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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

OR

Commission file number: 0-26802

CHECKFREE CORPORATION
(Exact name of registrant as specified in its charter)

4411 East Jones Bridge Road, Norcross, Georgia 30092
(Address of Principal Executive Offices, Including Zip Code)

(678) 375-3000
(Registrant’s Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YES  X   NO ___

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES  X   NO  ___

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 89,624,324 shares of Common Stock, $.01 par value, were outstanding at November 7, 2003.

FORM 10-Q

CHECKFREE CORPORATION

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Part I.  Financial Information

Item 1.  Financial Statements

CHECKFREE CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets

See Notes to Interim Unaudited Condensed Consolidated Financial Statements.

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CHECKFREE CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations

See Notes to Interim Unaudited Condensed Consolidated Financial Statements

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CHECKFREE CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows

See Notes to Interim Unaudited Condensed Consolidated Financial Statements

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CHECKFREE CORPORATION AND SUBSIDIARIES
Notes to Interim Unaudited Condensed Consolidated Financial Statements
for the Three Months Ended September 30, 2003 and 2002

      1.  Basis of Presentation and Summary of Significant Accounting Policies

      Unaudited Interim Financial Information

     The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and include all of the information and disclosures required by generally accepted accounting principles for interim financial reporting. The results of operations for the three months ended September 30, 2003 and 2002, are not necessarily indicative of the results for the full year.

     These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003, as filed with the Securities and Exchange Commission on September 15, 2003. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented.

      Stock-Based Compensation

     The Company accounts for stock-based compensation in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 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 Statement of Financial Accounting Standards (“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 No. 123,” which provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. 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):

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      2.  Strategic Agreement

     As a result of the strategic agreement signed with Bank of America in October 2000, Bank of America owned less than 10% of the Company as of September 30, 2003, and owned 11% as of September 30, 2002. Bank of America was considered a related party until January 2003. At that time, Bank of America sold a portion of its holdings in the Company’s common stock, and the total amount of common stock held by Bank of America fell below 10% of the Company’s total common stock outstanding. The following amounts related to Bank of America are included in the Company’s consolidated financial statements for the periods indicated (in thousands):

     Revenues and accounts receivable relate to all segments of the Company, but primarily to electronic billing and payment services provided to Bank of America. Accrued liabilities relate to payments to be made to Bank of America under contractual obligations. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q for additional information regarding our transactions with Bank of America.

      3.  Goodwill and Other Intangible Assets

     On July 1, 2002, the Company adopted SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 142 changes the accounting for goodwill and other intangible assets. Goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test.

     Upon adoption of SFAS 142, the Company transferred $1,350,000 of unamortized workforce in place intangible assets, net of the associated deferred income taxes, into goodwill, discontinued the amortization of goodwill and was required to perform a transitional impairment test. This impairment test required 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 exceeded its fair value, then additional testing was required to see if the goodwill carried on the balance sheet was impaired. After completing step one of the transitional impairment test, the Company determined that goodwill associated with its i-Solutions reporting unit, a unit within the Company’s Software segment, was potentially impaired.

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     The amount of goodwill impairment was then determined through an analysis similar to that of a purchase price allocation, where the fair value of the individual tangible and intangible assets (excluding goodwill) and liabilities of the i-Solutions reporting unit was compared to the fair value of the reporting unit, with the residual amount being the fair value assigned to goodwill. The fair value of the i-Solutions reporting unit was estimated using a combination of the cost, market, and income approaches. Specifically, the discounted cash flow and market multiples methodologies were utilized to determine the fair value of the reporting unit by estimating the present value of the future cash flows of the reporting unit along with reviewing revenue and earnings multiples for comparable publicly traded companies and applying these to the reporting unit’s projected cash flows. Fair value of each of the assigned assets and liabilities was determined using either a cost, market, or income approach, as appropriate, for each individual asset or liability. The resulting impairment charge of $2,894,000 was recorded and is reflected as a cumulative effect of a change in accounting principle in the unaudited Condensed Consolidated Statement of Operations for the three months ended September 30, 2002.

     As of September 30, 2003, the Company’s only non-amortizing intangible asset is goodwill of $523,231,000. There were no changes in the carrying value of goodwill for the three months ended September 30, 2003.

