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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended June 30, 2004 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)  Securities registered pursuant to Section 12(b) of the Act:
    None  Securities registered pursuant to Section 12(g) of the Act:
    Common Stock, $.01 par value
Preferred Stock Purchase Rights Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.  Yes  þ     No  o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).  Yes  þ     No  o The aggregate market value of our Common Stock held by our non-affiliates
was approximately $2,304,874,304 on December 31, 2003. There were 90,437,646 shares of our Common Stock outstanding on August 19,
2004. Documents Incorporated By Reference Portions of our Proxy Statement for the 2004 Annual Meeting of
Stockholders are incorporated by reference in Part III.




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Table of Contents PagePart IItem 1.
    
    Business
    
    
    4Item 2.
    
    Properties
    
    
    23Item 3.
    
    Legal Proceedings
    
    
    23Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    23Part IIItem 5.
    
    Market for the Registrants Common Equity and Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    24Item 6.
    
    Selected Financial Data
    
    
    25Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    58Item 8.
    
    Financial Statements and Supplementary Data
    
    
    58Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    97Item 9A.
    
    Controls and Procedures
    
    
    97Item 9B.
    
    Other Information
    
    
    97Part IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    98Item 11.
    
    Executive Compensation
    
    
    98Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    98Item 13.
    
    Certain Relationships and Related Transactions
    
    
    98Item 14.
    
    Principal Accountant Fees and Services
    
    
    98Part IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    99Signatures
    
    
    
    
    105EX-21 SUBSIDIARIES OF THE COMPANYEX-23 CONSENT OF DELOITTE & TOUCHE LLPEX-24 POWER OF ATTORNEYEX-31.(A) SECTION 302 CERTIFICATION OF THE CEOEX-31.(B) SECTION 302 CERTIFICATION OF THE CFOEX-32.(A) SECTION 906 CERTIFICATION OF THE CEOEX-32.(B) SECTION 906 CERTIFICATION OF THE CFO
 -3-




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Part I 
 Item 1. Business. All references to we, us, our, CheckFree or the Company in this
Annual Report onForm 10-Kmean CheckFree Corporation and all entities owned or
controlled by CheckFree Corporation, except where it is made clear that the
term only means the parent company. Overview CheckFree was founded in 1981 as an electronic payment processing company
and has become a leading provider of financial electronic commerce products and
services. Our current business was developed through the expansion of our core
electronic payments business and the acquisition of companies operating in
similar or complementary businesses. Through our Electronic Commerce Division, we enable consumers to receive
and pay bills. For the year ended June 30, 2004, we processed approximately
583 million transactions, and delivered approximately 82 million e-bills. For
the quarter ended June 30, 2004, we processed nearly 163 million transactions
and delivered approximately 26 million e-bills. The number of transactions we
process each year continues to grow. For the year ended June 30, 2004, growth
in the number of transactions exceeded 34%. The Electronic Commerce Division
accounts for approximately 75% of our annual revenue. 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 the Electronic Commerce
Division, APS enables us to reach consumers we had not previously serviced and
to provide an additional service to billers. Through our Investment Services Division, we provide a range of portfolio
management services to financial institutions, including broker dealers, money
managers and investment advisors. As of June 30, 2004, our clients used the
CheckFree APL portfolio accounting system to manage nearly 1.6 million
portfolios, totaling more than $900 billion in assets. The Investment Services
Division accounts for approximately 14% of our annual revenue. Through our Software Division, we deliver software, maintenance, support
and professional services to large financial service providers and other
companies across a range of industries. Our Software Division is comprised of
three units, each with its own distinct set of software products. The ACH
Solutions unit provides software and services that are used to process more
than two-thirds of the nations nine billion Automated Clearing House (ACH)
payments. The CheckFree Financial and Compliance Solutions (CFACS) unit
enables organizations to manage their reconciliation and compliance
requirements. On November 1, 2003, we acquired HelioGraph, Ltd., a United
Kingdom-based company that brings a financial transactions management solution
with straight through processing expertise to us and expands our international
presence. The i-Solutions unit provides software and services that enable
end-to-end electronic billing and electronic statement creation, delivery and payment. The
Software Division accounts for approximately 11% of our annual revenue. We own many trademarks and service marks. This Annual Report on Form 10-K
contains trade dress, trade names and trademarks of other companies. Use or
display of other parties trademarks, trade dress or trade names is not
intended to, and does not, imply a relationship with the trademark or trade
dress owner. Electronic Commerce Division Introduction.The Electronic Commerce Division enables consumers to
receive and pay bills electronically. Its 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. -4-




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Consumers using our services access CheckFrees system primarily through
Consumer Service Providers (CSPs). CSPs are organizations, such as banks,
brokerage firms, Internet portals and content sites, Internet-based banks,
Internet financial sites, and personal financial management software providers,
that use our products to enable consumers to receive and/or pay bills
electronically. We have relationships with hundreds of CSPs. Some of our
largest CSPs, as determined by type of CSP and number of consumers using our
products, are Bank of America, Charles Schwab & Co., Navy Federal Credit Union,
MSN, PNC Bank, SunTrust Banks, Wachovia Bank, Washington Mutual, Inc. and U.S.
Bank. This list of our CSPs is not exhaustive and does not fully represent our
customer base. Consumers can also access our system through CheckFree hosted
biller direct sites or through www.mycheckfree.com, an educational website
where consumers can go to learn about and experience electronic billing. Industry Background.In 2003, 16.4 billion consumer bills were sent and
9.4% of those were delivered online, according to TowerGroup. On average, the
cost to a biller of submitting a paper bill, including printing, postage and
billing inserts, is $1.10 per bill (according to a Gartner study). In
contrast, according to the same study, electronic bills reduce that cost by
over half. Today, approximately 55% of major billers present
electronic bills in one
fashion or another, and an additional 30% of major billers have firm plans to
do so, according to Gartner. In a 2001 study, the Federal Reserve estimated that 42.5 billion checks
were written in the United States in 2000, down from about 50 billion in 1995.
The use of checks for bill payment imposes significant costs on financial
services organizations, businesses and their customers. These costs include
the writing, mailing, recording and manual processing of checks. The majority
of todays consumer bill payments are completed using traditional paper-based
methods. According to a March 2002 TowerGroup study of United States consumer
bill payment methods, of the estimated 20.6 billion consumer bill payments
forecasted for 2003, 72.1% were paid by paper check, 16% were paid by
electronic means and the remainder were paid by other means (cash, payroll
deduction, money order, etc.). By comparison, in 2002, consumers used checks
to pay 73.6% of bills, and paid electronically 14.2% of the time. Many
financial services organizations and businesses have invested in the
infrastructure for recording, reporting and executing electronic transactions.
We believe the broad impact of the Internet, the relatively high cost of
producing, printing and mailing a paper bill and the cost to financial services
organizations, businesses and customers of processing paper checks will
continue the trend toward increased usage of electronic methods to execute
financial transactions. Products and Services.We provide a variety of products that allow
consumers to receive and pay bills. CSPs can offer our services to customers
either through a hosted application, known as CheckFree WebSM, or through
various protocols that link online banking applications to our Genesis billing
and payment engine. Through our CSPs, we support both Microsofts Money and
Quicken® for electronic bill payment. In addition, we offer a small
business-based version of CheckFree Web optimized for business users, CheckFree
Web for Small BusinessSM. All products feature the ability to pay anyone,
anytime, anywhere and the ability to receive hundreds of different bills
electronically. The next generation of CheckFree Web was released in August
2004 and further advances the capabilities available to consumers, including
same day and next day payments, and substantial ease-of-use improvements.  
    
    Electronic Billing or e-Bill Services.As of June 30, 2004,
consumers could view 296 different e-bills through CSP websites or
directly at our website. The following billers are some of our
largest electronic billing customers, as determined by the number of
consumers viewing and paying their e-bills: Bank of America Credit
Card, JC Penney Card Services, SBC, Sams Club Credit, Macys, Home
Depot Consumer Accounts, Lowes Consumer Credit Card, Sprint PCS,
Verizon Corporation and Texaco. Actual e-bills delivered in the
fourth quarter ended June 30, 2004, approached 26 million, which is
an increase of 15% over the nearly 23 million e-bills distributed in
the third quarter ended March 31, 2004, and an increase of more than
117% over the nearly 12 million e-bills delivered in the fourth
quarter ended June 30, 2003. For the year, we delivered about 82
million e-bills. The number of CSPs where consumers can both view
and pay bills grew by approximately 38% in 2004, with 1,308 CSPs now
offering full electronic billing and payment. -5-




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
    
    Electronic Payment or the CheckFree
PayAnyoneSMService.
Our PayAnyoneSM service allows consumers to literally pay anyone
electronically using a variety of devices such as personal
computers. Once a consumer has accessed the system, he or she can
either elect to pay an electronic bill delivered by us or can
instruct the system to pay any individual or company within the
United States. We complete this payment request either
electronically, using the Federal Reserves ACH, or in some
instances other electronic methods such as Visa ePay, or by issuing
a paper check or draft.  
    
    Automated Clearing House.The Federal Reserves
ACH is the primary batch-oriented electronic funds transfer
system financial services organizations use to move funds
electronically through the banking system. We access the ACH
through an agreement with SunTrust Bank. Additional
information on the ACH can be found at the Federal Reserve
Commissions website at www.federalreserve.gov.
    
    Paper Checks or Drafts.When we are unable to
move the funds electronically, we issue a paper check, drawn
on our bank account, or a paper draft, drawn on the consumers
bank account.
    
    Payment Method Selection.Our Genesis system
contains patented technology that determines the preferred
method of payment to balance processing costs, operational
efficiencies and risk of loss. We have been able to manage
our risk of loss by using this technology to adjust the mix of
electronic and paper transactions in individual cases such
that, overall, we have not incurred losses in excess of 0.41%
of our revenues in any of the past five years. We also
maintained a reserve for these risks of $600,000 at June 30,
2004.
    
    Walk-in Bill Payment Services.Through our
acquisition of APS, we are able to offer walk-in bill payment
services at more than 10,000 retail and agent locations
throughout the United States. The acquisition combines the
APS footprint with our current electronic billing and payment
infrastructure to offer billing organizations a wider number
of payment processing services from a single company. Usage Metrics. We report usage metrics in several ways. We report global
numbers showing the total number of transactions. For the year ended June 30,
2004, we processed more than 583 million transactions and delivered about 82
million e-bills, which represented growth in transactions of over 34% for the
year. We also report usage based on the relationship we have with the CSP,
either a Full Service relationship or a Payment Services relationship. A
Full Service relationship is one with a CSP that outsources the complete
electronic billing and payment process to us. A Payment Services relationship
is one with a CSP that utilizes only a subset of our electronic billing and
payment services or uses one of our other Electronic Commerce Division
products. Using these metrics, for the year ended June 30, 2004, we processed
approximately 440 million transactions related to Full Service consumers and
approximately 143 million transactions in the Payment Services category. The CheckFree Advantage.We have developed numerous systems and programs
to enhance our billing and payment products.  
    
    Scalable Genesis Platform.The Genesis platform is an open
infrastructure created to process e-bills and payments. Prior to
the acquisition of APS, all transaction processing for all consumers
using our services was performed on the Genesis platform, enabling
us to improve our economies of scale.  
    
    Sigma Quality.In fiscal year 2000, we began an internal
Sigma quality program, which ties employee performance evaluations
and compensation to the achievement of process and system
improvements which drive customer satisfaction. The program links
key drivers of satisfaction to an internal set of metrics of system
availability and payment accuracy and timeliness, to take our
quality performance to 99.9%, or 4.6 Sigma. As a result of our
Sigma quality program, in 2003, we voluntarily raised our service
level agreements across our entire base of CSPs. -6-




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
    
    Electronic Payment Rate.Electronic payments are more
efficient than paper payments, less expensive to process initially,
result in fewer errors and result in fewer customer inquiries. As
of June 30, 2004, we completed over 79% of our payments
electronically. This compares to 75% as of June 30, 2003. In
addition to sending a large majority of our payments electronically,
we also have developed a process by which we include with the
payment additional information the receiving merchant has given us
about how its payment should be transmitted. We have established
connectivity with thousands of merchants to provide this additional
information.  
    
    Experienced Customer Care.We have approximately 775
trained, experienced customer care and merchant services staff
located in facilities in Dublin, Ohio; Aurora, Illinois; and
Phoenix, Arizona. The level and types of customer care services we
provide vary depending upon the customers or CSPs requirements.
We provide both first- and second-tier support. When we provide
first-tier customer care, we handle all inbound customer calls, in
some cases under the CSPs name. When we provide second-tier
customer support, we provide payment research and support, and the
CSP handles its own inbound customer calls. To maintain our
customer care standards, we employ extensive internal monitoring
systems, conduct ongoing customer surveys and provide comprehensive
training programs.  
    
    Real-Time Payment Processing for Walk-In Bill Payments.We
offer billers a real-time payment solution, meaning that billers
can receive customer payment information as soon as payments are
made at one of our retail agent locations, assuring that unnecessary
service shut-offs of customers who pay their bills at the last
minute are avoided. Real-time payments also have the advantage of
minimizing calls to a billers call center by providing the billers
customer with the confidence that the biller has already received
his payment even before the customer leaves the agent location.
Today, this technology accounts for over one-third of the walk-in
bill payments that we process. Our Business Strategy.Our business strategy is to provide an expanding
range of convenient, secure and cost-effective electronic commerce services and
related products to financial services organizations, Internet-based
information sites, businesses that generate recurring bills and statements, and
their customers. We have designed our services and products to take advantage
of opportunities we perceive in light of current trends and our fundamental
strategy. The key elements of our business strategy are to:  
    
    Drive increased adoption of electronic commerce services by
consumers.We believe that consumers will move their financial
transactions from traditional paper-based to electronic methods if
they have an easy-to-access, easy-to-use, secure, and cost-effective
method for receiving and paying their bills electronically. To
drive this transition, we make our e-bill and payment services
available directly, through CSPs and through biller sites so that
e-bills are available wherever consumers feel most comfortable
viewing and paying them. We also price our services to our
customers in such a way as to facilitate their offering electronic
billing and payment to a broad array of consumers. CSPs and billers
pay us based on the number of their consumers enabled to use our
system, the number of transactions we process, or some combination
of both. The price charged for each consumer or each transaction is
negotiated individually with each CSP and may vary depending on:  
    
    the services provided to the consumers;
    
    the nature of the transactions processed; and
    
    the volume of consumers, transactions, or both. We believe this flexibility equips our CSPs and billers to provide
consumers with services that will meet their needs, and that this
flexibility makes it more attractive for CSPs and billers to promote
our electronic billing and payment service. -7-




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
    
    Continue to improve operational efficiency and effectiveness.
We believe that as our business grows and the number of
transactions we process increases, we will be able to take advantage
of operating efficiencies associated with increased volumes, thereby
reducing our unit costs. Our Sigma quality program, high electronic
rate, consolidation of platforms, the scalability of the Genesis
system and high-quality customer care centers all help us achieve
greater efficiencies.  
    
    Drive new forms of electronic commerce services.We intend
to leverage our infrastructure and distribution channels to address the
requirements of consumers and businesses in new electronic commerce
applications. For example, through our purchase of APS, we now
offer a more complete suite of payment services to meet the needs of
consumers and billers. In addition, our core payment and processing
network can manage person-to-person and small business payments, as
well as payments made at Internet merchant sites. Technology, Research and Development.Our core technology capabilities
were developed to handle settlement services, merchant database services and
online inquiry services on a traditional mainframe system with direct
communications to businesses. We have implemented a logical, nationwide
n-tier internetworking infrastructure, which networks together any number of
other networks, passing transaction data among them. For example, we
internetwork together networks of billers, consumers, CSPs, retail agents and
financial institutions to complete electronic billing and payment transactions.
Consumers, businesses and financial services organizations access our
electronic billing and payment transaction internetworking infrastructure
through the Internet, dial-up telephone lines, privately leased lines or
various types of communications networks. Our computing complex in Norcross,
Georgia, houses a wide variety of application servers that capture transactions
and route them to our back-end banking, billing and payment applications for
processing. The back-end applications are run on IBM mainframes, Intel
platforms or Unix servers. We have developed databases and information files
that allow accurate editing and initiation of payments to billers. These
databases have been constructed over the past 23 years as a result of our
transaction processing experience. As part of our disaster recovery systems, we utilize IBM Business Recovery
Services and EMCs remote disk mirroring technology. Using this system, we are
able to recover technical infrastructure, client communications, in-flight
payments and first-tier customer care within 24 hours. We maintain a research and development group with a long-term perspective
of planning and developing new services and related products for the electronic
commerce and financial application software markets. Additionally, we use
independent third party software development contractors as needed. Sales, Marketing and Distribution.Our marketing and distribution
strategy has been to create and maintain distribution alliances that maximize
access to potential customers for our services. We do not, for the most part,
market to, or have a direct relationship with, consumers or end-users of our
products and services. We believe that these alliances enable us to offer
services and related products to a larger customer base than can be reached
through stand-alone marketing efforts. We seek distribution alliances with
companies who have maximum penetration and leading reputations for quality with
our target customers. These alliances include our relationship with CSPs; with
billers; with Biller Service Providers (or BSPs) such as Kubra Data Transfer,
Ltd., and CSG Systems, Inc.; and with value-added resellers such as Fiserv,
FundsXpress, Digital Insight, PSCU Financial Services and S1 Corporation. This
list of BSPs and resellers is not exhaustive and does not fully represent our
customer base. In order to foster a better understanding of the needs of our CSPs,
billers, BSPs and resellers, we employ a number of relationship managers
assigned to each of these specific customers. We also employ marketing
personnel to facilitate joint consumer acquisition programs with each of these
customer groups, and to share industry knowledge and previously developed
campaigns with their marketing departments. Our alliance partners market our
services in numerous ways, including television, radio and print advertising,
in some cases offering bill payment services for free. Competition.We face significant competition for all of our products.
Our primary competition is the continuance of traditional paper-based methods
for receiving and paying bills, both on the part of consumers and billers. In
addition, the possibility of billers and CSPs using internal development and
management resources to create in-house systems to handle electronic billing
and payment remains a competitive threat. -8-




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Metavante, a division of Marshall and Ilsley Corporation, competes with us
most directly from the perspective of providing pay anyone solutions to
financial services organizations. Since 2001, Metavante has either purchased
or announced the purchase of four companies associated with some aspect of
electronic billing or payment: Cyberbills, Derivion, Paytrust and Spectrum. A
number of other companies compete with us by providing some, but not all, of
the services that make up our complete e-bill and electronic pay anyone
service. For example, MasterCard International provides a service which allows
electronic payment to certain merchants. Western Union, a division of First Data Corporation (FDC), and Viad
compete with our walk-in bill payment services. Each has a national network of
retail and agent locations. We also compete with smaller walk-in bill payment
providers in different regions of the United States and with billers who have
created in-house systems to handle walk-in bill payments. Other Products and Services.In addition to the electronic billing and
payment service products, the Electronic Commerce Division also offers a credit
card account balance transfer product, a credit card refund balance product, an
automated recurring payments and software service, which is primarily installed
at health clubs throughout the United States, and other forms of wholesale and
retail payment solutions. Acquisitions.Our current business was developed through expansion of
our core Electronic Commerce business and the acquisition of companies
operating in similar or complementary businesses. Our major acquisitions
related to the Electronic Commerce Division include Servantis Systems Holdings,
Inc. in February 1996, Intuit Services Corporation in January 1997, and MSFDC,
L.L.C. (TransPoint) in September 2000. In October 2000, we completed a
strategic agreement with Bank of America, under which we acquired certain of
Bank of Americas electronic billing and payment assets. In June 2004, we
acquired APS. Investment Services Division Introduction.The Investment Services Division provides a range of
portfolio management services to help more than 275 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. We also support a growing number of third party vendors
providing turnkey solutions. Investment Services primary product is a real-time portfolio management
system called CheckFree APL, which is used by 40 of the top 50 brokers in the
United States and 36 of the top 40 money managers. As of June 30, 2004, our
clients used the CheckFree APLSM portfolio accounting system to manage nearly
1.6 million portfolios representing more than $900 billion in assets. Industry Background.Industry analysts (including Cerulli Associates and
Financial Research Corporation (2003)) predict a compound annual growth in the
SMA business to exceed 20% over the next several years. This projected growth
is due primarily to the marketing of fee-based services, like SMAs by brokerage
companies, and consumers desire to more efficiently manage the tax
implications of their investments by leveraging SMAs. -9-




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Products and Services.Our portfolio management products and services
provide the following functions:  
    
    proposal generation;  
    
    account open and trading capabilities;  
    
    performance measurement and reporting;  
    
    decision support tools;  
    
    tax lot accounting;  
    
    multiple strategy portfolios;  
    
    straight through processing; and  
    
    Depository Trust Corporation interfacing. In fiscal 2003, we enhanced our CheckFree APL product by creating a
Multiple Strategy Portfolio (MSP) solution. This solution allows our clients
to track, on a combined basis, the portfolios of their customers, even when
multiple portfolios are managed by different asset managers. We currently have
21 clients using this solution and over 30,000 accounts under management. Revenues in our portfolio management services are generated per portfolio
under management through multiple year agreements that provide for monthly
revenue on a volume basis. Revenue from our information services and software
is typically generated through multi-year or annual agreements. Technology.Our Investment Services Division utilizes IBM technology to
run the portfolio management software on a Unix platform. Services are
provided primarily as a service bureau offering with the data center residing
in Chicago, Illinois and four concentration hub sites located in Jersey City,
Newark, Boston and San Diego. In addition to the dedicated private network,
clients use frame relay services from several companies to access services. We
plan to introduce a new technology platform to replace our existing platform
over the next few years that will include enhanced functionality and further
drive reductions in processing costs. Sales, Marketing and Distribution.We market CheckFree APL through our
direct sales force. We generate new customers through direct solicitation,
user groups and advertisements. We also participate in trade shows and sponsor
industry seminars for distribution alliances. Competition.Investment Services competes with potential customers
building their own internal portfolio accounting systems. We also compete with
providers of portfolio accounting software and services like Advent Software,
DST, Vestmark, and IDS, and service bureau providers like SunGard Portfolio
Solutions and Financial Models Company. Other Products and Services.In addition to our APL portfolio management
products, the Investment Services Division also offers proposal generation,
investment performance, and reporting products and services. Marketed under
M-Pact, M-Search® and M-Watch®, these products manage data for 1,300 managers
and 5,600 investment products. Acquisitions.Our current business was developed through the acquisition
of Security APL, Inc. in May 1996, and Möbius Group, Inc. in March 1999. -10-




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Software Division The Software Division operates three units, each of which delivers
software, maintenance, support and professional services. These units are ACH
Solutions, CFACS, and i-Solutions.  
    
    ACH Solutions.Our ACH Solutions unit provides ACH software
and services. ACH is the primary batch-oriented electronic funds
transfer system financial services organizations use to move funds
electronically through the banking system. Approximately 80% of the
nations top 50 ACH originators use our solutions for ACH
processing, and more than two-thirds of the nations nine billion
ACH payments are processed each year through institutions using our
software systems. In addition to the United States, we have
provided electronic payment technology in Asia, South America and
Central America.ACH Solutions markets software under the product name PEP+
(Paperless Entry Processing System). PEP+ is an online, real-time
system that enables the originating and receiving of payments through
the ACH system. These electronic transactions are substitutes for
paper checks, and are typically used for recurring payments such as
direct deposit payroll payments; corporate payments to contractors and
vendors; debit transfers that consumers make to pay insurance
premiums, mortgages, loans and other bills; and business-to-business
payments. Our PEP+reACH product, that can be used with our PEP+
software, allows returned checks, checks at the point-of-sale, and
checks sent to a lockbox to be converted to electronic payments.  
    
    CheckFree Financial and Compliance Solutions.CFACS provides
software and professional services that enable organizations to
perform automated reconciliation and maintain compliance with
federal and state regulations. Banks, bank holding companies,
securities and insurance firms, corporations, and government
agencies use our reconciliation and compliance products and
services. Our reconciliation solutions are marketed under the
CheckFree RECON-Plus and CheckFree RECON Securities brands. These
systems reconcile high volumes of complex transactions that are
spread across multiple internal and external systems and include
securities transaction processing, automated deposit verification,
consolidated bank account reconciliation and cash mobilization, and
improved cash control. In fiscal 2002, we released RECON-Plus
Frontier, a multi-tier reconciliation system that operates over the
Internet. In November 2003, we acquired HelioGraph, Ltd. to expand
our product set to provide intelligent workflow and control
applications to optimize business process management. Our solutions
enable the management, monitoring and measurement of the flow of
securities and cash transactions across a local or global
enterprise. These products are marketed under the names CheckFree
TradeFlow TPM, CheckFree Message Broker, CheckFree Message
Workstation and CheckFree eVent. The CFACS compliance products
support unclaimed property management and compliance reporting.  
    
    i-Solutions.i-Solutions provides end-to-end
business-to-consumer and business-to-business software and services
for electronic billing and electronic statement creation, delivery and payment.CheckFree i-Solutions software enables billers to create online bills
and statements and distribute them to their customers for viewing and
payment. Our software and outsourced application hosting services
deliver:  
    
    e-bill and e-statement creation;
    
    e-bill and e-statement delivery;
    
    e-bill payment transaction management and security;
    
    e-bill payment tracking and history;
    
    online marketing from the biller to its customers; and
    
    customer care.  i-Solutions products are marketed around the world and i-Solutions
software has been sold in 23 countries. -11-




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Licenses.We generally grant non-exclusive, non-transferable perpetual
licenses to use our application software at a single site. Our standard
license agreements contain provisions designed to prevent disclosure and
unauthorized use of our software. License fees vary according to a number of
factors, including the types and levels of services we provide. Multiple site
licenses are available for an additional fee. In our license agreements, we
generally warrant that our products will function in accordance with the
specifications set forth in our product documentation. License fees are
generally due upon software delivery to the customer. Maintenance and Support.Maintenance includes enhancements to our
software. Customers who obtain maintenance generally retain maintenance
service from year to year. To complement customer support, we frequently
participate in user groups with our customers. These groups exchange ideas and
techniques for using our products and provide a forum for customers to make
suggestions for product acquisition, development and enhancement. Professional Services.We offer implementation services building customer
applications around our products. Sales, Marketing and Distribution.We market software products through
our direct and indirect sales force. Salespersons have specific product
responsibility and receive support from technical personnel as needed. We
generate new customers through direct solicitations, user groups,
advertisements, direct mail campaigns and strategic alliances. We also
participate in trade shows and sponsor industry technology seminars for
prospective customers. Existing customers are often candidates for sales of
additional products or for enhancements to products they have already
purchased. We also market through resellers for certain geographies and
vertical markets. Competition. The computer application software industry is highly
competitive. We believe that there is at least one direct competitor for most
of our software products, but no competitor competes with us in all of our
software product areas. In the electronic statement creation and financial applications software
markets, we compete directly or indirectly with a number of firms, including
large diversified computer software service companies and independent suppliers
of software products. CheckFree i-Solutions electronic statement and billing
creation software products compete primarily with edocs, Inc., Avolent Software
and with billers building their own solutions rather than buying software or
outsourcing the service. The RECON-Plus products compete with Accurate and
SmartStream. Our PEP+ products compete with Transaction Systems Architects,
Inc. Acquisitions.Our current business was developed through the acquisition
of Servantis Systems Holdings, Inc. in February 1996, BlueGill Technologies,
Inc. in April 2000 and HelioGraph, Ltd. in November 2003. For further financial information about our segments, revenue derived from
foreign sales and geographic locations of our long-lived assets, please see
Note 20 to Consolidated Financial Statements. Government Regulation We believe that we are not required to be licensed by the Office of the
Comptroller of the Currency, the Federal Reserve Board, or other federal or
state agencies that regulate or monitor banks or other types of providers of
electronic commerce services. The Federal Financial Institutions Examination
Council (FFIEC), however, periodically audits us, because we are a supplier
of products and services to financial services organizations. The FFIEC is
made up of the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the National Credit Union Administration, the
Office of the Comptroller of the Currency and the Office of Thrift Supervision.
In addition, because we use the ACH to process many of our transactions, we
are subject to the rules of the Federal Reserve Board, which currently allow us
to use the ACH by using a routing number assigned to a bank. -12-




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In conducting our business, however, we are subject to various laws and
regulations relating to the electronic movement of money. In 2001, the USA
Patriot Act amended the Bank Secrecy Act (BSA) to expand the definition of
money services businesses so that it may include businesses such as CheckFree.
Several states have also passed legislation regulating or licensing check
sellers, money transmitters or service providers to banks, and we have
registered under this legislation in specific instances. In addition, as are
all U.S. citizens, we are subject to the regulations of the Office of Foreign
Assets Control targeted at money laundering. Further, we are a financial
institution within the meaning of the Gramm-Leach-Bliley Act, which governs
notice to consumers about the financial institutions policies with respect to
use of customer data and restricts certain use and disclosure of customer data.
Finally, we are also subject to the electronic funds transfer rules embodied
in Regulation E, promulgated by the Federal Reserve Board. The Federal
Reserves Regulation E implements the Electronic Fund Transfer Act, which was
enacted in 1978. Regulation E protects consumers engaging in electronic
transfers, and sets forth the basic rights, liabilities, and responsibilities
of consumers who use electronic money transfer services and of financial
services organizations that offer these services. Our walk-in bill payment service conducted through APS is considered a
money services business and as such is registered with the Financial Crimes
Enforcement Network. In consideration of certain risks posed, the nature of
the products and services, the customer base served and the size of APS
operations, we have established and we maintain a program to provide a system
of controls and procedures reasonably designed to detect, prevent and report
actual or suspected violations of the BSA, money laundering statutes,
anti-terrorism statutes and other illicit activity while assuring daily
adherence to the BSA. In addition, APS currently maintains 35 state licenses
to comply with various state legislation regulating money transmitters and is
subject to annual audits by those states. Intellectual Property Rights We regard our financial transaction services and related products as
proprietary and rely on a combination of patent, copyright, trademark and trade
secret laws, employee and third party nondisclosure agreements, and other
intellectual property protection methods to protect our services and related
products. We have been issued 23 patents in the United States and abroad. The
majority of these patents cover various facets of electronic billing and/or
payment. We also have a large number of pending patent applications. We own
more than 36 domestic and foreign trade and service mark registrations related
to products or services and have additional registrations pending. Employees As of June 30, 2004, we employed approximately 3,000 full-time employees,
including approximately 530 in research and development, approximately 775 in
customer care, approximately 245 in sales and marketing and approximately 1,450
in administration, financial control, corporate services, human resources and
other processing and service personnel. We are not a party to any collective
bargaining agreement and are not aware of any efforts to unionize our
employees. We believe that our relations with our employees are good. We
believe our future success and growth will depend in large measure upon our
ability to attract and retain qualified management, technical, marketing,
business development and sales personnel. Business Risks We desire to take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Many of the following important
factors discussed below have been discussed in our prior filings with the
Securities and Exchange Commission. In addition to the other information in
this report, readers should carefully consider that the following important
factors, among others, in some cases have affected, and in the future could
affect, our actual results and could cause our actual consolidated results of
operations for the fiscal year ending June 30, 2005 (and the individual fiscal
quarters therein), and beyond, to differ materially from those expressed in any
forward-looking statements made by us, or on our behalf. -13-




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Risks Related to Our Business The market for our electronic commerce services is evolving and may not
continue to develop or grow rapidly enough for us to sustain profitability. If the number of electronic commerce transactions does not continue to
grow or if consumers or businesses do not continue to adopt our services, it
could have a material adverse effect on our business, financial condition and
results of operations. We believe future growth in the electronic commerce
market will be driven by the cost, ease-of-use and quality of products and
services offered to consumers and businesses. In order to consistently
increase and maintain our profitability, consumers and businesses must continue
to adopt our services. We have not consistently operated profitably in the past and may experience net
losses in the future. We have not consistently operated profitably to date. Since our
inception, our accumulated losses have totaled approximately $1.17 billion. We
incurred:  
    
    a loss from operations of $535.5 million and net loss of
$440.9 million for the fiscal year ended June 30, 2002; and  
    
    a loss from operations of $73.5 million and net loss of $52.1
million for the fiscal year ended June 30, 2003. We experienced operating income of $19.8 million and net income of $10.5
million in fiscal 2004, but we could experience net losses or may not be able
to sustain profitability in the future. For the fiscal year ended June 30,
2004, we invested about $66.3 million in research and development and $51.9
million in sales and marketing. We intend to continue to make significant
investments in research and development and sales and marketing. If the
investment of our capital is not successful to grow our business, it will have
a material adverse effect on our business and financial condition, as well as
negatively impact an investment in our business and limit our ability to pay
dividends in the future to our stockholders. Our future profitability depends upon our ability to implement our strategy
successfully to increase adoption of electronic billing and payment methods. Our future profitability will depend, in part, on our ability to implement
our strategy successfully to increase adoption of electronic billing and
payment methods. Our strategy includes investment of time and money during
fiscal 2005 in programs designed to:  
    
    drive consumer awareness of electronic billing and payment;  
    
    encourage consumers to sign up for and use our electronic
billing and payment services offered by our distribution partners;  
    
    continue to refine our infrastructure to handle seamless processing of transactions;  
    
    continue to develop state-of-the-art, easy-to-use technology; and  
    
    increase the number of bills we can present and pay electronically. If we do not successfully implement our strategy, revenue growth may be
minimal, and expenditures for these programs will not be justified. Our investment in these programs will have a negative impact on our
short-term profitability. Additionally, our failure to implement these
programs successfully or to substantially increase adoption of electronic
commerce billing and payment methods by consumers who pay for the services
could have a material adverse effect on our business, financial condition and
results of operations. -14-




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Competitive pressures we face may have a material adverse effect on us. We face significant competition in our each of our business units,
Electronic Commerce, Investment Services and Software. Increased competition
or other competitive pressures may result in price reductions, reduced margins
or loss of business, any of which could have a material adverse effect on our
business, financial condition and results of operations. Further, competition
will persist, and may increase and intensify in the future. In Electronic Commerce, our primary competition remains the traditional
paper-based methods of paying and receiving bills. In addition, a number of
banks have developed their own internal solutions for all or portions of the
electronic bill presentment and payment process. Wells Fargo & Co., Bank One,
J.P. Morgan Chase and Wachovia currently have in-house solutions for all or a
portion of the integrated services we provide. We do not know whether other
banks that currently outsource the bill presentment and payment process to us
will decide to construct in-house solutions in the future. Although the banks
who decide to use an in-house solution may continue to use our services for
some portion of their electronic bill presentment and payment product, we may
not provide the same range of services as we currently do and, therefore, we
may not receive the same amount of revenue from these banks. We also compete directly with Metavante, a division of Marshall and Ilsley
Corporation, which currently offers a pay anyone solution to financial service
organizations. Over the past several years, Metavante has completed or
announced several acquisitions in the electronic bill presentment and payment
area, including the purchase of CyberBills, Derivion, Paytrust and Spectrum. We
also face potential competition from MasterCard International. We cannot
assure you that we will be able to compete effectively against Metavante and
MasterCard, or against financial services organizations and billers building
their own electronic billing and payment solutions internally, or against other
current and future electronic commerce competitors. In addition, we cannot assure you that we will be able to compete
effectively against current and future competitors in the investment services
and software products markets. The markets for our Investment Services and
Software products are also highly competitive. In Investment Services, our
competition comes from providers of portfolio accounting software and
outsourced services and from in-house solutions developed by large financial
institutions. In Software, our competition comes from several different market
segments, including large diversified computer software and service companies
and independent suppliers of software products. Security and privacy breaches in our electronic transactions may damage
customer relations and inhibit our growth. Any failures in our security and privacy measures could have a material
adverse effect on our business, financial condition and results of operations.
We electronically transfer large sums of money and store personal information
about consumers, including bank account and credit card information, social
security numbers, and merchant account numbers. If we are unable to protect,
or consumers perceive that we are unable to protect, the security and privacy
of our electronic transactions, our growth and the growth of the electronic
commerce market in general could be materially adversely affected. A security
or privacy breach may:  
    
    cause our customers to lose confidence in our services;  
    
    deter consumers from using our services;  
    
    harm our reputation;  
    
    expose us to liability;  
    
    increase our expenses from potential remediation costs; and  
    
    decrease market acceptance of electronic commerce transactions. While we believe that we utilize proven applications designed for premium
data security and integrity to process electronic transactions, there can be no
assurance that our use of these applications will be sufficient to address
changing market conditions or the security and privacy concerns of existing and
potential subscribers. -15-




