##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission file number: 0-26802 CHECKFREE CORPORATION  Delaware
    
    58-2360335(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 4411 East Jones Bridge Road, Norcross, Georgia 30092
(Address of Principal Executive Offices, Including Zip Code) (678) 375-3000
(Registrants Telephone Number, Including Area Code) Not Applicable  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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES x NO o Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date: 90,462,863 shares of
Common Stock, $.01 par value, were outstanding at November 4, 2004.




---



FORM 10-Q CHECKFREE CORPORATION Table of Contents  
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements.Unaudited Consolidated Balance Sheets at September 30, 2004 and June 30, 2004
    
    
    3Unaudited Condensed Consolidated Statements of Operations For the Three Months Ended
September 30, 2004 and 2003
    
    
    4Unaudited Consolidated Statements of Cash Flows For the Three Months Ended
September 30, 2004 and 2003
    
    
    5Notes to Interim Unaudited Condensed Consolidated Financial Statements For the Three
Months Ended September 30, 2004 and 2003
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    

    14Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    27Item 4. Controls and Procedures.
    
    
    28PART II. OTHER INFORMATIONItem 6. Exhibits.
    
    
    29Signatures.
    
    
    30EX-31(A)EX-31(B)EX-32(A)EX-32(B)
  2




---



##### Table of Contents



Part I. Financial Information 
 Item 1. Financial Statements CHECKFREE CORPORATION AND SUBSIDIARIES 
 Unaudited Consolidated Balance Sheets
 September 30,
    
    June 30,2004
    
    2004(In thousands, except share data)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    136,503
    
    
    $
    134,832Settlement assets
    
    
    86,829
    
    
    
    82,520Investments
    
    
    81,241
    
    
    
    73,197Accounts receivable, net
    
    
    102,567
    
    
    
    85,217Accounts receivable, related parties
    
    
    4,774
    
    
    
    26,632Prepaid expenses and other assets
    
    
    20,430
    
    
    
    14,727Deferred income taxes
    
    
    34,444
    
    
    
    49,129Total current assets
    
    
    466,788
    
    
    
    466,254PROPERTY AND EQUIPMENT, NET
    
    
    87,445
    
    
    
    91,912OTHER ASSETS:Capitalized software, net
    
    
    10,072
    
    
    
    11,512Goodwill, net
    
    
    615,515
    
    
    
    612,971Strategic agreements, net
    
    
    240,404
    
    
    
    271,390Other intangible assets, net
    
    
    19,809
    
    
    
    21,670Investments
    
    
    82,529
    
    
    
    68,344Other noncurrent assets
    
    
    4,089
    
    
    
    4,396Investment in joint venture
    
    
    808
    
    
    
    483Total other assets
    
    
    973,226
    
    
    
    990,766Total assets
    
    $
    1,527,459
    
    
    $
    1,548,932LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    10,668
    
    
    $
    12,234Settlement obligations
    
    
    85,429
    
    
    
    82,611Accrued liabilities
    
    
    50,875
    
    
    
    67,211Current portion of long-term obligations
    
    
    3,256
    
    
    
    4,192Deferred revenue
    
    
    37,388
    
    
    
    36,193Total current liabilities
    
    
    187,616
    
    
    
    202,441ACCRUED RENT AND OTHER
    
    
    3,392
    
    
    
    4,313DEFERRED INCOME TAXES
    
    
    1,429
    
    
    
    17,492CAPITAL LEASE AND LONG-TERM OBLIGATIONS - LESS CURRENT PORTION
    
    
    25,599
    
    
    
    25,504STOCKHOLDERS EQUITY:Preferred stock - 50,000,000 authorized shares, $0.01 par value;
no amounts issued or outstanding
    
    
    
    
    
    
    Common stock - 500,000,000 authorized shares, $0.01 par value;
issued and outstanding 90,450,236 and 90,164,926 shares, respectively
    
    
    904
    
    
    
    902Additional paid-in-capital
    
    
    2,482,377
    
    
    
    2,471,062Unearned compensation
    
    
    (7,994
    )
    
    
    Accumulated other comprehensive loss
    
    
    (17
    )
    
    
    (728
    )Accumulated deficit
    
    
    (1,165,847
    )
    
    
    (1,172,054
    )Total stockholders equity
    
    
    1,309,423
    
    
    
    1,299,182Total liabilities and stockholders equity
    
    $
    1,527,459
    
    
    $
    1,548,932
 See Notes to Interim Unaudited Condensed Consolidated Financial Statements 3




---



##### Table of Contents



CHECKFREE CORPORATION AND SUBSIDIARIES 
 Unaudited Condensed Consolidated Statements of Operations
 Three Months EndedSeptember 30,2004
    
    2003(In thousands, except per share data)REVENUES:Processing and servicing:Third parties
    
    $
    151,342
    
    
    $
    114,995Related parties
    
    
    7,500
    
    
    
    9,250Total processing and servicing
    
    
    158,842
    
    
    
    124,245License fees
    
    
    5,874
    
    
    
    4,962Maintenance fees
    
    
    7,355
    
    
    
    6,701Other
    
    
    5,762
    
    
    
    5,356Total revenues
    
    
    177,833
    
    
    
    141,264EXPENSES:Cost of processing, servicing and support
    
    
    75,362
    
    
    
    59,288Research and development
    
    
    20,223
    
    
    
    14,903Sales and marketing
    
    
    14,226
    
    
    
    12,325General and administrative
    
    
    15,035
    
    
    
    11,523Depreciation and amortization
    
    
    44,017
    
    
    
    50,613Total expenses
    
    
    168,863
    
    
    
    148,652INCOME (LOSS) FROM OPERATIONS
    
    
    8,970
    
    
    
    (7,388
    )OTHER:EQUITY IN NET LOSS OF JOINT VENTURE
    
    
    (647
    )
    
    
    INTEREST INCOME (EXPENSE), NET
    
    
    1,696
    
    
    
    (1,624
    )INCOME (LOSS) BEFORE INCOME TAXES
    
    
    10,019
    
    
    
    (9,012
    )INCOME TAX EXPENSE (BENEFIT)
    
    
    3,812
    
    
    
    (2,343
    )NET INCOME (LOSS)
    
    $
    6,207
    
    
    $
    (6,669
    )BASIC INCOME (LOSS) PER SHARE:Income (loss) per common share
    
    $
    0.07
    
    
    $
    (0.07
    )Equivalent number of shares
    
    
    90,315
    
    
    
    89,463DILUTED INCOME (LOSS) PER SHARE:Income (loss) per share
    
    $
    0.07
    
    
    $
    (0.07
    )Equivalent number of shares
    
    
    92,212
    
    
    
    89,463
 See Notes to Interim Unaudited Condensed Consolidated Financial Statements 4




---



##### Table of Contents



CHECKFREE CORPORATION AND SUBSIDIARIES 
 Unaudited Consolidated Statements of Cash Flows
 Three Months EndedSeptember 30,2004
    
    2003(In thousands)OPERATING ACTIVITIES:Net income (loss)
    
    $
    6,207
    
    
    $
    (6,669
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Equity in net loss of joint venture
    
    
    647
    
    
    
    Depreciation and amortization
    
    
    44,017
    
    
    
    50,613Deferred income tax benefit
    
    
    (1,582
    )
    
    
    (7,985
    )Equity-based compensation
    
    
    855
    
    
    
    Change in certain assets and liabilities:Settlement assets and obligations
    
    
    (1,491
    )
    
    
    Accounts receivable
    
    
    5,099
    
    
    
    (4,966
    )Prepaid expenses and other
    
    
    (2,968
    )
    
    
    278Accounts payable
    
    
    (2,133
    )
    
    
    760Accrued liabilities and other
    
    
    (18,172
    )
    
    
    (6,230
    )Deferred revenue
    
    
    1,195
    
    
    
    1,201Net cash provided by operating activities
    
    
    31,674
    
    
    
    27,002INVESTING ACTIVITIES:Purchase of property and software
    
    
    (4,879
    )
    
    
    (5,426
    )Capitalization of software development costs
    
    
    (387
    )
    
    
    (922
    )Purchase of businesses, net of cash acquired
    
    
    (3,277
    )
    
    
    Proceeds from maturities of investments - Held-to-maturity
    
    
    
    
    
    
    12,783Purchases of investments - Available-for-sale
    
    
    (76,283
    )
    
    
    (91,204
    )Proceeds from sales and maturities of investments - Available-for-sale
    
    
    54,533
    
    
    
    35,542Purchase of other investments
    
    
    (12
    )
    
    
    (10
    )Investment in joint venture
    
    
    (972
    )
    
    
    Net cash used in investing activities
    
    
    (31,277
    )
    
    
    (49,237
    )FINANCING ACTIVITIES:Principal payments under capital lease and other long-term obligations
    
    
    (1,205
    )
    
    
    (1,308
    )Proceeds from stock options exercised
    
    
    579
    
    
    
    644Proceeds from employee stock purchase plan
    
    
    1,412
    
    
    
    1,077Net cash provided by financing activities
    
    
    786
    
    
    
    413Effect of exchange rate changes on cash and cash equivalents
    
    
    488
    
    
    
    NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    1,671
    
    
    
    (21,822
    )CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    134,832
    
    
    
    209,358End of period
    
    $
    136,503
    
    
    $
    187,536
 See Notes to Interim Unaudited Condensed Consolidated Financial Statements 5




---



##### Table of Contents



CHECKFREE CORPORATION AND SUBSIDIARIES 
 Notes to Interim Unaudited Condensed Consolidated Financial Statements
for the Three Months Ended September 30, 2004 and 2003
 1. Basis of Presentation and Summary of Significant Accounting Policies Unaudited Interim Financial Information Our unaudited condensed consolidated financial statements and notes
included in this Quarterly Report on Form 10-Q (Form 10-Q), are prepared in
accordance with the rules and regulations of the United States Securities and
Exchange Commission (SEC) and include all of the information and disclosures
required by generally accepted accounting principles in the United States of
America for interim financial reporting. Our results of operations for the
three months ended September 30, 2004 and 2003, are not necessarily indicative
of our projected results for the full year. Please read our condensed consolidated financial statements in this Form
10-Q in conjunction with our consolidated financial statements, our significant
accounting policies and our notes to the consolidated financial statements
included in our Annual Report on Form 10-K for our fiscal year ended June 30,
2004, which we filed with the SEC on September 3, 2004. In our opinion, our
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments), which are
necessary for a fair representation of our financial results for the presented
interim periods. Stock-Based Compensation We account for stock-based compensation under the provisions and related
interpretations of Accounting Principles Board (APB) Opinion 25, Accounting
for Stock Issued to Employees. Accordingly, we are not required to record
compensation expense when stock options are granted to our employees as long as
the exercise price is not less than the fair market value of the stock when the
option is granted. Also, we are not required to record compensation expense
when stock options are granted under our Associate Stock Purchase Plan as long
as the purchase price is not less than 85% of the lower of the fair market
value at the beginning or end of each offer period. In October 1995, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) 123, Accounting for Stock-Based Compensation.
SFAS 123 allows us to continue to follow the present APB Opinion 25 guidelines,
but requires pro-forma disclosures of net income and earnings per share as if
we had adopted the provisions of the Statement. In December 2002, the FASB
issued SFAS 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an Amendment of FASB Statement No. 123, which provides
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation.
We continue to account for stock-based compensation under the provisions of APB
Opinion 25 using the intrinsic value method. 6




---



##### Table of Contents



Had compensation cost for our stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans in accordance with the provisions of SFAS 123, our net income (loss) and
net income (loss) per share would have been as follows (in thousands, except
per share data): Three Months EndedSeptember 30,2004
    
    2003Net income (loss), as reported
    
    $
    6,207
    
    
    $
    (6,669
    )Stock-based compensation included in net income (loss)
    
    
    930
    
    
    
    1,143Stock-based compensation under SFAS 123
    
    
    (2,932
    )
    
    
    (5,589
    )Pro forma net income (loss)
    
    $
    4,205
    
    
    $
    (11,115
    )Pro forma net income (loss) per share:Basic and diluted
    
    $
    0.05
    
    
    $
    (0.12
    )
 Recent Accounting Pronouncements On September 30, 2004, the FASB announced a delay in the effective date of
paragraphs 10 to 20 of the Emerging Issues Task Force (EITF) issue 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The FASB staff has issued a proposed Board-directed FASB Staff
Position (FSP), EITF Issue 03-1-a, Implementation Guidance for the
Application of Paragraph 16 of EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments.
Paragraphs 10-20 of Issue 03-1 will be effective upon the final issuance of FSP
EITF Issue 03-1-a. We continue to follow the disclosure guidance in paragraphs
21 and 22 of Issue 03-1 as it remains effective during the review period. On October 13, 2004, the FASB decided to delay by six months the effective
date to implement Statement 123R, Share Based Payment, an Amendment of FASB
Statements No. 123 and 95. This proposed standard, which will require us to
expense the value of employee stock options in our income statement, is
expected to be effective for periods beginning after June 15, 2005 or, for us,
the first quarter of our fiscal year 2006. Reclassifications Certain amounts in the prior years financial statements have been
reclassified to conform to the 2005 presentation. 7




---



##### Table of Contents



2. Investments Our investments consist of the following (in thousands): September 30,
    
    June 30,2004
    
    2004Available-for-sale
    
    $
    266,434
    
    
    $
    243,526Other investments
    
    
    737
    
    
    
    725Less: amounts classified as cash equivalents
    
    
    103,401
    
    
    
    102,710Total investments
    
    $
    163,770
    
    
    $
    141,541
 We based the fair value of available-for-sale securities on quoted market
values. In the three months ended September 30, 2004 and 2003, we sold
available-for-sale investments in the amount of $39,533,000 and $5,928,000,
respectively. We recognized gross gains of $0 and gross losses of $7,000 on
those sales during the three months ended September 30, 2004 and recognized
gross gains of $4,000 and gross losses of $0 on those sales during the three
months ended September 30, 2003. 3. Goodwill and Other Intangible Assets On July 1, 2002, we adopted SFAS 142, Goodwill and Other Intangible
Assets. SFAS 142 changes the accounting for goodwill and other intangible
assets. Goodwill is no longer subject to amortization over its estimated
useful life. Rather, goodwill is subject to at least an annual assessment for
impairment by applying a fair-value-based test. Our annual impairment test is
performed on April 30th of each year. In November 2003, we completed our acquisition of HelioGraph, Ltd.
(HelioGraph) for approximately $18,756,000 in cash. Our acquisition added a
financial transactions management solution with straight through processing and
financial messaging expertise to our reconciliation suite of products, in
addition to expanding our international presence. HelioGraph is part of our
International Operations business unit within our Software division. In June 2004, we completed our acquisition of American Payment Systems,
Inc. (APS) from its parent corporation UIL Holdings Corporation, for
approximately $109,013,000 in cash, subject to certain post-closing
adjustments. We completed the acquisition in order to penetrate a part of the
electronic billing and payment market in which we had not significantly
previously participated. APS is part of our Electronic Commerce division and a
leading provider of walk-in bill payments to an estimated 20% of U.S. consumers
who do not typically rely on bank products and services. We treated our
acquisition of APS as a purchase for accounting purposes, and, accordingly,
recorded purchased assets and liabilities based on their fair market values at
the date of acquisition. Based on the preliminary purchase price allocation, we
recorded goodwill of approximately $75,000,000. During the three-month period
ended September 30, 2004, we made a final purchase price adjustment of
$3,277,000. We recorded $733,000 of deferred taxes related to our final
purchase price adjustments. As of September 30, 2004, our only non-amortizing intangible asset is
goodwill. The changes in the carrying value of goodwill by segment from June
30, 2003 to September 30, 2004, were as follows (in thousands): Electronic
    
    
    
    
    
    InvestmentCommerce
    
    Software
    
    Services
    
    TotalBalance as of June 30, 2003
    
    $
    503,738
    
    
    $
    8,106
    
    
    $
    11,387
    
    
    $
    523,231Goodwill acquired
    
    
    74,957
    
    
    
    14,783
    
    
    
    
    
    
    
    89,740Balance as of June 30, 2004
    
    
    578,695
    
    
    
    22,889
    
    
    
    11,387
    
    
    
    612,971Goodwill acquired
    
    
    2,544

    
    
    
    
    
    
    
    
    
    
    
    2,544Balance as of September 30, 2004
    
    $
    581,239
    
    
    $
    22,889
    
    
    $
    11,387
    
    
    $
    615,515
 8




---



##### Table of Contents



The components of our various amortized intangible assets are as follows
(in thousands): September 30,
    
    June 30,2004
    
    2004Capitalized software:Product technology from acquisitions and strategic agreement
    
    $
    167,458
    
    
    $
    167,458Internal development costs
    
    
    31,906
    
    
    
    31,519Total
    
    
    199,364
    
    
    
    198,977Less: accumulated amortization
    
    
    189,292
    
    
    
    187,465Capitalized software, net
    
    $
    10,072
    
    
    $
    11,512Strategic agreements:Strategic
agreements (1)
    
    $
    744,424
    
    
    $
    744,424Less: accumulated amortization
    
    
    504,020
    
    
    
    473,034Strategic agreements, net
    
    $
    240,404
    
    
    $
    271,390Other intangible assets:Tradenames
    
    $
    50,728
    
    
    $
    50,728Customer base
    
    
    46,068
    
    
    
    46,068Current technology
    
    
    2,230
    
    
    
    2,230Money transfer license
    
    
    1,700
    
    
    
    1,700Covenants not to compete
    
    
    2,860
    
    
    
    2,860Total
    
    
    103,586
    
    
    
    103,586Less: accumulated amortization
    
    
    83,777
    
    
    
    81,916Other intangible assets, net
    
    $
    19,809
    
    
    $
    21,670
  (1)
    