     The components of the Company’s various amortized intangible assets are as follows (in thousands):

     Amortization of intangible assets totaled $41,872,000 and $47,863,000 for the three months ended September 30, 2003 and 2002, respectively. Amortization expense for the year ended June 30, 2004 and the next four fiscal years is estimated to be as follows (in thousands):

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      4. Common Stock

     In the three months ended September 30, 2003, the Company issued stock for various employee benefit programs. The Company issued 149,844 shares to fund its 401(k) match, the cost of which was accrued in the year ended June 30, 2003, and 98,741 shares of common stock in conjunction with its employee stock purchase plan, which was funded through employee payroll deductions in the immediately preceding six-month period.

     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 1,163,668 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 will issue approximately 252,000 shares of restricted stock under the 2002 Stock Incentive Plan over the next three years. The Company recorded an expense of $1,143,000 for the three months ended September 30, 2003, for cash payments incurred and restricted shares to be issued.

      5.  Stock-Related Transactions with Third Parties

     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, was issued warrants for up to one million shares, and had the ability to earn warrants for up to an additional two million shares. All warrants contain a strike price of $39.25 and were exercisable beginning on September 15, 2002, contingent upon achievement of various annual revenue targets and maintaining the continued existence of the agreement through that date. 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 of $2,748,000 for the fair value of the portion of the warrants earned through June 30, 2002. In the quarter ended September 30, 2002, the warrants vested. On the date of vesting, however, the fair value of our common 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 an addition to revenue of $644,000 in the quarter ended September 30, 2002. Fair value was determined based on a Black-Scholes option pricing model valuation. Under the provisions of Emerging Issues Task Force (“EITF”) 01-9, “Accounting for Consideration by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” the non-cash charge of $2,748,000 was recorded as a reduction of revenue, and the non-cash increase of $644,000 was recorded as an increase to revenue.

      6.  Earnings Per Share

     The following table reconciles the differences in income and shares outstanding between basic and diluted for the periods indicated (in thousands except per share data):

     Anti-dilution provisions of SFAS 128, “Earnings Per Share,” require consistency between diluted per-common-share amounts and basic per-common-share amounts in loss periods. Had the Company recognized net income for the periods presented, an additional 5,272,000 and 906,000 of in-the-money options and warrants would have been included in the diluted earnings per share calculation for the three months ended September 30, 2003 and 2002, respectively. Using the treasury stock purchase method prescribed by SFAS 128, this would have increased

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diluted shares outstanding by 1,895,000 and 196,000 for the three months ended September 30, 2003 and 2002, respectively.

     The weighted average diluted common shares outstanding for the three months ended September 30, 2003 and 2002, also exclude the effect of approximately 3,505,000 and 8,814,000 of out-of-the-money options and warrants, respectively, and the 2,357,000 share effect for the assumed conversion of the convertible subordinated notes, as their effect would be anti-dilutive. In addition, the after-tax effect of interest expense on the convertible subordinated notes of approximately $1,818,000 for the three months ended September 30, 2003 and 2002, has not been added back to the numerator, as its effect would be anti-dilutive.

      7.  Reorganization Charges

     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 consolidation of three legacy transaction processing platforms into the Genesis platform in the Electronic Commerce division 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.

     As a result of these actions, during the year ended June 30, 2002, the Company recorded $16,365,000 of reorganization charges for the year ended June 30, 2002, which included $1,640,000 of non-cash 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 included $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. The reorganization is expected to be completed by October, 2005 and no additional charges are anticipated. A summary of activity related to the reorganization reserve is as follows (in thousands):

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      8.  Supplemental Disclosure of Cash Flow Information (in thousands)

      9.  Comprehensive Loss

     Available-for-sale securities are recorded at fair value and changes in fair value are recorded as unrealized gains or losses and accumulated in other comprehensive income. As a result, the Company is required to report the components of comprehensive loss, which are as follows (in thousands):

      10.  Business Segments

     The Company operates in three business segments — Electronic Commerce, Software and Investment Services along with a Corporate services segment. These reportable segments are strategic business units that offer different products and services. The Company evaluates performance based on revenues and operating income (loss) of the respective segments. Segment operating income (loss) excludes acquisition related intangible asset amortization and significant one-time charges. There are no inter-segment sales.

