CHECKFREE CORP \GA\ - 10-Q Quarterly Report

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)

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.


			Page No.

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements.
		Unaudited Consolidated Balance Sheets September 30, 2003 and June 30, 2003		3
		Unaudited Condensed Consolidated Statements of Operations For the Three Months Ended September 30, 2003 and 2002		4
		Unaudited Consolidated Statements of Cash Flows For the Three Months Ended September 30, 2003 and 2002		5
		Notes to Interim Unaudited Condensed Consolidated Financial Statements For the Three Months Ended September 30, 2003 and 2002		6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			13
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.			23
	Item 4. Controls and Procedures.			23
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings.			N/A
	Item 2. Changes in Securities and Use of Proceeds.			N/A
	Item 3. Defaults Upon Senior Securities.			N/A
	Item 4. Submission of Matters to a Vote of Security Holders.			N/A
	Item 5. Other Information.			N/A
	Item 6. Exhibits and Reports on Form 8-K.			24
	Signatures.			25


					September 30,			June 30,
					2003			2003

					(In thousands, except share data)
				ASSETS
CURRENT ASSETS:
	Cash and cash equivalents				$	187,536		$	209,358
	Investments					121,855			69,674
	Restricted investments					3,000			3,000
	Accounts receivable, net					86,592			81,626
	Prepaid expenses and other assets					9,995			9,708
	Deferred income taxes					41,657			41,202

		Total current assets				450,635			414,568
PROPERTY AND EQUIPMENT, NET						91,569			94,853
OTHER ASSETS:
	Capitalized software, net					15,473			23,612
	Goodwill					523,231			523,231
	Strategic agreements, net					364,347			395,332
	Other intangible assets, net					2,975			4,801
	Investments					112,036			121,615
	Other noncurrent assets					8,721			9,258

		Total other assets				1,026,783			1,077,849

				Total assets	$	1,568,987		$	1,587,270

			LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Accounts payable				$	10,465		$	9,705
	Accrued liabilities					49,461			59,140
	Current portion of long-term obligations					4,063			4,894
	Deferred revenue					37,744			36,543

		Total current liabilities				101,733			110,282
ACCRUED RENT AND OTHER						3,354			3,419
DEFERRED INCOME TAXES						21,011			28,728
LONG-TERM OBLIGATIONS — LESS CURRENT PORTION						3,774			4,192
CONVERTIBLE SUBORDINATED NOTES						172,500			172,500
COMMITMENTS						—			—
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 89,569,940 and 89,266,370 shares, respectively					896			893
	Additional paid-in-capital					2,454,733			2,449,374
	Accumulated other comprehensive income					244			471
	Accumulated deficit					(1,189,258	)		(1,182,589	)

		Total stockholders’ equity				1,266,615			1,268,149

				Total liabilities and stockholders’ equity	$	1,568,987		$	1,587,270

CHECKFREE CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations


			Three Months Ended
			September 30,

			2003			2002

			(In thousands, except per share data)
REVENUES:
	Processing and servicing		$	124,245		$	114,491
	License fees			4,962			4,209
	Maintenance fees			6,701			6,186
	Other			5,356			5,349

		Total revenues		141,264			130,235

EXPENSES:
	Cost of processing, servicing and support			59,288			58,767
	Research and development			14,903			12,235
	Sales and marketing			12,325			13,206
	General and administrative			11,523			10,300
	Depreciation and amortization			50,613			56,878

		Total expenses		148,652			151,386

LOSS FROM OPERATIONS				(7,388	)		(21,151	)
INTEREST, NET				(1,624	)		(1,216	)

LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE				(9,012	)		(22,367	)
INCOME TAX BENEFIT				(2,343	)		(9,085	)

LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE				(6,669	)		(13,282	)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE				—			(2,894	)

NET LOSS			$	(6,669	)	$	(16,176	)

BASIC AND DILUTED LOSS PER SHARE:
	Loss per share before cumulative effect of accounting change		$	(0.07	)	$	(0.15	)
	Cumulative effect of accounting change			—			(0.03	)

	Net loss per common share		$	(0.07	)	$	(0.18	)

	Equivalent number of shares			89,463			88,378

CHECKFREE CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows


					Three Months Ended
					September 30,

					2003			2002

					(In thousands)
OPERATING ACTIVITIES:
		Net loss			$	(6,669	)	$	(16,176	)
		Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation and amortization				50,613			56,878
		Deferred income tax benefit				(7,985	)		(9,085	)
		Impact of warrants				—			(644	)
		Cumulative effect of accounting change				—			2,894
		Change in certain assets and liabilities:
			Accounts receivable			(4,966	)		4,476
			Prepaid expenses and other			278			(2,546	)
			Accounts payable			760			(1,676	)
			Accrued liabilities and other			(6,230	)		(8,063	)
			Deferred revenue			1,201			(2,011	)

				Net cash provided by operating activities		27,002			24,047
INVESTING ACTIVITIES:
	Purchase of property and software					(5,426	)		(9,695	)
	Capitalization of software development costs					(922	)		(523	)
	Purchases of investments — Held-to-maturity					—			(35,506	)
	Proceeds from maturities of investments — Held-to-maturity					12,783			38,690
	Purchases of investments — Available-for-sale					(91,204	)		(11,389	)
	Proceeds from sales and maturities of investments — Available-for-sale					35,542			91
	Purchase of other investments					(10	)		—

				Net cash used in investing activities		(49,237	)		(18,332	)
FINANCING ACTIVITIES:
		Principal payments under capital lease and other long-term obligations				(1,308	)		(6,102	)
		Proceeds from stock options exercised				644			17
		Proceeds from employee stock purchase plan				1,077			942

				Net cash provided by (used in) financing activities		413			(5,143	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS						(21,822	)		572
CASH AND CASH EQUIVALENTS:
		Beginning of period				209,358			115,009

		End of period			$	187,536		$	115,581

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

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.

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):

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.

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.

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):


		Three Months Ended
		September 30,

		2003			2002

Net loss, as reported		$	(6,669	)	$	(16,176	)
Stock-based compensation included in net loss			1,143			15
Stock-based compensation under SFAS 123			(5,589	)		(7,689	)

	Pro forma net loss	$	(11,115	)	$	(23,850	)

Pro forma net loss per share:
	Basic and diluted	$	(0.12	)	$	(0.27	)


			September 30,		June 30,
			2003		2003

Current assets:
	Accounts receivable, net		$	22,312	$	19,341

		Total current assets	$	22,312	$	19,341

Current liabilities:
	Accrued liabilities		$	1,370	$	3,595
	Deferred revenues			381		499

		Total current liabilities	$	1,751	$	4,094

Table of Contents

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(Mark One)
[ x ]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Delaware (State or Other Jurisdiction of Incorporation or Organization)		58-2360335 (I.R.S. Employer Identification No.)


Part I. Financial Information
	Item 1. Financial Statements
		Unaudited Consolidated Balance Sheets
		Unaudited Condensed Consolidated Statements of Operations
		Unaudited Consolidated Statements of Cash Flows
		Notes to Interim Unaudited Condensed Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
Part II. Other Information
	Item 6. Exhibits and Reports on Form 8-K.
	Signatures
Exhibit 31A
Exhibit 31B
Exhibit 32A
Exhibit 32B