing customer requirements. The market for
the Company's software, services, and related products is characterized by
rapidly changing technology, evolving industry standards, emerging competition
and frequent new and enhanced software, service and related product
introductions. In addition, the software market is subject to rapid and
substantial technological change. The Company, to remain successful, must be
responsive to new developments in hardware and semiconductor technology,
operating systems, programming technology, and computer capabilities. In many
instances, the new and enhanced services, products, and technologies are in the
emerging stages of development and marketing, and are subject to the risks
inherent in the development and marketing of new software, services, and
products. There can be no assurance that the Company can successfully identify
new service opportunities and develop and bring new and enhanced software,
services, and related products to market in a timely manner, that such software,
services, products or technologies will develop or will be commercially
successful, that the Company will benefit from such developments or that
services, products, or technologies developed by others will not render the
Company's software, services, and related products noncompetitive or obsolete.
If the Company is unable, for technological or other reasons, to develop and
introduce new services and products in a timely manner in response to changing
market conditions or customer requirements, or if new or enhanced software,
services, and related products do not achieve a significant degree of market
acceptance, the Company's business, operating results, and financial condition
would be materially adversely affected.
The Company's program to integrate its various processing sites and
platforms into a central site carries with it the risk of delays and performance
failures that have the potential to substantially interfere with the Company's
ability to provide acceptable service levels to its customers. Although
management believes that it has taken all reasonable steps to plan and monitor
this integration, there can be no assurance that its efforts will be successful
or timely, and a failure to provide adequate service levels could result in a
material adverse effect upon the Company's business, operating results, and
financial condition. See "Business -- General," "-- Products, Services, and
Competition," and "-- Research and Development."
Risk of Loss From Returned Transactions, Merchant Fraud or Erroneous
Transmissions. The Company utilizes the Federal Reserve's ACH for electronic
fund transfers and conventional paper check and draft clearing systems for
settlement of payments by check or drafts. In its use of these established
payment clearance systems, the Company generally bears the same credit risks
normally assumed by other users of these systems arising from returned
transactions caused by insufficient funds, stop payment orders, closed accounts,
frozen accounts, unauthorized use, disputes, theft, or fraud. In addition, the
Company also assumes the risk of merchant fraud and transmission errors when it
is unable to have erroneously transmitted funds returned by an unintended
recipient. Merchant fraud includes such actions as inputting false sales
transactions or false credits. The Company manages all of these risks through
its risk management systems, internal controls, and system security. The Company
also maintains a reserve for such credit risks and has not historically incurred
losses in excess of its reserve nor greater than 0.76% of its revenues in any of
the past five years. Past reserving experience cannot predict the adequacy of
reserves in the future. The Company believes that its risk management and
reserving practices are adequate. Nonetheless, there can be no assurance that
the Company's risk management practices or reserves will be sufficient to
protect the Company from returned transactions, merchant fraud, or erroneous
transmissions which could have a material adverse effect on the Company's
business, operating results, and financial condition. See "Business -- Payment
Clearance Systems."
Risk of System Failure. The Company's operations are dependent on its
ability to protect its computer equipment against damage from fire, earthquake,
power loss, telecommunications failure or similar event. All of the Company's
computer equipment, including its processing operations, is located at its
facilities in Columbus, Ohio, Norcross, Georgia, Chicago, Illinois, Aurora,
Illinois, Downers' Grove, Illinois, and Austin, Texas. A disproportionate amount
of the Company's computer equipment, including its primary processing
operations, is located in Norcross, Georgia. As a precautionary measure, the
Company has entered into disaster recovery agreements for the processing systems
at all sites, and conducts business resumption tests on a scheduled basis.
Additional risks may arise during the transition from the pre-existing platforms
to the Genesis platform, and during the migration of processing to the new
platform. During this transition, the Company may be exposed to loss of data or
unavailability of systems due to inadequate backups, reduced or eliminated
redundancy, or both. Any damage or failure that causes interruptions in the
Company's operations could have a material adverse effect on the Company's
business, operating
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results, and financial condition. The Company's property and business
interruption insurance may not be adequate to compensate the Company for all
losses that may occur. See "Business -- Technology."
Limited Protection of Proprietary Technology; Risk of Third Party
Infringement Claims. The Company regards its financial transaction services and
related products such as its software as proprietary and relies primarily 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 its services and related products.
The Company has been granted a patent for certain features of its
electronic bill payment processing system. See "Business -- Proprietary Rights."