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     The following sets forth certain financial information attributable to the Company’s business segments for the three months ended September 30, 2003 and 2002 (in thousands):

      11.  Subsequent Events

     On November 3, 2003, the Company announced that it completed the acquisition of privately held HelioGraph Ltd., a company that specializes in Straight Through Processing (STP) and Financial Messaging, for approximately $18.3 million in cash. HelioGraph will become a part of CheckFree Financial and Compliance Solutions (CFACS), a business unit within CheckFree’s Software Division. This acquisition is not material to CheckFree.

     On November 12, 2003, the Company provided notice to the holders of CheckFree Corporation’s 6 1/2% Convertible Subordinated Notes due 2006 (the “Notes”) that the Company has called for redemption on December 12, 2003, the entire outstanding aggregate principal amount of $172,500,000 of the Notes. Pursuant to the terms of the Indenture governing the Notes, the Company is optionally redeeming the Notes at a redemption price of 102.79% of the principal amount thereof plus accrued but unpaid interest to, but not including, the date of redemption of the Notes. Prior to December 12, 2003, holders may convert their Notes into shares of the Company’s common stock at a price of $73.20 per share, or 13.6612 shares of the Company’s common stock per $1,000 principal amount of the Notes. Cash will be paid in lieu of fractional shares. We expect to incur a charge of approximately $7.2 million for the early redemption of the Notes and we will fund the redemption out of existing resources, including cash, cash equivalents, and investments.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     CheckFree was founded in 1981 as an electronic payment processing company and has become a leading provider of financial electronic commerce products and services. Our current business was developed through the expansion of our core electronic payments business and the acquisition of companies operating in similar or complementary businesses.

     We operate our business through three independent but inter-related divisions:

•

Electronic Commerce;

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Investment Services; and

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Software.

     Through our Electronic Commerce division, we enable consumers to receive and pay bills electronically. For the year ended June 30, 2003, we processed approximately 434 million electronic transactions and delivered approximately 32 million electronic bills. For the quarter ended September 30, 2003, we processed nearly 127 million electronic payments and delivered approximately 14.7 million electronic bills. In the quarter ended September 30, 2003, there were about 11 million consumers initiating payments via CheckFree supported technology. The number of transactions we process each year continues to grow. Growth in the number of transactions processed exceeded 37% for the year ended June 30, 2003 and 31% for the quarter ended September 30, 2003 against the same periods in the prior year. The Electronic Commerce division accounted for approximately 75% of our revenue in the quarter ended September 30, 2003.

     Our Electronic Commerce division’s products allow consumers to:

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receive electronic bills through the Internet;

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pay any bill — whether it arrives over the Internet or through traditional mail — to anyone;

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make payments not related to bills — to anyone; and

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perform customary banking transactions, including balance inquiries, transfers between accounts and on-line statement reconciliations.

     Through our Investment Services division, we provide a range of outsourced portfolio management services to financial institutions, including broker dealers, money managers and investment advisors. As of September 30, 2003, our clients used the CheckFree APL Portfolio Accounting System to manage about 1.3 million portfolios totaling more than $700 billion in assets. The Investment Services division accounted for approximately 14% of our revenue in the quarter ended September 30, 2003.

     Our institutional 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 separately managed accounts, money management products, or traditional money managers, managing investments of institutions and high net worth individuals. We also support a growing number of third party vendors providing quick-to-market turnkey solutions.

     Our portfolio management systems are marketed under the product name CheckFree APL and provide the following functions:

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account open and trading capabilities;

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graphical client reporting;

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performance measurement;

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decision support tools;

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account analytics;

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tax lot accounting;

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multiple strategy portfolios;

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straight through processing;

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Depository Trust Corporation interfacing;

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billing functions; and

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system and data security.

     In addition to our APL portfolio management products, our 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 are a result of the acquisition of Mobius Group, Inc. in March 1999.

     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. The i-Solutions unit provides software and services that enable end-to-end e-billing and e-statement creation, delivery and payment. The Software division accounted for approximately 11% of revenue in the quarter ended September 30, 2003.

Results of Operations

     The following table sets forth as percentages of total revenues, certain consolidated statements of operations data: