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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-K [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003.
 Commission file number 0-30791. eFUNDS CORPORATION  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    39-1506286
(I.R.S. Employer
Identification No.)Gainey Center II
8501 N. Scottsdale Road, Suite 300
Scottsdale, Arizona
(Address of principal executive offices)
    
    85253
(Zip Code)
 Registrants telephone number, including area code: (480) 629-7700 Securities registered pursuant to Section 12(b) of the Act:
    
    NoneSecurities registered pursuant to Section 12(g) of the Act:
    
    Common Stock, par
value $.01 per
share, with
Preferred Stock
Purchase Rights
(Title of Class)
 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 such
filing requirements for the past 90 days. [X] Yes   [   ] No The aggregate market value of the voting stock held by non-affiliates of the
registrant is $540,587,979 based on the last sales price of the registrants
common stock on the New York Stock Exchange on June 30, 2003. The number of
outstanding shares of the registrants common stock as of
June 30, 2003 was
46,804,154 and the last sales price of the registrants common stock on that
date was $11.55. Documents Incorporated by Reference: Portions of the registrants proxy
statement for its 2004 Annual Meeting of Stockholders, which will be filed with
the Securities Exchange Commission on or before April 29, 2004, is incorporated
by reference in Part III. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) 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. [ X ] Documents Incorporated by Reference A portion of the Proxy Statement for the Annual Meeting of Stockholders of
eFunds Corporation to be held May 20, 2004 is incorporated by reference into
Part III of this report.




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PART I ITEM 1. BUSINESS INFORMATION ABOUT US Our Company was incorporated in Delaware in December 1984. Prior to our initial
public offering (the IPO) in June 2000, the Company was a wholly-owned
subsidiary of Deluxe Corporation (Deluxe). In April 1999, the Company began the
process of combining with four other operating units of Deluxe into an
integrated electronic payments and risk management business. The operations
combined were DebitBureau, Chex Systems, Inc., Deposit Payment Protection
Services, Inc. and an electronic check conversion company that Deluxe acquired
in February 1999. In September 1999, the Companys name was changed from
Deluxe Electronic Payments Systems, Inc. to eFunds Corporation. In January
2000, the Company combined Deluxes professional services business, eFunds IT
Solutions Group, Inc. and eFunds International India Private Limited, with the
electronic payments and risk management businesses. In December 2000, Deluxe
distributed all of its remaining shares of the Companys common stock to its
shareholders through a spin-off transaction. Following the spin-off, Deluxe
ceased to own any shares of our common stock. Our goal is to enable trusted commerce by delivering integrated information,
payment and technology solutions that strengthen our customers overall
profitability through increased revenue, reduced costs and improved operating
efficiency and technology performance. Our principal focus is on issuers of
transaction accounts, such as financial institutions, financial services
companies, electronic funds networks, retailers, government agencies, eCommerce
providers, telecommunications companies and other businesses. We deliver our information, payment and technology solutions through any
combination of our four capabilities or competencies as described below. Our
most profitable business segments are Electronic Payments and Risk Management,
although our Global Outsourcing and ATM Management segments also contribute to
our overall value proposition. The business model of each of our segments is
summarized below. Our principal executive offices are located at Gainey Center II, 8501 N.
Scottsdale Road, Suite 300, Scottsdale, Arizona 85253 and our telephone number
is 480-629-7700. Our Internet address is www.efunds.com. The information
contained on our web site is not a part of this document. OUR BUSINESS We provide electronic transaction processing, ATM management, risk management
and outsourcing services to issuers of transaction accounts. Our strategy is to
offer products and services that are directed at enhancing the ability of our
customers to manage the entire span of the transaction account lifecycle, from
customer acquisition and screening, to account transaction processing and
authorization through account closure and collections. We have four principal
business lines:  
    
    Electronic Payments
    
    ATM Management
    
    Risk Management
    
    Global Outsourcing One of our goals for 2004 and beyond is to enhance our ability to market and
sell comprehensive solutions incorporating multiple elements of the products
and services offered by our business lines to our customers. Electronic Payments
Our Electronic Payments segment provides electronic funds transfer (EFT)
software sales, automated clearinghouse (ACH), EFT and other payment processing
services as well as electronic benefit transfer (EBT) services for government
agencies. This segment had net revenues of $183.6 million in 2003, which
represented approximately 35% of our total net revenues in that year. 1




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We license our electronic funds transfer software, the same software that
drives our electronic funds transfer processing business, to in-house
processors and regional networks in 70 foreign countries and in the United
States. Our electronic funds transfer software runs on proprietary and, with
the recent acquisition of Oasis Technology Ltd., open system computing
platforms. We also provide software maintenance and support services. We process transactions for regional automated teller machine, or ATM, networks
in the United States. We also provide transaction processing for retail
point-of-sale terminals that accept payments from debit cards and paper checks
that have been converted into electronic transactions. Transaction processing
involves electronically transferring money from a persons checking or savings
account according to his or her instructions. For example, when a cardholder
inserts his or her debit card into an ATM machine and enters his or her PIN and
the type and amount of the transaction, the device contacts our systems and
transmits the request. We identify the institution that issued the card and
work through the necessary validation and authorization routines, such as
ensuring that the cardholder has entered the correct PIN, that the transaction
is within the cardholders limits on withdrawals and that there are sufficient
funds in the cardholders account. If all the routines are executed
successfully, we signal the ATM or point-of-sale device to complete the
transaction. To carry out the tasks required, each ATM or point-of-sale device is typically
connected to several computer networks. These networks include private networks
that connect the devices of a single owner, shared networks that serve several
device owners in a region and national shared networks that provide access to
devices across regions. Each shared network has numerous financial institution
members. For example, we provide network switching services for the CO-OP
Network and processing services for 1,800 of its member credit unions. As part
of our transaction processing services, we, and other gateway service providers
like us, provide cardholders with access across these multiple networks. We drive or operate more than 30,000 ATMs, including the ATMs managed by our
ATM management business and ATMs owned by financial institutions and more than
53,000 point-of-sale terminals. These terminals include approximately 44,000
electronic benefits transfer terminals and approximately 9,000 retail
terminals. We process virtually all types of debit-based transactions for our
financial institution customers, including cash withdrawals, cash deposits,
balance inquiries, purchases, purchases with cash back and purchase returns. In
addition, we authorize cash advances and purchases initiated with credit cards
at ATM or point-of-sale locations. We also provide 24 hour a day, 7 day a week
monitoring of ATMs for system irregularities. Our processing systems are
designed to operate continuously and in 2003 our systems were available 99.99%
of the time. In 2001, Concord EFS acquired the STAR debit network, formerly our largest
transaction processing customer, and notified us that it intended to license
our EFT software and perform the processing for this network at its own data
centers. The transition of the processing for the STAR network was completed in
September 2002. The transition of the STAR network from a processing customer
to a software customer has materially diminished the number of point-of-sale
debit transactions we process because these network transactions are no longer
routed through our switch. Our government services business was started in response to federal mandates
that require state and local governmental agencies to convert to electronic
payment methods for the distribution of benefits under entitlement programs,
primarily food stamps and Transitional Aid to Needy Families (formerly Aid to
Families with Dependant Children). Our EBT processing system manages, supports
and controls the electronic payment and distribution of cash benefits to
program participants through ATMs and point-of-sale networks. Our services
reduce operating costs and fraud for the government agency administering the
benefits program, eliminate the food stamp stigma for recipients through the
use of a plastic ATM-like card and make benefits more readily available to
recipients at retail point-of-sale terminals and ATMs. We were providing services for 30 state and local governments at the end of
2003. All of our government services contracts relate to government entitlement
programs. Our government contracts are for scheduled service periods of five to
seven years, although all of these contracts are terminable by the contracting
governmental entity at any time. The contracts are based on a fixed price per
recipient, variable volume model. For three contracts with coalitions of
states, we serve as a subcontractor for J.P. Morgan Chase. 2




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We have historically incurred losses related to our government services EBT
business and we have previously established reserves to provide for expected
future losses on some of our existing long-term EBT service contracts. During
2003, 2002 and 2001, we recorded net reductions to our previous estimates for
expected future losses on our government services contracts of $3.7 million,
$2.0 million and $2.5 million, respectively. Our former parent company, Deluxe,
has agreed to indemnify us under certain circumstances if we are required to
increase our loss contract reserve for government services contracts that were
in a loss position at the time of our IPO. We have not asserted any claims for
indemnification to date and have no present expectation of doing so. ATM Management
Our ATM Management segment provides ATM equipment sales, deployment,
management, branding and consultative services. Our net revenues in this
segment were $139.8 million, which represented approximately 26% of our total
net revenues in 2003. As an independent provider of ATMs, we place ATMs with financial institutions,
convenience, grocery, general merchandise and drug stores, as well as gas
stations, located throughout the United States and Canada. We also leverage a
large network of third party distributors to help sell our processing services
and ATM equipment. We are the largest independent provider of ATM services in
North America and currently manage approximately 17,000 ATMs. We own or lease
approximately 12% of these ATMs and the remaining ATMs are owned or leased by
the merchants operating at the site where the ATM is located. We collect both ATM surcharge fees from consumers using ATMs deployed by us and
interchange fees from their banks. We also derive revenue from ATM equipment
sales and maintenance services. In addition, financial institutions may
contract to brand ATMs managed by us so that their customers can use them
without paying a surcharge fee. During 2003, the operating margins generated by
our ATM business improved from a negative 3.7% of net revenue for this segment
to a positive 0.1%. Our efforts during 2004 will be directed towards further
improving the performance of this business by marketing an end-to-end ATM
management service to financial institutions and retailers. Risk Management
Our Risk Management segment provides risk management based data and other
products to financial institutions, retailers and other businesses that assist
in detecting fraud and assessing the risk of opening a new account or accepting
a check. This segment had net revenues of $133.1 million in 2003, which
represented approximately 25% of our total net revenues for that year. This
segment offers products and services that help:  
    
    determine the likelihood of account fraud and identity manipulation;
and
    
    assess the overall risks involved in opening new accounts or
accepting payment transactions. These products and services are based on or enhanced by our DebitBureau®
database. DebitBureau contains over three billion records and includes data
from our ChexSystems(SM) and SCAN(SM) databases and other sources. We use the
data in DebitBureau to screen for potentially incorrect, inconsistent or
fraudulent social security numbers, home addresses, telephone numbers, driver
license information and other indicators of possible identity manipulation.
Using our data, we can perform various tests to validate a consumers identity
and assess and rank the risk of fraud associated with opening an account for or
accepting a payment from that consumer. Our ChexSystems business is a provider of new account applicant verification
services for financial institutions. ChexSystems provides access to more than
18 million closed-for-cause accounts. An account is considered closed-for-cause
when, for example, a consumer refuses to pay the account fee and the bank
closes the account. ChexSystems helps financial institutions assess the risks
involved in opening an account for a new customer by supporting real-time
inquiries to our database of consumer debit account performance. The
ChexSystems service is used by more than 95,000 financial institution
locations. Financial institutions may access the service through a variety of
online options, or by telephone. Service fees for our new account verification
services are based on the number of inquiries a financial institution makes
each month. ChexSystems also offers DebitReport, a service pursuant to which our
DebitBureau data is made available to credit grantors and telecommunications
providers, directly and through credit bureaus or other data providers, to
supplement their credit decisioning processes and for use in making
pre-approved offers of credit. 3




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Our SCAN, or Shared Check Authorization Network, product helps retailers reduce
the risk of write-offs for dishonored checks due to insufficient funds and
other forms of account fraud. When a check is presented as payment at the
point-of-sale, SCAN members run the check through a scanner. The information on
the check is then compared to the SCAN database to determine whether there have
been previous payment problems with the check writer or his or her account.
SCAN then reports any issues to the retailer and the merchant decides whether
or not to accept the check. SCAN serves 14 of the 20 largest retailers in the
United States based on recent market data. More than 77,000 retail locations
report returned check activity to the SCAN network. Our larger retail customers
host our SCAN database on their own computers. Others access the database
through our SCAN Online product. Merchants pay a monthly service fee for SCAN
based on their net monthly sales, if they host the SCAN file themselves, or by
the number of inquiries submitted, if they use SCAN Online. Additional fees
apply for inquiries by the retailers or consumers to our call centers. Global Outsourcing
Our Global Outsourcing segment provides business process management and IT
outsourcing services. Net revenues in this segment were $75.6 million in 2003,
which represented 14% of our total net revenues for that year. We provide end-to-end customer account management services to the financial
services, retail, telecommunications and government sectors through both U.S.
and India based delivery centers. Our services include account acquisition
assistance, application processing, data entry, customer care, loan processing,
account reconciliation, billing and collections services as well as information
technology (IT) development, systems integration and systems maintenance. We
build long-term continuing relationships with our clients, allowing them to
significantly reduce costs and improve the quality and efficiency of their
business processes. As of December 31, 2003, we had over 3,100 associates dedicated to our
outsourcing business, approximately 95% of which worked out of our India
locations. Our Global Outsourcing business also supports our other lines of
business by processing calls and back office transactions for the users of the
products and services supplied by those businesses. Our former parent company, Deluxe, is the largest customer for our global
outsourcing offerings. Sales to Deluxe include services provided pursuant to a
five-year software development and business process outsourcing agreement that
we signed with Deluxe in 2000. If Deluxe fails to spend a minimum of $43
million for software development services under this agreement in any year, it
will be obligated to make payments to us based on a schedule in the contract
that is reflective of our estimates of our lost profits. For the year ended
December 31, 2003, Deluxes spending attributable to the software development
component of this agreement was below this minimum threshold so shortfall fees
were accrued. This agreement also calls for us to provide business process
outsourcing services, including accounts receivable, accounts payable and other
general accounting and data entry services to Deluxe. The provision of services
by us under the software development and business process outsourcing agreement
is non-exclusive, and Deluxe may contract with any third party for the
provision of professional services. Our contract with Deluxe is currently
scheduled to expire in March 2005. Sales and Marketing
We market our products and services through a direct sales force and indirect
sales channels, such as distributors, resellers and targeted alliances. We
organize our direct sales force along our four business segments. We work
consultatively with our new or existing customers to fully understand their
business requirements and provide standard or customized solutions that match
their individual needs. Most of our direct sales personnel are deployed globally and generally operate
out of their homes or on our customers premises. We also have some direct
sales personnel who work out of our offices in Milwaukee, Wisconsin; Woodbury,
Minnesota; Weston, Florida and Scottsdale, Arizona. Our international sales
offices are located in Sydney and Melbourne, Australia; Mumbai, India; Runcorn,
Daresbury and Watford, England; and North York and Toronto, Canada. We build
awareness of our products and services and the eFunds corporate name through
targeted advertising, public relations, participating in trade shows and
conferences and providing product information through our web site. 4




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Customer Support, Technology and Infrastructure
Customer Support. We provide customer support services through our customer
contact centers located in Woodbury, Minnesota; Gurgaon and Mumbai, India;
Milwaukee, Wisconsin; and Phoenix, Arizona. Most of our contact centers are
open 24 hours a day, 7 days a week and provide access to website, e-mail and
telephone support. We also provide technical and operational support for our
customers in our data centers. In addition to user questions and technical
issues, in accordance with the Fair Credit Reporting Act, we respond to
inquiries from consumers whose checks have been declined or who have been
rejected for a new banking account. We also provide on-site customer support
services in connection with our other products and services and we charge a
separate fee for these services based on an hourly rate. Technology. Our products are configured to run on operating systems common in
the electronic debit payment industry. These include the Tandem, IBM, UNIX and
Windows operating environments. Our software is developed using C, C++, Cobol,
HTML, TAL, Java and other programming languages. Our software products are
interoperable with a wide range of terminal types and computer networks and
support a variety of communications protocols, such as TCP/IP as well as other
protocols. Data Centers. We operate two highly secure, fault-tolerant data centers in New
Berlin, Wisconsin and Phoenix, Arizona. Our data centers have been engineered
to ensure minimal exposure to system failures and unauthorized access. Each of
our data centers contains multiple separate computer rooms to provide
containment and isolation. Physical security is maintained through restricted
card key access and closed circuit T.V. cameras. We use redundant
uninterruptible power supplies with battery backup and redundant generators to
ensure continuous flow of power to each data center in the event of any
component failure or power outage. The facilities have dual-entrance, fiber
optic SONET service for telecom redundancy. We expect to devote significant
efforts to enhancing the interoperability of our data centers in 2004. Competition
We face competition from a number of companies. We expect that competition will
intensify as consolidation efforts within the electronic payments industry
continue. Many of our competitors have significantly greater financial,
technical and marketing resources, greater name recognition and a larger
installed customer base than we do. In the electronic payments market, our principal competitors include:  
    
    third-party debit network processors, including First Data
Corporation/Concord EFS, VISA Debit Processing Services, Midwest Payment
Systems and Fiserv;
    
    financial institutions that have developed in-house processing
capabilities or services similar to ours, including Bank of America, M&I
Bank and Fifth Third National Bank;
    
    electronic funds transfer software providers, including Transaction
System Architects, S2, Mosaic and PaySys; and
    
    government services providers including J.P. Morgan Chase and ACS. In the ATM management market, our competitors include First Data
Corporation/Concord EFS, Genpass, certain ATM equipment manufacturers and
numerous independent service organizations (ISOs). In the risk management market, our principal competitors include:  
    
    providers of fraud management data and software including Primary
Payment Systems (a subsidiary of Concord EFS), Equifax, Experian,
TransUnion and RiskWise (a division of Lexis-Nexis of Reed Elsevier
PLC); and
    
    retail check verification and electronic check processing providers,
including Certegy and Telecheck, a subsidiary of First Data Corporation. In the global outsourcing market, our competitors include outsourcing solutions
companies, such as Spectramind/Wipro Ltd, Daksh and Infosys Technologies. The principal factors on which we compete in the electronic payments and ATM
industries are price and service levels. Competition for our risk management
products is based primarily on the quantity and quality of the data 5




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available to us for this purpose and, to a somewhat lesser degree, price. Our
business process outsourcing service offerings compete primarily on the basis
of the quality of service levels and price. We believe that we have competed effectively to date. Our continued ability to
do so will require us to effectively manage our costs, respond promptly and
effectively to changes in the marketplace and innovations by our competitors
and to efficiently introduce new products and services and combinations of our
new and existing products and services that are reflective of the current needs
of our customers. Government Regulation
Various aspects of our businesses are subject to federal and state regulation.
Our failure to comply with any applicable laws and regulations could result in
restrictions on our ability to provide our products and services, as well as
the imposition of civil fines and criminal penalties. As a provider of electronic data processing services to financial institutions,
we are subject to regulatory oversight and examination by the Federal Financial
Institutions Examination Council, an interagency body comprised of the various
federal bank and thrift regulators and the National Credit Union Association.
In addition, we may be subject to possible review by state agencies that
regulate banks in each state where we conduct our electronic processing
activities. Because we collect and disclose debit data and other personal information about
consumers, we are subject to the federal Fair Credit Reporting Act and any
state laws providing greater consumer protections. The Fair Credit Reporting
Act provides that consumers have the right to know the contents of the records
pertaining to them which are maintained at our consumer reporting agencies, to
challenge the accuracy of that information and to have their information
verified, updated or removed if it is incorrect. To comply with these
requirements, we maintain consumer relations call centers for each of our
consumer reporting businesses. We are also required to maintain a high level of
security for the computer systems in which consumer data files reside. Our consumer reporting agencies and collection agencies are also subject to
regulation by the Federal Trade Commission. In addition, our debt collection
services are subject to the Fair Debt Collection Practices Act and state
collections statutes and licensing requirements. Financial institutions are subject to the requirements of the federal financial
modernization law known as the Gramm-Leach-Bliley Act (the Act). The Act
imposes significant requirements on any entity engaged in the business of
providing financial services, including entities that provide services to
financial institutions. The privacy provisions of the Act impose on each entity
subject to the new requirements an affirmative obligation to develop and
implement policies to protect the security and confidentiality of consumers
nonpublic personal information and to disclose those policies to consumers
before a customer relationship is established and annually thereafter. The
banking regulators and the Federal Trade Commission have issued regulations
implementing the privacy portions of this Act. We believe that these
regulations permit banks to provide debit data and other nonpublic personal
information to us. Intellectual Property Rights
We rely on a combination of trademark, copyright, trade secrets and
confidentiality or license agreements to protect our trademarks, software and
know-how. We also have applied for patent protection on some of the features of
our products. With regard to our information technology service business, we
develop software applications. Ownership of this software is generally assigned
to the client. We also develop software components that can be reused in
software application development and software toolsets, most of which remains
our property. Employees
We had approximately 5,400 full and part-time employees as of February 1, 2004.
We have a number of employee benefit plans, including a 401(k) plan, stock
option and stock purchase plans, profit sharing plans and medical and
hospitalization plans. We have never experienced a work stoppage or strike and
consider our employee relations to be good. 6




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Financial Information About Industry Segment; Financial Information About
Domestic Operations and Export Sales
Information about these matters appears in Note 11  BUSINESS SEGMENT
INFORMATION to the financial statements included in Part II of this Annual
Report on Form 10-K. Executive Officers
The executive officers of our Company are elected by the Board of Directors
each year. The term of office of each executive officer will expire at the
annual meeting of the Board of Directors that will be held after the regular
shareholders meeting on May 20, 2004. The principal occupation of each
executive officer is with the Company and their positions are as follows: EXECUTIVE OFFICERNAME
    
    POSITION
    
    AGE
    
    SINCEPaul F. Walsh
    
    Chairman of the Board and Chief
Executive Officer
    
    
    54
    
    
    
    2002Thomas S. Liston
    
    Chief Financial Officer
    
    
    65
    
    
    
    2002Tommy L. Andrews
    
    Senior Vice President, Corporate
Development
    
    
    53
    
    
    
    2003John B. (Jack) Benton
    
    Senior Vice President, International
    
    
    61
    
    
    
    2004Steven F. Coleman
    
    Senior Vice President, General
Counsel and Secretary
    
    
    45
    
    
    
    2000Michael A. Feliciano
    
    Senior Vice President, Division
Executive-Electronic Payments
    
    
    46
    
    
    
    2003Kathleen Flanagan
    
    Senior Vice President, Division
Executive-Global Outsourcing
    
    
    44
    
    
    
    2002Rahul Gupta
    
    Senior Vice President, Division
Executive-Risk Management
    
    
    44
    
    
    
    2003Michele J. Langstaff
    
    Senior Vice President, Human
Resources and Administration
    
    
    49
    
    
    
    2003Kevin L. Reager
    
    Senior Vice President, Division
Executive-ATM Management
    
    
    46
    
    
    
    2003Clyde L. Thomas
    
    Chief Information Officer, Senior
Vice President, Technology
    
    
    51
    
    
    
    2002
 Paul F. Walsh has served as Chairman of our Board of Directors and our Chief
Executive Officer since September 2002. Between March 2000 and September 2002,
Mr. Walsh was chairman and chief executive officer of Clareon Corporation
(Clareon), an electronic payments provider. Mr. Walsh served as chairman and
chief executive officer of MaineStay Holdings L.L.C., a private equity
investment firm, from September 1998 until January 1999, when MaineStay formed
iDeal Partners (iDeal Partners), an equity investment partnership between
MaineStay, Berkshire Partners and BancBoston Capital. Mr. Walsh served as
chairman and chief executive officer of iDeal Partners until he joined Clareon.
From February 1995 to September 1998, Mr. Walsh was president and chief
executive officer of Wright Express Corporation (Wright Express), an
information and financial services company. From January 1990 until January
1995, Mr. Walsh was chairman of BancOne Investor Services Corporation, a
financial services company. 7




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Thomas S. Liston has served as our Chief Financial Officer since July 2002.
Between February and June 2001 and from December 2001 until he joined our
Company, Mr. Liston served as interim chief financial officer of PETsMART,
Inc., a retail chain of pet supply stores. From 1997 to 1998, Mr. Liston served
as vice president and chief financial officer of Little Switzerland, a
specialty jewelry and gift retail company. Prior to this position, Mr. Liston
held a variety of executive finance positions, primarily in the retail
industry. Tommy L. Andrews has been our Senior Vice President, Corporate Development
since January 2003. From February 2001, until he joined our Company, Mr.
Andrews served as senior vice president of operations for FleetCor
Technologies, Inc., a marketer of commercial fleet cards. From September 1999
to January 2001, Mr. Andrews was chief executive officer of B2Bexplorer, Inc.,
a provider of e-commerce solutions to small businesses. From 1996 to 1999, Mr.
Andrews was a senior vice president for Wright Express, serving most recently
as the head of its corporate development efforts. John B. (Jack) Benton has served as our Senior Vice President, International
since February 2004. From 1978 until joining our Company, Mr. Benton directed
Benton International, Inc. and Benton Consulting Partners, consulting firms in
the electronic payments industry. Mr. Benton has spent more than 30 years as an
executive active within the EFT industry. Steven F. Coleman has served as Senior Vice President, General Counsel and
Secretary since March 2000. From 1996 until joining our Company, Mr. Coleman
worked as a Senior Attorney for Deluxe. Prior to joining Deluxe, Mr. Coleman
was associated with Dorsey & Whitney, a law firm located in Minneapolis,
Minnesota, and Fried, Frank, Harris, Shriver & Jacobson, a law firm located in
New York, New York. Michael A. Feliciano has served as Senior Vice President, Division
Executive-Electronic Payments since January 2003. Mr. Feliciano was vice
president and general manager of the EFT processing business unit at NYCE
Corporation, an electronic funds transfer network, from 1995 until he joined
our Company. Prior to joining NYCE, Mr. Feliciano served in the electronic
commerce division of Electronic Data Systems for three years. Kathleen Flanagan has served as Senior Vice President, Division
Executive-Global Outsourcing since December 2002. From March 2000 until
December 2002, Ms. Flanagan served as the chief operations officer for Clareon,
and she was employed as senior vice president of client operations for Wright
Express from February 1996 until November 1999. Ms. Flanagan has also held
senior positions at Portland Glass and Melville Corporation. Rahul Gupta has served as Senior Vice President, Division Executive-Risk
Management since January 2003. From October to November 2000 and from January
to August 2002, Mr. Gupta served as vice president, network/ASP services of i2
Technologies, Inc. (i2), a provider of supply chain management software. From
December 2000 to December 2001, Mr. Gupta served as chief executive officer of
Financial Settlement Matrix, a joint venture between i2 and several financial
institutions that provided business-to-business payment services. Prior to this
position, Mr. Gupta served as the president and chief operating officer for
Summitt Marketing Group, a database, promotions and targeted marketing service
company from January 1998 until September 2000. Mr. Guptas previous experience
includes senior management positions at Fidelity Investments and
PriceWaterhouse Consulting. Michele J. Langstaff has served as our Senior Vice President, Human Resources
and Administration since August 2003. Between 2000 and 2003, Ms. Langstaff was
a principal with the Organizational Strategy Group, L.L.C., a human resources
related consulting practice specializing in organizational effectiveness
working with clients in North America, Latin America, Europe and Asia. From
1997 to 2000, she served as senior vice president, chief administration officer
for Wells Fargo Bank. Ms. Langstaffs previous experience includes senior
positions at AT&T Corporation and Citibank, as well as several other human
resource leadership positions with companies in the medical and education
fields. Kevin L. Reager has been our Senior Vice President, Division Executive-ATM
Management since February 2003. Prior to joining our Company, Mr. Reager spent
15 years focused on ATM program development and management for Bank of America,
serving as its senior vice president of ATM business development and account
management since 1999. 8




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##### 



Clyde L. Thomas has served as our Chief Information Officer and Senior Vice
President, Technology since November 2002. From March 2000 through October
2002, Mr. Thomas served as chief information officer for Clareon. From February
1999 until February 2000, Mr. Thomas served as a partner of iDeal Partners. Mr.
Thomas served on the management team of Wright Express from July 1987 to
January 1999, serving most recently as its senior vice president and chief
information officer. Prior to his service with Wright Express, Mr. Thomas was
employed by American Airlines and Gulf Oil Corporation. Clareon filed a voluntary petition under chapter 11 of the Federal bankruptcy
laws in connection with its sale to Fleet National Bank in November, 2002.
Messrs. Walsh and Thomas and Ms. Flanagan all served as executive officers of
Clareon within two years of this filing. Agreements with Deluxe
In connection with the IPO and the Spin-Off, we and Deluxe entered into various
agreements that addressed the allocation of assets and liabilities between us
and that defined our relationship after the separation. The agreements related
to matters such as consummation of the IPO and the distribution of our stock by
Deluxe, registration rights for Deluxe, intercompany loans, information
technology consulting, business process outsourcing services, indemnification,
data sharing, real estate matters, tax sharing and transition services. For
transition services, we and Deluxe compensated each other for providing
services. The transition period varied depending on the agreement, but most
transition services terminated following the Spin-Off. The following is a summary description of the remaining relevant agreements
between our Company and Deluxe. This description, which summarizes the material
terms of the agreements, is not complete. Interested parties should read the
full text of the agreements, which have been filed with the Securities and
Exchange Commission. Tax-Sharing Agreement
In general, we were included in Deluxes consolidated group for federal income
tax purposes for the year 2000 and prior periods. Each member of a consolidated
group is jointly and severally liable for the federal income tax liability of
each other member of the group. We entered into a tax-sharing agreement with
Deluxe which allocates tax liabilities between us and Deluxe during the periods
in which we were included in Deluxes consolidated group. We could, however, be
liable in the event that any federal tax liability is incurred, but not
discharged, by other members of Deluxes consolidated group. We and Deluxe made payments to each other such that the amount of taxes to be
paid by us would generally be determined as though we had filed separate
federal, state and local income tax returns. We are responsible for our share
of any taxes with respect to tax returns that include us and our subsidiaries.
In determining the amount of our tax-sharing payments, Deluxe prepared for us
pro forma returns with respect to federal and applicable state and local income
taxes for periods prior to 2001. We reconcile whether we owe Deluxe or Deluxe
owes us money in respect of tax liabilities on a rolling basis under this
agreement as these returns are filed and audits completed. Deluxe continues to have all the rights as our parent for purposes of federal,
state and local tax law and will be the sole and exclusive agent for us in any
and all matters relating to our income, franchise and similar tax liabilities
during the periods prior to the Spin-Off and Deluxe will have sole and
exclusive responsibility for the preparation and filing of any related
consolidated federal and consolidated or combined or unitary state income tax
returns or amended returns. For periods prior to the Spin-Off, Deluxe retains
the power, in its sole discretion, to contest, compromise or settle any
asserted tax adjustment or deficiency and to file, litigate or compromise any
claim for a refund on our behalf. Professional Services Agreement
We have entered into a master agreement with Deluxe under which we provide
Deluxe with:  
    
    software development and maintenance services for information
technology applications;
    
    financial shared services including accounts receivable, accounts
payable and general accounting transaction processing; and
    
    data entry services. 9




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##### 



This agreement is scheduled to expire on March 31, 2005, although it will
automatically renew each year thereafter for an additional one-year term unless
terminated by either party. In addition, this agreement may be terminated by
Deluxe at its option if we are acquired, whether by merger or through the sale
of all or substantially all of our assets, by a third party. During the term of
the agreement, Deluxe will be obligated to spend $43 million per year for
software development and maintenance services for information technology
applications. The actual amounts paid to us by Deluxe are based on the actual
number of hours of information technology services that we provide to Deluxe.
If Deluxe fails to reach the $43 million spending target per year, it is
obligated to make compensatory payments for a portion of our fees based on our
estimates of lost margins. If Deluxe exceeds the $43 million spending target
per year, Deluxe will be entitled to receive reduced rates. We also provide
Deluxe with business process outsourcing services, including accounts
receivable, accounts payable and other general accounting services and data
entry services. The agreement provides for credits to Deluxe for unsatisfactory
performance by us and bonuses for superior performance, as is typical for
information technology professional services. The provision of services by us
under the agreement is non-exclusive and Deluxe may contract with any third
party for the provision of information technology and business process
outsourcing services. We are unable to predict whether this agreement will be
extended beyond its currently scheduled expiration date. If the agreement is
extended, we would expect that it will be revised to reduce Deluxes minimum
annual commitment for software development and maintenance services. Network Access Agreement
Historically, some ChexSystems customers have elected to use the online check
ordering connectivity provided by Deluxes printing operations to receive
services provided by ChexSystems. Deluxe provided us a license to use these
connections to its check printing customers in order to allow us to continue to
provide our ChexSystems products to financial institutions who wish to receive
these products through the Deluxe network. The original network access agreement was scheduled to expire at the end of
2001, but it was extended through 2005 through an agreement we signed with
Deluxe in November 2001. Under the extended agreement, we pay Deluxe a
per-transaction fee for each electronic submission sent through its network by
customers of ChexSystems. The per-transaction fee varies depending on the
number of transactions submitted during any given month, subject to a minimum
monthly fee of $183,333 per month during 2002, $175,000 per month during 2003,
$158,333 per month during 2004 and $150,000 per month during 2005. We also pay
Deluxe an hourly rate for development and electronic delivery support and a fee
of $4,000 per month for standard data contribution transmissions. ITEM 2. PROPERTIES The following table sets forth a description of our principal facilities: Approximate
    
    Owned or LeaseLocation
    
    Square Feet
    
    Expiration Date
    
    FunctionScottsdale, Arizona
    
    
    47,550
    
    
    February 2012
    
    Corporate HeadquartersPhoenix, Arizona*
    
    
    96,100
    
    
    Owned
    
    Data centerNew Berlin, Wisconsin
    
    
    82,600
    
    
    Owned
    
    Data centerMilwaukee, Wisconsin
    
    
    82,500
    
    
    November 2013
    
    Electronic funds processing and
software developmentChennai, India
    
    
    18,600
    
    
    January/June 2008
    
    Software development centerChennai, India
    
    
    48,400
    
    
    October 2005/July 2006
    
    Software development centerMumbai, India
    
    
    52,500
    
    
    October 2004
    
    Customer call centerMumbai, India
    
    
    32,600
    
    
    August 2006
    
    Customer call centerGurgaon, India
    
    
    62,200
    
    
    October 2004/January 2006
    
    Shared services centerWoodbury, Minnesota
    
    
    79,400
    
    
    September 2012
    
    Customer contact center,
DebitBureau, professional
services, and ATM management
servicesToronto, Canada
    
    
    27,100
    
    
    October 2008
    
    Software development centerBothell, Washington
    
    
    32,300
    
    
    August 2004
    
    SubleasedBothell, Washington
    
    
    24,700
    
    
    August 2006
    
    VacantDallas, Texas
    
    
    31,650
    
    
    January 2004
    
    Customer contact center
  *
    
    Approximately 42,560 square feet of this facility is leased to Deluxe. We believe that additional space will be available at a reasonable cost to meet
our expected needs. 10




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##### 



ITEM 3. LEGAL PROCEEDINGS The Company is currently the subject of an investigation by the Securities and
Exchange Commission (SEC) with respect to restatements of its prior period
financial statements that occurred in 2002. The Company has been cooperating
fully with the SEC staff and intends to continue to do so. The Company may,
however, become subject to a fine or other remedies in connection with the
investigation. The Company has incurred, and may continue to incur,
significant legal expenses in connection with this investigation. The Company, its former chief executive and chief financial officers and its
current chief financial officer are defendants in a federal securities action
(the Federal Securities Action) pending in the U.S. District Court for the
District of Arizona. On December 30, 2003, the plaintiff in the Federal
Securities Action filed a Consolidated Amended Complaint (the Complaint). The
Complaint alleges, among other things, that during the period from July 21,
2000 through October 24, 2002 the defendants made false and misleading
statements and omissions of material facts and that the plaintiffs and other
members of a putative class of shareholders suffered damages as a result. On
February 10, 2004, the defendants filed a motion to dismiss this action. The Company is also a nominal defendant in two substantially identical
shareholder derivative actions filed in the Superior Court of Arizona, Maricopa
County in January 2003 (the Shareholder Derivative Actions). The complaints
allege, among other things, that certain of the Companys current and former
directors named in the complaints as defendants breached their fiduciary duties
to the Company in connection with certain alleged issues involving the
Companys accounting practices and internal controls. The complaints also name
as a defendant the Companys former external auditor. With the agreement of
the parties, the Court has entered an order staying these actions pending the
resolution of the motion to dismiss the Federal Securities Action. The Company believes the Federal Securities Action and the Shareholder
Derivative Actions are without merit and intends to vigorously defend itself.
However, the Company cannot predict the outcome of these actions with
certainty. The Company, along with numerous other defendants, is a defendant in an action
pending in the U.S. District Court for the Southern District of Florida. The
complaint in this action alleges the Company purchased motor vehicle records
from the State of Florida and used that data for marketing and other purposes
that are not permitted under the Federal Drivers Privacy Protection Act. The
plaintiffs are seeking liquidated damages of not less than $2,500 for each
affected member of a purported class, plus costs and attorneys fees. The
plaintiffs are also asking for injunctive relief to prevent further alleged
violations of the Federal Act. The Company cannot predict whether the
plaintiffs in this case will be successful in certifying their complaint as a
class action. The Company believes that it has meritorious defenses with
regard to the allegations made in this lawsuit and intends to vigorously defend
this action. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our security holders during the fourth
quarter of our fiscal year ended December 31, 2003. 11




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##### 



PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information
Through December 31, 2003, the shares of our Company were listed on the Nasdaq
National Market under the symbol EFDS. The following table sets forth the
high and low prices of our common stock, as reported by the Nasdaq National
Market, for the calendar quarters indicated and the last sales price of our
shares at the close of each such quarter. 2003
    
    High
    
    Low
    
    CloseFirst Quarter
    
    $
    9.46
    
    
    $
    5.65
    
    
    $
    6.87Second Quarter
    
    $
    13.42
    
    
    $
    6.87
    
    
    $
    11.55Third Quarter
    
    $
    13.45
    
    
    $
    11.03
    
    
    $
    12.37Fourth Quarter
    
    $
    17.95
    
    
    $
    12.30
    
    
    $
    17.35
 2002
    
    High
    
    Low
    
    CloseFirst Quarter
    
    $
    19.10
    
    
    $
    13.58
    
    
    $
    16.05Second Quarter
    
    $
    18.35
    
    
    $
    7.95
    
    
    $
    9.48Third Quarter
    
    $
    11.98
    
    
    $
    7.26
    
    
    $
    9.38Fourth Quarter
    
    $
    10.05
    
    
    $
    7.25
    
    
    $
    9.11
 The shares of our Company are currently listed on the New York Stock Exchange
under the symbol EFD. The closing price of our shares on February 17, 2004
was $17.15. As of February 17, 2004, we had 9,569 record holders of our common
stock. Dividend Policy
We have never paid a dividend on our common stock and do not presently
anticipate doing so. Annual Meeting
The annual meeting of our stockholders will be held at 12:00 p.m. Scottsdale,
Arizona time, on May 20, 2004, at The Boulders, 34631 North Tom Darlington
Drive, Carefree, Arizona, 85377. 12




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##### 



ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read together with the
consolidated financial statements and related notes and Managements
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this annual report. The selected statement of operations
data shown below for each of the years in the five-year period ended December
31, 2003 and the selected balance sheet data for each of the five years ended
December 31, 2003, are derived from our audited consolidated financial
statements. Year Ended December 31,(in thousands, except per share data)
    
    2003
    
    2002
    
    2001
    
    2000 (2)
    
    1999 (2)Statement of Operations Data:Net revenue (1)
    
    $
    532,054
    
    
    $
    543,107
    
    
    $
    537,159
    
    
    $
    439,299
    
    
    $
    322,367Operating expenses (1)
    
    
    493,344
    
    
    
    507,688
    
    
    
    486,338
    
    
    
    430,923
    
    
    
    323,455Income (loss) from operations
    
    
    38,710
    
    
    
    35,419
    
    
    
    50,821
    
    
    
    8,376
    
    
    
    (1,088
    )Other income (expense)
    
    
    1,157
    
    
    
    734
    
    
    
    171
    
    
    
    (1,594
    )
    
    
    (1,552
    )Income (loss) before income taxes
    
    
    39,867
    
    
    
    36,153
    
    
    
    50,992
    
    
    
    6,782
    
    
    
    (2,640
    )Provision for income taxes
    
    
    (10,959
    )
    
    
    (11,599
    )
    
    
    (17,653
    )
    
    
    (3,299
    )
    
    
    (5,586
    )Net income (loss)
    
    $
    28,908
    
    
    $
    24,554
    
    
    $
    33,339
    
    
    $
    3,483
    
    
    $
    (8,226
    )Net income (loss) per share  basic
    
    $
    0.62
    
    
    $
    0.53
    
    
    $
    0.72
    
    
    $
    0.08
    
    
    $
    (0.21
    )Net income (loss) per share  diluted
    
    $
    0.61
    
    
    $
    0.53
    
    
    $
    0.70
    
    
    $
    0.08
    
    
    $
    (0.21
    )Shares used in computing:Net income (loss) per share  basic
    
    
    46,854
    
    
    
    46,588
    
    
    
    45,985
    
    
    
    42,788
    
    
    
    40,000Net income (loss) per share  diluted
    
    
    47,239
    
    
    
    46,738
    
    
    
    47,445
    
    
    
    42,867
    
    
    
    40,000
   (1)
    
    All years include the effects of the adoption of EITF Issue No. 01-14
as outlined in Note 2 to the consolidated financial statements.(2)
    
    Prior to 2000, purchase and sale transactions between us and Deluxe
were executed at either current market pricing or agreed-upon transfer
prices and Deluxe allocated expenses to us for the cost of corporate
services provided. These common costs to us and Deluxe were allocated
because specific identification of the actual costs incurred was not
practicable. We and Deluxe believed that this allocation method was
reasonable. During 2000, certain of the costs for these support functions
were incurred directly by us. The remaining corporate services provided
by Deluxe were allocated to us based on estimates of the costs that would
have been incurred by us if we were a stand-alone, independent company.
The allocation of costs to us by Deluxe ceased at the Spin-Off in
December 2000. December 31,(in thousands)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Balance Sheet Data:Cash and cash equivalents
    
    $
    158,106
    
    
    $
    119,487
    
    
    $
    101,871
    
    
    $
    78,731
    
    
    $
    35,849Working capital
    
    
    162,702
    
    
    
    149,795
    
    
    
    118,641
    
    
    
    70,899
    
    
    
    25,607Total assets
    
    
    512,337
    
    
    
    459,418
    
    
    
    442,916
    
    
    
    389,132
    
    
    
    289,929Long-term debt, excluding current portion
    
    
    1,667
    
    
    
    1,338
    
    
    
    2,529
    
    
    
    2,244
    
    
    
    3,597Stockholders equity
    
    
    401,662
    
    
    
    363,520
    
    
    
    334,315
    
    
    
    286,165
    
    
    
    199,105
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) begins with an executive overview of our business. This
overview includes a description of our business goals, the business models for
our segments, key events of 2003 and certain trends, risks and challenges. We
then discuss our results of operations for 2003 and 2002 compared to 2002 and
2001, respectively. This is followed by a discussion of our liquidity and
capital resources, including cash resources, sources and uses of cash and
commercial commitments. We conclude with a discussion of Critical Accounting
Policies and Estimates that we believe are important for the reader to
understand our reported financial results and our business outlook for 2004. You should read the MD&A together with Selected Financial Data and our
consolidated financial statements and the notes to those financial statements
included in this annual report. In addition to historical and pro forma
information, the MD&A contains forward-looking information that involves risks
and uncertainties. Our actual future results could differ materially from those
presently anticipated due to a variety of factors, including those discussed in
Exhibit 99.1 to this Annual Report on Form 10-K. The forward-looking statements
included in this discussion do not reflect the potential impact of any
divestitures, mergers, acquisitions or other business combinations that may be
completed after March 15, 2004. 13




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EXECUTIVE OVERVIEW Our Business
Our goal is to enable trusted commerce by delivering integrated information,
payment and technology solutions that strengthen our customers overall
profitability through increased revenue, reduced costs and improved operating
efficiency and technology performance. Our principal focus is on issuers of
transaction accounts, such as financial institutions, financial services
companies, electronic funds networks, retailers, government agencies, eCommerce
providers, telecommunications companies and other businesses. We deliver our information, payment and technology solutions through the four
basic capabilities or competencies and through combinations of these products
and services. Our most profitable business segments are Electronic Payments and
Risk Management, although our Global Outsourcing and ATM Management segments
also contribute to our overall value proposition. One of our goals for 2004 and
beyond is to enhance our ability to market and sell comprehensive solutions
incorporating multiple elements of the products and services offered by our
business lines to our customers. The business model of each of our segments is
summarized below. Electronic Payments
This segment derives its revenue based upon our customers needs to process
electronic debit transactions. The majority of this segments revenue is
derived from processing debit transactions that originate at an ATM or
point-of-sale device. The remaining revenue is derived from the licensing of
the EFT software used to process electronic debit transactions. The provision
of EFT processing services requires substantial capital investment for
computers and related peripherals, maintenance, system modifications and
upgrades, security and redundancy. Although these requirements add barriers to
competitive entrance, they also create a relatively high ratio of fixed
operating costs to total costs. Processors are also required to maintain
significant cash reserves to cover temporary imbalances in the flow of funds
associated with electronic funds transfers. Additionally, the software
applications used for processing at our data centers and which we license to
our software customers are primarily developed in-house and require frequent
compliance updates and competitive upgrades, creating a dependence upon
experienced and qualified IT personnel. Other operating expenses include
telecommunications costs to support the transmission of electronic debit
transactions and settlement. The acquisition of Oasis in November 2003
expanded this segments software offering from legacy platforms to lower cost
open platforms. When evaluating the performance of this business, we focus
primarily on increasing its recurring revenue base through, among other things,
the retention of our current processing customers and the acquisition of new
processing relationships. Expanding our software sales and establishing a
processing presence in foreign markets are also areas of management emphasis. ATM Management
Our ATM Management segment derives its revenues from the use, sale and
maintenance of ATMs. Surcharge and interchange revenue represented the
majority of our revenue from this segment in 2003. Equipment sales are
non-recurring and, along with branding fees, represent a minority of the
revenue in this segment. Operating costs in this segment primarily include
processing and telecommunication costs, the cost of the equipment we sell and
the residual payments we make to the merchants where the ATMs we manage are
deployed. Our primary goal for this business is to continue to improve its
margins by lowering costs and providing additional services. Risk Management
This segment derives its revenue from database inquiries by financial
institutions and retailers seeking to comply with regulations and/or mitigate
the risk associated with accepting checks, providing credit or opening debit
accounts for new consumers. Revenue from financial institutions represented the
majority of this segments revenue in 2003 and the balance was derived from
retail customers using our check verification service. Operating costs
generally include data acquisition costs and the cost of technology and
regulatory compliance infrastructure and customer support centers. Our primary
efforts in managing this business are directed towards increasing its
revenues by improving customer usage rates and expanding our
product suite. Global Outsourcing
Our global outsourcing business derives its revenues from the need of companies
to remain competitive through reducing costs while maintaining or improving
service levels. Revenues in this segment are from a variety of 14




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business process outsourcing services (such as call centers, application
processing and data entry) and IT outsourcing. Operating costs in this segment
are primarily related to employee expense and telecommunications and facilities
costs. Our principal goal for this business is to expand its customer base in
our core target markets of financial service, retail and
telecommunications companies in our BPO solutions area. Key Events in 2003  
    
    A new team of senior business executives was recruited to
streamline our operations, reduce our costs, improve the customer focus
of our business and to prepare our Company for growth in the future.
    
    Revenue was adversely impacted by the expiration of significant
government and processing contracts in 2002 and a decline in the
revenues we received from Deluxe.
    
    We initiated multiple business process initiatives to improve
processes and identify cost savings, resulting in reduced operating
expenses.
    
    We established strategic distribution alliances for our processing business with MasterCard and BISYS.
    
    Industry consolidation and strong competition resulted in pricing pressures.
    
    We acquired Oasis Technology Ltd., providing us with open systems
software capability, a global distribution network and over 100
international software customers.
    
    We established Return on Invested Capital as a key corporate
performance measurement tool for 2004 and beyond.
    
    We renewed our EFT processing contracts with CitiShare and CO-OP.
    
    We began providing electronic benefit transfer (EBT) services as a
prime contractor in the states of Alabama, Missouri and North Carolina.
    
    We refined our long-term strategy to focus on maximizing the value
of consumer transaction accounts and increasing the inter-dependency of
our business lines.
    
    We retained KPMG LLP as our independent auditor as the successor to Deloitte & Touche LLP.
    
    We added Richard J. Almeida as a member of our Board of Directors. Trends
Our strategic planning and forecasting processes include the consideration of
economic, industry-wide and Company specific trends that may impact our
customers, competitors and our operations. We have identified the more material
positive and negative trends affecting our business below:  
    
    increased fraud and identity theft and regulatory requirements are
driving an increasing need for risk management products;
    
    consolidation in the industries we serve is resulting in increasing competition and pricing pressures;
    
    increased outsourcing as a means to control costs is driving an outsourcing demand;
    
    there is growing political opposition to the use of offshore outsourcing services;
    
    a continued shift in the mix of payment mechanisms toward debit
transactions is driving a need for electronic payment solutions and
associated risk management services;
    
    our sales of IT outsourcing services has been declining;
    
    the rate of new ATM deployment and per ATM transaction volumes in the United States is declining;
    
    ATM markets outside the United States are growing; and
    
    our India operations are experiencing increasing compensation costs
and employee attrition rates as competition increases. Risks and Challenges
In addition to the trends affecting our industry and Company as noted above, we
consider risks and challenges that could impact the Companys future financial
results, including the following and those described in Exhibit 99.1 to this
Annual Report on Form 10-K:  
    
    We are unable to predict the results of the investigation by the
SEC, the pending stockholders litigation or the purported class action
litigation filed in Florida.
    
    Estimates of future financial results are inherently unreliable.
    
    Consolidation in the industries we serve may adversely affect our
ability to sell our products and services.
    
    Our efforts to improve the margins of our ATM Management business may not be successful. 15




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
    
    Our ability to expand through acquisitions involves risks and may not be successful.
    
    We face intense competition in all areas of our business, and if we
do not compete effectively, our business will be harmed.
    
    If we experience system failures, the products and services we
provide to our customers could be delayed or interrupted, which would
harm our business and reputation and result in the loss of customers.
    
    Legislation or regulation could harm our ability to collect and use
data, increase our operating costs or otherwise harm our business.
    
    If the security of our databases is compromised, our reputation
could suffer and customers may not be willing to use our products and
services.
    
    We may experience software defects, development delays and
installation difficulties, which would harm our business and reputation
and expose us to potential liability.
    
    There are a number of risks associated with our international sales
and operations that could harm our business.
    
    Changes in Indian tax laws could adversely affect our results of operations.
    
    We face termination and compliance risks with respect to our government contracts.
    
    We may be unable to protect our intellectual property rights. RESULTS OF OPERATIONS The following table presents our consolidated financial results for the three
years ended December 31, 2003: % Change(dollars in thousands)
    
    2003
    
    2002
    
    2001
    
    03-02
    
    02-01Net revenue
    
    $
    532,054
    
    
    $
    543,107
    
    
    $
    537,159
    
    
    
    (2.0
    )%
    
    
    1.1
    %Operating expenses:Processing, communication and service
costs
    
    
    230,724
    
    
    
    226,151
    
    
    
    199,007
    
    
    
    2.0
    
    
    
    13.6Employee costs
    
    
    179,896
    
    
    
    185,719
    
    
    
    205,588
    
    
    
    (3.1
    )
    
    
    (9.7
    )Depreciation and amortization
    
    
    35,385
    
    
    
    36,972
    
    
    
    39,952
    
    
    
    (4.3
    )
    
    
    (7.5
    )Other operating costs
    
    
    46,780
    
    
    
    44,321
    
    
    
    41,091
    
    
    
    5.5
    
    
    
    7.9Restructuring, asset impairment and
other charges
    
    
    4,209
    
    
    
    16,525
    
    
    
    3,200
    
    
    
    (74.5
    )
    
    
    *Reversal of provision for contract losses
    
    
    (3,650
    )
    
    
    (2,000
    )
    
    
    (2,500
    )
    
    
    82.5
    
    
    
    (20.0
    )Total operating expenses
    
    
    493,344
    
    
    
    507,688
    
    
    
    486,338
    
    
    
    (2.8
    )
    
    
    4.4Income from operations
    
    
    38,710
    
    
    
    35,419
    
    
    
    50,821
    
    
    
    9.3
    
    
    
    (30.3
    )Other income  net
    
    
    1,157
    
    
    
    734
    
    
    
    171
    
    
    
    57.6
    
    
    
    *Income before income taxes
    
    
    39,867
    
    
    
    36,153
    
    
    
    50,992
    
    
    
    10.3
    
    
    
    (29.1
    )Provision for income taxes
    
    
    (10,959
    )
    
    
    (11,599
    )
    
    
    (17,653
    )
    
    
    (5.5
    )
    
    
    (34.3
    )Net income
    
    $
    28,908
    
    
    $
    24,554
    
    
    $
    33,339
    
    
    
    17.7
    
    
    
    (26.4
    )
  *
    
    Represents an increase or decrease in excess of 100%. Net Revenue Net revenue by reportable segment and for the Company as a whole for the three
years ended December 31, 2003 was as follows: % Change(dollars in thousands)
    
    2003
    
    2002
    
    2001
    
    03-02
    
    02-01Net revenueElectronic payments
    
    $
    183,556
    
    
    $
    210,698
    
    
    $
    245,216
    
    
    
    (12.9
    )%
    
    
    (14.1
    )%ATM management
    
    
    139,797
    
    
    
    115,597
    
    
    
    73,922
    
    
    
    20.9
    
    
    
    56.4Risk management
    
    
    133,129
    
    
    
    128,962
    
    
    
    125,251
    
    
    
    3.2
    
    
    
    3.0Global outsourcing
    
    
    75,572
    
    
    
    87,850
    
    
    
    92,770
    
    
    
    (14.0
    )
    
    
    (5.3
    )Total net revenue
    
    $
    532,054
    
    
    $
    543,107
    
    
    $
    537,159
    
    
    
    (2.0
    )
    
    
    1.1
 Electronic Payments
Processing revenue decreased in both 2002 and 2003 primarily due to the
termination of processing services previously provided to the STAR network
following the licensing of our EFT software to STAR in the third quarter of
2001. Processing revenues from the STAR network were approximately $17 million
in 2002 and approximately $27 million in 2001. Our contract to provide
Medicare eligibility verification services to the state of New York also 16




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expired at the end of 2002. Revenues from this contract were approximately $12
million in 2002. The revenues from the additional EBT contracts we obtained in
2003 did not completely offset the loss of revenue on the expired New York
contract. In 2004, we expect that our processing revenues from financial
institutions will increase due to increased volumes. This increase will be
somewhat offset by a decline in revenues from our government services business
due to contract expirations. We acquired Oasis Technology Ltd. (Oasis) in November of 2003. Incremental
software revenues in 2003 from this acquisition were approximately $3 million.
The revenue from Oasis was more than offset by a general decline in software
license fee revenues from 2002 to 2003. The licensing of our EFT software to
the STAR network is reflected in our software revenue in 2001. We would not
expect to see software sales of this magnitude to recur, although we expect
software revenues to increase in 2004 due to the acquisition of Oasis. The
following table illustrates our revenue generated from software sales: Year Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001License fees
    
    $
    10,414
    
    
    $
    12,835
    
    
    $
    42,447Maintenance
    
    
    13,100
    
    
    
    13,362
    
    
    
    13,457Software modifications
    
    
    7,207
    
    
    
    6,793
    
    
    
    9,373$
    30,721
    
    
    $
    32,990
    
    
    $
    65,277
 ATM Management
ATM processing revenue increased approximately $19 million in 2003 as compared
to 2002 due to our receipt of a full year of revenue from the acquisitions we
completed in this segment in 2002. Equipment sales and branding revenues also
increased in 2003 over 2002. We are redirecting the focus of this business
towards offering an end-to-end ATM portfolio management service to financial
institutions and retailers. We do not presently anticipate acquiring additional
ATM service providers in 2004 and we expect revenues from this segment to
increase modestly in 2004, largely from the sale of ATM managed services. The increase in ATM revenue from 2001 to 2002 is due primarily to incremental
revenues of approximately $38 million from the acquisitions of additional ATM
networks in 2002. Risk Management
Revenues from our ChexSystems(SM) suite of products increased for both 2003 as
compared to 2002 and 2002 as compared to 2001, primarily due to inquiry volume
growth driven by our marketing campaign to encourage better customer screening
by financial institutions in light of the USA Patriot Act. For both years, the
increase in revenues from ChexSystems was partially offset by declines in sales
of our SCAN(SM) and collection products over the prior year. The decrease in
revenues from SCAN products was attributable primarily to pricing concessions
in 2003 and the loss of customers in 2002. We expect that revenues from
ChexSystems and our fraud protection products will continue to increase in
future periods and that the customer base for our SCAN products has stabilized. Global Outsourcing
Revenues from information technology (IT) services provided under our contract
with Deluxe declined approximately $15 million in 2003 as compared to 2002. In
accordance with our agreement with Deluxe, a minimal short-fall fee, based upon
a formula in the contract reflective of our estimated lost profits, was billed
to Deluxe as it failed to reach the minimum target level of $43 million for
software development services for the year. Revenue from other IT services
declined approximately $7 million from 2001 to 2002 as a result of our decision
in 2001 to suspend sales and marketing efforts on our stand-alone information
technology development services. We expect to finalize our IT services strategy
in 2004. Business process outsourcing (BPO) revenues, which include outsourcing and
customer contact center services, increased approximately $3 million in 2003 as
compared to the prior year due to the expansion of services provided under
existing BPO contracts. We expect growth in our BPO business will come from the
acquisition of new clients and the continued expansion of the services offered
to existing clients. This business features, however, lengthy sales cycles and
so we expect that any ramp-up of revenues will occur relatively gradually. 17




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##### 



Business Segment Margin Contributions The following table presents our operating income (loss) by segment,
unallocated corporate expenses and consolidated operating income for the three
years ended December 31, 2003: % Change(dollars in thousands)
    
    2003
    
    2002
    
    2001
    
    03-02
    
    02-01Operating income
(loss)Electronic payments
    
    $
    42,490
    
    
    $
    64,625
    
    
    $
    76,267
    
    
    
    (34.3
    )%
    
    
    (15.3
    )%ATM management
    
    
    101
    
    
    
    (4,243
    )
    
    
    (5,502
    )
    
    
    *
    
    
    
    (22.9
    )Risk management
    
    
    38,321
    
    
    
    15,872
    
    
    
    15,560
    
    
    
    *
    
    
    
    2.0Global outsourcing
    
    
    3,879
    
    
    
    14,796
    
    
    
    9,507
    
    
    
    (73.8
    )
    
    
    55.6Corporate
    
    
    (46,081
    )
    
    
    (55,631
    )
    
    
    (45,011
    )
    
    
    (17.2
    )
    
    
    23.6Total operating income
    
    $
    38,710
    
    
    $
    35,419
    
    
    $
    50,821
    
    
    
    9.3
    
    
    
    (30.3
    )
  *
    
    Represents an increase or decrease in excess of 100%. Electronic Payment
Margins in 2003 were adversely impacted by the expiration of processing and
government service contracts during the latter part of 2002. Competitive
pressures led to pricing concessions in 2003, offsetting the impact of
increasing volumes and resulting in a degree of margin contraction.
Additionally, performance-based compensation expense increased approximately $4
million in 2003 as bonus incentives were not accrued in 2002. Higher margin
software revenues declined approximately $2 million in 2003. We expect
operating income from this segment to decline slightly in 2004 as compared to
2003 as, unlike 2003, we do not expect to record reversals of the provision for
government services loss contracts during 2004. In 2002, $3.2 million in restructuring and asset impairment charges
attributable to this segment were largely offset by an approximately $3 million
reduction in performance-based compensation expense as compared to 2001. The
reduction seen in 2002 in higher margin software revenue was largely offset by
cost reduction measures implemented in 2001 and 2002, including the relocation
of contact center work to our Indian operations. The loss of STAR network
processing revenues in the last quarter of 2002 resulted, however, in
additional margin contraction. ATM Management
The increase in the margins of this business in 2003 is the result of a focus
on improving equipment sales margins and expanding our sales of branding
services. We will seek to further improve the margins in this business in
future periods by offering ATM management services to large retailers and
financial institutions. We expect margins from this business to continue to
increase in 2004. Margin improvement from 2001 to 2002 was primarily the result of our efforts to
integrate the ATM businesses we acquired in 2001. Risk Management
The margin improvement during 2003 is due to the elimination of low margin
product lines and the reduction in employee and third party costs through
initiatives such as the transition of contact center work to our Indian
operations. In addition, restructuring costs of $5.0 million were charged to
this segment during 2002 compared to $0.8 million in 2003. We expect a
continued increase in the margins from this segment in 2004 as a result of a
full year of cost savings. The $5.0 million of restructuring and asset impairment charges we recorded in
this segment in 2002 related to severance, lease expense and asset impairments,
as compared to $3.2 million recorded in 2001 for the closure of our former
Bothell, Washington facility. The increase in restructuring costs in 2002 was
offset by an approximate $2 million reduction in expense recorded for
performance-based compensation from the amounts recorded during 2001. Global Outsourcing
The results of this segment for 2003 were adversely impacted by the reduction
in IT outsourcing and BPO services provided to Deluxe, pricing concessions on
existing contracts and increases in compensation costs. We expect a modest
improvement in the margins of this business in 2004 from a combination of the
restructuring of our IT services group and new BPO contracts. 18




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The improvement in operating margin from 2001 to 2002 was due primarily to an
approximate $5 million reduction in performance-based compensation expense. Corporate
Unallocated corporate overhead includes, among other things, executive
leadership costs, investor relations, general legal, consulting and accounting
and finance costs and certain technology costs. The decrease in expenses seen
in 2003 over 2002 is primarily due to $6.8 million in severance benefits and
lease impairment charges that were recorded in 2002. Approximately $0.4
million of the 2002 accrual for the lease impairment was reversed in 2003 due
to the subletting of the associated facilities. Expenses were more in 2002 as
compared to 2003 due to the additional costs incurred in the latter part of
2002 for the transition of executive leadership and the relocation of certain
administration functions from Wisconsin to Arizona. We expect corporate
expenses to be relatively flat in 2004. The increase in corporate expenses from 2001 to 2002 is primarily related to
increased professional service fees associated with the SEC inquiry and the
accounting review we completed in the fourth quarter of 2002 as well as the
$6.8 million of restructuring and asset impairment charges we recorded in 2002.
Expenses for facility rental costs related to the expansion of our facilities
in Scottsdale, Arizona and for corporate insurance and employee health benefits
also increased. These increases were partially offset by an approximately $2
million reduction for performance-based compensation and the elimination of
goodwill amortization expense. We recorded approximately $4 million of goodwill
amortization expense in 2001. Operating Expenses Operating expenses for the three years ended December 31, 2003 were as follows: % Change(dollars in thousands)
    
    2003
    
    2002
    
    2001
    
    03-02
    
    02-01Operating expenses:Processing, communication and service costs
    
    $
    230,724
    
    
    $
    226,151
    
    
    $
    199,007
    
    
    
    2.0
    
    
    
    13.6Employee costs
    
    
    179,896
    
    
    
    185,719
    
    
    
    205,588
    
    
    
    (3.1
    )
    
    
    (9.7
    )Depreciation and amortization
    
    
    35,385
    
    
    
    36,972
    
    
    
    39,952
    
    
    
    (4.3
    )
    
    
    (7.5
    )Other operating costs
    
    
    46,780
    
    
    
    44,321
    
    
    
    41,091
    
    
    
    5.5
    
    
    
    7.9Restructuring, asset impairment and other
charges
    
    
    4,209
    
    
    
    16,525
    
    
    
    3,200
    
    
    
    (74.5
    )
    
    
    *Reversal of provision for contract losses
    
    
    (3,650
    )
    
    
    (2,000
    )
    
    
    (2,500
    )
    
    
    82.5
    
    
    
    (20.0
    )Total operating expenses
    
    $
    493,344
    
    
    $
    507,688
    
    
    $
    486,338
    
    
    
    (2.8
    )
    
    
    4.4
  *
    
    Represents an increase or decrease in excess of 100%. Processing, communication and service costs
This category includes the cost of transaction processing, telecommunications,
computer equipment and promotional services. This category also includes
residual payments, or the payments we make to the occupants of the property
where the ATMs that we own or manage are located. During 2003, ATM processing and service costs increased approximately $16
million due to a full year of processing volume for the ATM network
acquisitions that we completed in 2002. This increase was offset by a decrease
in third party costs of approximately $6 million due to the migration of
support services for our Risk Management business to our India operations.
Additionally, equipment rental and maintenance and telecommunications costs
were reduced approximately $6 million due to contract renegotiations. During 2002, telecommunications and residual payments increased along with the
increase in ATM processing revenues associated with the ATM network
acquisitions in 2001 and 2002. Employee costs
Employee compensation, payroll taxes and medical expenses decreased
approximately $19 million during 2003 due primarily to a 900 person reduction
in U.S. headcount. Company-wide headcount increased from approximately 4,400 at
December 31, 2002 to 5,200 at December 31, 2003 as a result of the migration of
business processes to our India facilities and increased demand for our
outsourcing services. At December 31, 2003 more than 65% of our 19




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##### 



employees were located in India. Performance-based compensation was
reinstituted in 2003 resulting in an increase to compensation costs of
approximately $12 million over 2002. We expect future employee costs and
headcount to increase in 2004 in connection with new BPO business. Employee costs decreased approximately $13 million in 2002 compared to 2001 due
primarily to the elimination of performance-based employee compensation for
2002 as a result of reduced revenue and earnings expectations. We also began to
experience cost savings late in 2002 from our restructuring efforts and the
curtailment of travel expenditures. Depreciation and amortization
These costs represent depreciation of facilities and equipment and the
amortization of intangible assets, such as capitalized software costs and
acquired contracts. The decrease is due primarily to a reduction in
depreciation expense as a result of the sale of buildings during 2003. Upon
reclassification of the buildings and related assets as held for sale in the
third quarter of 2002, depreciation of those assets ceased. Depreciation on
these assets was $0.9 million in 2001, $0.8 million in 2002 and zero in 2003.
Additionally, we recorded goodwill amortization of approximately $4 million
2001. Such amortization ceased in 2002 in accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. Other operating costs
Expenditures in this category include facility costs, professional, consulting
and temporary services, bad debt, and certain administrative costs. External
consulting costs increased approximately $5 million during 2003 over 2002 due
to on-going strategic planning and business performance efficiency initiatives.
This increase was offset somewhat by reductions in legal and accounting
expense of approximately $2 million. We expect to continue to incur expenses
for legal services associated with the SEC inquiry and stockholder litigation
in 2004 and for external consultants related to the business improvement
initiatives we commenced in early 2003. During 2002, other operating costs increased primarily due to an increase in
professional services associated with responding to the SEC inquiry and the
accounting review we completed in the fourth quarter of 2002. These increases
were partially offset by a reduction in bad debt expense based upon a change in
estimates used for our calculation of the allowance for doubtful accounts. Restructuring, asset impairment and other charges
During 2002, we initiated a significant effort to reduce our cost structure by
eliminating unprofitable product lines, improving our internal business
processes and increasing the utilization of our India based resources. These
measures resulted in restructuring and asset impairment charges of $16.5
million. The charges were comprised of expected severance benefits totaling
$4.5 million for the elimination of approximately 300 positions primarily in
the United States, impairment of fixed assets totaling $5.1 million (including
a $3.0 million charge to write-down a building in Glendale, Wisconsin that was
held for sale), lease related costs of $4.8 million related to the
consolidation of facilities and a charge of $2.1 million for software
impairment related to products that were discontinued. During 2003, we reversed $0.9 million of the lease related charges we recorded
in 2002 to reflect the successful subletting of a portion of the properties
subject to those leases. Due to the business process improvement initiatives
identified during 2003, we recorded restructuring charges for severance
benefits of $3.6 million. We also recorded a $1.5 million charge for the
write-off of in-process research and development in connection with our
acquisition of Oasis. The in-process project relates to a product that assists
card issuers in managing customer cards, generating billing statements,
tracking account authorization, calculating overdrafts, issuing new cards and
performing various other tasks. This product is scheduled to be released in the
latter half of 2004. We could record similar charges in 2004. Results for 2001 included a restructuring charge of $3.2 million related to the
closure of our former Bothell, Washington facility. Reversal of provision for contract losses
In 2003, we recorded a $3.7 million benefit related to a reduction in our
estimate of future losses on certain government EBT contracts. Similar net
benefits of $2.0 million and $2.5 million were taken in the third quarters of 20




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##### 



2002 and 2001, respectively. Actual results have been better than previously
estimated due primarily to higher case counts and savings on costs such as
telecommunications. The government service contracts for which the loss
reserve was established are approaching their expiration dates and,
accordingly, the balance of the loss contract reserve has declined
substantially. At December 31, 2003 the balance of this reserve was
approximately $2 million. Other income  net
Other income  net primarily includes interest and investment income that is
enhanced or reduced by gains and losses on the disposal of assets, interest and
investment expense and foreign currency translation adjustments. Interest
earned on cash and cash equivalents was $2.1 million in 2003, $1.7 million in
2002 and $2.8 million in 2001. Provision for income taxes
The annualized effective tax rates for 2003, 2002 and 2001 were 27.5%, 32.1%
and 34.6%, respectively. The decrease in our effective tax rate from 2002 to
2003 reflects the benefit of certain permanent deductions taken by the Company
in 2003, some of which related to prior tax years. The decrease in our
effective tax rate from 2001 to 2002 was primarily a result of the cessation of
goodwill amortization in 2002 as this expense was non-deductible for tax
purposes. We expect our annualized effective tax rate to approximate 30% in
2004. Our effective tax rate is largely determined by our Indian subsidiarys
proportional share of our projected consolidated income. Our Indian software
development and business process outsourcing operations qualify for tax
incentives associated with businesses that operate within designated geographic
locations within India. These incentives generally provide us with exemptions
from Indian income tax on certain business income generated from these
operations and phase out through March 2009. The effect of these tax incentives
was to reduce our income tax expense by approximately $2.7 million in 2003,
$2.7 million in 2002 and $5.8 million in 2001. LIQUIDITY AND CAPITAL RESOURCES Overview
Information about our financial position as of December 31, 2003 and 2002 is
presented below: % Change(dollars in thousands)
    
    2003
    
    2002
    
    03-02Cash and cash equivalents
    
    $
    158,106
    
    
    $
    119,487
    
    
    
    32.3
    %Long-term debt due within one year
    
    
    5,586
    
    
    
    1,401
    
    
    
    *Long-term debt
    
    
    1,667
    
    
    
    1,338
    
    
    
    24.6Stockholders equity
    
    
    401,662
    
    
    
    363,520
    
    
    
    10.5Net working capital
    
    
    162,702
    
    
    
    149,795
    
    
    
    8.6
  *
    
    Represents an increase or decrease in excess of 100%. Cash Resources
In 2004, we expect our beginning cash balance and cash provided from operations
in 2004 to be sufficient to meet our normal operating commitments and to fund
planned capital expenditures and acquisitions. Cash and cash equivalents at
December 31, 2003 included cash in ATMs of approximately $7 million and cash in
India of approximately $14 million. The funds in India are held in Indian bank
accounts denominated in Indian rupees or U.S. dollars. These funds are
available for use in our Indian operations and investments. We consider these
funds to be permanently invested and have no current intention of repatriating
them to the United States of America. As part of our transaction processing business, we provide cash settlement
services to financial institutions and state and local governments. These
services involve the movement of funds between the various parties associated
with an ATM, point-of-sale or EBT transaction and this activity results in a
balance due to us at the end of each business day that we recoup over the next
few business days. The balances due us are included in cash on our consolidated
balance sheets. As of December 31, 2003, approximately $23 million of
settlement payments were due to us and we received these funds in early January
2004. We are required to maintain sufficient cash on hand to fund the daily
settlement advances we make against the payments we receive through the
settlement process. The typical overnight settlement balance due to us ranges
from $5 million to $30 million. We also seek to maintain an additional cash
balance of approximately $35 million to ensure that we can advance funds to our
processing 21




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##### 



customers if unusual circumstances prevent us from timely processing their
settlement files. We are considering an overnight credit facility to fund
these obligations. We have vault cash agreements with various financial institutions that provide
cash to certain of the ATMs owned or managed by us. Although some portion of
this cash may be physically located in the ATMs that we own or manage, these
funds are not included in cash and cash equivalents on our consolidated balance
sheet because we do not take title to it under the bailee/bailor relationship
as established by the agreements. Based upon the daily outstanding balance of
funds provided to the ATMs, we generally pay a monthly fee ranging from prime,
as defined, plus one half percent up to prime plus 5%. We indemnify the
financial institutions against any loss of the vault cash in the ATMs. One of
the agreements requires us to maintain a security amount equal to 1% of the
daily outstanding balance. The average monthly rate paid during 2003
approximated 7%. The agreements may be terminated upon notice by either party
and have various expiration dates through March 2005. Cash provided at December
31, 2003 pursuant to agreements with third-party vault cash providers was
approximately $41 million. We do not currently anticipate using our funds to pay cash dividends or
repurchase our stock during 2004. The following table sets forth our contractual cash obligations as of December
31, 2003 in total and for the time periods specified. Our long-term debt
consists principally of capital lease obligations related to equipment. Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    More than(in thousands)
    
    Total
    
    1 year
    
    1-3 Years
    
    3-5 Years
    
    5 YearsCapital lease obligations
    
    $
    7,253
    
    
    $
    5,586
    
    
    $
    1,602
    
    
    $
    65
    
    
    $
    Operating
lease obligations1
    
    
    59,027
    
    
    
    12,513
    
    
    
    23,367
    
    
    
    15,805
    
    
    
    7,342Vendor obligations
    
    
    89,517
    
    
    
    42,594
    
    
    
    46,923
    
    
    
    
    
    
    
    Total
    
    $
    155,797
    
    
    $
    60,693
    
    
    $
    71,892
    
    
    $
    15,870
    
    
    $
    7,342
  1 Future minimum lease payments for
non-cancelable operating leases are presented net of
minimum sublease rentals of $4.2 million due in the
future under non-cancelable subleases. Purchase orders for goods and services are not included in this table. Our
purchase orders may represent authorizations to purchase rather than binding
agreements and are based upon current service needs and are generally fulfilled
by our vendors within one or two months. For the purposes of this table,
contractual obligations for purchases of services are defined as agreements
that are enforceable and legally binding and that specify all significant
terms, such as fixed or minimum quantities to be purchased, fixed, minimum or
variable price provisions and the approximate timing of the transaction. We are party to certain other contracts with third parties whereby the third
party provides services to us. These services are operational in nature and our
obligations under these contracts vary from period to period based on our
utilization of these services. These commitments are not reflected in the table
above as the associated amounts are not currently determinable. Sources and Uses of Cash
The following table sets forth a summary of our cash flow activity for the
three years ended December 31, 2003 and should be read in conjunction with our
consolidated statements of cash flows: Summary of Cash FlowsYears Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001Cash provided by operating activities
    
    $
    73,448
    
    
    $
    74,792
    
    
    $
    85,022Cash used in investing activities
    
    
    (37,848
    )
    
    
    (57,470
    )
    
    
    (72,555
    )Cash provided by financing activities
    
    
    3,019
    
    
    
    294
    
    
    
    10,673Net increase in cash and cash equivalents
    
    $
    38,619
    
    
    $
    17,616
    
    
    $
    23,140
 22




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##### 



Our current priorities for use of our cash are:  
    
    investment in high return capital and operational projects with the
intention of increasing our product delivery and operational
effectiveness, enhancing our product suite and the redundancy of our
systems;
    
    complementary acquisitions; and
    
    ensuring we can fund our settlement obligations. Operating Activities
Our primary source of liquidity is the profits we generate from our business.
Operating cash outflows include payments to vendors for processing and
telecommunications services, consulting services and supplies. We also pay
salaries and benefits to our employees and income taxes. The cash we earned from operating activities was approximately the same for
2003 and 2002. Performance-based bonuses were not accrued in 2002 and therefore
not paid during 2003, resulting in a positive impact to cash flow in 2003.
Performance-based bonuses were, however, accrued at the end of 2003 and we paid
these bonuses during the first quarter of 2004. The 2003 benefit from the
elimination of incentive payments for 2002 was offset somewhat by a decrease in
our accounts payable, primarily as a result of the migration from the use of
vendors for outside services to the utilization of our employee workforce in
India and to a general reduction in expenses overall. In 2001, cash flows from operating activities were positively impacted by
greater net income and by the lapse of certain restrictions on our cash. We
reclassified approximately $29.5 million of cash from restricted to
unrestricted primarily due to the ATM vault cash we had provided to Access Cash
International LLC (ACI) prior to our acquisition of the company in the fall of
2001. Investing Activities
Cash from investing activities generally includes cash effects from the sale or
acquisition of assets. During 2003 we used approximately $27 million to acquire
Oasis and approximately $22 million to purchase fixed assets and develop
software. These expenditures were offset by approximately $13 million in
proceeds we received from the sale of buildings that were classified as held
for sale at December 31, 2002. We used less cash in investing activities in 2003 as compared to 2002 and 2001
because we spent less money on acquiring businesses, buying fixed assets and
developing software. We used approximately $35 million in 2002 for the
acquisition of four ATM networks and approximately $41 million in 2001,
primarily to complete our acquisition of ACI. We expect to acquire
complementary businesses in 2004, but we cannot predict the amount we will
spend on this activity with certainty. We also expect our capital expenditures
to increase to approximately $40 million in 2004 from the $22 million we
recorded in 2003, primarily as a result of the re-architecture of our technical
infrastructure and product development activities. Financing Activities
We receive financing funds from the exercise of stock options and the sale of
our shares through our employee stock purchase plan. Financing outflows
generally include the repayment of debt. In 2003, we used cash to repay debt
of approximately $3 million. These payments were more than offset by the
approximately $6 million in proceeds we received from the exercise of stock
options and the sale of shares through our employee stock purchase plan. We received approximately $3 million and $11 million in 2002 and 2001,
respectively, from the exercise of stock options and the sale of shares through
our employee stock purchase plan. We used cash to repay debt of approximately
$3 million and $9 million in 2002 and 2001, respectively. In 2001,
approximately $9 million in time deposit funds was released that had previously
been held as collateral to support our guarantee of an Indian facility. We cannot predict how much cash we will receive from option exercises and
employee stock purchases in 2004, but we would generally expect the amounts
generated from these sources to be consistent with our experience in 2003. 23




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Commercial Commitments
The following table sets forth our future commercial commitments as of December
31, 2003: Commitment Expiration by Period(in thousands)
    
    Total
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterLetters of credit and other
    
    $
    1,678
    
    
    $
    1,155
    
    
    $
    509
    
    
    $
    14
    
    
    $
    
    
    
    $
    
    
    
    $
    Guarantees
    
    
    964
    
    
    
    50
    
    
    
    256
    
    
    
    434
    
    
    
    213
    
    
    
    11
    
    
    
    Performance bonds
    
    
    14,426
    
    
    
    12,585
    
    
    
    1,571
    
    
    
    270
    
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    17,068
    
    
    $
    13,790
    
    
    $
    2,336
    
    
    $
    718
    
    
    $
    213
    
    
    $
    11
    
    
    $
    
 Prior to our acquisition of ACI in 2001, we had committed to guarantee up to
approximately $1.8 million of equipment lease payments for ACIs Canadian
customers and as of December 31, 2003, were guaranteeing lease payments
amounting to approximately $1 million. Through December 31, 2003, we have been
required to make payments of $128,000 pursuant to these guarantees. We use cash collateral to secure letters of credit we issue in the ordinary
course of business. We had $1.2 million in letters of credit outstanding at
December 31, 2003, mostly related to leases. These letters of credit were
secured by $1.3 million in cash collateral. We have also pledged $0.5 million
of time deposits as collateral related to the guarantee of performance on a
customer contract and certain obligations related to local government
requirements. In connection with our government services business, collection and ATM
placement activities, we post surety bonds with state agencies guaranteeing our
performance of certain obligations related to the relevant contracts or state
requirements. The aggregate amount of such bonds outstanding at December 31,
2003 was $14.4 million. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles that are generally accepted
in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates and
judgments, including those related to revenue recognition, intangible assets,
reserves and allowances, income taxes and stock-based compensation. We base our
estimates on our historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. The results of these
estimates form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies reflect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements. Revenue Recognition
Our net revenues consist of fees for transaction processing and related
services, risk management, software and data licensing, maintenance and
support, government services, and information technology consulting and
business process outsourcing services. Revenue arrangements entered into
subsequent to June 15, 2003 with multiple deliverables are divided into
separate units of accounting. A delivered item is considered a separate unit
of accounting if the item has value to the customer on a standalone basis,
there is objective and reliable evidence of the fair value of the undelivered
item and delivery of the item is considered probable and substantially in our
control if a general right of return on the delivered unit exists. The total
consideration associated with the arrangement is allocated among each of the
separate units of accounting based on their relative fair values and the
applicable revenue recognition criteria is considered separately for each unit
of accounting. Our revenue recognition policies for the various types of fees
our business receives are as follows:  
    
    Transaction processing and service fees are recognized in the period that
the service is performed. These services consist of processing our
customers electronic debit transactions and settling the funds with the
financial institutions involved in the transactions. These services also
include monitoring ATMs to alert our customers when potential problems
occur. Transaction processing and service fees are charged on a per
transaction basis, 24




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depending on the contractual arrangement with the customer. Government
services fees are recognized in the period services are provided based on
monthly fees per benefits recipient.  
    
    In connection with the provision of services in the ATM management
services segment, we earn surcharge and interchange fees as the
primary service provider. Surcharge fees are the familiar fees the
user of an ATM pays at the time of a transaction. Interchange fees
are paid by that users financial institution. We assume the credit
risk associated with collection of these fees. Generally, our
arrangements call for us to pay a fee to the occupants of the
property at which the ATM is physically located. The amount of this
fee typically has some relationship to the surcharge and interchange
fees that are collected by us on individual transactions. Based upon
the underlying contractual provisions to our arrangements, we record
the surcharge and interchange fees that we collect at their gross
amounts as revenue and the residual payments to the occupant of the
property at which the ATM is physically located is recorded as a
processing, communication and service cost.  
    
    Risk management fees are recognized as revenue in the period the
services are provided. Risk management services consist of new
account applicant and check verification screenings to manage the
risk associated with account openings and check acceptance. Risk
management fees are based on the number of inquiries against the
databases used for screening purposes or monthly fees based on the
net monthly sales of the retailer using our check verification
products or other similar measures, depending on the product and
service.  
    
    We provide professional services consisting of information
technology consulting and business process outsourcing services.
Revenue from providing these services is generally recognized under
one of two methods, depending on the relevant contractual terms.
Under the time and materials method, which is applied to nearly all
of our professional services contracts, revenue is based on a fee
per hour basis and is recognized as hours are completed. Under the
fixed contract method, a pre-set fee is agreed upon for a project
and revenue is recognized proportionately to the percentage of
completion of the project. If the information technology consulting
services involve the significant customization of software that has
been licensed from us, the license fee and related service fees are
also recognized proportionately to the percentage of completion of
the project.  
    
    Software and data license fees for standard products are recognized
when a license agreement has been signed, the license fee is fixed
and determinable, collectibility of the license fee is probable,
delivery has occurred and there are no uncertainties surrounding
product acceptance. If a license contains customer acceptance
criteria for which significant uncertainties exist, the revenue is
recognized upon the earlier of customer acceptance or the expiration
of the acceptance period. Certain software products include multiple
modules and the license fee charged to the customer is based on the
modules licensed. If a customer contract requires that we deliver
multiple elements, then upfront fees are recognized as revenue if
vendor specific objective evidence of fair value exists for each of
the undelivered elements. If vendor specific objective evidence of
fair value does not exist, then the total fees of the arrangement
are recognized over the term of the related agreement based upon
delivery of all essential elements.  
    
    Software maintenance and support revenue is recognized ratably over
the term of the contract or as the services are provided. The process involved in evaluating the appropriateness of revenue recognition
involves judgments about vendor-specific objective evidence of the fair value
of each of the various elements to be delivered in a sale that has multiple
components, collectibility of fees, and projections of costs to complete
projects for our customers. Intangible Assets
Our intangible assets consist primarily of goodwill, capitalized software costs
and acquired contracts. Capitalized software
We capitalize the cost of software developed or obtained for internal use once
the preliminary project stage has been completed, management commits to funding
the project and it is probable that the project will be completed and that the
software will be used to perform the function intended. Capitalized costs
include only (1) external direct costs of materials and services consumed in
developing or obtaining internal-use software, (2) payroll and payroll-related
costs for employees who are directly associated with and who devote time to the
internal-use software project and (3) interest costs incurred, when material,
while developing internal-use software. Capitalization of costs ceases 25




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when the project is substantially complete and the software is ready for its
intended use. Software developed or obtained for internal use is tested for
impairment whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable, such as when we elect to discontinue a
product line. We capitalize the cost of software developed for licensing and resale once
technological feasibility has been established. Costs incurred prior to
establishing technological feasibility are expensed as incurred. Technological
feasibility is established when we have completed all planning, designing,
coding and testing activities that are necessary to determine that a product
can be produced to meet its design specifications. Capitalization of costs
ceases when the product is available for general release to customers. Such
costs are amortized on a product-by-product basis normally over three years and
no longer than five years. Software developed for resale is carried at the
lesser of amortized cost or net realizable value. Goodwill
When we acquire other companies, accounting principles generally accepted in
the United States of America require that we make estimates regarding the fair
value of the acquired companys tangible assets and liabilities and its
identifiable intangible assets. Based upon these estimates, we then allocate
the purchase price to the assets and liabilities of the acquired company for
the purpose of recording these items in our financial records. Any unallocated
purchase price is recorded as goodwill. The distinction between the amount of
the purchase price allocated either to tangible assets and liabilities or
identifiable intangible assets and goodwill is significant because goodwill is
not amortized to our statement of operations but is instead subject to an
annual impairment test. Estimates inherent in the process of this purchase
price allocation include assumptions regarding the timing and amounts of future
cash inflows and outflows, the salability of inventories, selection of discount
rates, contract renewal rates and general market conditions. Where appropriate,
we use third-party valuation professionals to assist us in making these
estimates. We perform an annual review in the fourth quarter of each year, or more
frequently if changes in circumstances indicate a potential impairment, to
determine if the goodwill we have recorded is impaired. This review includes
the comparison of the fair value of the reporting unit to its carrying value,
including its associated goodwill. The carrying value of the reporting unit
includes an allocation of those corporate assets and liabilities that have not
been specifically identified with a reporting unit, based upon its pro-rata
percentage of our total net revenue. We primarily rely on the income method to
determine a reporting units fair value. This approach is based on a discounted
future cash flow approach that uses estimates of the reporting units revenue
and costs and a discount rate based upon the estimated weighted average cost of
capital for that reporting unit. Our estimates of segment market growth and
costs are based upon historical data, various internal estimates and external
sources. We develop these estimates as part of our routine long-term strategic
planning. We test the reasonableness of the assumptions underlying our
discounted cash flow analysis by the available and comparable market data. The
goodwill associated with our ATM Management business could be impaired in the
future if we fail to achieve the presently expected gross margin improvements. Acquired contracts
The fair value of acquired contracts is measured based on the present value of
the estimated future net cash flows from the contracts, including expected
renewals. The majority of these intangibles are amortized on an accelerated
method that is intended to mirror the cash flow patterns and duration used in
estimating the value recognized from an acquired contract. Where appropriate,
we use third-party valuation professionals to assist us in determining the fair
value and amortizable life of contracts at the time of their acquisition. This
type of intangible asset could be impaired if the contract attrition rate is
materially more than the rate used to estimate its present value. Reserves and Allowances
Loss contract reserve
We maintain a reserve for expected future losses on certain long-term
government service contracts. Our estimates of these losses are based on our
best estimate of the contracts revenue and costs. We use a variety of
assumptions, including assumptions about future welfare case levels, the number
of transactions per case and the costs related to processing transactions and
providing support services. These assumptions are subject to significant
uncertainties and actual results may differ from our estimates. In the event
such differences arise, a revision to the loss contract reserve would be
required. Any such revision could have a material effect on our financial
position or results of operations. Actual losses on individual long-term
service contracts are compared with loss projections periodically, 26




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with any changes in the estimated total contract loss recognized as they become
probable and reasonably estimable. We could record additional losses or record
a reversal of the loss provision in the event that actual and projected
revenues and expenses do not track with our original estimates. In the past
three years, we recorded a reversal of our loss contracts provision as a result
of revenues and costs tracking better than our previous estimates. Allowance for doubtful accounts
We maintain an allowance for doubtful accounts based on our estimates of how
often our customers will fail to make their required payments. We develop this
allowance based on our experience with specific customers, our understanding of
their current economic circumstances and our own judgment as to the likelihood
of their ultimate payment. We also consider our collection experience with the
balance of our receivables portfolio and make estimates regarding
collectibility based on trends in aging. The estimates utilized to calculate
our allowance for doubtful accounts were revised during 2002 to be more
reflective of our collection history following the establishment of our
collections and credit committee and the implementation of enhanced collection
processes and systems. If the financial condition of our customers were to
deteriorate, thereby impairing their ability to make payments, an increase in
this allowance could be required in a future period. Income Taxes
Accounting for income taxes requires us to make significant judgments in
estimating our future income taxes. These judgments include, but are not be
limited to, the likelihood we will realize the benefits of net operating loss
carryforwards, the adequacy of our valuation allowances, the rates to be used
to measure transactions with foreign subsidiaries and the valuation models to
be used for measuring the value of certain transactions. Further, our
operations are governed by and subject to government regulations in the United
States and in foreign countries in which we operate, including laws and
regulations relating to taxation and the judgments and estimates we use are
subject to challenge by domestic and foreign taxing authorities. We recognize
tax liabilities at the time that they are judged to be probable of being
incurred and can be reasonably estimated. It is possible that either foreign or
domestic taxing authorities could challenge our judgments and estimates and
draw conclusions that would cause us to incur tax liabilities in excess of
those currently recorded. We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. Although we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event we were to
determine that we will be able to realize our deferred tax assets in the future
in excess of the net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such a determination was made. Likewise,
should we determine that we would not be able to realize all or part of our net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such a determination was made. We consider the undistributed earnings of our foreign subsidiaries to be
permanently invested and, accordingly, we have not provided for U.S. Federal,
state income or applicable foreign withholding taxes on those amounts.
Undistributed earnings of our foreign subsidiaries amounted to approximately
$31.7 million at December 31, 2003. Upon any distribution of those earnings in
the form of dividends or otherwise, we would be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and applicable
withholding taxes payable to the foreign countries. Determination of the amount
of unrecognized deferred U.S. income tax liability is not practicable because
of the complexities associated with such a hypothetical calculation. Stock-based Compensation
We issue stock options to our employees under the terms of the eFunds
Corporation 2000 Stock Option Plan. Accounting principles generally accepted in
the United States of America (GAAP) provide two alternative methods of
accounting for stock options issued under the terms and conditions that we
typically issue such options. One alternative is to estimate the fair value of
the stock option at the date of grant and amortize that value as an expense to
operations over the contractual vesting period. The other option currently
available to companies reporting under GAAP is to estimate the fair value of
the option at the grant date, but only reflect the impact of the amortization
in a footnote to the financial statements and to forgo adjusting the statement
of operations. The method a company chooses to apply is a matter of policy.
Consistent with our past practices, we utilize the second of these options and
we reflect the impact of option amortization in the footnotes to our financial
statements. As illustrated in Note 2 to the financial statements, were we to
change our accounting policy on this matter to reflect option expense in our 27




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statement of operations, or should GAAP change to require us to reflect this
expense in our statements of operations, our results of operations would be
materially and adversely affected. Recent Accounting Pronouncements
In January 2002, the Emerging Issues Task Force (EITF) issued EITF Issue No.
01-14, Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred (formerly EITF Abstracts, Topic No. D-103).
This EITF requires that reimbursements received for out-of-pocket expenses
should be classified as revenue and is effective for financial reporting
periods beginning after December 15, 2001. EITF Issue No. 01-14 requires that
financial statements for prior periods presented be reclassified to comply with
these provisions. We typically incur telecommunications, network customer
fees, travel, maintenance and repair, and other transaction costs that are
billed to and reimbursed by our customers. These reimbursements were previously
classified as a reduction in operating expenses. The effect of our adoption of
EITF Issue No. 01-14 was an increase in net revenue and operating expenses by
$32.0 million, $30.4 million and $27.7 million for the years ended December 31,
2003, 2002 and 2001, respectively, with no effect on our consolidated financial
position or results of operations. In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities. This
statement requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. We adopted this new
standard effective January 1, 2003. The adoption of this standard did not have
a material impact on our consolidated financial position or results of
operations. In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This interpretation sets forth
expanded financial statement disclosure requirements about a guarantors
obligations under certain guarantees that it has issued. It also clarifies that
under certain circumstances a guarantor is required to recognize a liability
equal to the fair value of the obligation at the inception of the guarantee.
Certain types of guarantees, such as product warranties, guarantees accounted
for as derivatives and guarantees related to parent-subsidiary relationships
are excluded from the liability recognition provisions of FIN 45, although they
are subject to its disclosure requirements. The initial liability recognition
provisions are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for financial statements for interim or annual periods ending after
December 15, 2002. In accordance with FIN 45, we have included the required
disclosure relating to our guarantees in our financial statements as of
December 31, 2003 (see Note 13). The adoption of FIN 45 did not have a material
impact on our consolidated financial position or results of operations. In November 2002, the EITF reached a consensus on EITF Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21
provides guidance on how to account for arrangements that involve the delivery
or performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into
in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No.
00-21 did not have a material effect on our consolidated financial position or
results of operations. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. This statement amends SFAS No. 123
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of SFAS No. 123 to
require prominent disclosure about the effects on reported net income of an
entitys accounting policy decisions with respect to stock-based employee
compensation. This statement also amends APB Opinion No. 28, Interim Financial
Reporting to require disclosure about those effects in interim financial
statements. SFAS No. 148 is effective for financial statements for fiscal years
ending after December 15, 2002. We have elected not to change to the fair value
based method of accounting for stock-based compensation at this time.
Additional disclosure required by SFAS No. 148 has been included in Note 2 to
our consolidated financial statements. In December 2003, the FASB revised FIN No. 46, Consolidation of Variable
Interest Entities (FIN 46R), which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and accordingly should consolidate the entity.
FIN 46R replaces FIN No. 46, 28




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Consolidation of Variable Interest Entities, which was issued in January
2003. FIN 46R will be required for all enterprises with variable interests in
variable interest entities (VIEs) created after December 31, 2003. For variable
interests in VIEs created before January 1, 2004, FIN 46R will be applied
beginning on January 1 2005, with effective dates for public enterprises
varying based on the type of VIE, whether the public enterprise is a small
business issuer, and whether the original interpretation issued in January 2003
was applied to a VIE prior to the effective date of FIN 46R. For any VIEs that
must be consolidated under FIN 46R that were created before January 1, 2004,
the assets, liabilities and noncontrolling interests of the VIE initially would
be measured at their carrying amounts with any difference between the net
amount added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and noncontrolling
interest of the VIE. The adoption of FIN 46R did not have an impact on our
consolidated financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The Statement amends and
clarifies accounting for derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133. This Statement is generally
effective for contracts entered into or modified after June 30, 2003. The
adoption of this Statement did not have a material impact on our consolidated
financial position or results of operations. In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
statement establishes standards for how a company classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. The statement 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. The statement primarily
affects three types of freestanding financial instruments, including
mandatorily redeemable shares, financial instruments that do or may require the
issuer to buy back a portion of its shares in exchange for cash or other assets
and obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the values of the issuers shares. The adoption of this
statement did not have a material impact on our consolidated financial position
or results of operations. FORWARD LOOKING STATEMENTS When used in this Annual Report on Form 10-K and in future filings by the
Company with the Securities and Exchange Commission, in our press releases,
letters and reports to stockholders and in oral statements made by our
representatives, the words or phrases should result, are expected to,
targeted, will continue, will approximate, is anticipated, estimate,
project or similar expressions are intended to identify forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are necessarily subject to certain risks and
uncertainties, including those discussed in Exhibit 99.1 to this Annual Report
on Form 10-K, that could cause our actual results to differ materially from our
historical experience and our present expectations or projections. Such
differences could be material and adverse. Caution should be taken not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. Business Outlook for 2004
The Company presently anticipates that full year net revenues for 2004 will
increase approximately 5 to 10 percent over the net revenues recorded in 2003.
Additionally, the Company expects diluted earnings per share to increase 25 to
30 percent in 2004 over the diluted earnings per share of $0.61 reported in
2003. The Company expects to generate operating cash flows in 2004 in line with
the level achieved in 2003. The foregoing expectations reflect the following assumptions:  
    
    an effective annualized tax rate of approximately 30 percent;  
    
    fully diluted shares outstanding of approximately 48 million; and  
    
    expected cash outlays of approximately $40 million for capital expenditures and product development. These projections do not give effect to any acquisitions that may be completed
during 2004. 29