While the Company believes that the ownership of the patent is a significant
factor in its business, its success does not depend on the ownership of the
patent or future patents, but on the innovative skills, technical competence,
quality of service and marketing abilities of its personnel. The Company
believes its patent provides some measure of security against competition, and
the Company intends to enforce its patent against infringement by third parties.
If the Company's patent is found to be invalid, to the extent it has or would in
the future serve as a barrier to entry in this marketplace, there may be
increased competition in the market. See "Business -- Competition" and "--
Business Risks (Intense Competition)."
Existing intellectual property laws afford only limited protection,
and it may be possible for unauthorized third parties to copy the Company's
services and related products or to reverse engineer or obtain and use
information that the Company regards as proprietary. There can be no assurance
that the Company's competitors will not independently develop services and
related products that are substantially equivalent or superior to those of the
Company.
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continued contributions of its key management,
marketing, service and related product development and operational personnel,
including its Chairman, President, and Chief Executive Officer, Peter J. Kight,
its Chief Operating Officer, Peter F. Sinisgalli, its Vice Chairman for
Corporate Development and Marketing, Mark A. Johnson, and its Chief Technology
Officer, Ravi Ganesan. The Company's operations could be affected adversely if,
for any reason, any of these officers ceased to be active in the Company's
management. The Company maintains proprietary nondisclosure and noncompete
agreements with all of its key employees. The Company maintains key person life
insurance policies on Mr. Kight. The success of the Company depends to a large
extent upon its ability to retain and continue to attract highly skilled
personnel. Competition for employees in the electronic commerce industry is
intense especially in light of the Year 2000 computer issues, and there can be
no assurance that the Company will be able to attract and retain enough
qualified employees. If the business of the Company grows or certain market
conditions exist (e.g., the Year 2000 computer issue), it may become
increasingly difficult to hire, train and assimilate the new employees needed.
For example, the demand for software programmers and computer personnel is high
as a result of companies seeking to hire skilled employees to address their Year
2000 computer issues, which makes it increasingly difficult for the Company to
hire and retain the skilled employees necessary for the operation and expansion
of its business. The Company's inability to retain and attract key employees
could have a material adverse effect on the Company's business, operating
results, and financial condition. See "Business -- Employees."
ACH Access. The Federal Reserve rules provide that the Company can
only access the Federal Reserve's ACH through a bank. If the Federal Reserve
rules were to change to further restrict access to the ACH or limit the
Company's ability to provide ACH transaction processing services, the Company's
business could be materially adversely affected. See "Business -- Government
Regulation" and "-- Payment Clearance Systems."
Limited Prior Market; Volatility of Stock Price. Prior to September
28, 1995, there was no public market for the Company's Common Stock. Although
the Company is listed on the Nasdaq National Market, there can be no assurance
that an active or liquid trading market in the Company's Common Stock will
continue. The market price of the Company's Common Stock is subject to
significant fluctuations in response to variations in quarterly operating
results, the failure of the Company to achieve operating results consistent with
securities analysts' projections of the Company's performance, and other
factors. The stock market has experienced extreme price and volume fluctuations
and volatility that has particularly affected the market prices of many
technology, emerging growth, and developmental stage companies. Such
fluctuations and volatility have often been unrelated or disproportionate to the
operating performance of such companies. Factors such as announcements of the
introduction of new or enhanced services or related products by the Company or
its competitors, announcements of joint development efforts or corporate
partnerships in the electronic commerce market, market conditions in the
technology, banking, telecommunications and other emerging growth sectors, and
rumors relating to the Company or its competitors may have a significant impact
on the market price of the Company's Common Stock.
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Control by Principal Stockholders. At September 9, 1998, the directors,
executive officers, and principal stockholders of the Company and their
affiliates collectively owned approximately 39% of the outstanding shares of the
Company's Common Stock. As a result, these stockholders will be able to exercise
significant influence over matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
Shares Eligible for Future Sale; Possible Adverse Effect on Market
Price. At September 9, 1998, the Company had 55,571,546 shares of the Company's
Common Stock outstanding. Of these shares, 33,669,870 shares are held by
nonaffiliates of the Company. The holders of the remaining 21,901,676 shares are
entitled to resell them only pursuant to a registration statement under the
Securities Act or an applicable exemption from registration thereunder such as
an exemption provided by Rule 144, Rule 145, or Rule 701 under the Securities
Act of 1933, as amended (the "Securities Act"). Additionally, as of June 30,
1998, the Company had outstanding options to purchase 4,365,562 shares of the
Company's Common Stock at a weighted average exercise price of $15.23, of which
options for 1,352,516 shares of the Company's Common Stock were exercisable as
of June 30, 1998 at a weighted average exercise price of $6.81.
