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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to Commission file number: 0-26802 CHECKFREE CORPORATION  Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    58-2360335
(I.R.S. Employer
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
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) 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 þ NO o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). YES þ NO o Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: 90,771,869 shares of Common Stock, $.01 par value, were outstanding
at February 1, 2005.




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FORM 10-Q CHECKFREE CORPORATION Table of Contents Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Consolidated Balance Sheets at
    
    3December 31, 2004 and June 30, 2004Unaudited Condensed Consolidated Statements of Operations
    
    4For the Three and Six Months Ended
December 31, 2004 and 2003Unaudited Consolidated Statements of Cash Flows
    
    5For the Six Months Ended
December 31, 2004 and 2003Notes to Interim Unaudited Condensed Consolidated
    
    6Financial Statements For the Three and Six Months Ended
December 31, 2004 and 2003Item 2. Managements Discussion and Analysis of Financial
    
    14Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market Risk
    
    31Item 4. Controls and Procedures
    
    32PART II. OTHER INFORMATIONItem 4. Submission of Matters to a Vote of Security Holders
    
    33Item 6. Exhibits
    
    34Signatures
    
    35Exhibit 10(A)Exhibit 10(B)Exhibit 10(C)Exhibit 10(D)Exhibit 10(E)Exhibit 10(F)Exhibit 10(G)Exhibit 10(H)Exhibit 31(A)Exhibit 31(B)Exhibit 32(A)Exhibit 32(B)
  2




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Part I. Financial Information 
 Item 1. Financial Statements 
 CHECKFREE CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets December 31,
    
    
    June 30,2004
    
    
    2004(In thousands, except share data)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    197,639
    
    
    $
    134,832Settlement assets
    
    
    84,915
    
    
    
    82,520Investments
    
    
    86,662
    
    
    
    73,197Accounts receivable, net
    
    
    107,428
    
    
    
    85,217Accounts receivable, related parties
    
    
    4,774
    
    
    
    26,632Prepaid expenses and other assets
    
    
    25,748
    
    
    
    14,727Deferred income taxes
    
    
    20,694
    
    
    
    49,129Total current assets
    
    
    527,860
    
    
    
    466,254PROPERTY AND EQUIPMENT, NET
    
    
    87,430
    
    
    
    91,912OTHER ASSETS:Capitalized software, net
    
    
    9,147
    
    
    
    11,512Goodwill
    
    
    615,292
    
    
    
    612,971Strategic agreements, net
    
    
    209,419
    
    
    
    271,390Other intangible assets, net
    
    
    17,951
    
    
    
    21,670Investments
    
    
    74,951
    
    
    
    68,344Other noncurrent assets
    
    
    4,407
    
    
    
    4,396Deferred income taxes
    
    
    10,094
    
    
    
    Investment in joint venture
    
    
    948
    
    
    
    483Total other assets
    
    
    942,209
    
    
    
    990,766Total assets
    
    $
    1,557,499
    
    
    $
    1,548,932LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    12,686
    
    
    $
    12,234Settlement obligations
    
    
    83,578
    
    
    
    82,611Accrued liabilities
    
    
    59,298
    
    
    
    67,211Current portion of long-term obligations
    
    
    3,010
    
    
    
    4,192Deferred revenue
    
    
    39,852
    
    
    
    36,193Total current liabilities
    
    
    198,424
    
    
    
    202,441ACCRUED RENT AND OTHER
    
    
    4,977
    
    
    
    4,313DEFERRED INCOME TAXES
    
    
    
    
    
    
    17,492CAPITAL LEASE AND LONG-TERM OBLIGATIONS  LESS CURRENT PORTION
    
    
    25,373
    
    
    
    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 90,663,558 and 90,164,926 shares, respectively
    
    
    907
    
    
    
    902Additional paid-in-capital
    
    
    2,488,273
    
    
    
    2,471,062Unearned compensation
    
    
    (7,292
    )
    
    
    Accumulated other comprehensive loss
    
    
    (359
    )
    
    
    (728
    )Accumulated deficit
    
    
    (1,152,804
    )
    
    
    (1,172,054
    )Total stockholders equity
    
    
    1,328,725
    
    
    
    1,299,182Total liabilities and stockholders equity
    
    $
    1,557,499
    
    
    $
    1,548,932
 See Notes to Interim Unaudited Condensed Consolidated Financial Statements 3




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CHECKFREE CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations Three Months Ended
    
    Six Months EndedDecember 31,
    
    December 31,2004
    
    2003
    
    2004
    
    2003(In thousands, except per share data)REVENUES:Processing and servicing:Third parties
    
    $
    156,688
    
    
    $
    121,897
    
    
    $
    308,030
    
    
    $
    236,892Related parties
    
    
    7,500
    
    
    
    9,750
    
    
    
    15,000
    
    
    
    19,000Total processing and servicing
    
    
    164,188
    
    
    
    131,647
    
    
    
    323,030
    
    
    
    255,892License fees
    
    
    7,655
    
    
    
    4,716
    
    
    
    13,529
    
    
    
    9,678Maintenance fees
    
    
    7,456
    
    
    
    7,412
    
    
    
    14,811
    
    
    
    14,113Other
    
    
    6,457
    
    
    
    6,161
    
    
    
    12,219
    
    
    
    11,517Total revenues
    
    
    185,756
    
    
    
    149,936
    
    
    
    363,589
    
    
    
    291,200EXPENSES:Cost of processing, servicing and support
    
    
    72,688
    
    
    
    60,798
    
    
    
    148,050
    
    
    
    120,086Research and development
    
    
    19,329
    
    
    
    16,102
    
    
    
    39,552
    
    
    
    31,005Sales and marketing
    
    
    16,282
    
    
    
    13,206
    
    
    
    30,508
    
    
    
    25,531General and administrative
    
    
    13,430
    
    
    
    11,672
    
    
    
    28,465
    
    
    
    23,195Depreciation and amortization
    
    
    43,643
    
    
    
    42,384
    
    
    
    87,660
    
    
    
    92,997In-process research and development
    
    
    
    
    
    
    324
    
    
    
    
    
    
    
    324Total expenses
    
    
    165,372
    
    
    
    144,486
    
    
    
    334,235
    
    
    
    293,138INCOME (LOSS) FROM OPERATIONS
    
    
    20,384
    
    
    
    5,450
    
    
    
    29,354
    
    
    
    (1,938
    )OTHER:EQUITY IN NET LOSS OF JOINT VENTURE
    
    
    (700
    )
    
    
    
    
    
    
    (1,347
    )
    
    
    INTEREST INCOME (EXPENSE), NET
    
    
    1,490
    
    
    
    (7,964
    )
    
    
    3,186
    
    
    
    (9,588
    )INCOME (LOSS) BEFORE INCOME TAXES
    
    
    21,174
    
    
    
    (2,514
    )
    
    
    31,193
    
    
    
    (11,526
    )INCOME TAX EXPENSE (BENEFIT)
    
    
    8,131
    
    
    
    (618
    )
    
    
    11,943
    
    
    
    (2,961
    )NET INCOME (LOSS)
    
    $
    13,043
    
    
    $
    (1,896
    )
    
    $
    19,250
    
    
    $
    (8,565
    )BASIC INCOME (LOSS) PER SHARE:Income (loss) per common share
    
    $
    0.14
    
    
    $
    (0.02
    )
    
    $
    0.21
    
    
    $
    (0.10
    )Equivalent number of shares
    
    
    90,545
    
    
    
    89,624
    
    
    
    90,482
    
    
    
    89,543DILUTED INCOME (LOSS) PER SHARE:Income (loss) per common share
    
    $
    0.14
    
    
    $
    (0.02
    )
    
    $
    0.21
    
    
    $
    (0.10
    )Equivalent number of shares
    
    
    93,019
    
    
    
    89,624
    
    
    
    92,764
    
    
    
    89,543
 See Notes to Interim Unaudited Condensed Consolidated Financial Statements 4




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CHECKFREE CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows Six Months EndedDecember 31,2004
    
    
    2003(In thousands)OPERATING ACTIVITIES:Net income (loss)
    
    $
    19,250
    
    
    $
    (8,565
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Equity in net loss of joint venture
    
    
    1,347
    
    
    
    Depreciation and amortization
    
    
    87,660
    
    
    
    92,997Deferred income tax provision (benefit)
    
    
    2,285
    
    
    
    (11,083
    )Equity-based compensation
    
    
    3,035
    
    
    
    Write off of convertible notes issuance costs
    
    
    
    
    
    
    2,407Write off of in-process research and development
    
    
    
    
    
    
    324Net loss on disposition of property and equipment
    
    
    
    
    
    
    9Change in certain assets and liabilities:Settlement assets and obligations
    
    
    (1,428
    )
    
    
    Accounts receivable
    
    
    (666
    )
    
    
    (5,624
    )Prepaid expenses and other
    
    
    (5,921
    )
    
    
    1,486Accounts payable
    
    
    1,026
    
    
    