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We rely on third parties to distribute our electronic commerce and investment
services products, which may not result in widespread adoption. In Electronic Commerce, we rely on our contracts with financial services
organizations, businesses, billers, Internet portals and other third parties to
provide branding for our electronic commerce services and to market our
services to their customers. Similarly, in Investment Services, we rely upon
financial institutions, including broker dealers, money managers and investment
advisors to market investment accounts to consumers and thereby increase
portfolios on our APL system. These contracts are an important source of the
growth in demand for our electronic commerce and investment service products.
If any of these third parties abandons, curtails or insufficiently increases
its marketing efforts, it could have a material adverse effect on our business,
financial condition and results of operations. Consolidation in the financial services industry may adversely affect our
ability to sell our electronic commerce services, investment services and
software. Mergers, acquisitions and personnel changes at key financial services
organizations have the potential to adversely affect our business, financial
condition and results of operations. This consolidation could cause us to
lose:  
    
    current and potential customers;  
    
    business opportunities, if combined financial services
organizations were to determine that it is more efficient to develop
in-house services similar to ours or offer our competitors products
or services; and  
    
    revenue, if combined financial services organizations were
able to negotiate a greater volume discount for, or to discontinue
the use of, our products and services. One customer accounts for a significant percentage of our revenue. We have one customer, Bank of America that accounts for 19.6% of our total
revenue, which reflects their use of products in all three of our business
segments. The loss or renegotiation of our contract with Bank of America or a
significant decline in the number of transactions we process for them could
have a material adverse effect on our business, financial condition and results
of operations. No other customer accounts for more than 10% of our total
revenue. If we do not successfully renew or renegotiate our agreements with our
customers, our business may suffer. Our agreements for electronic commerce services with financial services
organizations generally provide for terms of two to five years. Similarly, our
agreements with our portfolio management customers are generally long term. If
we are not able to renew or renegotiate these agreements on favorable terms as
they expire, it could have a material adverse effect on our business, financial
condition and results of operations. The profitability of our Software Division depends, to a substantial
degree, upon our software customers electing to annually renew their
maintenance agreements. If a substantial number of our software customers
declined to renew these agreements, our revenues and profits in this business
segment would be materially adversely affected. Our future profitability depends on a decrease in the cost of processing
payment transactions. If we are unable to continue to decrease the cost of processing
transactions, our margins could decrease, which could have a material adverse
effect on our business, financial condition and results of operations. Many
factors contribute to our ability to decrease the cost of processing
transactions, including our Sigma quality program, our customer care efficiency
program, our processing technology optimization program, and our focus on
continually increasing the number of transactions we process electronically.
Our electronic rate, or percentage of transactions processed electronically,
was more than 71% at the end of fiscal year 2002, more than 75% at the end of
fiscal year 2003 and 79% at the end of fiscal year 2004. As a result of the
combined effects of programs focused on quality and process improvements,
maximizing efficiency, and improving electronic processing rates, our total
Electronic Commerce cost per transaction processed decreased more than 24% as
of June 30, 2004, as compared to June 30, 2003. Our future profitability will
depend, in part, on our ability to continue to decrease this cost. -16-




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The transactions we process expose us to fraud and credit risks. Losses resulting from returned transactions, merchant fraud or erroneous
transmissions could result in liability to financial services organizations,
merchants or subscribers, which could have a material adverse effect on our
business, financial condition and results of operations. Although ameliorated
by reversibility arrangements with many billers, the electronic and
conventional paper-based transactions we process expose us to credit risks.
These include risks arising from returned transactions caused by:  
    
    insufficient funds;  
    
    unauthorized use;  
    
    stop payment orders;  
    
    payment disputes;  
    
    closed accounts;  
    
    theft;  
    
    frozen accounts; and  
    
    fraud. We are also exposed to credit risk from merchant fraud and erroneous
transmissions. We could experience significant losses due to our reliance on agents for
walk-in bill payment services. Through our contractual relationships with billers, we guarantee consumer
payments made at our retail or agent locations regardless of whether an agent
makes timely deposits of funds collected. We could suffer significant losses
if we are unable to manage and control agents making correct and timely
deposits. We may experience breakdowns in our processing systems that could damage
customer relations and expose us to liability. We depend heavily on the reliability of our processing systems in both the
Electronic Commerce and Investment Services Divisions. A system outage or data
loss could have a material adverse effect on our business, financial condition
and results of operations. Not only would we suffer damage to our reputation
in the event of a system outage or data loss but we may also be liable to third
parties. Many of our contractual agreements with financial institutions
require the payment of penalties if our systems do not meet certain operating
standards. In addition, in our Electronic Commerce Division, we guarantee the
delivery of payments and any failure on our part to perform may result in late
payments or penalties to third parties on behalf of our subscribers. In our
Investment Services Division, a failure of our system could result in incorrect
or mistimed stock trades that may result in third party liability. To
successfully operate our business, we must be able to protect our processing
and other systems from interruption by events that are beyond our control.
Events that could cause system interruptions include:  
    
    fire;  
    
    natural disaster;  
    
    unauthorized entry;  
    
    power loss;  
    
    telecommunications failure;  
    
    computer viruses; and  
    
    terrorist acts. Although we have taken steps to protect against data loss and system
failures, there is still risk that we may lose critical data or experience
system failures. Furthermore, our property and business interruption insurance
may not be adequate to compensate us for all losses or failures that may occur. -17-




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We may experience software defects and development delays, damaging customer
relations, decreasing our potential profitability and exposing us to liability. Our products are based on sophisticated software and computing systems
that often encounter development delays, and the underlying software may
contain undetected errors or defects. Defects in our software products and
errors or delays in our processing of electronic transactions could result in:  
    
    additional development costs;  
    
    diversion of technical and other resources from our other development efforts;  
    
    loss of credibility with current or potential customers;  
    
    harm to our reputation; or  
    
    exposure to liability claims. In addition, we rely on technologies supplied to us by third parties that
may also contain undetected errors or defects that could have a material
adverse effect on our business, financial condition and results of operations.
Although we attempt to limit our potential liability for warranty claims
through disclaimers in our software documentation and limitation-of-liability
provisions in our license and customer agreements, we cannot assure you that
these measures will be successful in limiting our liability. We experience seasonal fluctuations in our net sales causing our operating
results to fluctuate. We have historically experienced seasonal fluctuations in our electronic
commerce and software sales, and we expect to experience similar fluctuations
in the future, which could cause our stock price to decrease unexpectedly. Our
growth in electronic commerce transactions is affected by seasonal factors,
such as holiday-based resolutions consumers make to manage finances better, and
the fact that most financial institutions traditionally conduct their largest
consumer marketing campaigns in the fall months. These seasonal factors may
impact our operating results by concentrating consumer acquisition and set-up
costs, which may not be immediately offset by revenue increases primarily due
to introductory service price discounts. Additionally, online interactive
service consumers generally tend to be less active users during the summer
months, resulting in lower revenue during this period. Our software sales have
historically been affected by calendar year end, our fiscal year end, buying
patterns of financial services organizations and our sales compensation
structure, which measures sales performance at our June 30 fiscal year end. If we do not respond to rapid technological change or changes in industry
standards, our services could become obsolete and we could lose our customers. If competitors introduce new products and services embodying new
technologies, or if new industry standards and practices emerge, our existing
product and service offerings, proprietary technology and systems may become
obsolete. Further, if we fail to adopt or develop new technologies or to adapt
our products and services to emerging industry standards, we may lose current
and future customers, which could have a material adverse effect on our
business, financial condition and results of operations. The electronic
commerce industry is changing rapidly. To remain competitive, we must continue
to enhance and improve the functionality and features of our products, services
and technologies. We may be unable to protect our intellectual property and technology,
permitting competitors to duplicate our products and services. Our success and ability to compete depends, in part, upon our proprietary
technology, which includes several patents for our electronic billing and
payment processing system, our source code information for our software
products, and our operating technology. We rely primarily on patent,
copyright, trade secret and trademark laws to protect our technology. We also
enter into confidentiality and assignment agreements with our employees,
consultants and vendors and generally control access to and distribution of our
software documentation and other intellectual property. We cannot assure you
that these measures will provide the protection that we need. -18-




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Because our means of protecting our intellectual property rights may not
be adequate, it may be possible for a third party to copy, reverse engineer or
otherwise obtain and use our technology without authorization. In addition,
the laws of some countries in which we sell our products do not protect
software and intellectual property rights to the same extent as the laws of the
United States. Unauthorized copying, use or reverse engineering of our
products could have a material adverse effect on our business, financial
condition and results of operations. A third party could also claim that our technology infringes its
proprietary rights. As the number of software products in our target markets
increases and the functionality of these products overlap, we believe that
software developers may increasingly face infringement claims. These claims,
even if without merit, can be time-consuming and expensive to defend. A third
party asserting infringement claims against us in the future may require us to
enter into costly royalty arrangements or litigation. Our business could become subject to increased government regulation, which
could make our business more expensive to operate. Although our business is currently subject to numerous rules and
regulations of governmental entities, it is possible that this regulation may
increase or change in the future and such increase or change might make our
business more expensive to operate and our products less desirable to use. In
particular, due to increased focus by the government on terrorist activities,
we may see additional regulation targeted at money laundering or making
payments to certain prohibited individuals. In recent years, various
governmental entities have become even more interested in further regulating
the use and sharing of data and protection of the privacy of this data. It is
also possible that new laws and regulations may be enacted with respect to the
Internet, including taxation of electronic commerce activities. Because
electronic commerce in general, and most of our products and services in
particular, are so new, the effect of an increase in regulation or amendment to
existing regulation is uncertain and difficult to predict. Any such changes,
however, could lead to increased operating costs and reduce the convenience and
functionality of our products or services, possibly resulting in reduced market
acceptance. It is also possible that new laws and regulations involving the
Internet might decrease the growth of consumers using the Internet, which could
in turn decrease the demand for our products or services, increase our cost of
doing business or could otherwise have a material adverse effect on our
business, financial condition and results of operations. The Federal Reserve rules provide that we can only access the Federal
Reserves ACH through a bank. If the Federal Reserve rules were to change to
further restrict our access to the ACH or limit our ability to provide ACH
transaction processing services, it could have a material adverse effect on our
business, financial condition and results of operations. Our walk-in bill payment business is subject to government regulation and any
violation of such regulations could result in civil or criminal penalties or a
prohibition against providing money transmitter services in particular
jurisdictions. We conduct our walk-in bill payment business through APS. In many states
in which APS operates, it is licensed as a money transmitter. These licenses
require APS to demonstrate and maintain certain levels of net worth and
liquidity and also require APS to file periodic reports. In addition to state
licensing requirements, APS is subject to regulation in the United States by
the federal government, including anti-money laundering regulations and certain
restrictions on transactions to or from certain individuals or entities. APS
has developed a compliance program to monitor its business for compliance with
regulatory requirements and has developed and implemented policies and
procedures to monitor all of its transactions in order to comply with federal
reporting and recordkeeping requirements. Notwithstanding these efforts, the
complexity of these regulations will continue to increase our cost of doing
business. In addition, any violations of law may result in civil or criminal
penalties against us and our officers or the prohibition against us providing
money transmitter services in particular jurisdictions. -19-




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A weak economy could have a materially adverse impact on our business. A weak United States economy could have a material adverse impact on our
business. In a weak economy, companies may postpone or cancel new software
purchases or limit the amount of money they spend on technology and marketing.
In the Investment Services Division, growth depends upon individuals and
companies continuing to invest in the United States equity markets. To the
extent the United States stock markets see a decrease in investment, we may see
a decrease in portfolio accounts. Our quarterly operating results fluctuate and may not accurately predict our
future performance. Our quarterly results of operations have varied significantly and probably
will continue to do so in the future as a result of a variety of factors, many
of which are outside our control.These factors include:  
    
    changes in our pricing policies or those of our competitors;  
    
    loss of customers due to competitors or in-house solutions;  
    
    relative rates of acquisition of new customers;  
    
    seasonal patterns;  
    
    delays in the introduction of new or enhanced services,
software and related products by us or our competitors or market
acceptance of these products and services; and  
    
    other changes in operating expenses, personnel and general
economic conditions. As a result, we believe that period-to-period comparisons of our operating
results are not necessarily meaningful, and you should not rely on them as an
indication of our future performance.In addition, our operating results in a
future quarter or quarters may fall below expectations of securities analysts
or investors and, as a result, the price of our common stock may fluctuate. Our marketing agreement with FDC and our commercial alliance agreement with
Microsoft Corporation may limit the flexibility of management. The marketing agreement we executed with FDC requires us to purchase
payment processing and other products from FDC under specified circumstances,
even if our management has other reasons for choosing a different supplier. In
addition, our commercial alliance agreement with Microsoft Corporation (Microsoft) requires us to
develop our products that are used with products made by Microsoft in ways that
conform to specified standards. Accordingly, as a result of these arrangements
with Microsoft and FDC, both of which were entered into as part of our
acquisition of TransPoint, our managements flexibility to
make business decisions may be limited in various respects. Risks Related to Our Common Stock Our common stock has been volatile since December 31, 2000. Since December 31, 2000, our stock price has been volatile, trading at a
high of $58.25 per share and a low of $7.45 per share. The volatility in our
stock price has been caused by:  
    
    actual or anticipated fluctuations in our operating results;  
    
    actual or anticipated fluctuations in our transaction and consumer growth;  
    
    announcements by us, our competitors or our customers;  
    
    announcements of the introduction of new or enhanced products
and services by us or our competitors;  
    
    announcements of joint development efforts or corporate
partnerships in the electronic commerce market;  
    
    market conditions in the banking, telecommunications,
technology and other emerging growth sectors;  
    
    rumors relating to our competitors or us; and  
    
    general market or economic conditions. -20-




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Availability of significant amounts of our common stock for sale in the future
could adversely affect our stock price. The availability for future sale of a substantial number of shares of our
common stock in the public market or otherwise, or issuance of common stock
upon the exercise of stock options or warrants could adversely affect the
market price for our common stock. As of August 19, 2004, we had outstanding
90,437,646 shares of our common stock, of which 84,170,929 shares were held by
non-affiliates. The holders of the remaining 6,266,717 shares were entitled to
resell them only by a registration statement under the Securities Act of 1933
or an applicable exemption from registration. As of August 19, 2004, we also
had:  
    
    up to 9,220,803 shares available for issuance under our stock
option and stock incentive plans, under which there are (1)
outstanding options to purchase 5,537,701 shares of our common
stock, of which options for 3,649,069 shares were fully vested and
exercisable at an average weighted exercise price of approximately
$29.24 per share, and (2) 505,617 outstanding shares of restricted
stock;  
    
    issued warrants to purchase 7,500,000 shares of our common
stock, of which warrants for 2,500,000 shares were fully vested and
exercisable at a weighted exercise price of approximately $28.86 per
share;  
    
    up to 884,788 shares available for issuance under our Associate Stock Purchase Plan; and  
    
    up to 1,073,953 shares available for issuance under our 401(k) Plan. As of August 19, 2004, the following entities held shares or warrants to
purchase shares of our common stock in the following amounts:  
    
    Microsoft, which holds 8,567,250 shares;  
    
    The former members of Integrion Financial Network, L.L.C.
collectively hold warrants to purchase up to 1,500,000 shares which
are fully vested and exercisable;  
    
    Bank One, which holds warrants to purchase 1,000,000 shares,
which are fully vested and exercisable; and  
    
    Bank of America, which holds 3,710,608 shares of record,
450,000 of the vested Integrion warrants and warrants to purchase up
to 5,000,000 shares, which warrants are not currently vested. Each of Bank One, Bank of America and the former members of Integrion may
be entitled to registration rights. If the former members of Integrion, Bank
One or Bank of America, by exercising their registration rights, cause a large
number of shares to be registered and sold in the public market, these sales
may have an adverse effect on the market price of our common stock. In connection with the TransPoint acquisition, we filed a shelf
registration statement on behalf of Microsoft, FDC and Citibank that allows
continuous resales of the shares that each received as a result of the
TransPoint acquisition. Citibank was not restricted in its ability to transfer
its shares of our common stock, and we believe it has sold all of the shares
that it acquired as a result of this acquisition. Microsoft and FDC were
limited in their ability to transfer their shares of our common stock through
September 1, 2002, pursuant to stockholder agreements with us. Since September
1, 2002, FDC has sold a significant number of its shares and no longer holds in
excess of 5% of our common stock. Microsoft continues to hold its shares of
our common stock but as of September 1, 2003, could sell up to the greater of
1% of our average weekly trading volume or 1% of our outstanding common stock
in reliance on registration exemptions. In addition, Microsoft and FDC are
permitted to a limited extent to engage in hedging transactions with respect to
our common stock. Sales of substantial amounts of our common stock by any of the parties
described above, or the perception that these sales could occur, may adversely
affect prevailing market prices for our common stock. -21-




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Anti-takeover provisions in our organizational documents and Delaware law make
any change in control more difficult. Our certificate of incorporation and by-laws contain provisions that may
have the effect of delaying or preventing a change in control, may discourage
bids at a premium over the market price of our common stock and may adversely
affect the market price of our common stock and the voting and other rights of
the holders of our common stock. These provisions include:  
    
    division of our board of directors into three classes serving staggered three-year terms;  
    
    removal of our directors by the stockholders only for cause upon 80% stockholder approval;  
    
    prohibiting our stockholders from calling a special meeting of stockholders;  
    
    ability to issue additional shares of our common stock or
preferred stock without stockholder approval;  
    
    prohibiting our stockholders from unilaterally amending our
certificate of incorporation or by-laws except with 80% stockholder
approval; and  
    
    advance notice requirements for raising business or making
nominations at stockholders meetings. We also have a stockholder rights plan that allows us to issue preferred
stock with rights senior to those of our common stock without any further vote
or action by our stockholders. The issuance of our preferred stock under the
stockholder rights plan could decrease the amount of earnings and assets
available for distribution to the holders of our common stock or could
adversely affect the rights and powers, including voting rights, of the holders
of our common stock. In some circumstances, the issuance of preferred stock
could have the effect of decreasing the market price of our common stock. We also are subject to provisions of the Delaware corporation law that, in
general, prohibit any business combination with a beneficial owner of 15% or
more of our common stock for five years unless the holders acquisition of our
stock was approved in advance by our board of directors. In addition, both our commercial alliance agreement with Microsoft and our
marketing agreement with FDC, each of which we executed in connection with the
closing of the TransPoint acquisition, allow the termination of the agreement
by Microsoft or FDC, as the case may be, under specific change of control
circumstances. If either Microsoft or FDC terminates under these
circumstances, we will lose a portion of the future revenue guarantees under
the applicable agreement. This potential termination event could discourage
third parties from acquiring us. We are subject to significant influence by some stockholders that may have the
effect of delaying or preventing a change in control. At August 19, 2004, our directors, executive officers and Microsoft
collectively owned approximately 16.4% of the outstanding shares of our common
stock.As a result, these stockholders are able to exercise significant
influence over matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions.This
concentration of ownership may have the effect of delaying or preventing a
change in control. Available Information We make available free of charge on our corporate website,
www.checkfreecorp.com, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended (the Exchange Act), as soon as reasonably
practicable after such reports are electronically filed with or furnished to
the Securities and Exchange Commission. Our Code of Business Conduct, which is
applicable to all of our directors, officers and associates, including our
principal executive officer, principal financial officer and principal
accounting officer, is also available at the Corporate Governance section of
the Investor Center page of our corporate website, www.checkfreecorp.com. -22-




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Item 2. Properties. We lease the following office facilities:  
    
    approximately 229,000 square feet in Norcross, Georgia;  
    
    approximately 150,000 square feet in Dublin, Ohio;  
    
    approximately 100,000 square feet in Phoenix, Arizona;  
    
    approximately 78,000 square feet in Aurora, Illinois;  
    
    approximately 59,000 square feet in Wallingford, Connecticut;  
    
    approximately 35,000 square feet Raleigh, North Carolina;  
    
    approximately 33,000 square feet in Jersey City, New Jersey;  
    
    approximately 29,000 square feet in Waterloo, Ontario, Canada;  
    
    approximately 26,000 square feet in Owings Mills, Maryland;  
    
    approximately 22,000 square feet in Worthington, Ohio;  
    
    approximately 21,000 square feet in Newark, New Jersey;  
    
    approximately 15,000 square feet in Chicago, Illinois;  
    
    approximately 8,000 square feet in London, United Kingdom;  
    
    approximately 5,000 square feet in San Diego, California;  
    
    approximately 2,000 square feet in Slough, Berkshire, United Kingdom;  
    
    approximately 2,000 square feet in Boston, Massachusetts; and  
    
    approximately 2,000 square feet in Henderson, Nevada. We own a 51,000-square-foot conference center in Norcross, Georgia that
includes lodging, training, and fitness facilities for our customers and
employees. Although we own the building, it is on land that is leased through
June 30, 2015. We believe that our facilities are adequate for current and
near-term growth and that additional space is available to provide for
anticipated growth. 
 Item 3. Legal Proceedings. There are no material legal proceedings pending against us. 
 Item 4. Submission of Matters to a Vote of Security Holders. None. -23-




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Part II 
 Item 5. Market for the Registrants Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities. Our common stock is traded on the Nasdaq National Market under the symbol
CKFR. The following table sets forth the high and low sales prices of our
common stock for the periods indicated as reported by the Nasdaq National
Market. Common StockPriceFiscal Period
    
    High
    
    LowFiscal 2003First Quarter
    
    $
    15.83
    
    
    $
    7.45Second Quarter
    
    $
    20.35
    
    
    $
    8.96Third Quarter
    
    $
    23.65
    
    
    $
    16.12Fourth Quarter
    
    $
    30.13
    
    
    $
    20.60Fiscal 2004First Quarter
    
    $
    30.10
    
    
    $
    19.75Second Quarter
    
    $
    29.90
    
    
    $
    20.30Third Quarter
    
    $
    35.25
    
    
    $
    26.07Fourth Quarter
    
    $
    33.40
    
    
    $
    28.06Fiscal 2005First Quarter (through August 19, 2004)
    
    $
    31.95
    
    
    $
    24.56
 On August 19, 2004, the last reported bid price for our common stock on
the Nasdaq National Market was $25.97 per share. As of August 19, 2004, there
were approximately 1,445 holders of record of our common stock. We currently anticipate that all of our future earnings will be retained
for the development of our business and do not anticipate paying cash dividends
on our common stock for the foreseeable future. In addition, our current
credit facility does not allow for the payment of cash dividends on our common
stock. Our board of directors will determine future dividend policy based on
our results of operations, financial condition, capital requirements and other
circumstances. During the last ten years, we have not paid cash dividends. -24-




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Item 6. Selected Financial Data. The following selected financial data should be read in conjunction with
Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations and Item 8, Financial Statements and Supplementary
Data. Year Ended June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(In thousands, except per share data)Statement of Operations:Revenues:Processing and servicingThird parties
    
    $
    488,705
    
    
    $
    397,435
    
    
    $
    339,424
    
    
    $
    308,548
    
    
    $
    261,621Related parties (a)
    
    
    41,500
    
    
    
    78,981
    
    
    
    82,813
    
    
    
    53,503
    
    
    
    Total processing and servicing
    
    
    530,205
    
    
    
    476,416
    
    
    
    422,237
    
    
    
    362,051
    
    
    
    261,621License fees
    
    
    23,931
    
    
    
    24,163
    
    
    
    25,020
    
    
    
    30,180
    
    
    
    16,818Maintenance fees
    
    
    28,271
    
    
    
    25,733
    
    
    
    24,298
    
    
    
    21,332
    
    
    
    18,752Other
    
    
    24,057
    
    
    
    25,334
    
    
    
    18,922
    
    
    
    19,757
    
    
    
    13,004Total revenues
    
    
    606,464
    
    
    
    551,646
    
    
    
    490,477
    
    
    
    433,320
    
    
    
    310,195Expenses:Cost of processing, servicing and support
    
    
    244,811
    
    
    
    237,978
    
    
    
    262,105
    
    
    
    255,528
    
    
    
    182,540Research and development
    
    
    66,288
    
    
    
    52,717
    
    
    
    55,172
    
    
    
    55,621
    
    
    
    35,631Sales and marketing
    
    
    51,910
    
    
    
    57,170
    
    
    
    58,030
    
    
    
    90,283
    
    
    
    44,782General and administrative
    
    
    45,759
    
    
    
    39,030
    
    
    
    43,687
    
    
    
    50,474
    
    
    
    40,931Depreciation and amortization
    
    
    177,582
    
    
    
    226,638
    
    
    
    435,565
    
    
    
    427,495
    
    
    
    42,830In-process research and development (b)
    
    
    324
    
    
    
    
    
    
    
    
    
    
    
    18,600
    
    
    
    6,900Impairment of intangible assets (c)
    
    
    
    
    
    
    10,228
    
    
    
    155,072
    
    
    
    
    
    
    
    Reorganization charge (d)
    
    
    
    
    
    
    1,405
    
    
    
    16,365
    
    
    
    
    
    
    
    Total expenses
    
    
    586,674
    
    
    
    625,166
    
    
    
    1,025,996
    
    
    
    898,001
    
    
    
    353,614Income (loss) from operations
    
    
    19,790
    
    
    
    (73,520
    )
    
    
    (535,519
    )
    
    
    (464,681
    )
    
    
    (43,419
    )Equity in net loss of joint venture (e)
    
    
    (593
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest:Income
    
    
    5,697
    
    
    
    7,327
    
    
    
    8,486
    
    
    
    15,415
    
    
    
    7,689Expense
    
    
    (13,164
    )
    
    
    (12,975
    )
    
    
    (12,788
    )
    
    
    (13,154
    )
    
    
    (8,027
    )Loss on investments (f)
    
    
    
    
    
    
    (3,228
    )
    
    
    
    
    
    
    (16,077
    )
    
    
    Income (loss) before income taxes and
cumulative effect of
accounting change
    
    
    11,730
    
    
    
    (82,396
    )
    
    
    (539,821
    )
    
    
    (478,497
    )
    
    
    (43,757
    )Income tax expense (benefit)
    
    
    1,195
    
    
    
    (33,106
    )
    
    
    (98,871
    )
    
    
    (115,362
    )
    
    
    (11,437
    )Income (loss) before cumulative effect of
accounting change
    
    
    10,535
    
    
    
    (49,290
    )
    
    
    (440,950
    )
    
    
    (363,135
    )
    
    
    (32,320
    )Cumulative effect of accounting change (g)
    
    
    
    
    
    
    (2,894
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    10,535
    
    
    $
    (52,184
    )
    
    $
    (440,950
    )
    
    $
    (363,135
    )
    
    $
    (32,320
    )Diluted net income (loss) per common share
    
    $
    0.11
    
    
    $
    (0.59
    )
    
    $
    (5.04
    )
    
    $
    (4.49
    )
    
    $
    (0.61
    )Equivalent number of shares outstanding
    
    
    91,864
    
    
    
    88,807
    
    
    
    87,452
    
    
    
    80,863
    
    
    
    53,367Balance Sheet Data:Working capital
    
    $
    263,813
    
    
    $
    304,286
    
    
    $
    201,741
    
    
    $
    142,661
    
    
    $
    178,761Total assets
    
    
    1,548,932
    
    
    
    1,587,270
    
    
    
    1,637,477
    
    
    
    2,183,953
    
    
    
    713,114Long-term obligations, less current portion
    
    
    25,504
    
    
    
    176,692
    
    
    
    176,377
    
    
    
    176,541
    
    
    
    173,236Total stockholders equity
    
    
    1,299,182
    
    
    
    1,268,149
    
    
    
    1,305,661
    
    
    
    1,732,186
    
    
    
    445,894
 -25-




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(a) During fiscal years 2001 through January 2003, all revenues generated from
Bank of America are classified as related party. During fiscal years 2001
through 2004, all revenues generated from Microsoft Corporation and First Data
Corporation are classified as related party. (b) During fiscal years ended
June 30, 2004, 2001 and 2000, we
recorded charges related to in-process research and development that were
capitalized by entities before we acquired them. (c) During the fiscal year
ended June 30, 2002, we recorded an
impairment charge related to the goodwill associated with CheckFree i-Solutions
and technology assets associated with TransPoint. During fiscal year ended June
30, 2003, we recorded an impairment charge related to other intangible
assets and goodwill of CheckFree i-Solutions. (d) During the fiscal year
ended June 30, 2002, we recorded a
reorganization charge in order to streamline operations in our Electronic
Commerce Division, refine our strategy for the i-Solutions business
unit of our
Software Division, and discontinue certain product lines associated
with our
Investment Services Division. For the fiscal year ended June 30,
2003, we adjusted our estimate of the total reorganization charge that was
recorded in the previous fiscal year. (e) In April 2004,
we entered into an agreement with BACS, Ltd. to
form a joint venture in EBPP, Ltd. located in the United Kingdom, which has
incurred losses since inception. (f) During the fiscal years
ended June 30, 2003 and 2001, we recorded
losses on certain investments resulting from an other-than-temporary decline in
their fair value. (g) On July 1,
2002, we adopted SFAS 142, Goodwill and Other
Intangible Assets. Upon its adoption, we performed a transitional
impairment test and recorded an impairment charge related to the goodwill
associated with CheckFree i-Solutions. The preparation of financial
statements in conformity with Generally Accepted Accounting
Principles in the United States of America requires
us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. -26-




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Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations. Overview CheckFree was founded in 1981 as an electronic payment processing company
and has become a leading provider of financial electronic commerce products and
services. Our current business was developed through the expansion of our core
electronic payments business and the acquisition of companies operating in
similar or complementary businesses. We operate our business through three independent but inter-related
divisions:  
    
    Electronic Commerce;  
    
    Investment Services; and  
    
    Software. Through our Electronic Commerce Division, we enable consumers to receive
and pay bills. 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 June 30, 2004, we processed nearly 163 million
payment transactions and delivered approximately 26 million e-bills. The
number of transactions we process each year continues to grow. For the year
ended June 30, 2004, growth in the number of transactions processed exceeded
34%. The Electronic Commerce Division accounted for approximately 75% of our
annual revenue. Through our Investment Services Division, we provide a range of portfolio
management services to financial institutions, including broker dealers, money
managers and investment advisors. As of June 30, 2004, our clients used the
CheckFree APLSM portfolio accounting system to manage nearly 1.6 million
portfolios, representing more than $900 billion in assets. The Investment
Services Division accounted for approximately 14% of our annual revenue. Through our Software Division, we deliver software, maintenance, support
and professional services to large financial service providers and other
companies across a range of industries. The Software Division is comprised of
three units, each with its own distinct set of software products. The ACH
Solutions unit provides software and services that are used to process more
than two-thirds of the nations nine billion annual Automated Clearing House
(ACH) payments. The CheckFree Financial and Compliance Solutions (CFACS)
unit enables organizations to handle their reconciliation and compliance
requirements and provides a financial transactions management solution with
straight through processing. The i-Solutions unit provides software and
services that enable end-to-end electronic billing and electronic statement creation, delivery
and payment. The Software Division accounted for approximately 11% of our
annual revenue. Executive Summary For the year ended June 30, 2004, we earned net income of $10.5 million.
Through continued efforts to improve quality and efficiency throughout the
company, we generated $147.8 million of free cash flow, an increase of $14.3
million, or 11% over last year. This free cash flow, combined with
cash, cash equivalents, and investments of $400.6 million as of June 30, 2003,
allowed us to call our $172.5 million of 6.5% convertible subordinated notes,
to acquire HelioGraph, Ltd. (HelioGraph) for a purchase price of
approximately $18.8 million (approximately $16.3 million net of cash received),
and to acquire American Payment Systems, Inc. (APS) for a purchase price of
approximately $109.0 million (approximately $106.0 million net of cash
received), subject to certain post-closing adjustments, in our 2004 fiscal
year. In addition, increasingly positive operating results have allowed us to
invest heavily in all of our businesses, in order to take full advantage of
anticipated growth opportunities. 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 for further discussion of this
measure. We continue to experience growth in our Electronic Commerce business.
Despite the completion of the previously announced migration of four large
banks to in-house billing and payment systems early in fiscal 2004, we
generated total transaction growth exceeding 34% on a year-over-year basis. By
the end of fiscal 2004, one of the -27-




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four banks signed an exclusive, long-term agreement to return to
CheckFree. In the quarter ended December 31, 2003, we announced amended
contract terms with our largest customer, Bank of America. The new contract
reset the pricing model, and the bank converted to a transaction-based pricing
model with volume discounts that are more predictable than in the past.
Continued efforts to improve quality and efficiency in our operations, combined
with a steadily improving electronic versus paper payment rate and our ability
to leverage a significant fixed cost base, have resulted in a lower cost per
transaction, offsetting volume-based pricing discounts. Additionally, we
delivered almost 82 million e-bills in the year ended June 30, 2004, compared
to about 32 million in the previous year. We believe that added availability
of e-bills will make electronic payment offerings even more compelling to
consumers. Finally, on June 22, 2004, we acquired APS in an effort to
penetrate a part of the electronic billing and payment market in which we have
not materially participated previously. APS provides agent-based walk-in bill
payments to the estimated 20% of U.S. consumers who do not typically rely on
bank products and services. We expect this acquisition to generate about 27
million transactions and more than $14.0 million in revenue in the upcoming
quarter ending September 30, 2004. The results of our APS operations will be
reported in the Payment Services category of our Electronic Commerce Division. After two years of slow growth due to stock market conditions, our
Investment Services business has begun to see growth in the number of
portfolios managed and related revenue. To take advantage of the emerging
separately managed accounts market, we are investing heavily to upgrade our
technology infrastructure in this business. While near-term investments will
reduce our operating margin in this segment over the next year or two, we
expect the investments to result in increased penetration and growth in this
evolving market in the longer term. Despite a solid sales pipeline, customers in our Software Division
continue to require an extended evaluation period before purchasing
discretionary software applications. While our acquisition of HelioGraph
brought us a modest maintenance base and has generated several software sales,
revenue growth in our Software business was limited to 4% on a year-over-year
basis. With the addition of APS for the last eight days of fiscal 2004, we expect
substantial revenue growth in fiscal 2005, as we benefit from a full year of
APS transactions. While we expect the APS business to result in a modest reduction in our
gross margin and our operating margin in the early part of fiscal 2005, as we
leverage the technical infrastructure of the business, we expect the margins to
return to historical levels by the end of fiscal 2005. As part of our acquisition of TransPoint in September 2000, we entered
into separate five-year agreements with Microsoft Corporation (Microsoft) and
First Data Corporation (FDC), both of which include monthly minimum revenue
guarantees that have increased annually over the term of the agreements. These
contracts will expire in fiscal 2006. The following table represents the total
annual minimum revenue guarantees throughout the contract period with Microsoft
and FDC (in thousands): Fiscal Year Ended June 30,
    
    Microsoft
    
    FDC
    
    Total2001
    
    $
    6,000
    
    
    $
    5,000
    
    
    $
    11,0002002
    
    
    15,000
    
    
    
    8,500
    
    
    
    23,5002003
    
    
    21,000
    
    
    
    11,500
    
    
    
    32,5002004
    
    
    27,000
    
    
    
    14,500
    
    
    
    41,5002005
    
    
    33,000
    
    
    
    17,500
    
    
    
    50,5002006
    
    
    18,000
    
    
    
    3,000
    
    
    
    21,000Total
    
    $
    120,000
    
    
    $
    60,000
    
    
    $
    180,000
 Both of these agreements are currently operating substantially below their
minimum levels. If volumes do not grow significantly from both Microsoft
and FDC, we expect to see a temporary decline in revenue growth, initially in
the second quarter of fiscal 2006. However, we believe we can manage
investment levels and improve profitability in our electronic billing business
in order to maintain our targeted operating margin in the mid to upper 20%
level on a full-year basis. Additionally, we plan to continue to pursue other
opportunities for growth, as our recent electronic billing and payment contract
signings and the APS acquisition demonstrate. -28-




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The following table sets forth, as percentages of total revenue, certain
consolidated statements of operations data: Year ended June 30,2004
    
    2003
    
    2002Total revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Expenses:Cost of processing, servicing and support
    
    
    40.4
    
    
    
    43.1
    
    
    
    53.4Research and development
    
    
    10.9
    
    
    
    9.6
    
    
    
    11.3Sales and marketing
    
    
    8.6
    
    
    
    10.4
    
    
    
    11.8General and administrative
    
    
    7.5
    
    
    
    7.1
    
    
    
    8.9Depreciation and amortization
    
    
    29.2
    
    
    
    41.1
    
    
    
    88.9In-process research and development
    
    
    0.1
    
    
    
    
    
    
    
    Impairment of intangible assets
    
    
    
    
    
    
    1.8
    
    
    
    31.6Reorganization charge
    
    
    
    
    
    
    0.2
    
    
    
    3.3Total expenses
    
    
    96.7
    
    
    
    113.3
    
    
    
    209.2Income (loss) from operations
    
    
    3.3
    
    
    
    (13.3
    )
    
    
    (109.2
    )Equity in net loss of joint venture
    
    
    (0.1
    )
    
    
    
    
    