The Company issued 5,692,734, 2,805,652, and 12,600,000 shares of the
Company's Common Stock in connection with the Servantis Acquisition, the
Security APL Acquisition, and ISC Acquisition, respectively. A portion of these
shares have been sold by the respective stockholders and the remainder are
available for resale subject to Rule 144 and Rule 145 under the Securities Act
or certain registration rights agreements.
On September 9, 1998, the Company announced that the Board of
Directors had authorized the Company to repurchase up to 1,500,000 shares of
its outstanding Common Stock during the next twelve months. (For more detailed
information concerning the stock repurchase, please refer to the Company's Form
8-K filed on September 14, 1998.)
Sales of substantial amounts of these shares in the public market or
the prospect of such sales could adversely affect the market price of the
Company's Common Stock.
Anti-Takeover Provisions; Certain Provisions of Delaware Law;
Certificate of Incorporation, By-Laws, and Stockholder Rights Plan. Certain
provisions of Delaware law the Company's Certificate of Incorporation, By-Laws,
and Stockholder Rights Plan could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, control of the Company. The Company's Certificate of Incorporation
provides for the Board of Directors to be divided into three classes of
directors serving staggered three-year terms. Such classification of the Board
of Directors expands the time required to change the composition of a majority
of directors and may tend to discourage a proxy contest or other takeover bid
for the Company. Certain provisions of Delaware law, the Company's Certificate
of Incorporation, and the Stockholder Rights Plan allow the Company to issue
preferred stock with rights senior to those of the Company's Common Stock
without any further vote or action by the stockholders. The issuance of the
Company's Preferred Stock under the Stockholder Rights Plan could decrease the
amount of earnings and assets available for distribution to the holders of the
Company's Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of the Company's Common Stock. In
certain circumstances, such issuance could have the effect of decreasing the
market price of the Company's Common Stock. See Note 14 to Notes to the
Consolidated Financial Statements.
Government Regulation. Management believes that the Company is 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. There
can be no assurance that a federal or state agency will not attempt to regulate
providers of electronic commerce services such as the Company which could impede
the Company's ability to do business in the regulator's jurisdiction. In
addition, through its processing agreements, the Company agrees to comply with
the data, recordkeeping, processing and other requirements of applicable federal
and state laws and regulations, Federal Reserve Bank operating letters, and the
National Automated Clearing House Association Operating Rules imposed on the
Company's processing banks. In conducting various aspects of its business, the
Company is subject to various laws and regulations relating to commercial
transactions generally, such as the Uniform Commercial Code, and is also subject
to the electronic funds transfer rules embodied in Regulation E, promulgated by
the Federal Reserve Board. Given the expansion of the electronic commerce
market, it is possible that the Federal Reserve might revise Regulation E or
adopt new rules for electronic funds transfer affecting users other than
consumers. Because of growth in the electronic commerce market, Congress has
held hearings on whether to regulate providers of services and transactions in
the electronic commerce market, and it is possible that Congress or individual
states could enact laws regulating the electronic commerce market. If enacted,
such laws, rules and regulations could
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be imposed on the Company's business and industry and could have a material
adverse effect on the Company's business, operating results, and financial
condition. See "Business -- Government Regulation."
Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its available cash resources and funds from
operations will be sufficient to meet its presently anticipated working capital
and capital expenditure requirements both for the short-term and through at
least December 31, 1998. The Company has a $20 million line of credit available
for unanticipated needs. However, the Company may need to raise additional funds
through public or private debt or equity financings in order to take advantage
of unanticipated opportunities, including more rapid expansion or acquisitions
of complementary businesses or technologies, or to develop new or enhanced
services and related products, or otherwise respond to unanticipated competitive
pressures. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the then current stockholders of the
Company may be reduced and such equity securities may have rights, preferences
or privileges senior to those of the holders of the Company's Common Stock.
There can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or are
not available on acceptable terms, the Company may not be able to take advantage
of unanticipated opportunities, develop new or enhanced services and related
products or otherwise respond to unanticipated competitive pressures and the
Company's business, operating results, and financial condition could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 2. PROPERTIES.