    Strategic agreements primarily include certain entity-level
covenants not to compete. Amortization of intangible assets totaled $34,674,000 and $41,872,000 for
the three months ended September 30, 2004 and 2003, respectively. 4. Common Stock In the three months ended September 30, 2004, we issued stock for various
employee benefit programs. Under the 2002 Stock Incentive Plan, we issued
108,484 shares of common stock to fund our 401(k) match, the cost of which we
accrued during the year ended June 30, 2004, and 72,293 shares of common stock
in conjunction with our employee stock purchase plan, which were funded through
employee payroll deductions in the immediately preceding six-month period. We
also issued 341,837 shares of restricted stock related to a Long-Term Incentive
Compensation (LTIC) program under our 2002 Stock Incentive Plan and recorded
unearned compensation of $7,994,000 within stockholders equity during the
three-month period ended September 30, 2004. The shares of restricted stock
granted under the LTIC program have a five-year vesting period with an
accelerated vesting provision of three years based on achievement of specific
goals and objectives. 9




---



##### Table of Contents



In June 2003, we made an offer (the Tender Offer) to certain of our
employees to exchange options with exercise prices greater than or equal to
$44.00 per share that were then outstanding under our 1983 Incentive Stock
Option Plan, 1983 Non-Statutory Stock Option Plan, 1993 Stock Option Plan,
Third Amended and Restated 1995 Stock Option Plan, BlueGill Technologies, Inc.
1997 Stock Option Plan, BlueGill Technologies, Inc. 1998 Incentive and
Non-Qualified Stock Option Plan, and 2002 Stock Incentive Plan, for restricted
stock units of our common stock, and in certain cases, cash payments.
Restricted stock units that we issued under the Tender Offer vest ratably over
a three-year period. The offer period closed on July 17, 2003, and employees
holding 1,165,035 options participated in the Tender Offer. We made cash
payments totaling $586,000 in July 2003, representing the cash consideration
portion of the Tender Offer. We issued 51,143 shares in the three-month period
ended September 30, 2004. Approximately 157,500 shares of restricted stock
units are scheduled to vest under the 2002 Stock Incentive Plan over the next
two years. We recorded an expense of approximately $522,000 for the
three-month period ended September 30, 2004 related to the vesting of
restricted stock units and recorded an expense of $1,143,000 for the three
months ended September 30, 2003, for cash payments incurred and the vesting of
restricted stock units under the Tender Offer. 5. Earnings Per Share The following table reconciles the differences in our income and shares
outstanding between basic and diluted for the periods indicated (in thousands,
except per share data): For the Three Months EndedSeptember 30, 2004
    
    September 30, 2003Per-
    
    
    
    
    
    
    
    
    
    Per-Income
    
    Shares
    
    Share
    
    Loss
    
    Shares
    
    Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic EPS
    
    $
    6,207
    
    
    
    90,315
    
    
    $
    0.07
    
    
    $
    (6,669
    )
    
    
    89,463
    
    
    $
    (0.07
    )Effect of dilutive
securities:Options and warrants
    
    
    
    
    
    
    1,897
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPS
    
    $
    6,207
    
    
    
    92,212
    
    
    $
    0.07
    
    
    $
    (6,669
    )
    
    
    89,463
    
    
    $
    (0.07
    )
 Anti-dilution provisions of SFAS 128, Earnings Per Share, require
consistency between diluted per-common-share amounts and basic per-common-share
amounts in loss periods. Had we recognized net income for the three-month
period ended September 30, 2003, we would have included an additional 5,272,000
of in-the-money options and warrants in the diluted earnings per share
calculation. Using the treasury stock purchase method prescribed by SFAS 128,
this would have increased diluted shares outstanding by 1,895,000 for the three
months ended September 30, 2003. The weighted average diluted common shares outstanding for the three
months ended September 30, 2004 excludes the effect of approximately 2,973,000
of out-of-the-money options and warrants as their effect would be
anti-dilutive. The weighted average diluted common shares outstanding for the
three months ended September 30, 2003, excludes the effect of approximately
3,505,000 of out-of-the-money options and warrants, and the effect of 2,357,000
shares for the assumed conversion of the convertible subordinated notes, as
their effect would be anti-dilutive. In addition, the after-tax effect of
interest expense on the convertible subordinated notes of approximately
$1,818,000 for the three months ended September 30, 2003, has not been added
back to the numerator, as its effect would also be anti-dilutive. 10




---



##### Table of Contents



6. Reorganization Charges We expect our previously announced reorganizations to be completed by
October 2005 and do not anticipate additional charges. A summary of activity
related to our reorganization reserve is as follows (in thousands): Office Closureand BusinessExit CostsBalance as of June 30, 2003
    
    $
    1,537Cash payments, year ended June 30, 2004
    
    
    (805
    )Balance as of June 30, 2004
    
    
    732Cash payments, three months ended
September 30, 2004
    
    
    (158
    )Balance as of September 30, 2004
    
    $
    574
 7. Supplemental Disclosure of Cash Flow Information (in thousands) Three Months EndedSeptember 30,2004
    
    2003Interest paid
    
    $
    195
    
    
    $
    157Income taxes paid
    
    $
    10,284
    
    
    $
    2,270Supplemental disclosure of non-cash investing and financing activities:Capital lease and other long-term asset additions
    
    $
    
    
    
    $
    65Stock funding of 401(k) match
    
    $
    29
    
    
    $
    3,144Stock funding of Associate Stock Purchase Plan
    
    $
    1,694
    
    
    $
    1,447
 8. Related Parties On September 1, 2000, we acquired MSFDC, L.L.C. (TransPoint) from
Microsoft Corporation (Microsoft), First Data Corporation (First Data), and
Citibank, N.A. in exchange for 17 million shares of our common stock. As part
of the TransPoint acquisition, Microsoft received 8,567,250 shares of our
common stock and Microsoft continued to own those shares as of September 30,
2004. Pursuant to the terms of the TransPoint acquisition, Microsoft is
entitled to nominate one director to our board for such time as they own at
least 6,425,438 shares of common stock. Therefore, Microsoft is considered a
related party. In addition, we entered into a commercial alliance agreement with
Microsoft as part of the TransPoint acquisition. Under the terms of the
commercial alliance agreement, Microsoft, among other things, agreed to use us
for pay anyone and bill presentment services offered by Microsoft. Our
commercial alliance agreement also provides for a minimum fee and revenue
guarantee to us of $120 million over the five year term of the agreement. Pursuant to the terms of the TransPoint acquisition, First Data was
entitled to nominate one director to our board for such time as they own at
least 4,925,438 shares of common stock. Although First Data owned less than
4,925,438 shares of common stock as of September 30, 2004, First Data owned in
excess of 4,925,438 shares of common stock at the time of the directors most
recent re-election to the board. On July 27, 2004, the director resigned
from our board of directors. Since First Data did not maintain the required
level of share ownership, they no longer have the right to appoint a member of
our board of directors. Although First Data remains a customer of ours, First
Data was not considered to be a related party for our quarter ended September
30, 2004. 11




---



##### Table of Contents



In addition, we entered into a marketing agreement with First Data as part
of the TransPoint acquisition. Under the terms of the marketing agreement, we
agreed to use certain First Data payment processing services if, in each case
using reasonable judgment, substantially similar services are not then
obtainable from a third party at an overall economic cost to us that is less
than the overall economic cost of First Datas services. The marketing
agreement also provides for a minimum fee and revenue guarantee of $60 million
over the five-year term of the agreement. On January 10, 2002, we entered into
an agreement for check processing services with Integrated Payment Systems
Inc., a subsidiary of First Data. Microsoft and First Data operate substantially below their minimum monthly
commitments, and we do not expect these customers to increase their activity
such that they would operate above the minimum commitments in the next twelve
months. 9. Comprehensive Income (Loss) We record available-for-sale securities at fair value and we record
changes in fair value as unrealized gains or losses and we accumulate these
items in other comprehensive income. As a result, we are required to report
the components of our comprehensive loss, which are as follows (in thousands): Three Months EndedSeptember 30,2004
    
    2003Net income (loss)
    
    $
    6,207
    
    
    $
    (6,669
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    105
    
    
    
    Unrealized holding gains (losses) on investments, net of tax
    
    
    606
    
    
    
    (226
    )Comprehensive income (loss)
    
    $
    6,918
    
    
    $
    (6,895
    )
 12




---



##### Table of Contents



10. Business Segments We operate in three business segments  Electronic Commerce, Investment
Services, and Software, along with a Corporate segment. These reportable
segments are strategic business units through which we offer different products
and services. We evaluate the performance of our segments based on their
respective revenues and operating income (loss). Segment operating income
(loss) excludes acquisition related intangible asset amortization and
significant one-time charges. There are no inter-segment sales. The following table sets forth certain financial information attributable
to our business segments for the three months ended September 30, 2004 and 2003
(in thousands): Three Months EndedSeptember 30,2004
    
    2003Revenues:Electronic Commerce
    
    $
    138,207
    
    
    $
    106,555Investment Services
    
    
    22,843
    
    
    
    20,293Software
    
    
    16,783
    
    
    
    14,416Total
    
    $
    177,833
    
    
    $
    141,264Segment operating income (loss):Electronic Commerce
    
    $
    46,951
    
    
    $
    33,922Investment Services
    
    
    2,560
    
    
    
    4,918Software
    
    
    633
    
    
    
    2,228Corporate
    
    
    (7,959
    )
    
    
    (7,962
    )Total
    
    
    42,185
    
    
    
    33,106Purchase accounting amortization
    
    
    (33,215
    )
    
    
    (40,494
    )Equity in net loss of joint venture
    
    
    (647
    )
    
    
    Interest, net
    
    
    1,696
    
    
    
    (1,624
    )Total income (loss) before income taxes
    
    $
    10,019
    
    
    $
    (9,012
    )
 13




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations Overview CheckFree was founded in 1981 as an electronic payment processing company
and has become a leading provider of financial electronic commerce products and
services. Our current business was developed through the expansion of our core
electronic payments business and the acquisition of companies operating similar
or complementary businesses. We operate our business through three independent but inter-related
divisions:  
    
    Electronic Commerce;
    
    Investment Services; and
    
    Software. Through our Electronic Commerce division, we enable consumers to receive
and pay bills electronically. For the year ended June 30, 2004, we processed
approximately 583 million payment transactions and delivered approximately 82
million e-Bills. For the quarter ended September 30, 2004, we processed over
205 million payment transactions and delivered over 29 million e-Bills. The
number of transactions we process each year continues to grow. Transaction
growth exceeded 34% for the year ended June 30, 2004, and 62% for the quarter
ended September 30, 2004 compared to the same quarter in the prior year. On
June 22, 2004, we acquired American Payment Systems, Inc. (APS), a leading
provider of walk-in bill payment services to consumers. As part of our
Electronic Commerce division, these services enable us to reach an additional
group of consumers we had not previously serviced and to provide an additional
service to our biller clients. The Electronic Commerce division accounted for
approximately 78% of our revenue in the quarter ended September 30, 2004. Electronic Commerce division products enable consumers to:  
    
    receive e-Bills through the Internet;
    
    pay any bill  whether it arrives over the Internet or through traditional mail  to anyone; and
    
    make payments not related to bills  to anyone. Through our Investment Services division, we provide a range of portfolio
management services to help financial institutions, including broker dealers,
money managers and investment advisors, deliver portfolio management,
performance measurement and reporting services to their clients, primarily for
processing separately managed accounts (SMA or SMAs). Our client base
includes investment advisors, brokerage firms, banks and insurance companies.
Our fee-based money manager clients are typically sponsors or managers of
wrap, or SMAs, money management products, or institutional money managers,
managing investments of institutions and high net worth individuals. As of
September 30, 2004, our clients used the CheckFree APLSM portfolio accounting
system to manage nearly 1.7 million portfolios, representing more than $1
trillion in assets. Our Investment Services division accounted for
approximately 13% of our revenue in the quarter ended September 30, 2004. Our portfolio management products and services provide the following
functions:  
    
    proposal generation;
    
    account open and trading capabilities;
    
    performance measurement and reporting;
    
    tax lot accounting;
    
    multiple strategy portfolios;
    
    straight through processing; and
    
    Depository Trust Corporation interfacing. Through our Software division, we deliver software, maintenance, support
and professional services to large financial service providers and other
companies across a range of industries. Our Software division is comprised of
two units, North American Operations and International Operations, providing
three distinct sets of software products. ACH software and services are used
to process more than two-thirds of the United States ten 14




---



##### Table of Contents



billion annual Automated Clearing House (ACH) payments. CheckFree Financial
and Compliance Solutions (CFACS) software and services enable organizations
to handle their reconciliation and compliance requirements and to provide a
financial transactions management solution with straight through processing.
Our i-Solutions software and services enable end-to-end e-billing and
e-statement creation, delivery and payment. Our Software division accounted
for approximately 9% of our revenue in the quarter ended September 30, 2004. Executive Summary For the quarter ended September 30, 2004, we earned net income of $6.2
million. We generated $28.3 million of free cash flow, an increase of $6.7
million, or 31% over the same period last year, despite making an estimated tax
payment of over $10 million in the quarter compared to about $2 million in the
same period last year. See Use of Non-GAAP Financial Information for our
definition and discussion of free cash flow. Our continued efforts to improve
quality and efficiency throughout our operations have resulted in increasingly
positive operating results and allowed us to continue to invest in our
businesses. With our acquisition of APS on June 22, 2004, the quarter ended September
30, 2004 represents our first quarter to fully incorporate our walk-in bill
payment business. Beyond the added walk-in bill payment transaction volume and
revenue, we continued to experience solid revenue growth in our Electronic
Commerce business in the quarter ended September 30, 2004. Transaction growth,
including walk-in bill payments, exceeded 62% in the first quarter as compared
to the same period last year, and sequential quarterly transaction growth
reached 25%. Additionally, we delivered almost 30 million e-Bills in the
quarter ended September 30, 2004, compared to about half that amount in the
same period last year. We believe that the added availability of e-Bills will
make electronic payment offerings increasingly more compelling to consumers.
Although the walk-in bill payment business carries a lower operating margin as
compared to the rest of our Electronic Commerce business, continued efforts to
improve quality and efficiency in our operations, combined with a steadily
improving electronic versus paper payment rate and our ability to leverage a
significant fixed cost base, have resulted in a lower cost per transaction, and
have offset volume-based pricing discounts inherent in our Electronic Commerce
business. Our Investment Services division achieved revenue growth of 13% in the
quarter ended September 30, 2004, as compared to the same period last year.
However, portfolio growth, which is dependent primarily on the growth of the
United States stock market, has not been accelerating due to uncertainty
inherent in the equity markets. We expect portfolio growth to accelerate when
growth in the stock market resumes. Also, we continue to invest in our
Investment Services processing platform to position ourselves to take full
advantage of the emerging SMA market. Our near-term operating margin has
dropped, and we expect it to continue to lag historical levels, primarily as a
result of this developmental activity. Our Software division achieved better-than-expected growth during a
traditionally slow quarter for us. Our Software operating margin suffered
during the first quarter of fiscal 2005, due to a charge associated with a
large services agreement, but we expect to return to mid-teen margin levels in
the quarter ending December 31, 2004. As part of our acquisition of TransPoint in September 2000, we entered
into separate five-year agreements with Microsoft Corporation (Microsoft) and
First Data Corporation (FDC), both of which include monthly minimum revenue
guarantees that have increased annually over the term of the agreements. These
contracts will expire in fiscal 2006. The following table represents the total
annual minimum revenue guarantees throughout the contract period with Microsoft
and FDC (in thousands): Fiscal Year Ended June 30,
    
    Microsoft
    
    FDC
    
    Total2001
    
    $
    6,000
    
    
    $
    5,000
    
    
    $
    11,0002002
    
    
    15,000
    
    
    
    8,500
    
    
    
    23,5002003
    
    
    21,000
    
    
    
    11,500
    
    
    
    32,5002004
    
    
    27,000
    
    
    
    14,500
    
    
    
    41,5002005
    
    
    33,000
    
    
    
    17,500
    
    
    
    50,5002006
    
    
    18,000
    
    
    
    3,000
    
    
    
    21,000Total
    
    $
    120,000
    
    
    $
    60,000
    
    
    $
    180,000
 15




---



##### Table of Contents



Both of these agreements are currently operating substantially below their
minimum levels. If volumes do not grow significantly from both Microsoft and
FDC, we expect to see a temporary decline in revenue growth, initially in the
second quarter of fiscal 2006. However, we believe we can manage investment
levels and improve profitability in our Electronic Billing business in order to
maintain our targeted operating margin in the mid to upper 20% level on a
full-year basis. Additionally, we plan to continue to pursue other
opportunities for growth, as our recent electronic billing and payment (EBP)
contract signings and our APS acquisition demonstrate. The following table sets forth as percentages of total revenue, certain
consolidated statements of operations data: Three Months EndedSeptember 30,2004
    
    2003Total revenues
    
    
    100.0
    %
    
    
    100.0
    %Expenses:Cost of processing, servicing and support
    
    
    42.4
    
    
    
    42.0Research and development
    
    
    11.4
    
    
    
    10.5Sales and marketing
    
    
    8.0
    
    

    
    8.7General and administrative
    
    
    8.4
    
    
    
    8.2Depreciation and amortization
    
    
    24.8
    
    
    
    35.8Total expenses
    
    
    95.0
    
    
    
    105.2Income (loss) from operations
    
    
    5.0
    
    
    
    (5.2
    )Equity in net loss of joint venture
    
    
    (0.4
    )
    
    
    Interest, net
    
    
    1.0
    
    
    
    (1.2
    )Income (loss) before income taxes
    
    
    5.6
    
    
    
    (6.4
    )Income tax expense (benefit)
    
    
    2.1
    
    
    
    (1.7
    )Net income (loss)
    
    
    3.5
    %
    
    
    (4.7
    )%
 Results of Operations The following table sets forth total company revenue for the quarters
ended September 30, 2004 and 2003, respectively. Total Revenues (000s)
    
    September 30,
    
    Change2004
    
    2003
    
    $
    
    %Quarter ended
    
    $
    177,833
    
    
    $
    141,264
    
    
    $
    36,569
    
    
    
    25.9
    %
 Total company revenue growth was driven by 30% growth in our Electronic
Commerce business, 13% growth in our Investment Services business and 16%
growth in our Software business. Our walk-in bill payments business, resulting from our acquisition of APS
on June 22, 2004, provided over 10% of the growth in our Electronic Commerce
business on a quarter-over-quarter basis. Our quarter ending September 30 2004
represented our first full quarter results from our walk-in bill payment unit.
Overall growth in Electronic Commerce, including walk-in bill payments,
continues to be driven primarily by growth in transactions processed from
approximately 127 million for the quarter ended September 30, 2003, to nearly
206 million for the quarter ended September 30, 2004. In addition, we
delivered over 29 million e-Bills in the quarter ended September 30, 2004,
representing an increase of more than 101% over the 14.7 million e-Bills we
delivered during the quarter ended September 30, 2003. Finally, with interest
rates increasing since this time last year, we are experiencing growth in our
revenue from interest-sensitive products such as Account Balance Transfer
(ABT). This combined revenue growth for our Electronic Commerce division was
offset somewhat by our pricing practices. We have established pricing models
that provide volume-based discounts in order to share scale efficiencies with
our customers. As a result of significant transaction growth, our average
revenue per transaction has declined over time with respect to our
transaction-based revenue. 16




---



##### Table of Contents



Growth in Investment Services revenue was driven primarily by growth in
the number of portfolios managed, from over 1.3 million as of September 30,
2003, to about 1.7 million as of September 30, 2004. In some cases, we are
adding new portfolios to our APL system at a lower price point, driven by the
increased volume coming from broker dealers at a lower price, and by price
reductions, where we trade off near-term revenue growth against long-term
strategic advantage. While the U.S. stock market stalled due to overall market
uncertainty during the quarter ended September 30, 2004, we expect growth rates
of portfolios and revenue to resume in more favorable market conditions. We experienced substantial revenue growth in our Software business on a
quarter-over-quarter basis. In addition to new business resulting from our
acquisition of HelioGraph, Ltd. (HelioGraph) in the quarter ended December
31, 2003, we achieved license growth during the quarter ended September 30,
2004, despite the September quarter normally being a seasonally slow quarter.
License growth occurred across all of our product lines. Across all of our segments, for the quarter ended September 30, 2004, Bank
of America generated total revenue of $30.1 million, and continues to be our
only customer providing more than 10% of our total revenue. Our EBP agreement
with Bank of America has a 10-year term, includes annual minimum guarantees of
$50 million, and provides for tiered transaction-based pricing which reflects
discounts for increased volumes of transactions provided by the bank. The following tables set forth comparative revenues, by type, for the
quarters ended September 30, 2004 and 2003, respectively. Processing and Servicing (000s)
    
    September 30,
    
    Change2004
    
    2003
    
    $
    
    %Quarter ended
    
    $
    158,842
    
    
    $
    124,245
    
    
    $
    34,597
    
    
    
    27.8
    %
 We earn processing and servicing revenue in both our Electronic Commerce
and our Investment Services businesses. While growth in portfolios managed in
our Investment Services business contributed positively, our increase in
processing and servicing revenue resulted primarily from the aforementioned
growth in transactions processed in our Electronic Commerce business. This
growth in transactions was driven primarily by our walk-in bill payment
business. The rest of our electronic bill
payment business continued to grow nicely as well, with sequential transaction
growth falling within our historical quarterly growth rate range of 6%
and 10%. We delivered over 29 million e-Bills in the quarter ended September
30, 2004, representing an increase of more than 101% over the 14.7 million
e-Bills we delivered during the quarter ended September 30, 2003.
Additionally, with interest rates increasing since the quarter ending September
30, 2003, we experienced growth in revenue from our interest-sensitive products
such as ABT. Overall growth in processing and servicing revenue was somewhat
offset by the tier-based volume pricing discounts within both our Electronic
Commerce and Investment Services businesses. License Fees (000s)
    
    September 30,
    
    Change2004
    
    2003
    
    $
    
    %Quarter ended
    
    $
    5,874
    
    
    $
    4,962
    
    
    $
    912
    
    
    
    18.4
    %
 Although license revenue growth was not isolated to any particular product
line, the acquisition of HelioGraph in the quarter ended December 31, 2003
provided us with a new source of license revenue. Our first quarter is
typically a seasonally slow quarter for us. We are not certain at this point
in time whether this represents a general trend for the fiscal year. Maintenance Fees (000s)
    
    September 30,
    
    Change2004
    
    2003
    
    $
    
    %Quarter ended
    
    $
    7,355
    
    
    $
    6,701
    
    
    $
    654
    
    
    
    9.8
    %
 Maintenance revenue, which represents annually renewable product support
for our software customers, is isolated to our Software business, and tends to
grow with incremental license sales from previous periods. Our maintenance
base has grown as a result of recent license sales, customer retention rates
exceeding 80%, and moderate price increases across all business units, as well
as a full quarter of maintenance revenue from our 17




---



##### Table of Contents



November 2003 acquisition of HelioGraph. We defer revenue recognition on
maintenance billings until cash is collected, which can cause quarterly
fluctuations. We expect minimal growth in maintenance fee revenue without
additional license sales growth. Other
Revenue (000s)
    
    September 30,
    
    Change2004
    
    2003
    
    $
    
    %Quarter ended
    
    $
    5,762
    
    
    $
    5,356
    
    
    $
    406
    
    
    
    7.6
    %
 Other revenue consists mostly of consulting and implementation fees across
all three of our businesses. We completed a significant software services
engagement during fiscal 2004, have entered into incremental consulting and
implementation services with customers in our traditional operations, as well
as through HelioGraph, and our APS acquisition has provided us with stored
value card revenue. The following set of tables provides line-by-line expense comparisons with
their relative percentages of total company revenue for the quarters ended
September 30, 2004 and 2003, respectively. Cost of
Processing, Servicing and Support (000s)
    
    September 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueQuarter ended
    
    $
    75,362
    
    
    
    42.4
    %
    
    $
    59,288
    
    
    
    42.0
    %
 In Electronic Commerce, our electronic payment rate has increased from 76%
as of September 30, 2003, to 83% as of September 30, 2004. Electronic payments
carry a significantly lower variable cost per unit than paper-based payments
and are far less likely to result in a costly customer care claim. The
acquisition of APS brought with it a significant number of exclusively
electronic payment transactions, accounting for three points of the four percentage
point increase we experienced in our electronic payment rate, quarter over
quarter. In addition to leveraging a significant fixed-cost processing
infrastructure, we continue to focus investment on additional efficiency and
quality improvements within our customer care processes and our information
technology infrastructure in order to drive improvement in our cost per
transaction. These drivers of expense efficiency were offset somewhat by a
couple of factors, resulting in a slight increase in the ratio of cost of
processing, servicing and support as a percentage of total revenue. First, the
gross margin of our walk-in bill payment business is less than the remainder of
our electronic billing and payment business. Additionally, we incurred a
charge of approximately $2.6 million related to a software services engagement
with a large customer. Research and Development (000s)
    
    September 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueQuarter ended
    
    $
    20,223
    
    
    
    11.4
    %
    
    $
    14,903
    
    
    
    10.5
    %
 Including capitalized development costs of $0.4 million for the quarter
ended September 30, 2004, and $0.9 million for the quarter ended September 30,
2003, gross expenditures for research and development were $20.6 million, or
11.6% of total revenue, for the quarter ended September 30, 2004, and were
$15.8 million, or 11.2% of total revenue for the quarter ended September 30,
2003. We continue to invest heavily in product enhancement and productivity
improvement initiatives, particularly in our Investment Services and Electronic
Commerce businesses, and we added moderate levels of research and development
spending as a result of our acquisitions of APS and HelioGraph. Sales and Marketing (000s)
    
    September 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueQuarter ended
    
    $
    14,226
    
    
    
    8.0
    %
    
    $
    12,325
    
    
    
    8.7
    %
 18




---



##### Table of Contents



The decrease in sales and marketing costs, as a percentage of revenue, is
due primarily to the predominance of our revenue growth resulting from our
Electronic Commerce business, which has less associated variable sales costs as
compared to our other businesses. Our acquisitions of APS and HelioGraph
provided incremental sales and marketing personnel and program costs. General and Administrative (000s)
    
    September 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueQuarter ended
    
    $
    15,035
    
    
    
    8.4
    %
    
    $
    11,523
    
    
    
    8.2
    %
 Incremental general and administrative costs have resulted primarily from
facilities and other non-redundant expenses we incurred within our new walk-in
bill payment and HelioGraph businesses. Additionally, in the quarter ended
September 30, 2004, we incurred approximately $2.0 million from an increase in
formula-based reserves against customer accounts receivable that we may recover
all or part of as the year progresses. Finally, we are experiencing
increasing quarterly Sarbanes-Oxley compliance costs. We continue to expect our general and
administrative costs to run between 7% and 8% of revenue and are managing
toward returning these costs to this targeted range. Depreciation and Amortization (000s)
    
    September 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueQuarter ended
    
    $
    44,017
    
    
    
    24.8
    %
    
    $
    50,613
    
    
    