    601Accrued liabilities and other
    
    
    (12,712
    )
    
    
    (6,092
    )Deferred revenue
    
    
    3,659
    
    
    
    1,916Net cash provided by operating activities
    
    
    97,535
    
    
    
    68,376INVESTING ACTIVITIES:Purchase of property and software
    
    
    (14,117
    )
    
    
    (9,079
    )Capitalization of software development costs
    
    
    (1,006
    )
    
    
    (1,625
    )Purchase of business, net of cash acquired
    
    
    (3,054
    )
    
    
    (15,737
    )Purchase of investments  held to maturity
    
    
    
    
    
    
    (511
    )Proceeds from maturities of investments  held to maturity
    
    
    
    
    
    
    27,512Purchase of investments  available for sale
    
    
    (105,577
    )
    
    
    (125,415
    )Proceeds from investments  available for sale
    
    
    85,680
    
    
    
    124,453Purchase of other investments
    
    
    (100
    )
    
    
    (45
    )Proceeds from other investments
    
    
    26
    
    
    
    Investment in joint venture
    
    
    (1,872
    )
    
    
    Net cash used in investing activities
    
    
    (40,020
    )
    
    
    (447
    )FINANCING ACTIVITIES:Principal payments under capital lease and other long-term obligations
    
    
    (1,880
    )
    
    
    (1,769
    )Redemption of convertible notes
    
    
    
    
    
    
    (172,500
    )Proceeds from stock options exercised
    
    
    3,813
    
    
    
    1,845Proceeds from employee stock purchase plan
    
    
    2,302
    
    
    
    1,767Net cash provided by (used in) financing activities
    
    
    4,235
    
    
    
    (170,657
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    1,057
    
    
    
    NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    62,807
    
    
    
    (102,728
    )CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    134,832
    
    
    
    209,358End of period
    
    $
    197,639
    
    
    $
    106,630
 See Notes to Interim Unaudited Condensed Consolidated Financial Statements 5




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CHECKFREE CORPORATION AND SUBSIDIARIES 
 Notes to Interim Unaudited Condensed Consolidated Financial Statements
 for the Three and Six Months Ended December 31, 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 and six months ended
December 31, 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. 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 Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net income (loss), as reported
    
    $
    13,043
    
    
    $
    (1,896
    )
    
    $
    19,250
    
    
    $
    (8,565
    )Stock-based compensation included in
net income (loss)
    
    
    950
    
    
    
    553
    
    
    
    1,880
    
    
    
    1,696Stock-based compensation under SFAS
123
    
    
    (2,235
    )
    
    
    (4,808
    )
    
    
    (5,167
    )
    
    
    (10,397
    )Pro forma net income (loss)
    
    $
    11,758
    
    
    $
    (6,151
    )
    
    $
    15,963
    
    
    $
    (17,266
    )Pro forma net income (loss) per share:Basic
    
    $
    0.13
    
    
    $
    (0.07
    )
    
    $
    0.18
    
    
    $
    (0.19
    )Diluted
    
    $
    0.13
    
    
    $
    (0.07
    )
    
    $
    0.17
    
    
    $
    (0.19
    )
 6




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Recent Accounting Pronouncements In December 2004, the FASB issued a revision to FASB Statement No. 123, Accounting for Stock
Based Compensation (SFAS 123). FASB Statement
No. 123 (R), Share-Based Payment (SFAS 123
(R)), supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS 123 (R) establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or services that are based
on the fair value of the entitys equity instruments or that may be settled by the issuance of
those equity instruments. SFAS 123 (R) focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. This Statement does not
change the accounting guidance for share-based payment transactions with parties other than
employees provided in SFAS 123 as originally issued and EITF Issue No. 96-18, Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. SFAS 123 (R) does not address the accounting for employee share
ownership plans, which are subject to AICPA Statement of Position 93-6, Employers Accounting for
Employee Stock Ownership Plans. Based
on the guidance of SFAS 123 (R), we will be required to initially measure the cost of
employee services received in exchange for an award of liability instruments (i.e. awards settled
in cash rather than equity) based on its current fair value; the fair value of that award will be
re-measured subsequently at each reporting date through the settlement date. Changes in fair value
during the requisite service period will be recognized as compensation cost over that period. For
equity settled awards, we will be required to estimate the grant-date fair value of employee share
options and similar instruments expected to ultimately be issued to employees using option-pricing
models adjusted for the unique characteristics of those instruments (unless observable market
prices for the same or similar instruments are available). Based on the grant date fair value
calculated, we will be required to amortize the cost of such award over the requisite service
period. Excess
tax benefits, as defined by SFAS 123 (R), will be recognized as an addition to
paid-in-capital. Cash retained as a result of those excess tax benefits will be presented in the
statement of cash flows as financing cash inflows. The write-off of deferred tax assets relating to
unrealized tax benefits associated with recognized compensation cost will be recognized as income
tax expense unless there are excess tax benefits from previous awards remaining in paid-in capital
to which it can be offset. The
effective date of SFAS 123 (R) is as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. We will adopt this Statement in the first quarter
of our 2006 fiscal year (quarter ended September 30, 2005). We are still currently evaluating the
impact that the adoption of SFAS 123 (R) will have on our financial statements. In December 2004, the FASB issued FASB Statement No. 153, Exchanges of Nonmonetary Assets
(SFAS 153). This Statement addresses the measurement of exchanges of nonmonetary assets. The
guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions (APB 29), is based on
the principle that exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in APB 29, however, included certain exceptions to that
principle. SFAS 153 amends APB 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of nonmonetary assets that
do not have commercial substance. A nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the exchange. This
Statement is effective for financial statements for fiscal years beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges incurred during fiscal years
beginning after the date this Statement is issued. We do not believe that the adoption of this
statement will have a significant impact on our financial statements. 7




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FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS 131), requires that a public company separately report the financial and descriptive
information about its reportable operating segments. Paragraph 17 of SFAS 131 sets forth the
aggregation criteria used to determine whether an operating segment that does not otherwise meet
the quantitative thresholds to be a reportable segment may be aggregated in accordance with
paragraph 19 of SFAS 131. EITF Issue 04-10 Determining Whether to Aggregate Operating Segments
That Do Not Meet the Quantitative Thresholds (EITF 04-10), addresses the criteria for
aggregating operating segments. We currently report our financial and operating results according to our four primary business
segments (Electronic Commerce, Investment Services, Software, and Corporate). The financial and
operating results for at least one of those primary business segments is comprised of one or more
smaller business units that have been aggregated. Based upon our analysis of our current
operations, we believe that such aggregations meet the criteria for
aggregation under EITF 04-10 and
paragraph 17 of SFAS 131. We will continue to monitor any changes in the nature and operations of
each of our business segments and modify our method of aggregation as appropriate in order to
remain in compliance with EITF 04-10 and SFAS 131. Reclassifications Certain amounts in the prior years financial statements have been reclassified to conform to
the fiscal year 2005 presentation. 2. Investments Our investments consist of the following (in thousands): December 31,
    
    
    June 30,2004
    
    
    2004Available-for-sale
    
    $
    335,643
    
    
    $
    243,526Other investments
    
    
    796
    
    
    
    725Less: amounts classified as cash equivalents
    
    
    174,826
    
    
    
    102,710Total investments
    
    $
    161,613
    
    
    $
    141,541
 We base the fair value of available-for-sale securities on quoted market values. In the three
and six months ended December 31, 2004, we sold available-for-sale investments in the amount of
$20,638,000 and $60,171,000, respectively. In the three and six months ended December 31, 2003, we
sold available-for-sale investments in the amount of $55,477,000 and $61,405,000, respectively. We
recognized gross gains of $4,000 and $238,000 as well as gross losses of $33,000 and $474,000 on
these sales during the three months ended December 31, 2004 and 2003, respectively. We recognized
gross gains of $4,000 and $242,000 as well as gross losses of $40,000 and $474,000 on these sales
during the six months ended December 31, 2004, and 2003, respectively. 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. During the six-month period
ended December 31, 2004, we received a refund of an escrow deposit in the amount of $223,000. 8




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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. 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 six-month period ended December 31, 2004, we made a final purchase price
adjustment of $3,277,000. We recorded $733,000 of deferred tax assets related to our final purchase
price adjustments. As of December 31, 2004, our only non-amortizing intangible asset is goodwill. The changes in
the carrying value of goodwill by segment from June 30, 2003 to December 31, 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
    
    
    
    612,971Purchase price adjustments
    
    
    2,544
    
    
    
    (223
    )
    
    
    
    
    
    
    2,321Balance as of December 31, 2004
    
    $
    581,239
    
    
    $
    22,666
    
    
    $
    11,387
    
    
    $
    615,292
 The components of our various amortized intangible assets are as follows (in thousands): December 31,
    
    
    June 30,2004
    
    
    2004Capitalized software:Product technology from acquisitions and strategic agreement
    