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the potential for loss due to adverse changes in the
fair value of financial instruments. We operate internationally and are subject
to potentially adverse movements in foreign currency exchange rates and
interest rates. These exposures may change over time as our business evolves
and could have an adverse impact on our financial results. We have not entered
into any derivative instruments or hedging contracts to reduce our exposure to
adverse foreign currency rate or interest rate changes, although we may do so
in the future. Currently, we receive non-U.S. dollar denominated revenues and
incur non-U.S. dollar denominated operating expenses in the United Kingdom,
India and Canada. We also have assets located in these countries. The principal
currencies creating foreign exchange rate risk for us are the British pound,
Indian rupee and Canadian dollar. For the year ended December 31, 2003, less
than 10% of our net revenues and operating expenses were denominated in
non-U.S. dollar currencies. We do not believe that our net income for the year
ended December 31, 2003 would have been materially affected if the U.S. dollar
had appreciated or depreciated by 10% against the British pound, the Indian
rupee or the Canadian dollar. Changes in interest rates could impact our anticipated interest income on cash
equivalents and interest expense on variable short-term debt. A 10% adverse
change in interest rates from the interest rates in effect at the end of 2003
would not, however, have had a material adverse effect on our net income or
financial condition for 2003. 30




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Independent Auditors Report The Board of Directors
eFunds Corporation: We have audited the accompanying consolidated balance sheet of eFunds
Corporation and subsidiaries as of December 31, 2003, and the related
consolidated statements of operations, stockholders equity, comprehensive
income and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted
in United States of America. 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 audit provides a
reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of eFunds Corporation
and subsidiaries as of December 31, 2003 and the results of their operations
and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in United States of America. /s/ KPMG LLP
Phoenix, Arizona
March 2, 2004 31




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Independent Auditors Report The Board of Directors and Stockholders of:
eFunds Corporation
Scottsdale, Arizona We have audited the accompanying consolidated balance sheet of eFunds
Corporation and subsidiaries as of December 31, 2002 and the related
consolidated statements of operations, comprehensive income, stockholders
equity, and cash flows for each of the two years in the period ended December
31, 2002. Our audits also included the financial statement schedule listed in
the index at Item 16. These financial statements and the financial statement
schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits. We did not audit the financial
statements of iDLX Holdings BV (a consolidated subsidiary), which statements
reflect total assets constituting 11% of consolidated total assets as of
December 31, 2002 and net revenue constituting 6% of consolidated net revenue
and net income constituting 30% of consolidated net income for the year ended
December 31, 2002. Such financial statements were audited by other auditors.
The report of the other auditor has been furnished to us and our opinion,
insofar as it relates to the amounts included for iDLX Holdings BV, is based
solely on the report of such other auditors. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 and the report of the other auditors provide a reasonable basis for our
opinion. In our opinion, based on our audits and the reports of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of eFunds Corporation and subsidiaries at December 31, 2002,
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, based on our audits and (as to the amounts included for iDLX Holdings
BV) the report of the other auditors, such 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 discussed in Note 4 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142. /s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 14, 2003
(March 12, 2004 as to the effect of the reclass of segment information as described in Note 11) 32




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##### 



ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA EFUNDS CORPORATION
CONSOLIDATED BALANCE SHEETS December 31,(dollars in thousands)
    
    2003
    
    2002Current assets:Cash and cash equivalents
    
    $
    158,106
    
    
    $
    119,487Deposits subject to compensating balance arrangements
    
    
    472
    
    
    
    1,133Restricted custodial cash
    
    
    4,168
    
    
    
    3,046Accounts receivable  net
    
    
    63,841
    
    
    
    59,311Deferred income taxes
    
    
    12,743
    
    
    
    11,580Prepaid expenses and other current assets
    
    
    16,979
    
    
    
    17,865Assets held for sale
    
    
    
    
    
    
    13,310Total current assets
    
    
    256,309
    
    
    
    225,732Property and equipment  net
    
    
    49,629
    
    
    
    50,764Long-term investments
    
    
    3,243
    
    
    
    3,758Intangibles:Goodwill
    
    
    128,586
    
    
    
    114,036Software  net
    
    
    29,553
    
    
    
    29,439Other intangible assets  net
    
    
    41,563
    
    
    
    32,397Total intangibles  net
    
    
    199,702
    
    
    
    175,872Other non-current assets
    
    
    3,454
    
    
    
    3,292Total non-current assets
    
    
    256,028
    
    
    
    233,686Total assets
    
    $
    512,337
    
    
    $
    459,418Current liabilities:Accounts payable
    
    $
    26,585
    
    
    $
    33,074Accrued liabilities:Accrued compensation and employee benefits
    
    
    16,552
    
    
    
    3,936Accrued contract losses
    
    
    1,890
    
    
    
    7,578Accrued income taxes
    
    
    15,037
    
    
    
    7,941Deferred revenue
    
    
    7,900
    
    
    
    3,423Restructuring accruals
    
    
    2,475
    
    
    
    2,367Other
    
    
    17,582
    
    
    
    16,217Long-term debt due within one year
    
    
    5,586
    
    
    
    1,401Total current liabilities
    
    
    93,607
    
    
    
    75,937Long-term debt
    
    
    1,667
    
    
    
    1,338Deferred income taxes
    
    
    11,400
    
    
    
    9,202Other long-term liabilities
    
    
    4,001
    
    
    
    9,421Total liabilities
    
    
    110,675
    
    
    
    95,898Commitments and contingencies (Notes 2, 3, 9, 12 and 13)Stockholders equity:Preferred stock $.01 par value; 100,000,000 shares
authorized; no shares issued and outstanding
    
    
    
    
    
    
    Common stock $.01 par value (authorized:250,000,000 shares; issued and outstanding:47,299,742 and 46,702,496 shares at December 31,
2003 and 2002, respectively)
    
    
    473
    
    
    
    467Additional paid-in capital
    
    
    418,496
    
    
    
    411,451Accumulated deficit
    
    
    (17,587
    )
    
    
    (46,495
    )Accumulated other comprehensive gain (loss)
    
    
    280
    
    
    
    (1,903
    )Stockholders equity
    
    
    401,662
    
    
    
    363,520Total liabilities and stockholders equity
    
    $
    512,337
    
    
    $
    459,418
 See Notes to Consolidated Financial Statements 33




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##### 



EFUNDS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31,(dollars and shares in thousands, except per share amounts)
    
    2003
    
    2002
    
    2001Net revenue
    
    $
    532,054
    
    
    $
    543,107
    
    
    $
    537,159Operating
expenses:Processing, communication and service costs
    
    
    230,724
    
    
    
    226,151
    
    
    
    199,007Employee costs
    
    
    179,896
    
    
    
    185,719
    
    
    
    205,588Depreciation and amortization
    
    
    35,385
    
    
    
    36,972
    
    
    
    39,952Other operating costs
    
    
    46,780
    
    
    
    44,321
    
    
    
    41,091Restructuring, asset impairment and other charges
    
    
    4,209
    
    
    
    16,525
    
    
    
    3,200Reversal of provision for contract losses
    
    
    (3,650
    )
    
    
    (2,000
    )
    
    
    (2,500
    )Total operating expenses
    
    
    493,344
    
    
    
    507,688
    
    
    
    486,338Income from operations
    
    
    38,710
    
    
    
    35,419
    
    
    
    50,821Other income  net
    
    
    1,157
    
    
    
    734
    
    
    
    171Income before income taxes
    
    
    39,867
    
    
    
    36,153
    
    
    
    50,992Provision for income taxes
    
    
    (10,959
    )
    
    
    (11,599
    )
    
    
    (17,653
    )Net income
    
    $
    28,908
    
    
    $
    24,554
    
    
    $
    33,339Weighted average shares outstanding:Basic
    
    
    46,854
    
    
    
    46,588
    
    
    
    45,985Diluted
    
    
    47,239
    
    
    
    46,738
    
    
    
    47,445Net income per share:Basic
    
    $
    0.62
    
    
    $
    0.53
    
    
    $
    0.72Diluted
    
    $
    0.61
    
    
    $
    0.53
    
    
    $
    0.70
 See Notes to Consolidated Financial Statements 34




---



##### 



EFUNDS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001Net income
    
    $
    28,908
    
    
    $
    24,554
    
    
    $
    33,339Other comprehensive gain (loss):Foreign currency translation adjustments
    
    
    2,183
    
    
    
    407
    
    
    
    (709
    )Comprehensive income
    
    $
    31,091
    
    
    $
    24,961
    
    
    $
    32,630
 See Notes to Consolidated Financial Statements 35




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##### 



EFUNDS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AccumulatedCommon Stock
    
    Additional
    
    
    
    
    
    other
    
    Totalpaid-in
    
    Accumulated
    
    comprehensive
    
    stockholders(in thousands)
    
    Shares
    
    Amount
    
    capital
    
    deficit
    
    income (loss)
    
    equityBalance, December 31, 2000
    
    
    45,500
    
    
    $
    455
    
    
    $
    391,699
    
    
    $
    (104,388
    )
    
    $
    (1,601
    )
    
    $
    286,165Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,339
    
    
    
    
    
    
    
    33,339Proceeds from exercise of stock
options
    
    
    732
    
    
    
    8
    
    
    
    9,827
    
    
    
    
    
    
    
    
    
    
    
    9,835Restricted stock units
    
    
    32
    
    
    
    
    
    
    
    333
    
    
    
    
    
    
    
    
    
    
    
    333Proceeds from employee stock
purchase plan
    
    
    116
    
    
    
    1
    
    
    
    1,190
    
    
    
    
    
    
    
    
    
    
    
    1,191Tax benefits attributable to
stock options exercised
    
    
    
    
    
    
    
    
    
    
    4,161
    
    
    
    
    
    
    
    
    
    
    
    4,161Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (709
    )
    
    
    (709
    )Balance, December 31, 2001
    
    
    46,380
    
    
    
    464
    
    
    
    407,210
    
    
    
    (71,049
    )
    
    
    (2,310
    )
    
    
    334,315Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,554
    
    
    
    
    
    
    
    24,554Proceeds from exercise of stock
options
    
    
    105
    
    
    
    1
    
    
    
    1,309
    
    
    
    
    
    
    
    
    
    
    
    1,310Restricted stock units
    
    
    24
    
    
    
    
    
    
    
    217
    
    
    
    
    
    
    
    
    
    
    
    217Proceeds from employee stock
purchase plan
    
    
    194
    
    
    
    2
    
    
    
    1,817
    
    
    
    
    
    
    
    
    
    
    
    1,819Tax benefits attributable to
stock options exercised
    
    
    
    
    
    
    
    
    
    
    898
    
    
    
    
    
    
    
    
    
    
    
    898Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    407
    
    
    
    407Balance, December 31, 2002
    
    
    46,703
    
    
    
    467
    
    
    
    411,451
    
    
    
    (46,495
    )
    
    
    (1,903
    )
    
    
    363,520Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,908
    
    
    
    
    
    
    
    28,908Proceeds from exercise of stock
options
    
    
    440
    
    
    
    4
    
    
    
    5,204
    
    
    
    
    
    
    
    
    
    
    
    5,208Restricted stock units
    
    
    17
    
    
    
    1
    
    
    
    166
    
    
    
    
    
    
    
    
    
    
    
    167Proceeds from employee stock
purchase plan
    
    
    140
    
    
    
    1
    
    
    
    1,058
    
    
    
    
    
    
    
    
    
    
    
    1,059Tax benefits attributable to
stock options exercised
    
    
    
    
    
    
    
    
    
    
    617
    
    
    
    
    
    
    
    
    
    
    
    617Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,183
    
    
    
    2,183Balance, December 31, 2003
    
    
    47,300
    
    
    $
    473
    
    
    $
    418,496
    
    
    $
    (17,587
    )
    
    $
    280
    
    
    $
    401,662
 See Notes to Consolidated Financial Statements 36




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##### 



EFUNDS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    28,908
    
    
    $
    24,554
    
    
    $
    33,339Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation
    
    
    14,768
    
    
    
    17,725
    
    
    
    18,140Amortization
    
    
    20,617
    
    
    
    19,247
    
    
    
    21,812Loss on impairment or disposals of property, equipment and intangibles
    
    
    1,731
    
    
    
    7,980
    
    
    
    1,753Deferred income taxes
    
    
    1,035
    
    
    
    2,430
    
    
    
    10,647Write-off of purchased in-process research and development
    
    
    1,493
    
    
    
    
    
    
    
    Equity in loss of investee
    
    
    
    
    
    
    
    
    
    
    1,097Changes in assets and liabilities, net of effects from acquisitions:Restricted custodial cash
    
    
    (1,122
    )
    
    
    (1,922
    )
    
    
    29,449Accounts receivable
    
    
    (209
    )
    
    
    20,199
    
    
    
    (15,380
    )Accounts payable
    
    
    (8,130
    )
    
    
    7,285
    
    
    
    (16,257
    )Accrued compensation and employee benefits
    
    
    12,502
    
    
    
    (12,975
    )
    
    
    (1,724
    )Income taxes receivable/payable
    
    
    7,714
    
    
    
    2,302
    
    
    
    1,969Accrued contract losses
    
    
    (5,688
    )
    
    
    (7,199
    )
    
    
    (7,470
    )Other assets and liabilities
    
    
    (171
    )
    
    
    (4,834
    )
    
    
    7,647Net cash provided by operating activities
    
    
    73,448
    
    
    
    74,792
    
    
    
    85,022Cash flows from investing activities:Capital expenditures
    
    
    (21,954
    )
    
    
    (20,861
    )
    
    
    (30,902
    )Payments for acquisitions and investments, net of cash acquired
    
    
    (27,456
    )
    
    
    (35,184
    )
    
    
    (40,620
    )Proceeds from sales of property and equipment
    
    
    13,310
    
    
    
    
    
    
    
    415Other
    
    
    (1,748
    )
    
    
    (1,425
    )
    
    
    (1,448
    )Net cash used in investing activities
    
    
    (37,848
    )
    
    
    (57,470
    )
    
    
    (72,555
    )Cash flows from financing activities:Net payments on line of credit
    
    
    
    
    
    
    
    
    
    
    (5,303
    )Proceeds from exercise of stock options and employee stock purchase plan
    
    
    6,267
    
    
    
    3,129
    
    
    
    11,026Payments on long-term debt
    
    
    (3,248
    )
    
    
    (2,835
    )
    
    
    (3,550
    )Release of loan guarantee collateral
    
    
    
    
    
    
    
    
    
    
    8,500Net cash provided by financing activities
    
    
    3,019
    
    
    
    294
    
    
    
    10,673Net increase in cash and cash equivalents
    
    
    38,619
    
    
    
    17,616
    
    
    
    23,140Cash and cash equivalents at beginning of period
    
    
    119,487
    
    
    
    101,871
    
    
    
    78,731Cash and cash equivalents at end of period
    
    $
    158,106
    
    
    $
    119,487
    
    
    $
    101,871Supplemental cash flow dataCash paid during the year for:Interest
    
    $
    527
    
    
    $
    390
    
    
    $
    700Income taxes
    
    
    2,702
    
    
    
    5,407
    
    
    
    7,000Noncash investing and financing activities:Purchase of assets under capital lease obligations
    
    $
    7,762
    
    
    $
    
    
    
    $
    
 See Notes to Consolidated Financial Statements 37




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##### 



EFUNDS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 NOTE 1  DESCRIPTION OF BUSINESS:
eFunds Corporation and its wholly-owned subsidiaries (the Company) provide
transaction processing, risk management and professional services to financial
institutions, retailers, electronic funds transfer networks and government
agencies. The Company has four operating segments: Electronic Payments;
Automated Teller Machine (ATM) Management; Risk Management; and Global
Outsourcing. The Electronic Payments segment provides electronic funds transfer
(EFT) software, software applications development, maintenance and
installation, EFT processing services, including automated clearinghouse (ACH)
processing as well as electronic benefit transfer (EBT) services for government
agencies. The ATM Management segment provides ATM deployment, management and
branding services. The Risk Management segment provides risk management based
data and other products to financial institutions, retailers and other
businesses that assist in detecting fraud and assessing the risk of opening a
new account or accepting a check. The Global Outsourcing segment provides
information technology services and business process outsourcing services. The Company was incorporated in Delaware in December 1984. Prior to its
initial public offering (the IPO) in June 2000, the Company was a wholly-owned
subsidiary of Deluxe Corporation (Deluxe). In December 2000, Deluxe distributed
all of its remaining shares of the Companys common stock to its shareholders
through a spin-off transaction (Spin-Off). NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Consolidation
All significant intercompany accounts, transactions and profits have been
eliminated in the Companys consolidated results. Use of estimates
The Company has prepared the accompanying consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America. As part of this process, management is required to make certain
assumptions and estimates which affect the amounts reported in the consolidated
financial statements and related notes. These estimates and assumptions are
developed based upon all information available using managements best efforts.
However, actual results can differ from assumed and estimated amounts. These
estimates and assumptions include, but are not limited to:  
    
    estimates of the fair value of the Companys reporting units used to
perform annual impairment testing of recorded goodwill;
    
    estimates of the fair value and estimated costs of disposal of assets held for sale;
    
    estimates of the useful lives and residual values of property and equipment;
    
    estimates of the useful lives of intangible assets;
    
    estimates surrounding contract performance variables when determining
whether a long-term service contract is in a loss position; and
    
    estimates regarding the likelihood and the extent to which the
benefits of deferred tax assets will be realized. Reclassifications
Approximately $476,000 included in Accounts payable in the Companys
consolidated balance sheet for 2002 has been reclassified to Other accrued
liabilities to conform to the current period classification. Cash and cash equivalents
The Company considers all cash on hand, money market funds, cash in ATMs and
other highly liquid investments with original maturities of three months or
less to be cash and cash equivalents. Cash in ATMs at December 31, 2003 was
approximately $7 million. As part of the Companys transaction processing
business, the Company provides cash settlement services to financial
institutions and state and local governments. These services involve the
movement of funds between the various parties associated with an ATM,
point-of-sale or EBT transactions and this activity results in a balance due to
the Company at the end of each business day that it recoups over the next few 38




---



##### 



business days. The balances due the Company are included in cash. As of
December 31, 2003, approximately $23.0 million was due the Company and it
received these funds in early January 2004. As of December 31, 2002,
approximately $18.5 million was due the Company and it received these funds in
early January 2003. Restricted custodial cash
In connection with the Companys electronic payment business, the Company also
has cash belonging to customers that temporarily resides in custodial accounts
maintained by the Company. The Company records these amounts as current
restricted custodial cash with a corresponding liability within other accrued
liabilities in the consolidated balance sheets. Accounts receivable
Accounts receivable are stated net of allowances for uncollectible accounts of
$3.1 million and $3.0 million at December 31, 2003 and 2002, respectively.
Management develops the estimate of the allowance based on the Companys
experience with specific customers, its understanding of their current economic
circumstances and its own judgment as to the likelihood of their ultimate
payment. Management also considers the Companys collection experience with the
balance of its receivables portfolio and makes estimates regarding
collectibility based on trends in aging. The estimates utilized for calculate
the Companys allowance for doubtful accounts were revised during 2002 to be
more reflective of its recent collection history following the establishment of
a collections and credit committee and the implementation of enhanced
collection processes. Bad debt is reflected as a component of other operating
costs in the consolidated statement of operations and represents accounts
receivables that are deemed uncollectible by the Companys management, net of
amounts recovered during the period that were previously deemed uncollectible
and changes in managements estimates related to the collectibility of accounts
receivable. Bad debt expense was $0.9 million in 2003 and $1.8 million in 2001.
Bad debt expense was not material in 2002. When a specific account receivable
is determined to be uncollectible, the Company reduces both its accounts
receivable and allowances for uncollectible accounts accordingly. No customers
accounted for greater than 10% of the Companys total receivables as of
December 31, 2003 or 2002. Assets held for sale
When management determines that a material fixed asset is to be disposed of
within a twelve-month period, that asset is reclassified from property and
equipment to assets held for sale and the depreciation of that asset is
discontinued. Assets held for sale are valued at the lower of their carrying
amount or estimated fair value less cost to sell. As of December 31, 2002,
assets held for sale consisted of two administrative facilities, one located in
Glendale, Wisconsin and the other located in Runcorn, England. In estimating
the properties fair value less cost to sell, management considered recent
appraisals and offers relative to these assets. As a result of these
considerations, the Company recorded a pre-tax loss of $3.0 million to
write-down these assets during 2002 (see Note 5). This amount is reflected in
2002 Restructuring, asset impairment and other charges in the accompanying
consolidated statements of operations. During the first quarter of 2003, the Glendale, Wisconsin facility was sold for
net proceeds of approximately $12 million. The Company also entered into an
agreement with the buyer for a short-term leaseback. The gain of approximately
$0.6 million from this sale was amortized over the term of the leaseback. In
October 2003, the Company completed the sale of its facility in Runcorn, United
Kingdom and recorded an approximate $0.5 million gain on the sale of this
property. The gains from these sales are reflected in 2003 Other income  net
in the accompanying consolidated statements of operations. As of December 31,
2003, there were no other assets held for sale. Property and equipment
Property and equipment, including leasehold and other improvements that extend
an assets useful life or productive capabilities, are capitalized and stated
at historical cost. Buildings with 40-year lives and computer and other
equipment with lives of three to eight years are generally depreciated using
accelerated methods. Leasehold and building improvements are depreciated on a
straight-line basis over the estimated useful life of the property or the life
of the lease, whichever is shorter. Property and equipment are tested for
impairment in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (see Note 5). 39




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##### 



At December 31, property and equipment consisted of the following: December 31,(in thousands)
    
    2003
    
    2002Land and improvements
    
    $
    3,070
    
    
    $
    3,079Buildings and improvements
    
    
    29,776
    
    
    
    28,741Machinery and equipment
    
    
    31,957
    
    
    
    31,038Computer equipment
    
    
    81,875
    
    
    
    72,807Total property and equipment
    
    
    146,678
    
    
    
    135,665Accumulated depreciation and amortization
    
    
    (97,049
    )
    
    
    (84,901
    )Property and equipment  net
    
    $
    49,629
    
    
    $
    50,764
 Goodwill and other intangible assets
Effective January 1, 2002, goodwill is no longer amortized but instead is
subject to periodic impairment testing in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. Goodwill is tested for impairment
annually, or more frequently if events or changes in circumstances indicate
that it might be impaired. The impairment test consists of a comparison of the
estimated fair value of the reporting unit with its carrying amount, including
its goodwill. The Company reviewed its recorded goodwill for potential
impairment as of December 31, 2003 and concluded that its goodwill was not
impaired. Intangible assets with finite lives are stated at cost, net of accumulated
amortization, and are subject to impairment testing under certain circumstances
in accordance with SFAS No. 144. These assets are amortized on the
straight-line and accelerated methods, as appropriate, over their estimated
useful lives or period of expected benefit. Intangible assets with indefinite
lives are no longer amortized but instead are subject to periodic impairment
testing in accordance with SFAS No. 142. Accrued contract losses
Provisions for anticipated losses on long-term service contracts are recorded
in full in the period in which such losses become evident (see Note 6). Income taxes
Income taxes are computed using the asset and liability method of accounting.
Under the asset and liability method, deferred income taxes result from
temporary differences between the financial reporting basis of assets and
liabilities and their respective tax reporting basis. Future tax benefits are
recognized to the extent that realization of such benefit is more likely than
not. Undistributed earnings of the Companys foreign subsidiaries amounted to
approximately $31.7 million at December 31, 2003. Those earnings are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. federal
and state income taxes has been provided with respect to them. Upon any
distribution of these earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes (subject to an adjustment
for foreign tax credits) and applicable withholding taxes payable to the
foreign countries. Determination of the amount of unrecognized deferred U.S.
income tax liability is not practicable because of the complexities associated
with such a hypothetical calculation. Revenue recognition
The Companys net revenues consist of fees for transaction processing and
related services, risk management, software and data licensing, maintenance and
support, government services, and information technology consulting and
business process outsourcing services. Revenue arrangements entered into
subsequent to June 15, 2003 with multiple deliverables are divided into
separate units of accounting. A delivered item is considered a separate unit
of accounting if the item has value to the customer on a standalone basis,
there is objective and reliable evidence of the fair value of the undelivered
item, and delivery of the item is considered probable and substantially in the
control of the Company if a general right of return on the delivered unit
exists. The total consideration associated with the arrangement is allocated
among each of the separate units of accounting based on their relative fair
values and the applicable revenue recognition criteria is considered separately
for each unit of accounting. The Companys revenue recognition policies for the
various types of fees it receives are as follows:  
    
    Transaction processing and service fees are recognized in the period
that the service is performed. These services consist of processing
customers electronic debit transactions and settling the funds with the
financial 40




---



##### 



institutions involved in the transactions. These services also include
monitoring ATMs to alert customers when potential problems occur.
Transaction processing and service fees are charged on a per transaction
basis, depending on the contractual arrangement with the customer.
Government services fees are recognized in the period services are provided
based on monthly fees per benefits recipient.
    
