##### Table of Contents



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, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period fromto
 Commission file number: 0-26802
 CHECKFREE CORPORATION
  Delaware
    
    58-2360335(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 4411 East Jones Bridge Road, Norcross, Georgia 30092
 (678) 375-3000
 Not Applicable
 þ o
  þ o o
 o þ




---



##### 



FORM 10-Q
 CHECKFREE CORPORATION
 Table of Contents
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Consolidated Balance Sheets
    
    
    3As of December 31, 2005 and June 30, 2005Unaudited Consolidated Statements of Operations
    
    
    4For the Three and Six Months Ended December 31, 2005 and 2004Unaudited Consolidated Statements of Cash Flows
    
    
    5For the Six Months Ended December 31, 2005 and 2004Notes to the Interim Unaudited Consolidated Financial Statements
    
    
    6For the Three and Six Months Ended December 31, 2005 and 2004Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    37PART II. OTHER INFORMATIONItem 4. Submission of Matters to a Vote of Security Holders
    
    
    38Item 6. Exhibits
    
    
    39Signatures
    
    
    40EX-31(A)EX-31(B)EX-32(A)EX-32(B)
  2




---



##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 CHECKFREE CORPORATION AND SUBSIDIARIES
 
 Unaudited Consolidated Balance Sheets
 December 31,
    
    
    June 30,2005
    
    
    2005(In thousands, exceptshare and per share data)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    206,625
    
    
    $
    101,272Settlement assets
    
    
    118,872
    
    
    
    73,675Investments
    
    
    133,882
    
    
    
    196,805Accounts receivable, net
    
    
    138,736
    
    
    
    122,158Accounts receivable, related parties
    
    
    5,773
    
    
    
    5,775Prepaid expenses and other assets
    
    
    36,709
    
    
    
    26,258Deferred income taxes
    
    
    6,462
    
    
    
    10,407Total current assets
    
    
    647,059
    
    
    
    536,350PROPERTY AND EQUIPMENT, NET
    
    
    96,407
    
    
    
    89,273OTHER ASSETS:Capitalized software, net
    
    
    4,683
    
    
    
    6,175Goodwill
    
    
    673,699
    
    
    
    656,174Strategic agreements, net
    
    
    118,476
    
    
    
    147,448Other intangible assets, net
    
    
    42,167
    
    
    
    30,935Investments and restricted cash
    
    
    69,868
    
    
    
    62,996Other noncurrent assets
    
    
    5,309
    
    
    
    4,600Deferred income taxes
    
    
    43,883
    
    
    
    35,648Investment in joint venture
    
    
    1,210
    
    
    
    317Total other assets
    
    
    959,295
    
    
    
    944,293Total assets
    
    $
    1,702,761
    
    
    $
    1,569,916LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    13,727
    
    
    $
    11,444Settlement obligations
    
    
    116,854
    
    
    
    73,919Accrued liabilities
    
    
    66,094
    
    
    
    72,189Current portion of long-term obligations
    
    
    1,058
    
    
    
    476Deferred revenue
    
    
    51,588
    
    
    
    40,793Total current liabilities
    
    
    249,321
    
    
    
    198,821ACCRUED RENT AND OTHER
    
    
    3,542
    
    
    
    4,324DEFERRED INCOME TAXES
    
    
    2,686
    
    
    
    4,967CAPITAL LEASE AND LONG-TERM OBLIGATIONS  LESS CURRENT PORTION
    
    
    25,253
    
    
    
    25,389STOCKHOLDERS 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 90,982,564 and 90,257,704 shares, respectively
    
    
    910
    
    
    
    903Additional paid-in-capital
    
    
    2,488,795
    
    
    
    2,469,184Unearned compensation
    
    
    
    
    
    
    (6,168
    )Accumulated other comprehensive loss
    
    
    (2,615
    )
    
    
    (2,251
    )Accumulated deficit
    
    
    (1,065,131
    )
    
    
    (1,125,253
    )Total stockholders equity
    
    
    1,421,959
    
    
    
    1,336,415Total liabilities and stockholders equity
    
    $
    1,702,761
    
    
    $
    1,569,916
  3




---



##### Table of Contents



CHECKFREE CORPORATION AND SUBSIDIARIES
 
 Unaudited Consolidated Statements of Operations
 Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share data)REVENUES:Processing and servicing:Third parties
    
    $
    178,700
    
    
    $
    156,688
    
    
    $
    356,324
    
    
    $
    308,030Related parties
    
    
    9,000
    
    
    
    7,500
    
    
    
    18,000
    
    
    
    15,000Total processing and servicing
    
    
    187,700
    
    
    
    164,188
    
    
    
    374,324
    
    
    
    323,030License fees
    
    
    7,822
    
    
    
    7,655
    
    
    
    15,380
    
    
    
    13,529Maintenance fees
    
    
    9,974
    
    
    
    7,456
    
    
    
    19,644
    
    
    
    14,811Professional fees
    
    
    10,444
    
    
    
    6,457
    
    
    
    22,349
    
    
    
    12,219Total revenues
    
    
    215,940
    
    
    
    185,756
    
    
    
    431,697
    
    
    
    363,589EXPENSES:Cost of processing, servicing and support
    
    
    81,577
    
    
    
    72,688
    
    
    
    161,834
    
    
    
    148,050Research and development
    
    
    24,340
    
    
    
    19,329
    
    
    
    47,954
    
    
    
    39,552Sales and marketing
    
    
    20,959
    
    
    
    16,282
    
    
    
    39,564
    
    
    
    30,508General and administrative
    
    
    16,683
    
    
    
    13,430
    
    
    
    33,369
    
    
    
    28,465Depreciation and amortization
    
    
    20,129
    
    
    
    43,643
    
    
    
    55,809
    
    
    
    87,660Total expenses
    
    
    163,688
    
    
    
    165,372
    
    
    
    338,530
    
    
    
    334,235INCOME FROM OPERATIONS
    
    
    52,252
    
    
    
    20,384
    
    
    
    93,167
    
    
    
    29,354OTHER:Equity in net loss of joint venture
    
    
    (807
    )
    
    
    (700
    )
    
    
    (1,474
    )
    
    
    (1,347
    )Interest income
    
    
    3,156
    
    
    
    1,810
    
    
    
    5,847
    
    
    
    3,717Interest expense
    
    
    (240
    )
    
    
    (320
    )
    
    
    (475
    )
    
    
    (531
    )INCOME BEFORE INCOME TAXES
    
    
    54,361
    
    
    
    21,174
    
    
    
    97,065
    
    
    
    31,193INCOME TAX EXPENSE
    
    
    20,596
    
    
    
    8,131
    
    
    
    36,943
    
    
    
    11,943NET INCOME
    
    $
    33,765
    
    
    $
    13,043
    
    
    $
    60,122
    
    
    $
    19,250BASIC INCOME PER SHARE:Income per common share
    
    $
    0.37
    
    
    $
    0.14
    
    
    $
    0.66
    
    
    $
    0.21Weighted-average number of shares
    
    
    90,820
    
    
    
    90,545
    
    
    
    90,699
    
    
    
    90,482DILUTED INCOME PER SHARE:Income per common share
    
    $
    0.36
    
    
    $
    0.14
    
    
    $
    0.65
    
    
    $
    0.21Weighted-average number of shares
    
    
    93,589
    
    
    
    93,019
    
    
    
    93,203
    
    
    
    92,764
  4




---



##### Table of Contents



CHECKFREE CORPORATION AND SUBSIDIARIES
 
 Unaudited Consolidated Statements of Cash Flows
 Six Months EndedDecember 31,2005
    
    
    2004(In thousands)OPERATING ACTIVITIES:Net income
    
    $
    60,122
    
    
    $
    19,250Adjustments to reconcile net income to net cash provided by operating activities:Equity in net loss of joint venture
    
    
    1,474
    
    
    
    1,347Depreciation and amortization
    
    
    55,809
    
    
    
    87,660Deferred income tax provision (benefit)
    
    
    (6,571
    )
    
    
    2,285Equity-based compensation
    
    
    8,092
    
    
    
    3,035Net loss on disposition of property and equipment
    
    
    220
    
    
    
    Change in certain assets and liabilities (net of acquisitions):Settlement assets and obligations
    
    
    (2,262
    )
    
    
    (1,428
    )Accounts receivable
    
    
    (15,525
    )
    
    
    (666
    )Prepaid expenses and other
    
    
    (9,837
    )
    
    
    (5,921
    )Accounts payable
    
    
    1,719
    
    
    
    1,026Accrued liabilities and other
    
    
    (2,885
    )
    
    
    (12,712
    )Deferred revenue
    
    
    9,906
    
    
    
    3,659Net cash provided by operating activities
    
    
    100,262
    
    
    
    97,535INVESTING ACTIVITIES:Purchase of property and software
    
    
    (23,642
    )
    
    
    (14,117
    )Capitalization of software development costs
    
    
    (276
    )
    
    
    (1,006
    )Purchase of businesses, net of cash acquired
    
    
    (36,144
    )
    
    
    (3,054
    )Purchase of investments  Available-for-sale
    
    
    (173,674
    )
    
    
    (105,577
    )Proceeds from sales and maturities of investments  Available-for-sale
    
    
    229,744
    
    
    
    85,680Purchase of other investments
    
    
    (443
    )
    
    
    (100
    )Proceeds from other investments
    
    
    163
    
    
    
    26Increase in restricted cash
    
    
    (450
    )
    
    
    Investment in joint venture
    
    
    (2,367
    )
    
    
    (1,872
    )Change in other assets
    
    
    (976
    )
    
    
    Net cash used in investing activities
    
    
    (8,065
    )
    
    
    (40,020
    )FINANCING ACTIVITIES:Principal payments under capital lease and other long-term obligations
    
    
    (1,596
    )
    
    
    (1,880
    )Proceeds from stock options exercised
    
    
    11,334
    
    
    
    3,813Proceeds from associate stock purchase plan
    
    
    2,090
    
    
    
    2,302Excess tax benefit from equity-based compensation
    
    
    1,486
    
    
    
    Net cash provided by financing activities
    
    
    13,314
    
    
    
    4,235Effect of exchange rate changes on cash and cash equivalents
    
    
    (158
    )
    
    
    1,057NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    105,353
    
    
    
    62,807CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    101,272
    
    
    
    134,832End of period
    
    $
    206,625
    
    
    $
    197,639
  5




---



##### Table of Contents



CHECKFREE CORPORATION AND SUBSIDIARIES
 
 NOTES TO THE INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    Basis of Presentation and Summary of Significant Accounting Policies
 Unaudited Interim Financial Information
   2.
    
    Investments
  December 31,
    
    
    June 30,2005
    
    
    2005Available-for-sale
    
    $
    398,920
    
    
    $
    347,895Other investments
    
    
    1,200
    
    
    
    918Restricted cash
    
    
    450
    
    
    
    Less: amounts classified as cash equivalents
    
    
    196,820
    
    
    
    89,012Total investments
    
    $
    203,750
    
    
    $
    259,801
   6




---



##### Table of Contents



3 Goodwill and Other Intangible Assets
   Intangible
    
    
    UsefulAsset
    
    
    LifeCustomer base
    
    $
    5,400
    
    
    5 yrsCurrent technology
    
    
    1,300
    
    
    5 yrsTradenames
    
    
    600
    
    
    3 yrsCovenants not to compete
    
    
    330
    
    
    2 yrs
   Intangible
    
    
    UsefulAsset
    
    
    LifeCustomer base
    
    $
    7,000
    
    
    6 yrsTradenames
    
    
    1,831
    
    
    3 yrsCurrent technology
    
    
    500
    
    
    3 yrs
    7




---



##### Table of Contents



Electronic
    
    
    
    
    
    
    InvestmentCommerce
    
    
    Software
    
    
    Services
    
    
    TotalBalance as of June 30, 2004
    
    $
    578,695
    
    
    $
    22,889
    
    
    $
    11,387
    
    
    $
    612,971Goodwill acquired and adjustments
    
    
    2,544
    
    
    
    40,659
    
    
    
    
    
    
    
    43,203Balance as of June 30, 2005
    
    
    581,239
    
    
    
    63,548
    
    
    
    11,387
    
    
    
    656,174Goodwill acquired and adjustments
    
    
    10,251
    
    
    
    (740
    )
    
    
    8,014
    
    
    
    17,525Balance as of December 31, 2005
    
    $
    591,490
    
    
    $
    62,808
    
    
    $
    19,401
    
    
    $
    673,699
  December 31,
    
    
    June 30,2005
    
    
    2005Capitalized software:Product technology from acquisitions and strategic agreement
    
    $
    167,458
    
    
    $
    167,458Internal development costs
    
    
    33,502
    
    
    
    33,226Total
    
    
    200,960
    
    
    
    200,684Less: accumulated amortization
    
    
    196,277
    
    
    
    194,509Capitalized software, net
    
    $
    4,683
    
    
    $
    6,175Strategic agreements:Strategic agreements (1)
    
    $
    744,423
    
    
    $
    744,423Less: accumulated amortization
    
    
    625,947
    
    
    
    596,975Strategic agreements, net
    
    $
    118,476
    
    
    $
    147,448Other intangible assets:Tradenames
    
    $
    55,185
    
    
    $
    52,754Customer base
    
    
    69,468
    
    
    
    57,068Current technology
    
    
    5,890
    
    
    
    4,090Money transfer license
    
    
    1,700
    
    
    
    1,700Covenants not to compete
    
    
    5,680
    
    
    
    5,350Total
    
    
    137,923
    
    
    
    120,962Less: accumulated amortization
    
    
    95,756
    
    
    
    90,027Other intangible assets, net
    
    $
    42,167
    
    
    $
    30,935
 
 (1)
    
    Strategic agreements primarily include certain entity-level covenants not to compete.  8




---



##### Table of Contents



4.
    
    Reorganization Charges
     OfficeSeverance
    
    
    Closureand Other
    
    
    andEmployee
    
    
    BusinessCosts
    
    
    Exit Costs
    
    
    TotalBalance as of June 30, 2004
    
    $
    
    
    
    $
    732
    
    
    $
    732Reorganization charge
    
    
    5,585
    
    
    
    
    
    
    
    5,585Cash payments  year ended June 30, 2005
    
    
    (385
    )
    
    
    (576
    )
    
    
    (961
    )Balance as of June 30, 2005
    
    
    5,200
    
    
    
    156
    
    
    
    5,356Cash payments  six months ended December 31, 2005
    
    
    (4,900
    )
    
    
    (156
    )
    
    
    (5,056
    )Balance as of December 31, 2005
    
    $
    300
    
    
    $
    
    
    
    $
    300
 5.
    
    Common Stock
   9




---



##### Table of Contents



6.
    
    Equity-Based Compensation
    10




---



##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedNet income, as reported
    
    $
    13,043
    
    
    $

19,250Equity-based compensation included in net income, as reported
    
    
    950
    
    
    
    1,880Equity-based compensation under SFAS 123
    
    
    (2,235
    )
    
    
    (5,167
    )Pro forma net income
    
    $
    11,758
    
    
    $
    15,963Reported net income per share:Basic and diluted
    
    $
    0.14
    
    
    $
    0.21Pro forma net income per share:Basic
    
    $
    0.13
    
    
    $
    0.18Diluted
    
    $
    0.13
    
    
    $
    0.17
  11




---



##### Table of Contents



7.
    
    Earnings Per Share
  Three Months EndedDecember 31, 2005
    
    
    December 31, 2004Weighted -
    
    
    
    
    
    
    
    
    
    
    Weighted -Average
    
    
    Earnings
    
    
    
    
    
    
    Average
    
    
    EarningsNet Income
    
    
    Shares
    
    
    Per
    
    
    Net Income
    
    
    Shares
    
    
    Per(Numerator)
    
    
    (Denominator)
    
    
    Share
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    ShareBasic EPS
    
    $
    33,765
    
    
    
    90,820
    
    
    $
    0.37
    
    
    $
    13,043
    
    
    
    90,545
    
    
    $
    0.14Effect of dilutive securities:Options and warrants
    
    
    
    
    
    
    2,769
    
    
    
    
    
    
    
    
    
    
    
    2,474Diluted EPS
    
    $
    33,765
    
    
    
    93,589
    
    
    $
    0.36
    
    
    $
    13,043
    
    
    
    93,019
    
    
    $
    0.14
 Six Months EndedDecember 31, 2005
    
    
    December 31, 2004Weighted -
    
    
    
    
    
    
    
    
    
    
    Weighted -Average
    
    
    Earnings
    
    
    
    
    
    
    Average
    
    
    EarningsNet Income
    
    
    Shares
    
    
    Per
    
    
    Net Income
    
    
    Shares
    
    
    Per(Numerator)
    
    
    (Denominator)
    
    
    Share
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    ShareBasic EPS
    
    $
    60,122
    
    
    
    90,699
    
    
    $
    0.66
    
    
    $
    19,250
    
    
    
    90,482
    
    
    $
    0.21Effect of dilutive securities:Options and warrants
    
    
    
    
    
    
    2,504
    
    
    
    
    
    
    
    
    
    
    
    2,282Diluted EPS
    
    $
    60,122
    
    
    
    93,203
    
    
    $
    0.65
    
    
    $
    19,250
    
    
    
    92,764
    
    
    $
    0.21
  8.
    
    Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    33,765
    
    
    $
    13,043
    
    
    $
    60,122
    
    
    $
    19,250Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    (343
    )
    
    
    355
    
    
    
    (137
    )
    
    
    460Unrealized
holding gains (losses) on investments, net of tax
    
    
    484
    
    
    
    (697
    )
    
    
    (227
    )
    
    
    (91
    )Comprehensive income
    
    $
    33,906
    
    
    $
    12,701
    
    
    $
    59,758
    
    
    $
    19,619
 12




---



##### Table of Contents



9.
    
    Related Parties
       13




---



##### Table of Contents



10.
    
    Supplemental Disclosure of Cash Flow Information (in thousands)
 Six Months EndedDecember 31,2005
    
    
    2004Interest paid
    
    $
    249
    
    
    $
    360Income taxes paid
    
    $
    33,333
    
    
    $
    16,394Supplemental disclosure of non-cash investing and financing activities:Capital lease and other long-term asset additions
    
    $
    1,819
    
    
    $
    567Stock funding of 401(k) match
    
    $
    2,994
    
    
    $
    3,100Stock funding of Associate Stock Purchase Plan
    
    $
    1,946
    
    
    $
    1,694
 11.
    
    Business Segments
   Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Electronic Commerce
    
    $
    163,298
    
    
    $
    142,108
    
    
    $
    326,749
    
    
    $
    280,315Investment Services
    
    
    28,448
    
    
    
    23,972
    
    
    
    54,869
    
    
    
    46,815Software
    
    
    24,194
    
    
    
    19,676
    
    
    
    50,079
    
    
    
    36,459Total
    
    $
    215,940
    
    
    $
    185,756
    
    
    $
    431,697
    
    
    $
    363,589Segment operating income (loss):Electronic Commerce
    
    $
    64,070
    
    
    $
    50,879
    
    
    $
    132,543
    
    
    $
    97,830Investment Services
    
    
    5,052
    
    
    
    5,624
    
    
    
    9,450
    
    
    
    8,184Software
    
    
    3,308
    
    
    
    6,669
    
    
    
    8,473
    
    
    
    7,302Corporate
    
    
    (9,281
    )
    
    
    (9,577
    )
    
    
    (19,504
    )
    
    
    (17,536
    )Total
    
    
    63,149
    
    
    
    53,595
    
    
    
    130,962
    
    
    
    95,780Acquisition-related intangible asset amortization
    
    
    (9,655
    )
    
    
    (33,211
    )
    
    
    (35,197
    )
    
    
    (66,426
    )SFAS 123(R)  Stock options issued before July 1, 2004 (1)
    
    
    (1,242
    )
    
    
    
    
    
    
    (2,598
    )
    
    
    Equity in net loss of joint venture
    
    
    (807
    )
    
    
    (700
    )
    
    
    (1,474
    )
    
    
    (1,347
    )Interest, net
    
    
    2,916
    
    
    
    1,490
    
    
    
    5,372
    
    
    
    3,186Total income before income taxes
    
    $
    54,361
    
    
    $
    21,174
    
    
    $
    97,065
    
    
    $
    31,193
 
 (1)
    
    At the beginning of our fiscal year 2005, we implemented a new long-term incentive
compensation philosophy, which significantly reduced overall participation and focused on
restricted stock with limited stock options. As a result, we recorded the cost of restricted
stock throughout our fiscal year 2005. In fiscal year 2006, we adopted SFAS 123(R), and are
consequently recording all long-term incentive grants, both restricted stock and stock
options, as an expense in our consolidated statement of operations. The adjustment for SFAS
123(R) represents the charge associated with the current vesting of options that were unvested
as of July 1, 2004 under our previous compensation philosophy, which were originally accounted
for utilizing APB 25. 14




---



##### Table of Contents



12.
    
    Subsequent Events
  ® ®
 Total current assets
    
    $
    1,100Total other assets
    
    
    8,600Total current liabilities
    
    $
    4,600Total other liabilities
    
    
    600
 15




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
   
    
    Electronic Commerce;
    
    Investment Services; and
    
    Software.
   
    
    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.
 SM
  16




---



##### Table of Contents



Executive Summary
    17




---



##### Table of Contents



Fiscal Year Ended June 30,
    
    Microsoft
    
    
    FDC
    
    
    Total2001
    
    $
    6,000
    
    
    $
    5,000
    
    
    $
    11,0002002
    
    
    15,000
    
    
    
    8,500
    
    
    
    23,5002003
    
    
    21,000
    
    
    
    11,500
    
    
    
    32,5002004
    
    
    27,000
    
    
    
    14,500
    
    
    
    41,5002005
    
    
    33,000
    
    
    
    17,500
    
    
    
    50,5002006
    
    
    18,000
    
    
    
    3,000
    
    
    
    21,000Total
    
    $
    120,000
    
    
    $
    60,000
    
    
    $
    180,000
    18




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedDecember 31,
    
    December 31,2005
    
    2004
    
    2005
    
    2004Total revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Expenses:Cost of processing, servicing and support
    
    
    37.8
    
    
    
    39.1
    
    
    
    37.5
    
    
    
    40.7Research and development
    
    
    11.3
    
    
    
    10.4
    
    
    
    11.1
    
    
    
    10.9Sales and marketing
    
    
    9.7
    
    
    
    8.8
    
    
    
    9.2
    
    
    
    8.4General and administrative
    
    
    7.7
    
    
    
    7.2
    
    
    
    7.7
    
    
    
    7.8Depreciation and amortization
    
    
    9.3
    
    
    
    23.5
    
    
    
    12.9
    
    
    
    24.1Total expenses
    
    
    75.8
    
    
    
    89.0
    
    
    
    78.4
    
    
    
    91.9Income from operations
    
    
    24.2
    
    
    
    11.0
    
    
    
    21.6
    
    
    
    8.1Equity in net loss of joint venture
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    (0.3
    )
    
    
    (0.4
    )Interest, net
    
    
    1.4
    
    
    
    0.8
    
    
    
    1.2
    
    
    
    0.9Income before income taxes
    
    
    25.2
    
    
    
    11.4
    
    
    
    22.5
    
    
    
    8.6Income tax expense
    
    
    9.6
    
    
    
    4.4
    
    
    
    8.6
    
    
    
    3.3Net income
    
    
    15.6
    %
    
    
    7.0
    %
    
    
    13.9
    %
    
    
    5.3
    %
 Results of Operations
  Total Revenues (000s)
    
    December 31,
    
    Change2005
    
    2004
    
    $
    
    %Three months ended
    
    $
    215,940
    
    
    $
    185,756
    
    
    $
    30,184
    
    
    
    16.2
    %Six months ended
    
    $
    431,697
    
    
    $
    363,589
    
    
    $
    68,108
    
    
    
    18.7
    %
  19




---



##### Table of Contents



20




---



##### Table of Contents



Processing and Servicing (000s)
    
    December 31,
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Three months ended
    
    $
    187,700
    
    
    $
    164,188
    
    
    $
    23,512
    
    
    
    14.3
    %Six months ended
    
    $
    374,324
    
    
    $
    323,030
    
    
    $
    51,294
    
    
    
    15.9
    %
  License Fees (000s)
    
    December 31,
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Three months ended
    
    $
    7,822
    
    
    $
    7,655
    
    
    $
    167
    
    
    
    2.2
    %Six months ended
    
    $
    15,380
    
    
    $
    13,529
    
    
    $
    1,851
    
    
    
    13.7
    %
  21




---



##### Table of Contents



Maintenance Fees (000s)
    
    December 31,
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Three months ended
    
    $
    9,974
    
    
    $
    7,456
    
    
    $
    2,518
    
    
    
    33.8
    %Six months ended
    
    $
    19,644
    
    
    $
    14,811
    
    
    $
    4,833
    
    
    
    32.6
    %
  Professional Fees (000s)
    
    December 31,
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Three months ended
    
    $
    10,444
    
    
    $
    6,457
    
    
    $
    3,987
    
    
    
    61.7
    %Six months ended
    
    $
    22,349
    
    
    $
    12,219
    
    
    $
    10,130
    
    
    
    82.9
    %
  Cost of Processing, Servicing and Support (000s)
    
    December 31,2005
    
    
    2004%
    
    
    
    
    
    
    %$
    
    
    Revenue
    
    
    $
    
    
    RevenueThree months ended
    
    $
    81,577
    
    
    
    37.8
    %
    
    $
    72,688
    
    
    
    39.1
    %Six months ended
    
    $
    161,834
    
    
    
    37.5
    %
    
    $
    148,050
    
    
    
    40.7
    %
  22




---



##### Table of Contents



Research and Development (000s)
    
    December 31,2005
    
    
    2004%
    
    
    
    
    
    
    %$
    
    
    Revenue
    
    
    $
    
    
    RevenueThree months ended
    
    $
    24,340
    
    
    
    11.3
    %
    
    $
    19,329
    
    
    
    10.4
    %Six months ended
    
    $
    47,954
    
    
    
    11.1
    %
    
    $
    39,552
    
    
    
    10.9
    %
  Sales and Marketing (000s)
    
    December 31,2005
    
    
    2004%
    
    
    
    
    
    
    %$
    
    
    Revenue
    
    
    $
    
    
    RevenueThree months ended
    
    $
    20,959
    
    
    
    9.7
    %
    
    $
    16,282
    
    
    
    8.8
    %Six months ended
    
    $
    39,564
    
    
    
    9.2
    %
    
    $
    30,508
    
    
    
    8.4
    %
  General and Administrative (000s)
    
    December 31,2005
    
    
    2004%
    
    
    
    
    
    
    %$
    
    
    Revenue
    
    
    $
    
    
    RevenueThree months ended
    
    $
    16,683
    
    
    
    7.7
    %
    
    $
    13,430
    
    
    
    7.2
    %Six months ended
    
    $
    33,369
    
    
    
    7.7
    %
    
    $
    28,465
    
    
    
    7.8
    %
  23




---



##### Table of Contents



Depreciation and Amortization (000s)
    
    December 31,2005
    
    
    2004%
    
    
    
    
    
    
    %$
    
    
    Revenue
    
    
    $
    
    
    RevenueThree months ended
    
    $
    20,129
    
    
    
    9.3
    %
    
    $
    43,643
    
    
    
    23.5
    %Six months ended
    
    $
    55,809
    
    
    
    12.9
    %
    
    $
    87,660
    
    
    
    24.1
    %
   Equity in Net Loss of Joint Venture (000s)
    
    December 31,2005
    
    
    2004%
    
    
    
    
    
    
    %$
    
    
    Revenue
    
    
    $
    
    
    RevenueThree months ended
    
    $
    (807
    )
    
    
    (0.4
    )%
    
    $
    (700
    )
    
    
    (0.4
    )%Six months ended
    
    $
    (1,474
    )
    
    
    (0.3
    )%
    
    $
    (1,347
    )
    
    
    (0.4
    )%
  24




---



##### Table of Contents



Net Interest (000s)
    
    December 31,2005
    
    
    2004%
    
    
    
    
    
    
    %$
    
    
    Revenue
    
    
    $
    
    
    RevenueThree months ended:Interest income
    
    $
    3,156
    
    
    
    
    
    
    $
    1,810Interest expense
    
    
    (240
    )
    
    
    
    
    
    
    (320
    )Net interest
    
    $
    2,916
    
    
    
    1.4
    %
    
    $
    1,490
    
    
    
    0.8
    %Six months ended:Interest income
    
    $
    5,847
    
    
    
    
    
    
    $
    3,717Interest expense
    
    
    (475
    )
    
    
    
    
    
    
    (531
    )Net interest
    
    $
    5,372
    
    
    
    1.2
    %
    
    $
    3,186
    
    
    
    0.9
    %
   Income Tax Expense (000s)
    
    December 31,2005
    
    
    2004Effective
    
    
    
    
    
    
    Effective$
    
    
    Rate
    
    
    $
    
    
    RateThree months ended
    
    $
    20,596
    
    
    
    37.9
    %
    
    $
    8,131
    
    
    
    38.4
    %Six months ended
    
    $
    36,943
    
    
    
    38.1
    %
    
    $
    11,943
    
    
    
    38.3
    %
  25




---



##### Table of Contents



Segment Information
   Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Revenues:Electronic Commerce
    
    $
    163,298
    
    
    $
    142,108
    
    
    $
    326,749
    
    
    $
    280,315Investment Services
    
    
    28,448
    
    
    
    23,972
    
    
    
    54,869
    
    
    
    46,815Software
    
    
    24,194
    
    
    
    19,676
    
    
    
    50,079
    
    
    
    36,459Total revenues
    
    $
    215,940
    
    
    $
    185,756
    
    
    $
    431,697
    
    
    $
    363,589Segment operating income (loss):Electronic Commerce
    
    $
    64,070
    
    
    $
    50,879
    
    
    $
    132,543
    
    
    $
    97,830Investment Services
    
    
    5,052
    
    
    
    5,624
    
    
    
    9,450
    
    
    
    8,184Software
    
    
    3,308
    
    
    
    6,669
    
    
    
    8,473
    
    
    
    7,302Corporate
    
    
    (9,281
    )
    
    
    (9,577
    )
    
    
    (19,504
    )
    
    
    (17,536
    )Acquisition-related amortization:Electronic Commerce
    
    
    (7,352
    )
    
    
    (32,559
    )
    
    
    (30,927
    )
    
    
    (65,122
    )Investment Services
    
    
    (648
    )
    
    
    (151
    )
    
    
    (961
    )
    
    
    (302
    )Software
    
    
    (1,655
    )
    
    
    (501
    )
    
    
    (3,309
    )
    
    
    (1,002
    )SFAS 123(R)  Options issued before
July 1, 2004 (1):Electronic Commerce
    
    
    (901
    )
    
    
    
    
    
    
    (1,886
    )
    
    
    Investment Services
    
    
    (128
    )
    
    
    
    
    
    
    (267
    )
    
    
    Software
    
    
    (55
    )
    
    
    
    
    
    
    (115
    )
    
    
    Corporate
    
    
    (158
    )
    
    
    
    
    
    
    (330
    )
    
    
    Total income from operations
    
    $
    52,252
    
    
    $
    20,384
    
    
    $
    93,167
    
    
    $
    29,354
 
 (1)
    
    At the beginning of our fiscal year 2005, we implemented a new long-term incentive
compensation philosophy, which significantly reduced overall participation and focused on
restricted stock with limited stock options. As a result, we recorded the cost of restricted stock
throughout our fiscal year 2005. In fiscal year 2006, we adopted SFAS 123(R), and are consequently
recording all long-term incentive grants, both restricted stock and stock options, as an expense in
our consolidated statement of operations. The adjustment for SFAS 123(R) represents the charge
associated with the current vesting of options that were unvested as of July 1, 2004 under our
previous compensation philosophy, which were originally accounted for utilizing APB 25. 26




---



##### Table of Contents



Electronic Commerce Segment Information:
 Electronic Commerce Revenues (000s)
    
    December 31,
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Three months ended
    
    $
    163,298
    
    
    $
    142,108
    
    
    $
    21,190
    
    
    
    14.9
    %Six months ended
    
    $
    326,749
    
    
    $
    280,315
    
    
    $
    46,434
    
    
    
    16.6
    %
    Three Months Ended12/31/05
    
    9/30/05
    
    6/30/05
    
    3/31/05
    
    12/31/04
    
    9/30/04(In millions)Full ServiceRevenue
    
    $
    116.0
    
    
    $
    118.5
    
    
    $
    110.1
    
    
    $
    106.4
    
    
    $
    102.4
    
    
    $
    99.1Active Subscribers (1)
    
    
    9.0
    
    
    
    8.8
    
    
    
    7.8
    
    
    
    7.4
    
    
    
    6.9
    
    
    
    6.4Transactions processed
    
    
    189.7
    
    
    
    180.1
    
    
    
    161.9
    
    
    
    153.6
    
    
    
    142.9
    
    
    
    133.5Payment ServicesRevenue
    
    $
    36.1
    
    
    $
    35.4
    
    
    $
    33.8
    
    
    $
    32.4
    
    
    $
    31.3
    
    
    $
    30.5Transactions processed
    
    
    81.0
    
    
    
    85.9
    
    
    
    83.0
    
    
    
    80.8
    
    
    
    76.5
    
    
    
    72.3Other Electronic CommerceRevenue
    
    $
    11.2
    
    
    $
    9.6
    
    
    $
    8.9
    
    
    $
    8.8
    
    
    $
    8.4
    
    
    $
    8.6TotalsElectronic Commerce revenue
    
    $
    163.3
    
    
    $
    163.5
    
    
    $
    152.8
    
    
    $
    147.6
    
    
    $
    142.1
    
    
    $
    138.2Transactions processed
    
    
    270.7
    
    
    
    266.0
    
    
    
    244.9
    
    
    
    234.4
    
    
    
    219.4
    
    
    
    205.8
 
 (1)
    
    Active refers to subscribers who have viewed or paid a bill in the last 90
days at a Consumer Service Provider. 27




---



##### Table of Contents



Electronic Commerce Operating Income (000s)
    
    December 31,
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Three months ended
    
    $
    64,070
    
    
    $
    50,879
    
    
    $
    13,191
    
    
    
    25.9
    %Six months ended
    
    $
    132,543
    
    
    $
    97,830
    
    
    $
    34,713
    
    
    
    35.5
    %
  28




---



##### Table of Contents



Investment Services Segment Information:
 Investment Services Revenues (000s)
    
    December 31,
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Three months ended
    
    $
    28,448
    
    
    $
    23,972
    
    
    $
    4,476
    
    
    
    18.7
    %Six months ended
    
    $
    54,869
    
    
    $
    46,815
    
    
    $
    8,054
    
    
    
    17.2
    %
  Investment Services Operating Income (000s)
    
    December 31,
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Three months ended
    
    $
    5,052
    
    
    $
    5,624
    
    
    $
    (572
    )
    
    
    (10.2
    )%Six months ended
    
    $
    9,450
    
    
    $
    8,184
    
    
    $
    1,266
    
    
    
    15.5
    %
 TM
 Software Segment Information:
 Software Revenues (000s)
    
    December 31,
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Three months ended
    
    $
    24,194
    
    
    $
    19,676
    
    
    $
    4,518
    
    
    
    23.0
    %Six months ended
    
    $
    50,079
    
    
    $
    36,459
    
    
    $
    13,620
    
    
    
    37.4
    %
  29




---



##### Table of Contents



Software Operating Income (000s)
    
    December 31,
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Three months ended
    
    $
    3,308
    
    
    $
    6,669
    
    
    $
    (3,361
    )
    
    
    (50.4
    )%Six months ended
    
    $
    8,473
    
    
    $
    7,302
    
    
    $
    1,171
    
    
    
    16.0
    %
  Corporate Segment Information:
 Corporate Operating Loss (000s)
    
    December 31,
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Three months ended
    
    $
    (9,281
    )
    
    $
    (9,577
    )
    
    $
    296
    
    
    
    (3.1
    )%Six months ended
    
    $
    (19,504
    )
    
    $
    (17,536
    )
    
    $
    (1,968
    )
    
    
    11.2
    %
  Acquisition-Related Amortization:
 Acquisition-Related Amortization Expense (000s)
    
    December 31,
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Three months ended
    
    $
    9,655
    
    
    $
    33,211
    
    
    $
    (23,556
    )
    
    
    (70.9
    )%Six months ended
    
    $
    35,197
    
    
    $
    66,426
    
    
    $
    (31,229
    )
    
    
    (47.0
    )%
  30




---



##### Table of Contents



SFAS 123(R)  Options Issued Before July 1, 2004:
 SFAS 123(R)  Options Issued Before July 1, 2004 (000s)
    
    December 31,
    
    
    Change2005
    
    
    2004
    
    
    $
    
    
    %Three months ended
    
    $
    1,242
    
    
    $
    
    
    
    $
    1,242
    
    
    
    
    %Six months ended
    
    $
    2,598
    
    
    $
    
    
    
    $
    2,598
    
    
    
    
    %
  Inflation
  31




---



##### Table of Contents



Liquidity and Capital Resources
  Six MonthsThree Months Ended
    
    
    EndedSeptember 30,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2005
    
    
    2005(in thousands)Net cash provided by operating activities
    
    $
    43,475
    
    
    $
    56,787
    
    
    $
    100,262Net cash provided by (used in) investing activities
    
    
    1,242
    
    
    
    (9,307
    )
    
    
    (8,065
    )Net cash provided by financing activities
    
    
    5,190
    
    
    
    8,124
    
    
    
    13,314Effect of exchange rate changes
    
    
    59
    
    
    
    (217
    )
    
    
    (158
    )Net increase in cash and cash equivalents
    
    $
    49,966
    
    
    $
    55,387
    
    
    $
    105,353
      32




---



##### Table of Contents



Use of Non-GAAP Financial Information
     33




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net cash provided by operating activities
    
    $
    56,787
    
    
    $
    65,861
    
    
    $
    100,262
    
    
    $
    97,535Excluding: Net change in settlement accounts
    
    
    (2,646
    )
    
    
    (63
    )
    
    
    2,262
    
    
    
    1,428Less:          Capital expenditures
    
    
    (16,476
    )
    
    
    (9,238
    )
    
    
    (23,642
    )
    
    
    (14,117
    )Free cash flow
    
    $
    37,665
    
    
    $
    56,560
    
    
    $
    78,882
    
    
    $
    84,846
   Recent Developments
 Acquisition
of PhoneCharge, Inc.
 Disposal of M-Solutions. ® ®
 Application of Critical Accounting Policies
  34




---



##### Table of Contents



Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
  35




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
       36




---



##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures.
   Internal Controls.
 37




---



##### Table of Contents



Part II. Other Information
 
 Item 4. Submission of Matters to a Vote of Security Holders
  Proposal 1:
 Number of Shares VotedDirector Nominees
    
    For
    
    Withhold Authority
    
    TotalWilliam P. Boardman
    
    
    43,853,486
    
    
    
    40,383,186
    
    
    
    84,236,672James D. Dixon
    
    
    79,110,278
    
    
    
    5,126,394
    
    
    
    84,236,672
   38




---



##### Table of Contents



Item 6. Exhibits
 Exhibit
    
    ExhibitNumber
    
    Description31(a)*
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Chief
Executive Officer.31(b)*
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Chief
Financial Officer.32(a)+
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer.32(b)+
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer.
 
 *
    
    Filed with this report.+
    
    Furnished with this report. 39




---



##### Table of Contents



Signatures
  CHECKFREE CORPORATIONDate: February 8, 2006
    
    By:
    
    /s/ David E. MangumDavid E. Mangum, Executive Vice
President and Chief Financial Officer*
(Principal Financial Officer)Date: February 8, 2006
    
    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. 40




---



##### Table of Contents



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