The Company leases office facilities in Norcross, Georgia, Columbus,
Ohio, Aurora, Illinois, Downers' Grove, Illinois, Owings Mills, Maryland,
Austin, Texas, Jersey City, New Jersey, Chicago, Illinois, San Diego,
California, Boston, Massachusetts, Houston, Texas, and Ashburn, Virginia with
square footage of approximately 229,000, 107,000, 51,000, 14,000, 30,000,
32,000, 17,100, 10,000, 3,000, 2,000, 1,000, and 3,000, respectively. The
Company owns approximately eight acres of real property adjacent to the
Company's facility in Columbus, Ohio. The Company owns a 51,000 square foot
conference center in Norcross, Georgia which includes lodging, training, and
fitness facilities for the Company's customers and employees. Although the
Company owns the building, it is on land which is leased through June 30, 2021.
The Company believes that its facilities are adequate for current and near-term
growth and that additional space is available to provide for anticipated growth.
The Company leases its Columbus, Ohio facility from the Director of
Development, State of Ohio, pursuant to the terms of a capitalized lease entered
into as part of the issuance by the State of Ohio of State Economic Development
Revenue Bonds (the "Bonds") in the aggregate principal amount of $7.5 million.
Pursuant to the terms of the lease, the Company pays monthly lease payments
equal to the amount of the debt service on the Bonds. Upon full payment of the
amount due on the Bonds, the Company has a right to purchase the real property
from the Director of Development, State of Ohio, for the sum of one dollar.
Under the terms of the lease, the Company has the right to prepay all amounts
owed thereunder without significant prepayment penalty. On May 8, 1998, the
Company beneficially purchased an office building in Dublin, Ohio comprising
149,961 square feet, for a price of $14,288,600. The Company intends to complete
relocation of its Columbus, Ohio personnel and equipment to the Dublin facility
by the end of calendar 1998 and to sell the Columbus facility. See "Item 13.
Certain Relationships and Related Transactions."
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded in the over-the-counter market on
the Nasdaq National Market under the symbol "CKFR." The following table sets
forth, for the periods indicated, the high and low sales prices for the
Company's Common Stock, as reported on the Nasdaq National Market.
CALENDAR PERIOD COMPANY COMMON STOCK
-------------------------------------------------------- -------------------------------
Fiscal 1997: HIGH LOW
First Quarter $22.125 $10.750
Second Quarter $25.00 $14.125
Third Quarter $17.375 $11.125
Fourth Quarter $19.625 $9.50
Fiscal 1998:
First Quarter $23.125 $16.50
Second Quarter $31.438 $20.25
Third Quarter $28.50 $20.00
Fourth Quarter $30.625 $20.438
Fiscal 1999:
First Quarter (through September 9, 1998) $31.50 $8.25
The number of record holders of the Company's Common Stock, as of
September 9, 1998, was 564. The closing sales price of the common stock on
September 9, 1998, was $12.00.
The Company has paid no cash dividends since 1986. The Company
presently anticipates that all of its future earnings will be retained for the
development of its business and does not anticipate paying cash dividends on the
Company's Common Stock in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
be based on the Company's future earnings, financial condition, capital
requirements and other relevant factors. Presently, the Company's line of credit
restricts the payment of dividends on the Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is included under the caption
"SELECTED FINANCIAL DATA" in the Company's Annual Report and is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this item is included under the caption
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION" in the Company's Annual Report and is incorporated herein by
reference.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This annual report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
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intended to be covered by the safe harbors created thereby. Those statements
include, but may not be limited to, all statements regarding the intent, belief
and expectations of the Company and its management, such as statements
concerning the Company's future profitability and its operating and growth
strategy. Investors are cautioned that all forward-looking statements involve
risks and uncertainties including, without limitation, the factors set forth
under the caption "Business -- Business Risks" in this report and other factors
detailed from time to time in the Company's filings with the Securities and
Exchange Commission. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate. Therefore, there can be no assurance
that the forward-looking statements included in this annual report will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated balance sheets as of as of June 30, 1998
and 1997 and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended June 30, 1998 and 1997, the six months
ended June 30, 1996, and the year ended December 31, 1995, and the notes to the
financial statements, together with the independent auditors' report thereon
appear in the Company's Annual Report and are incorporated herein by reference.
The Company's Financial Statement Schedule and Independent Auditors'
Report on Financial Statement Schedule are included in response to Item 14
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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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 the Company's Proxy Statement (the "Proxy
Statement") relating to the Company's 1998 Annual Meeting of Stockholders to be
held on November 9, 1998, 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
the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the captions
"OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS" and "OWNERSHIP
OF COMMON STOCK BY PRINCIPAL STOCKHOLDERS" in the 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 the Proxy Statement and is incorporated
herein by reference.