    In connection with the provision of services in the ATM management
services segment, the Company earns surcharge and interchange fees as
the primary service provider. Surcharge fees are the familiar fees the
user of an ATM pays at the time of a transaction. Interchange fees are
paid by that users financial institution. The credit risk associated
with collection of these fees is assumed by the Company. The Companys
arrangements generally call for it to pay a fee to the occupant of the
property at which the ATM is physically located. The amount of this fee
typically has some relationship to the surcharge and interchange fees
that are collected by the Company on individual transactions. The
Company records the surcharge and interchange fees that it collects at
their gross amounts as revenue and the residual payments to the occupant
of the property at which the ATM is located is recorded as a processing,
communication and service cost.
    
    Risk management fees are recognized as revenue in the period the
services are provided. Risk management services consist of new account
applicant and check verification screenings to manage the risk
associated with account openings and check acceptance. Risk management
fees are based on the number of inquiries against the databases used for
screening purposes or monthly fees based on the net monthly sales of the
user of the Companys products or other similar measures, depending on
the product and service.
    
    The Company also provides information technology consulting and
business process outsourcing services. Revenue from providing such
services is generally recognized under one of two methods, depending on
the relevant contractual terms. Under the time and materials method,
which is applied to nearly all of the Companys professional services
contracts, revenue is based on a fee per hour basis and is recognized as
hours are completed. Under the fixed contract method, a pre-set fee is
agreed upon for a project and revenue is recognized proportionately to
the percentage of completion of the project. If information technology
consulting services involve significant customization of software that
has been licensed from the Company, the license fee and related service
fees are also recognized proportionately to the percentage of completion
of the project.
    
    Software and data license fees for standard products are recognized
when a license agreement has been signed, the license fee is fixed and
determinable, collectibility of the license fee is probable, delivery
has occurred and there are no uncertainties surrounding product
acceptance. If a license contains customer acceptance criteria for which
significant uncertainties exist, the revenue is recognized upon the
earlier of customer acceptance or the expiration of the acceptance
period. Certain software products include multiple modules and the
license fee charged to the customer is based on the modules licensed. If
a customer contract requires that the Company deliver multiple elements,
then upfront fees are recognized as revenue if vendor specific objective
evidence of fair value exists for each of the undelivered elements. If
vendor specific objective evidence of fair value does not exist, then
the total fees of the arrangement are recognized over the term of the
related agreement based upon delivery of all essential elements.
    
    Software maintenance and support revenue is recognized ratably over
the term of the contract or as the services are provided.The following table illustrates the Companys revenue generated from
software sales: Year Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001License fees
    
    $
    10,414
    
    
    $
    12,835
    
    
    $
    42,447Maintenance
    
    
    13,100
    
    
    
    13,362
    
    
    
    13,457Software modifications
    
    
    7,207
    
    
    
    6,793
    
    
    
    9,373$
    30,721
    
    
    $
    32,990
    
    
    $
    65,277
 The process involved in evaluating the appropriateness of revenue recognition
involves judgments about vendor-specific objective evidence of fair value,
collectibility of license fees, and projections of costs to complete projects
for our customers. 41




---



##### 



Employee stock-based compensation
The Company accounts for the issuance of stock options to employees using the
intrinsic value method prescribed by Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
income as all options granted under the Companys plans had an exercise price
equal to the fair market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings
per share that would result if the Company had applied the fair value
recognition provision of SFAS No. 123, Accounting for Stock-Based
Compensation, to its stock-based employee compensation during the periods
indicated. Year Ended December 31,(dollars in thousands, except per share amounts)
    
    2003
    
    2002
    
    2001Net income, as reported
    
    $
    28,908
    
    
    $
    24,554
    
    
    $
    33,339Total stock-based employee compensation expense determined
under fair value based method for all awards, net of tax
    
    
    (2,718
    )
    
    
    (6,960
    )
    
    
    (6,310
    )Pro forma net income
    
    $
    26,190
    
    
    $
    17,594
    
    
    $
    27,029Earnings per share:Basic-as reported
    
    $
    0.62
    
    
    $
    0.53
    
    
    $
    0.72Basic-pro forma
    
    $
    0.56
    
    
    $
    0.38
    
    
    $
    0.59Diluted-as reported
    
    $
    0.61
    
    
    $
    0.53
    
    
    $
    0.70Diluted-pro forma
    
    $
    0.55
    
    
    $
    0.38
    
    
    $
    0.57
 For purposes of applying SFAS No. 123, the estimated fair value of stock
options granted during 2003, 2002, and 2001 was $4.35, $7.32 and $7.74,
respectively. The fair value of options was estimated at the date of grant
using a Black-Scholes option-pricing model with the following assumptions: 2003
    
    2002
    
    2001Expected volatility
    
    
    48.6
    %
    
    
    68.1
    %
    
    
    78.6
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rate
    
    
    2.9
    %
    
    
    3.2
    %
    
    
    4.6
    %Expected life
    
    5 years
    
    5 years
    
    5 years
 Translation adjustments
The financial position and results of operations of the Companys international
subsidiaries are measured using local currencies as the functional currencies.
Assets and liabilities of these operations are translated at the exchange rate
in effect at the balance sheet date. Income statement accounts are translated
at the average exchange rate during the year. Translation adjustments arising
from the use of differing exchange rates from period to period are included in
accumulated other comprehensive gain or loss in the stockholders equity
section of the consolidated balance sheets. Gains and losses that result from
foreign currency transactions are included in earnings. Comprehensive income
The Companys total comprehensive income consists of net income and foreign
currency translation adjustments. The foreign currency translation adjustments
are reflected as accumulated other comprehensive gain or loss in the Companys
consolidated balance sheets. Recent accounting pronouncements
In January 2002, the Emerging Issues Task Force (EITF) issued EITF Issue No.
01-14, Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred (formerly EITF Abstracts, Topic No. D-103).
This EITF requires that reimbursements received for out-of-pocket expenses
should be classified as revenue and is effective for financial reporting
periods beginning after December 15, 2001. EITF Issue No. 01-14 requires that
financial statements for prior periods presented be reclassified to comply with
these provisions. The Company typically incurs telecommunications, network
customer fees, travel, maintenance and repair, and other transaction costs that
are billed to and reimbursed by its customers. These reimbursements were
previously classified as a reduction in operating expenses. The effect of the
Companys adoption of EITF Issue No. 01-14 was an increase in net revenue and
operating expenses by $32.0 million, $30.4 million and $27.7 million for the
years ended December 31, 2003, 2002 and 2001, respectively, with no effect on
the Companys consolidated financial position or results of operations. In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities. This
statement requires companies to recognize costs associated with 42




---



##### 



exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. The Company adopted this
new standard effective January 1, 2003. The adoption of this standard did not
have a material impact on the Companys consolidated financial position or
results of operations. In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This interpretation sets forth
expanded financial statement disclosure requirements about a guarantors
obligations under certain guarantees that it has issued. It also clarifies that
under certain circumstances, a guarantor is required to recognize a liability
equal to the fair value of the obligation at the inception of the guarantee.
Certain types of guarantees, such as product warranties, guarantees accounted
for as derivatives and guarantees related to parent-subsidiary relationships
are excluded from the liability recognition provisions of FIN No. 45, although
they are subject to its disclosure requirements. The initial liability
recognition provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements of FIN
No. 45 are effective for financial statements for interim or annual periods
ending after December 15, 2002. In accordance with FIN No. 45, the Company has
included the required disclosure relating to its guarantees in its financial
statements as of December 31, 2003 (see Note 13). The adoption of FIN No. 45
did not have a material impact on the Companys consolidated financial position
or results of operations. In November 2002, the EITF reached a consensus on EITF Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21
provides guidance on how to account for arrangements that involve the delivery
or performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into
in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No.
00-21 did not have a material effect on the Companys consolidated financial
position or results of operations. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. This statement amends SFAS No. 123,
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of SFAS No. 123 to
require prominent disclosure about the effects on reported net income of an
entitys accounting policy decisions with respect to stock-based employee
compensation. This statement also amends APB Opinion No. 28, Interim Financial
Reporting to require disclosure about those effects in interim financial
statements. SFAS No. 148 is effective for financial statements for fiscal years
ending after December 15, 2002. The Company has elected not to change to the
fair value based method of accounting for stock-based compensation at this
time. The Company has included the additional disclosure required by SFAS No.
148 in this Note 2. In December 2003, the FASB revised FIN No. 46,Consolidation of Variable
Interest Entities (FIN 46R), which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and accordingly should consolidate the entity.
FIN 46R replaces FIN No. 46, Consolidation of Variable Interest Entities,
which was issued in January 2003. FIN 46R will be required for all enterprises
with variable interests in variable interest entities (VIEs) created after
December 31, 2003. For variable interests in VIEs created before January 1,
2004, FIN 46R will be applied beginning on January 1 2005, with effective dates
for public enterprises varying based on the type of VIE, whether the public
enterprise is a small business issuer, and whether the original interpretation
issued in January 2003 was applied to a VIE prior to the effective date of FIN
46R. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities
and noncontrolling interest of the VIE. The adoption of FIN 46R did not have an
impact on the Companys consolidated financial position or results of
operations. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The Statement amends and
clarifies accounting for derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133. This Statement is generally
effective for contracts entered 43




---



##### 



into or modified after June 30, 2003. The adoption of this Statement did not
have a material impact on the Companys consolidated financial position or
results of operations. In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
statement establishes standards for how a company classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. The statement 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. The statement primarily
affects three types of freestanding financial instruments including mandatorily
redeemable shares, financial instruments that do or may require the issuer to
buy back a portion of its shares in exchange for cash or other assets and
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the values of the issuers shares. The adoption of this
statement did not have a material impact on the Companys consolidated
financial position or results of operations. NOTE 3  BUSINESS COMBINATIONS:Acquisitions During the Years Ended December 31, 2002 and 2001
In March 2000, the Company paid cash of $20 million for an approximately 24%
interest in Access Cash International L.L.C. (ACI), which was then the second
largest independent provider of ATM services in the United States. The Company
accounted for this initial investment under the equity method of accounting.
Effective October 1, 2001, the Company acquired the remaining 76% equity
interest in ACI for cash of approximately $44 million and began to consolidate
the results of ACIs operations with its own. The estimated fair value of the
assets acquired and liabilities assumed in connection with this acquisition is
summarized in the table below with the useful lives of the acquired intangible
assets. The entire amount of goodwill associated with this acquisition was
assigned to the ATM management segment and approximately $48 million of this
goodwill is expected to be deductible for tax purposes. Wtd. Avg.Amortization(dollars in thousands)
    
    Amount
    
    PeriodCurrent assets
    
    $
    12,074Property and equipment
    
    
    4,404Goodwill
    
    
    48,994Intangible assets:Acquired Contracts
    
    
    11,693
    
    
    14.7 yearsNon-compete agreements and other
    
    
    1,485
    
    
    3.0 yearsOther non-current assets
    
    
    347Total assets acquired
    
    
    78,997Current liabilities
    
    
    14,818Long-term debt
    
    
    3,517Other long-term liabilities
    
    
    1,895Total liabilities assumed
    
    
    20,230Net assets acquired
    
    $
    58,767
 In September 2000, the Company entered into an ATM deployment and management
agreement with ACI under which the Company received fees paid by consumers
utilizing ATMs deployed by it and interchange fees from their banks. ACI
managed this network of ATMs in exchange for a management fee determined by
reference to the number of ATMs deployed. Transactions recorded during 2001
under this agreement between the Company and ACI included $53.2 million in
revenue and $49.9 million in management fee expenses. The Company also recorded
equity losses in ACI of $1.1 million in 2001. In June 2001, the ATM deployment and management agreement was amended
(Amendment Agreement) and extended until at least March 31, 2002. In July 2001,
the Company and ATM Holding entered into an agreement (Letter Agreement)
acknowledging their mutual desire to pursue a transaction by which the Company
would acquire the remaining 76% of ACI. The June 2001 Amendment Agreement and
the July 2001 Letter Agreement resulted in payments among the Company, ACI and
ATM Holding. These payments were accounted for as advances and repayments
between the parties and the net amount of these payments was treated as a $1.3
million reduction to the ultimate purchase price of ACI. During 2002, the Company acquired four additional independent ATM networks
through stock or asset purchases: Hanco Systems, Inc. (Hanco); Samsar ATM
Company, Inc. (Samsar); Evergreen Teller Services, Inc. (Evergreen); 44




---



##### 



and Cash Resources, Inc. (CRI). The operating results of Hanco, Samsar,
Evergreen and CRI have been included in the Companys consolidated financial
statements since the date of each purchase. The total purchase price of these acquisitions was approximately $40 million of
which approximately $35 million was paid in cash. At December 31, 2003, payment
of approximately $2 million of the aggregate purchase price of these entities
remained subject to the satisfaction of certain post-closing conditions. The
purchase prices were allocated to the assets and liabilities of the acquired
companies and the unallocated portions of the purchase price were recorded as
goodwill. Approximately $16.5 million of this goodwill is expected to be
deductible for tax purposes. The following table summarizes the estimated fair
value of assets acquired and liabilities assumed at the date of each
acquisition and the useful lives of the acquired intangible assets: Wtd. AvgAmortization(dollars in thousands)
    
    Amount
    
    PeriodCurrent assets
    
    $
    1,784Property and equipment
    
    
    1,085Intangible assets:Acquired Contracts
    
    
    10,570
    
    
    12.8 yearsNon-compete agreements and other
    
    
    1,150
    
    
    3.6 yearsGoodwill
    
    
    24,969Other assets
    
    
    100Total assets acquired
    
    
    39,658Current liabilities
    
    
    1,734Net assets acquired
    
    $
    37,924
 The following table summarizes the unaudited pro forma results of operations of
the Company as though the acquisition of Hanco, Samsar, Evergreen, CRI and ACI
had occurred at the beginning of each period presented. Pro forma adjustments
include only the effect of events directly related to the acquisitions that are
factually supported and expected to have a continuing impact. The pro forma
results contained in the table below include pro forma adjustments resulting
from the application of the Companys income tax rate to the pro forma net
income. (unaudited)(in thousands, except per share amounts)
    
    2002
    
    2001Revenue
    
    $
    565,152
    
    
    $
    591,088Net income
    
    
    24,610
    
    
    
    29,712Net income per share:Basic
    
    $
    0.53
    
    
    $
    0.65Diluted
    
    $
    0.53
    
    
    $
    0.63
 Acquisitions During the Year Ended December 31, 2003
On November 12, 2003, the Company acquired substantially all of the assets of
Oasis Technology Ltd. (Oasis), a privately held provider of transaction
processing software. The results of Oasis have been included in the Companys
consolidated financial statements since that date. The total purchase price for Oasis was approximately $31 million, of which
approximately $27 million was paid in cash and the remainder was placed in
escrow subject to the satisfaction of certain post-closing conditions. The
following table summarizes the estimated fair value of assets acquired and
liabilities assumed at the date of Oasis acquisition and the useful lives of
its intangible assets: Amortization(dollars in thousands)
    
    Amount
    
    LivesCurrent assets
    
    $
    5,588Property and equipment
    
    
    303Intangible assets:Developed technology
    
    
    7,947
    
    
    5 yearsBacklog
    
    
    794
    
    
    1 yearMaintenance contracts, trade
name, and distributor contracts
    
    
    5,082
    
    
    9 yearsIn-process technology
    
    
    1,493
    
    
    
    n/aGoodwill
    
    
    13,360Total assets acquired
    
    
    34,567Current liabilities
    
    
    3,825Net assets acquired
    
    $
    30,742
 45




---



##### 



The value assigned to Oasis in-process research and development of $1.5
million was expensed at the date of acquisition and is reflected in
Restructuring, asset impairment and other charges in the accompanying
consolidated statements of operations. The entire amount of goodwill was
assigned to the Electronic Payments segment and is expected to be deductible
for tax purposes. The following table summarizes the unaudited pro forma results of operations of
the Company as though the acquisition of Oasis had occurred at the beginning of
each period presented. The table also includes pro forma information relating
to the acquisitions of Hanco, Samsar, Evergreen, and CRI in 2002. Pro forma
adjustments include only the effects of events directly related to the
acquisitions that are factually supported and expected to have a continuing
impact. The pro forma results contained in the table below include pro forma
adjustments related to the extinguishment of Oasis debt and the application of
the Companys income tax rate to the pro forma net income. (unaudited)(in thousands, except per share amounts)
    
    2003
    
    2002Revenue
    
    $
    547,594
    
    
    $
    579,094Net income
    
    
    29,067
    
    
    
    16,119Net income per share:Basic
    
    $
    0.62
    
    
    $
    0.35Diluted
    
    $
    0.62
    
    
    $
    0.34
 NOTE 4  INTANGIBLES:
Intangible assets consist primarily of goodwill, capitalized software costs and
acquired contracts. Goodwill
When the Company acquires another company, accounting principles generally
accepted in the United States of America require the Company to estimate the
fair value of the other companys tangible assets and liabilities and
identifiable intangible assets. Based upon these estimates, the purchase price
is allocated to the assets and liabilities of the acquired company for the
purpose of recording these items in the Companys financial records. Any
unallocated purchase price is recorded as goodwill. The distinction between the
amount of the purchase price allocated either to tangible assets and
liabilities or identifiable intangible assets and goodwill is significant
because goodwill is not amortized to the Companys consolidated statement of
operations but is instead subject to the annual impairment test discussed
below. Estimates inherent in the process of this purchase price allocation
include assumptions regarding the timing and amounts of future cash inflows and
outflows, the salability of inventories, selection of discount rates, contract
renewal rates and general market conditions. Where appropriate, third-party
valuation professionals are used to assist management in making these
estimates. The changes in the carrying
amount of goodwill for the years ended December 31,
2002 and 2003 are as follows: Electronic
    
    ATM
    
    Risk
    
    Global(in thousands)
    
    Payments
    
    Management
    
    Management
    
    Outsourcing
    
    Other
    
    TotalBalance as of January 1, 2002
    
    $
    1,600
    
    
    $
    48,662
    
    
    $
    5,724
    
    
    $
    20,559
    
    
    $
    10,606
    
    
    $
    87,151Goodwill acquired during the year
    
    
    
    
    
    
    24,969
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,969Contingent consideration
    
    
    
    
    
    
    1,916
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,916Balance as of December 31, 2002
    
    
    1,600
    
    
    
    75,547
    
    
    
    5,724
    
    
    
    20,559
    
    
    
    10,606
    
    
    
    114,036Goodwill acquired during year
    
    
    13,360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,360Contingent consideration
    
    
    
    
    
    
    2,435
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,435Adjustment for acquired net
operating loss carryforward
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,245
    )
    
    
    (1,245
    )Balance as of December 31, 2003
    
    $
    14,960
    
    
    $
    77,982
    
    
    $
    5,724
    
    
    $
    20,559
    
    
    $
    9,361
    
    
    $
    128,586
 46




---



##### 



Effective January 1, 2002, the Company adopted SFAS No. 142, which prohibits
the amortization of goodwill and intangible assets with indefinite useful lives
and requires instead that these assets be tested for impairment at least
annually (see Note 5). The following table reconciles the net income and
earnings per share the Company reported for the year ended December 31, 2001
with this requirement: (in thousands, except per share
amounts)Reported net income
    
    $
    33,339Adjustment amount for purchased goodwill amortization
    
    
    3,907Adjustment amount for ACI equity investment amortization
    
    
    654Adjusted net income
    
    $
    37,900Reported net income per share:Basic
    
    $
    0.72Diluted
    
    $
    0.70Adjusted net income per share:Basic
    
    $
    0.82Diluted
    
    $
    0.80
 Software-internal use
The Company capitalizes the cost of software developed or obtained for internal
use once the preliminary project stage has been completed, management commits
to funding the project and it is probable that the project will be completed
and that the software will be used to perform the function intended.
Capitalized costs include only (1) external direct costs of materials and
services consumed in developing or obtaining internal-use software, (2) payroll
and payroll-related costs for employees who are directly associated with and
who devote time to the internal-use software project and (3) interest costs
incurred, when material, while developing internal-use software. Capitalization
of costs ceases when the project is substantially complete and the software is
ready for its intended use. Acquired contracts
Contracts acquired through acquisitions are specifically identified in
connection with the acquisition. Acquired contracts represent the estimated
fair value of these contractual relationships. The fair value of these
intangibles is measured as the present value of the estimated net cash flows
from the contracts, including expected renewals. Management exercises judgment
in the assessment of the related useful lives, fair value and recoverability of
these intangibles. The majority of these acquired contract intangibles are
amortized on an accelerated method that is intended to mirror the cash flow
patterns and duration used in estimating the value recognized from an acquired
contract. Other intangibles
Other intangibles consist primarily of capitalized costs related to software
developed for licensing and resale and other assets obtained in connection with
the acquisition of other companies, such as non-competition agreements. Assets
such as non-competition agreements are carried at their estimated fair value at
the date of acquisition less any applicable amortization. Amortization is
recognized over the periods of the non-competition agreements. Software developed for licensing and resale is capitalized once technological
feasibility has been established. Costs incurred prior to establishing
technological feasibility are expensed as incurred. Technological feasibility
is established when all planning, designing, coding and testing activities that
are necessary to determine that a product can be produced to meet its design
specifications have been completed. Capitalization of costs ceases when the
product is available for general release to customers. These costs are
amortized on a product-by-product basis, normally over three years and no
longer than five years. Software developed for resale is carried at the lesser
of amortized cost or net realizable value. Other intangible assets, both acquired and developed, subject to amortization
were as follows: Wtd. Avg.
    
    December 31, 2003
    
    December 31, 2002Amortization
    
    Gross
    
    
    
    
    
    
    
    
    
    GrossPeriod
    
    Carrying
    
    Accumulated
    
    
    
    
    
    Carrying
    
    Accumulated(in thousands)
    
    In Years
    
    Amounts
    
    Amortization
    
    Net
    
    Amounts
    
    Amortization
    
    NetAcquired contracts
    
    
    13.8
    
    
    $
    22,262
    
    
    $
    (3,599
    )
    
    $
    18,663
    
    
    $
    22,262
    
    
    $
    (1,455
    )
    
    $
    20,807Other
    
    
    5.1
    
    
    
    89,542
    
    
    
    (66,642
    )
    
    
    22,900
    
    
    
    73,353
    
    
    
    (61,763
    )
    
    
    11,590Other intangible
assets
    
    
    
    
    
    
    111,804
    
    
    
    (70,241
    )
    
    
    41,563
    
    
    
    95,615
    
    
    
    (63,218
    )
    
    
    32,397Software-internal use
    
    
    3.8
    
    
    
    82,376
    
    
    
    (52,823
    )
    
    
    29,553
    
    
    
    69,111
    
    
    
    (39,672
    )
    
    
    29,439$
    194,180
    
    
    $
    (123,064
    )
    
    $
    71,116
    
    
    $
    164,726
    
    
    $
    (102,890
    )
    
    $
    61,836
 47




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##### 



For the years ended December 31, 2003, 2002 and 2001 amortization expense for
intangible assets was $20.6 million, $19.2 million and $21.8 million,
respectively. The estimated future annual amortization expense for intangible
assets held at December 31, 2003 is $20 million, $15 million, $10 million, $6
million, $4 million and $2 million for the years 2004, 2005, 2006, 2007, 2008
and 2009, respectively. NOTE 5  RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGES:
The process of evaluating fixed assets, goodwill and other intangible assets,
including capitalized software costs and acquired customer contracts, for
impairment involves judgments about market conditions and economic indicators,
estimates of future cash flows and assumptions about the Companys strategic
plans. To the extent additional information arises or the Companys strategies
change, it is possible that the Companys conclusions regarding the carrying
value of its intangible assets could change and materially affect its financial
position or results of operations because the Company would then incur a charge
to write-down these assets to the fair value estimated using these new
assumptions. Long-lived assets to be held and used
Whenever events or changes in circumstances indicate that a long-lived asset
that is not held for sale may be impaired, the Company evaluates the
recoverability of the asset by measuring its carrying amount against the
estimated undiscounted future cash flows associated with it. Should the sum of
the expected future net cash flows be less than the carrying value of the asset
being evaluated, an impairment loss would be recognized. The impairment loss
would be calculated as the amount by which the carrying value of the asset
exceeds its fair value. In evaluating whether there is any impairment of a
long-lived asset associated with a long-term service contract, the amount of
any loss contract accrual is excluded from the undiscounted future cash flows
associated with the long-lived asset when determining whether the asset is
impaired. Long-lived assets held for sale
The Company evaluates the recoverability of property and equipment and
identifiable intangibles held for sale by comparing the carrying amount of the
asset with its estimated fair value less costs to sell. Should the estimated
fair value less costs to sell be less than the carrying value of the long-lived
asset, an impairment loss would be recognized. The impairment loss would be
calculated as the amount by which the carrying value of the asset exceeds its
estimated fair value of the asset less costs to sell. The Company has recorded restructuring, asset impairment and other charges in
accordance with its accounting policies as follows: Year Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001Property and equipment
    
    $
    
    
    
    $
    5,067
    
    
    $
    Software
    
    
    
    
    
    
    2,122
    
    
    
    In-process research and development
    
    
    1,493
    
    
    
    
    
    
    
    Total asset impairment and other charges
    
    
    1,493
    
    
    
    7,189
    
    
    
    Reversal of lease-related provision (see table below)
    
    
    (854
    )
    
    
    
    
    
    
    Restructuring charges (see table below)
    
    
    3,570
    
    
    
    9,336
    
    
    
    3,200Total restructuring, asset impairment and other charges
    
    $
    4,209
    
    
    $
    16,525
    
    
    $
    3,200
 Restructuring accruals
Through December 31, 2002, restructuring charges were accrued in the period in
which management committed to execute the restructuring actions. Subsequent to
that date, restructuring charges were comprised of termination benefits which
are accrued when the amount is probable and can be reasonably estimated. These
charges are included in Restructuring, asset impairment and other charges in
the Companys consolidated statements of operations. During 2002, management initiated cost reduction efforts associated with
specific product lines and corporate-wide initiatives. These measures resulted
in restructuring and asset impairment charges of $2.7 million and $16.5 million
in 2003 and 2002, respectively. The charges in 2003 were comprised of severance
benefits totaling $3.6 million for the elimination of approximately 380
positions located primarily in the United States and the reversal of $0.9
million of lease related reserves to reflect the subleasing of the associated
properties. The charges in 2002 were comprised 48




---



##### 



of severance benefits totaling $4.5 million for the elimination of 343
positions located primarily in the United States, lease related costs of $4.8
million related to the consolidation of facilities, impairment of fixed assets
totaling $5.1 million (including a $3.0 million charge to write-down a building
in Glendale, Wisconsin that was held for sale), and a charge of $2.1 million
for software impairment related to products that were discontinued. During 2001, the planned closure of the Companys operations in Bothell,
Washington, resulted in a $1.8 million accrual of severance charges for the
elimination of 224 positions and a $1.4 million accrual for lease related
costs.
The following table summarizes the change in the Companys restructuring
accruals for 2003, 2002 and 2001 including the long-term portion of
approximately $1.9 million, $4.6 million and $0.9 million at December 31, 2003,
2002 and 2001, respectively. The Company expects to pay the remaining severance
related accruals in 2004 and the lease-related costs over the terms of the
leases. Severance
    
    Lease Related(in thousands)
    
    Related
    
    Cost & Other
    
    TotalBalance December 31, 2000
    
    $
    378
    
    
    $
    5,522
    
    
    $
    5,900Expense provision
    
    
    1,803
    
    
    
    1,397
    
    
    
    3,200Cash payments
    
    
    (1,170
    )
    
    
    (5,040
    )
    
    
    (6,210
    )Balance December 31, 2001
    
    
    1,011
    
    
    
    1,879
    
    
    
    2,890Expense provision
    
    
    4,517
    
    
    
    4,819
    
    
    
    9,336Cash payments
    
    
    (3,730
    )
    
    
    (1,511
    )
    
    
    (5,241
    )Balance December 31, 2002
    
    
    1,798
    
    
    
    5,187
    
    
    
    6,985Reversal of lease-related provision
    
    
    
    
    
    
    (854
    )
    
    
    (854
    )Expense provision
    
    
    3,570
    
    
    
    
    
    
    
    3,570Cash payments
    
    
    (3,800
    )
    
    
    (1,547
    )
    
    
    (5,347
    )Balance December 31, 2003
    
    $
    1,568
    
    
    $
    2,786
    
    
    $
    4,354
 NOTE 6  ACCRUED CONTRACT LOSSES:
The Company has entered into long-term service contracts to provide services
over a period of time in excess of one year and with respect to which the
Company has no contractual right to adjust the prices or terms at which its
services are supplied during the term of the contract. The Companys accrued
contract losses pertain to long-term government service contracts for
transaction processing in the electronic payments segment. In determining the profitability of a long-term service contract, only direct
and allocable indirect costs associated with the contract are included in the
calculation. The appropriateness of allocations of indirect costs depends on
the circumstances and involves the judgment of management, but such costs may
include the costs of indirect labor, contract supervision, tools and equipment,
supplies, quality control and inspection, insurance, repairs and maintenance,
depreciation and amortization and, in some circumstances, support costs. The
method of allocating any indirect costs included in the analysis is also
dependent upon the circumstances and the judgment of management, but the
allocation method must be systematic and rational. Selling, general and
administrative costs are not included in the analysis. Provisions for estimated
losses on long-term service contracts, if any, are made in the period in which
the loss first becomes probable and reasonably estimable. Projected losses are
based on managements best estimates of a contracts revenue and costs. Actual
losses on individual long-term service contracts are compared with loss
projections periodically, with any changes in the estimated total contract loss
recognized as they become probable and reasonably estimable. Certain direct
costs associated with the Companys contracts are common to a number of
contracts and are attributed to each contract based on its use of the services
associated with these common direct costs. Revenue, case counts or other
applicable statistics are used to attribute these costs to individual
contracts. The Company has historically incurred losses related to its government services
business and has established a reserve to provide for expected losses on
certain existing long-term service contracts of this business. The Companys
estimates of such losses are based on a variety of assumptions including
assumptions about future case levels, number of transactions per case and costs
related to processing transactions and support services. These assumptions are
subject to uncertainties and the actual results may differ from the original
estimates. In the event such differences arise, a revision to the loss contract
reserve would be required. Any such revision could have a material effect on
the Companys financial position or results of operations. Additional
provisions for contract losses and reversals of provision for contract losses
are recorded in the Reversal of provision for contract losses line item of
the accompanying consolidated statements of operations and in the Electronic
Payments segment. During the third quarter of each of the years 2003 and 2002,
the Company recorded reversals of the provision of $3.7 million 49




---



##### 



and $2.0 million, respectively, to reflect a reduction in the expected future
losses related to its government services contracts. During 2001, the Company recorded a net credit of $2.5 million to reflect an
overall reduction in the level of expected future losses on long-term service
contracts within its Electronic Payments segment. The net credit is composed of
reductions to the reserve of $3.8 million reflecting lower than anticipated
costs, offset by a provision for a loss of $1.3 million for an additional state
where projected future costs exceeded projected future revenue. Deluxe has agreed to indemnify the Company for certain future losses arising
from identified loss contracts of the Companys government services business.
The Company plans to record any amounts received from Deluxe under the
indemnification agreement as a reduction of expense if any additional contract
losses are recognized. Under the indemnification agreement, the Company is
required to calculate increases or decreases to the loss contract reserve in a
manner consistent with Deluxes historical practices, which may differ from the
Companys calculation of estimated future losses for financial statement
purposes. Deluxe will also indemnity the Company against any liabilities,
losses or expenses arising from the litigation or claims asserted against the
Company in connection with the operation of the government services business
prior to the completion of the Companys IPO in June 2000. Deluxes total
indemnification obligations to the Company with respect to the government
services business are limited to $14.6 million. No such indemnification
obligations have been incurred through December 31, 2003. The following table summarizes the activity of the accrued contract loss
reserve: Year Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001Beginning balance
    
    $
    7,578
    
    
    $
    14,777
    
    
    $
    22,247Provision for contract losses
    
    
    
    
    
    
    
    
    
    
    1,295Reversal of provision for contract losses
    
    
    (3,650
    )
    
    
    (2,000
    )
    
    
    (3,795
    )Charges to reserve
    
    
    (2,038
    )
    
    
    (5,199
    )
    
    
    (4,970
    )Ending balance
    
    $
    1,890
    
    
    $
    7,578
    
    
    $
    14,777
 NOTE 7  PROVISION FOR INCOME TAXES: Income before income taxes consists of: Years Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001Domestic
    
    $
    29,961
    
    
    $
    28,846
    
    
    $
    39,891Foreign
    
    
    9,906
    
    
    
    7,307
    
    
    
    11,101Total
    
    $
    39,867
    
    
    $
    36,153
    
    
    $
    50,992
 The components of the provision for income taxes are as follows: Years Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001Current tax provisionFederal
    
    $
    (8,438
    )
    
    $
    (7,339
    )
    
    $
    (6,486
    )Foreign
    
    
    (404
    )
    
    
    (854
    )
    
    
    (100
    )State
    
    
    (1,082
    )
    
    
    (1,456
    )
    
    
    (3,114
    )Total
    
    
    (9,924
    )
    
    
    (9,649
    )
    
    
    (9,700
    )Deferred tax benefit (provision)Federal
    
    
    (809
    )
    
    
    (1,620
    )
    
    
    (8,389
    )State
    
    
    (226
    )
    
    
    (330
    )
    
    
    436Total
    
    $
    (10,959
    )
    
    $
    (11,599
    )
    
    $
    (17,653
    )
 50




---



##### 



The Companys effective tax rate on pretax income differs from the U.S. Federal
statutory tax rate of 35% as follows: Years Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001Income tax at Federal statutory rate
    
    $
    (13,953
    )
    
    $
    (12,652
    )
    
    $
    (17,847
    )State income taxes net of Federal income tax benefit
    
    
    (850
    )
    
    
    (1,161
    )
    
    
    (1,676
    )Difference between Federal statutory rate and
foreign tax rate
    
    
    2,310
    
    
    
    2,531
    
    
    
    3,556Amortization and write down of intangibles
    
    
    
    
    
    
    
    
    
    
    (1,570
    )Change in valuation allowance
    
    
    1,246
    
    
    
    2,083
    
    
    
    2,989Extraterritorial income exclusion
    
    
    547
    
    
    
    
    
    
    
    Other
    
    
    (259
    )
    
    
    (2,400
    )
    
    
    (3,105
    )Provision for income taxes
    
    $
    (10,959
    )
    
    $
    (11,599
    )
    
    $
    (17,653
    )
 Tax effected temporary differences, which give rise to a significant portion of
deferred tax assets and liabilities are as follows: 2003
    
    2002Deferred
    
    Deferred
    
    Deferred
    
    Deferredtax
    
    tax
    
    tax
    
    tax(in thousands)
    
    assets
    
    liabilities
    
    assets
    
    liabilitiesNet operating loss carryforwards
    
    $
    9,768
    
    
    $
    
    
    
    $
    9,010
    
    
    $
    (444
    )Reserve for legal proceedings
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    Accrued contract losses
    
    
    723
    
    
    
    
    
    
    
    2,899
    
    
    
    Restructuring and other accruals
    
    
    1,802
    
    
    
    
    
    
    
    4,104
    
    
    
    Property and equipment
    
    
    815
    
    
    
    
    
    
    
    99
    
    
    
    Intangibles
    
    
    
    
    
    
    9,502
    
    
    
    
    
    
    
    9,646Employee benefit and incentive plans
    
    
    4,388
    
    
    
    
    
    
    
    1,906
    
    
    
    Miscellaneous reserves and accruals
    
    
    2,038
    
    
    
    
    
    
    
    2,560
    
    
    
    Deferred revenue
    
    
    1,261
    
    
    
    
    
    
    
    1,604
    
    
    
    Prepaid expenses
    
    
    
    
    
    
    1,898
    
    
    
    (1,843
    )
    
    
    All other
    
    
    677
    
    
    
    
    
    
    
    348
    
    
    
    Subtotal
    
    
    21,472
    
    
    
    11,400
    
    
    
    20,689
    
    
    
    9,202Valuation allowance
    
    
    (8,729
    )
    
    
    
    
    
    
    (9,109
    )
    
    
    Total deferred taxes
    
    $
    12,743
    
    
    $
    11,400
    
    
    $
    11,580
    
    
    $
    9,202
 The valuation allowance relates principally to the uncertainty of realizing
federal, foreign and state net operating loss carryforwards. At December 31, 2003, net operating loss carryforwards relating to federal,
state and foreign jurisdictions amounted to $3.0 million, $128.9 million and
$14.8 million, respectively. Of these carryforwards, the $14.8 million of
foreign net operating losses may be carried forward indefinitely. It is
anticipated that benefits associated with the utilization
of the $14.8 million foreign net operating loss, if any, would be offset by
United States residual tax. The federal net operating loss carryforwards are
subject to certain limitations on their utilization pursuant to Section 382 of
the Internal Revenue Code. Federal and State net operating loss carryforwards
are subject to expiration as follows: (in thousands)
    
    Federal
    
    State
    
    Total2004-2006
    
    $
    
    
    
    $
    2,646
    
    
    $
    2,6462007-2011
    
    
    668
    
    
    
    13,530
    
    
    
    14,1982012
    
    
    
    
    
    
    21,242
    
    
    
    21,2422013
    
    
    
    
    
    
    30,857
    
    
    
    30,8572014
    
    
    
    
    
    
    31,298
    
    
    
    31,2982016
    
    
    
    
    
    
    3,012
    
    
    
    3,0122017
    
    
    2,300
    
    
    
    21,018
    
    
    
    23,3182018
    
    
    
    
    
    
    1,077
    
    
    
    1,0772019
    
    
    
    
    
    
    1,294
    
    
    
    1,2942021
    
    
    
    
    
    
    454
    
    
    
    4542022
    
    
    
    
    
    
    2,493
    
    
    
    2,493Total
    
    $
    2,968
    
    
    $
    128,921
    
    
    $
    131,889
 The Companys Indian software development and business process management
operations qualify for tax incentives associated with businesses which operate
within designated geographic locations in India. These incentives generally
provide the Company with exemptions from Indian tax on certain business income
generated from these operations and phase out through March 2009. These tax
incentives reduced the Companys income tax expense by approximately $2.7
million, $2.7 million and $5.8 million in the years ended December 31, 2003,
2002 and 2001, respectively. 51




---



##### 



Accounting for income taxes requires significant judgments in estimating, among
other things, the likelihood the Company will realize the benefits of net
operating loss carryforwards, the adequacy of valuation allowances, the rates
used to measure transactions with foreign subsidiaries and the development of
valuation models used for measuring the value of certain transactions. In
addition, the Companys operations are subject to government regulations in the
United States and in foreign countries in which the Company operates relating
to taxation. The judgments and estimates used by the Company are subject to
challenge by domestic and foreign taxing authorities. The Company recognizes
tax liabilities at such time as they are judged to be probable of being
incurred and they can be reasonably estimated. It is possible that either
foreign or domestic taxing authorities could challenge those judgments and
estimates and draw conclusions that would cause the Company to incur tax
liabilities in excess of those currently recorded. NOTE 8  EMPLOYEE BENEFIT PLANS:Stock purchase plan
In 2001, the Company established a non-compensatory Employee Stock Purchase
Plan (ESPP) as defined in Section 423(b) of the Internal Revenue Code of 1986,
as amended, and the Treasury Regulations promulgated thereunder. The Company
has reserved 2.3 million shares for issuance in accordance with the provisions
of the ESPP. All regular full-time employees of the Company, other than its
United Kingdom and Canadian employees, were eligible to participate in the
ESPP in 2003, subject to certain limitations. The ESPP enables eligible
employees to purchase the Companys common stock at the lesser of 85% of its
fair market value on the first or last business day of each three-month
purchase period. Stock incentive plans
Employees of the Company participated in Deluxes stock option plans through
the date of the Spin-Off. In connection with the Spin-Off, Deluxe and the
Company decided that Deluxe options outstanding as of the record date for the
Spin-Off would be converted into options to purchase shares of the Company and
options to purchase shares of Deluxe based on a formula that compared the
market value of the Companys and Deluxes common stock at the record date for
the Spin-Off. The formula was designed to maintain an equivalent intrinsic
value for the Deluxe option holder following the Spin-Off. To accommodate this
conversion, the Company established the eFunds Corporation Stock Incentive Plan
for Deluxe Conversion Awards (the Conversion Plan). Under the Conversion Plan, the converted options retain their remaining terms,
vesting and other characteristics as provided in the Deluxe plans. Options to
purchase 2.9 million shares of the Companys common stock were outstanding with
a weighted average exercise price of $13.75 per share at December 31, 2000
under the Conversion Plan. The Company did not record compensation expense as a
result of the conversion process. As of December 31, 2003, approximately 1.5
million of these options remained outstanding. All of these options will expire
on or before December 29, 2005. In connection with the IPO, the Company established the eFunds Corporation 2000
Stock Incentive Plan under which 9.1 million shares were reserved for issuance.
The plan provides for a broad range of methods to deliver stock-based awards,
other than incentive stock options. Options issued under the plan become
exercisable in varying amounts beginning generally one year after the date of
grant and generally become fully vested after three years. Awards made under
the plan have a maximum term of ten years. The Company issued 31,791 restricted stock units in 2003, 53,079 restricted
stock units in 2002 and 53,514 of such units in 2001. These awards generally
vest over periods ranging from one to five years. No consideration is paid by
employees for these awards. The Company recorded compensation expense of
$259,000, $42,000 and $665,000 for restricted stock unit awards for the years
ended December 31, 2003, 2002 and 2001, respectively. In lieu of cash
compensation, members of the Companys Board of Directors elected to receive an
aggregate 6,321 restricted stock units in 2003, 7,763 restricted stock units in
2002 and 1,537 units in 2001. 52




---



##### 



Information with respect to stock option activity is as follows: Year Ended December 31,2003
    
    2002
    
    2001Wtd. Avg.
    
    
    
    
    
    Wtd. Avg.
    
    
    
    
    
    Wtd. Avg.Exercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOptions outstanding at beginning of year
    
    
    5,867,201
    
    
    $
    12.84
    
    
    
    5,671,385
    
    
    $
    12.95
    
    
    
    5,485,908
    
    
    $
    13.33Options granted
    
    
    1,046,232
    
    
    
    9.01
    
    
    
    1,468,317
    
    
    
    12.22
    
    
    
    1,330,174
    
    
    
    11.51Options exercised
    
    
    (439,911
    )
    
    
    11.84
    
    
    
    (105,186
    )
    
    
    12.46
    
    
    
    (732,312
    )
    
    
    13.43Options cancelled
    
    
    (1,251,650
    )
    
    
    13.16
    
    
    
    (1,167,315
    )
    
    
    12.85
    
    
    
    (412,385
    )
    
    
    12.57Options outstanding at end of year
    
    
    5,221,872
    
    
    $
    12.09
    
    
    
    5,867,201
    
    
    $
    12.84
    
    
    
    5,671,385
    
    
    $
    12.95Options exercisable
    
    
    3,661,768
    
    
    $
    13.00
    
    
    
    4,362,040
    
    
    $
    13.15
    
    
    
    2,582,192
    
    
    $
    13.63
 For options outstanding and exercisable at December 31, 2003, the exercise
price ranges and average remaining lives in years were as follows: Ranges of
    
    Options
    
    Wtd. Avg.
    
    Wtd. Avg.
    
    Options
    
    Wtd. Avg.Exercise Prices
    
    Outstanding
    Remaining Life
    Exercise Price
    
    Exercisable
    
    Exercise Price$7.13-$12.87
    
    
    2,269,828
    
    
    
    7.89
    
    
    $
    9.60
    
    
    
    1,054,102
    
    
    $
    10.90$13.00-$13.88
    
    
    1,825,202
    
    
    
    6.69
    
    
    
    13.21
    
    
    
    1,625,515
    
    
    
    13.15$14.05-$21.33
    
    
    1,126,842
    
    
    
    5.34
    
    
    
    15.28
    
    
    
    982,151
    
    
    
    14.995,221,872
    
    
    
    6.92
    
    
    $
    12.09
    
    
    
    3,661,768
    
    
    $
    13.00
 Profit sharing, defined contribution and401(k)plans
The Company established a 401(k) plan effective on January 1, 2001. During
2003, highly compensated employees, as defined by the IRS tax code, could
contribute the lesser of $12,000 or 10% of their eligible wages to the plan.
Non-highly compensated employees could contribute the lesser of $12,000 or 15%
of their eligible wages to the plan. Employees age 50 or over could contribute
up to an additional $2,000 during 2003. The Company matches 100% of the first
5% of wages contributed. The 401(k) plan has a profit sharing feature whereby
the Company will contribute up to an additional 10% of an employees eligible
wages, depending on the Companys performance, as long as the employee is
enrolled in the plan and contributing at least 3% of their eligible wages. The
Companys expense for matching and profit sharing was $8.4 million for the year
ended December 31, 2003, $5.2 million for the year ended December 31, 2002,
and $9.7 million for the year ended December 31, 2001. The Company also
maintains a defined contribution plan for its UK based employees. Expenses
under this plan amounted to $0.2 million, $0.2 million and $0.4 million in
2003, 2002 and 2001, respectively. The Company has also established a deferred compensation plan that permits
eligible employees to defer the receipt of their base salary, annual cash
incentive compensation and/or sales incentive compensation. The amount of
deferral is based on elections made by each participant. The amounts deferred
by a participant is credited with earnings and investment gains and losses by
assuming that the amount deferred was invested in one or more investment
options selected by the participant. The Company will make certain matching and
profit-sharing contributions to the participants deferred compensation
accounts related to earnings in excess of allowable 401(k) contribution limits.
The plan provides that the Company may make additional contributions to the
participants accounts at its sole discretion. The Companys supplemental
matching and profit sharing contributions amounted to approximately $23,000 for
2003, $0.1 million for 2002 and $0.4 million for 2001. NOTE 9  LEASE AND DEBT COMMITMENTS:
Long-term debt was as follows: December 31,(in thousands)
    
    2003
    
    2002Capital leases and other
    
    $
    7,253
    
    
    $
    2,739Less amount due within one year
    
    
    (5,586
    )
    
    
    (1,401
    )Total
    
    $
    1,667
    
    
    $
    1,338
 Long-term debt consists principally of capital lease obligations related to
purchased software and equipment. These capital lease obligations bear interest
rates of 2.0% to 10.9% and are due through the year 2008. Carrying value
approximates fair value for these obligations. Maturities of long-term debt for
the five years ending December 31, 2008, are $5.6 million in 2004, $0.8 million
in 2005, $0.6 million in 2006, $0.2 million in 2007 and $0.1 million in 53




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##### 



2008. The net book value of equipment under capital leases was $6.9 million at
December 31, 2003. Amortization of assets held under capital leases is included
with depreciation expense. The Company has entered into operating leases on certain facilities and
equipment. Future minimum lease payments for non-cancelable operating leases,
net of minimum sublease rental of $4.2 million due in the future under
non-cancelable subleases, are $12.5 million in 2004, $9.5 million in 2005, $6.9
million in 2006, $7.0 million in 2007, $6.1 million in 2008 and $17.0 million
thereafter. Rental expense was $15.0 million, $17.8 million and $13.5 million
in 2003, 2002 and 2001, respectively. NOTE 10  INCOME PER SHARE AND STOCKHOLDERS EQUITY:
The following table reflects the calculation of basic and diluted income per
share: Year Ended December 31,(dollars and shares outstanding inthousands, except per share amounts)
    
    2003
    
    2002
    
    2001Net income per share  basicNet income
    
    $
    28,908
    
    
    $
    24,554
    
    
    $
    33,339Weighted average shares outstanding
    
    
    46,854
    
    
    
    46,588
    
    
    
    45,985Net income per share  basic
    
    $
    0.62
    
    
    $
    0.53
    
    
    $
    0.72Net income per share  dilutedNet income
    
    $
    28,908
    
    
    $
    24,554
    
    
    $
    33,339Weighted average shares outstanding
    
    
    46,854
    
    
    
    46,588
    
    
    
    45,985Dilutive impact of options
    
    
    385
    
    
    
    150
    
    
    
    1,460Weighted average shares and potential
dilutive shares outstanding
    
    
    47,239
    
    
    
    46,738
    
    
    