    
    Interest:Interest income
    
    
    0.9
    
    
    
    1.3
    
    
    
    1.7Interest expense
    
    
    (2.2
    )
    
    
    (2.3
    )
    
    
    (2.6
    )Loss on investments
    
    
    
    
    
    
    (0.6
    )
    
    
    Income (loss) before income taxes and cumulative effect
of accounting change
    
    
    1.9
    
    
    
    (14.9
    )
    
    
    (110.1
    )Income tax expense (benefit)
    
    
    0.2
    
    
    
    (6.0
    )
    
    
    (20.2
    )Income (loss) before cumulative effect of accounting change
    
    
    1.7
    
    
    
    (8.9
    )
    
    
    (89.9
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (0.5
    )
    
    
    Net income (loss)
    
    
    1.7
    %
    
    
    (9.4
    )%
    
    
    (89.9
    )%
 Results of Operations Years Ended June 30, 2004 and 2003 The following table sets forth total company revenue for the years ended
June 30, 2004 and 2003, respectively. Total Revenue (000s) June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    606,464
    
    
    $
    551,646
    
    
    $
    54,818
    
    
    
    9.9
    %
 Total company revenue growth was driven by 12% growth in our Electronic
Commerce business, 6% growth in our Investment Services business and 4% growth
in our Software business. Growth in our Electronic Commerce business continues to be driven
primarily by growth in transactions processed from approximately 434 million
for the year ended June 30, 2003, to approximately 583 million for the year
ended June 30, 2004. Additionally, revenue related to minimum guarantees from
Microsoft and FDC increased in total by $9.0 million on a year-over-year basis.
We have established pricing models that provide volume-based discounts to
share scale efficiencies with our customers. As a result of significant
transaction growth, our average revenue per transaction has declined by
approximately 14% in our transaction-based revenue. Historically low interest
rates throughout fiscal 2004 have also resulted in a dampening of revenue in
our interest-sensitive products such as Account Balance Transfer (ABT).
While our June 22, 2004 acquisition of APS provided only about $1.0 million of
revenue in fiscal 2004, we expect that APS will contribute about 27 million
electronic transactions and more than $14.0 million of revenue in the first
quarter of fiscal 2005. -29-




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##### Table of Contents



Growth in our Investment Services revenue was driven primarily by growth
in the number of portfolios managed, from approximately 1.2 million as of June
30, 2003, to nearly 1.6 million as of June 30, 2004. Economic conditions
throughout our fiscal year ended June 30, 2003 resulted in portfolios managed
remaining essentially flat at 1.2 million for the year. As the stock market
rebound progressed into our 2004 fiscal year, the number of portfolios we
managed increased by about 100,000 per quarter. In some cases, new portfolios
are being added to our APL system at a lower price point, driven by a mix shift
as increased volume comes from broker dealers at a lower price, and by price
reductions, where we trade off near-term revenue growth against long-term
strategic advantage. As investors move back into equity investments, we expect
growth rates of portfolios and revenue to continue. Growth in our Software business was driven primarily by our acquisition of
HelioGraph in the quarter ended December 31, 2003. While our sales pipeline
remains solid, customers continue to take longer to evaluate discretionary
software purchases than in prior years. Across all segments of our business, for the year ended June 30, 2004,
Bank of America generated total revenue of $119.0 million, which exceeds 10% of
our total revenue, and remains the only customer that exceeds 10% of our total
revenue. Our agreement with Bank of America has a 10-year term, includes
annual minimum guarantees of $50.0 million, and provides for tiered pricing
which reflects the volume of activity provided by Bank of America. The following tables set forth comparative revenues, by type, for the
years ended June 30, 2004 and 2003, respectively. Processing and Servicing Revenue (000s) June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    530,205
    
    
    $
    476,416
    
    
    $
    53,789
    
    
    
    11.3
    %
 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 nicely,
our increase in processing and servicing revenue has come primarily from the
aforementioned growth in transactions processed in our Electronic Commerce
business. While expected transaction volume diverted from CheckFree to
in-house solutions by four large bank customers has dampened our growth during
the transition, growth in the remainder of our Electronic Commerce business,
including the addition of two large bank customers, has outpaced diverted
transactions. We delivered approximately 82 million e-bills in the year ended
June 30, 2004, with a price point of approximately $0.20 per e-bill,
representing an increase of 156% over the 32 million e-bills delivered during the
year ended June 30, 2003. Our commercial agreements with Microsoft and FDC,
resulting from our acquisition of TransPoint in September 2000, include monthly
minimum revenue guarantees consistent with other consumer service providers.
The minimum revenue guarantees from Microsoft and FDC increase annually over
the five-year term of the agreements. Volumes from Microsoft and FDC continue
to fall substantially below guaranteed levels, but as
a result of contractual increases in the minimum revenue guarantee levels,
revenue from Microsoft and FDC grew by approximately $9.0 million on a
year-over-year basis. Somewhat offsetting this growth has been a reduction in
market demand for our ABT products. Finally, contract revisions with Bank of
America late in the quarter ended December 31, 2003, along with other
volume-based discounts inherent in our business, further reduced our processing
and servicing revenue growth. -30-




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##### Table of Contents



License Fee Revenue (000s) June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    23,931
    
    
    $
    24,163
    
    
    $
    (232
    )
    
    
    (0.9
    )%
 Although the software market showed signs of recovery, potential customers
continued to extend their evaluation period on discretionary software spending.
Therefore, in spite of a strong sales pipeline and the addition of HelioGraph
in November 2003, we experienced a slight decline in license revenue on a
year-over-year basis. Maintenance Fee Revenue (000s) June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    28,271
    
    
    $
    25,733
    
    
    $
    2,538
    
    
    
    9.9
    %
 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 grown as a result of recent license sales, customer retention rates
exceeding 80%, and moderate price increases across all business units, as well
as eight months of revenue from the acquisition of HelioGraph. We defer
revenue recognition on maintenance billings until cash is collected, which can
cause quarter-to-quarter fluctuations. We expect minimal growth in maintenance
fee revenue without additional license sales growth. Other Revenue (000s) June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    24,057
    
    
    $
    25,334
    
    
    $
    (1,227
    )
    
    
    (5.0
    )%
 Other revenue consists mostly of consulting and implementation fees across
all three of our businesses. During our fiscal year ending June 30, 2003, we
performed a custom software implementation project that generated a significant
amount of consulting revenue that has not recurred in our 2004 fiscal year. The following set of tables provides line-by-line expense comparisons with
their relative percentages of total company revenue for the years ended June
30, 2004 and 2003, respectively. Cost of Processing, Servicing and Support (000s) June 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    244,811
    
    
    
    40.4
    %
    
    $
    237,978
    
    
    
    43.1
    %
 In Electronic Commerce, our electronic payment rate has increased from 75%
as of June 30, 2003, to 79% as of June 30, 2004. Electronic payments carry a
significantly lower variable cost per unit than paper-based payments and are
far less likely to result in a costly customer care claim. In addition to
leveraging a significant fixed-cost processing infrastructure, we continue to
focus investment on additional efficiency and quality improvements within our
customer care processes and our information technology infrastructure to drive
cost per transaction improvement. -31-




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##### Table of Contents



Research and Development (000s) June 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    66,288
    
    
    
    10.9
    %
    
    $
    52,717
    
    
    
    9.6
    %
 Including capitalized development costs of $2.8 million for the year ended
June 30, 2004, and $4.3 million for the year ended June 30, 2003, gross
expenditures for research and development were $69.1 million, or 11.4% of total
revenue, for the year ended June 30, 2004, and were $57.0 million, or 10.3% of
total revenue for the year ended June 30, 2003. We continue to invest heavily
in product enhancement and productivity improvement initiatives in all of our
business segments, and we added moderate levels of research and development
spending with the acquisition of HelioGraph. Sales and Marketing (000s) June 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    51,910
    
    
    
    8.6
    %
    
    $
    57,170
    
    
    
    10.4
    %
 The decrease in sales and marketing costs, as a percentage of revenue, is
due primarily to the fact that the predominance of our revenue growth has taken
place in our Electronic Commerce business, which has less associated variable
sales commissions. On an absolute dollar basis, we have incurred less general
awareness marketing program expense in fiscal 2004 than we had in fiscal 2003.
However, these expenses have historically fluctuated due to the nature and
timing of various programs. General and Administrative (000s) June 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    45,759
    
    
    
    7.5
    %
    
    $
    39,030
    
    
    
    7.1
    %
 The acquisition of HelioGraph in the quarter ended December 31, 2003 added
approximately $0.8 million of new quarterly general and administrative costs to
our cost base. In the quarter ended March 31, 2004, we accrued approximately
$0.5 million of costs associated with a closed facility in the Ann Arbor,
Michigan area. We expect our general and administrative costs to continue to
run between 7% and 8% of revenue. Depreciation and Amortization (000s) June 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    177,582
    
    
    
    29.3
    %
    
    $
    226,638
    
    
    
    41.1
    %
 Depreciation and amortization expense from operating fixed assets and
internally capitalized product costs has decreased from $43.3 million for the
year ended June 30, 2003, to $41.0 million for the year ended June 31, 2004.
The remainder of our depreciation and amortization costs represents
acquisition-related amortization. The decrease in non-acquisition-related
depreciation and amortization is the result of investments in replacement
assets that carry lower costs than the assets they are replacing. The
remaining reduction in depreciation and amortization is the result of lower
acquisition-related intangible amortization from intangible assets that have
fully amortized since last year, and the amortization of lower non-goodwill
intangible assets balances resulting from impairment charges in the prior year. -32-




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##### Table of Contents



In-Process Research and Development (000s) June 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    324
    
    
    
    
    
    
    $
    
    
    
    
    
 In the three month period ended December 31, 2003, we incurred $0.3
million of in-process research and development costs associated with our
acquisition of HelioGraph. Please refer to Note 2 in our Consolidated
Financial Statements for a further explanation of this charge. There was no
charge for in-process research and development associated with our acquisition
of APS in June 2004. Impairment of Intangible Assets (000s) June 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    
    
    
    
    
    
    
    $
    10,228
    
    
    
    1.9
    %
 Throughout fiscal 2004, there were no triggering events that caused us to
evaluate the recovery of our intangible asset balances. In April 2004, we
performed our annual evaluation of intangible asset recoverability and our
tests provided no indication of possible impairment. Throughout fiscal 2003,
there were no triggering events that caused us to evaluate the recoverability
of our intangible asset balances. In April 2003, we performed our annual
evaluation of intangible asset recoverability. Our initial tests indicated a
potential impairment of goodwill in our i-Solutions reporting unit. Our
follow-up tests included a Statement of Financial Accounting Standards (SFAS)
86 recoverability test of our technology assets, which indicated no issues, and
a SFAS 144 test, which resulted in an impairment of $4.2 million in one of our
non-goodwill intangible assets. The final SFAS 142 test resulted in a further
impairment of $6.0 million in our i-Solutions goodwill balance for a total
charge of $10.2 million. Reorganization Charge (000s) June 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    
    
    
    
    
    
    
    $
    1,405
    
    
    
    0.3
    %
 Due primarily to our inability to sublease office space that was abandoned
as a result of a prior reorganization, in the quarter ended June 30, 2003, we
recorded $1.4 million of additional reorganization charges to true-up our
estimates from the actions we initiated in fiscal 2002. Equity in the Loss of Joint Venture (000s) June 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    (593
    )
    
    
    (0.1
    %)
    
    $
    
    
    
    
    
 In April 2004, we announced a joint venture with BACS, Ltd. in the United
Kingdom, designed to create an integrated electronic billing and payment
network for billers and banks in the United Kingdom. The equity in the loss of
joint venture represents our portion of the loss incurred by the joint venture
since its inception. -33-




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##### Table of Contents



Net interest (000s) June 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended:Interest income
    
    $
    5,697
    
    
    
    
    
    
    $
    7,327Interest expense
    
    
    (5,943
    )
    
    
    
    
    
    
    (12,975
    )Call premium expense
    
    
    (4,813
    )
    
    
    
    
    
    
    Unamortized note issuance cost
    
    
    (2,408
    )
    
    
    
    
    
    
    Net interest
    
    $
    (7,467
    )
    
    
    (1.2
    )%
    
    $
    (5,648
    )
    
    
    (1.0
    )%
 Despite an increase in average cash and invested assets on a
year-over-year basis, interest income has declined as a result of lower average
yields. Our interest expense decreased significantly on a year-over-year basis.
We continued to carry our 6.5% Convertible Subordinated Notes due 2006 at a
balance of $172.5 million throughout the year ending June 30, 2003, and through
the quarter ended September 30, 2003. We redeemed the notes in full on
December 12, 2003. We incurred a cash charge of $4.8 million for a 2.79% call
premium to redeem the notes prior to their scheduled maturity date, and we
incurred a non-cash charge of $2.4 million to write off the remaining
unamortized note issuance costs. Loss on Investments (000s) June 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    
    
    
    
    
    
    
    $
    (3,228
    )
    
    
    (0.6
    )%
 The fair market value of one of our investments in a private imaging
company remained below our book value for an extended period of time. As a
result, we judged this to be an other-than-temporary decline in the market
value based on our evaluation of an expected potential recovery of fair value,
and, accordingly, in the quarter ended March 31, 2003, we recorded a charge of
$1.0 million to reflect the loss. The fair market value of our investment in
Payment Data Systems, Inc. (formerly Billserv, Inc.), remained below our book
value for an extended period of time. As a result, we judged this to be an
other-than-temporary decline in the market value based on our evaluation of
an expected potential recovery of fair value, and, accordingly, in the quarter
ended December 31, 2002, we recorded a charge of $1.9 million. The fair market
value of this investment continued to decline subsequent to December 31, 2002,
and in the quarter ended March 31, 2003, we recorded an additional charge of
$0.3 million. Income Tax Expense (Benefit) (000s) June 30,2004
    
    2003Effective
    
    
    
    
    
    Effective$
    
    Rate
    
    $
    
    RateYear ended
    
    $
    1,195
    
    
    
    10.2
    %
    
    $
    (33,106
    )
    
    
    40.2
    %
 We turned profitable for the year ended June 30, 2004. However, because
our pre-tax income was relatively low for the year, earned tax credits
significantly reduced our effective tax rate. As our profits increase and
exceed our earned credits in fiscal year 2005, we expect our effective tax rate
to approximate the federal and state blended statutory rate of 39%. -34-




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##### Table of Contents



Cumulative Effect of Accounting Change (000s) June 30,2004
    
    2003%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    
    
    
    
    
    
    
    $
    (2,894
    )
    
    
    (0.5
    )%
 On July 1, 2002, we adopted SFAS 142, Goodwill and Other Intangible
Assets. SFAS 142 changed the accounting for goodwill and other intangible
assets, as 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. As a result of the transitional impairment test, under SFAS 142, we
determined that goodwill associated with our i-Solutions reporting unit was
impaired. We recorded an impairment charge of $2.9 million, net of tax, which
is reflected as a cumulative effect of a change in accounting principle in our
Consolidated Statement of Operations for the year ended June 30, 2003. Years Ended June 30, 2003 and 2002 The following table sets forth total company revenue for the years ended
June 30, 2003 and 2002, respectively. Total Revenue (000s) June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    551,646
    
    
    $
    490,477
    
    
    $
    61,169
    
    
    
    12.5
    %
 Total company revenue growth was driven by 15% growth in our Electronic
Commerce business, 10% growth in our Software business and 2% growth in our
Investment Services business. Growth in our Electronic Commerce business was driven primarily by growth
in total transactions processed from approximately 316 million for the year
ended June 30, 2002, to approximately 434 million for the year ended June 30,
2003. Additionally, revenue related to minimum guarantees from Microsoft and
FDC increased in total by $9.0 million on a year-over-year basis. Growth in
Electronic Commerce revenue had been dampened somewhat by a decrease in
interest rates, which negatively impacted our interest-sensitive offerings,
such as our ABT product, by certain of our larger customers transferring
payment volume to in-house solutions during fiscal 2003, and by a large
customer reaching pricing tier discounts during fiscal 2003 due to significant
volume growth. Growth in our Investment Services business was dampened by poor stock
market conditions. Portfolios managed remained relatively flat, as investors
reducing stock holdings offset new portfolio growth. Pricing in Investment
Services is primarily based on portfolios managed, and as a result, we
experienced less than historical revenue growth in this business. Our Software business continued to grow despite our customers extending
their software evaluation periods. We experienced relatively strong software
license sales in our seasonally high June and December quarters in fiscal 2003,
and we were engaged in a significant software services agreement during the
year, which combined to provide a boost to Software revenue. Across all segments of our business, for the year ended June 30, 2003,
Bank of America generated total revenue of $94.3 million, which exceeded 10% of
our total revenue, and was the only customer that exceeded 10% of our total
revenue. -35-




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##### Table of Contents



The following tables set forth comparative revenues, by type, for the
years ended June 30, 2003 and 2002, respectively. Processing and Servicing Revenue (000s) June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    476,416
    
    
    $
    422,237
    
    
    $
    54,179
    
    
    
    12.8
    %
 As previously mentioned, portfolios managed remained fairly flat
year-over-year, and as a result, we saw only modest growth in processing and
servicing revenue from our Investment Services business. Growth came primarily
from greater transactions processed within our Electronic Commerce business.
Additionally, we delivered almost 32 million e-bills in the year ended June 30,
2003, as compared to approximately 11 million e-bills in the previous year. In
conjunction with our acquisition of TransPoint in September 2000, we entered
into agreements with Microsoft and FDC, both of which include monthly minimum
revenue guarantees that increase annually over the five-year term of the
agreements. Volumes from Microsoft and FDC continue to fall substantially below guaranteed levels, but
as a result of contractual increases in the minimum revenue guarantee levels,
revenue from Microsoft and FDC grew by $9.0 million from the year ended June
30, 2002, to the year ended June 30, 2003. Reductions in interest yields from
fiscal 2002 had a dampening effect on our interest-sensitive products such as
our ABT product, which offset further growth in Electronic Commerce processing
and servicing revenue. Furthermore, our largest customer reached cliff-based
pricing milestones in the quarters ended December 31, 2002, and June 30, 2003,
which reduced our revenue per subscriber for that customer by between 10% and
15%, respectively. Three of our larger customers, all of whom were original principals of a
consortium known as Spectrum, created and began using in-house payment
warehouses for routing electronic bill payment transactions in fiscal 2003.
Each of these banks began routing payment transactions to Metavante. A fourth
bank customer announced intentions to move its electronic payment processing to
an in-house payment solution as well and started processing its own payments
late in fiscal 2003. License Fee Revenue (000s) June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    24,163
    
    
    $
    25,020
    
    
    $
    (857
    )
    
    
    (3.4
    )%
 Potential customers continued to extend their evaluation time on
discretionary spending for such things as software products, which resulted in
slower-than-normal software license sales during fiscal 2003. As the economy
began to turn a bit positive in early calendar 2004, we began to see license
sales increase. Maintenance Fee Revenue (000s) June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    25,733
    
    
    $
    24,298
    
    
    $
    1,435
    
    
    
    5.9
    %
 A combination of a decrease in new license sales, customer retention rates
of at least 80% across all of our Software business units, and moderate price
increases on a year-over-year basis, resulted in a moderately increasing
maintenance base. Other Revenue (000s) June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    25,334
    
    
    $
    18,922
    
    
    $
    6,412
    
    
    
    33.9
    %
 Other revenue consists of consulting and implementation fees across all
three of our business segments. The primary driver of growth in this area was
a consulting services project we were engaged in with a large bank customer
within our ACH Solutions business unit in fiscal 2003. -36-




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##### Table of Contents



The following set of tables provides line-by-line expense comparisons with
their relative percentages of total company revenue for the years ended June
30, 2003 and 2002, respectively. Cost of Processing, Servicing and Support (000s) June 30,2003
    
    2002%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    237,938
    
    
    
    43.1
    %
    
    $
    262,105
    
    
    
    53.4
    %
 The most significant factor resulting in the decline in processing and
servicing costs, in light of growth in processing and servicing revenue, was
platform consolidation in our Electronic Commerce business late in fiscal 2002.
For most of fiscal 2002, we maintained three redundant payment-processing
platforms. Through December 2001, we were converting Bank of America
subscribers from the legacy Bank of America processing platform we purchased in
October 2000 and, through March 2002, we maintained the redundant system to
close out remaining customer care inquiries and claims, at which time we
retired the redundant processing platform. Through this period, we paid Bank
of America to run and maintain the platform for us. Once we retired the Bank
of America system, we were able to close our customer care facility in San
Francisco on April 30, 2002, and our Houston customer care facility in the
month ended June 30, 2002. Additionally, as we migrated all but a few CSPs off
of our legacy Austin processing platform onto Genesis by the end of June 2002,
we closed our Austin office as well. The combination of platform consolidation
and office closings eliminated approximately $6.0 million of redundant
quarterly processing and servicing costs in the Electronic Commerce business.
Additionally, our electronic payment rate improved from approximately 71% for
the year ended June 30, 2002, to over 75% for the year ended June 30, 2003.
Electronic payments carry a significantly lower variable cost per unit than do
paper-based payments and are far less likely to result in a costly customer
care claim. Research and Development (000s) June 30,2003
    
    2002%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    52,717
    
    
    
    9.6
    %
    
    $
    55,172
    
    
    
    11.2
    %
 Late in fiscal 2002, we announced a company reorganization that resulted
in a reduction in workforce that impacted all our areas, including research and
development. The reduction resulted in savings on a year-over-year basis.
However, we continued to invest significantly in product enhancement and
quality improvement programs in all three of our businesses into fiscal 2003. Sales and Marketing (000s) June 30,2003
    
    2002%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    57,170
    
    
    
    10.4
    %
    
    $
    58,030
    
    
    
    11.8
    %
 During the 2003 fiscal year, we introduced new relationship management and
account management positions in our Investment Services business, however, the
previously mentioned reorganization, late in fiscal 2002, also impacted sales
and marketing expenses, resulting in a year-over-year reduction of costs. General and Administrative (000s) June 30,2003
    
    2002%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    39,030
    
    
    
    7.1
    %
    
    $
    43,687
    
    
    
    8.9
    %
 In addition to reduced rental and related overhead expense from facilities
closed late in fiscal 2002 and improved collection experience resulting in
favorable bad debt expenses year over year, we continued to carefully manage
our corporate expenses, resulting in expected leverage in our overhead costs. -37-




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##### Table of Contents



Depreciation and Amortization (000s) June 30,2003
    
    2002%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    226,638
    
    
    
    41.1
    %
    
    $
    435,565
    
    
    
    88.8
    %
 In
the beginning of fiscal 2003, we adopted SFAS 142, Goodwill and Other
Intangible Assets. Upon adoption, goodwill was no longer subject to
amortization over its estimated useful life. Instead, goodwill is now subject
to at least an annual assessment for possible impairment. We continue to
amortize all other intangible assets, such as acquired technology, strategic
agreements, tradenames, and the like, over their respective useful lives. As a
result of the change, amortization from acquisition-related intangible assets
decreased from $394.0 million for the year ended June 30, 2002, to $183.3
million for the year ended June 30, 2003. Underlying depreciation and
amortization from operating fixed assets and internally developed product costs
increased from $41.6 million for the year ended June 30, 2002, to $43.3 million
for the year ended June 30, 2003. The increase in non-acquisition related
depreciation and amortization was the result of continued investment in new
product innovations and fixed assets necessary to support the continued growth
of the company. Impairment of Intangible Assets (000s) June 30,2003
    
    2002%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    10,228
    
    
    
    1.9
    %
    
    $
    155,072
    
    
    
    31.6
    %
 In the quarter ended December 31, 2001, we recorded intangible asset
impairment charges totaling $155.1 million. This was the combined result of a
charge of $107.4 million for the impairment of goodwill associated with our
acquisition of BlueGill Technologies in April 2000 (currently known as
CheckFree i-Solutions), and of $47.7 million for the retirement of certain
technology assets we acquired from TransPoint in September 2000. In the
quarter ended June 30, 2003, we recorded intangible asset impairment charges
totaling approximately $10.2 million associated with our annual assessment of
the recoverability of goodwill and other intangible asset balances,
particularly in our i-Solutions business unit. Upon adoption of SFAS 142 in
the quarter ended September 30, 2002, we incurred an additional $2.9 million
impairment of intangible assets that is described below in the section titled
Cumulative Effect of Accounting Change, which is reflected separately in our
Consolidated Statement of Operations included in our Consolidated Financial
Statements. Upon successful integration of BlueGill Technologies into the operations
of our Software business, during fiscal 2001, we established a revenue outlook
for fiscal 2002 that anticipated continued rapid growth in software license
sales. We experienced a drop in demand for electronic billing software during
the quarter ended September 30, 2001; however, we did not believe this would
impact our longer-term expectations for this product line and, therefore, in
our estimation, there was no impairment at that time. When software sales
declined again in the quarter ended December 31, 2001, we reevaluated our
long-term expectations and viewed this as a triggering event that required
evaluation of possible impairment under the guidelines of SFAS 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. Our tests relative to the total tangible and intangible assets
related to the i-Solutions product line revealed that the assets were in fact
impaired. This resulted in a charge of $107.4 million to write down the value
of goodwill related to the acquisition of BlueGill. As part of the acquisition of TransPoint in September 2000, we were
contractually required to maintain the TransPoint operating technology for up
to three years for any customer that wished to remain on the system. When
valuing the TransPoint assets, we established an intangible asset for current
technology and assigned it a three-year life. By December 31, 2001, we had
migrated all of the subscribers, billers and CSPs to our Genesis platform and
the last of our international partners gave notice of their intention to cancel
their maintenance agreement with us during the December 2001 quarter.
Additionally, we had recently concluded that components of the TransPoint
technology were not compatible with current or future planned initiatives. We
viewed these as triggering events that required the evaluation of possible
impairment per SFAS 121. Our overall testing indicated that there was no
impairment of the TransPoint assets in general; however, we then evaluated SFAS
121 requirements related to the retirement of assets and identified two
technologies for which we had no future use. We retired these two
technologies, resulting in a charge of $47.7 million in the quarter ended
December 31, 2001. -38-




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##### Table of Contents



Throughout fiscal 2003, there were no triggering events that caused us to
evaluate the recoverability of our intangible asset balance. In April 2003, we
performed our annual evaluation of intangible asset recoverability. Our
initial tests indicated a potential impairment of goodwill in our i-Solutions
reporting unit. Our follow-up tests included an SFAS 86 recoverability test of
our technology assets, which indicated no impairment, and a SFAS 144 test,
which resulted in an impairment of $4.2 million in one of our non-goodwill
intangible assets. The final SFAS 142 test resulted in a further impairment of
$6.0 million in our i-Solutions goodwill balance for a total charge of $10.2
million. Reorganization Charge (000s) June 30,2003
    
    2002%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    1,405
    
    
    
    0.3
    %
    
    $
    16,365
    
    
    
    3.3
    %
 In January 2002, we announced plans to close a customer care facility in
San Francisco, effective April 30, 2002, which resulted in the termination of
employees at that facility. At that time we also announced our intent to
eliminate certain of our financial planning products within our Investment
Services division, which also resulted in a small reduction of employees in our
Raleigh, North Carolina office. On March 19, 2002, we further announced the
closing of our Houston and Austin, Texas offices, our Ann Arbor, Michigan
office and our Singapore office, combined with a net reduction in force
totaling 450 employees. As a result of those actions, we incurred charges
totaling $16.4 million consisting primarily of severance and related employee
benefits and lease termination fees. We accounted for these actions in
accordance with Emerging Issues Task Force (EITF) 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity. Due primarily to our inability to sublease abandoned office
space as originally expected, in the quarter ended June 30, 2003, we recorded
$1.4 million of additional reorganization charges to true-up our estimates from
the actions we initiated in fiscal 2002. Net interest (000s) June 30,2003
    
    2002%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended:Interest income
    
    $
    7,327
    
    
    
    
    
    
    $
    8,486Interest expense
    
    
    (12,975
    )
    
    
    
    
    
    
    (12,788
    )Net interest
    
    $
    (5,648
    )
    
    
    (1.0
    )%
    
    $
    (4,302
    )
    
    
    (0.9
    )%
 An increase in invested balances of cash, short-term and long-term
investments from 2002 to 2003 was offset by reduced yields from lower interest
rates during fiscal 2003, resulting in a drop in interest income. The increase
in interest expense was due primarily to an increase in long-term lease
obligations during fiscal 2003. Anchored by the fixed rate on our $172.5
million of outstanding convertible debt, average interest rates on our debt
remained stable for us over these periods. -39-




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##### Table of Contents



Loss on Investments (000s) June 30,2003
    
    2002%
    
    
    
    
    
    %$
    
    Revenue
    
    $
    
    RevenueYear ended
    
    $
    (3,228
    )
    
    
    (0.6
    )%
    
    $
    
    
    
    
    
 The fair market value of one of our investments in a private imaging
company remained below our book value for an extended period of time. As a
result, we judged this to be an other-than-temporary decline in the market
value based on our evaluation of an expected potential recovery of fair value,
and, accordingly, in the quarter ended March 31, 2003, we recorded a charge of
$1.0 million to reflect the loss. The fair market value of our investment in
Payment Data Systems, Inc. (formerly Billserv, Inc.), remained below our book
value for an extended period of time. As a result, we judged this to be an
other than temporary decline in the market value based on our evaluation of
an expected potential recovery of fair value, and, accordingly, in the quarter
ended December 31, 2002, we recorded a charge of $1.9 million. The fair market
value of this investment continued to decline subsequent to December 31, 2002,
and in the quarter ended March 31, 2003, we recorded an additional charge of
$0.3 million. Income Tax Benefit (000s) June 30,2003
    
    2002Effective
    
    
    
    
    
    Effective$
    
    Rate
    
    $
    
    RateYear ended
    
    $
    (33,106
    )
    
    
    40.2
    %
    
    $
    (98,871
    )
    
    
    18.3
    %
 Our June 30, 2002, pre-tax income included the impact of non-deductible
goodwill amortization expense. With our adoption of SFAS 142 in July 2002, we
stopped amortizing goodwill. Our resulting effective tax rate in fiscal 2003
became more in line with a blended statutory rate of about 40%, with the
exception of federal and state tax credits that have more than offset other
non-deductible expense. Cumulative Effect of Accounting Change. Please
refer to the Years Ended June 30, 2004 and 2003 section
above for an explanation of the cumulative effect of accounting change. -40-




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##### Table of Contents



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, in-process
research and development, and significant one-time charges related to various
business and asset acquisitions. The following table sets forth revenue,
operating income (loss) and certain other financial information by segment, for
the periods noted: Year Ended June 30,2004
    
    2003
    
    2002(In thousands)Revenue:Electronic Commerce
    
    $
    452,732
    
    
    $
    405,373
    
    
    $
    352,054Investment Services
    
    
    86,270
    
    
    
    81,562
    
    
    
    79,574Software
    
    
    67,462
    
    
    
    64,711
    
    
    
    58,849Total revenue
    
    $
    606,464
    
    
    $
    551,646
    
    
    $
    490,477Segment operating income (loss):Electronic Commerce
    
    $
    155,724
    
    
    $
    115,539
    
    
    $
    39,010Investment Services
    
    
    19,911
    
    
    
    21,062
    
    
    
    24,376Software
    
    
    14,293
    
    
    
    18,008
    
    
    
    5,789Corporate
    
    
    (33,256
    )
    
    
    (33,798
    )
    
    
    (36,500
    )Purchase accounting amortization:Electronic Commerce
    
    
    (132,699
    )
    
    
    (175,028
    )
    
    
    (358,476
    )Investment Services
    
    
    (819
    )
    
    
    (2,300
    )
    
    
    (5,665
    )Software
    
    
    (3,040
    )
    
    
    (6,014
    )
    
    
    (29,868
    )Impairment of intangible assets:Electronic Commerce
    
    
    
    
    
    
    
    
    
    
    (47,667
    )Software
    
    
    
    
    
    
    (10,228
    )
    
    
    (107,405
    )Reorganization charge:Electronic Commerce
    
    
    
    
    
    
    (307
    )
    
    
    (11,041
    )Investment Services
    
    
    
    
    
    
    68
    
    
    
    (2,309
    )Software
    
    
    
    
    
    
    (1,183
    )
    
    
    (2,812
    )Corporate
    
    
    
    
    
    
    17
    
    
    
    (203
    )Warrants issued to third party  Electronic Commerce
    
    
    
    
    
    
    644
    
    
    
    (2,748
    )In-process research and development  Software
    
    
    (324
    )
    
    
    
    
    
    
    Income (loss) from operations
    
    $
    19,790
    
    
    $
    (73,520
    )
    
    $
    (535,519
    )
 -41-




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##### Table of Contents



Years Ended June 30, 2004 and 2003 Electronic Commerce Segment Information: Electronic Commerce Revenue
(000s)
    
    June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    452,732
    
    
    $
    405,373
    
    
    $
    47,359
    
    
    
    11.7
    %
 Revenue growth in Electronic Commerce is primarily the result of an
increase in transactions processed, the addition of two large bank customers,
an increase in e-bills distributed, and tiered TransPoint-related revenue
minimums, offset by contractual volume-based price discounts, four bank
customers transferring transaction volume to in-house systems, and dampened
demand for our ABT product offering. 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. 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 account balance transfer. A third
category of revenue we simply refer to as Other Electronic Commerce includes
our Health and Fitness business and other ancillary revenue sources, such as
consumer service provider and biller implementation and consulting services. The following tables provide a historical trend of revenue, underlying
transaction metrics and subscriber metrics, where appropriate, for our
Electronic Commerce business over fiscal 2004 and fiscal 2003: Fiscal 2004: Quarter Ended6/30/04
    
    3/31/04
    
    12/31/03
    
    9/30/03(In millions)Full ServiceRevenue
    
    $
    96.2
    
    
    $
    94.0
    
    
    $
    91.8
    
    
    $
    85.5Active subscribers
    
    
    5.9
    
    
    
    5.5
    
    
    
    5.0
    
    
    
    4.6Transactions processed
    
    
    123.9
    
    
    
    115.5
    
    
    
    106.1
    
    
    
    94.3Payment ServicesRevenue
    
    $
    14.0
    
    
    $
    12.8
    
    
    $
    12.0
    
    
    $
    11.9Transactions processed
    
    
    41.3
    
    
    
    36.7
    
    
    
    33.1
    
    
    
    32.4Other Electronic CommerceRevenue
    
    $
    8.3
    
    
    $
    8.4
    
    
    $
    8.7
    
    
    $
    9.2TotalsElectronic Commerce revenue
    
    $
    118.5
    
    
    $
    115.2
    
    
    $
    112.5
    
    
    $
    106.6Transactions processed
    
    
    165.2
    
    
    
    152.2
    
    
    
    139.2
    
    
    
    126.7
 -42-




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##### Table of Contents



Fiscal 2003: Quarter Ended6/30/03
    
    3/31/03
    
    12/31/02
    
    9/30/02(In millions)Full ServiceRevenue
    
    $
    82.6
    
    
    $
    81.5
    
    
    $
    75.1
    
    
    $
    71.6Active subscribers
    
    
    4.2
    
    
    
    3.9
    
    
    
    3.5
    
    
    
    3.2Transactions processed
    
    
    87.5
    
    
    
    80.3
    
    
    
    74.9
    
    
    
    67.2Payment ServicesRevenue
    
    $
    12.3
    
    
    $
    12.8
    
    
    $
    13.9
    
    
    $
    14.7Transactions processed
    
    
    32.7
    
    
    
    31.6
    
    
    
    30.1
    
    
    
    29.5Other Electronic CommerceRevenue
    
    $
    11.1
    
    
    $
    10.3
    
    
    $
    9.2
    
    
    $
    9.7Non-cash revenue impact of warrants
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.6TotalsElectronic Commerce revenue
    
    $
    106.0
    
    
    $
    104.6
    
    
    $
    98.2
    
    
    $
    96.6Transactions processed
    
    
    120.2
    
    
    
    111.9
    
    
    
    105.0
    
    
    
    96.7
 The primary drivers of the increase in Full Service revenue from fiscal
2003 to fiscal 2004, were growth in Full Service transactions processed of 42%,
from 309.8 million for the year ended June 30, 2003, to 439.7 million for the
year ended June 30, 2004, a $9.0 million increase in TransPoint revenue
minimums on a year-over-year basis, and the addition of two large bank
customers since June 30, 2003. Growth from the aforementioned sources has been
offset by several factors. Since the quarter ended September 30, 2002, two
large customers moved Full Service transaction volume to in-house systems.
Both banks completed their moves by the quarter ended September 30, 2003. The
combination of these moves, price tier discounts earned by our largest
customer, Bank of America, during the last 12 months, additional discounts
resulting from our previously mentioned contract amendment with Bank of America
in the quarter ended December 31, 2003, and general tiered pricing declines
across our customer base related to increasing transaction volumes, resulted in
Full Service revenue per transaction declines from $1.00 for the year ended
June 30, 2003, to $0.84 for the year ended June 30, 2004. In the Payment Services category, the primary driver of the revenue
decline on a year-over-year basis has been the movement of transactions to
in-house solutions by two large bank customers since the quarter ended
September 30, 2002. The first bank completed its move by December 31, 2002,
and the second by the quarter ended December 31, 2003. Growth in the remaining
Payment Services businesses has surpassed lost volume from these banks as
quarterly revenue has returned to prior year levels. The decline in Other Electronic Commerce revenue is due to the loss of a
large Health and Fitness customer and less implementation revenue.
Additionally, we recorded a non-cash addition to revenue of $0.6 million in the
quarter ended September 30, 2002 related to a true-up of a previously recorded
charge for warrants issued to a third party. Electronic Commerce Operating Income (000s)
    
    June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    155,724
    
    
    $
    115,539
    
    
    $
    40,185
    
    
    
    34.8
    %
 Our ratio of electronic payments to total payments has improved from 75%
as of June 30, 2003, to 79% as of June 30, 2004. Electronic payments carry a
significantly lower variable cost per unit than paper payments and are far less
likely to result in a costly customer care inquiry or claim. Due to our
continued efforts toward the improvement of quality and efficiency and the
leverage we have experienced in our existing fixed cost base, we realized a
reduction in our cost per transaction, which has resulted in an increase in
operating income. -43-




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##### Table of Contents



Investment Services Segment Information: Investment Services Revenue (000s)
    
    June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    86,270
    
    
    $
    81,562
    
    
    $
    4,708
    
    
    
    5.8
    %
 Revenue derived from the volume of portfolios managed has begun to
improve, after several quarters of relatively flat results. The total amount
of accounts managed has increased from 1.2 million at June 30, 2003 to almost
1.6 million at June 30, 2004. As the stock market has improved, we have seen
growth in the number of portfolios managed. We have provided certain
incentives for customers to sign multi-year contracts and are experiencing a
business mix shift to lower priced services, both of which we expect to result
in a modest reduction to our revenue per average portfolio managed as we look
forward. Investment Services Operating Income (000s)
    
    June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    19,911
    
    
    $
    21,062
    
    
    $
    (1,151
    )
    
    
    (5.5
    )%
 The reduction in operating income is due primarily to added investment in
research and development programs to further improve our product offering in
the market and efforts to improve our operational quality standards. Software Segment Information: Software Revenue (000s)
    
    June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    67,462
    
    
    $
    64,711
    
    
    $
    2,751
    
    
    
    4.3
    %
 With the acquisition of HelioGraph in November 2003, our efforts in Europe
with an enterprise reconciliation solution, and new ACH software (marketed as
PEP+ reACH) designed to take advantage of recent check conversion rules and
regulations, we have experienced an increase in software revenue since the year
ended June 30, 2003. However, despite solid sales pipelines and an apparent
improvement in economic conditions, customers continue to require an extended
evaluation period prior to committing to discretionary software purchases. Software Operating Income (000s)
    
    June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    14,293
    
    
    $
    18,008
    
    
    $
    (3,715
    )
    
    
    (20.6
    )%
 The decrease in operating income on a year-over-year basis is due
primarily to increased costs associated with the HelioGraph acquisition in
November 2003. Additionally, we accrued approximately $0.5 million of costs
associated with a closed facility we have been unable to sublease in the Ann
Arbor, Michigan area. As we continue to integrate HelioGraph into our Software
business and our license sales begin to improve, we expect improvement in
operating income. Corporate Segment Information: Corporate Operating Loss (000s)
    
    June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    (33,256
    )
    
    $
    (33,798
    )
    
    $
    542
    
    
    
    1.6
    %
 Corporate results represent costs for legal, human resources, finance and
various other unallocated overhead expenses. We continue to leverage our
infrastructure costs in the face of increasing revenues. -44-




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##### Table of Contents



Purchase Accounting Amortization: Purchase Accounting
Amortization (000s)
    
    June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    136,558
    
    
    $
    183,342
    
    
    $
    (46,784
    )
    
    
    (25.5
    )%
 Purchase accounting amortization represents amortization of intangible
assets resulting from our various acquisitions from 1998 forward. The decrease
in expense on a year-over-year basis is the result of intangible assets that
have fully amortized since June 30, 2003, and the amortization of lower
intangible asset balances resulting from impairment charges in the year ended
June 30, 2003. Impairment of Intangible Assets: Impairment of
Intangible Assets (000s)
    
    June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    
    
    
    $
    10,228
    
    
    $
    (10,228
    )
    
    
    
 In the quarter ended June 30, 2003, we recorded charges totaling $10.2
million for the impairment of intangible assets. Our annual review for
possible impairment of goodwill as required by SFAS 142 resulted in a charge of
$4.2 million for the impairment of our customer base intangible asset and
another $6.0 million for the impairment of goodwill, both from intangible
assets we established upon the acquisition of BlueGill Technologies in April
2000 (currently referred to as CheckFree i-Solutions). Reorganization Charge: Reorganization
Charge (000s)
    
    June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    
    
    
    $
    1,405
    
    
    $
    (1,405
    )
    
    
    
 In the year ended June 30, 2003, we incurred a true-up reorganization
charge of $1.4 million, due primarily to our inability to sub-lease vacated
property that was abandoned in a restructuring action that took place in the
year ended June 30, 2002. Because these activities were initiated prior to
June 30, 2002, we accounted for these actions in accordance with EITF 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity. Warrants Issued to a Third Party: Warrants Issued to a
Third Party (000s)
    
    June 30,
    
    Change2004
    
    2003
    
    $
    
    %Year ended
    
    $
    
    
    
    $
    644
    
    
    $
    (644
    )
    
    
    
 During the quarter ended June 30, 2002, we recorded a non-cash charge of
$2.7 million against revenue resulting from the probable vesting of warrants
issued to a third party. In the quarter ended September 30, 2002, the warrants
vested. On the date of vesting, however, the fair value of our stock was lower
than at June 30, 2002, when we calculated the initial charge. As a result, a
true-up of the value of the warrants resulted in a credit to revenue of $0.6
million in the quarter ended September 30, 2002. The charge, and the true-up
credit, were based on a Black-Scholes valuation of the warrants and were
accounted for as a net charge to revenue in accordance with EITF 01-09,
Accounting for Consideration Given by a Vendor to a Customer. -45-




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##### Table of Contents



Years Ended June 30, 2003 and 2002 Electronic Commerce Segment Information: Electronic
Commerce Revenue (000s)
    
    June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    405,373
    
    
    $
    352,054
    
    
    $
    53,319
    
    
    
    15.1
    %
 In the quarter ended June 30, 2002, we recorded a non-cash charge of $2.7
million against Electronic Commerce revenue associated with the probable
vesting of warrants we issued to a third party. The warrants vested in the
quarter ended September 30, 2002, and at that time, we recorded a true-up of
$0.6 million which reduced the original charge. Net of this one-time charge
and its subsequent true-up, revenue in Electronic Commerce increased by $49.9
million, or 14%, from $354.8 million for the year ended June 30, 2002, to
$404.7 million for the year ended June 30, 2003. The increase in revenue is
driven primarily by an increase in year-over-year transaction volume. The following tables provide a historical trend of revenue, underlying
transaction metrics, and subscriber metrics where appropriate, for the
Electronic Commerce business: Fiscal 2003: Quarter Ended6/30/03
    
    3/31/03
    
    12/31/02
    
    9/30/02(In millions)Full ServiceRevenue
    
    $
    82.6
    
    
    $
    81.5
    
    
    $
    75.1
    
    
    $
    71.6Active subscribers
    
    
    4.2
    
    
    
    3.9
    
    
    
    3.5
    
    
    
    3.2Transactions processed
    
    
    87.5
    
    
    
    80.3
    
    
    
    74.9
    
    
    
    67.2Payment ServicesRevenue
    
    $
    12.3
    
    
    $
    12.8
    
    
    $
    13.9
    
    
    $
    14.7Transactions processed
    
    
    32.7
    
    
    
    31.6
    
    
    
    30.1
    
    
    
    29.5Other Electronic CommerceRevenue
    
    $
    11.1
    
    
    $
    10.3
    
    
    $
    9.2
    
    
    $
    9.7Non-cash revenue impact of warrants
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.6TotalsElectronic Commerce revenue
    
    $
    106.0
    
    
    $
    104.6
    
    
    $
    98.2
    
    
    $
    96.6Transactions processed
    
    
    120.2
    
    
    
    111.9
    
    
    
    105.0
    
    
    
    96.7
 -46-




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##### Table of Contents



Fiscal 2002: Quarter Ended6/30/02
    
    3/31/02
    
    12/31/01
    
    9/30/01(In millions)Full ServiceRevenue
    
    $
    74.1
    
    
    $
    71.2
    
    
    $
    67.2
    
    
    $
    65.0Active subscribers
    
    
    3.1
    
    
    
    2.9
    
    
    
    2.7
    
    
    
    2.6Transactions processed
    
    
    69.0
    
    
    
    65.5
    
    
    
    60.9
    
    
    
    56.1Payment ServicesRevenue
    
    $
    10.7
    
    
    $
    10.3
    
    
    $
    10.2
    
    
    $
    9.9Transactions processed
    
    
    18.9
    
    
    
    16.9
    
    
    
    15.5
    
    
    
    13.4Other Electronic CommerceRevenue
    
    $
    9.8
    
    
    $
    8.3
    
    
    $
    8.2
    
    
    $
    9.9Non-cash revenue impact of warrants
    
    $
    (2.7
    )
    
    $
    
    
    
    $
    
    
    
    $
    TotalsElectronic Commerce revenue
    
    $
    91.9
    
    
    $
    89.8
    
    
    $
    85.6
    
    
    $
    84.8Transactions processed
    
    
    87.9
    
    
    
    82.4
    
    
    
    76.4
    
    
    
    69.5
 We experienced generally steady growth in Full Service revenue, active
subscribers, and transactions processed until the September 30, 2002, quarter
when one of our larger customers converted from Full Service to Payment
Services, and, accordingly, approximately 300,000 active subscribers and their
related transactions switched categories. Although Payment Services
transactions generate less revenue per transaction, because we provide less
service, our cost per transaction is less as well. Although our largest bank
customer accounted for more than one-third of our active Full Service
subscribers, growth in active subscribers and transactions processed was the
result of broad growth throughout the channel. CSP customer pricing in this
category can be based on transactions processed, the number of subscribers, or
a combination of both. Additionally, in order to share the benefits
associated with scale efficiencies, pricing is tiered in nature, whereby a
customer exceeding predetermined volumes is eligible for a lower price on a
going forward basis. In addition, the mix of customers utilizing
transaction-based versus subscriber-based pricing will have an impact on
revenue per transaction. In the latter half of the quarter ended December 31,
2002, and again in the early part of the quarter ended June 30, 2003, our
largest customer reached pricing tier discount levels. Because of the
significance of this relationship, when this customer reaches a pricing tier
discount, the implied revenue per transaction in this category declines
accordingly. Also, we saw reductions in subscribers and/or transactions from
two Full Service customers moving to in-house solutions throughout the second
half of fiscal 2003. We experienced moderate quarterly growth in revenue and transactions
processed in the Payment Services category throughout fiscal 2002, a
significant increase in the quarter ended September 30, 2002, followed by a
declining revenue trend beginning in the quarter ended December 31, 2002. As
previously mentioned, a large bank customer converted from a Full Service
relationship to a Payment Services relationship and subsequently reduced
volumes to us. This customer is e-bill enabled and its in-house system is
integrated with our processing system. Electronic bills that we present to its
customers are routed back to us for payment purposes. We delivered approximately 32
million e-bills in the year ended June 30, 2003; almost three times the approximately 11 million e-bills delivered in the year ended June 30, 2002. We also report
miscellaneous payment-only transactions from complementary products such as our
ABT business in this category. Other Electronic Commerce revenue includes our Health and Fitness product,
which grew modestly, and other non-transaction related services such as
implementation and consulting, which increased on a year-over-year basis.
During the quarter ended June 30, 2002, we recorded a non-cash charge of $2.7
million against Electronic Commerce revenue associated with the probable
vesting of warrants we issued to a third party. In the quarter ended September
30, 2002, the warrants actually vested. On the date of vesting, however, the
fair value of our stock was lower than when we calculated the initial charge.
As a result, a true-up of the value of the warrants resulted in a credit to
revenue of $0.6 million in the quarter ended September 30, 2002. -47-




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##### Table of Contents



Electronic Commerce Operating Income (000s)
    
    June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    115,539
    
    
    $
    39,010
    
    
    $
    76,529
    
    
    
    196.2
    %
 Our ratio of electronic payments to total payments continued to improve,
from approximately 71% as of June 30, 2002, to over 75% as of June 30, 2003.
Electronic payments carry a significantly lower variable cost per unit than
paper payments and are far less likely to result in a costly customer care
inquiry or claim. The full underlying impact of improved efficiency and
quality, however, is not fully explained by a change in electronic rate.
Throughout fiscal 2002, we supported two additional payment-processing
platforms over and above our Genesis platform. We paid Bank of America to run
the legacy Bank of America platform through March 2002, as we migrated
consumers onto our more efficient Genesis platform, and cleared outstanding
customer care claims initiated on the Bank of America platform. In March 2002,
we announced a corporate-wide reorganization that resulted in a reduction in
workforce, over and above the employees impacted by office closings and
platform consolidation. In total, we eliminated between $7.0 million and $8.0
million of quarterly costs starting in the quarter ended June 30, 2002.
Finally, we continued to emphasize quality improvement, designed to result in
further reduction in cost per transaction as we leverage the fixed costs
already invested in our Electronic Commerce business. Investment Services Segment Information: Investment Services Revenue (000s)
    
    June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    81,562
    
    
    $
    79,574
    
    
    $
    1,988
    
    
    
    2.5
    %
 Our total number of portfolios managed had remained relatively flat at
approximately 1.2 million on a year-over-year basis. Revenue growth in fiscal
2003 did not match historical performance as the depressed stock market had a
direct impact on our ability to grow revenue in the business. Our pricing is
based primarily on portfolios managed and portfolio additions continue to be
offset by investors reducing stock holdings. Investment Services Operating Income (000s)
    
    June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    21,062
    
    
    $
    24,376
    
    
    $
    (3,314
    )
    
    
    (13.6
    )%
 The decline in operating income is due to investment spending on new
product offerings and quality improvement initiatives in anticipation of a
positive turn in the stock market. Throughout fiscal 2003, key initiatives in
our Investment Services business included:  
    
    new product offerings (e.g., Multiple Strategy Portfolios / M-Pact) with a shortened time to market;
    
    additional web-based products with increased functionality and ease of use;
    
    build out of relationship-based service offerings in our operations; and
    
    investments to improve quality. Software Segment Information: Software Revenue (000s)
    
    June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    64,711
    
    
    $
    58,849
    
    
    $
    5,862
    
    
    
    10.0
    %
 The downturn in the software market throughout fiscal 2002 and 2003 caused
many businesses to curtail discretionary expenditures, which resulted in an
overall dampening of demand for licensed software solutions. While our
i-Solutions electronic statement and billing software was impacted most,
short-term demand for reconciliation and ACH processing licenses was impacted
as well. However, during the quarter ended December 31, 2002, we began work on
a consulting services agreement with a large bank customer in our ACH business
unit that provided greater than normal consulting revenue through the end of
fiscal 2003. Resulting services revenue was the driving factor behind growth
in the Software segment. -48-




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##### Table of Contents



Software Operating
Income (000s)
    
    June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    18,008
    
    
    $
    5,789
    
    
    $
    12,219
    
    
    
    211.1
    %
 In March 2002, we announced a company-wide reorganization that resulted in
a net reduction in staff. As part of these actions, we announced the closing
of our Ann Arbor, Michigan office. In addition to the recurring savings that
resulted from these actions, improvements in operating income are also the
result of continued efforts to closely manage discretionary expenses in light
of economic conditions. Corporate Segment Information: Corporate Operating
Loss (000s)
    
    June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    (33,798
    )
    
    $
    (36,500
    )
    
    $
    2,702
    
    
    
    7.4
    %
 Our Corporate segment represents expenses for legal, human resources,
finance and other various unallocated overhead expenses. Our corporate
operating expenses were 6% of total revenue for the year ended June 30, 2002,
and 7% of total revenue for the year ended June 30, 2003. We continued to
closely manage our expenses, which resulted in expected leverage in overhead
costs. Purchase Accounting Amortization: Purchase Accounting
Amortization (000s)
    
    June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    183,342
    
    
    $
    394,009
    
    
    $
    (210,667
    )
    
    
    (53.5
    )%
 Purchase accounting amortization represents amortization of intangible
assets resulting from various acquisitions from 1996 forward. In July 2002, we
adopted SFAS 142, Goodwill and Other Intangible Assets. Upon adoption,
goodwill is no longer subject to amortization over its estimated useful life.
Instead, goodwill is subject to at least an annual assessment for possible
impairment. All other intangible assets, continue to be amortized over their
respective useful lives. Impairment of Intangible Assets: Impairment of
Intangible Assets (000s)
    
    June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    10,228
    
    
    $
    155,072
    
    
    $
    (144,844
    )
    
    
    (93.4
    )%
 In the quarter ended June 30, 2003, we recorded charges totaling $10.2
million for the impairment of intangible assets. Our annual review for
possible impairment of goodwill as required by SFAS 142 resulted in a charge of
$4.2 million for the impairment of our customer base intangible asset and
another $6.0 million for the impairment of goodwill, both from intangible
assets we established upon the acquisition of BlueGill Technologies in April
2000 (currently referred to as CheckFree i-Solutions). In the quarter ended
December 31, 2001, we recorded charges totaling $155.1 million for the
impairment of intangible assets. This was the combined result of a charge of
$107.4 million for the impairment of goodwill associated with our acquisition
of BlueGill Technologies and of $47.7 million for the retirement of certain
technology assets we acquired from TransPoint in September 2000. -49-




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Reorganization Charge: Reorganization Charge
(000s)
    
    June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    1,405
    
    
    $
    16,365
    
    
    $
    (14,960
    )
    
    
    (91.4
    )%
 In January 2002, we announced plans to close our customer care facility in
San Francisco, California, effective April 30, 2002, which resulted in the
termination of employees at that facility. At that time we also announced our
intent to eliminate certain of our financial planning products within our
Investment Services division, which also resulted in a small reduction of
employees in our Raleigh, North Carolina office. In March 2002, we further
announced the closing of our Houston, Austin, Ann Arbor and Singapore offices,
along with a net reduction in force totaling approximately 450 employees. As a
result of these actions, we incurred a charge of $15.9 million in the quarter
ended March 31, 2002, a true-up charge of $0.5 million in the quarter ended
June 30, 2002, and a second true-up charge of $1.4 million in the quarter ended
June 30, 2003. The first true-up consisted primarily of severance and related
employee benefits and lease termination fees. The second true-up of $1.4
million was due primarily to our inability to sub-lease vacated property as
originally anticipated. We accounted for these actions in accordance with EITF
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity. Warrants Issued to a Third Party: Warrants Issued to a
Third Party (000s)
    
    June 30,
    
    Change2003
    
    2002
    
    $
    
    %Year ended
    
    $
    644
    
    
    $
    (2,748
    )
    
    $
    3,392
    
    
    
    123.4
    %
 During the quarter ended June 30, 2002, we recorded a non-cash charge of
$2.7 million against revenue resulting from the probable vesting of warrants
issued to a third party. In the quarter ended September 30, 2002, the warrants
vested. On the date of vesting, however, the fair value of our stock was lower
than at June 30, 2002, when we calculated the initial charge. As a result, a
true-up of the value of the warrants resulted in a credit to revenue of $0.6
million in the quarter ended September 30, 2002. The charge, and the true-up
credit, were based on a Black-Scholes valuation of the warrants and were
accounted for as a net charge to revenue in accordance with EITF 01-09,
Accounting for Consideration Given by a Vendor to a Customer. Liquidity and Capital Resources The following chart provides a summary of our Consolidated Statements of
Cash Flows for the appropriate periods: Year Ended June 30,2004
    
    2003
    
    2002(In thousands)Net cash provided by operating activities
    
    $
    171,059
    
    
    $
    157,793
    
    
    $
    45,869Net cash used in investing activities
    
    
    (103,415
    )
    
    
    (61,172
    )
    
    
    (58,189
    )Net cash provided by (used in) financing activities
    
    
    (142,466
    )
    
    
    (2,272
    )
    
    
    3,207Effect of exchange rate changes
    
    
    296
    
    
    
    
    
    
    
    Net increase (decrease) in cash and cash
equivalents
    
    $
    (74,526
    )
    
    $
    94,349
    
    
    $
    (9,113
    )
 As of June 30, 2004, we had $208.0 million of cash, cash equivalents and
short-term investments on hand, and an additional $68.3 million in long-term
investments. Our balance sheet reflects a current ratio of 2.3 and working
capital of $263.8 million. Due primarily to processing efficiency improvement,
we experienced a significant increase in net cash provided by operating activities over the past
several years. For the year ended June 30, 2004, we generated $171.1 million
of net cash provided by operating activities. We expect net cash provided by
operating activities of approximately $185.0 million for our fiscal year ending
June 30, 2005. We typically have a seasonally low September quarter due to the
payout of annual incentive bonuses and commissions, and as a result, we expect
net cash from operating activities to be relatively low in the quarter ended September 30,
2004. This will result in only a modest -50-




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increase over fiscal 2004, as we expect to fully utilize our net operating
loss carryover credits in fiscal 2005, at which time the amount of tax payments
we will be required to make increases. Considering our existing balances and
expectations of net cash provided by operating activities in the near
future, we believe we have sufficient cash to meet our presently anticipated
requirements for the foreseeable future. Our board of directors has approved
up to $40.0 million for the purpose of repurchasing shares of our common stock
through August 2005. As of June 30, 2004, no such purchases have taken place. From an investing perspective, we used $103.4 million of cash for the year
ended June 30, 2004. Of this amount, $106.0 million was used for the
acquisition of APS, net of cash received, $16.3 million was used for the
acquisition of HelioGraph, net of cash received, and $1.2 million for our
investment in a joint venture with BACS, Ltd. We used $23.5
million for capital expenditures and another $2.8 million for the
capitalization of software development costs. These uses of cash were offset
by proceeds of $51.7 million from the net purchases and sales of investment
securities. We expect to spend approximately $40.0 million on purchases of
property and equipment in fiscal 2005. From a financing perspective, we used $142.5 million of cash for the year
ended June 30, 2004. We used $172.5 million to redeem our 6.5% convertible
notes and another $5.6 million for principal payments under capital leases and
other long-term obligations. We received $10.6 million in combined proceeds
from the exercise of employee stock options and the purchase of stock under our
employee stock purchase plan. In April 2004, we received a $25.0 million
deposit from one of our ABT customers in connection with a contract
modification relating to the timing of transaction settlements. The agreement
has an initial term of four years and automatically renews thereafter unless
terminated with 180 days notice. We will pay the customer a variable rate of
interest on a monthly basis equal to the then current overnight repurchase
agreement rate. There are no restrictions on the deposit, and the funds will
be available for general corporate use. We will refund the deposit upon
termination of the agreement. While the timing of cash payments and collections will cause fluctuations
from quarter to quarter and the level of expected capital expenditures could
change, we expect to generate as much as $145.0 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 assets and liabilities, less capital expenditures. 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 June 30, 2004, and do not anticipate
any change in the foreseeable future. See Recent Developments regarding our recently obtained line of credit
facility. We have no immediate plans to borrow against this line of credit. The following table represents a summary of our contractual obligations
and commercial commitments over the next several years which may assist in
understanding expected cash commitments from various obligations we have
entered into over time: Payments DueYear Ended June 30,2006 to
    
    2008 toContractual Obligations
    
    Total
    
    2005
    
    2007
    
    2009
    
    Thereafter(In thousands)Operating leases
    
    $
    92,073
    
    
    $
    17,015
    
    
    $
    24,621
    
    
    $
    20,649
    
    
    $
    29,788Capital lease obligations
    
    
    1,541
    
    
    
    1,364
    
    
    
    177
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    28,726
    
    
    
    3,359
    
    
    
    367
    
    
    
    25,000
    
    
    
    Total contractual cash obligations
    
    $
    122,340
    
    
    $
    21,738
    
    
    $
    25,165
    
    
    $
    45,649
    
    
    $
    29,788
 -51-




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Use of Non-GAAP Financial Information A measure that we have used in this Annual Report on Form 10-K to evaluate
our operations is free cash flow (which we define as net cash provided by
operating activities, exclusive of the net change in settlement accounts and
less capital expenditures). We consider free cash flow to be a measure of
liquidity that provides useful information to management and investors about
the amount of cash we generate after the acquisition of property and equipment,
which can be used for strategic and other purposes. Our free cash flow should
be considered in addition to, and not as a substitute for, our GAAP (Generally Accepted Accounting Principles in the United States of America) results. Our free cash flow for the years ended June 30, 2004, and June 30, 2003,
is calculated as follows (in thousands): Year Ended June 30,2004
    
    2003Net cash provided by operating activities
    
    $
    171,059
    
    
    $
    157,793Less: Net change in settlement accounts *
    
    
    193
    
    
    
    Capital expenditures
    
    
    23,482
    
    
    
    24,324Free cash flow
    
    $
    147,770
    
    
    $
    133,469
  *
    
    Relates to APS walk-in bill payment transactions. Net cash used in investing activities for the years ended June 30, 2004
and June 30, 2003, was $103.4 million and $61.2 million, respectively. Net
cash used in financing activities was $142.5 million for the year ended June
30, 2004, and $2.3 million for the year ended June 30, 2003. Recent Accounting Pronouncements On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
SFAS 141, Business Combinations and SFAS 142, Goodwill and Other Intangible
Assets. SFAS 141 requires all business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting. In addition,
it requires application of the provisions of SFAS 142 for goodwill and other
intangible assets related to any business combinations completed after June 30,
2001, but prior to the adoption date of SFAS 142. SFAS 142 changes the
accounting for goodwill and other intangible assets. Upon adoption, goodwill is
no longer subject to amortization over its estimated useful life. Rather,
goodwill is subject to at least an annual assessment for impairment by applying
a fair-value-based test. All other acquired intangibles are separately
recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, or exchanged, regardless of our intent to do so. Other
intangibles are amortized over their useful lives. SFAS 142 became effective for us on July 1, 2002, and had the following
impacts:  
    
    We reclassified approximately $1,350,000 of unamortized
workforce in place intangible assets, net of
the associated deferred income taxes, into goodwill.
    
    After the reclassification noted above, goodwill was no longer
amortized.
    
    We performed a transitional impairment test as of July 1,
2002. This impairment test requires us to (1) identify its
reporting units, (2) determine the carrying value of each reporting
unit by assigning assets and liabilities, including existing
goodwill and intangible assets, to those reporting units, and (3)
determine the fair value of each reporting unit. If the carrying
value of any reporting unit exceeds its fair value, then the amount
of any goodwill impairment will be determined through a fair value
analysis of each of the assigned assets (excluding goodwill) and
liabilities. -52-




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We recorded a charge of $2,894,000 for impairment of goodwill associated
with our i-Solutions reporting unit upon the adoption of SFAS 142. This charge
is reflected as a cumulative effect of a change in accounting principle in the
accompanying Consolidated Statement of Operations for the year ended June 30,
2003. Following the transitional impairment test, our goodwill balances are
subject to annual impairment tests using the same process described above. We
perform our annual evaluation under the requirements of SFAS 142 as of April 30
each year. Refer to Note 6 of our Consolidated Financial Statements where the
results of our annual impairment test are discussed. In November 2002, FASB Interpretation 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45), was issued. This interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The initial recognition and initial measurement provisions
of FIN 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The following is a summary of agreements that
we determined to be within the scope of FIN 45: (1) We warrant that our software products will perform in all
material respects in accordance with our standard published
specifications in effect at the time of delivery of the licensed products
to the customer for 90 days. Additionally, we warrant that our services
will be performed consistent with generally accepted industry standards
or specific service levels through completion of the agreed upon
services. If necessary, we would provide for the estimated cost of
product and service warranties based on specific warranty claims and
claim history, however, we have not incurred significant recurring
expense under our product or service warranties. As a result, we believe
the estimated liabilities related to these agreements are not material. (2) We guarantee the obligations of one of our wholly owned
subsidiaries. See Note 8 of our Consolidated Financial Statements. In December 2003, the FASB issued FIN 46R Consolidation of Variable
Interest Entities (VIE) to address the consolidation issues around certain
types of entities, including special purpose entities. FIN 46R requires
a variable interest entity to be consolidated if our variable interest (i.e.,
investment in the entity) will absorb a majority of the entitys expected
losses and/or residual returns if they occur. Application of this
interpretation was required in financial statements of public entities that
have interests in variable interest entities or potential variable interest
entities for periods ending after December 15, 2003. The adoption of this
interpretation had no impact on our financial position or results of operations
for the year ended June 30, 2004. In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Statement 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003. The
adoption of this statement had no impact on our results of operations or
financial position for the year ended June 30, 2004. In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
SFAS 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the statement and still
existing at the beginning of the interim period of adoption. The adoption of
this statement had no impact on our results of operations or financial position
for the year ended June 30, 2004. In November 2002, the EITF reached a consensus on Issue 00-21, Multiple
Deliverable Revenue Arrangements. EITF 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. It also addresses when and how an arrangement
involving multiple deliverables should be divided into separate units of
accounting. The guidance in EITF 00-21 is effective for revenue -53-




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arrangements entered into in fiscal periods beginning after June 15, 2003, with
early application permitted. Companies may elect to report the change in
accounting as a cumulative effect of a change in accounting principle in
accordance with APB Opinion 20, Accounting Changes and SFAS 3, Reporting
Accounting Changes in Interim Financial Statements (an amendment of APB Opinion
28). We adopted the provisions of EITF 00-21 for all revenue arrangements
entered into after June 30, 2003. The adoption of EITF 00-21 did not have an
impact on our financial position, results of operations or liquidity. In January 2003, the EITF reached a consensus on Issue
03-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments
which set out to provide guidance on the meaning of other-than-temporary
impairment and its application to investments classified as either
available-for-sale or held-to-maturity under SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities (Including Individual Securities and
Investments in Mutual Funds), and investments accounted for under the cost
method or the equity method. In subsequent discussions, the EITF reached a
consensus that certain quantitative and qualitative disclosures should be
required for debt and marketable equity securities classified as
available-for-sale or held-to-maturity under SFAS 115 that are impaired at the
balance sheet date but for which an other-than-temporary impairment has not
been recognized. EITF 03-1 became effective for fiscal years ending after
December 15, 2003. The required disclosures pursuant to EITF 03-1 are
included in Note 3 of our Consolidated Financial Statements. 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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Critical accounting policies are those policies
that are both important to the portrayal of our financial condition and results
of operations, and they require our most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. We believe the policies and estimates
described below relating to intangible assets, equity instruments issued to
customers, and deferred income taxes are our critical accounting policies. Discussion with the Audit Committee of the Board of Directors.In
determining which of our accounting policies warranted disclosure as critical
in nature, our senior financial management team prepares an analysis of our
accounting policies and reviewed the policies in detail with our Audit
Committee. After discussing the level of management judgment required to
comply with our accounting policies, we agree with our Audit Committee that the
following accounting policies are deemed to be critical in nature and should be
disclosed as such. Accounting for Goodwill.Over the past several years, we have acquired a
number of businesses and the electronic billing and payment assets of Bank of
America, which resulted in significant goodwill balances. As of June 30, 2004,
the balance of goodwill on our balance sheet totaled $613.0 million and is
spread across our three business segments as follows:  
    
    Electronic Commerce of $578.7 million;
    
    Software of $22.9 million; and
    
    Investment Services of $11.4 million. Upon adoption of SFAS 142, we were required to perform a transitional
impairment test related to our goodwill balances. We performed the test as of
July 1, 2002. During the quarter ended September 30, 2002, we recorded a
transitional goodwill impairment loss of $2.9 million related to the
i-Solutions reporting unit of the Software segment. Subsequent to the initial
adoption of SFAS 142, annual impairment tests were performed in 2003 and 2004.
The annual impairment test in 2003 resulted an additional impairment of $6.0
million related to the i-Solutions reporting unit of the Software segment. Our
2004 annual impairment analysis resulted in our Electronic Commerce, Investment
Services, ACH/CFACS and i-Solutions reporting units passing the impairment
test, and as a result, no additional testing was required. However, a decline
in the expected cash flows or the estimated terminal value in the future could
lead to additional goodwill impairment losses. Similarly, an increase in the
discount rate (weighted average cost of capital) could also result in
additional goodwill impairment. -54-




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Intangible Assets Exclusive of Goodwill.Over the past several years, we
have acquired a number of businesses and the electronic billing and payment
assets of Bank of America, which resulted in significant non-goodwill related
intangible assets. As of June 30, 2004, the balance of such intangible assets
on our balance sheet totaled $295.6 million and is spread across our three
business segments as follows:  
    
    Electronic Commerce of $289.9 million;
    
    Software of $3.4 million; and
    
    Investment Services of $2.3 million. We adopted SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets on July 1, 2002, which replaced SFAS 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of among other authoritative standards. During the year ended June 30, 2004, there were no events that provided a
reason to believe any of our non-goodwill-related intangible assets were
impaired. Likewise, our annual test for the impairment of goodwill provided no
indication of impairment. During the year ended June 30, 2003, there were no events that provided a
reason to believe any of our non-goodwill-related intangible assets were
impaired. However, our annual test for the impairment of goodwill caused us to
perform additional procedures to test the recoverability of intangible assets
within our i-Solutions reporting unit. We first tested for the recoverability
of our capitalized software. Using the guidance of SFAS 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, we
compared the undiscounted net realizable value for projected i-Solutions sales
for the period representing the remaining useful life of the capitalized
software intangible asset. Because the undiscounted net realizable value
exceeded the carrying value of the asset, no impairment was indicated. We then
tested for impairment of all intangible assets other than goodwill and
capitalized software under the terms of SFAS 144. The undiscounted cash flows
from our i-Solutions projections were lower than the carrying value of our
intangible assets and, as a result, we recorded a charge of $4.2 million to
write down to fair value our customer base asset, which was the only remaining
intangible asset. A 10% swing in our cash flow projections, either up or down,
would not have materially impacted the amount of the charge that we recorded. Through June 30, 2002, we evaluated our intangible assets for impairment
whenever indicators of impairment existed. SFAS 121 required that if the sum
of the future cash flows expected to result from a companys asset,
undiscounted and without interest charges, is less than the reported value of
the asset, impairment must be recognized in the financial statements. The
amount of impairment to recognize is calculated by subtracting the fair value
of the asset from the reported value of the asset. In our Software segment, we reviewed our i-Solutions intangible assets for
impairment during the quarter ended December 31, 2001, due to a trend in
lower-than-expected license sales during the extended recessionary economy. We
determined that the book value of intangible assets within i-Solutions exceeded
the undiscounted sum of the expected future cash flows from the assets related
to the i-Solutions business unit, which indicated that the intangible assets
were impaired. The actual amount of impairment was then determined by
subtracting the fair value of the expected cash flows from the i-Solutions
business unit from the related long-lived assets. As a result, we recorded an
impairment charge of $107.4 million against the balance of i-Solutions goodwill
in the quarter ended December 31, 2001. We applied judgment in developing
projections of future cash flows from our i-Solutions business. Our
projections included, but were not limited to, expectations of product sales
and related future product maintenance revenues, cost of sales, and other
operating expenses supporting this business five years into the future.
Additionally, we estimated a terminal value, which represented the present
value of future cash flow beyond the five-year period. Finally, we assumed a
discount rate that we believed fairly represented the risk-free rate and a risk
premium appropriate for this business. Variances from our projected cash
flows, and the related terminal value, could have had a significant impact on
the amount of the impairment charge we recorded. If we had assumed a 10%
increase in our estimated annual cash flows from the i-Solutions business unit,
we would have passed the SFAS 121 undiscounted cash flow test and not recorded
an impairment charge at all. If, however, we reduced our estimated annual cash
flows for the i-Solutions business unit by 10%, our impairment charge would
have increased by approximately $3.6 million. -55-




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In our Electronic Commerce segment, we reviewed our TransPoint related
technology assets for impairment during the quarter ended December 31, 2001,
due to the termination of a maintenance agreement for this technology from the
last of our international partners and an evaluation of the service potential
of the related technology assets against our current and future initiatives.
We determined that there was no alternative future use for two of the
technology assets, and recorded a charge of $47.7 million to retire these
assets. The retirement of the TransPoint technology assets was an indicator of
potential impairment for other intangible assets associated with this
acquisition. SFAS 121 required us to test for impairment at the lowest level
of separately identifiable cash flows, which we determined in this case, was
our Electronic Commerce Division. Because the sum of the undiscounted future
cash flows exceeded the long-lived assets book value, there was no impairment.
There were several areas of management judgment used in performing this
analysis. Initially, our projections of future cash flow from the Electronic
Commerce Division required managements judgment regarding our expectations of
future revenues, costs, and other operating expenses supporting this business
five years into the future. Additionally, we estimated a terminal value, which
represented the present value of future cash flow beyond the five-year period.
Finally, we assumed a discount rate that we believed fairly represented the
risk-free rate and a risk premium appropriate for this business. Variances,
both positive and negative, from our projected cash flows, and the related
terminal value, would not have had a significant impact on our analysis. If
we had assumed a 10% increase in our estimated annual cash flows from the
Electronic Commerce Division, we would have simply passed the SFAS 121
undiscounted cash flow test by a greater margin. If we had assumed a 10%
reduction in our estimated annual cash flows we still would have passed the
undiscounted cash flow test, and therefore, not incurred an impairment charge. Equity Instruments Issued to Customers.Within our Electronic Commerce
segment, from time to time, we have determined it appropriate to issue warrants
to certain of our customers to provide an incentive for them to achieve
mutually beneficial long-term objectives. These objectives can take the form
of performance against long-term growth targets, such as the number of the
third-partys customers that become active bill paying subscribers of our
service or the number of bills distributed electronically to the third partys
customers, or more relationship-oriented, such as simply remaining a customer
at a specified future date. Accounting standards for these types of warrants
require us to record a charge when it becomes probable that the warrants will
vest. For milestone-based warrants the amount of the charge would be the fair
value of the portion of the warrants earned by the customer based on their
progress towards achieving the milestone(s) required to vest in the warrants.
At each reporting date, we would determine the current fair value of the
portion of the warrants previously earned and true-up the charges previously
recorded. In addition, we would record a charge for the fair value of the
additional portion of the warrants earned during that period, again based on
the customers progress towards the vesting milestones. This would continue
until the warrants vest, at which time a final fair value is determined and the
charge is adjusted accordingly. At the time we issued these warrants,
accounting standards in place indicated that the charge for these type warrants
be recorded as an expense. Since then, EITF 01-09, Accounting for
Consideration by a Vendor to a Customer (Including a Reseller of the Vendors
Products), became effective. This guidance became effective for financial
statements issued after December 15, 2001, and is retroactively applied to
existing equity instruments previously issued. It requires that the charge for
the fair value of these types of warrants be recorded against revenue up to the
cumulative amount of revenue recognized for a customer instead of to expense as
was previously the case. Management must use judgment in determining when the
vesting of a warrant becomes probable. As of June 30, 2004, we
had 5.0 million
unvested warrants outstanding that could potentially result in significant
charges against our revenue, which expire in October 2010. Deferred Income Taxes.As of June 30, 2004, we have $63.7 million of net
deferred income tax assets recorded on our balance sheet, $49.1 million of
which are recorded in the current asset section of our balance sheet, and $14.6
million of which are netted against long-term deferred tax liabilities.
Deferred income tax assets represent future tax benefits we expect to be able
to apply against future taxable income, and consist primarily of tax credits
and net operating loss benefits carried forward to future periods. Our ability
to utilize the deferred tax benefits is dependent upon our ability to generate
future taxable income. SFAS 109, Accounting for Income Taxes, requires us to
record a valuation allowance against any deferred income tax benefits that we
believe may expire before we generate sufficient taxable income to use them.
If we were to record a deferred tax benefit valuation allowance, it would have
the effect of increasing our tax expense thereby decreasing our net income and
decreasing our deferred tax asset balance on our balance sheet. We use current
estimates of future taxable income to determine whether a valuation allowance
is needed. Projecting our future taxable income requires us to use significant
judgment regarding the expected future revenues and expenses in each of our
business segments. In addition, we must assume that changes in tax laws will
not materially impact the expected tax liability associated with our expected
taxable -56-




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income. In fiscal 2004 we determined that it was more likely than not that
certain of our foreign tax credits would not be utilized in the future.
Accordingly, we established a valuation allowance in the amount of $1.1 million
to reduce our net tax credit carryforwards to their estimated net realizable
value. While our current projections indicate we will be able to fully utilize
our remaining deferred income tax benefits, should the economic recession
continue for an extended period of time, or competitive pressures or other
business risks result in a significant variance to our projected taxable
income, we could be required to establish a valuation allowance for our
remaining deferred tax asset balances. Inflation We believe the effects of inflation have not had a significant impact on
our results of operations. Recent Developments In preparing this Annual Report on Form 10-K, we determined that certain
deferred tax assets which are expected to be utilized during fiscal 2005 were
not included in current assets in the balance sheet included in our press
release furnished on Form 8-K dated August 3, 2004. We have appropriately
classified all tax credits and carryforwards we expect to utilize in fiscal
2005 as current assets in this Annual Report on Form 10-K. On August 20, 2004, we entered into a senior secured revolving credit
facility that provides for up to $185.0 million in revolving credit loans,
including swingline loans and the issuance of letters of credit. The revolving
credit facility matures in three years and borrowings are subject to periodic
payments and bear interest at one of two rates, at our option; either Prime
plus 0% to 1% or LIBOR plus 1% to 2%. Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995 Except for the historical information contained herein, the matters
discussed in our Annual Report on Form 10-K include certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, 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 Annual Report
and in other statements we make involve risks and uncertainties including,
without limitation, the factors set forth under the caption Business 
Business Risks included elsewhere in this Annual Report on Form 10-K and other
factors detailed from time to time in our filings with the Securities and
Exchange Commission. One or more of these factors have affected, and in the
future could affect, our businesses and financial results in the future and
could cause actual results to differ materially from plans and projections.
Although we believe that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate. Therefore, there can be no assurance that the forward-looking
statements included in this Annual Report on Form 10-K will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved. All forward-looking statements made in
this Annual Report on Form 10-K are based on information presently available to
our management. We assume no obligation to update any forward-looking
statements. -57-




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Item 7A. Quantitative and Qualitative Disclosures About Market Risk. With the acquisition of BlueGill in April 2000, we obtained operations in
Canada, and with the acquisition of HelioGraph in November 2003, we now
maintain multiple offices in the United Kingdom. As a result, we have assets
and liabilities outside the United States that are subject to fluctuations in
foreign currency exchange rates. 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 at this time. Therefore, we have not yet engaged in forward
foreign exchange hedges and other similar instruments to mitigate this
immaterial risk. While our international sales represented approximately two percent of our
revenue for the year ended June 30, 2004, we market, sell and license our
products throughout the world. As a result, our future revenue could be
somewhat affected by weak economic conditions in foreign markets that could
reduce demand for our products. Our exposure to interest rate risk includes the yield we earn on invested
cash, cash equivalents and investments and interest-based revenue earned on
products such as our ABT product. Our outstanding lease obligations carry
fixed interest rates. As part of processing certain types of transactions, we earn interest from
the time money is collected from our customers until the time payment is made
to merchants. These revenues, which are generated from trust account balances
not included in our consolidated balance sheet, are included in processing and
servicing revenue. We use derivative financial instruments to manage the
variability of cash flows related to this interest rate sensitive portion of
processing and servicing revenue. Accordingly, we enter into interest rate
swaps to effectively fix the interest rate on a portion of our interest rate
sensitive revenue. As of June 30, 2004, we entered into interest rate swap
transactions totaling $75.0 million. The swaps are designated as cash flow hedges, and they are recorded in the
balance sheet at fair value. Because of the high degree of effectiveness
between the interest rate swaps and underlying interest rate sensitive revenue,
fluctuations in the fair value of the swaps are generally offset by the changes
resulting from the variability of cash flows from the underlying interest rate
sensitive revenue. A 1% increase in interest rates would decrease the fair
value of derivatives by about $1.4 million. Such decline in the fair value of
the swap would decrease the cash flows of the underlying hedged interest rate
sensitive revenue by 100 basis points. Our investment policy does not allow us to enter into derivative financial
instruments for speculative or trading purposes. We maintain a system of
internal controls that includes policies and procedures covering the
authorization, reporting and monitoring of derivative activity. Further, the
policy allows us to enter into derivative contracts only with counter-parties
that meet certain credit rating and/or financial stability criteria. The
counter-parties to these contracts are major financial institutions, and we
believe the risk of loss is remote. 
 Item 8. Financial Statements and Supplementary Data. The Independent Auditors Report of Deloitte & Touche LLP and the
Consolidated Financial Statements of the Company as of June 30, 2004 and 2003,
and for each of the years in the three year period ended June 30, 2004, follow: -58-




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
CheckFree Corporation and Subsidiaries
Norcross, Georgia We have audited the accompanying consolidated balance sheets of CheckFree
Corporation and Subsidiaries (the Company) as of June 30, 2004 and 2003, and
the related consolidated statements of operations, stockholders equity, and
cash flows for each of the three years in the period ended June 30, 2004. Our
audits also included the consolidated financial statement schedule listed in
the index at item 15. These financial statements and financial statement
schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at June 30, 2004 and
2003, and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 2004, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein. As described in Note 6 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, effective July 1, 2002. /s/ Deloitte & Touche LLP
Atlanta, Georgia
September 3, 2004 -59-




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CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS June 30,2004
    
    2003(In thousands, except share data)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    134,832
    
    
    $
    209,358Investments
    
    
    73,197
    
    
    
    69,674Settlement assets
    
    
    82,520
    
    
    
    Restricted investments
    
    
    
    
    
    
    3,000Accounts receivable, net
    
    
    85,217
    
    
    
    55,505Accounts receivable, related parties
    
    
    26,632
    
    
    
    26,121Prepaid expenses and other assets
    
    
    14,727
    
    
    
    9,708Deferred income taxes
    
    
    49,129
    
    
    
    41,202Total current assets
    
    
    466,254
    
    
    
    414,568PROPERTY AND EQUIPMENT, Net
    
    
    91,912
    
    
    
    94,853OTHER ASSETS:Capitalized software, net
    
    
    11,512
    
    
    
    23,612Goodwill, net
    
    
    612,971
    
    
    
    523,231Strategic agreements, net
    
    
    271,390
    
    
    
    395,332Other intangible assets, net
    
    
    21,670
    
    
    
    4,801Investments
    
    
    68,344
    
    
    
    121,615Other noncurrent assets
    
    
    4,396
    
    
    
    9,258Investment in joint venture
    
    
    483
    
    
    
    Total other assets
    
    
    990,766
    
    
    
    1,077,849Total assets
    
    $
    1,548,932
    
    
    $
    1,587,270LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    12,234
    
    
    $
    9,705Settlement obligations
    
    
    82,611
    
    
    
    Accrued liabilities
    
    
    67,211
    
    
    
    59,140Current portion of long-term obligations
    
    
    4,192
    
    
    
    4,894Deferred revenue
    
    
    36,193
    
    
    
    36,543Total current liabilities
    
    
    202,441
    
    
    
    110,282ACCRUED RENT AND OTHER
    
    
    4,313
    
    
    
    3,419DEFERRED INCOME TAXES
    
    
    17,492
    
    
    
    28,728CAPITAL LEASE AND LONG-TERM OBLIGATIONS  Less current portion
    
    
    25,504
    
    
    
    4,192CONVERTIBLE SUBORDINATED NOTES
    
    
    
    
    
    
    172,500COMMITMENTS (Note 11)STOCKHOLDERS EQUITY:Preferred stock  50,000,000 authorized shares, $0.01 par value; no amounts issued or outstanding
    
    
    
    
    
    
    Common stock  500,000,000 authorized shares, $0.01 par value; issued and outstanding 90,164,926 and 89,266,370 shares, respectively
    
    
    902
    
    
    
    893Additional paid-in-capital
    
    
    2,471,062
    
    
    
    2,449,374Accumulated
other comprehensive income (loss)
    
    
    (728
    )
    
    
    471Accumulated deficit
    
    
    (1,172,054
    )
    
    
    (1,182,589
    )Total stockholders equity
    
    
    1,299,182
    
    
    
    1,268,149Total
liabilities and stockholders equity
    
    $
    1,548,932
    
    
    $
    1,587,270
 See Notes to Consolidated
Financial Statements -60-




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CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended June 30,2004
    
    2003
    
    2002(In thousands, except share data)REVENUES:Processing and servicing:Third parties
    
    $
    488,705
    
    
    $
    397,435
    
    
    $
    339,424Related parties
    
    
    41,500
    
    
    
    78,981
    
    
    
    82,813Total processing and servicing
    
    
    530,205
    
    
    
    476,416
    
    
    
    422,237License fees
    
    
    23,931
    
    
    
    24,163
    
    
    
    25,020Maintenance fees
    
    
    28,271
    
    
    
    25,733
    
    
    
    24,298Other
    
    
    24,057
    
    
    
    25,334
    
    
    
    18,922Total revenues
    
    
    606,464
    
    
    
    551,646
    
    
    
    490,477EXPENSES:Cost of processing, servicing and support
    
    
    244,811
    
    
    
    237,978
    
    
    
    262,105Research and development
    
    
    66,288
    
    
    
    52,717
    
    
    
    55,172Sales and marketing
    
    
    51,910
    
    
    
    57,170
    
    
    
    58,030General and administrative
    
    
    45,759
    
    
    
    39,030
    
    
    
    43,687Depreciation and amortization
    
    
    177,582
    
    
    
    226,638
    
    
    
    435,565In-process research and development
    
    
    324
    
    
    
    
    
    
    
    Impairment of intangible assets
    
    
    
    
    
    
    10,228
    
    
    
    155,072Reorganization charge
    
    
    
    
    
    
    1,405
    
    
    
    16,365Total expenses
    
    
    586,674
    
    
    
    625,166
    
    
    
    1,025,996INCOME (LOSS) FROM OPERATIONS
    
    
    19,790
    
    
    
    (73,520
    )
    
    
    (535,519
    )OTHER:Equity in net loss of joint venture
    
    
    (593
    )
    
    
    
    
    
    
    Interest income
    
    
    5,697
    
    
    
    7,327
    
    
    
    8,486Interest expense
    
    
    (13,164
    )
    
    
    (12,975
    )
    
    
    (12,788
    )Loss on investments
    
    
    
    
    
    
    (3,228
    )
    
    
    INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVEEFFECT OF ACCOUNTING CHANGE
    
    
    11,730
    
    
    
    (82,396
    )
    
    
    (539,821
    )INCOME TAX EXPENSE (BENEFIT)
    
    
    1,195
    
    
    
    (33,106
    )
    
    
    (98,871
    )INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
    
    
    10,535
    
    
    
    (49,290
    )
    
    
    (440,950
    )CUMULATIVE EFFECT OF ACCOUNTING CHANGE
    
    
    
    
    
    
    (2,894
    )
    
    
    NET INCOME (LOSS)
    
    $
    10,535
    
    
    $
    (52,184
    )
    
    $
    (440,950
    )BASIC INCOME (LOSS) PER SHARE:Income (loss) before cumulative effect
of accounting change
    
    $
    0.12
    
    
    $
    (0.56
    )
    
    $
    (5.04
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (0.03
    )
    
    
    Net income (loss)
    
    $
    0.12
    
    
    $
    (0.59
    )
    
    $
    (5.04
    )Weighted average number of shares
    
    
    89,869,760
    
    
    
    88,807,069
    
    
    
    87,452,339DILUTED INCOME (LOSS) PER SHARE:Income (loss) before cumulative effect
of accounting change
    
    $
    0.11
    
    
    $
    (0.56
    )
    
    $
    (5.04
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (0.03
    )
    
    
    Net income (loss)
    
    $
    0.11
    
    
    $
    (0.59
    )
    
    $
    (5.04
    )Weighted average number of shares
    
    
    91,864,490
    
    
    
    88,807,069
    
    
    
    87,452,339
 See Notes to Consolidated
Financial Statements -61-




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##### Table of Contents



CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY Number of
    
    Common
    
    Additional
    
    Accumulated OtherShares of
    
    Stock
    
    Paid-In
    
    ComprehensiveCommon Stock
    
    at Par
    
    Capital
    
    Income (Loss)(In thousands, except share data)BALANCE  JUNE 30, 2001
    
    
    86,928,475
    
    
    $
    869
    
    
    $
    2,420,957
    
    
    $
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options and warrants exercised
    
    
    808,163
    
    
    
    9
    
    
    
    2,964
    
    
    
    Tax benefit associated with exercise
of stock options and warrants
    
    
    
    
    
    
    
    
    
    
    568
    
    
    
    Employee stock purchases
    
    
    216,369
    
    
    
    2
    
    
    
    4,453
    
    
    
    401(k) match
    
    
    132,887
    
    
    
    1
    
    
    
    3,620
    
    
    
    Impact of warrants
    
    
    
    
    
    
    
    
    
    
    2,748
    
    
    
    Amortization of unearned
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BALANCE  JUNE 30, 2002
    
    
    88,085,894
    
    
    
    881
    
    
    
    2,435,310
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized gain on available-for-sale
securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    471Total comprehensive lossStock options and warrants exercised
    
    
    532,841
    
    
    
    5
    
    
    
    6,942
    
    
    
    Tax benefit associated with exercise
of stock options and warrants
    
    
    
    
    
    
    
    
    
    
    1,550
    
    
    
    Employee stock purchases
    
    
    257,533
    
    
    
    3
    
    
    
    3,291
    
    
    
    401(k) match
    
    
    402,102
    
    
    
    4
    
    
    
    3,225
    
    
    
    Return of restricted stock
    
    
    (12,000
    )
    
    
    
    
    
    
    (300
    )
    
    
    Impact of warrants
    
    
    
    
    
    
    
    
    
    
    (644
    )
    
    
    BALANCE  JUNE 30, 2003
    
    
    89,266,370
    
    
    
    893
    
    
    
    2,449,374
    
    
    
    471Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized loss on available-for-sale
securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (709
    )Unrealized gain on foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54Unrealized loss on cash flow hedges, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (544
    )Total comprehensive incomeStock options exercised
    
    
    571,844
    
    
    
    6
    
    
    
    7,150
    
    
    
    Tax benefit associated with exercise
of stock options
    
    
    
    
    
    
    
    
    
    
    2,621
    
    
    
    Employee stock purchases
    
    
    176,868
    
    
    
    2
    
    
    
    3,299
    
    
    
    401(k) match
    
    
    149,844
    
    
    
    1
    
    
    
    6,213
    
    
    
    Equity based compensation
    
    
    
    
    
    
    
    
    
    
    2,405
    
    
    
    BALANCE  JUNE 30, 2004
    
    
    90,164,926
    
    
    $
    902
    
    
    $
    2,471,062
    
    
    $
    (728
    )
 See Notes to Consolidated
Financial Statements -62-




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##### Table of Contents



CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY TotalUnearned
    
    Accumulated
    
    Stockholders'Compensation
    
    Deficit
    
    Equity(In thousands, except share data)BALANCE  JUNE 30, 2001
    
    $
    (185
    )
    
    $
    (689,455
    )
    
    $
    1,732,186Net loss
    
    
    
    
    
    
    (440,950
    )
    
    
    (440,950
    )Stock options and warrants exercised
    
    
    
    
    
    
    
    
    
    
    2,973Tax benefit associated with exercise of stock options and warrants
    
    
    
    
    
    
    
    
    
    
    568Employee stock purchases
    
    
    
    
    
    
    
    
    
    
    4,455401(k) match
    
    
    
    
    
    
    
    
    
    
    3,621Impact of warrants
    
    
    
    
    
    
    
    
    
    
    2,748Amortization of unearned
compensation
    
    
    60
    
    
    
    
    
    
    
    60BALANCE  JUNE 30, 2002
    
    
    (125
    )
    
    
    (1,130,405
    )
    
    
    1,305,661Net loss
    
    
    
    
    
    
    (52,184
    )
    
    
    (52,184
    )Unrealized gain on available-for-sale securities, net of tax
    
    
    
    
    
    
    
    
    
    
    471Total comprehensive loss
    
    
    
    
    
    
    
    
    (51,713
    )Stock options and warrants exercised
    
    
    
    
    
    
    
    
    
    
    6,947Tax benefit associated with exercise of stock options and warrants
    
    
    
    
    
    
    
    
    
    
    1,550Employee stock purchases
    
    
    
    
    
    
    
    
    
    
    3,294401(k) match
    
    
    
    
    
    
    
    
    
    
    3,229Return of restricted stock
    
    
    125
    
    
    
    
    
    
    
    (175
    )Impact of warrants
    
    
    
    
    
    
    
    
    
    
    (644
    )BALANCE  JUNE 30, 2003
    
    
    
    
    
    
    (1,182,589
    )
    
    
    1,268,149Net income
    
    
    
    
    
    
    10,535
    
    
    
    10,535Unrealized loss on available-for-sale securities, net of tax
    
    
    
    
    
    
    
    
    
    
    (709
    )Unrealized gain on foreign currency translation
    
    
    
    
    
    
    
    
    
    
    54Unrealized loss on cash flow hedges, net of tax
    
    
    
    
    
    
    
    
    
    
    (544
    )Total comprehensive income
    
    
    
    
    
    
    
    
    9,336Stock options exercised
    
    
    
    
    
    
    
    
    
    
    7,156Tax benefit associated with exercise of stock options
    
    
    
    
    
    
    
    
    
    
    2,621Employee stock purchases
    
    
    
    
    
    
    
    
    
    
    3,301401(k) match
    
    
    
    
    
    
    
    
    
    
    6,214Equity based compensation
    
    
    
    
    
    
    
    
    
    
    2,405BALANCE  JUNE 30, 2004
    
    $
    
    
    
    $
    (1,172,054
    )
    
    $
    1,299,182
 See Notes to Consolidated
Financial Statements -63-




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##### Table of Contents



CHECKFREE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended June 30,2004
    
    2003
    
    2002(In thousands)OPERATING ACTIVITIES:Net income (loss)
    
    $
    10,535
    
    
    $
    (52,184
    )
    
    $
    (440,950
    )Adjustments
to reconcile net income (loss) to net cash providedby
operating activities:Equity in net loss of joint venture
    
    
    593
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    177,582
    
    
    
    226,638
    
    
    
    435,565Deferred income tax benefit
    
    
    (12,930
    )
    
    
    (35,147
    )
    
    
    (99,152
    )Impairment of intangible assets
    
    
    
    
    
    
    10,228
    
    
    
    155,072Impact of warrants
    
    
    
    
    
    
    (644
    )
    
    
    2,748Loss on investments
    
    
    
    
    
    
    3,228
    
    
    
    Equity-based compensation
    
    
    5,569
    
    
    
    
    
    
    
    Cumulative effect of accounting change
    
    
    
    
    
    
    2,894
    
    
    
    Net loss on disposition of property and equipment
    
    
    487
    
    
    
    471
    
    
    
    55Non-cash portion of reorganization charge
    
    
    
    
    
    
    
    
    
    
    1,640Write off of in-process research and development
    
    
    324
    
    
    
    
    
    
    
    Write off of convertible notes issuance costs
    
    
    2,407
    
    
    
    
    
    
    
    Change in certain assets and liabilities (net of acquisitions and
dispositions):Settlement assets and obligations
    
    
    (193
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    (12,874
    )
    
    
    6,404
    
    
    
    788Prepaid expenses and other
    
    
    3,495
    
    
    
    (2,604
    )
    
    
    2,676Accounts payable
    
    
    11
    
    
    
    (344
    )
    
    
    (9,035
    )Accrued liabilities and other
    
    
    (2,308
    )
    
    
    4,720
    
    
    
    (1,035
    )Deferred revenue
    
    
    (1,639
    )
    
    
    (5,867
    )
    
    
    (2,503
    )Net cash provided by operating activities
    
    
    171,059
    
    
    
    157,793
    
    
    
    45,869INVESTING ACTIVITIES:Purchase of property and software
    
    
    (23,482
    )
    
    
    (24,324
    )
    
    
    (21,980
    )Proceeds from sale of assets
    
    
    
    
    
    
    580
    
    
    
    Capitalization of software development costs
    
    
    (2,817
    )
    
    
    (4,296
    )
    
    
    (4,435
    )Purchases of investments  held-to-maturity
    
    
    (511
    )
    
    
    (38,522
    )
    
    
    (100,715
    )Proceeds from maturities of investments  held-to-maturity
    
    
    34,253
    
    
    
    118,527
    
    
    
    72,329Purchases of investments  available-for-sale
    
    
    (240,919
    )
    
    
    (137,921
    )
    
    
    Proceeds from maturities of investments  available-for-sale
    
    
    255,972
    
    
    
    24,936
    
    
    
    Purchase of other investments
    
    
    (74
    )
    
    
    (152
    )
    
    
    (388
    )Proceeds from maturities of investments  other
    
    
    11
    
    
    
    
    
    
    
    Decrease (increase) in restricted investments
    
    
    3,000
    
    
    
    
    
    
    
    (3,000
    )Purchase of businesses, net of cash acquired
    
    
    (122,322
    )
    
    
    
    
    
    
    Investment in joint venture
    
    
    (1,212
    )
    
    
    
    
    
    
    Changes in other assets
    
    
    (5,314
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (103,415
    )
    
    
    (61,172
    )
    
    
    (58,189
    )FINANCING ACTIVITIES:Principal payments under capital lease and other
long-term obligations
    
    
    (5,575
    )
    
    
    (12,212
    )
    
    
    (3,553
    )Proceeds from stock options exercised
    
    
    7,156
    
    
    
    6,947
    
    
    
    2,285Proceeds from employee stock purchase plan
    
    
    3,453
    
    
    
    2,993
    
    
    
    3,787Redemption of convertible notes
    
    
    (172,500
    )
    
    
    
    
    
    
    Increase in long-term deposits
    
    
    25,000
    
    
    
    
    
    
    
    Proceeds from sale of stock and exercise of warrants
    
    
    
    
    
    
    
    
    
    
    688Net cash provided by (used in) financing activities
    
    
    (142,466
    )
    
    
    (2,272
    )
    
    
    3,207Effect of exchange rate changes on cash and cash equivalents
    
    
    296
    
    
    
    
    
    
    
    NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    (74,526
    )
    
    
    94,349
    
    
    
    (9,113
    )CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    209,358
    
    
    
    115,009
    
    
    
    124,122End of period
    
    $
    134,832
    
    
    $
    209,358
    
    
    $
    115,009
 See Notes to Consolidated
Financial Statements -64-




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization- CheckFree Corporation (the Company) is the parent company of
CheckFree Services Corporation (CheckFree Services), the principal operating
company of the business. In April 2000, CheckFree Services changed its name
from CheckFree Corporation to CheckFree Services Corporation. Following that
change, in August 2000, CheckFree Holdings Corporation changed its name to
CheckFree Corporation. CheckFree Services was organized in 1981 and is a
leading provider of financial electronic commerce products and services. See
Note 20 for a description of the Companys business segments. Principles of Consolidation- The accompanying consolidated financial
statements include the results of operations of the Company and its wholly
owned subsidiaries. The Companys majority owned subsidiary, CheckFree
Management Corporation, was merged into CheckFree Services Corporation
effective June 30, 2004. All significant intercompany transactions have been
eliminated. Use of Estimates- The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Cash and Cash Equivalents- The Company considers all highly liquid debt
instruments purchased with maturities of three months or less to be cash
equivalents. Investments- The Company has certain investments in marketable debt securities
that are classified as either available-for-sale or held-to-maturity in
accordance with SFAS 115, Accounting for Certain Investments in Debt and
Equity Securities, (SFAS 115). The Company began investing in
available-for-sale securities during the quarter ended September 30, 2002. All
new non-collateral securities purchased after September 1, 2002, have been
classified as available-for-sale. Held-to-maturity securities are carried at
amortized cost and are adjusted only for other-than-temporary declines in fair
value. Available-for-sale investments are recorded at fair value and changes
in fair value are recorded as unrealized gains and losses in accumulated other
comprehensive income, a component of stockholders equity. Restricted
investments represent amounts that are restricted as to their use in accordance
with leasing arrangements. The Company has certain other investments in equity and debt securities that
are accounted for under the cost method. Under the cost method of accounting,
investments are carried at cost and are adjusted only for other-than-temporary
declines in fair value, distributions of earnings and additional investments.
The Company periodically evaluates whether any declines in fair value of its
investments are other than temporary. In performing this evaluation, the
Company considers various factors including any decline in market price, where
available, the investees financial condition, results of operations, operating
trends and other financial ratios. -65-




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##### Table of Contents



The Company has received equity instruments in connection with agreements with
certain partners. In such cases, the Companys initial cost is determined
based on the estimated fair value of the equity instruments received.
Subsequent changes in the fair value of these equity instruments are accounted
for in accordance with the investment policies described above. During April 2004, the Company formed a joint venture, EBPP, Ltd., with BACS,
Ltd. in the United Kingdom. EBPP, Ltd. is designed to create an integrated
electronic billing and payment network for billers and banks in the United
Kingdom. During the fiscal year ended June 30, 2004, the Company invested $1.2
million in the joint venture out of an initial commitment of approximately
$3,150,000. If certain milestones are achieved, the Company may contribute an
additional $3,150,000 to the joint venture. The Company will account for the
investment in EBPP, Ltd. under the equity method. Settlement Assets and Obligations- Amounts receivable from the Companys
agents and clients, as well as amounts payable to the Companys agents and
clients associated with the Companys walk-in bill payment services, are
classified as settlement assets and obligations. The majority of these assets
and obligations result from timing differences between the Companys agents
collecting funds from the consumers making the payments and depositing the
funds collected into the Companys bank accounts. Settlement assets and
obligations arise due to the Companys reporting of transactions to its clients
prior to fulfilling the payment obligation. Concentrations of Credit Risk- Financial instruments that potentially subject
the Company to concentrations of credit risk consist of cash, investments and
trade accounts receivable. Excess cash is invested through banks, mutual funds
and brokerage houses primarily in highly liquid securities. The Company has
investment policies and procedures that limit any concentration of credit risk
with single issuers. With respect to accounts receivable, the Company does
not generally require collateral and believes that any credit risk is
substantially mitigated by the nature of our customers and reasonably short
collection terms. The Company maintains reserves for potential credit losses
on customer accounts when deemed necessary. Derivative
Financial Instruments - On July 1, 2000, the Company adopted SFAS
133, Accounting for Derivative Instruments and Hedging
Activities, as amended, which requires that all derivative financial instruments be
recognized as either assets or liabilities in the balance sheet. SFAS 133 requires the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are either offset against the
change in fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivatives change in
fair value is immediately recognized in earnings. Prior to
July 1, 2003, the Companys investment policy prohibited the use of
derivatives for trading or hedging purposes. Additionally, the Company
performed reviews of its contracts and determined that they did not contain any
embedded derivatives that require separate reporting and disclosure under
SFAS 133. As such, the adoption of SFAS 133 did not have a material impact on
the Companys financial position or results of operations for the years ended
June 30, 2003 and 2002. During
fiscal year 2004, the Company amended its investment policy to allow for
the use of derivative financial instruments in certain instances. This change
was implemented to manage the variability of cash flows related to interest
rate sensitive portions of processing and servicing revenue. The Company does
not enter into derivative financial instruments for speculative or trading
purposes. As required by SFAS 133, the Company records all derivatives on the balance
sheet at their fair value. As discussed further in Note 17, all of the
Companys derivative financial instruments have been designated as cash flow
hedges. Under SFAS 133, the effective portion of the changes in fair value of
these cash flow hedges are recorded as a component of accumulated other
comprehensive income within stockholders equity and are subsequently
recognized in earnings when the cash flows of the hedged item impact earnings.
The ineffective portion of changes in fair value is immediately recognized in
earnings. -66-




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##### Table of Contents



Property and Equipment- Property and equipment are stated at cost. Property
and equipment are depreciated using the straight-line method over the estimated
useful lives as follows: land improvements, building and building
improvements, 15 to 30 years; computer equipment, software and furniture, 18
months to seven years. Equipment under capital leases is amortized using the
straight-line method over the lesser of their estimated useful lives or the
terms of the leases. Leasehold improvements are amortized over the lesser of
the estimated useful lives or remaining lease periods. Capitalized Software - Capitalized software includes purchased technology
intangible assets associated with acquisitions and capitalized internal
development costs. Purchased technology intangibles are initially recorded
based on the fair value ascribed at the time of acquisition. Internal
development costs are capitalized in accordance with the provisions of either
SFAS 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed, or Statement of Position (SOP) 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. The
Company determines whether software costs fall under the provisions of SFAS 86
or SOP 98-1 and accounts for them as follows:  
    
    SFAS 86 - Software development costs incurred prior to the
establishment of technological feasibility are expensed as incurred.
Software development costs incurred after the technological
feasibility of the subject software product has been established are
capitalized in accordance with SFAS 86. Capitalized software costs
are amortized on a product-by-product basis using either the estimated
economic life of the product on a straight-line basis over three to
five years, or the current year gross product revenue to the current
and anticipated future gross product revenue, whichever is greater.
Unamortized software development costs in excess of estimated future
net realizable values from a particular product are written down to
estimated net realizable value.
    
    SOP 98-1 - Software costs incurred in the preliminary project stage
are expensed as incurred. Software costs incurred after the
preliminary project stage is complete, management has committed to the
project, and it is probable the software will be used to perform the
function intended are capitalized in accordance with SOP 98-1.
Capitalized software costs are amortized on a product-by-product basis
using the estimated economic life of the product on a straight-line
basis, generally three to five years. Capitalized software costs not
expected to be completed and placed in service are written down to
estimated fair value. Goodwill and Other Intangible Assets- Goodwill represents the excess of the
purchase price over the fair value of net assets acquired in business
combinations accounted for under the purchase method. Goodwill was amortized
on a straight-line basis over five to ten years prior to July 1, 2002.
Effective July 1, 2002, goodwill is no longer amortized. Other intangibles represent identifiable intangible assets purchased by the
Company in connection with business combinations. The costs of identified
intangible assets are generally amortized on a straight-line basis over periods
from eight months to ten years. The Company performs its
annual goodwill impairment review on April 30 of each year. No
indicators for impairment were evident during the review for fiscal year 2004. Impairment of Long-Lived Assets - In accordance with SFAS 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, (SFAS 144), effective July
1, 2002, long-lived assets are reviewed for impairment whenever events indicate
that their carrying amount may not be recoverable. In such reviews, estimated
undiscounted future cash flows associated with these assets or operations are
compared with their carrying value to determine if a write-down to fair value
is required (normally measured by the expected present value technique).
During the year ended June 30, 2003, the Company performed a review of certain
of its long-lived assets, determined that certain assets were impaired and
recorded a charge of $4,245,000 related to the impairment of other intangible
assets. The charge was included in the accompanying Consolidated Statement of
Operations (See Note 6 for a description of this review). Transaction Processing- In connection with the timing of the Companys
financial transaction processing, the Company is exposed to credit risk in the
event of nonperformance by other parties, such as returns. The Company
utilizes credit analysis and other controls to manage its credit risk exposure.
The Company also maintains a reserve for -67-




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future returns. This reserve is included in accrued
liabilities in the accompanying Consolidated Balance Sheets. Comprehensive Income- The Company reports comprehensive income in accordance
with SFAS 130, Reporting Comprehensive Income. The Statement requires
disclosure of total non-shareowner changes in equity and its components. Total
non-shareowner changes in equity include all changes in equity during a period
except those resulting from investments by and distributions to shareowners.
The components of other comprehensive income applicable to the Company are
unrealized gains or losses on the Companys available-for-sale securities and
derivative instruments, as well as unrealized foreign currency translation
differences. There were no components of other comprehensive income applicable
to the Company prior to June 30, 2002. The Company began investing in
available-for-sale securities during the quarter ended September 30, 2002, and
began using derivative instruments in fiscal year 2004. As of June 30, 2004,
unrealized foreign currency translation gains of $54,000, gross unrealized
gains of $449,000 offset by gross unrealized losses of $826,000 on the
Companys available-for-sale securities, net of deferred taxes of $139,000, and
the unrealized loss on interest rate swaps of $850,000, net of deferred taxes of
$306,000, have been recorded in the accompanying Consolidated Statement of
Stockholders Equity as a component of accumulated other comprehensive income. Stock-Based Compensation- The Company accounts for stock-based compensation in
accordance with the provisions of Accounting Principles Board (APB) Opinion
25, Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, compensation expense is not required to be recorded when stock
options are granted to employees as long as the exercise price is not less than
the fair market value of the stock when the option is granted, and in
connection with our Associate Stock Purchase Plan as long as the purchase price
is not less than 85% of the lower of the fair market value at the beginning or
end of each offer period. In October 1995, the Financial Accounting Standards
Board (FASB) issued SFAS 123, Accounting for Stock-Based Compensation.
SFAS 123 allows the Company to continue to follow the present APB Opinion 25
guidelines, but requires pro-forma disclosures of net income and earnings per
share as if the Company had adopted the provisions of the Statement. In
December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an Amendment of FASB Statement 123,
which provides alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. SFAS 148 requires prominent disclosure about the effects on
reported net income of an entitys accounting policy decisions with respect to
stock-based employee compensation and amends APB Opinion 28, Interim Financial
Reporting, to require disclosure about those effects in interim financial
information. These disclosure requirements became effective for the Companys
third quarter of fiscal 2003. The Company has continued to account for
stock-based compensation under the provisions of APB Opinion 25 using the
intrinsic value method. Had compensation cost for the Companys stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans in accordance with the provisions of SFAS 123, the Companys net loss and
net loss per share would have been as follows (in thousands, except per share
data): Year Ended June 30,2004
    
    2003
    
    2002Net income (loss), as reported
    
    $
    10,535
    
    
    $
    (52,184
    )
    
    $
    (440,950
    )Stock-based compensation
included in net income (loss)
    
    
    1,828
    
    
    
    (175
    )
    
    
    60Stock-based compensation under SFAS 123
    
    
    (16,589
    )
    
    
    (27,764
    )
    
    
    (35,182
    )Pro forma net loss
    
    $
    (4,226
    )
    
    $
    (80,123
    )
    
    $
    (476,072
    )Pro forma net loss per share:Basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.90
    )
    
    $
    (5.44
    )
 Stock-Related Transactions With Third Parties- The Company accounts for stock
warrants issued to third parties, including customers, in accordance with the
provisions of the Emerging Issues Task Force (EITF) 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services, and EITF 01-9, Accounting
for Consideration Given by a Vendor to a Customer -68-




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(Including a Reseller of the Vendors Products). Under the provisions of EITF
96-18, because none of the Companys agreements have a disincentive for
non-performance, the Company records a charge for the fair value of the portion
of the warrants earned from the point in time when vesting of the warrants
becomes probable. Final determination of fair value of the warrants occurs
upon actual vesting. EITF 01-9, which became effective during the quarter
ended March 31, 2002, requires that the fair value of certain types of warrants
issued to customers be recorded as a reduction of revenue to the extent of
cumulative revenue recorded from that customer. Basic and Diluted Earnings (Loss) Per Share- The Company reports basic and
diluted earnings (loss) per share in accordance with the provisions of SFAS
128, Earnings Per Share. Basic earnings (loss) per common share is
determined by dividing income (loss) available to common shareholders by the
weighted average number of common shares outstanding. Diluted per common share
amounts assume the issuance of common stock for all potentially dilutive
equivalent shares outstanding. Foreign
Currency Translation- Effective with the acquisition of BlueGill
Technologies, Inc. on April 28, 2000, and the acquisition of
HelioGraph, Ltd (HelioGraph) in
November 2003, certain wholly owned subsidiaries of the Company have foreign
operations. As a result, those assets and liabilities outside the United
States are subject to fluctuations in foreign currency exchange rates.
Consequently, the Company began to utilize pounds sterling as the functional
currency for the United Kingdom in the quarter ended December 31, 2003, and the
Canadian dollar as the functional currency for Canada in the quarter ending
March 31, 2004. Assets, liabilities, revenues and expenses are remeasured using
current and historical exchange rates in accordance with SFAS 52, Foreign
Currency Translation. The translation from the applicable foreign currencies
to U.S. dollars is performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date, historical rates for equity and the
weighted average exchange rates during the period for revenue and expense
accounts. The gains or losses resulting from such translations are included in
other comprehensive income (loss). Due to the relatively immaterial nature of
the amounts involved, neither the Companys economic exposure from fluctuations
in foreign exchange rates nor the net translation gains / losses for the years
ended June 30, 2004, 2003 and 2002 were material. Revenue Recognition- The Companys sources of revenue and methodology of
recognition is as follows:  
    
    Processing and servicing- Processing and servicing revenues include
revenues from transaction processing, electronic funds transfer and
monthly service fees on consumer funds transfer services. The Company
recognizes revenue when the services have been performed. Certain customer
agreements include minimum monthly revenue commitments to the Company and,
of those agreements, some have provisions that allow these minimum
commitments to be credited against future services, as defined. The
Company defers any portion of the minimum revenue commitments that it
expects to be credited against future services until the future services
are performed or the credits expire unused. The Companys estimate of
minimums to be credited against future services is primarily based on
customer specific historical experience and volume and growth experience
with other customers.As part of processing certain types of transactions, the Company earns
interest from the time money is collected from its customers until the time
payment is made to the applicable merchants. These revenues, which are
generated from trust account balances not included on the Companys
consolidated balance sheets, are included in processing and servicing
revenue and totaled $14,813,000, $20,258,000 and $25,090,000 for the years
ended June 30, 2004, 2003 and 2002, respectively.
    
    License fees - The Company recognizes revenue on software transactions
in accordance with SOP 97-2, Software Revenue Recognition, as
amended by SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. In accordance
with the provisions of SOP 97-2, the Company recognizes revenue from
software license agreements when there is persuasive evidence that an
arrangement exists, the fee is fixed and determinable, collectibility
is probable and the software has been shipped, provided that no
significant obligation remains under the contract.
    
    Maintenance fees- Upon receipt of payment, maintenance fee revenue is
recognized ratably over the term of the related contractual support
period, generally 12 months. -69-




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
    
    Other- Other revenue consists primarily of consulting and training
services. Consulting revenue is recognized as services are performed
and training revenue is recognized upon delivery of the related
service. Customers are billed in accordance with contract terms. Maintenance revenue is
generally billed on an annual basis. The Company records any unrecognizable
portion of billed fees as deferred revenue until such time as revenue
recognition is appropriate. Estimated losses, if any, on contracts are provided for when probable.
Estimated loss provisions are based on excess costs over the revenues earned
from the contract. Credit losses, if any, are contemplated in the establishment
of the allowance for doubtful accounts. Advertising Costs- The Company expenses advertising costs as incurred in
accordance with SOP 93-7, Reporting on Advertising Costs. Advertising
expense for the years ended June 30, 2004, 2003 and 2002 were $3,632,000,
$3,227,000 and $2,744,000, respectively. Advertising expenses are included in
sales and marketing costs in the accompanying Consolidated Statements of
Operations. Income Taxes- The Company accounts for income taxes in accordance with SFAS
109, Accounting for Income Taxes, which requires an asset and liability
approach to financial accounting and reporting for income taxes. In accordance
with SFAS 109, deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax expense
(benefit) is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities. Business Segments- The Company reports information about its business segments
in accordance with SFAS 131, Disclosures about Segments of an Enterprise and
Related Information. The Statement defines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a companys operating segments. See Note 20 for the
Companys segment information. Related
Parties- The Company considers certain entities to be related
parties as defined by SFAS 57, Related Party Disclosures
based on the ability to appoint a member of the board of directors as
well as the level of share ownership. Based on these criteria,
Microsoft Corporation (Microsoft) and First Data
Corporation (FDC) are considered related parties in each
of the three years in the period ending June 30, 2004. Bank of
America was considered a related party from October 2000 to
January 1, 2003. Recent Accounting Pronouncements- On July 20, 2001, the FASB issued SFAS 141,
Business Combinations and SFAS 142, Goodwill and Other Intangible Assets.
SFAS 141 requires all business combinations initiated after June 30, 2001, to
be accounted for using the purchase method of accounting. In addition, it
requires application of the provisions of SFAS 142 for goodwill and other
intangible assets related to any business combinations completed after June 30,
2001, but prior to the adoption date of SFAS 142. SFAS 142 changes the
accounting for goodwill and other intangible assets. Upon adoption, goodwill is
no longer subject to amortization over its estimated useful life. Rather,
goodwill is subject to at least an annual assessment for impairment by applying
a fair-value-based test. All other acquired intangibles are separately
recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, or exchanged, regardless of the Companys intent to do
so. Other intangibles are amortized over their useful lives. SFAS 142 became effective for the Company on July 1, 2002, and had the
following impacts:  
    
    The Company reclassified approximately $1,350,000 of unamortized
workforce in place intangible assets, net of the associated deferred
income taxes, into goodwill.
    
    After the reclassification above, goodwill was no longer amortized.
    
    The Company performed a transitional impairment test as of July 1,
2002. This impairment test requires the Company to (1) identify its
reporting units, (2) determine the carrying value of each reporting
unit by assigning assets and liabilities, including existing goodwill
and intangible assets, to those reporting units, and (3) determine the
fair value of each reporting unit. If the carrying value of any
reporting unit exceeds its fair value, then the amount of any goodwill
impairment will be determined through a fair value analysis of each of
the assigned assets (excluding goodwill) and liabilities. -70-




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The Company recorded a charge of $2,894,000 for impairment of goodwill
associated with its i-Solutions reporting unit upon the adoption of SFAS 142.
This charge is reflected as a cumulative effect of a change in accounting
principle in the accompanying Consolidated Statement of Operations for the year
ended June 30, 2003. Following the transitional impairment test, the Companys
goodwill balances are subject to annual impairment tests using the same process
described above. Refer to Note 6 where the results of the Companys annual
impairment test are discussed. In November 2002, FASB Interpretation 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, (FIN 45) was issued. This interpretation clarifies
accounting and disclosure requirements for guarantors in interim and annual
financial statements relating to obligations under certain guarantees. FIN 45
requires that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The following is a summary of agreements that the Company
has determined to be within the scope of FIN 45: (1) We warrant that our software products will perform in all material
respects in accordance with our standard published specifications in effect at
the time of delivery of the licensed products to the customer for ninety days.
Additionally, we warrant that our services will be performed consistent with
generally accepted industry standards or specific service levels through
completion of the agreed upon services. If necessary, we would provide for the
estimated cost of product and service warranties based on specific warranty
claims and claim history, however, we have not incurred significant recurring
expense under our product or service warranties. As a result, we believe the
estimated liabilities related to these agreements are not material. (2) CheckFree Services Corporation guarantees the obligations of one of its
wholly owned subsidiaries. See Note 8. In
December 2003, the FASB issued FIN 46R Consolidation of Variable Interest
Entities (VIE) to address the consolidation issues around certain types of
entities, including special purpose entities. FIN 46R requires a
variable interest entity to be consolidated if the Companys variable interest
(i.e., investment in the entity) will absorb a majority of the entitys
expected losses and/or residual returns if they occur. Application of this
Interpretation was required in financial statements of public entities that
have interests in variable interest entities or potential variable interest
entities for periods ending after December 15, 2003. The adoption of this
interpretation had no impact on the Companys financial position or results of
operations for the year ended June 30, 2004. In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Statement 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003. The
adoption of this statement had no impact on the Companys financial position or
results of operations for the year ended June 30, 2004. In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
SFAS 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. The adoption of
this statement had no impact on the Companys results of operations or
financial position for the year ended June 30, 2004. In
November 2002, the EITF reached a consensus
on Issue 00-21, Multiple Deliverable Revenue Arrangements. EITF 00-21
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. It also
addresses when and how an arrangement involving multiple deliverables should be
divided into separate units of accounting. The guidance in -71-




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EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003, with early application permitted. Companies may
elect to report the change in accounting as a cumulative effect of a change in
accounting principle in accordance with APB Opinion 20, Accounting Changes
and SFAS 3, Reporting Accounting Changes in Interim Financial Statements (an
amendment of APB Opinion 28). The Company adopted the provisions of EITF
00-21 for all revenue arrangements entered into after June 30, 2003. The
adoption of EITF 00-21 did not have an impact on the Companys financial
position, results of operations or liquidity. In January 2003, the EITF reached a consensus on Issue 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
which set out to provide guidance on the meaning of other-than-temporary
impairment and its application to investments classified as either
available-for-sale or held-to-maturity under SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities (Including Individual Securities and
Investments in Mutual Funds), and investments accounted for under the cost
method or the equity method. In subsequent discussions, the EITF reached a
consensus that certain quantitative and qualitative disclosures should be
required for debt and marketable equity securities classified as
available-for-sale or held-to-maturity under SFAS 115 that are impaired at the
balance sheet date but for which an other-than-temporary impairment has not
been recognized. EITF 03-1 became effective for fiscal years ending after
December 15, 2003. The required disclosures pursuant to EITF 03-1 are
included in the notes to consolidated financial statements. Reclassifications- Certain amounts in the prior years financial statements
have been reclassified to conform to the 2004 presentation. NOTE 2. ACQUISITIONS HelioGraph, Ltd. In
November 2003, the Company completed its acquisition of HelioGraph for approximately $18,756,000 in cash. The acquisition added a
financial transactions management solution with straight through processing
and financial messaging expertise to the Companys reconciliation suite
of products, in addition to expanding the Companys international presence.
HelioGraph is part of CheckFree Financial and Compliance Solutions, a business
unit within the Companys software division. In connection with the acquisition
of HelioGraph, the Company recorded a charge of $324,000 for purchased
in-process research and development. The acquisition was treated as a purchase
for accounting purposes, and, accordingly, the assets and liabilities were
recorded based on their fair market values at the date of the acquisition.
Based on the preliminary purchase price allocation, the Company recorded
goodwill of approximately $14,800,000. The values ascribed to acquired
intangible assets and their respective future lives are as follows (in
thousands): Intangible
    
    UsefulAsset
    
    LifeCustomer relationships
    
    $
    520
    
    
    5 yrsCovenants not to compete
    
    
    410
    
    
    3 yrsCurrent technology
    
    
    880
    
    
    4 to 5 yrsTradenames
    
    
    110
    
    
    3 yrs
 -72-




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American Payment Systems, Inc. In June 2004, the Company completed its acquisition of American Payment
Systems, Inc. (APS) from its parent corporation UIL Holdings, for
approximately $109,013,000 in cash, subject to certain post-closing adjustments.
The acquisition was made to penetrate a
part of the electronic billing and payment market in which the Company had not
materially previously participated. APS is part of CheckFrees Electronic
Commerce Division and a leading provider of walk-in bill payments to the
estimated 20% of U.S. consumers who do not typically rely on bank products and
services. The acquisition was treated as a purchase for accounting purposes,
and, accordingly, the assets and liabilities were recorded based on their fair
market values at the date of the acquisition. Based on the preliminary purchase
price allocation, the Company recorded goodwill of approximately $75,000,000.
The values ascribed to other acquired intangible assets and their respective
future lives are as follows (in thousands): Intangible
    
    UsefulAsset
    
    LifeCustomer relationships
    
    $
    10,790
    
    
    
    3 to 6 yrsCurrent technology
    
    
    2,230
    
    
    
    4 to 5 yrsCovenants not to compete
    
    
    1,250
    
    
    
    4 to 5 yrsMoney transfer licenses
    
    
    1,700
    
    
    1 yrTradenames
    
    
    2,650
    
    
    
    2 to 10 yrs
 The effect of these acquisitions made by the Company during fiscal year 2004
were not material individually or in the aggregate. NOTE 3. INVESTMENTS Investments consist of the following (in thousands): June 30,2004
    
    2003Available-for-sale
    
    $
    243,526
    
    
    $
    113,624Held-to-maturity
    
    
    
    
    
    
    251,851Other investments
    
    
    725
    
    
    
    660Less: amounts classified as cash equivalents
    
    
    102,710
    
    
    
    171,846Total investments
    
    $
    141,541
    
    
    $
    194,289
 -73-




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Available-for-Sale- The following is a summary of available-for-sale
investment securities (in thousands): Gross UnrealizedAmortized
    
    
    
    FairCost
    
    Gains
    
    Losses
    
    ValueJune 30, 2004:Corporate bonds
    
    $
    44,853
    
    
    $
    196
    
    
    $
    (293
    )
    
    $
    44,756Asset-backed securities
    
    
    20,511
    
    
    
    89
    
    
    
    (107
    )
    
    
    20,493Collateralized mortgage obligations
    
    
    5,072
    
    
    
    1
    
    
    
    (194
    )
    
    
    4,879Commercial paper
    
    
    7,146
    
    
    
    
    
    
    
    
    
    
    
    7,146U.S. Government and federal agency
obligations
    
    
    45,469
    
    
    
    55
    
    
    
    (184
    )
    
    
    45,340Money market and mutual funds
    
    
    98,588
    
    
    
    
    
    
    
    
    
    
    
    98,588Mortgage pass-through securities
    
    
    22,264
    
    
    
    108
    
    
    
    (48
    )
    
    
    22,324Available-for-sale investments
    
    
    243,903
    
    
    
    449
    
    
    
    (826
    )
    
    
    243,526Less: amounts classified as cash
equivalents
    
    
    102,710
    
    
    
    
    
    
    
    
    
    
    
    102,710Total available-for-sale investments
    
    $
    141,193
    
    
    $
    449
    
    
    $
    (826
    )
    
    $
    140,816
 Gross UnrealizedAmortized
    
    
    
    FairCost
    
    Gains
    
    Losses
    
    ValueJune 30, 2003:Corporate bonds
    
    $
    29,718
    
    
    $
    228
    
    
    $
    (6
    )
    
    $
    29,940Asset-backed securities
    
    
    25,480
    
    
    
    183
    
    
    
    (6
    )
    
    
    25,657Collateralized mortgage obligations
    
    
    1,447
    
    
    
    18
    
    
    
    
    
    
    
    1,465Commercial paper
    
    
    5,350
    
    
    
    
    
    
    
    
    
    
    
    5,350U.S. Government and federal agency
obligations
    
    
    50,115
    
    
    
    338
    
    
    
    (116
    )
    
    
    50,337Mortgage pass-through securities
    
    
    876
    
    
    
    
    
    
    
    (1
    )
    
    
    875Total available-for-sale investments
    
    $
    112,986
    
    
    $
    767
    
    
    $
    (129
    )
    
    $
    113,624
 The fair value of available-for-sale securities is based on quoted market
values. -74-




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The Company has determined that the unrealized losses in its available-for-sale
investments, comprised of 95 securities, are deemed to be temporary impairments
as of June 30, 2004. The Company believes that the unrealized losses generally
are caused by liquidity discounts and increases in the risk premiums required
by market participants rather than an adverse change in cash flows or a
fundamental weakness in the credit quality of the issuer or underlying assets.
The following table summarizes the aggregate amount of unrealized losses,
amortized costs and estimated fair value of investments classified as
available-for-sale as of June 30, 2004 (in thousands): Cost or
    
    Gross
    
    Estimated FairAmortized Cost
    
    Unrealized Losses
    
    ValueCorporate bonds
    
    $
    27,549
    
    
    $
    (293
    )
    
    $
    27,256Asset-backed securities
    
    
    5,386
    
    
    
    (107
    )
    
    
    5,279Collateralized mortgage obligations
    
    
    4,825
    
    
    
    (194
    )
    
    
    4,631U.S. Government and federal agency
obligations
    
    
    34,811
    
    
    
    (184
    )
    
    
    34,627Mortgage pass-through securities
    
    
    11,733
    
    
    
    (48
    )
    
    
    11,685Total impaired available-for-sale investments
    
    $
    84,304
    
    
    $
    (826
    )
    
    $
    83,478
 The following table summarizes the unrealized losses on available-for-sale
investment securities for which the fair value was below the carrying value for
a period of more than twelve months as of June 30, 2004 (in thousands): Less than
    
    Equal or Greater than12 Months Impaired
    
    12 Months ImpairedEstimated
    
    Unrealized
    
    Estimated
    
    Unrealized
    
    Total
    
    Total UnrealizedFair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    LossesCorporate bonds
    
    $
    19,163
    
    
    $
    (142
    )
    
    $
    8,093
    
    
    $
    (151
    )
    
    $
    27,256
    
    
    $
    (293
    )Asset-backed securities
    
    
    2,203
    
    
    
    (16
    )
    
    
    3,076
    
    
    
    (91
    )
    
    
    5,279
    
    
    
    (107
    )Collateralized mortgage obligations
    
    
    
    
    
    
    
    
    
    
    4,631
    
    
    
    (194
    )
    
    
    4,631
    
    
    
    (194
    )U.S. Government and federal agency
obligations
    
    
    34,627
    
    
    
    (184
    )
    
    
    
    
    
    
    
    
    
    
    34,627
    
    
    
    (184
    )Mortgage pass-through securities
    
    
    11,685
    
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    11,685
    
    
    
    (48
    )Total available-for-sale
investments
    
    $
    67,678
    
    
    $
    (390
    )
    
    $
    15,800
    
    
    $
    (436
    )
    
    $
    83,478
    
    
    $
    (826
    )
 In 2004, the Company sold available-for-sale investments of $65,861,000. The
Company recognized gross gains of $247,000 and gross losses of $484,000 on
those sales. No sales of available-for-sale securities occurred during 2003. In April 2004, the Company transferred all of its held-to-maturity investments
to the available-for-sale category. Management determined that it no longer had
the positive intent to hold its investment in securities classified as
held-to-maturity for an indefinite period of time due to managements desire to
have more flexibility in managing the investment portfolio. The securities
transferred had a total amortized cost of $43,769,000, fair value of
$43,842,000 and unrealized gross gains of $514,000 and unrealized gross losses
of $441,000 at the time of the transfer. The net unrealized gain of $73,000 was
recorded as other comprehensive income at the time of transfer. As a result of
the reclassification, SFAS 115 prohibits the Company from classifying
securities as held-to-maturity for two years following the transfer. -75-




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The amortized cost and fair value of available-for-sale securities at June 30,
2004, by contractual maturity or repricing date are as follows (in thousands): Amortized
    
    FairCost
    
    ValueDue in one year or less
    
    $
    73,168
    
    
    $
    73,197Due after one year through five years
    
    
    68,025
    
    
    
    67,619Total
    
    $
    141,193
    
    
    $
    140,816
 Expected maturities may differ from contractual maturities because debt issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Held-to-Maturity- The following is a summary of held-to-maturity investment
securities (in thousands): Gross UnrealizedAmortized
    
    
    
    FairCost
    
    Gains
    
    Losses
    
    ValueJune 30, 2003:Corporate bonds
    
    $
    28,466
    
    
    $
    606
    
    
    $
    (425
    )
    
    $
    28,647Asset-backed securities
    
    
    21,648
    
    
    
    238
    
    
    
    (414
    )
    
    
    21,472Commercial paper
    
    
    3,550
    
    
    
    
    
    
    
    
    
    
    
    3,550Certificates of deposit
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    3,000U.S. Government and federal agency
obligations
    
    
    22,079
    
    
    
    287
    
    
    
    
    
    
    
    22,366Mortgage pass-through securities
    
    
    8,082
    
    
    
    73
    
    
    
    
    
    
    
    8,155Money market funds
    
    
    165,026
    
    
    
    
    
    
    
    
    
    
    
    165,026Held-to-maturity investments
    
    
    251,851
    
    
    
    1,204
    
    
    
    (839
    )
    
    
    252,216Less: amounts classified as cash
equivalents
    
    
    171,846
    
    
    
    
    
    
    
    
    
    
    
    171,846Total held-to-maturity investments
    
    $
    80,005
    
    
    $
    1,204
    
    
    $
    (839
    )
    
    $
    80,370
 The fair value of
held-to-maturity securities is based on quoted market values. During fiscal year 2004, the Company transferred all investments classified as
held-to-maturity to available-for-sale. As a result of the change in
classification, there are no held-to-maturity investments held by the Company
as of
June 30, 2004. Other investments- Other investments are accounted for under the cost method
and include common stock, warrants and venture capital initiatives as of June
30, 2004 and 2003. The common stocks and warrants consist of preferred stock
warrants in a non-publicly traded electronic billing related company. The venture
capital entity invests in early to mid-stage financial solutions and technology
companies. The Company has made a commitment to invest $1,000,000 in venture
capital initiatives. Actual contributions are made at the point in time a specific company
in which venture capital will be invested is identified. The fair value of
other investments was approximately $725,000 and $660,000 as of June 30, 2004
and 2003, respectively. During the year ended June 30, 2003, the Company recorded losses on certain of
its other investments. The losses were the result of the Companys evaluation
of any other-than-temporary decline in the fair value of these investments.
In performing this evaluation, the Company considered various factors including
any decline in market price, where available, the investees financial
condition, results of operations, operating trends and other financial ratios.
Based on these factors, the Company recorded a loss of $3,228,000 for the year
ended June 30, 2003. Pledged investments- The Company has pledged certain available-for-sale
investments as collateral for payments due under operating leases and for
standby letters of credit related to operating leases. The total amount of
securities pledged as collateral at June 30, 2004 and 2003 was approximately
$3,866,000 and $5,438,000, respectively, of which $3,000,000 was classified as
a restricted investment at June 30, 2003. The lease agreement associated with
the -76-




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##### Table of Contents



restricted investment expired without renewal during the year ended June 30,
2004. The operating leases expire at various dates through December 31, 2004.
The standby letters of credit expired on September 30, 2003, but automatically
renewed through the underlying lease expiration date of September 30, 2004. NOTE 4. ACCOUNTS RECEIVABLE Accounts receivable consist of the following (in thousands): June 30,2004
    
    2003Trade accounts receivable
    
    $
    76,020
    
    
    $
    47,919Unbilled trade accounts receivable
    
    
    4,336
    
    
    
    4,557Other receivables
    
    
    5,641
    
    
    
    4,698Total
    
    
    85,997
    
    
    
    57,174Less: allowance for doubtful accounts
    
    
    780
    
    
    
    1,669Accounts receivable, net
    
    $
    85,217
    
    
    $
    55,505
 Trade accounts receivable represents amounts billed to customers. Revenue is
recognized and customers are billed under service agreements as the services
are performed. Unbilled trade accounts receivable result primarily from
extended payment terms not in excess of one year on software license
agreements. For software contracts, revenue is recognized under the provisions
of SOP 97-2 as described in Note 1, and unbilled amounts under those software
contracts are billed on specific dates according to contractual terms. Other
receivables are comprised primarily of interest receivable. The allowance for
doubtful accounts represents managements estimate of uncollectible accounts
receivable. NOTE 5. PROPERTY AND EQUIPMENT The components of property and equipment are as follows (in thousands): June 30,2004
    
    2003Land and land improvements
    
    $
    4,944
    
    
    $
    4,944Building and building improvements
    
    
    51,390
    
    
    
    50,736Computer equipment and software licenses
    
    
    206,946
    
    
    
    181,872Furniture and equipment
    
    
    20,781
    
    
    
    19,838Total
    
    
    284,061
    
    
    
    257,390Less: accumulated depreciation
    
    
    192,149
    
    
    
    162,537Property and equipment, net
    
    $
    91,912
    
    
    $
    94,853
 Depreciation expense totaled $35,520,000, $36,631,000 and $36,430,000 for the
years ended June 30, 2004, 2003 and 2002, respectively. -77-




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NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS Impairment of Intangible Assets CheckFree i-Solutions During the year ended June 30, 2002, the Company identified certain indicators
of possible impairment of its long-lived assets, primarily goodwill and other
acquired intangible assets, related to its acquisition of BlueGill
Technologies, Inc. (currently referred to as CheckFree i-Solutions). The main
indicators of impairment were recent economic conditions, accompanied by
internet-based software industry trends that negatively impacted both
i-Solutions current operations, as well as its expected future growth rates.
The Company first evaluated recoverability under the provisions of SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of, by comparing the projected undiscounted cash flows of the
i-Solutions business, including an estimated terminal value, to the related
carrying value of its long-lived assets. As a result of this comparison, the
Company determined that the i-Solutions assets were impaired. The amount of
the impairment was then determined by comparing the estimated fair value of the
i-Solutions assets to the related carrying value. The fair value was
determined using a discounted cash flow approach for the net cash flows of the
i-Solutions business and an estimated terminal value. The assumptions
supporting the estimated cash flows, including the discount rate and estimated
terminal value, reflected managements best estimates at the time. As a
result of the fair value test, the Company recorded a charge reducing the
carrying value of CheckFree i-Solutions goodwill by $107,405,000. This amount
was included in impairment of intangible assets in the Companys Consolidated
Statement of Operations for the year ended June 30, 2003. CheckFree
i-Solutions is included in the Companys Software business segment. Upon adoption of SFAS 142, the Company performed a transitional impairment test
and recorded a charge of $2,894,000 for impairment of goodwill associated with
i-Solutions. The transitional impairment charge is reflected as a cumulative
effect of a change in accounting principles in the accompanying Consolidated
Statement of Operations for the year ended June 30, 2003. During the fourth quarter of the fiscal year ended June 30, 2003, the Company
performed its annual impairment review for goodwill and other intangible
assets. The conditions which gave rise to indications of impairment during the
year ended June 30, 2002, continued to be present during the year ended June
30, 2003. As a result of its assessment, the Company recorded an additional
charge of $10,228,000, which represents a SFAS 142 goodwill impairment of
$5,983,000 and a SFAS 144 impairment of other intangible assets of $4,245,000
both related to the Companys i-Solutions reporting unit. This amount is
included in impairment of intangible assets in the Companys Consolidated
Statement of Operations. TransPoint During the year ended June 30, 2002, the Company performed a review of the
carrying value of technology assets it acquired as part of the TransPoint
acquisition in September 2000. The review was prompted by the termination of
the maintenance agreement for this technology from the last of our
international partners, and the conclusions reached by the Company in
evaluating the service potential of the technology against our present and
future initiatives. As a result of the review, the Company identified two
technologies for which there was no future use and recorded a SFAS 121 charge
of $47,667,000 to retire these assets. The charge was included in impairment
of intangible assets in the Companys Consolidated Statement of Operations for
the year ended June 30, 2002. The retirement of the TransPoint technology assets noted above was an indicator
to the Company of possible impairment of its long-lived assets, primarily
goodwill and other acquired intangible assets, related to its acquisition of
TransPoint. The Company evaluated the recoverability of all its Electronic
Commerce Division long-lived assets by comparing the projected undiscounted
cash flows of the division, including an estimated terminal value, to the
carrying value of its long-lived assets. The assumptions supporting the
estimated cash flows, including the estimated terminal value, reflected
managements best estimates at the time. The result of this test indicated
that there was no impairment of the Companys Electronic Commerce Division
long-lived assets. -78-




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##### Table of Contents



In connection with the TransPoint acquisition, we entered into commercial
agreements with Microsoft and FDC to provide payment processing services. These agreements included
minimum revenue commitments totaling $180.0 million over five years. The
monthly minimum commitments from Microsoft and FDC increase over the five-year
term of the agreements. Currently, Microsoft and FDC are each operating
substantially below their minimum monthly commitments and the Company does not
expect these customers to increase their activity such that they would operate
above the minimum commitments in the next twelve months. The
Company performed its annual goodwill impairment review as of April 30, 2004, for
the year ended June 30, 2004. No indicators of impairment were evident based on
this review. As of June 30, 2004 and 2003, the Companys only non-amortizing intangible
asset is goodwill. The changes in the carrying value of goodwill by segment
for the year ended June 30, 2004, were as follows (in thousands): Electronic
    
    
    
    
    
    InvestmentCommerce
    
    Software
    
    Services
    
    TotalBalance as of June 30, 2002
    
    $
    503,255
    
    
    $
    16,116
    
    
    $
    11,387
    
    
    $
    530,758Reclassification of workforce, net of tax
    
    
    483
    
    
    
    867
    
    
    
    
    
    
    
    1,350Impairment loss from adoption of SFAS 142
    
    
    
    
    
    
    (2,894
    )
    
    
    
    
    
    
    (2,894
    )Fourth quarter impairment loss
    
    
    
    
    
    
    (5,983
    )
    
    
    
    
    
    
    (5,983
    )Balance as of June 30, 2003
    
    
    503,738
    
    
    
    8,106
    
    
    
    11,387
    
    
    
    523,231Goodwill acquired
    
    
    74,957
    
    
    
    14,783
    
    
    
    
    
    
    
    89,740Balance as of June 30, 2004
    
    $
    578,695
    
    
    $
    22,889
    
    
    $
    11,387
    
    
    $
    612,971
 The components of the Companys various amortized intangible assets are as
follows (in thousands): June 30,2004
    
    2003Capitalized software:Product technology from acquisitions and strategic agreement
    
    $
    167,458
    
    
    $
    166,578Internal development costs
    
    
    31,519
    
    
    
    29,170Total
    
    
    198,977
    
    
    
    195,748Less: accumulated amortization
    
    
    187,465
    
    
    
    172,136Capitalized software, net
    
    $
    11,512
    
    
    $
    23,612Strategic agreements:Strategic
agreements (1)
    
    $
    744,424
    
    
    $
    744,424Less: accumulated amortization
    
    
    473,034
    
    
    
    349,092Strategic agreements, net
    
    $
    271,390
    
    
    $
    395,332Other intangible assets:Tradenames
    
    $
    50,728
    
    
    $
    47,968Customer base
    
    
    46,068
    
    
    
    34,758Current technology
    
    
    2,230
    
    
    
    Money transfer licenses
    
    
    1,700
    
    
    
    Covenants not to compete
    
    
    2,860
    
    
    
    1,200Total
    
    
    103,586
    
    
    
    83,926Less: accumulated amortization
    
    
    81,916
    
    
    
    79,125Other intangible assets, net
    
    $
    21,670
    
    
    $
    4,801
  (1)
    
    Strategic agreements primarily include certain entity-level covenants not to compete. -79-




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##### Table of Contents



Amortization of intangible assets totaled $142,062,000, $190,007,000 and
$399,135,000 for the years ended June 30, 2004, 2003 and 2002, respectively.
Amortization expense for the next five fiscal years is estimated to be as
follows (in thousands): Fiscal Year Ending June 30,2005
    
    $
    136,9782006
    
    
    48,3632007
    
    
    29,4782008
    
    
    28,0892009
    
    
    27,259
 The Companys results of operations for the year ended June 30, 2002, do not
reflect the application of the provisions of SFAS 142. The following table
adjusts net loss and net loss per share for the impact of the implementation of
SFAS 142 as follows (in thousands, except per share data): Year Ended June 30,2004
    
    2003
    
    2002Net income (loss) before cumulative effect of accounting change
    
    $
    10,535
    
    
    $
    (49,290
    )
    
    $
    (440,950
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (2,894
    )
    
    
    Net income (loss)
    
    
    10,535
    
    
    
    (52,184
    )
    
    
    (440,950
    )Add back: goodwill amortization
    
    
    
    
    
    
    
    
    
    
    184,464Adjusted net income (loss)
    
    $
    10,535
    
    
    $
    (52,184
    )
    
    $
    (256,486
    )Basic net income (loss) per share:Basic net income (loss) per common share before
cumulativeeffect of accounting change
    
    $
    0.12
    
    
    $
    (0.56
    )
    
    $
    (5.04
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (0.03
    )
    
    
    Net income (loss) per common share
    
    
    0.12
    
    
    
    (0.59
    )
    
    
    (5.04
    )Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    2.11Adjusted basic net income (loss) per share
    
    $
    0.12
    
    
    $
    (0.59
    )
    
    $
    (2.93
    )Diluted net income (loss) per share:Diluted net income (loss) per common share before
cumulativeeffect of accounting change
    
    $
    0.11
    
    
    $
    (0.56
    )
    
    $
    (5.04
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (0.03
    )
    
    
    Net income (loss) per common share
    
    
    0.11
    
    
    
    (0.59
    )
    
    
    (5.04
    )Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    2.11Adjusted diluted net income (loss) per share
    
    $
    0.11
    
    
    $
    (0.59
    )
    
    $
    (2.93
    )
 NOTE 7. ACCRUED LIABILITIES The components of accrued liabilities are as follows (in thousands): June 30,2004
    
    2003Compensation and benefits
    
    $
    37,953
    
    
    $
    34,933Reorganization reserve
    
    
    732
    
    
    
    1,537Other
    
    
    28,526
    
    
    
    22,670Total
    
    $
    67,211
    
    
    $
    59,140
 -80-




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NOTE 8.    FINANCING AGREEMENTS The Company had a $30.0 million line of credit agreement, which was terminated
by the Company in August 2003 in anticipation of obtaining a new line of credit
facility. No amounts were outstanding under the line at June 30, 2003. In August 2003, CheckFree Corporations wholly owned subsidiaries, CheckFree
Services and Bastogne, Inc., a bankruptcy-remote, special purpose entity
(Bastogne), entered into a Master Agreement with SunTrust Bank, Atlanta,
Georgia with respect to the activities of CheckFree Services Electronic
Commerce Division. Under this Master Agreement, SunTrust provides Automated
Clearing House (ACH) and other electronics funds transfer services, on behalf
of Bastogne in connection with the receipt, investment, custody and
transmission of subscriber funds. In addition, SunTrust Bank and its
affiliates provide various deposit accounts and investment accounts and
services to Bastogne. CheckFree Services provides processing and
administrative services to Bastogne to facilitate transactions under the Master
Agreement. SunTrust has agreed to provide a facility to Bastogne to cover overdrafts
occurring from time to time due to timing differences between transmission of
subscriber funds and movement of funds from Bastognes investment accounts to
the zero balance demand deposit account maintained by Bastogne with SunTrust.
In addition, SunTrust provides ACH services, and maintains and permits Bastogne
to use SunTrusts MasterCard ICA transit number and VISA bank identification
numbers to facilitate transactions in the MasterCard and VISA systems. The
obligations of Bastogne under the Master Agreement to SunTrust are guaranteed
by CheckFree Services, which has pledged substantially all the assets of its
Electronic Commerce Division to secure such guarantee. NOTE 9.    CONVERTIBLE SUBORDINATED NOTES On November 29, 1999, the Company issued $172,500,000 of 6.5% convertible
subordinated notes that were due on December 1, 2006. In December 2003, the
Company redeemed the notes. The $172,500,000 principal amount, along with a
call premium of $4,813,000, was paid in cash. In addition, the Company
incurred a non-cash charge of $2,407,000 due to the write off of the remaining
unamortized bond issuance costs. These amounts are included in interest
expense for the year ended June 30, 2004. Interest on the notes was payable on
June 1 and December 1 of each year, commencing on June 1, 2000. Interest
expense on the notes for the years ended June 30, 2004, 2003 and 2002, was
$7,755,000, $12,023,000 and $12,023,000, respectively. NOTE 10.    CAPITAL LEASE AND OTHER LONG-TERM OBLIGATIONS The Company leases certain equipment under capital leases and purchases certain
software licenses under long-term agreements. The Company is required to pay
certain taxes, insurance and other expenses related to the leased property. The following is a summary of property under capital leases included in the
accompanying consolidated balance sheets (in thousands): June 30,2004
    
    2003Equipment and software licenses
    
    $
    19,962
    
    
    $
    17,599Less: accumulated depreciation and amortization
    
    
    8,764
    
    
    
    7,425Property under capital leases, net
    
    $
    11,198
    
    
    $
    10,174
 - 81 -




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Future minimum lease payments required by the capital leases and the net future
minimum lease payments are as follows (in thousands): Fiscal Year Ending June 30,2005
    
    $
    1,3642006
    
    
    177Total future minimum lease payments
    
    
    1,541Less: amount representing interest
    
    
    93Net future minimum lease payments
    
    $
    1,448
 Additionally, the Company has purchased software licenses under agreements with
extended payment terms. Total amounts due under these agreements are as
follows (in thousands): Fiscal Year Ending June 30,2005
    
    $
    3,3592006
    
    
    2722007
    
    
    95Total future minimum lease payments
    
    
    3,726Less: amount representing interest
    
    
    478Net future minimum payments
    
    $
    3,248
 On April 2, 2004, the Company received a $25.0 million deposit from one of its
customers in connection with a contract modification relating to the timing of
transaction settlements. The agreement has an initial term of four years and
automatically renews thereafter unless terminated with 180 days notice. During
the term of the agreement, the Company will pay the customer a variable rate of
interest on a monthly basis equal to the then current overnight repurchase
agreement rate. The deposit is reflected as a long-term liability in the
Companys financial statements. There are no restrictions on the deposit, and
the funds are available for general corporate use. The deposit will be
refunded to the customer upon termination of the agreement. NOTE 11.    COMMITMENTS Operating Leases- The Company leases office space and equipment under
operating leases. Certain leases contain renewal options and generally provide
that the Company shall pay for insurance, taxes and maintenance. In addition,
certain leases include rent escalations throughout the terms of the lease.
Total expense under all operating lease agreements for the years ended June 30,
2004, 2003 and 2002 was $23,500,000, $23,917,000 and $27,997,000, respectively. Future minimum rental payments under these leases are as follows (in
thousands): Fiscal Year Ending June 30,2005
    
    $
    17,0152006
    
    
    13,6672007
    
    
    10,9542008
    
    
    10,3122009
    
    
    10,337Thereafter
    
    
    29,788Net future minimum lease payments
    
    $
    92,073
 - 82 -




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The Company has pledged certain available-for-sale investments as collateral
for payments due under operating leases and for standby letters of credit
related to operating leases. The total amount of securities pledged at June
30, 2004 and 2003 was approximately $3,866,000 and $5,438,000, respectively. A
deposit in the amount of $3,000,000, was classified as a restricted investment
as of June 30, 2003 until the lease associated with such deposit expired during
fiscal year 2004. The operating leases expire at various dates through
December 31, 2004. The standby letter of credit expired on September 30, 2003,
but automatically renewed through the underlying lease expiration date of
September 30, 2004. The Company and certain of its subsidiaries have entered into the following
guarantees related to its walk-in bill payment operations. The transmittal of
consumer funds for two customers is guaranteed. The Company has issued bonds
and letters of credit totaling $20.8 million on behalf of consumers in the
event that consumer funds are not remitted to billers. Historically, payments
made related to settling claims under these arrangements have not been
significant. As a result, we believe the estimated fair value of any unsettled
claims is nominal. Accordingly, we have no liabilities recorded for these
arrangements as of June 30, 2004. NOTE 12.    CAPITAL STOCK On November 1, 2000, the Companys stockholders approved an increase in the
number of authorized shares of the Company from 165,000,000 to 550,000,000,
consisting of 500,000,000 shares of common stock, $.01 par value, 48,500,000
shares of preferred stock, $.01 par value, and 1,500,000 shares of Series A
Junior Participating Cumulative Preferred Stock, $.01 par value. The preferred
stock may be issued in one or more series and may be established with such
relative voting, dividend, redemption, liquidation, conversion and other
powers, preferences, rights, qualifications, limitations and restrictions as
the Board of Directors may determine without further stockholder approval. No
preferred shares have been issued through June 30, 2004. In January 1997, the Companys Board of Directors declared a dividend
distribution of Preferred Share Purchase Rights (Rights) to protect its stockholders in
the event of an unsolicited attempt to acquire the Company. On February 14,
1997, the Rights were issued to the Companys stockholders of record, with an
expiration date of 10 years. Until a person or group acquires 15% or more of
the Companys Common Stock, the Rights will automatically trade with the shares
of Common Stock. Only when a person or group has acquired 15% or more of the
Companys Common Stock, will the Rights become exercisable and separate
certificates issued. Prior to the acquisition by a person or group of
beneficial ownership of 15% or more of the Companys Common Stock, the Rights
are redeemable for $.001 per Right at the option of the Board of Directors. NOTE 13.    TRANSACTIONS INVOLVING EQUITY INSTRUMENTS Employee Plans During 1995, the Company adopted the 1995 Stock Option Plan (the 1995 Plan).
The options granted under the 1995 Plan may be either incentive stock options
or non-statutory stock options. The terms of the options granted under the
1995 Plan are at the sole discretion of a committee of members of the Companys
Board of Directors, not to exceed ten years. Generally, options vest at either
33% or 20% per year from the date of grant. The 1995 Plan originally provided
that the Company may grant options for not more than 5,000,000 shares of common
stock to certain key employees, officers and directors. In November of 1998
and again in November of 2000, the 1995 Plan was amended by a vote of
the Companys shareholders to extend the maximum option grants to not more than
8,000,000 shares and not more than 12,000,000 shares, respectively. Options
granted under the 1995 Plan are exercisable according to the terms of each
option, however, in the event of a change in control or merger as defined, the
options shall become immediately exercisable. In November 2002, the Companys stockholders approved the 2002 Stock Incentive
Plan (the 2002 Plan). Under the provisions of the 2002 Plan, the Company may
grant incentive or non-qualified stock options, stock appreciation rights
(SARs), restricted stock, performance units or performance shares for not
more than 6,000,000 shares of common stock to certain key employees, officers
and non-employee directors. The terms of the options, SARs, restricted stock,
performance units or performance shares granted under the 2002 Plan are
determined by a committee of the - 83 -




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##### Table of Contents



Companys Board of Directors, however, in the event of a change in control as
defined in the 2002 Plan, they shall become immediately exercisable. The 2002
Plan will replace the Companys 1995 Stock Option Plan (the 1995 Plan), going
forward, except that the 1995 Plan will continue to exist to the extent that
options granted prior to the effective date of the 2002 Plan continue to remain
outstanding. At June 30, 2004, 3,681,535 additional shares are available for
grant under the 2002 Plan. All options granted under the 2002 Plan and the 1995 Plan were granted at
exercise prices not less than the fair market value of the underlying common
stock at the date of grant. In the event that shares purchased through the
exercise of incentive stock options are sold within one year of exercise, the
Company is entitled to a tax deduction. The tax benefit of the deduction is
not reflected in the consolidated statements of operations but is reflected as
an increase in additional paid-in capital. The following table summarizes stock option activity from July 1, 2001 to June
30, 2004: Year EndedJune 30, 2004
    
    June 30, 2003
    
    June 30, 2002Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageNumber of
    
    Exercise
    
    Number of
    
    Exercise
    
    Number of
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding - Beginning of period
    
    
    7,236,216
    
    
    $
    31.72
    
    
    
    8,084,673
    
    
    $
    34.25
    
    
    
    7,128,141
    
    
    $
    36.96Granted
    
    
    661,529
    
    
    
    17.13
    
    
    
    1,195,168
    
    
    
    15.89
    
    
    
    2,818,928
    
    
    
    22.10Exercised
    
    
    (571,844
    )
    
    
    12.51
    
    
    
    (533,263
    )
    
    
    13.01
    
    
    
    (761,750
    )
    
    
    3.09Cancelled
    
    
    (1,668,620
    )
    
    
    55.07
    
    
    
    (1,510,362
    )
    
    
    39.37
    
    
    
    (1,100,646
    )
    
    
    41.35Outstanding - End of period
    
    
    5,657,281
    
    
    $
    25.07
    
    
    
    7,236,216
    
    
    $
    31.72
    
    
    
    8,084,673
    
    
    $
    34.25Options exercisable at end of period
    
    
    3,494,088
    
    
    $
    28.82
    
    
    
    3,972,477
    
    
    $
    37.79
    
    
    
    3,122,949
    
    
    $
    38.84Weighted average per-share fair value of
options granted during the year
    
    
    
    
    
    $
    21.10
    
    
    
    
    
    
    $
    12.25
    
    
    
    
    
    
    $
    14.81
 The following table summarizes information about options outstanding at June 30, 2004: Options Outstanding
    
    Options ExercisableWeighted Average
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    
    
    
    
    AverageContractual
    
    Exercise
    
    
    
    
    
    ExerciseRange of Exercise Price
    
    Number
    
    Life
    
    Price
    
    Number
    
    Price$  0.01 - $  15.00
    
    
    1,871,933
    
    
    
    5.4
    
    
    $
    11.80
    
    
    
    1,032,784
    
    
    $
    13.08$15.01 - $  30.00
    
    
    1,903,900
    
    
    
    7.5
    
    
    
    19.79
    
    
    
    899,064
    
    
    
    18.49$30.01 - $  60.00
    
    
    1,791,623
    
    
    
    6.3
    
    
    
    40.57
    
    
    
    1,472,415
    
    
    
    41.56$60.01 - $  90.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $90.01 - $120.00
    
    
    89,825
    
    
    
    5.5
    
    
    
    104.5
    
    
    
    89,825
    
    
    
    104.55,657,281
    
    
    
    
    
    
    $
    25.07
    
    
    
    3,494,088
    
    
    $
    28.82
 The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the years ended June 30, 2004, 2003 and 2002,
respectively: dividend yield of 0% in all periods; expected volatility of 61%,
95% and 98%; risk-free interest rates of 2.95%, 3.47% and 4.00%; and expected
lives of two to seven years. - 84 -




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##### Table of Contents



In June 2003, the Company made an offer (the Tender Offer) to certain
employees to exchange options with exercise prices greater than or equal to
$44.00 per share currently outstanding under the Companys 1983 Incentive Stock
Option Plan, 1983 Non-Statutory Stock Option Plan, 1993 Stock Option Plan,
Third Amended and Restated 1995 Stock Option Plan, BlueGill Technologies, Inc.
1997 Stock Option Plan, BlueGill Technologies, Inc. 1998 Incentive and
Non-Qualified Stock Option Plan, and 2002 Stock Incentive Plan, for restricted
stock units of the Companys Common Stock, and in certain cases, cash payments.
Restricted stock units issued under the Tender Offer will vest ratably over a
three-year period. The offer period closed on July 17, 2003, and employees
holding 1,165,035 options participated in the Tender Offer. The Company made
cash payments totaling $586,000 in July 2003 representing the cash
consideration portion of the Tender Offer, and the Company will issue
approximately 241,000 shares of restricted stock under the 2002 Stock Incentive
Plan over the next three years. The Company will record an expense for cash
payments as incurred and will record an expense for restricted shares, subject
to cancellation, ratably over the vesting period. The Company recorded an
expense of $2,994,000 for the year ended June 30, 2004, for cash payments made
and the vesting of restricted stock units. There was no financial impact to
the Company for the year ended June 30, 2003. On July 19, 2004, the Company
issued 51,143 shares relating to the portion of the tender offer that vested on
July 17, 2004. In total 80,588 shares actually vested of which 29,445 shares
were retained by the Company to fund the payroll taxes associated with the
Plan. Under the 1997 Associate Stock Purchase Plan, effective for the six-month
period beginning January 1, 1997, the Company is authorized to issue up to
1,000,000 shares of Common Stock to its full-time employees, nearly all of whom
are eligible to participate. In November 2002, the Companys stockholders
approved an increase in the number of shares reserved and available for sale
under the 1997 Associate Stock Purchase Plan from 1,000,000 shares to 2,000,000
shares. Under the terms of the Plan, employees can choose, every six months,
to have up to 15% of their salary withheld to purchase the Companys Common
Stock. The purchase price of the stock is 85% of the lower of its
beginning-of-period or end-of-period market price. Participation in the plan
by eligible employees has ranged from 25% to 50% in any given six-month period.
Under the Plan, 72,293 shares were issued in July 2004, 74,952 in January
2004, 98,741 in July 2003, 128,033 in January 2003, 128,443 in July 2002 and
135,721 in January 2002 from employees salary withholdings from the respective
previous six-month period. As of June 30, 2004, there were 957,081 shares
available for future issuance to the Associate Stock Purchase Plan. Following is a summary of the weighted average fair market value of the
look-back feature estimated on the grant date using the Black-Scholes option
pricing model, and the related assumptions used: June 30,
    
    December 31,
    
    June 30,
    
    December 31,
    
    June 30,
    
    December 31,2004
    
    2003
    
    2003
    
    2002
    
    2002
    
    2001Fair value of options
    
    $
    7.56
    
    
    $
    8.46
    
    
    $
    7.73
    
    
    $
    5.08
    
    
    $
    4.17
    
    
    $
    4.95Assumptions:Risk-free interest rate
    
    
    1.0
    %
    
    
    1.0
    %
    
    
    1.2
    %
    
    
    1.8
    %
    
    
    4.0
    %
    
    
    4.0
    %Expected life
    
    3 months
    
    3 months
    
    3 months
    
    3 months
    
    3 months
    
    3 monthsVolatility
    
    
    43.7
    %
    
    
    53.8
    %
    
    
    107.9
    %
    
    
    71.8
    %
    
    
    98.0
    %
    
    
    98.0
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 In the year ended June 30, 2000, the Company issued 13,000 shares of restricted
stock to certain of its key employees. Under the terms of the grants, full
vesting of the shares was dependent upon the continued employment of the
employee for the duration of the vesting period. Shares issued were recorded
at fair market value on the date of the grant with a corresponding charge to
stockholders equity. The unearned portion was amortized as compensation
expense on a straight-line basis over the related vesting period. In the year
ended June 30, 2003, 12,000 shares of restricted stock were forfeited and
returned when a key employee left the Company. - 85 -




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##### Table of Contents



In January 1997, the Board of Directors approved an amendment to the Companys
401(k) plan, which authorized up to 1,000,000 shares of Common Stock for the
Companys matching contribution. The Board of Directors authorized an
additional 1,000,000 shares of Common Stock for the Companys matching
contribution in November 2002. The Company issued 149,844 shares in August
2003, 402,102 shares in August 2002 and 132,887 shares in August 2001 to fund
its 401(k) match that had accrued during the years ended June 30, 2003, 2002
and 2001, respectively. As of June 30, 2004, there were 1,073,953 shares
available for future contributions to the 401(k) plan. In August 2004, the
Company issued 108,484 shares to fund its 401(k) match for fiscal year ended
June 30, 2004. Stock Related Transactions With Third Parties- In October 2000, the Company
completed an agreement to acquire various electronic billing and payment assets
from Bank of America in exchange for ten million shares of the Companys Common
Stock, $35.0 million in cash and warrants to acquire an additional ten million
shares of the Companys Common Stock. In connection with a December 2003
modification of the terms of the processing services agreement with Bank of
America, the amount of shares available under the warrants was reduced to five
million. Bank of America has the ability to earn warrants on up to five
million shares, three million of which vest upon achievement of specific levels
of active subscriber adoption of electronic billing and payment services and
two million of which vests upon achievement of specific levels of electronic
bills presented to those subscribers. The warrants have a strike price of
$32.50. At the time that vesting of a portion of these warrants becomes
probable, the Company will record a charge for the fair value of the portion of
the warrants earned to date based on Bank of Americas progress towards
achieving the milestones set forth in the agreement. The Company will continue
to record a charge each period for any additional portion of the warrants
earned, plus any change in fair value of the cumulative amount of warrants
earned to date, up to the point in time that the milestones are achieved and
actual vesting occurs. Any charge associated with these warrants will be
recorded as a reduction of revenue up to the aggregate amount of revenue
received from Bank of America. In October 1999, the Company entered into an agreement with one of its
customers. Under the terms of the agreement, the customer purchased 250,000
shares of the Companys stock and has been issued warrants on one million
shares. All warrants reflect a strike price of $39.25 and became exercisable on
September 15, 2002. During the quarter ended June 30, 2002, vesting of the
warrants for one million shares became probable. As such, the Company recorded
a non-cash charge to revenues of $2,748,000 for the fair value of the portion
of the warrants earned through June 30, 2002 based on a Black-Scholes option
pricing model valuation. At September 15, 2002, upon actual vesting, the
Company determined the final fair value of the one million warrants taking into
consideration the market value of our stock at that date. During the quarter
ended September 30, 2002, the Company recorded a non-cash increase in revenue
of $644,000, reflecting the portion of the warrants earned during the quarter
and the final fair value of the one million warrants that vested on September
15, 2002. Fair value was determined based on a Black-Scholes option pricing
model valuation. In January 1998, the Company entered into a ten-year processing agreement with
a strategic partner. Under the terms of the agreement, the partner acquired
ten-year warrants exercisable at $20 15/16 for ten million shares of the
Companys Common Stock. Three million warrants vested upon the execution of a
related processing outsourcing agreement on March 9, 1998. During the year
ended June 30, 2001, the strategic partners business was dissolved, and
therefore, it does not have the ability to earn any of the remaining seven
million warrants. During each of the fiscal years ended June 30, 2000 and
2001, the strategic partner exercised 750,000 of the vested warrants and
1,500,000 remain outstanding at June 30, 2004. In March 1997, the Company entered into a consulting agreement with a third
party. Under the terms of the agreement, the consultant acquired 5-year
options exercisable at $13.00 for up to 50,000 shares of the Companys Common
Stock. In June 1998, upon the execution of a processing agreement with a key
customer, 25,000 of the options vested. The remaining 25,000 options vested in
March 2002. In March 2002, the consultant exercised all 50,000 options. Any
shares acquired by the consultant under the terms of the agreement are subject to certain transfer restrictions. - 86 -




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NOTE 14.    EARNINGS PER SHARE The following table reconciles the differences in income and shares outstanding
between basic and dilutive for the periods indicated (in thousands, except per
share data): Year Ended June 30, 2004
    
    Year Ended June 30, 2003
    
    Year Ended June 30, 2002Net Income
    
    Shares
    
    Per-Share
    
    Net Loss
    
    Shares
    
    Per-Share
    
    Net Loss
    
    Shares
    
    Per-Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic EPS
    
    $
    10,535
    
    
    
    89,870
    
    
    $
    0.12
    
    
    $
    (52,184
    )
    
    
    88,807
    
    
    $
    (0.59
    )
    
    $
    (440,950
    )
    
    
    87,452
    
    
    $
    (5.04
    )Effective of dilutive securities:Options and warrants
    
    
    
    
    
    
    1,994
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPS
    
    $
    10,535
    
    
    
    91,864
    
    
    $
    0.11
    
    
    $
    (52,184
    )
    
    
    88,807
    
    
    $
    (0.59
    )
    
    $
    (440,950
    )
    
    
    87,452
    
    
    $
    (5.04
    )
 Anti-dilution provisions of SFAS 128 require consistency between diluted
per-common-share amounts and basic per-common-share amounts in loss periods.
Had the Company recognized net income, an additional 3,567,000 and 3,333,000 of
in-the-money options and warrants would have been included in the diluted
earnings per share calculation for the years ended June 30, 2003 and 2002,
respectively. Using the treasury stock method prescribed by SFAS 128, this
would have increased diluted shares outstanding by 747,000 and 899,000 for the
years ended June 30, 2003 and 2002, respectively. The weighted average diluted common shares outstanding for the years ended June
30, 2004, 2003 and 2002, also exclude the effect of approximately 3,222,000,
6,411,000 and 6,565,000 of out-of-the-money options and warrants, respectively.
In addition, the weighted average diluted common shares outstanding for
fiscal years 2003 and 2002 exclude the 2,357,000 share effect for the assumed
conversion of the convertible subordinated notes, as their effect would be
anti- dilutive. The after-tax effect of interest expense on the convertible
subordinated notes for the years ended June 30, 2003 and 2002 has not been
added back to the numerator, as its effect would be anti-dilutive. The
convertible subordinated notes were redeemed in December 2003. NOTE 15.    EMPLOYEE BENEFIT PLANS Retirement Plan- The Company has a defined contribution 401(k) retirement plan
covering substantially all of its U.S.-based employees. Under the plan,
eligible employees may contribute a portion of their salary until retirement
and the Company, at its discretion, may match a portion of the employees
contribution. In January 2002, the Company added a similar plan covering
substantially all its non U.S.-based employees. Total expense under both plans
amounted to $3,009,000, $3,476,000 and $3,035,000 for the years ended June 30,
2004, 2003 and 2002, respectively. Pension Plan- The Company has a defined contribution pension plan for eligible
United Kingdom employees. Total contributions amounted to $130,000, $56,000 and
$37,000 for the years ended June 30, 2004, 2003 and 2002, respectively. Deferred Compensation Plan- In January 1999, the Company established a
deferred compensation plan (the DCP) covering highly compensated employees as
defined by the DCP. Under the plan, eligible employees may contribute a
portion of their salary on a pre-tax basis. The DCP is a non-qualified plan,
therefore the associated liabilities are included in the Companys June 30,
2004 and 2003 Consolidated Balance Sheets. In addition, the Company has
established a rabbi trust to finance obligations under the DCP with
corporate-owned life insurance policies on participants. The cash surrender
value of such policies is also included in the Companys June 30, 2004 and 2003
Consolidated Balance Sheets. Total expense under the DCP for the years ended
June 30, 2004, 2003 and 2002 amounted to $161,000, $131,000 and $176,000,
respectively. - 87 -




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##### Table of Contents



Group Medical Plans- Effective January 1, 2000, the Company converted all of
its U.S.-based employees to a group medical self-insurance plan. The Company
has employed an administrator to manage this plan. Under terms of this plan,
both the Company and eligible employees are required to make contributions.
The administrator reviews all claims filed and authorizes the payment of
benefits. The Company has stop-loss insurance coverage on all individual
claims exceeding $250,000. Prior to January 1, 2000, the Company had a group
medical self-insurance plan covering certain of its employees, and medical
insurance coverage under managed care health plans covering the remaining
employees. The Company provides supplemental medical insurance coverage to its
non U.S.-based employees. Total
expense for medical insurance coverage including premiums amounted to
$13,014,000, $11,454,000 and $11,588,000 for the years ended June 30, 2004,
2003 and 2002, respectively. Under the self-insurance plan, the Company
expenses amounts as claims are incurred and recognizes a liability for incurred
but not reported claims. At June 30, 2004 and 2003, the Company accrued
$2,924,000 and $3,425,000, respectively, as a liability for costs incurred but
not paid under this plan. In December 1998, a subsidiary, CheckFree Management Corporation, was created
to administer the Companys employee medical benefits program. The Company
owns a controlling interest in the subsidiary and, therefore, the accompanying
consolidated financial statements include the subsidiarys results of
operations. On June 30, 2004, CheckFree Management Corporation was legally
merged into CheckFree Services Corporation. NOTE 16.    REORGANIZATION CHARGE During the year ended June 30, 2002, the Company announced it would streamline
operations in its Electronic Commerce Division, refine its strategy for the
i-Solutions business unit of its Software Division, and discontinue certain
product lines associated with its Investment Services Division. As a result of
these actions, the Company closed or consolidated operations in several
locations and eliminated certain other positions in the Company. The
streamlining of its Electronic Commerce Division operations results from
efficiencies gained from the consolidation of three legacy transaction
processing platforms to its Genesis platform and resulted in the closing of its
San Francisco, California location on April 30, 2002; its Houston, Texas
location on June 30, 2002; and its Austin, Texas location on September 30,
2002. The refinement in strategy for the i-Solutions business resulted in the
closing of its Ann Arbor, Michigan and Singapore locations on March 19, 2002.
Revenues and operating income related to the discontinued product lines in the
Investment Services Division are immaterial to the Company. As a result of these actions, the Company recorded $16,365,000 of
reorganization charges for the year ended June 30, 2002, which included
$1,640,000 of non-cash asset impairment charges, $10,962,000 of severance and
related benefits costs for the termination of 707 employees, and $3,763,000 of
other exit costs, including lease termination fees and other closure, employee
and professional costs. For the year ended June 30, 2003, the Company reviewed
its estimated remaining liabilities under this reorganization plan and recorded
an additional charge of $1,405,000, which includes $165,000 of severance and
related benefits and $1,240,000 of other exit costs, including lease
termination fees and other closure, employee and professional costs. These
amounts are included in reorganization charge in the Companys Consolidated
Statement of Operations. The Company expects the reorganization to be
completed by October 2005 and anticipates no additional charges. - 88 -




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##### Table of Contents



A summary of activity related to the reorganization reserve is as follows (in
thousands): Severanceand Other
    
    Office ClosureEmployee
    
    and Business
    
    OtherCosts
    
    Exit Costs
    
    Exit Costs
    
    TotalInitial reorganization charge
    
    $
    10,962
    
    
    $
    3,677
    
    
    $
    86
    
    
    $
    14,725Cash payments, year ended June 30, 2002
    
    
    (6,261
    )
    
    
    (649
    )
    
    
    (15
    )
    
    
    (6,925
    )Reorganization reserve at June 30, 2002
    
    
    4,701
    
    
    
    3,028
    
    
    
    71
    
    
    
    7,800Additional reorganization charge
    
    
    165
    
    
    
    1,248
    
    
    
    (8
    )
    
    
    1,405Cash payments, year ended June 30, 2003
    
    
    (4,866
    )
    
    
    (2,739
    )
    
    
    (63
    )
    
    
    (7,668
    )Balance as of June 30, 2003
    
    
    
    
    
    
    1,537
    
    
    
    
    
    
    
    1,537Cash payments, year ended June 30, 2004
    
    
    
    
    
    
    (805
    )
    
    
    
    
    
    
    (805
    )Balance as of June 30, 2004
    
    $
    
    
    
    $
    732
    
    
    $
    
    
    
    $
    732
 In conjunction with the reorganization activities described above, the Company
revised the estimated useful lives of the Existing Product Technology and
Customer Relationships intangible assets related to the product lines that were
to be discontinued from its Mobius Group acquisition, the Workforce intangible
asset from its strategic agreement with Bank
of America, and certain property and equipment assets associated with office
locations that were to be closed. This resulted in additional amortization
expense of $1,035,000 for the year ended June 30, 2003, which represents an
after-tax impact of $621,000 and an impact to earnings per share of $(0.01) for
the year ended June 30, 2003, and additional depreciation and amortization
expense of $3,318,000 for the year ended June 30, 2002, which represents an
after-tax impact of $2,710,000 and an impact to earnings per share of $(0.03)
for the year ended June 30, 2002. NOTE 17.    DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative financial instruments to manage its exposure to the
variability associated with the interest rate sensitive portion of processing
and servicing revenue, specifically, to effectively fix the interest rate on a
portion of its interest rate sensitive revenue. At inception, the Company
formally designates and documents its swaps as cash flow hedges of the
variability in interest rate sensitive revenue and states the risk management
objectives and strategies for undertaking the hedge transaction. The Company formally assesses, both at inception and on an ongoing basis,
whether the swap is highly effective in offsetting changes in the cash flows of
the underlying interest rate sensitive revenue. The critical terms of the
interest rate swap and the hedged interest rate sensitive revenue are the same.
Accordingly, there is no ineffectiveness relating to these interest rate
swaps. Pursuant to SFAS 133, the effective portion of changes in the fair
value of these interest rate swaps are recorded, net of tax, as a component of
accumulated other comprehensive income. Any ineffectiveness of the cash flow
hedge would be reclassified to processing and servicing revenue as earnings
are affected by the cash flow variability of the underlying interest rate
sensitive revenue. On April 23, 2004, the Company entered into three interest rate swap
agreements. Each swap agreement has a notional amount of $25,000,000 and an
average life of 1.94 years. Changes in fair value of the net asset (liability) related to the Companys
cash flow hedges included in other comprehensive income (loss) are summarized
as follows (after-tax, in thousands): June 30, 2004Beginning balance
    
    $
    Net losses from cash flow hedges
    
    
    (544
    )Net amounts reclassified to earnings
    
    
    Ending balance
    
    $
    (544
    )
 - 89 -




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Approximately $76,000 of the ending balance of deferred net losses associated
with cash flow hedges are expected to be reclassified from accumulated other
comprehensive income to earnings during the next twelve months. The Company
expects that the amount reclassified will generally offset the anticipated
change in earnings relating to the variability of the cash flows of the
underlying interest rate sensitive revenue. The maximum length of time over
which the Company is hedging is 4 years. NOTE 18.    INCOME TAXES The Company accounts for income taxes in accordance with SFAS 109, Accounting
for Income Taxes, which requires an asset and liability approach to financial
accounting and reporting for income taxes. In accordance with SFAS 109,
deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax expense
(benefit) is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities. The Companys income tax expense (benefit) consists of the following (in
thousands): Year Ended June 30,2004
    
    2003
    
    2002Current:Federal
    
    $
    11,780
    
    
    $
    1,700
    
    
    $
    State and local
    
    
    2,191
    
    
    
    
    
    
    
    Foreign
    
    
    154
    
    
    
    341
    
    
    
    281Total current
    
    
    14,125
    
    
    
    2,041
    
    
    
    281Deferred federal and state
    
    
    (12,930
    )
    
    
    (35,147
    )
    
    
    (99,152
    )Total income tax expense (benefit)
    
    $
    1,195
    
    
    $
    (33,106
    )
    
    $
    (98,871
    )
 - 90 -




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##### Table of Contents



Income tax expense (benefit) differs from the amounts computed by applying the
U.S. federal statutory income tax rate of 35 percent to income before income
taxes as a result of the following (in thousands): Year Ended June 30,2004
    
    2003
    
    2002Computed expected tax expense (benefit)
    
    $
    4,106
    
    
    $
    (28,838
    )
    
    $
    (188,937
    )Nondeductible intangible charges
    
    
    
    
    
    
    2,094
    
    
    
    101,294State and local taxes, net of federal
income tax benefits
    
    
    (796
    )
    
    
    (4,715
    )
    
    
    (10,321
    )Deemed dividend from foreign affiliate
    
    
    1,329
    
    
    
    
    
    
    
    Federal, state and foreign tax credits
    
    
    (3,779
    )
    
    
    (2,080
    )
    
    
    (1,364
    )Valuation allowance  foreign research tax credit
    
    
    1,114
    
    
    
    
    
    
    
    Impact of change in effective state tax rates
    
    
    (1,353
    )
    
    
    
    
    
    
    Other, net
    
    
    574
    
    
    
    433
    
    
    
    457Total income tax expense (benefit)
    
    $
    1,195
    
    
    $
    (33,106
    )
    
    $
    (98,871
    )
 The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 2004 and
2003 are as follows (in thousands): June 30,2004
    
    2003Deferred tax assets:Federal, state and foreign net operating loss carryforwards
    
    $
    19,768
    
    
    $
    48,008Federal, state and foreign tax credit carryforwards
    
    
    14,530
    
    
    
    12,289Allowance for bad debts and returns
    
    
    855
    
    
    
    845Accrued compensation and related items
    
    
    1,577
    
    
    
    1,369Stock warrants
    
    
    14,797
    
    
    
    17,433Property and equipment
    
    
    
    
    
    
    518Other investments and other
    
    
    4,702
    
    
    
    3,964Deferred revenue
    
    
    1,481
    
    
    
    1,786Reserve accruals
    
    
    7,140
    
    
    
    4,891Valuation allowance  foreign research tax credit
    
    
    (1,114
    )
    
    
    Deferred tax assets
    
    
    63,736
    
    
    
    91,103Deferred tax liabilities:Capitalized software
    
    
    (1,101
    )
    
    
    (5,246
    )Property and equipment
    
    
    (2,346
    )
    
    
    Intangible assets
    
    
    (28,652
    )
    
    
    (73,383
    )Deferred tax liabilities
    
    
    (32,099
    )
    
    
    (78,629
    )Net deferred tax assets
    
    $
    31,637
    
    
    $
    12,474
 At June 30, 2004, the Company has approximately $146,000,000 of state and
$38,000,000 of federal net operating loss carryforwards available, expiring in
2005 to 2024 and 2019 to 2024, respectively. Additionally, at June 30, 2004,
the Company has approximately $500,000 of state, $12,600,000 of federal and
$1,400,000 of foreign tax credit carryforwards available, expiring in 2008 to
2013, 2018 to 2024 and 2007 to 2009, respectively. The realization of the Companys deferred tax assets, which relate primarily to
net operating loss carryforwards and temporary differences is dependent on
generating sufficient taxable income in future periods. At each year end, the
Company evaluates the recoverability of its operating loss carryforwards and
research tax credits. Based on an evaluation of expected future profitability,
management determined that is was more likely than not that certain of its
foreign research tax credits would not be recovered. Accordingly, the Company
established a valuation allowance of $1,114,000 representing that portion of
the foreign research credit which may not be utilized. - 91 -




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##### Table of Contents



NOTE 19.    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Year Ended June 30,2004
    
    2003
    
    2002(In thousands)Interest paid
    
    $
    6,233
    
    
    $
    12,028
    
    
    $
    12,041Call premium for redemption of convertible notes
    
    $
    4,813
    
    
    $
    
    
    
    $
    Income taxes paid, net
    
    $
    8,152
    
    
    $
    2,770
    
    
    $
    49Supplemental disclosure of non-cash investing and
financing activities:Capital lease additions and acquisitions of other
long-term assets
    
    $
    1,247
    
    
    $
    13,105
    
    
    $
    1,539Stock funding of 401(k) match
    
    $
    3,144
    
    
    $
    3,229
    
    
    $
    3,621Stock funding of Associate Stock Purchase Plan
    
    $
    3,208
    
    
    $
    3,274
    
    
    $
    4,433
 NOTE 20.    BUSINESS SEGMENTS The Company operates in three business segments - Electronic Commerce, Software
and Investment Services. These reportable segments are strategic business
units that offer different products and services. A further description of each
business segment along with the Corporate services area follows:  
    
    Electronic Commerce- Electronic Commerce provides services that
allow consumers to receive electronic bills through the Internet, pay
bills received electronically or in paper form to anyone and perform
ordinary banking transactions including balance inquiries, transfers
between accounts and on-line statement reconciliation. These services
are primarily directed to financial institutions, internet financial
sites, personal financial management software providers and the
customers of these businesses.
    
    Software- Software includes software products and related services
for electronic billing, ACH processing and account reconciliation.
These products and services are primarily directed to large
corporations and financial institutions.
    
    Investment Services - Investment Services includes investment
portfolio management services and investment trading and reporting
services. These products and services are primarily directed to
fee-based money managers and financial planners who manage investments
of institutions and high net worth individuals.
    