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PART IV
ITEM 14. 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 appearing in the
Company's Annual Report are incorporated herein by reference:
Independent Auditors' Report.
Consolidated Balance Sheets as of June 30, 1998 and 1997.
Consolidated Statements of Operations for each of the two
years in the period ended June 30, 1998, the six months ended
June 30, 1996, and for the year ended December 31, 1995.
Consolidated Statements of Stockholders' Equity for each of
the two years in the period ended June 30, 1998, the six
months ended June 30, 1996, and for year ended December 31,
1995.
Consolidated Statements of Cash Flows for each of the two
years in the period ended June 30, 1998, the six months ended
June 30, 1996, and for the year ended December 31, 1995.
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 the Annual Report.
Schedule II -- Valuation and Qualifying Accounts.
Independent Auditors' Report on Financial Statement Schedule.
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) Asset Purchase Agreement, dated as of July 1, 1997,
among CheckFree Corporation, Servantis Systems
Holdings, Inc., Servantis Systems, Inc., London
Bridge Software Holdings plc, and LBSS, Inc.
(Reference is made to Exhibit 2 to the Current Report
on Form 8-K, dated July 1, 1997, filed with the
Securities and Exchange Commission on July 3, 1997,
and incorporated herein by reference.)
2(b) Agreement and Plan of Merger, dated as of December
22, 1997, among the Company, CheckFree Corporation,
and CheckFree Merger Corporation. (Reference is made
to Exhibit 2 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(a) Restated Certificate of Incorporation of the Company.
(Reference is made to Exhibit 3(a) 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.)
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3(b) 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(c) Form of Specimen Stock Certificate. (Reference is
made to Exhibit 3(c) 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.)
4 Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND
ELEVENTH of the Company's Restated Certificate of
Incorporation (contained in the Company's 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).
10(a) CheckFree Holdings Corporation Amended and Restated
Associate Stock Purchase Plan. (Reference is made to
Exhibit 4(a) to Post-Effective Amendment No. 1 to
Form S-8, as amended (Registration No. 333-21795),
filed with the Securities and Exchange Commission on
January 14, 1998, and incorporated herein by
reference.)
10(b) CheckFree Holdings Corporation Amended and Restated
1995 Stock Option Plan. (Reference is made to Exhibit
4(a) to Post-Effective Amendment No. 1 to Form S-8,
as amended (Registration No. 33-98446), filed with
the Securities and Exchange Commission on January 9,
1998, and incorporated herein by reference.)
10(c) CheckFree Holdings 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(d) CheckFree Holdings 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(e) CheckFree Holdings 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(f) 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(g) Schedule identifying material details of
Indemnification Agreements substantially identical to
Exhibit 10(f). (Reference is made to Exhibit 10(g) 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(h) Noncompete, Nondisclosure, and Assignment Agreement,
dated February 1, 1990, between Peter J. Kight and
the Company. (Reference is made to Exhibit 10(i) 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) Noncompete, Nondisclosure, and Assignment Agreement,
dated February 1, 1990, between Mark A. Johnson and
the Company. (Reference is made to Exhibit 10(j) to
Registration
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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(j) Electronic Bill Payment Services Agreement, dated
March 10, 1995, between the Company and FiTech, Inc.
(Reference is made to Exhibit 10(gg) 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(k) Amendment to Bill Payment and Remote Banking Services
Agreement, dated July 1, 1995, between the Company
and FiTech, Inc. (Reference is made to Exhibit 10(hh)
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(l) ACH Operations Agreement, dated April 1, 1994,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(ii) 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(m) Merchant Processing Agreement, dated March 13, 1995,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(jj) 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(n) Lease, dated August 1, 1993, between the Company and
The Director of Development of the State of Ohio.
(Reference is made to Exhibit 10(rr) 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(o) Guaranty Agreement, dated August 1, 1993, between the
Company and The Provident Bank. (Reference is made to
Exhibit 10(ss) 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(p) Demand Mortgage Note, dated August 25, 1993, of the
Company. (Reference is made to Exhibit 10(tt) 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(q) Irrevocable Letter of Credit from Society National
Bank for the Company, dated August 25, 1993
(including second renewal thereof). (Reference is
made to Exhibit 10(uu) 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(r) Open-End Mortgage, Assignment of Rents and Security
Agreement, dated August 25, 1993, with the Company as
mortgagor and Society National Bank as mortgagee.