    $
    167,458
    
    
    $
    167,458Internal development costs
    
    
    32,525
    
    
    
    31,519Total
    
    
    199,983
    
    
    
    198,977Less: accumulated amortization
    
    
    190,836
    
    
    
    187,465Capitalized software, net
    
    $
    9,147
    
    
    $
    11,512Strategic agreements:Strategic agreements (1)
    
    $
    744,424
    
    
    $
    744,424Less: accumulated amortization
    
    
    535,005
    
    
    
    473,034Strategic agreements, net
    
    $
    209,419
    
    
    $
    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
    
    
    85,635
    
    
    
    81,916Other intangible assets, net
    
    $
    17,951
    
    
    $
    21,670
  (1)
    Strategic agreements primarily include certain
entity-level covenants not to compete. Amortization of intangible assets totaled $34,387,000 and $33,466,000 for the three
months ended December 31, 2004 and 2003, respectively. Amortization of intangible assets totaled
$69,061,000 and $75,338,000 for the six months ended December 31, 2004 and 2003, respectively. 9




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##### Table of Contents



4. Common Stock In the six months ended December 31, 2004, we issued stock for various employee benefit
programs. 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 $8,721,000 within stockholders equity during the six-month
period ended December 31, 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. We recorded an expense of approximately $1,429,000
for the six months ended December 31, 2004 related to the vesting of the restricted stock. 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
six-month period ended December 31, 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 $1,043,000 for the six-month period ended December 31, 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 EndedDecember 31, 2004
    
    
    December 31, 2003Per-
    
    
    
    
    
    
    
    
    
    
    Per-Income
    
    
    Shares
    
    
    Share
    
    
    Loss
    
    
    Shares
    
    
    Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    13,043
    
    
    
    90,545
    
    
    $
    0.14
    
    
    $
    (1,896
    )
    
    
    89,624
    
    
    $
    (0.02
    )Effect of dilutive
securities:Options and warrants
    
    
    
    
    
    
    2,474
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPS
    
    $
    13,043
    
    
    
    93,019
    
    
    $
    0.14
    
    
    $
    (1,896
    )
    
    
    89,624
    
    
    $
    (0.02
    )
 For the Six Months EndedDecember 31, 2004
    
    
    December 31, 2003Per-
    
    
    
    
    
    
    
    
    
    
    Per-Income
    
    
    Shares
    
    
    Share
    
    
    Loss
    
    
    Shares
    
    
    Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    19,250
    
    
    
    90,482
    
    
    $
    0.21
    
    
    $
    (8,565
    )
    
    
    89,543
    
    
    $
    (0.10
    )Effect of dilutive
securities:Options and warrants
    
    
    
    
    
    
    2,282
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPS
    
    $
    19,250
    
    
    
    92,764
    
    
    $
    0.21
    
    
    $
    (8,565
    )
    
    
    89,543
    
    
    $
    (0.10
    )
 10




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##### Table of Contents



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 and six-month periods ended December 31, 2003, we would have
included an additional 5,410,000 and 1,848,000 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 2,001,000 and 195,000 for the three and six
months ended December 31, 2003, respectively. The weighted average diluted common shares outstanding for the three and six months ended
December 31, 2004 excludes the effect of approximately 2,625,000 and 2,778,000 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 and six months ended December 31, 2003, excludes the effect of
approximately 3,187,000 and 8,643,000 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, for the three and six months ended December 31, 2003, the
after-tax effect of interest expense on the convertible subordinated notes has not been added back
to the numerator, as its effect would also be anti-dilutive. 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, six months ended
December 31, 2004
    
    
    (279
    )Balance as of December 31, 2004
    
    $
    453
 7. Supplemental Disclosure of Cash Flow Information (in thousands) Six Months EndedDecember 31,2004
    
    
    2003Interest paid
    
    $
    360
    
    
    $
    5,837Call premium paid for redemption of convertible notes
    
    $
    
    
    
    $
    4,813Income taxes paid
    
    $
    16,394
    
    
    $
    5,651Supplemental disclosure of non-cash investing and
financing activities:Capital lease and other long-term asset additions
    
    $
    567
    
    
    $
    600Stock funding of 401(k) match
    
    $
    29
    
    
    $
    3,144Stock funding of Associate Stock Purchase Plan
    
    $
    1,694
    
    
    $
    1,447
 11




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##### Table of Contents



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 December 31, 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 December 31, 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 beginning with our quarter ended
September 30, 2004. 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 to us 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 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 Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net income (loss)
    
    $
    13,043
    
    
    $
    (1,896
    )
    
    $
    19,250
    
    
    $
    (8,565
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    355
    
    
    
    
    
    
    
    460
    
    
    
    Unrealized holding gains (loss) on
investments, net of tax
    
    
    (697
    )
    
    
    (236
    )
    
    
    (91
    )
    
    
    (463
    )Less: reclassification adjustments for
gains (loss) realized in net income
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    93Net unrealized gains (loss)
    
    
    (342
    )
    
    
    (143
    )
    
    
    369
    
    
    
    (370
    )Comprehensive income (loss)
    
    $
    12,701
    
    
    $
    (2,039
    )
    
    $
    19,619
    
    
    $
    (8,935
    )
 12




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##### 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 sets forth certain financial information attributable to our business segments
for the three and six months ended December 31, 2004 and 2003 (in thousands): Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Revenues:Electronic Commerce
    
    $
    142,108
    
    
    $
    112,488
    
    
    $
    280,315
    
    
    $
    219,043Investment Services
    
    
    23,972
    
    
    
    21,465
    
    
    
    46,815
    
    
    
    41,758Software
    
    
    19,676
    
    
    
    15,983
    
    
    
    36,459
    
    
    
    30,399Total
    
    $
    185,756
    
    
    $
    149,936
    
    
    $
    363,589
    
    
    $
    291,200Segment operating income (loss):Electronic Commerce
    
    $
    50,879
    
    
    $
    38,961
    
    
    $
    97,830
    
    
    $
    72,883Investment Services
    
    
    5,624
    
    
    
    4,608
    
    
    
    8,184
    
    
    
    9,526Software
    
    
    6,669
    
    
    
    3,565
    
    
    
    7,302
    
    
    
    5,793Corporate
    
    
    (9,577
    )
    
    
    (9,261
    )
    
    
    (17,536
    )
    
    
    (17,223
    )Total
    
    
    53,595
    
    
    
    37,873
    
    
    
    95,780
    
    
    
    70,979Purchase accounting amortization
    
    
    (33,211
    )
    
    
    (32,099
    )
    
    
    (66,426
    )
    
    
    (72,593
    )Write off of in-process research and development costs
    
    
    
    
    
    
    (324
    )
    
    
    
    
    
    
    (324
    )Equity in net loss of joint venture
    
    
    (700
    )
    
    
    
    
    
    
    (1,347
    )
    
    
    Interest, net
    
    
    1,490
    
    
    
    (7,964
    )
    
    
    3,186
    
    
    
    (9,588
    )Total income (loss) before income taxes
    
    $
    21,174
    
    
    $
    (2,514
    )
    
    $
    31,193
    
    
    $
    (11,526
    )
 13




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##### 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 in similar or complementary businesses. We operate our business through three independent but inter-related divisions:  
    Electronic Commerce; 
    Investment Services; and 
    Software. Through our Electronic Commerce division, we enable consumers to receive and pay bills
electronically. For the year ended June 30, 2004, we processed approximately 583 million payment
transactions and delivered approximately 82 million e-Bills. For the quarter ended December 31,
2004, we processed more than 219 million payment transactions and delivered almost 33 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 was 7% for the quarter ended December 31, 2004,
compared to the quarter ended September 30, 2004. 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 76% of our revenue in the
quarter ended December 31, 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 December 31, 2004, our clients used the CheckFree APLSM portfolio accounting
system to manage more than 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 December 31, 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. 14




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##### Table of Contents



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, together providing three sets of software products. ACH software and services are used
to process more than two-thirds of the United States ten 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 11% of our revenue in quarter ended December 31,
2004. Executive Summary For the quarter ended December 31, 2004, we earned net income of $13.0 million compared to a
net loss of $1.9 million for the same period last year, and we generated $56.5 million of free cash
flow, an increase of $18.8 million, or 50%, over the same period last year. For the six month
period ended December 31, 2004, we earned $19.3 million of net income compared to a net loss of
$8.6 million for the same period last year and we generated $84.8 million of free cash flow, an
increase of $25.5 million, or 43%, over the same period last year. We became a cash basis tax
payer in the current fiscal year. See Use of Non-GAAP Financial Information for our definition
and discussion of free cash flow. Our efforts to improve quality and efficiency throughout our
operations have resulted in increasingly positive operating results, allowing us to continue to
invest toward the future growth of our businesses. Because of better than expected results through
the first half of fiscal 2005, we have initiated previously unplanned investments of between $4.0
million and $6.0 million for the second half of fiscal 2005, across all of our business segments
that are geared toward future growth. Beyond additional walk-in bill payment transaction volume and related revenue resulting from
our acquisition of APS on June 22, 2004, we continued to experience solid revenue growth in our
Electronic Commerce business. Transaction volume, including walk-in bill payments, exceeded 219
million, and transaction growth exceeded 57% in the quarter ended December 31, 2004, as compared to
the same period last year. Additionally, we delivered almost 33 million e-Bills in the quarter
ended December 31, 2004, an increase of 77% over the same period last year. We believe that the
added availability of e-Bills make electronic payment offerings increasingly more compelling to
consumers. Continued efforts to improve quality and efficiency in our operations, combined with an
improving electronic versus paper payment rate and our ability to leverage a significant fixed cost
base, have resulted in a steadily reducing cost per transaction, and has offset volumebased
pricing discounts inherent in our Electronic Commerce business. Our Investment Services division achieved revenue growth of 12% in the quarter ended December
31, 2004, as compared to the same period last year. Portfolio growth, which is dependent primarily
on the growth of the United States stock market, has started to resume. We are cautiously
optimistic about continued near-term portfolio growth. We continue to invest heavily in our
Investment Services process platform to position ourselves to take full advantage of the emerging
SMA market. We expect our near-term operating margin to lag historical levels over the next 18 to
24 months, until this development effort is complete. Our Software division has achieved better than expected license revenue growth for the last
two quarters. Because license revenue carries a relatively high operating margin, our operating
income has improved in this division as well. However, we remain uncertain as to whether this
represents the beginning of a growth trend in software sales. 15




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##### Table of Contents



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, which we expect to result in a temporary
decline in revenue growth, primarily in the quarter ending March 31, 2006. The following table
represents the relevant annual minimum revenue guarantees with Microsoft and FDC (in thousands): Fiscal Year Ended June 30,
    
    Microsoft
    
    
    FDC
    
    
    Total2004
    
    $
    27,000
    
    
    $
    14,500
    
    
    $
    41,5002005
    
    $
    33,000
    
    
    $
    17,500
    
    
    $
    50,5002006
    
    $
    18,000
    
    
    $
    3,000
    
    
    $
    21,000
 Both agreements are operating substantially below their minimum levels. However, we believe
we can manage investment levels and improved scale in Electronic Billing in order to maintain our
total company targeted operating margin in the mid to upper 20% level on a full-year basis in
fiscal 2006. 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 revenues, certain consolidated
statements of operations data: Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    December 31,2004
    
    2003
    
    2004
    
    2003Total Revenues:
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Expenses:Cost of processing, servicing and support
    
    
    39.1
    
    
    
    40.6
    
    
    
    40.7
    
    
    
    41.2Research and development
    
    
    10.4
    
    
    
    10.7
    
    
    
    10.9
    
    
    
    10.7Sales and marketing
    
    
    8.8
    
    
    
    8.8
    
    
    
    8.4
    
    
    
    8.8General and administrative
    
    
    7.2
    
    
    
    7.8
    
    
    
    7.8
    
    
    
    8.0Depreciation and amortization
    
    
    23.5
    
    
    
    28.3
    
    
    
    24.1
    
    
    
    31.9In-process research and development
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.1Total expenses
    
    
    89.0
    
    
    
    96.4
    
    
    
    91.9
    
    
    
    100.7Income (loss) from operations
    
    
    11.0
    
    
    
    3.6
    
    
    
    8.1
    
    
    
    (0.7
    )Equity in net loss of joint venture
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.4
    )
    
    
    Interest, net
    
    
    0.8
    
    
    
    (5.3
    )
    
    
    0.9
    
    
    
    (3.2
    )Income (loss) before income taxes
    
    
    11.4
    
    
    
    (1.7
    )
    
    
    8.6
    
    
    
    (3.9
    )Income tax expense (benefit)
    
    
    4.4
    
    
    
    (0.4
    )
    
    
    3.3
    
    
    
    (1.0
    )Net income (loss)
    
    
    7.0
    %
    
    
    (1.3
    )%
    
    
    5.3
    %
    
    
    (2.9
    )%
 16




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##### Table of Contents



Results of Operations The following table sets forth total company revenue for the three- and six-month periods
ended December 31, 2004, and 2003, respectively. Total Revenues (000s)
    
    December 31,
    
    
    Change2004
    
    
    2003
    
    
    $
    
    
    %Three months ended
    
    $
    185,756
    
    
    $
    149,936
    
    
    $
    35,820
    
    
    
    23.9%Six months ended
    
    $
    363,589
    
    
    $
    291,200
    
    
    $
    72,389
    
    
    
    24.9%
 Quarter-over-quarter revenue growth was driven by 26% growth in our Electronic Commerce
business, 12% growth in our Investment Services business and 23% growth in our Software business.
Year-over-year revenue growth was driven by 28% growth in our Electronic Commerce business, 12%
growth in our Investment Services business and 20% growth in our Software business. Our walk-in bill payment business provided more than 10% of the quarter-over-quarter and
year-over-year revenue growth in our Electronic Commerce business. Overall growth in Electronic
Commerce, including walk-in bill payment, continues to be driven primarily by growth in
transactions processed, from approximately 139 million for the quarter ended December 31, 2003, to
more than 219 million for the quarter ended December 31, 2004, and from approximately 266 million
for the six-month period ended December 31, 2003, to more than 425 million for the six-month period
ended December 31, 2004. Additionally, we delivered almost 33 million e-Bills in the quarter ended
December 31, 2004, an increase of over 77% compared to the nearly 19 million e-Bills delivered in
the quarter ended December 31, 2003, and we delivered more than 62 million e-Bills in the six-month
period ended December 31, 2004, representing 88% growth over the more than 33 million e-Bills
delivered in the same period last year. Lastly, with interest rates increasing since this time
last year, we are experiencing growth in our interest-sensitive products, such as Account Balance
Transfer (ABT). This combined growth in 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 transaction growth, our
average revenue per transaction has, therefore, declined over time with respect to our
transaction-based revenue. Growth in Investment Services revenue was driven primarily by an increase in the number of
portfolios managed, from about 1.4 million as of December 31, 2003, to more than 1.7 million as of
December 31, 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 lower priced broker dealers, and by conscious
price reductions, where we trade off near-term revenue growth against long-term strategic
advantage. We believe that more favorable market conditions have resulted in resumed growth in
portfolios managed. We are cautiously optimistic about resulting growth opportunities. We experienced substantial license revenue growth in our Software business, both on
quarter-over-quarter and year-over-year bases. In addition to new business resulting from our
acquisition of HelioGraph, Ltd. (HelioGraph) in the quarter ended December 31, 2003, we achieved
strong growth in our more mature ACH and reconciliation products. We believe this to be the
result of improved execution within our Software division, combined with signs of recovery in the
U.S. economy. The following tables set forth comparative revenues, by type, for the three- and six-month
periods ended December 31, 2004 and 2003, respectively. Processing and Servicing (000s)
    
    December 31,
    
    
    Change2004
    
    
    2003
    
    
    $
    
    
    %Three months ended
    
    $
    164,188
    
    
    $
    131,647
    
    
    $
    32,541
    
    
    
    24.7%Six months ended
    
    $
    323,030
    
    
    $
    255,892
    
    
    $
    67,138
    
    
    
    26.2%
 17




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##### Table of Contents



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 quarter-over-quarter and year-over-year increases 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. Our traditional electronic bill payment business continued to grow as well,
with sequential transaction growth of 7% remaining within our historical growth range of 6% to 10%.
We delivered almost 33 million e-Bills in the quarter ended December 31, 2004, representing an
increase of more than 77% from the nearly 19 million e-Bills delivered in the quarter ended
December 31, 2003, and we delivered more than 62 million e-Bills in the six-months ended December
31, 2004, representing growth of 88% over the more than 33 million e-Bills delivered in the same
period last year. Additionally, with interest rates increasing over the past year, we have
experienced growth in revenue from our interest-sensitive products, such as ABT. Overall
quarter-over-quarter and year-over-year growth in processing and servicing revenue was somewhat
offset by tier-based volume pricing discounts within both our Electronic Commerce and Investment
Services businesses. License Fees (000s)
    
    December 31,
    
    
    Change2004
    
    
    2003
    
    
    $
    
    
    %Three months ended
    
    $
    7,655
    
    
    $
    4,716
    
    
    $
    2,939
    
    
    
    62.3%Six months ended
    
    $
    13,529
    
    
    $
    9,678
    
    
    $
    3,851
    
    
    
    39.8%
 License fees relate to our Software division. Significant quarter-over-quarter and
year-over-year license fee revenue growth has taken place primarily in our more traditional ACH and
reconciliation product lines. The acquisition of HelioGraph in the quarter ended December 31,
2003, has also contributed to license growth. Despite two quarters of strong license revenue
growth in fiscal 2005, we remain uncertain as to whether this represents the beginning of a general
trend in continued software sales growth. Maintenance Fees (000s)
    
    December 31,
    
    
    Change2004
    
    
    2003
    
    
    $
    
    
    %Three months ended
    
    $
    7,456
    
    
    $
    7,412
    
    
    $
    44
    
    
    
    0.6%Six months ended
    
    $
    14,811
    
    
    $
    14,113
    
    
    $
    698
    
    
    
    4.9%
 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 increased as a result of recent license sales,
customer retention rates exceeding 80%, and moderate price increases across all our software
product lines. However, quarter-over-quarter maintenance revenue growth is negatively impacted by
the timing of cash collections on annual maintenance billing. We defer revenue recognition on
maintenance billings until cash is collected, which can cause quarterly fluctuations.
Year-over-year maintenance growth has been positively impacted by the acquisition of HelioGraph in
the quarter ended December 31, 2003. Other Revenues (000s)
    
    December 31,
    
    
    Change2004
    
    
    2003
    
    
    $
    
    
    %Three months ended
    
    $
    6,457
    
    
    $
    6,161
    
    
    $
    296
    
    
    
    4.8%Six months ended
    
    $
    12,219
    
    
    $
    11,517
    
    
    $
    702
    
    
    
    6.1%
 Other revenue consists mostly of consulting and implementation fees across all three of our
businesses, and with the acquisition of APS we have added revenue associated with stored value
cards to this category. We completed a significant software services engagement during fiscal
2004, which has resulted in a dampening in growth during fiscal 2005. This has been offset by
incremental services revenue provided from the acquisitions of HelioGraph in the quarter ended
December 31, 2003, and APS in the quarter ended June 30, 2004. 18




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##### Table of Contents



Cost of Processing, Servicing and Support (000s)
    
    December 31,2004
    
    
    2003$
    
    
    % Revenue
    
    
    $
    
    
    % RevenueThree months ended
    
    $
    72,688
    
    
    
    39.1%
    
    
    $
    60,798
    
    
    
    40.6%Six months ended
    
    $
    148,050
    
    
    
    40.7%
    
    
    $
    120,086
    
    
    
    41.2%
 In Electronic Commerce, our electronic payment rate has improved from 78% as of December 31,
2003, to 83% as of December 31, 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 about three points of the five percentage point increase we
experienced in our electronic payment rate, year-over-year. In addition to leveraging a
significant fixed-cost processing infrastructure, we continue to focus investments on additional
efficiency and quality improvements through Six-Sigma based improvements in our customer care
processes and information technology infrastructure in order to drive improvement in our cost per
transaction. These drivers of expense efficiency were offset somewhat by two factors over the past
year. First, the gross margin of our walk-in bill payment business is less than the remainder of
our electronic billing and payment business. Additionally, in the quarter ended September 30,
2004, we incurred a charge of approximately $2.6 million to provide for an anticipated loss in a
software services engagement with a large customer. Research and Development (000s)
    
    December 31,2004
    
    
    2003$
    
    
    % Revenue
    
    
    $
    
    
    % RevenueThree months ended
    
    $
    19,329
    
    
    
    10.4%
    
    
    $
    16,102
    
    
    
    10.7%Six months ended
    
    $
    39,552
    
    
    
    10.9%
    
    
    $
    31,005
    
    
    
    10.7%
 Including capitalized development costs of $0.6 million for the quarter ended December 31,
2004, and $0.7 million for the quarter ended December 31, 2003, gross expenditures for research and
development were $19.9 million, or 10.7% of total revenue, for the quarter ended December 31, 2004,
and were $16.8 million, or 11.2% of total revenue, for the quarter ended December 31, 2003.
Including capitalized development costs of $1.0 million for the six-month period ended December 31,
2004, and $1.6 million for the six-month period ended December 31, 2003, gross expenditures for
research and development were $40.6 million, or 11.2% of total revenue, for the six-month period
ended December 31, 2004, and $32.6 million, or 11.2% of total revenue, for the six-month period
ended December 31, 2003. Our acquisitions of APS and HelioGraph have added a moderate level of
research and development spending. We continue to invest heavily in product enhancement and
productivity improvement initiatives, particularly in our Investment Services and Electronic
Commerce businesses. We incurred a slight delay in a major development effort in Investment
Services as we transitioned detailed requirements knowledge to a new development during the quarter
ended December 31, 2004, causing the slight variation in development costs as a percentage of
revenue, however we expect research and development costs to increase as a percentage of revenue
due to this project in the coming quarters. Sales and Marketing (000s)
    
    December 31,2004
    
    
    2003$
    
    
    % Revenue
    
    
    $
    
    
    % RevenueThree months ended
    
    $
    16,282
    
    
    
    8.8%
    
    
    $
    13,206
    
    
    
    8.8%Six months ended
    
    $
    30,508
    
    
    
    8.4%
    
    
    $
    25,531
    
    
    
    8.8%
 19




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##### Table of Contents



Sales and marketing costs, as a percentage of total revenue, have remained fairly consistent
on a quarter-over-quarter and year-over-year basis. The slight drop in the six-month period ended
December 31, 2004, is the result of the predominance of revenue growth occurring within our
Electronic Commerce business, which has less associated variable sales costs as compared to our
other businesses. Our acquisition of APS and HelioGraph have provided incremental sales and
marketing personnel and program costs both on quarter-over-quarter and year-over-year bases. General and Administrative (000s)
        
        December
          31,2004
        
        
        2003$
        
        
        %
          
          Revenue
        
        
        $
        
        
        %
          
          RevenueThree months ended
        
        $
        13,430
        
        
        
        7.2%
        
        
        $
        11,672
        
        
        
        7.8%Six months ended
        
        $
        28,465
        
        
        
        7.8%
        
        
        $
        23,195
        
        
        
        8.0%
 Incremental general and administrative costs, on an absolute dollar basis, have resulted
primarily from facilities and other non-redundant expenses related to our acquisitions of APS and
HelioGraph. Additionally, we are experiencing increasing quarterly Sarbanes-Oxley Section 404
compliance costs as we prepare for our first internal controls certification as of June 30, 2005.
Finally, in the quarter ended September 30, 2004, we incurred approximately $2.0 million of bad
debt expense resulting from a formula-based accounts receivable reserve that was mostly recovered
in the quarter ended December 31, 2004. The recovery is the primary reason for the drop in general
and administrative costs as a percentage of total revenue in the quarter ended December 31, 2004.
We continue to expect our general and administrative costs to run between 7% and 8% of revenue and
are managing these costs accordingly. Depreciation and Amortization (000s)
        
        December
          31,2004
        
        
        2003$
        
        
        %
          
          Revenue
        
        
        $
        
        
        %
          
          RevenueThree months ended
        
        $
        43,643
        
        
        
        23.5%
        
        
        $
        42,384
        
        
        
        28.3%Six months ended
        
        $
        87,660
        
        
        
        24.1%
        
        
        $
        92,997
        
        
        
        31.9%
 Depreciation and amortization expense has increased by $1.3 million quarter-over-quarter
primarily due to the amortization of intangible assets associated with the acquisitions of APS and
HelioGraph, more than offsetting the drop in amortization associated with intangible assets that
fully amortized since December 31, 2003. On a year-over-year basis, the drop in amortization
associated with fully amortized intangible assets has more than offset the increase in amortization
associated with intangible assets recorded as a result of the acquisitions of APS and HelioGraph.
Depreciation expense associated with tangible assets remained essentially flat on
quarter-over-quarter and year-over-year bases. In-Process Research & Development (000s)
        
        December
          31,2004
        
        
        2003$
        
        
        %
          Revenue
        
        
        $
        
        
        %
          
          RevenueThree months ended
        
        $
        
        
        
        
        
        
        
        $
        324
        
        
        
        0.2%Six months ended
        
        $
        
        
        
        
        
        
        
        $
        324
        
        
        
        0.1%
 We recorded immaterial research and development costs totaling $0.3 million related to our
acquisition of HelioGraph in the quarter ended December 31, 2003. 20




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##### Table of Contents





Equity in Net Loss of Joint Venture (000s)
        
        December
          31,2004
        
        
        2003$
        
        
        %
          Revenue
        
        
        $
        
        
        %
          RevenueThree months ended
        
        $
        (700
        )
        
        
        (0.4)%
        
        
        $
        
        
        
        
        Six months ended
        
        $
        (1,347
        )
        
        
        (0.4)%
        
        
        $
        
        
        
        
        


In April 2004, we announced a joint venture, OneVu Limited (OneVu), with Voca Limited
(Voca), designed to create an integrated electronic billing and payment network for billers and
banks in the United Kingdom. We account for the joint venture on the equity basis of accounting
and the equity in the net loss of the joint venture represents our portion of the loss incurred by
the joint venture during the indicated periods. The joint venture is still in its formative stage
and therefore we do not expect it to become profitable in the foreseeable future.

Net Interest (000s)
    
    December 31,2004
    
    
    2003$
    
    

%Revenue
    
    
    $
    
    

%RevenueThree months ended:Interest income
    
    $
    1,810
    
    
    
    
    
    
    $
    1,718Interest expense
    
    
    (320
    )
    
    
    
    
    
    
    (2,461
    )Call premium expense
    
    
    
    
    
    
    
    
    
    
    (4,813
    )Unamortized note issuance cost
    
    
    
    
    
    
    
    
    
    
    (2,408
    )Net interest
    
    $
    1,490
    
    
    
    0.8%
    
    
    $
    (7,964
    )
    
    
    (5.3)%Six months ended:Interest income
    
    $
    3,717
    
    
    
    
    
    
    $
    3,311Interest expense
    
    
    (531
    )
    
    
    
    
    
    
    (5,678
    )Call premium expense
    
    
    
    
    
    
    
    
    
    
    (4,813
    )Unamortized note issuance cost
    
    
    
    
    
    
    
    
    
    
    (2,408
    )Net interest
    
    $
    3,186
    
    
    
    0.9%
    
    
    $
    (9,588
    )
    
    
    (3.2)%


On a quarter-over-quarter basis, despite a modest decrease in average cash and invested
assets, interest income increased by approximately $0.1 million due to an increase in investment
yield since last year. We carried $172.5 million of 6.5% convertible notes throughout much of
the quarter ended December 31, 2003. We redeemed the notes in full on December 12, 2003. Interest
expense decreased significantly from $2.5 million in the quarter ended December 31, 2003, to $0.3
million in the quarter ended December 31, 2004, due primarily to the reduced interest expense upon
redemption of the notes. Additionally, as a result of the redemption, we incurred a charge of $4.8
million for a 2.79% call premium for early redemption of the notes, and an additional $2.4 million
charge to write off the remaining unamortized note issuance costs.

On a year-over-year basis, again despite a decrease in average cash and invested assets,
interest income increased by approximately $0.4 million due primarily to an increase in investment
yield since last year. Additionally, 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 unrelated to invested assets. As a result of the aforementioned
redemption of $172.5 million of 6.5% convertible notes on December 12, 2003, our year-over-year
interest expense declined from $5.7 million for the six months ended December 31, 2003, to $0.5
million for the six months ended December 31, 2004. The call premium expense of $4.8 million and
the $2.4 million charge for unamortized note issuance costs resulted from the early redemption of
the notes.

21



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##### Table of Contents



Income Tax Expense (Benefit) (000s)
        
        December
          31,2004
        
        
        2003$
        
        
        Effective
          Rate
        
        
        $
        
        
        Effective
          RateThree months ended
        
        $
        8,131
        
        
        
        38.4%
        
        
        $
        (618
        )
        
        
        24.6%Six months ended
        
        $
        11,943
        
        
        
        38.3%
        
        
        $
        (2,961
        )
        
        
        25.7%
 Under normal circumstances we would expect a blended statutory effective tax rate of about
39%. For the three-month and the six-month periods ended December 31, 2004, our effective tax rate
was slightly lower due to research and experimentation tax credits recorded in the fiscal year.
For the three-month and six-month periods ended December 31, 2003, our effective tax benefit was
offset by federal alternative minimum taxes and the temporary suspension 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 and significant one-time
charges. The following table sets forth revenue and operating income by segment, for the periods
noted: Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands)Revenues:Electronic Commerce
    
    $
    142,108
    
    
    $
    112,488
    
    
    $
    280,315
    
    
    $
    219,043Investment Services
    
    
    23,972
    
    
    
    21,465
    
    
    
    46,815
    
    
    
    41,758Software
    
    
    19,676
    
    
    
    15,983
    
    
    
    36,459
    
    
    
    30,399Total revenues
    
    $
    185,756
    
    
    $
    149,936
    
    
    $
    363,589
    
    
    $
    291,200Segment operating income (loss):Electronic Commerce
    
    $
    50,879
    
    
    $
    38,961
    
    
    $
    97,830
    
    
    $
    72,883Investment Services
    
    
    5,624
    
    
    
    4,608
    
    
    
    8,184
    
    
    
    9,526Software
    
    
    6,669
    
    
    
    3,565
    
    
    
    7,302
    
    
    
    5,793Corporate
    
    
    (9,577
    )
    
    
    (9,261
    )
    
    
    (17,536
    )
    
    
    (17,223
    )Purchase accounting amortization:Electronic Commerce
    
    
    (32,559
    )
    
    
    (31,049
    )
    
    
    (65,122
    )
    
    
    (70,570
    )Investment Services
    
    
    (151
    )
    
    
    (231
    )
    
    
    (302
    )
    
    
    (463
    )Software
    
    
    (501
    )
    
    
    (819
    )
    
    
    (1,002
    )
    
    
    (1,560
    )Write off of in-process research and
development costs  Software
    
    
    
    
    
    
    (324
    )
    
    
    
    
    
    
    (324
    )Total income (loss) from operations
    
    $
    20,384
    
    
    $
    5,450
    
    
    $
    29,354
    
    
    $
    (1,938
    )
 22




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##### Table of Contents



Electronic Commerce Segment Information: Electronic Commerce Revenues
(000s)
    

December 31,
    
    
    Change2004
    
    
    2003
    
    
    $
    
    
    %Three months ended
    
    $
    142,108
    
    
    $
    112,488
    
    
    $
    29,620
    
    
    
    26.3%Six months ended
    
    $
    280,315
    
    
    $
    219,043
    
    
    $
    61,272
    
    
    
    28.0%
 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 revenue from interest-sensitive products, such as ABT, somewhat
offset by contractual volume-based price discounts. 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 and fees associated
with the issuance of stored value cards. The following table provides a historical trend of revenues, underlying transaction metrics,
and subscriber metrics, where appropriate, for our Electronic Commerce business over the last six
quarters. Three Months Ended12/31/04
    
    
    9/30/04
    
    
    6/30/04
    
    
    3/31/04
    
    
    12/31/03
    
    
    9/30/03(In millions)Full ServiceRevenues
    
    $
    102.4
    
    
    $
    99.1
    
    
    $
    96.2
    
    
    $
    94.0
    
    
    $
    91.8
    
    
    $
    85.5Active Subscribers
    
    
    6.9
    
    
    
    6.4
    
    
    
    5.9
    
    
    
    5.5
    
    
    
    5.0
    
    
    
    4.6Transactions processed
    
    
    142.9
    
    
    
    133.5
    
    
    
    123.9
    
    
    
    115.5
    
    
    
    106.1
    
    
    
    94.3Payment ServicesRevenues
    
    $
    31.3
    
    
    $
    30.5
    
    
    $
    14.0
    
    
    $
    12.8
    
    
    $
    12.0
    
    
    $
    11.9Transactions processed
    
    
    76.5
    
    
    
    72.3
    
    
    
    41.3
    
    
    
    36.7
    
    
    
    33.1
    
    
    
    32.4Other Electronic CommerceRevenues
    
    $
    8.4
    
    
    $
    8.6
    
    
    $
    8.3
    
    
    $
    8.4
    
    
    $
    8.7
    
    
    $
    9.2TotalsElectronic Commerce revenues
    
    $
    142.1
    
    
    $
    138.2
    
    
    $
    118.4
    
    
    $
    115.2
    
    
    $
    112.5
    
    
    $
    106.6Transactions processed
    
    
    219.4
    
    
    
    205.8
    
    
    
    165.2
    
    
    
    152.2
    
    
    
    139.2
    
    
    
    126.7
 23




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##### Table of Contents



The primary driver behind the increase in Full Service revenue from $91.8 million for the
quarter ended December 31, 2003, to $102.4 million for the quarter ended December 31, 2004, was 35%
growth in Full Service transactions processed from 106.1 million for the quarter ended December 31,
2003, to 142.9 million for the quarter ended December 31, 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 including volume discounts commensurate with this
customers volume. Since the quarter ended December 31, 2003, Full Service revenue per transaction
has declined from $0.87 to $0.72 as of December 31, 2004. Payment Services revenue has increased substantially, from $12.0 million for the quarter ended
December 31, 2003, to $31.3 million for the quarter ended December 31, 2004. In addition to
continued growth in transactions processed from our existing customer base, the primary driver of
the increase in revenue 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. The addition of APS can be seen
clearly in the increase in both revenue and transactions processed beginning in the quarter ended
September 30, 2004, in the historical trends above. The decline in Other Electronic Commerce revenue from the three- and six-month periods ended
December 31, 2003, to the three- and six-month periods ended December 31, 2004, was due to the loss
of a large Health and Fitness customer since last year, combined with lower consulting service
revenue in the division. Electronic Commerce Operating
Income (000s)
    
    December 31,
    
    
    Change2004
    
    
    2003
    
    
    $
    
    
    %Three months ended
    
    $
    50,879
    
    
    $
    38,961
    
    
    $
    11,918
    
    
    
    30.6%Six months ended
    
    $
    97,830
    
    
    $
    72,883
    
    
    $
    24,947
    
    
    
    34.2%
 Our ratio of electronic payments to total payments improved from 78% as of December 31, 2003,
to 83% as of December 31, 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 have realized a significant reduction in cost per transaction
over the past year, which resulted in an increase in operating income. Despite our new walk-in bill
payments operation providing a relatively low operating margin, the overall operating margin in our
Electronic Commerce business has increased from 35% for the quarter ended December 31, 2003, to 36%
for the quarter ended December 31, 2004, and from 33% for the six-months ended December 31, 2003,
to 35% for the six-months ended December 31, 2004. Investment Services Segment Information: Investment Services Revenues
(000s)
    
    December 31,
    
    
    Change2004
    
    
    2003
    
    
    $
    
    
    %Three months ended
    
    $
    23,972
    
    
    $
    21,465
    
    
    $
    2,507
    
    
    
    11.7%Six months ended
    
    $
    46,815
    
    
    $
    41,758
    
    
    $
    5,057
    
    
    
    12.1%
 Quarter-over-quarter and year-over-year revenue growth in Investment Services was driven
primarily by an increase in portfolios managed from almost 1.4 million as of December 31, 2003, to
more than 1.7 million as of December 31, 2004. We have provided certain incentives for customers
to sign multi-year contracts and are experiencing a mix shift toward lower priced services, both of
which we expect to result in lower revenue per average portfolio managed. Growth in portfolios
managed is typically tied to the growth in the U.S. stock market. We have experienced renewed
growth in portfolios, and as a result, we are cautiously optimistic about continued near-term
portfolio growth. 24




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##### Table of Contents



Investment Services Operating Income (000s)
        
        December
          31,
        
        
        Change2004
        
        
        2003
        
        
        $
        
        
        %Three months ended
        
        $
        5,624
        
        
        $
        4,608
        
        
        $
        1,016
        
        
        
        22.0%Six months ended
        
        $
        8,184
        
        
        $
        9,526
        
        
        $
        (1,342
        )
        
        
        (14.1)%
 The quarter-over-quarter growth in operating income is due primarily to the aforementioned
growth in revenue, in addition to a formula-based accounts receivable reserve that reversed in the
quarter ended December 31, 2004, which lowered expenses for the quarter. We began work on an
enhanced version of our operating system in the Investment Services division, but experienced a
brief delay in research and development spending in the quarter ended December 31, 2004, as we
transitioned detailed requirements knowledge to a new development partner that will be programming
the new system. Our operating margin improved from 21% for the quarter ended December 31, 2003, to
23% for the quarter ended December 31, 2004, as a result of these factors, but we expect our margin
to be about 20% for at least the next 18 to 24 months as we complete work on the project. The year-over-year decline in operating income is due primarily to additional spending on the
enhanced operating system project, and to a lesser extent, efforts to improve operational quality
standards through Six Sigma quality programs. Our operating margin has declined from 23% for the
six-month period ended December 31, 2003, to 17% for the six-month period ended December 31, 2004,
due primarily to project spending. As mentioned above, we expect our going forward margin to
average approximately 20% until completion of the enhanced version of the operating system. Software Segment Information: Software Revenues (000s)
        
        December
          31,
        
        
        Change2004
        
        
        2003
        
        
        $
        
        
        %Three months ended
        
        $
        19,676
        
        
        $
        15,983
        
        
        $
        3,693
        
        
        
        23.1%Six months ended
        
        $
        36,459
        
        
        $
        30,399
        
        
        $
        6,060
        
        
        
        19.9%
 In addition to incremental maintenance and services revenue provided from our acquisition of
HelioGraph in the quarter ended December 31, 2003, we have experienced strong license revenue
growth both on a quarter-over-quarter and year-over-year basis. We believe this to be the result
of improved execution within our Software division. It is too early to determine whether the
growth experienced in the first half of fiscal 2005 is sustainable in the near-term. Software Operating Income (000s)
        
        December
          31,
        
        
        Change2004
        
        
        2003
        
        
        $
        
        
        %Three months ended
        
        $
        6,669
        
        
        $
        3,565
        
        
        $
        3,104
        
        
        
        87.1%Six months ended
        
        $
        7,302
        
        
        $
        5,793
        
        
        $
        1,509
        
        
        
        26.0%
 The increase in quarter-over-quarter operating income is due to growth in high margin license
revenue. The increase in year-over-year operating income is dampened somewhat by a $2.6 million
charge in the quarter ended September 30, 2004, where we provided for a loss on a services contract
for a large customer. Corporate Segment Information: Corporate Operating Loss (000s)
        
        December
          31,
        
        
        Change2004
        
        
        2003
        
        
        $
        
        
        %Three months ended
        
        $
        (9,577
        )
        
        $
        (9,261
        )
        
        $
        (316
        )
        
        
        (3.4)%Six months ended
        
        $
        (17,536
        )
        
        $
        (17,223
        )
        
        $
        (313
        )
        
        
        (1.8)%
 25




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##### Table of Contents



Corporate results represent costs for legal, human resources, finance and various other
unallocated overhead expenses. We have been able to leverage our infrastructure costs by limiting
additional corporate costs primarily to increased regulatory compliance costs. Purchase Accounting Amortization: Purchase Accounting Amortization Expense (000s)
        
        December
          31,
        
        
        Change2004
        
        
        2003
        
        
        $
        
        
        %Three months ended
        
        $
        33,211
        
        
        $
        32,099
        
        
        $
        1,112
        
        
        
        3.5%Six months ended
        
        $
        66,426
        
        
        $
        72,593
        
        
        $
        (6,167
        )
        
        
        (8.5)%
 Purchase accounting amortization represents amortization of intangible assets resulting from
our various acquisitions from 1998 forward. On a quarter-over-quarter basis, the increase in
purchase accounting amortization is due to the recording of intangible assets associated with our
acquisitions of APS and HelioGraph. The decrease in year-over-year purchase accounting
amortization is the result of older intangible assets that became fully amortized since the quarter
ended December 31, 2003. In-Process Research & Development (000s)
        
        December
          31,2004
        
        
        2003$
        
        
        %
          Revenue
        
        
        $
        
        
        %
          RevenueThree months ended
        
        $
        
        
        
        
        
        
        
        $
        324
        
        
        
        0.2%Six months ended
        
        $
        
        
        
        
        
        
        
        $
        324
        
        
        
        0.1%
 We recorded immaterial research and development costs totaling $0.3 million related to our
acquisition of HelioGraph in the quarter ended December 31, 2003. Inflation We believe the effects of inflation have not had a significant impact on our results of
operations. 26




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##### Table of Contents



Liquidity and Capital Resources The following chart summarizes our Consolidated Statement of Cash Flows for the three months
ended September 30, 2004 and the three- and six-month periods ended December 31, 2004: Six MonthsThree Months Ended
    
    
    EndedSeptember 30,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2004
    
    
    2004(in thousands)Net cash provided by operating activities
    
    $
    31,674
    
    
    $
    65,861
    
    
    $
    97,535Net cash used in investing activities
    
    
    (31,277
    )
    
    
    (8,743
    )
    
    
    (40,020
    )Net cash provided by financing activities
    
    
    786
    
    
    
    3,449
    
    
    
    4,235Effect of exchange rate changes
    
    
    488
    
    
    
    569
    
    
    
    1,057Net increase in cash and cash equivalents
    
    $
    1,671
    
    
    $
    61,136
    
    
    $
    62,807
 As of December 31, 2004, we had $284.3 million of cash, cash equivalents and short-term
investments on hand, and an additional $75.0 million in long-term investments. Our balance sheet
reflects a current ratio of 2.7 and working capital of $329.4 million. Due to revenue growth and
processing efficiency improvement, we have 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 $65.9 million
of net cash provided by operating activities during the three months ended December 31, 2004, and
we expect to generate over $200 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 December 31, 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 the credit facility. From an investing perspective, we used $40.0 million of cash during the six-month period ended
December 31, 2004. Of this amount, we used $20.0 million in the net purchases of investments,
$14.1 million in capital expenditures, $3.1 million in the working capital adjustments associated
with acquisitions, $1.9 million for an investment in our United Kingdom-based joint venture, OneVu,
and $1.0 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 $4.2 million of cash for the six-month period ended
December 31, 2004. Proceeds of $3.8 million from exercised employee stock options and $2.3 million
from our associate stock purchase plan were offset by $1.9 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 more
than $160 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 December
31, 2004, and do not anticipate any change in the foreseeable future. 27




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##### 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 entitled Contractual Obligations in the Liquidity and Capital
Resources section of Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2004,
which was filed with the Securities and Exchange Commission on September 3, 2004, and in our
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, which was filed with the
Securities and Exchange Commission on November 9, 2004. Our free cash flow for the three- and six-month periods ended December 31, 2004 and December
31, 2003, is calculated as follows (in thousands): Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net cash provided by operating activities
    
    $
    65,861
    
    
    $
    41,374
    
    
    $
    97,535
    
    
    $
    68,376Excluding: Net change in settlement accounts
    
    
    (63
    )
    
    
    
    
    
    
    1,428
    
    
    
    Less:          Capital expenditures
    
    
    (9,238
    )
    
    
    (3,653
    )
    
    
    (14,117
    )
    
    
    (9,079
    )Free cash flow
    
    $
    56,560
    
    
    $
    37,721
    
    
    $
    84,876
    
    
    $
    59,297
 Net cash provided by (used in) investing activities for the three-month periods ending
December 31, 2003, and December 31, 2004, was $48.8 million and $(8.7) million, respectively. Net
cash provided by (used in) financing activities was $(171.1) million for the three months ended
December 31, 2003, and was $3.4 million for the three months ended December 31, 2004. Net cash used
in investing activities for the six-month periods ending December 31, 2003, and December 31, 2004,
was $40.0 million and $0.4 million, respectively. Net cash provided by (used in) financing
activities was $(170.7) million for the six months ended December 31, 2003, and was $4.2 million
for the six months ended December 31, 2004. 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 similar titled measures reported by other
companies. 28




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##### Table of Contents



Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board issued a revision to Financial
Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock Based Compensation
(SFAS 123). FASB Statement No. 123 (R), Share-Based Payment (SFAS 123 (R)), supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS 123 (R) establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on the fair value of the
entitys equity instruments or that may be settled by the issuance of those equity instruments.
SFAS 123 (R) focuses primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. This Statement does not change the accounting
guidance for share-based payment transactions with parties other than employees provided in SFAS
123 as originally issued and EITF Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
SFAS 123 (R) does not address the accounting for employee share ownership plans, which are subject
to AICPA Statement of Position 93-6, Employers Accounting for Employee Stock Ownership Plans. Based on the guidance of SFAS 123 (R), we will be required to initially measure the cost of
employee services received in exchange for an award of liability instruments (i.e., awards settled
in cash rather than equity) based on its current fair value; the fair value of that award will be
re-measured subsequently at each reporting date through the settlement date. Changes in fair value
during the requisite service period will be recognized as compensation cost over that period. For
equity settled awards, we will be required to estimate the grant-date fair value of employee share
options and similar instruments expected to ultimately be issued to employees using option-pricing
models adjusted for the unique characteristics of those instruments (unless observable market
prices for the same or similar instruments are available). Based on the grant date fair value
calculated, we will be required to amortize the cost of such award over the requisite service
period. Excess tax benefits, as defined by SFAS 123 (R), will be recognized as an addition to
paid-in-capital. Cash retained as a result of those excess tax benefits will be presented in the
statement of cash flows as financing cash inflows. The write-off of deferred tax assets relating to
unrealized tax benefits associated with recognized compensation cost will be recognized as income
tax expense unless there are excess tax benefits from previous awards remaining in paid-in capital
to which it can be offset. The effective date of SFAS 123 (R) is as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. We will adopt this Statement in the first quarter
of our 2006 fiscal year (quarter ended September 30, 2005). We are still currently evaluating the
impact that the adoption of SFAS 123 (R) will have on our financial statements. In December 2004, the FASB issued FASB Statement No. 153, Exchanges of Nonmonetary Assets
(SFAS 153). This Statement addresses the measurement of exchanges of nonmonetary assets. The
guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions (APB 29), is based on
the principle that exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in APB 29, however, included certain exceptions to that
principle. SFAS 153 amends APB 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of nonmonetary assets that
do not have commercial substance. A nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the exchange. This
Statement is effective for financial statements for fiscal years beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges incurred during fiscal years
beginning after the date of this Statement is issued. We do not believe that the adoption of this
statement will have a significant impact on our financial statements. FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS 131), requires that a public company separately report the financial and descriptive
information about its reportable operating segments. Paragraph 17 of SFAS 131 sets forth the
aggregation criteria used to determine whether an operating segment that does not otherwise meet
the quantitative thresholds to be a reportable segment may be aggregated in accordance with
paragraph 19 of SFAS 131. EITF Issue 04-10 Determining Whether to Aggregate Operating Segments That
Do Not Meet the Quantitative Thresholds (EITF 04-10), addresses the criteria for aggregating
operating segments. 29




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##### Table of Contents



We currently report our financial and operating results according to our four primary business
segments (Electronic Commerce, Investment Services, Software, and Corporate). The financial and
operating results for at least one of those primary business segments are comprised of one or more
smaller business units that have been aggregated. Based upon our analysis of our current
operations, we believe that such aggregations meet the criteria for
aggregation under EITF 04-10 and
paragraph 17 of SFAS 131. We will continue to monitor any changes in the nature and operations of
each of our business segments and modify our method of aggregation as appropriate in order to
remain in compliance with EITF 04-10 and SFAS 131. 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 other 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. 30




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##### 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. Our international sales contributed less than four percent of our revenue for the six months
ended December 31, 2004. We market, sell and license our products throughout the world. As a
result, our future revenue could be 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 December 31, 2004, we have entered
into interest rate swap transactions totaling $125 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 $1.9 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. 31




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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 December 31, 2004, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. 32




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##### Table of Contents



Part II. Other Information 
 Item 4. Submission of Matters to a Vote of Security Holders. The 2004 Annual Meeting of Stockholders of the Company was held on Wednesday, October 27,
2004, for the following purpose:  (1)
    To elect three Class III Directors each to serve for a three-year term expiring
at the 2007 Annual Meeting of Stockholders or until their respective successors have
been elected or appointed. Proposal 1:The Board of Directors proposal to elect the following three nominees as Class
III Directors of the Company, to serve until the 2007 Annual Meeting of Stockholders or until his
successor is elected and qualified was approved, with the following vote: Number of Shares VotedDirector Nominees
    
    For
    
    Withhold Authority
    
    TotalPeter J. Kight
    
    
    81,181,999
    
    
    
    2,635,959
    
    
    
    83,817,958Lewis C. Levin
    
    
    50,415,212
    
    
    
    33,402,746
    
    
    
    83,817,958Jeffrey M. Wilkins
    
    
    81,027,248
    
    
    
    2,790,710
    
    
    
    83,817,958
 The following are our directors whose terms of office continued after the Annual Meeting: William
P. Boardman (term expires in 2005), James D. Dixon (term expires in 2005), Mark A. Johnson (term
expires in 2006) and Eugene F. Quinn (term expires in 2006). 33




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##### Table of Contents



Item 6.  Exhibits Exhibit
    
    ExhibitNumber
    
    Description10(a)*
    
    CheckFree Services Corporation 401(k) Plan.10(b)*
    
    Prototype Defined Contribution Plan and Trust, sponsored by SunTrust Bank  Basic
Plan Document #02, June 2002 (prototype plan for CheckFree Services Corporation 401(k)
Plan).10(c)*
    
    First Amendment to Revolving Credit Agreement, made and entered into as of December
7, 2004, by and among CheckFree Corporation, CheckFree Services Corporation, and CheckFree
Investment Corporation, the several banks and other financial institutions from time to time
party thereto (the Lenders), and SunTrust Bank, in its capacity as administrative agent
for the Lenders, as issuing bank, and as swingline lender.10(d)*
    
    Form of Restricted Stock Award Agreement for Non-Employee Directors.10(e)*
    
    Form of Performance Accelerated Restricted Stock Award Agreement.10(f)*
    
    Form of Restricted Stock Award Agreement.10(g)*
    
    Form of Nonstatutory Stock Option Agreement under the 2002 Stock Incentive Plan.10(h)*
    
    Form of Incentive Stock Option Agreement under the 2002 Stock Incentive Plan.31(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. 34




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##### 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: February 8, 2005
    
    By:
    
    /s/ David E. MangumDavid E. Mangum, Executive Vice President
and Chief Financial Officer* (Principal Financial Officer)Date: February 8, 2005
    
    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. 35




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    ExhibitDescription10(a)*
    
    CheckFree Services Corporation 401(k) Plan.10(b)*
    
    Prototype Defined Contribution Plan and Trust, sponsored by SunTrust Bank  Basic
Plan Document #02, June 2002 (prototype plan for CheckFree Services Corporation 401(k)
Plan).10(c)*
    
    First Amendment to Revolving Credit Agreement, made and entered into as of December
7, 2004, by and among CheckFree Corporation, CheckFree Services Corporation, and CheckFree
Investment Corporation, the several banks and other financial institutions from time to time
party thereto (the Lenders), and SunTrust Bank, in its capacity as administrative agent
for the Lenders, as issuing bank, and as swingline lender.10(d)*
    
    Form of Restricted Stock Award Agreement for Non-Employee Directors.10(e)*
    
    Form of Performance Accelerated Restricted Stock Award Agreement.10(f)*
    
    Form of Restricted Stock Award Agreement.10(g)*
    
    Form of Nonstatutory Stock Option Agreement under the 2002 Stock Incentive Plan.10(h)*
    
    Form of Incentive Stock Option Agreement under the 2002 Stock Incentive Plan.31(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. 36