    Corporate - Corporate services include human resources, legal,
finance and various other of the Companys unallocated overhead
charges. The accounting policies of the segments are the same as those described in Note 1
Summary of Significant Accounting Policies. The Company evaluates
performance based on revenues and operating income (loss) of the respective
segments. Segment operating income (loss) excludes intangible asset
amortization, in-process research and development costs and significant
one-time charges related to various business and asset acquisitions. There
are no intersegment sales. - 92 -




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##### Table of Contents



The following sets forth certain financial information attributable to the
Companys business segments for the years ended June 30, 2004, 2003 and 2002: Year Ended June 30,2004
    
    2003
    
    2002(In thousands)Revenues:Electronic Commerce
    
    $
    452,732
    
    
    $
    405,373
    
    
    $
    352,054Investment Services
    
    
    86,270
    
    
    
    81,562
    
    
    
    79,574Software
    
    
    67,462
    
    
    
    64,711
    
    
    
    58,849Total
    
    $
    606,464
    
    
    $
    551,646
    
    
    $
    490,477Segment operating income (loss):Electronic Commerce
    
    $
    155,724
    
    
    $
    115,539
    
    
    $
    39,010Investment Services
    
    
    19,911
    
    
    
    21,062
    
    
    
    24,376Software
    
    
    14,293
    
    
    
    18,008
    
    
    
    5,789Corporate
    
    
    (33,256
    )
    
    
    (33,798
    )
    
    
    (36,500
    )Total
    
    
    156,672
    
    
    
    120,811
    
    
    
    32,675Purchase accounting amortization
    
    
    (136,558
    )
    
    
    (183,342
    )
    
    
    (394,009
    )Impairment of intangible assets
    
    
    
    
    
    
    (10,228
    )
    
    
    (155,072
    )Reorganization charge
    
    
    
    
    
    
    (1,405
    )
    
    
    (16,365
    )Impact of warrants
    
    
    
    
    
    
    644
    
    
    
    (2,748
    )In-process research and development
    
    
    (324
    )
    
    
    
    
    
    
    Loss on investments
    
    
    
    
    
    
    (3,228
    )
    
    
    Equity in net loss of joint venture
    
    
    (593
    )
    
    
    
    
    
    
    Interest, net
    
    
    (7,467
    )
    
    
    (5,648
    )
    
    
    (4,302
    )Total income (loss)
before income taxes
and cumulative effect
ofaccounting change
    
    $
    11,730
    
    
    $
    (82,396
    )
    
    $
    (539,821
    )Identifiable assets:Electronic Commerce
    
    $
    1,105,751
    
    
    $
    1,046,063
    
    
    $
    1,218,340Investment Services
    
    
    62,838
    
    
    
    37,696
    
    
    
    41,347Software
    
    
    40,171
    
    
    
    39,782
    
    
    
    63,792Corporate
    
    
    340,172
    
    
    
    463,729
    
    
    
    313,998Total
    
    $
    1,548,932
    
    
    $
    1,587,270
    
    
    $
    1,637,477Capital expenditures:Electronic Commerce
    
    $
    18,113
    
    
    $
    31,963
    
    
    $
    15,654Investment Services
    
    
    5,446
    
    
    
    4,857
    
    
    
    2,643Software
    
    
    708
    
    
    
    381
    
    
    
    2,074Corporate
    
    
    462
    
    
    
    228
    
    
    
    3,148Total
    
    $
    24,729
    
    
    $
    37,429
    
    
    $
    23,519Depreciation and amortization:Electronic Commerce
    
    $
    158,873
    
    
    $
    202,313
    
    
    $
    385,729Investment Services
    
    
    6,725
    
    
    
    8,126
    
    
    
    10,706Software
    
    
    7,115
    
    
    
    10,665
    
    
    
    32,887Corporate
    
    
    4,869
    
    
    
    5,534
    
    
    
    6,243Total
    
    $
    177,582
    
    
    $
    226,638
    
    
    $
    435,565
 - 93 -




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##### Table of Contents



For the years ended June 30, 2004, 2003, and 2002, one customer accounted for
$119,003,000, $94,265,000 and $60,022,000 of consolidated revenues,
respectively. Revenues for that customer were generated through the Electronic
Commerce, Software and Investment Services segments. Foreign sales based on
the location of the customer, for the years ended June 30, 2004, 2003 and 2002
were $13,157,000, $9,491,000 and $10,772,000, respectively.
Long-lived assets by geographic area are as follows (in thousands): Year Ended June 30,2004
    
    2003United States
    
    $
    992,438
    
    
    $
    1,037,213Other
    
    
    17,017
    
    
    
    4,616Total
    
    $
    1,009,455
    
    
    $
    1,041,829
 NOTE 21.    SUBSEQUENT EVENTS On August 20, 2004, the Company entered into a senior secured revolving credit
facility that provides for up to $185.0 million in revolving credit loans,
including swingline loans and the issuance of letters of credit. The revolving
credit facility matures in three years and borrowings are subject to periodic
payments and bear interest at one of two rates, at the Companys option; either
Prime plus 0% to 1% or LIBOR plus 1% to 2%. NOTE 22.    SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following quarterly financial information for the years ended June 30, 2004
and 2003 includes all adjustments necessary for a fair presentation of
quarterly results of operations (in thousands, except per share data): Quarter EndedSeptember 30
    
    December 31
    
    March 31
    
    June 30FISCAL 2004Total revenue
    
    $
    141,264
    
    
    $
    149,936
    
    
    $
    155,238
    
    
    $
    160,026Income (loss) from operations
    
    
    (7,388
    )
    
    
    5,450
    
    
    
    9,387
    
    
    
    12,341Net income (loss)
    
    
    (6,669
    )
    
    
    (1,896
    )
    
    
    7,696
    
    
    
    11,404Basic earnings per share:Net income
(loss) per common share
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    0.09
    
    
    $
    0.13Equivalent number of shares
    
    
    89,463
    
    
    
    89,624
    
    
    
    89,924
    
    
    
    90,166Diluted earnings per share:Net income
(loss) per common share
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    0.08
    
    
    $
    0.12Equivalent number of shares
    
    
    89,463
    
    
    
    89,624
    
    
    
    92,053
    
    
    
    92,279
 - 94 -




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##### Table of Contents



Quarter EndedSeptember 30
    
    December 31
    
    March 31
    
    June 30FISCAL 2003Total revenue
    
    $
    130,235
    
    
    $
    135,505
    
    
    $
    141,301
    
    
    $
    144,605Loss from operations
    
    
    (21,151
    )
    
    
    (17,437
    )
    
    
    (11,695
    )
    
    
    (23,237
    )Net loss
    
    
    (16,176
    )
    
    
    (11,207
    )
    
    
    (7,830
    )
    
    
    (16,971
    )Basic earnings per share:Net loss per common share
    
    $
    (0.18
    )
    
    $
    (0.13
    )
    
    $
    (0.09
    )
    
    $
    (0.19
    )Equivalent number of shares
    
    
    88,378
    
    
    
    88,694
    
    
    
    88,949
    
    
    
    89,215Diluted earnings per share:Net loss per common share
    
    $
    (0.18
    )
    
    $
    (0.13
    )
    
    $
    (0.09
    )
    
    $
    (0.19
    )Equivalent number of shares
    
    
    88,378
    
    
    
    88,694
    
    
    
    88,949
    
    
    
    89,215
 The sum of the quarterly loss per share does not equal the year-to-date loss
per share for the respective fiscal periods, due to changes in the number of
shares outstanding at each quarter-end. - 95 -




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##### Table of Contents



SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2004, 2003 AND 2002 BALANCE ASOF
    
    CHARGES TO
    
    
    
    
    
    BALANCE ASBEGINNING
    
    COSTS AND
    
    
    
    
    
    OF END OFOF PERIOD
    
    EXPENSES
    
    DEDUCTIONS
    
    PERIOD(In thousands)Allowance for Doubtful Accounts2004
    
    $
    1,670
    
    
    $
    (757
    )
    
    $
    79
    
    
    $
    8342003
    
    $
    2,000
    
    
    $
    (232
    )
    
    $
    98
    
    
    $
    1,6702002
    
    $
    2,963
    
    
    $
    689
    
    
    $
    1,652
    
    
    $
    2,000Reserve for Returns2004
    
    $
    1,262
    
    
    $
    2,483
    
    
    $
    2,574
    
    
    $
    1,1712003
    
    $
    1,706
    
    
    $
    1,235
    
    
    $
    1,679
    
    
    $
    1,2622002
    
    $
    4,663
    
    
    $
    (514
    )
    
    $
    2,443
    
    
    $
    1,706
 - 96 -




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##### Table of Contents



Item 9.
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 
  Item 9A.
    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
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission (SEC). 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 the 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 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 June 30, 2004, that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. 
  Item 9B.
    Other Information. None. - 97 -




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##### Table of Contents



Part III 
  Item 10.
    Directors and Executive Officers of the Registrant. The information required by this item is included under the captions
Election of Directors, Executive Officersand Section16(a)Beneficial
Ownership Reporting Compliancein our Proxy Statement relating to our 2004
Annual Meeting of Stockholders to be held on October 27, 2004, and is
incorporated herein by reference. 
  Item 11.
    Executive Compensation. The information required by this item is included under the captions
Information Concerning the Board of Directors, Executive Officers and
Principal Stockholdersand Information Concerning Compensationin our Proxy
Statement and is incorporated herein by reference. 
  Item 12.
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item is included under the captions
Ownership of Our Common Stock by Directors and Executive Officers, Ownership
of Our Common Stock by Principal Stockholdersand Equity Compensation Plan
Informationin our Proxy Statement and is incorporated herein by reference. 
  Item 13.
    Certain Relationships and Related Transactions. The information required by this item is included under the captions
Certain Relationships and Related Transactionsand Compensation Committee
Interlocks and Insider Participationin our Proxy Statement and is
incorporated herein by reference. 
  Item 14.
    Principal Accountant Fees and Services. The information required by this item is included under the caption Fees
of the Independent Public Accountants for Fiscal 2004in our Proxy Statement
and is incorporated herein by reference. - 98 -




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##### Table of Contents



Part IV 
  Item 15.
    Exhibits and Financial Statement Schedules.  (a)
    
    The following documents are filed as part of this report:(1)     The following financial statements are included herein in Item 8:Independent Auditors Report.Consolidated Balance Sheets as of June 30, 2004 and 2003.Consolidated Statements of Operations for each of the three years
in the period ended June 30, 2004.Consolidated Statements of Stockholders Equity for each of the
three years in the period ended June 30, 2004.Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 2004.Notes to the Consolidated Financial Statements.(2)     The following financial statement schedule is included in this
Annual Report on Form 10-K and should be read in conjunction with
the Consolidated Financial Statements contained in Item 8:Schedule II  Valuation and Qualifying Accounts. Schedules not listed above are omitted because of the absence of the conditions
under which they are required or because the required information is included
in the financial statements or the notes thereto.  (3)
    
    Exhibits: Exhibit
    
    ExhibitNumber
    
    Description2(a)
    
    Agreement and Plan Merger and Contribution Agreement, dated as of
February 15, 2000, among Microsoft Corporation, First Data
Corporation, Citibank, N.A., MS II, LLC, First Data, L.L.C., H & B
Finance, Inc., First Data International Partner, Inc., MSFDC
International, Inc., Citicorp Electronic Commerce, Inc., CheckFree
Holdings Corporation, Chopper Merger Corporation, and CheckFree
Corporation. (Reference is made to Exhibit 2(b) of the Registration
Statement on Form S-4 (Registration No. 333-32644) filed with the
Securities and Exchange Commission on March 16, 2000, and incorporated
herein by reference.)
 - 99 -




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##### Table of Contents



2(b)
    
    Amended and Restated Agreement and Plan of Merger, dated as of
July 7, 2000, among CheckFree Holdings Corporation, Microsoft
Corporation, First Data Corporation, Citibank, N.A., H&B Finance,
Inc., FDC International Partner, Inc., FDR Subsidiary Corp., MS FDC
International, Inc., Citi TransPoint Holdings Inc., TransPoint
Acquisition Corporation, Tank Acquisition Corporation, Chopper Merger
Corporation, CheckFree Corporation, Microsoft II, LLC and First Data,
L.L.C. (Reference is made to Appendix A of the Registration Statement
on Form S-4 (Registration No. 333-41098) filed with the Securities and
Exchange Commission on July 10, 2000, and incorporated herein by
reference.)2(c)
    
    Amended and Restated Strategic Alliance Master Agreement, dated
as of April 26, 2000, among CheckFree Holdings Corporation, CheckFree
Services Corporation and Bank of America, N.A. (Reference is made to
Appendix A to the Companys Proxy Statement for the Special Meeting of
Stockholders held on September 28, 2000, and incorporated herein by
reference.)2(d)
    
    Stock Purchase Agreement by and among UIL Holdings Corporation,
United Resources, Inc. and CheckFree Corporation, dated December 16,
2003 (Reference is made to Exhibit 2 to the Companys Quarterly Report
on Form 10-Q for the quarter ended December 31, 2003, filed with the
Securities and Exchange Commission on February 12, 2004, and
incorporated herein by reference; the Company agrees to furnish
supplementally a copy of any omitted schedules to this Agreement to
the Securities and Exchange Commission upon request).3(a)
    
    Amended and Restated Certificate of Incorporation of the Company.
(Reference is made to Exhibit 4(e) to the Registration Statement on
Form S-8 (Registration No. 333-50322), filed with the Securities and
Exchange Commission on November 20, 2000, and incorporated herein by
reference.)3(b)
    
    Certificate of Ownership and Merger Merging CheckFree Corporation
into CheckFree Holdings Corporation. (Reference is made to Exhibit
3(b) to the Companys Form 10-K for the year ended June 30, 2000,
filed with the Securities and Exchange Commission on September 26,
2000, and incorporated herein by reference.)3(c)
    
    By-Laws of the Company. (Reference is made to Exhibit 3(b) to
the Current Report on Form 8-K, dated December 22, 1997, filed with
the Securities and Exchange Commission on December 30, 1997, and
incorporated herein by reference.)3(d)
    
    Form of Specimen Stock Certificate. (Reference is made to
Exhibit 3(d) to the Companys Form 10-K for the year ended June 30,
2000, filed with the Securities and Exchange Commission on September 26,
2000, and incorporated herein by reference.)4(a)
    
    Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND ELEVENTH of
the Companys Amended and Restated Certificate of Incorporation
(contained in the Companys Amended and Restated Certificate of
Incorporation filed as Exhibit 3(a) hereto) and Articles II, III, IV,
VI and VIII of the Companys By-Laws (contained in the Companys
By-Laws filed as Exhibit 3(b) hereto.)4(b)
    
    Rights Agreement, dated as of December 16, 1997, by and between
the Company and The Fifth Third Bank, as Rights Agent. (Reference is
made to Exhibit 4.1 to Registration Statement on Form 8-A, filed with
the Securities and Exchange Commission on December 19, 1997, and
incorporated herein by reference.)
 - 100 -




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4(c)
    
    Amendment No. 1 to the Rights Agreement, dated as of February 5,
1999, between CheckFree Corporation and the Fifth Third Bank, as
Rights Agent. (Reference is made to Exhibit 4.2 to Amendment No. 1 to
Registration Statement on Form 8-A (File No. 0-26802), filed with the
Securities and Exchange Commission on May 12, 1999, and incorporated
herein by reference.)4(d)
    
    Amendment No. 2 to the Rights Agreement, dated as of August 3,
2000, between CheckFree Corporation and the Fifth Third Bank, as
Rights Agent. (Reference is made to Exhibit 4.3 to Amendment No. 2 to
Registration Statement on Form 8-A (File No. 0-26802), filed with the
Securities and Exchange Commission on October 3, 2000, and
incorporated herein by reference.)4(e)
    
    Amendment No. 3 to the Rights Agreement, dated as of January 25,
2002, between CheckFree Corporation and Wells Fargo Bank Minnesota,
National Association, as Rights Agent. (Reference is made to Exhibit 4.4
to Amendment No. 3 to Registration Statement on Form 8-A (File No. 0-26802),
filed with the Securities and Exchange Commission on January 28, 2002, and incorporated herein by reference.)10(a)
    
    CheckFree Corporation Second Amended and Restated Associate
Stock Purchase Plan. (Reference is made to Exhibit 4(a) to the
Registration Statement on Form S-8 (Registration No. 333-101284),
filed with the Securities and Exchange Commission on November 18,
2002, and incorporated herein by reference.)10(b)
    
    CheckFree Corporation 401(k) Plan. (Reference is made to
Exhibit 10.1 to the Registration Statement on Form S-8 (Registration
No. 333-91490), filed with the Securities and Exchange Commission on
June 28, 2002, and incorporated herein by reference.)10(c)
    
    CheckFree Corporation 2002 Stock Incentive Plan. (Reference is
made to Appendix B to the Companys Definitive Proxy Statement for the
2002 Annual Meeting of Stockholders held on November 6, 2002, filed
with the Securities and Exchange Commission on October 3, 2002, and
incorporate herein by reference.)10(d)
    
    CheckFree Corporation Third Amended and Restated 1995 Stock
Option Plan. (Reference is made to Exhibit 4(d) to Registration
Statement on Form S-8, as amended (Registration No. 333-50322), filed
with the Securities and Exchange Commission on November 20, 2000, and
incorporated herein by reference.)10(e)
    
    CheckFree Corporation Amended and Restated 1993 Stock Option
Plan. (Reference is made to Exhibit 4(a) to Post-Effective Amendment
No. 1 to Form S-8, as amended (Registration No. 33-98442), filed with
the Securities and Exchange Commission on January 9, 1998, and
incorporated herein by reference.)10(f)
    
    CheckFree Corporation Amended and Restated 1983 Non-Statutory
Stock Option Plan. (Reference is made to Exhibit 4(a) to
Post-Effective Amendment No. 1 to Form S-8, as amended (Registration
No. 33-98440), filed with the Securities and Exchange Commission on
January 9, 1998, and incorporated herein by reference.)10(g)
    
    CheckFree Corporation Second Amended and Restated 1983 Incentive
Stock Option Plan. (Reference is made to Exhibit 4(a) to
Post-Effective Amendment No. 1 to Form S-8, as amended (Registration
No. 33-98444), filed with the Securities and Exchange Commission on
January 9, 1998, and incorporated herein by reference.)
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##### Table of Contents



10(h)
    
    Form of Indemnification Agreement. (Reference is made to
Exhibit 10(a) to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated herein by reference.)10(i)
    
    Schedule identifying material details of Indemnification
Agreements substantially identical to Exhibit 10(h). (Reference is
made to Exhibit 10(i) to the Companys Form 10-K for the year ended
June 30, 2003, filed with the Securities and Exchange Commission on
September 15, 2003, and incorporated herein by reference.)10(j)
    
    Confidentiality and Noncompetition Agreement, dated May 7, 1999,
between Peter J. Kight and the Company. (Reference is made to Exhibit
10(j) to the Companys Form 10-K for the year ended June 30, 2003,
filed with the Securities and Exchange Commission on September 15,
2003, and incorporated herein by reference.)10(k)
    
    Noncompetition Agreement, dated February 11, 2003, between Mark
A. Johnson and the Company. (Reference is made to Exhibit 10(k) to
the Companys Form 10-K for the year ended June 30, 2003, filed with
the Securities and Exchange Commission on September 15, 2003, and
incorporated herein by reference.)10(l)
    
    Confidentiality and Nonsolicitation Agreement, dated February
11, 2003, between Mark A. Johnson and the Company. (Reference is made
to Exhibit 10(l) to the Companys Form 10-K for the year ended June
30, 2003, filed with the Securities and Exchange Commission on
September 15, 2003, and incorporated herein by reference.)10(m)
    
    Executive Employment Agreement between the Company and Peter J.
Kight. (Reference is made to Exhibit 10(z) to the Companys Form 10-K
for the year ended June 30, 1997, filed with the Securities and
Exchange Commission on September 26, 1997, and incorporated herein by
reference.)10(n)
    
    CheckFree Corporation 2003 Incentive Compensation Plan.
(Reference is made to Appendix A to the Companys Proxy Statement for
the Annual Meeting of Stockholders held on October 29, 2003, and
incorporated herein by reference.)10(o)
    
    Form of Stockholder Agreement entered into between the Company
and each of Microsoft Corporation and First Data Corporation.
(Reference is made to Exhibit 10(ff) of the Companys Registration
Statement on Form S-4 (Registration No. 333-41098) filed with the
Securities and Exchange Commission on July 10, 2000 and incorporated
herein by
reference.)**
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##### Table of Contents



10(p)
    
    Form of Registration Rights Agreement entered into between the
Company and each of Microsoft Corporation and First Data Corporation.
(Reference is made to Exhibit 10(gg) of the Companys Registration
Statement on Form S-4 (Registration No. 333-41098) filed with the
Securities and Exchange Commission on July 10, 2000 and incorporated
herein byreference.)**10(q)
    
    Form of Registration Rights Agreement entered into between the
Company and Citibank, N.A. (Reference is made to Exhibit 10(hh) of
the Companys Registration Statement on Form S-4 (Registration No. 333-41098)
filed with the Securities and Exchange Commission on July 10,
2000 and incorporated herein by reference.)**10(r)
    
    Form of Commercial Alliance Agreement entered into between the
Company and Microsoft Corporation. (Reference is made to Exhibit
10(ff) of the Companys Amendment No. 1 to the Registration Statement
on Form S-4 (Registration No. 333-32644) filed with the Securities and
Exchange Commission on April 18, 2000 and incorporated herein by
reference.)**10(s)
    
    Form of Marketing Agreement entered into between the Company and
First Data Corporation. (Reference is made to Exhibit 10(gg) of the
Companys Amendment No. 1 to the Registration Statement on Form S-4
(Registration No. 333-32644) filed with the Securities and Exchange
Commission on April 18, 2000 and incorporated herein by reference.)**10(t)
    
    Master Agreement, dated August 5, 2003, among Bastogne, Inc.,
CheckFree Services Corporation and SunTrust Bank. (Reference is made
to Exhibit 10(v) to the Companys Form 10-K for the year ended June
30, 2003, filed with the Securities and Exchange Commission on
September 15, 2003, and incorporated herein by reference.)**10(u)
    
    Revolving Credit Agreement, dated August 20, 2004, among
CheckFree Corporation, CheckFree Services Corporation and CheckFree
Investment Corporation, as Borrowers, the lenders from time to time
party thereto, SunTrust Bank, as Administrative Agent, Bank of
America, N.A., as Syndication Agent and KeyBank National Association,
US Bank and BNP Paribas, as Documentation Agents. (Reference is made
to Exhibit 10.1 of the Companys Current Report on Form 8-K filed with
the Securities and Exchange Commission on August 25, 2004 and
incorporated herein by reference).
 - 103 -




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21
    
    *
    
    Subsidiaries of the Company.23
    
    *
    
    Consent of Deloitte & Touche LLP.24
    
    *
    
    Power of Attorney.31(a)
    
    *
    
    Certification of Chief Executive Officer under Section 302
of Sarbanes-Oxley Act of 2002.31(b)
    
    *
    
    Certification of Chief Financial Officer under Section 302
of Sarbanes-Oxley Act of 2002.32(a)
    
    ***
    
    Certification of Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002.32(b)
    
    ***
    
    Certification of Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002.
   *
    
    Filed with this report.**
    
    Portions of this Exhibit have been given confidential treatment by the Securities and Exchange Commission.***
    
    Furnished with this report.  (b)
    
    Exhibits.The exhibits to this report follow the Signature Page.(c)
    
    Financial Statement Schedules.The financial statement schedule is included in Item 8 to
this Annual Report on Form 10-K. - 104 -




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, we have duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized. CHECKFREE CORPORATIONDate: September 3, 2004
    
    By:
    
    /s/ David E. MangumDavid E. Mangum, Executive Vice
President and Chief Financial Officer
 Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on our
behalf and in the capacities indicated on the 3rd day of September,
2004. Signature
    
    Title*Peter J. Kight
Peter J. Kight
    
    Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)/s/ David E. Mangum
David E. Mangum
    
    Executive Vice President and Chief Financial Officer
(Principal Financial Officer)/s/ John J. Browne, Jr.
John J. Browne, Jr.
    
    Vice President, Controller, and Chief Accounting Officer
(Principal Accounting Officer)*William P. Boardman
William P. Boardman
    
    Director*James D. Dixon
James D. Dixon
    
    Director*Mark A. Johnson
Mark A. Johnson
    
    Director*Lewis C. Levin
Lewis C. Levin
    
    Director*Eugene F. Quinn
Eugene F. Quinn
    
    Director*Jeffrey M. Wilkins
Jeffrey M. Wilkins
    
    Director
 *By:
    
    /s/ Curtis A. LovelandCurtis A. Loveland,Attorney-in-Fact
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EXHIBIT INDEX Exhibit
    
    ExhibitNumber
    
    Description2(a)
    
    Agreement and Plan Merger and Contribution Agreement, dated as of
February 15, 2000, among Microsoft Corporation, First Data
Corporation, Citibank, N.A., MS II, LLC, First Data, L.L.C., H & B
Finance, Inc., First Data International Partner, Inc., MSFDC
International, Inc., Citicorp Electronic Commerce, Inc., CheckFree
Holdings Corporation, Chopper Merger Corporation, and CheckFree
Corporation. (Reference is made to Exhibit 2(b) of the Registration
Statement on Form S-4 (Registration No. 333-32644) filed with the
Securities and Exchange Commission on March 16, 2000, and incorporated
herein by reference.)2(b)
    
    Amended and Restated Agreement and Plan of Merger, dated as of
July 7, 2000, among CheckFree Holdings Corporation, Microsoft
Corporation, First Data Corporation, Citibank, N.A., H&B Finance,
Inc., FDC International Partner, Inc., FDR Subsidiary Corp., MS FDC
International, Inc., Citi TransPoint Holdings Inc., TransPoint
Acquisition Corporation, Tank Acquisition Corporation, Chopper Merger
Corporation, CheckFree Corporation, Microsoft II, LLC and First Data,
L.L.C. (Reference is made to Appendix A of the Registration Statement
on Form S-4 (Registration No. 333-41098) filed with the Securities and
Exchange Commission on July 10, 2000, and incorporated herein by
reference.)2(c)
    
    Amended and Restated Strategic Alliance Master Agreement, dated
as of April 26, 2000, among CheckFree Holdings Corporation, CheckFree
Services Corporation and Bank of America, N.A. (Reference is made to
Appendix A to the Companys Proxy Statement for the Special Meeting of
Stockholders held on September 28, 2000, and incorporated herein by
reference.)2(d)
    
    Stock Purchase Agreement by and among UIL Holdings Corporation,
United Resources, Inc. and CheckFree Corporation, dated December 16,
2003 (Reference is made to Exhibit 2 to the Companys Quarterly Report
on Form 10-Q for the quarter ended December 31, 2003, filed with the
Securities and Exchange Commission on February 12, 2004, and
incorporated herein by reference; the Company agrees to furnish
supplementally a copy of any omitted schedules to this Agreement to
the Securities and Exchange Commission upon request).3(a)
    
    Amended and Restated Certificate of Incorporation of the Company.
(Reference is made to Exhibit 4(e) to the Registration Statement on
Form S-8 (Registration No. 333-50322), filed with the Securities and
Exchange Commission on November 20, 2000, and incorporated herein by
reference.)3(b)
    
    Certificate of Ownership and Merger Merging CheckFree Corporation
into CheckFree Holdings Corporation. (Reference is made to Exhibit
3(b) to the Companys Form 10-K for the year ended June 30, 2000,
filed with the Securities and Exchange Commission on September 26,
2000, and incorporated herein by reference.)3(c)
    
    By-Laws of the Company. (Reference is made to Exhibit 3(b) to
the Current Report on Form 8-K, dated December 22, 1997, filed with
the Securities and Exchange Commission on December 30, 1997, and
incorporated herein by reference.)




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##### Table of Contents



3(d)
    
    Form of Specimen Stock Certificate. (Reference is made to
Exhibit 3(d) to the Companys Form 10-K for the year ended June 30,
2000, filed with the Securities and Exchange Commission on September 26,
2000, and incorporated herein by reference.)4(a)
    
    Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND ELEVENTH of
the Companys Amended and Restated Certificate of Incorporation
(contained in the Companys Amended and Restated Certificate of
Incorporation filed as Exhibit 3(a) hereto) and Articles II, III, IV,
VI and VIII of the Companys By-Laws (contained in the Companys
By-Laws filed as Exhibit 3(b) hereto.)4(b)
    
    Rights Agreement, dated as of December 16, 1997, by and between
the Company and The Fifth Third Bank, as Rights Agent. (Reference is
made to Exhibit 4.1 to Registration Statement on Form 8-A, filed with
the Securities and Exchange Commission on December 19, 1997, and
incorporated herein by reference.)4(c)
    
    Amendment No. 1 to the Rights Agreement, dated as of February 5,
1999, between CheckFree Corporation and the Fifth Third Bank, as
Rights Agent. (Reference is made to Exhibit 4.2 to Amendment No. 1 to
Registration Statement on Form 8-A (File No. 0-26802), filed with the
Securities and Exchange Commission on May 12, 1999, and incorporated
herein by reference.)4(d)
    
    Amendment No. 2 to the Rights Agreement, dated as of August 3,
2000, between CheckFree Corporation and the Fifth Third Bank, as
Rights Agent. (Reference is made to Exhibit 4.3 to Amendment No. 2 to
Registration Statement on Form 8-A (File No. 0-26802), filed with the
Securities and Exchange Commission on October 3, 2000, and
incorporated herein by reference.)4(e)
    
    Amendment No. 3 to the Rights Agreement, dated as of January 25,
2002, between CheckFree Corporation and Wells Fargo Bank Minnesota,
National Association, as Rights Agent. (Reference is made to Exhibit 4.4
to Amendment No. 3 to Registration Statement on Form 8-A (File No. 0-26802),
filed with the Securities and Exchange Commission on January 28, 2002, and incorporated herein by reference.)10(a)
    
    CheckFree Corporation Second Amended and Restated Associate
Stock Purchase Plan. (Reference is made to Exhibit 4(a) to the
Registration Statement on Form S-8 (Registration No. 333-101284),
filed with the Securities and Exchange Commission on November 18,
2002, and incorporated herein by reference.)10(b)
    
    CheckFree Corporation 401(k) Plan. (Reference is made to
Exhibit 10.1 to the Registration Statement on Form S-8 (Registration
No. 333-91490), filed with the Securities and Exchange Commission on
June 28, 2002, and incorporated herein by reference.)10(c)
    
    CheckFree Corporation 2002 Stock Incentive Plan. (Reference is
made to Appendix B to the Companys Definitive Proxy Statement for the
2002 Annual Meeting of Stockholders held on November 6, 2002, filed
with the Securities and Exchange Commission on October 3, 2002, and
incorporate herein by reference.)10(d)
    
    CheckFree Corporation Third Amended and Restated 1995 Stock
Option Plan. (Reference is made to Exhibit 4(d) to Registration
Statement on Form S-8, as amended (Registration No. 333-50322), filed
with the Securities and Exchange Commission on November 20, 2000, and
incorporated herein by reference.)10(e)
    
    CheckFree Corporation Amended and Restated 1993 Stock Option
Plan. (Reference is made to Exhibit 4(a) to Post-Effective Amendment
No. 1 to Form S-8, as amended (Registration No. 33-98442), filed with
the Securities and Exchange Commission on January 9, 1998, and
incorporated herein by reference.)




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##### Table of Contents



10(f)
    
    CheckFree Corporation Amended and Restated 1983 Non-Statutory
Stock Option Plan. (Reference is made to Exhibit 4(a) to
Post-Effective Amendment No. 1 to Form S-8, as amended (Registration
No. 33-98440), filed with the Securities and Exchange Commission on
January 9, 1998, and incorporated herein by reference.)10(g)
    
    CheckFree Corporation Second Amended and Restated 1983 Incentive
Stock Option Plan. (Reference is made to Exhibit 4(a) to
Post-Effective Amendment No. 1 to Form S-8, as amended (Registration
No. 33-98444), filed with the Securities and Exchange Commission on
January 9, 1998, and incorporated herein by reference.)10(h)
    
    Form of Indemnification Agreement. (Reference is made to
Exhibit 10(a) to Registration Statement on Form S-1, as amended
(Registration No. 33-95738), filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated herein by reference.)10(i)
    
    Schedule identifying material details of Indemnification
Agreements substantially identical to Exhibit 10(h). (Reference is
made to Exhibit 10(i) to the Companys Form 10-K for the year ended
June 30, 2003, filed with the Securities and Exchange Commission on
September 15, 2003, and incorporated herein by reference.)10(j)
    
    Confidentiality and Noncompetition Agreement, dated May 7, 1999,
between Peter J. Kight and the Company. (Reference is made to Exhibit
10(j) to the Companys Form 10-K for the year ended June 30, 2003,
filed with the Securities and Exchange Commission on September 15,
2003, and incorporated herein by reference.)10(k)
    
    Noncompetition Agreement, dated February 11, 2003, between Mark
A. Johnson and the Company. (Reference is made to Exhibit 10(k) to
the Companys Form 10-K for the year ended June 30, 2003, filed with
the Securities and Exchange Commission on September 15, 2003, and
incorporated herein by reference.)10(l)
    
    Confidentiality and Nonsolicitation Agreement, dated February
11, 2003, between Mark A. Johnson and the Company. (Reference is made
to Exhibit 10(l) to the Companys Form 10-K for the year ended June
30, 2003, filed with the Securities and Exchange Commission on
September 15, 2003, and incorporated herein by reference.)10(m)
    
    Executive Employment Agreement between the Company and Peter J.
Kight. (Reference is made to Exhibit 10(z) to the Companys Form 10-K
for the year ended June 30, 1997, filed with the Securities and
Exchange Commission on September 26, 1997, and incorporated herein by
reference.)10(n)
    
    CheckFree Corporation 2003 Incentive Compensation Plan.
(Reference is made to Appendix A to the Companys Proxy Statement for
the Annual Meeting of Stockholders held on October 29, 2003, and
incorporated herein by reference.)10(o)
    
    Form of Stockholder Agreement entered into between the Company
and each of Microsoft Corporation and First Data Corporation.
(Reference is made to Exhibit 10(ff) of the Companys Registration
Statement on Form S-4 (Registration No. 333-41098) filed with the
Securities and Exchange Commission on July 10, 2000 and incorporated
herein by reference.)**10(p)
    
    Form of Registration Rights Agreement entered into between the
Company and each of Microsoft Corporation and First Data Corporation.
(Reference is made to Exhibit 10(gg) of the Companys Registration
Statement on Form S-4 (Registration No. 333-41098) filed with the
Securities and Exchange Commission on July 10, 2000 and incorporated
herein by reference.)**




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##### Table of Contents



10(q)
    
    Form of Registration Rights Agreement entered into between the
Company and Citibank, N.A. (Reference is made to Exhibit 10(hh) of
the Companys Registration Statement on Form S-4 (Registration No. 333-41098)
filed with the Securities and Exchange Commission on July 10,
2000 and incorporated herein by reference.)**10(r)
    
    Form of Commercial Alliance Agreement entered into between the
Company and Microsoft Corporation. (Reference is made to Exhibit
10(ff) of the Companys Amendment No. 1 to the Registration Statement
on Form S-4 (Registration No. 333-32644) filed with the Securities and
Exchange Commission on April 18, 2000 and incorporated herein by
reference.)**10(s)
    
    Form of Marketing Agreement entered into between the Company and
First Data Corporation. (Reference is made to Exhibit 10(gg) of the
Companys Amendment No. 1 to the Registration Statement on Form S-4
(Registration No. 333-32644) filed with the Securities and Exchange
Commission on April 18, 2000 and incorporated herein by reference.)**10(t)
    
    Master Agreement, dated August 5, 2003, among Bastogne, Inc.,
CheckFree Services Corporation and SunTrust Bank. (Reference is made
to Exhibit 10(v) to the Companys Form 10-K for the year ended June
30, 2003, filed with the Securities and Exchange Commission on
September 15, 2003, and incorporated herein by reference.)**10(u)
    
    Revolving Credit Agreement, dated August 20, 2004, among
CheckFree Corporation, CheckFree Services Corporation and CheckFree
Investment Corporation, as Borrowers, the lenders from time to time
party thereto, SunTrust Bank, as Administrative Agent, Bank of
America, N.A., as Syndication Agent and KeyBank National Association,
US Bank and BNP Paribas, as Documentation Agents. (Reference is made
to Exhibit 10.1 of the Companys Current Report on Form 8-K filed with
the Securities and Exchange Commission on August 25, 2004 and
incorporated herein by reference).
 21
    
    *
    
    Subsidiaries of the Company.23
    
    *
    
    Consent of Deloitte & Touche LLP.24
    
    *
    
    Power of Attorney.31(a)
    
    *
    
    Certification of Chief Executive Officer under Section 302
of Sarbanes-Oxley Act of 2002.31(b)
    
    *
    
    Certification of Chief Financial Officer under Section 302
of Sarbanes-Oxley Act of 2002.32(a)
    
    ***
    
    Certification of Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002.32(b)
    
    ***
    
    Certification of Chief Financial Officer under Section 906
of the Sarbanes-Oxley Act of 2002.
   *
    
    Filed with this report.**
    
    Portions of this Exhibit have been given confidential treatment by the Securities and Exchange Commission.***
    
    Furnished with this report.