    35.8
    %
 Depreciation and amortization expense from operating fixed assets and
internally capitalized product costs has increased from $10.1 million for the
quarter ended September 30, 2003, to $10.8 million for the quarter ended
September 30, 2004, due primarily to asset additions resulting from our APS
acquisition. The remainder of our depreciation and amortization costs
represents acquisition-related amortization. Despite additional amortization
from intangible assets resulting from our APS and HelioGraph acquisitions over
the past year, depreciation and amortization decreased as a result of lower
acquisition-related intangible amortization from intangible assets that have
fully amortized since last year. Equity in Net Loss of Joint Venture (000s)
    
    September 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueQuarter ended
    
    $
    (647
    )
    
    
    (0.4
    %)
    
    $
    
    
    
    
    
 In April 2004, we announced a joint venture, OneVu, with BACS Limited (now
known as Voca), designed to create an integrated electronic billing and payment
network for billers and banks in the United Kingdom. The equity in the loss of
joint venture represents our portion of the loss incurred by the joint venture
in the quarter. Net Interest (000s)
    
    September 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueQuarter ended:Interest Income
    
    $
    1,907
    
    
    
    
    
    
    $
    1,593Interest expense
    
    
    (211
    )
    
    
    
    
    
    
    (3,217
    )Net interest
    
    $
    1,696
    
    
    
    1.0
    %
    
    $
    (1,624
    )
    
    
    (1.2
    )%
 Despite a decrease in average cash and invested assets, we experienced an
increase in interest income. During the quarter ended September 30, 2004, we
received nearly $0.5 million of interest associated with a sales tax rebate
program from assets purchased in 2001, providing interest income that was
unrelated to invested assets. 19




---



##### Table of Contents



Our interest expense decreased significantly on a year-over-year basis.
We continued to carry our 6.5% Convertible Subordinated Notes at a balance of
$172.5 million throughout the quarter ending September 30, 2003. We redeemed
the notes in full on December 12, 2003, relieving ourselves of approximately
$2.8 million of quarterly interest expense. The remaining reduction in
interest expense is the result of the replacement of higher interest rate
leases with lower rates for required financing. Income Tax Expense (Benefit) (000s)
    
    September 30,2004
    
    2003Effective
    
    
    
    
    
    Effective$
    
    Rate
    
    $
    
    RateQuarter ended
    
    $
    3,812
    
    
    
    38.0
    %
    
    $
    (2,343
    )
    
    
    26.0
    %
 Under normal circumstances we would expect a blended statutory effective
tax rate of about 39%. For the quarter ended September 30, 2004, however, our
effective rate was slightly lower due to an extension of research and
experimentation tax credits in our 2005 fiscal year. For the quarter ended
September 30, 2003, our effective tax benefit was offset by federal alternative
minimum taxes and the temporary elimination of state-level net operating loss
carryover credits. Segment Information We evaluate the performance of our segments based on revenues and
operating income (loss) of the respective segments. Segment operating income
(loss) excludes acquisition-related intangible asset amortization related to
various business and asset acquisitions. The following table sets forth
revenue, operating income (loss) and certain other financial information by
segment, for the periods noted: Three Months EndedSeptember 30,2004
    
    2003(in thousands)Revenue:Electronic Commerce
    
    $
    138,207
    
    
    $
    106,555Investment Services
    
    
    22,843
    
    
    
    20,293Software
    
    
    16,783
    
    
    
    14,416Total revenue
    
    $
    177,833
    
    
    $
    141,264Segment operating income (loss):Electronic Commerce
    
    $
    46,951
    
    
    $
    33,922Investment Services
    
    
    2,560
    
    
    
    4,918Software
    
    
    633
    
    
    
    2,228Corporate
    
    
    (7,959
    )
    
    
    (7,962
    )Purchase accounting amortization:Electronic Commerce
    
    
    (32,563
    )
    
    
    (39,521
    )Investment Services
    
    
    (151
    )
    
    
    (232
    )Software
    
    
    (501
    )
    
    
    (741
    )Income (loss) from operations
    
    $
    8,970
    
    
    $
    (7,388
    )
 Electronic Commerce Segment Information: Electronic Commerce Revenue (000s)
    
    September 30,
    
    Change2004
    
    2003
    
    $
    
    %Quarter ended
    
    $
    138,207
    
    
    $
    106,555
    
    
    $
    31,652
    
    
    
    29.7
    %
 Revenue growth in Electronic Commerce was primarily the result of an
increase in transactions processed, including those added by our walk-in bill
payment business, an increase in e-Bills distributed, and an increase in our
revenue from interest-sensitive products such as ABT, somewhat offset by
contractual volume-based price discounts. 20




---



##### Table of Contents



We offer two basic levels of electronic billing and payment services to
our customers  a Full Service offering and a Payment Services offering.
Customers that use our Full Service offering generally outsource their
electronic billing and payment process to us. A Full Service customer may or
may not use a CheckFree-hosted user interface, but uses a broad array of
services, including payment processing, payment warehouse, claims processing,
e-Bill, online proof of payment, various levels of customer care, and other
aspects of our service. Also, while a Full Service customer may have its own
payment warehouse, we maintain a customer record and payment history within our
payment warehouse to support the Full Service customers servicing needs.
Customers in the Full Service category may contract to pay us either on a
per-subscriber basis, a per-transaction basis, or a blend of both. The
distinction between Full Service and Payment Services is based solely on the
types of service the customer receives, not on our pricing methodology.
Customers that utilize our Payment Services offering receive a limited subset
of our electronic billing and payment services, primarily remittance
processing, including our newly acquired walk-in bill payment business.
Additionally, within Payment Services, we provide services to billers for
electronic bill delivery, biller direct hosting and payments, as well as other
payment services, such as ABT. A third category of revenue we simply refer to
as Other Electronic Commerce includes our Health and Fitness business and
other ancillary revenue sources, such as consumer service provider and biller
implementation and consulting services. The following table provides a historical trend of revenue, underlying
transaction metrics and subscriber metrics, where appropriate, for our
Electronic Commerce business over the last five quarters. Quarter Ended9/30/04
    
    6/30/04
    
    3/31/04
    
    12/31/03
    
    9/30/03(in millions)Full ServiceRevenue
    
    $
    99.1
    
    
    $
    96.2
    
    
    $
    94.0
    
    
    $
    91.8
    
    
    $
    85.5Active subscribers
    
    
    6.4
    
    
    
    5.9
    
    
    
    5.5
    
    
    
    5.0
    
    
    
    4.6Transactions processed
    
    
    133.5
    
    
    
    123.9
    
    
    
    115.5
    
    
    
    106.1
    
    
    
    94.3Payment ServicesRevenue
    
    $
    30.5
    
    
    $
    14.0
    
    
    $
    12.8
    
    
    $
    12.0
    
    
    $
    11.9Transactions processed
    
    
    72.3
    
    
    
    41.3
    
    
    
    36.7
    
    
    
    33.1
    
    
    
    32.4Other Electronic CommerceRevenue
    
    $
    8.6
    
    
    $
    8.3
    

    
    $
    8.4
    
    
    $
    8.7
    
    
    $
    9.2TotalsElectronic Commerce revenue
    
    $
    138.2
    
    
    $
    118.4
    
    
    $
    115.2
    
    
    $
    112.5
    
    
    $
    106.6Transactions processed
    
    
    205.8
    
    
    
    165.2
    
    
    
    152.2
    
    
    
    139.2
    
    
    
    126.7
 The primary driver of the increase in Full Service revenue of $85.5
million for the quarter ended September 30, 2003 to $99.1 million for the
quarter ended September 30, 2004, was growth in Full Service transactions
processed of 42%, from 94.3 million for the quarter ended September 30, 2003,
to 133.5 million for the quarter ended September 30, 2004. The impact of
transaction growth was offset by general volume-based pricing tier discounts
and particularly by a December 2003 revision to our contract with our largest
customer, Bank of America, where subscriber pricing was replaced with
transaction-based pricing with volume discounts commensurate to this customers
volume. Since the quarter ended September 30, 2003, Full Service revenue per
transaction has declined from $0.91 to $0.74. In the Payment Services category, revenue has increased substantially,
from $11.9 million in the quarter ended September 30, 2003, to $30.5 million in
the quarter ended September 30, 2004. In addition to continued growth in
transactions from our existing customers, the primary driver of the revenue
increase on a quarter-over-quarter basis has been our acquisition of APS on
June 22, 2004. This walk-in bill payment business contributed significant
transaction volume at a revenue per transaction rate substantially higher than
our core Payment Services business. 21




---



##### Table of Contents



The decline in Other Electronic Commerce revenue was due to the loss of a
large Health and Fitness customer since last year and lower implementation
revenue. Electronic Commerce Operating Income (000s)
    
    September 30,
    
    Change2004
    
    2003
    
    $
    
    %Quarter ended
    
    $
    46,951
    
    
    $
    33,922
    
    
    $
    13,029
    
    
    
    38.4
    %
 Our ratio of electronic payments to total payments improved from 76% as of
September 30, 2003, to 83% as of September 30, 2004. Electronic payments carry
a significantly lower variable cost per unit than paper payments, and are far
less likely to result in a costly customer care inquiry or claim. Due to
continued improvement in quality and efficiency and the leverage we have
experienced in our existing fixed cost base, we realized a reduction in our
cost per transaction, which resulted in an increase in our operating income.
Our walk-in-bill payments operations carry a relatively low operating margin,
but the overall operating margin in our Electronic Commerce business has
increased from 32% for the quarter ended September 30, 2003, to 34% for the
quarter ended September 30, 2004. Investment Services Segment Information: Investment Services Revenue (000s)
    
    September 30,
    
    Change2004
    
    2003
    
    $
    
    %Quarter ended
    
    $
    22,843
    
    
    $
    20,293
    
    
    $
    2,550
    
    
    
    12.6
    %
 Revenue growth in Investment Services was primarily due to an increase in
portfolios managed from over 1.3 million as of September 30, 2003, to almost
1.7 million as of September 30, 2004. We have provided certain incentives for
customers to sign multi-year contracts and are experiencing a business mix
shift to lower priced services, both of which we expect to result in a modest
reduction to our revenue per average portfolio managed. Growth in portfolios
managed is typically tied to the growth in the U.S. stock market. While the
market stalled during the quarter ended September 30, 2004, when investors move
back into equity investments, we expect growth rates of portfolios and revenue
to resume. Investment Services Operating Income (000s)
    
    September 30,
    
    Change2004
    
    2003
    
    $
    
    %Quarter ended
    
    $
    2,560
    
    
    $
    4,918
    
    
    $
    (2,358
    )
    
    
    (47.9
    %)
 The reduction in operating income was due primarily to added investment in
research and development programs to further improve our product offerings in
the market, efforts to improve our operational quality standards through Six
Sigma quality programs, and a formula-based receivables reserve for customer
accounts receivable in the quarter ended September 30, 2004, which we expect to
recover later in the year. Software Segment Information: Software Revenue (000s)
    
    September 30,
    
    Change2004
    
    2003
    
    $
    
    %Quarter ended
    
    $
    16,783
    
    
    $
    14,416
    
    
    $
    2,367
    
    
    
    16.4
    %
 In addition to incremental maintenance and services revenue provided from
our acquisition of HelioGraph in the quarter ended December 31, 2003, we
experienced relatively strong license growth in the quarter ended September 30,
2004. Our September quarter is typically slow due to seasonality. We are not
certain at this time whether this represents a general trend for the fiscal
year. Software Operating Income (000s)
    
    September 30,
    
    Change2004
    
    2003
    
    $
    
    %Quarter ended
    
    $
    633
    
    
    $
    2,228
    
    
    $
    (1,595
    )
    
    
    (71.6
    )%
 22




---



##### Table of Contents



The decrease in quarter-over-quarter operating income was due primarily to
a charge of approximately $2.6 million that we recorded in the quarter ended
September 30, 2004, to cover the expected loss associated with a services
agreement with a large customer. Corporate Segment Information: Corporate Operating Loss (000s)
    
    September 30,
    
    Change2004
    
    2003
    
    $
    
    %Quarter ended
    
    $
    (7,959
    )
    
    $
    (7,962
    )
    
    $
    3
    
    
    
    0.0
    %Corporate results represent costs for legal, human resources, finance and
various other unallocated overhead expenses. We continue to leverage our
infrastructure costs in the face of increasing revenues and in spite of
operations added through acquisition.Purchase Accounting Amortization:Purchase Accounting Amortization (000s)
    
    September 30,
    
    Change2004
    
    2003
    
    $
    
    %Quarter ended
    
    $
    33,215
    
    
    $
    40,494
    
    
    $
    (7,279
    )
    
    
    (18.0
    )%
 Purchase accounting amortization represents amortization of intangible
assets resulting from our various acquisitions from 1998 forward. Despite the
addition of $20.5 million of non-goodwill intangible assets from our
acquisitions of APS and HelioGraph in our fiscal year ended June 30, 2004, the
incremental amortization expense has been more than offset by the decrease
resulting from intangible assets that have fully amortized since September 30,
2003. Inflation We believe the effects of inflation have not had a significant impact on
our results of operations. Liquidity and Capital Resources The following chart provides a summary of our Consolidated Statements of
Cash Flows for the quarters ended September 30, 2004 and 2003, respectively: Quarter Ended September 30,2004
    
    2003Net cash provided by operating activities
    
    $
    31,674
    
    
    $
    27,002Net cash used in investing activities
    
    
    (31,277
    )
    
    
    (49,237
    )Net cash provided by financing activities
    
    
    786
    
    
    
    413Effect of exchange rate changes
    
    
    488
    
    
    
    Net increase (decrease) in cash and cash equivalent
    
    $
    1,671
    
    
    $
    (21,822
    )
 23




---



##### Table of Contents



As of September 30, 2004, we had $217.7 million of cash, cash equivalents
and short-term investments on hand, and an additional $82.5 million in
long-term investments. Our balance sheet reflects a current ratio of 2.5 and
working capital of $279.2 million. Due primarily to processing efficiency
improvement, we experienced a significant increase in net cash provided by
operating activities over the past several years. We fully utilized our
federal net operating loss carryover credits late in the quarter ended
September 30, 2004, and as a result, we are now a full federal taxpayer.
Despite having to pay full federal income taxes, we generated $31.7 million of
net cash provided by operating activities, and we expect to generate about $185
million of net cash provided by operating activities in the fiscal year ending
June 30, 2005. Considering our existing cash and investment balances and
expectations of net cash provided by operating activities for the year, we
believe we will have sufficient cash to meet our presently anticipated
requirements for the foreseeable future. Our board of directors has approved
up to $40 million for the purpose of repurchasing shares of our common stock
through August 2005. As of September 30, 2004, no such purchases have taken
place. To the extent we require additional cash, we have access to an untapped
$185 million revolving credit facility. We have no immediate plans to borrow
against this credit facility. From an investing perspective, we used $31.3 million of cash in the
quarter ended September 30, 2004. Of this amount, we used $21.8 million in the
net purchase of investments, $4.9 million in capital expenditures, $3.3 million
in working capital adjustments related to our acquisition of APS, $1.0 million
for an investment in our United Kingdom based joint venture, OneVu, and $0.4
million in the capitalization of software development costs. We expect to
spend no more than $40 million on purchases of property and equipment in fiscal
2005. From a financing perspective, we generated $0.8 million of cash for the
quarter ended September 30, 2004. Proceeds of $1.4 million from our employee
stock purchase plan and $0.6 million from the exercise of stock options were
offset by $1.2 million of payments for capital leases and other long-term
obligations. While the timing of cash payments and collections will cause fluctuations
from quarter to quarter and the level of expected capital expenditures could
change, we expect to generate as much as $145 million of free cash flow for the
fiscal year ending June 30, 2005. We define free cash flow as net cash
provided by operating activities, exclusive of the net change in settlement
accounts, less capital expenditures. See Use of Non-GAAP Financial
Information below for a discussion of this measure. Our agreement to use a bank routing number to process payments contains
certain financial covenants related to tangible net worth, cash flow coverage,
debt service coverage and maximum levels of debt to cash flow, as defined. We
are in compliance with all covenants as of September 30, 2004, and do not
anticipate any change in the foreseeable future. The following table represents a summary of our expected cash commitments
under our contractual obligations and commercial commitments over the next
several years: Payments Due - Year Ended June 30,2005
    
    2006 to
    
    2008 toContractual Obligations
    
    Total
    
    (Remaining)
    
    2007
    
    2009
    
    Thereafter(In thousands)Operating leases
    
    $
    93,080
    
    
    $
    13,697
    
    
    $
    26,506
    
    
    $
    21,378
    
    
    $
    31,499Capital lease obligations
    
    
    1,139
    
    
    
    962
    
    
    
    177
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    27,790
    
    
    
    2,423
    
    
    
    367
    
    
    
    25,000
    
    
    
    Total contractual cash obligations
    
    $
    122,009
    
    
    $
    17,082
    
    
    $
    27,050
    
    
    $
    46,378
    
    
    $
    31,499
 24




---



##### Table of Contents



Use of Non-GAAP Financial Information We supplement our reporting of cash flow information determined in
accordance with GAAP (Generally Accepted Accounting Principles in the United
States of America) by using free cash flow in this Quarterly Report on Form
10-Q as a measure to evaluate our liquidity. We define free cash flow as GAAP
net cash provided by operating activities, exclusive of the net change in
settlement accounts and less capital expenditures. We believe free cash flow
provides useful information to management and investors in understanding our
financial results and assessing our prospects for future performance. We also
use free cash flow as a factor in determining long-term incentive compensation
for senior management. We exclude the net change in settlement accounts from free cash flow
because we believe this facilitates managements and investors ability to
analyze operating cash flow trends. In connection with our walk-in bill
payment business, our balance sheet reflects settlement assets and settlement
obligations. The settlement assets represent payment receipts in transit to us
from agents, and the settlement obligations represent scheduled but unpaid
payments due to billers. Balances in settlement accounts fluctuate daily based
on deposit timing and payment transaction volume. These timing differences are
not reflective of our liquidity, and thus, we exclude the net change in
settlement accounts from free cash flow. As a technology company, we make significant capital expenditures in order
to update our technology and to remain competitive. Our free cash flow
reflects the amount of cash we generated that remains, after we have met those
operational needs, for the evaluation and execution of strategic initiatives
such as acquisitions, stock and/or debt repurchases and other investing and
financing activities, including servicing additional debt obligations. Free cash flow does not solely represent residual cash flow available for
discretionary expenditures, as certain of our non-discretionary obligations are
also funded out of free cash flow. These consist primarily of payments on
capital leases and other long-term commitments, if any, as reflected in the
table above, entitled Contractual Obligations in the Liquidity and Capital
Resources section of Managements Discussion and Analysis of Financial
Condition and Results of Operations. Our free cash flow for the quarters ended September 30, 2004 and September
30, 2003 is calculated as follows (in thousands): Quarter Ended September 30,2004
    
    2003Net cash provided by operating activities
    
    $
    31,674
    
    
    $
    27,002Excluding: Net change in settlement accounts
    
    
    1,491
    
    
    
    Less: Capital expenditures
    
    
    (4,879
    )
    
    
    (5,426
    )Free cash flow
    
    $
    28,286
    
    
    $
    21,576
 Net cash used in investing activities for the quarters ended September 30,
2004 and September 30, 2003, was $31.3 million and $49.2 million, respectively.
Net cash provided by financing activities was $0.8 million for the quarter
ended September 30, 2004 and $0.4 million for the quarter ended September 30,
2003. Our free cash flow should be considered in addition to, and not as a
substitute for, net cash provided by operating activities or any other amount
determined in accordance with GAAP. Further, our measure of free cash flow may
not be comparable to similarly titled measures reported by other companies. 25




---



##### Table of Contents



Recent Accounting Pronouncements On September 30, 2004, the FASB announced a delay in the effective date of
paragraphs 10 to 20 of the Emerging Issues Task Force (EITF) issue 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The FASB staff has issued a proposed Board-directed FASB Staff
Position (FSP), EITF Issue 03-1-a, Implementation Guidance for the
Application of Paragraph 16 of EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments.
Paragraphs 10-20 of Issue 03-1 will be effective upon the final issuance of FSP
EITF Issue 03-1-a. We continue to follow the disclosure guidance in paragraphs
21 and 22 of Issue 03-1 as it remains effective during the review period. On October 13, 2004, the FASB decided to delay by six months the effective
date to implement Statement 123R, Share Based Payment, an Amendment of FASB
Statements No. 123 and 95. This proposed standard, which will require us to
expense the value of employee stock options in our income statement, is
expected to be effective for periods beginning after June 15, 2005 or, for us,
the first quarter of our fiscal year 2006. Application of Critical Accounting Policies The preparation of financial statements in conformity with GAAP requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Critical accounting policies are those
policies that are both important to the portrayal of our financial conditions
and results of operations, and they require our most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. In our Annual Report on Form
10-K for the fiscal year ended June 30, 2004, as filed with the Securities and
Exchange Commission on September 3, 2004, we described the policies and
estimates relating to intangible assets, equity instruments issued to customers
and deferred income taxes as our critical accounting policies, and since then,
we have made no changes to our reported critical accounting policies. Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995 Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-Q include certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. Those
statements include, but may not be limited to, all statements regarding our and
managements intent, belief and expectations, such as statements concerning our
future profitability and our operating and growth strategy. Words such as
believe, anticipate, expect, will, may, should, intend, plan,
estimate, predict, potential, continue, likely and similar
expressions are intended to identify forward-looking statements. Investors are
cautioned that all forward-looking statements contained in this Quarterly
Report on Form 10-Q and in other statements we make involve risks and
uncertainties including, without limitation, the factors set forth under the
caption Business  Business Risks included in our Annual Report on Form 10-K
for the year ended June 30, 2004, and other factors detailed from time to time
in our filings with the Securities and Exchange Commission. One or more of
these factors have affected, and in the future could affect our businesses and
financial results in the future and could cause actual results to differ
materially from plans and projections. Although we believe that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate. Therefore, there can
be no assurance that the forward-looking statements included in this Quarterly
Report on Form 10-Q will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives and plans will be achieved. All
forward-looking statements made in this Quarterly Report on Form 10-Q are based
on information presently available to our management. We assume no obligation
to update any forward-looking statements. 26




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk We now maintain multiple offices in the United Kingdom and Canada. As a
result, we have assets and liabilities outside the United States that are
subject to fluctuations in foreign currency exchange rates. We utilize pounds
sterling as the functional currency for the United Kingdom, and the Canadian
dollar as the functional currency for Canada. Due to the relatively immaterial
nature of the amounts involved, our economic exposure from fluctuations in
foreign exchange rates is not significant enough at this time to engage in
forward foreign exchange contracts and other similar instruments. While our international sales represented less than two percent of our
revenue for the quarter ended September 30, 2004, we market, sell and license
our products throughout the world. As a result, our future revenue could be
somewhat affected by weak economic conditions in foreign markets that could
reduce demand for our products. Our exposure to interest rate risk includes the yield we earn on invested
cash, cash equivalents and investments and interest-based revenue earned on
products such as our ABT product. Our outstanding lease obligations carry
fixed interest rates. As part of processing certain types of transactions, we earn interest from
the time money is collected from our customers until the time payment is made
to merchants. These revenues, which are generated from trust account balances
not included in our consolidated balance sheet, are included in processing and
servicing revenue. We use derivative financial instruments to manage the
variability of cash flows related to this interest rate-sensitive portion of
processing and servicing revenue. Accordingly, we enter into interest rate
swaps to effectively fix the interest rate on a portion of our interest
rate-sensitive revenue. As of September 30, 2004, we have entered into
interest rate swap transactions totaling $75 million. The swaps are designated as cash flow hedges, and they are recorded on our
balance sheet at fair value. Because of the high degree of effectiveness
between the interest rate swaps and underlying interest rate-sensitive revenue,
fluctuations in the fair value of the swaps are generally offset by the changes
resulting from the variability of cash flows from the underlying interest rate
sensitive revenue. A 1% increase in interest rates would decrease the fair
value of derivatives by about $1.4 million. Such decline in the fair value of
the swap would decrease the cash flows of the underlying hedged interest rate
sensitive revenue by 100 basis points. Our investment policy does not allow us to enter into derivative financial
instruments for speculative or trading purposes. We maintain a system of
internal controls that includes policies and procedures covering the
authorization, reporting and monitoring of derivative activity. Further, the
policy allows us to enter into derivative contracts only with counter-parties
that meet certain credit rating and/or financial stability criteria. The
counter-parties to these contracts are major financial institutions, and we
believe the risk of loss is remote. 27




---



##### Table of Contents



Item 4. Controls and Procedures Disclosure Controls and Procedures.Disclosure controls and procedures
are controls and other procedures that are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded,
processed, summarized and reported, within the time periods specified in the
SECs rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information we are
required to disclose in the reports that we file or submit under the Exchange
Act is accumulated and communicated to our management as appropriate to allow
timely decisions regarding required disclosure. As of end of the period covered by this report, our management, with the
participation of our chief executive officer and chief financial officer,
carried out an evaluation of the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15 promulgated under the Exchange Act. Based
upon this evaluation, our chief executive officer and our chief financial
officer concluded that our disclosure controls and procedures were (1) designed
to ensure that material information relating to our company is accumulated and
made known to our management, including our chief executive officer and chief
financial officer, in a timely manner, particularly during the period in which
this report was being prepared and (2) effective, in that they provide
reasonable assurance that information we are required to disclose in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules
and forms. Management believes, however, that a controls system, no matter how well
designed and operated, cannot provide absolute assurance that the objectives of
the controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected. Internal Controls.There has been no change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act) during our fiscal quarter ended September 30, 2004,
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. 28




---



##### Table of Contents



Part II. Other Information 
 Item 6. Exhibits Exhibit
    
    ExhibitNumber
    
    Description31(a)*
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
of the Chief Executive Officer.31(b)*
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
of the Chief Financial Officer.32(a)+
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive
Officer.32(b)+
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial
Officer.
   *
    
    Filed with this report.+
    
    Furnished with this report. 29




---



##### Table of Contents



Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. CHECKFREE CORPORATIONDate: November 9, 2004
    
    By:
    
    /s/ David E. MangumDavid E. Mangum, Executive Vice Presidentand Chief Financial Officer*(Principal Financial Officer)Date: November 9, 2004
    
    By:
    
    /s/ John J. Browne, Jr.John J. Browne, Jr., Vice President,Controller, and Chief Accounting Officer(Principal Accounting Officer)
  *
    
    In his capacity as Executive Vice President and Chief Financial Officer,
Mr. Mangum is duly authorized to sign this report on behalf of the
Registrant. 30




---



##### Table of Contents



EXHIBIT INDEX Exhibit
    
    ExhibitNumber
    
    Description31(a)*
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
of the Chief Executive Officer.31(b)*
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
of the Chief Financial Officer.32(a)+
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive
Officer.32(b)+
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial
Officer.
   *
    
    Filed with this report.+
    
    Furnished with this report.