(Reference is made to Exhibit 10(vv) 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(s) Loan and Security Agreement, dated August 25, 1993,
between the Company and Society National Bank.
(Reference is made to Exhibit 10(ww) 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.)
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10(t) Commercial Note Variable Rate, dated January 3, 1995,
of the Company. (Reference is made to Exhibit 10(xx)
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(u) Reimbursement Agreement, dated August 25, 1993,
between the Company and Peter J. Kight. (Reference is
made to Exhibit 10(yy) 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(v) License Agreement, dated October 27, 1995, between
the Company and Block Financial Corporation.
(Reference is made to Exhibit 10(ddd) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Securities
and Exchange Commission, and incorporated herein by
reference.)**
10(w) Joint Marketing and Trademark License Agreement,
dated December 28, 1995, between the Company and
Electronic Data Systems Corporation. (Reference is
made to Exhibit 10(eee) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)**
10(x) Joint Marketing Agreement, dated November 3, 1995,
between the Company and Fiserv, Inc. (Reference is
made to Exhibit 10(fff) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)**
10(y) Payment Services, Software Development and Marketing
Agreement, dated as of February 27, 1996, between the
Company and CyberCash. (Reference is made to Exhibit
10(a) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.) **
10(z) 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.)
10(aa) Executive Employment Agreement between the Company
and Kenneth J. Benvenuto. (Reference is made to
Exhibit 10(d) to the Form 10-Q for the quarter ended
March 31, 1996, filed with the Securities and
Exchange Commission, and incorporated herein by
reference.)
10(bb) Executive Employment Agreement between the Company
and Lynn D. Busing. (Reference is made to Exhibit
10(f) to the Form 10-Q for the quarter ended March
31, 1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
10(cc) Agreement for ACH Services between the Company and
The Chase Manhattan Bank, N.A., dated as of July 1,
1996. (Reference is made to Exhibit 10(qqq) to the
Form 10-K for the transition period ended June 30,
1996, filed with the Securities and Exchange
Commission, and incorporated herein by reference.)
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10(dd) 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(ee) 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.)
13 * Portions of the Annual Report to Stockholders for the
year ended June 30, 1998.
21 * Subsidiaries of the Company.
23 * Consent of Deloitte & Touche LLP.
24 * Power of Attorney.
27 * Financial Data Schedule.
- - ----------
* Filed with this report.
** Portions of this Exhibit have been given confidential treatment by the
Securities and Exchange Commission.
(b) REPORTS ON FORM 8-K
The Company filed the following Current Reports on Form 8-K
since March 31, 1998:
(i) Current Report on Form 8-K, dated March 24, 1998,
filed with the Securities and Exchange Commission on
April 3, 1998 (Items 5 and 7).
(ii) Current Report on Form 8-K, dated April 1, 1998,
filed with the Securities and Exchange Commission on
April 3, 1998 (Items 5 and 7).
(iii) Current Report on Form 8-K, dated April 28, 1998,
filed with the Securities and Exchange Commission on
May 4, 1998 (Items 5 and 7).
(c) EXHIBITS
The exhibits to this report follow the Consolidated Financial
Statements.
(d) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and the independent auditors'
report thereon are included on the pages following the Notes to the Consolidated
Financial Statements.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHECKFREE HOLDINGS CORPORATION
Date: September 25, 1998 By: /s/ Allen L. Shulman
--------------------------------
Allen L. Shulman, Executive Vice
President, Chief Financial Officer
and General Counsel
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities indicated on the 25th day of September, 1998.
Signature Title
*Peter J. Kight Chairman of the Board, President, and Chief Executive Officer
- - ------------------------------- (Principal Executive Officer)
Peter J. Kight
*Mark A. Johnson Vice Chairman - Corporate Development and Marketing and
- - ------------------------------- Director
Mark A. Johnson
/s/Allen L. Shulman Executive Vice President, Chief Financial Officer
- - ------------------------------- and General Counsel
Allen L. Shulman (Principal Financial Officer)
*Gary A. Luoma, Jr. Vice President and Chief Accounting Officer
- - ------------------------------- (Principal Accounting Officer)
Gary A. Luoma, Jr.
*William P. Boardman Director
- - -------------------------------
William P. Boardman
*George R. Manser Director
- - -------------------------------
George R. Manser
*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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