    47,445Net income per share  diluted
    
    $
    0.61
    
    
    $
    0.53
    
    
    $
    0.70
 Options to purchase 103,954 shares, 4,361,050 shares and 94,838 shares of
common stock were excluded from the above calculation as they were antidilutive
for the years ended December 31, 2003, 2002 and 2001, respectively. In connection with its IPO, the Company adopted a stockholder rights plan. The
rights issued under this plan have anti-takeover effects, as they will cause
substantial dilution to a person or group that attempts to acquire control of
the Company pursuant to an offer that is not approved by the Companys Board of
Directors. The rights should not interfere with any tender offer or merger
approved by the Board because the Board of Directors may redeem the rights or
approve an offer at any time prior to such time as any person becomes the
beneficial owner of 15% or more of the Companys outstanding common stock. NOTE 11- BUSINESS SEGMENT INFORMATION:
The Companys segment reporting was revised during 2003 to reflect
organizational changes and the additional allocation of overhead to the
business segments. To facilitate the delivery of a full range of processing
solutions from software licensing through outsourced processing, the Company
now manages its EFT software sales in its Electronic Payments segment. This
service was previously managed under its Professional Services segment.
Collection activities, which were formerly managed under the Companys Risk
Management segment, and account verification services, which were previously
managed under the Companys Electronic Payment segment, are both now under the
executive leadership of its Global Outsourcing segment. Currently, the
Companys business segments are Electronic Payments, ATM Management, Risk
Management and Global Outsourcing. The Company reports segment information
consistent with the way management internally disaggregates its operations to
assess performance and to allocate resources. The Electronic Payments segment
provides EFT software sales, ACH, EFT and other processing services as well as
EBT services for government agencies. The ATM Management segment provides ATM
deployment, management and branding services. The Risk Management segment
provides risk management based data and other products to financial
institutions, retailers and other businesses to assist them in detecting fraud
and assessing the risk of opening a new account or accepting a check. The
Global Outsourcing segment provides information technology services and
business process outsourcing services. The segment information presented below
for the years ended December 31, 2002 and 2001 has been reclassified to reflect
the Companys current business segments. The accounting policies of the segments are the same as those applied to the
Company on a consolidated basis. For internal reporting purposes, the Company
aggregates costs based upon managerial control. The majority of these managed
cost groups are directly assigned to a reportable segment. For cost groups
supporting more than one 54




---



##### 



reportable segment, the costs are assigned based upon the product line or
project benefited. The assignment of costs is based upon estimates of factors
considered most appropriate for the cost group such as transactions, calls,
customers, square footage, revenues and headcount. The Company does not
allocate expenses that benefit all segments and are corporate or administrative
in nature. These costs include, among other things, executive leadership costs,
investor relations and general legal, consulting, accounting and finance costs. Information concerning operations in these reportable segments of business is
as follows: Year Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001Net revenue:Electronic payments
    
    $
    183,556
    
    
    $
    210,698
    
    
    $
    245,216ATM management
    
    
    139,797
    
    
    
    115,597
    
    
    
    73,922Risk management
    
    
    133,129
    
    
    
    128,962
    
    
    
    125,251Global outsourcing
    
    
    75,572
    
    
    
    87,850
    
    
    
    92,770Total net revenue
    
    
    532,054
    
    
    
    543,107
    
    
    
    537,159Operating expenses before overhead, restructuring, asset impairment and other
charges, net of reversal of provision for contract losses:Electronic payments
    
    
    132,141
    
    
    
    133,999
    
    
    
    162,178ATM management
    
    
    132,015
    
    
    
    112,866
    
    
    
    74,686Risk management
    
    
    83,900
    
    
    
    98,008
    
    
    
    98,086Global outsourcing
    
    
    62,728
    
    
    
    63,312
    
    
    
    75,079Total operating expenses before overhead, restructuring, asset impairment and
other charges, net of reversal of provision for contract losses
    
    
    410,784
    
    
    
    408,185
    
    
    
    410,029Allocated overhead:Electronic payments
    
    
    10,007
    
    
    
    10,705
    
    
    
    9,271ATM management
    
    
    7,437
    
    
    
    6,892
    
    
    
    4,738Risk management
    
    
    10,084
    
    
    
    10,084
    
    
    
    8,405Global outsourcing
    
    
    8,088
    
    
    
    8,526
    
    
    
    8,184Corporate
    
    
    46,385
    
    
    
    48,771
    
    
    
    45,011Total allocated overhead
    
    
    82,001
    
    
    
    84,978
    
    
    
    75,609Restructuring, asset impairment and other charges, net of reversal of provision
for contract losses:Electronic payments
    
    
    (1,082
    )
    
    
    1,369
    
    
    
    (2,500
    )ATM management
    
    
    244
    
    
    
    82
    
    
    
    Risk management
    
    
    824
    
    
    
    4,998
    
    
    
    3,200Global outsourcing
    
    
    877
    
    
    
    1,216
    
    
    
    Corporate
    
    
    (304
    )
    
    
    6,860
    
    
    
    Total restructuring, asset impairment and other charges, net of reversal of
provision for contract losses
    
    
    559
    
    
    
    14,525
    
    
    
    700Income (loss) from operations:Electronic payments
    
    
    42,490
    
    
    
    64,625
    
    
    
    76,267ATM management
    
    
    101
    
    
    
    (4,243
    )
    
    
    (5,502
    )Risk management
    
    
    38,321
    
    
    
    15,872
    
    
    
    15,560Global outsourcing
    
    
    3,879
    
    
    
    14,796
    
    
    
    9,507Corporate
    
    
    (46,081
    )
    
    
    (55,631
    )
    
    
    (45,011
    )Income from operations
    
    $
    38,710
    
    
    $
    35,419
    
    
    $
    50,821
 The Company has not disclosed assets, interest income, interest expense or
income taxes by segment as this information is not reviewed by the chief
operating decision maker, is not produced internally and is not practicable to
prepare. Depreciation and amortization for each of the Companys reporting
segments is as follows: Year Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001Depreciation and amortization:Electronic payments
    
    $
    8,639
    
    
    $
    10,381
    
    
    $
    14,532ATM management
    
    
    4,970
    
    
    
    3,560
    
    
    
    1,454Risk management
    
    
    6,870
    
    
    
    7,171
    
    
    
    11,537Global outsourcing
    
    
    3,447
    
    
    
    3,028
    
    
    
    3,737Corporate
    
    
    11,459
    
    
    
    12,832
    
    
    
    8,692Total depreciation and amortization
    
    $
    35,385
    
    
    $
    36,972
    
    
    $
    39,952
 Concord EFS accounted for approximately 11% of the Companys total net revenue
(before reimbursed expenses) during the year ended December 31, 2001. Revenues
from this customer were recorded in the Electronic Payment and ATM Management
segments. No other customers accounted for more than 10% of the Companys total
net revenue before reimbursed expenses during 2001, 2002 or 2003. 55




---



##### 



Revenue is attributed to geographic areas based on the location of the assets
producing the revenue. The Companys operations by geographic area are as
follows: Total Net Revenue
    
    Property and EquipmentYear Ended December 31,
    
    December 31,(in thousands)
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002United States
    
    $
    482,251
    
    
    $
    495,768
    
    
    $
    495,928
    
    
    $
    38,594
    
    
    $
    41,038United Kingdom
    
    
    15,649
    
    
    
    14,853
    
    
    
    15,318
    
    
    
    493
    
    
    
    276India
    
    
    18,817
    
    
    
    23,169
    
    
    
    23,765
    
    
    
    9,445
    
    
    
    8,713Other
    
    
    15,337
    
    
    
    9,317
    
    
    
    2,148
    
    
    
    1,097
    
    
    
    737Total consolidated
    
    $
    532,054
    
    
    $
    543,107
    
    
    $
    537,159
    
    
    $
    49,629
    
    
    $
    50,764
 NOTE 12  LEGAL PROCEEDINGS: The Company is currently the subject of an investigation by the Securities and
Exchange Commission (SEC) with respect to restatements of its prior period
financial statements that occurred in 2002. The Company has been cooperating
fully with the SEC staff and intends to continue to do so. The Company may,
however, become subject to a fine or other remedies in connection with the
investigation. The Company has incurred, and may continue to incur,
significant legal expenses in connection with this investigation. The Company, its former chief executive and chief financial officers and its
current chief financial officer are defendants in a federal securities action
(the Federal Securities Action) pending in the U.S. District Court for the
District of Arizona. On December 30, 2003, the plaintiff in the Federal
Securities Action filed a Consolidated Amended Complaint (the Complaint). The
Complaint alleges, among other things, that during the period from July 21,
2000 through October 24, 2002 the defendants made false and misleading
statements and omissions of material facts and that the plaintiff and other
members of a putative class of shareholders suffered damages as a result. On
February 10, 2004, the defendants filed a motion to dismiss this action. The Company is also a nominal defendant in two substantially identical
shareholder derivative actions filed in the Superior Court of Arizona, Maricopa
County in January 2003 (the Shareholder Derivative Actions). The complaints
allege, among other things, that certain of the Companys current and former
directors named in the complaints as defendants breached their fiduciary duties
to the Company in connection with certain alleged issues involving the
Companys accounting practices and internal controls. The complaints also name
as a defendant the Companys former external auditor. With the agreement of
the parties, the Court has entered an order staying these actions pending the
resolution of the motion to dismiss the Federal Securities Action. The Company believes the Federal Securities Action and the Shareholder
Derivative Actions are without merit and intends to vigorously defend itself.
However, the Company cannot predict the outcome of these actions with
certainty. The Company, along with numerous other defendants, is a defendant in an action
pending in the U.S. District Court for the Southern District of Florida. The
complaint in this action alleges the Company purchased motor vehicle records
from the State of Florida and used that data for marketing and other purposes
that are not permitted under the Federal Drivers Privacy Protection Act. The
plaintiffs are seeking liquidated damages of not less than $2,500 for each
affected member of a purported class, plus costs and attorneys fees. The
plaintiffs are also asking for injunctive relief to prevent further alleged
violations of the Federal Act. The Company cannot predict whether the
plaintiffs in this case will be successful in certifying their complaint as a
class action. The Company believes that it has meritorious defenses with
regard to the allegations made in this lawsuit and intends to vigorously defend
this action. NOTE 13  COMMITMENTS AND CONTINGENCIES:Future commercial commitments
In connection with the Companys government services, collection and ATM
placement activities, the Company posts surety bonds with state agencies
guaranteeing its performance of certain obligations related to the relevant
contracts or state requirements. The aggregate amount of such bonds outstanding
at December 31, 2003 was $14.4 million. 56




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##### 



At December 31, 2003, the Company provided guarantees of approximately $1
million on certain equipment lease payments for ACIs Canadian customers. These
guarantees were established prior to the Companys acquisition of ACI in 2001
and expire through December 2007. The Company would be required to make
payments under these guarantees in the event that the Canadian ACI customers
could not meet their own payment obligations. Through December 31, 2003 , the
Company has been required to make payments of approximately $128,000 pursuant
to these guarantees. The customers ATM equipment assets are utilized as
collateral on these guarantees. There are no amounts being carried as
liabilities for the Companys obligations under these guarantees. The Company uses time deposits to secure letters of credit it uses in the
ordinary course of business in India. The Company had $1.2 million in letters
of credit outstanding at December 31, 2003, mostly related to leases. These
letters of credit were secured by $1.3 million in cash collateral. The Company
has also pledged $0.5 million of time deposits as collateral related to the
performance on a customer contract and certain obligations related to local
government requirements. Contractual cash obligations
As of December 31, 2003, the Company had contractual cash obligations for
outsourcing and maintenance obligations in the aggregate amount of
approximately $89.5 million. Amounts due under these obligations are
approximately $42.6 million in 2004, $33.4 million in 2005 and $13.5 million in
2006. Other commitments
ACI has vault cash agreements with various financial institutions who provide
cash to certain of the ATMs owned or managed by the Company. Although some
portion of this cash may be physically located in the ATMs managed by the
Company, this cash is not included in cash and cash equivalents on the
Companys consolidated balance sheet because the Company does not take title to
the cash under the bailee/bailor relationship established by the agreements.
Based upon the daily outstanding balance of funds provided to the ATMs, ACI
generally pays a monthly fee ranging from prime, as defined, plus one half
percent up to prime plus 5%. The average monthly rate paid during 2003
approximated 7%. The Company indemnifies the financial institutions against any
loss of the cash in the ATMs. One of the agreements requires ACI to maintain a
security account equal to 1% of the daily outstanding balance. The agreements
may be terminated upon notice by either party and have various expiration dates
ranging from March 2004 to March 2005. Total cash provided pursuant to these
vault cash agreements was approximately $41 million at December 31, 2003. The Company seeks to maintain an adequate cash balance to ensure that it can
advance funds to its processing customers if unusual circumstances prevent the
Company from the timely processing of its settlement files. Although highly
infrequent, the Company has funded approximately $30 million under such a
circumstance in the past. The Company is evaluating means to reduce the need
for it to maintain these minimum cash balance levels, including the possibility
of obtaining an overnight credit facility to fund these obligations. Under a third party indemnification agreement, the Company agreed to indemnify
Deluxe in connection with any liabilities incurred by Deluxe after the Spin-Off
as a result of Deluxes purchase or lease of property or services for the
Companys benefit under any master agreement. The Company also agreed to
indemnify Deluxe in connection with any guarantees under which Deluxe
guaranteed the Companys performance of agreements with third parties. The
Company is obligated to indemnify Deluxe for any liability to the extent such
liability primarily relates to the past, present or future operation of the
Companys business or operations. No amounts have been paid to Deluxe under
this agreement. The Company and Deluxe also entered into a Cross-Indemnification Agreement
pursuant to which both the Company and Deluxe agreed to indemnify each other
against any liabilities arising out of the underwriting agreement related to
the Companys IPO, except insofar as any such liability arises out of a breach
of such agreement by the party seeking indemnification. No payments have been
made pursuant to this agreement. The Companys agreements with users of its products and services generally
contain indemnity clauses under which the Company agrees to indemnify its
customers and hold them harmless from and against liabilities arising from
claims of patent, copyright or other intellectual property infringement brought
by a third party related to those products or services. The Companys
agreements may also provide indemnification for claims relating to property
damage or personal injury resulting from the performance of services by the
Company or its subcontractors. 57




---



##### 



Historically, the Companys costs to defend lawsuits or settle claims relating
to these indemnity agreements have not been significant. The Companys amended and restated certificate of incorporation and by-laws
require it to indemnify its directors, officers, employees and other agents to
the fullest extent permitted by Delaware law. The Companys amended and
restated certificate of incorporation also permits the Company to secure
insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in such capacity, regardless of
whether the amended and restated certificate of incorporation would permit such
indemnification. These indemnification obligations are implicated with respect
to the directors and officers of the Company named as defendants in the Federal
Securities Actions and Shareholder Derivative Actions described above. NOTE 14  SUBSEQUENT EVENTS:
In January 2004, the Company acquired the assets of Benton Consulting Partners,
a provider of consulting services to the electronic payments industry, for
approximately $1.6 million. John B. (Jack) Benton, who began serving as the
Companys Senior Vice President, International, in February 2004, was a founder
and principal of Benton Consulting Partners. During 2003, the Company operated a call center in Mumbai, India under a
customer contract that included the customers right to acquire a minority
interest in, or sole ownership of, certain assets used by the Company in
performing call center operations for the customer as well as transition
assistance. In January 2004, the customer contract was amended to include
additional services and in conjunction with that amendment the customers right
to these assets was eliminated. 58




---



##### 



SUPPLEMENTAL INFORMATION: EFUNDS CORPORATION
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) 2003 Quarters Ended,(1)(in thousands except per share amounts)
    
    March 31
    
    June 30
    
    September 30
    
    December 31Net revenue
    
    $
    130,528
    
    
    $
    132,956
    
    
    $
    133,141
    
    
    $
    135,429Operating expenses
    
    
    123,951
    
    
    
    126,042
    
    
    
    120,961
    (2)
    
    
    122,390
    (3)Net income
    
    
    4,632
    
    
    
    5,113
    
    
    
    9,072
    
    
    
    10,091Per share of common stock:Net income  basic
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.19
    
    
    $
    0.21Net income  diluted
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.19
    
    
    $
    0.21
 2002 Quarters Ended,(1)(in thousands except per share amounts)
    
    March 31
    
    June 30
    
    September 30
    
    December 31Net revenue
    
    $
    133,997
    
    
    $
    133,471
    
    
    $
    143,995
    
    
    $
    131,644Operating expenses
    
    
    121,539
    
    
    
    127,958
    
    
    
    128,505
    (4)
    
    
    129,686Net income
    
    
    8,526
    
    
    
    4,476
    
    
    
    10,671
    
    
    
    881Per share of common stock:Net income  basic
    
    $
    0.18
    
    
    $
    0.10
    
    
    $
    0.23
    
    
    $
    0.02Net income  diluted
    
    $
    0.18
    
    
    $
    0.10
    
    
    $
    0.23
    
    
    $
    0.02
  (1)
    
    The sum of quarterly earnings per share may not equal annual earnings per
share, due to rounding.(2)
    
    Includes a credit of $2.3 million to reduce the reserve for additional
expected future losses on existing EBT contracts.(3)
    
    Includes a credit of $1.4 million to reduce the reserve for additional
expected future losses on existing EBT contracts.(4)
    
    Includes a credit of $2.0 million to reduce the reserve for additional
expected future losses on existing EBT contracts. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The disclosure called for by this item has been previously reported, see item
16(b) Reports on Form 8-K in this Annual Report. ITEM 9A. CONTROLS AND PROCEDURES The Companys management, under the supervision and with the participation of
its Chief Executive Officer and Chief Financial Officer, evaluated the
Companys disclosure controls and procedures as of December 31, 2003. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective. There
have been no significant changes in the internal controls related to financial
reporting that have materially affected, or are reasonably likely to materially
affect these controls since December 31, 2003. PART III ITEMS 10, 11, 12, AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS, AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Companys proxy statement, which will be filed with the Securities and
Exchange Commission on or before April 29, 2004, is incorporated by reference.
Information regarding executive officers of the Registrant appears on page 7 of
this Report. 59




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##### 



PART IV ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following financial statements, schedules and independent auditors
report and consent are filed with or incorporated by reference in this
report: Financial Statements
    
    Page in This ReportIndependent Auditors Reports
    
    
    31-32Consolidated Balance Sheets at December 31, 2003 and 2002
    
    
    33Consolidated Statements of Operations for each of the
three years in the period ended December 31, 2003
    
    
    34Consolidated Statements of Comprehensive Income for each of
the three years in the period ended December 31, 2003
    
    
    35Consolidated Statements of Stockholders Equity
    
    
    36Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2003
    
    
    37Notes to Consolidated Financial Statements
    
    
    38-58Supplemental Financial Information (Unaudited):Summarized Quarterly Financial Data
    
    
    59Schedule re: Valuation and Qualifying Accounts
    
    
    F-1
 Schedules other than those listed above are not required or are not applicable,
or the required information is shown in the consolidated financial statements
or notes. (b) Reports on Form 8-K On October 14, 2003, the Company furnished a report on Form 8-K which included,
pursuant to Items 4 and 7 of that form, an announcement of the Companys
certifying auditors decision not to stand for re-election as the Companys
independent auditors. On October 29, 2003, the Company furnished a report on Form 8-K which included,
pursuant to Items 7 and 9 of that form, a press release announcing the
Companys third quarter 2003 financial results. This press release included the
Companys condensed consolidated balance sheets at September 30, 2003 and
December 31, 2002, and its condensed consolidated statements of operations and
cash flows for the three and nine months ended September 30, 2003 and September
30, 2002. On November 21, 2003, the Company furnished a report on Form 8-K which
included, pursuant to Items 4 and 7 of that form, an announcement of the
Companys certifying auditors resignation and the engagement of KPMG LLP as
the Companys new independent accountant to audit the Companys financial
statements. On December 17, 2003, the Company furnished a report on Form 8-K which
included, pursuant to Items 4 and 7 of that form, an announcement of the
Companys dismissal of its independent auditor of iDLX Holdings, Inc. and the
engagement of KPMG India Private Limited as the new independent accountant to
audit the financial statements of iDLX Holdings, Inc. On December 30, 2003, the Company furnished a report on Form 8-K which
included, pursuant to Item 5 of that form, an announcement of the New York
Stock Exchanges approval of the Companys common stock for listing effective
January 2, 2004. 60




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##### 



The following exhibits are filed as part of or are incorporated in this report
by reference: EXHIBIT NUMBER
    
    DESCRIPTION
    
    METHOD OF FILING2.1
    
    Asset Purchase Agreement, dated as of October 17, 2003, by
and between eFunds Corporation, Access Cash Canada Co. and
eFunds International Limited and Oasis Technology Ltd.,
Oasis Technology USA Inc. and Oasis Technology UK Ltd.
    
    Filed herewith3.1
    
    Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 the (S-1) filed by the
Company with the Securities and Exchange Commission (the
Commission) on April 4, 2000, Registration No. 33-333992)
    
    *3.2
    
    Bylaws (incorporated by reference to Exhibit 3.2 to the S-1)
    
    *4.1
    
    Form of common stock certificate (incorporated by reference
to Exhibit 4.1 to Amendment No. 1 to the S-1 filed by the
Company with the Commission on May 15, 2000 (Amendment No.
1)
    
    *4.2
    
    Form of Rights Agreement by and between the Company and
Rights Agent, (incorporated by reference to Exhibit 4.2 to
Amendment No. 1)
    
    *4.3
    
    Certificate of Designations of Series A Participating
Preferred Stock (incorporated by reference to Exhibit 4.3
to the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000 (the June 2000 10-Q))
    
    *4.4
    
    Shareholder Agreement, dated as of November 19, 2003, by
and between the Company and MasterCard International
Incorporated
    
    Filed herewith10.1
    
    Assignment and Assumption Agreement, dated as of March 31,
2000, by and between the Company and Deluxe Corporation
(Deluxe) (incorporated by reference to Exhibit 10.1 to
the S-1)
    
    *10.2
    
    Third Party Indemnification Agreement, dated as of May 1,
2000, by and between the Company and Deluxe (incorporated
by reference to Exhibit 10.2 to Amendment No. 4 (Amendment
No. 4) to the S-1 filed by the Company with the Commission
on June 23, 2000 (Registration No. 333-33992)
    
    *10.3
    
    Tax Sharing Agreement, dated as of April 1, 2000, by and
between the Company and Deluxe (incorporated by reference
to Exhibit 10.3 to Amendment No. 1)
    
    *10.4
    
    Lease, dated as of May 15, 2000, by and between the Company
and Deluxe Financial Services, Inc. (DFSI) for property
located in Phoenix, Arizona (incorporated by reference to
Exhibit 10.7 to Amendment No. 1)
    
    *10.5
    
    Professional Services Agreement, dated as of April 1, 2000,
by and between the Company and Deluxe (incorporated by
reference to Exhibit 10.10 to Amendment No. 1)
    
    *10.6
    
    ONE Application Development and Support Agreement, dated as
of January 1, 2000, by and between the Company and DFSI
(incorporated by reference to Exhibit 10.11 to Amendment
No. 1)
    
    *10.7
    
    Government Services Indemnification Agreement, dated as of
May 1, 2000, by and between the Company and Deluxe
(incorporated by reference to Exhibit 10.17 to Amendment
No. 1)
    
    *10.8
    
    eFunds Corporation 2000 Stock Incentive Plan, as amended
(incorporated by reference to Exhibit 10.18 to the
Companys Annual Report on Form 10-K for the year ended
December 31, 2000 (the 2000 10-K))
    
    *
 61




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##### 



EXHIBIT NUMBER
    
    DESCRIPTION
    
    METHOD OF FILING10.9
    
    eFunds Corporation Stock Incentive Plan for Deluxe Conversions Awards,
as amended December 8, 2000 (incorporated by reference to Exhibit 4.1
to the Companys Registration Statement on Form S-8 filed on December
8, 2000, Registration No. 333-51536)
    
    *10.10
    
    Cross-Indemnification Agreement, dated as of June 26, 2000, by and
between the Company and Deluxe (incorporated by reference to Exhibit
10.23 to the Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000)
    
    *10.11
    
    eFunds Corporation Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.1 to the Companys Registration Statement on
Form S-8 filed on December 8, 2000, Registration Statement No.
333-51568)
    
    *10.12
    
    eFunds Corporation Annual Incentive Plan (incorporated by reference to
Exhibit 10.27 to the 2000 10-K)
    
    *10.13
    
    eFunds Corporation Deferred Compensation Plan (incorporated by
reference to Exhibit 4.1 to the Companys Registration Statement on
Form S-8 filed on December 8, 2000, Registration Statement No.
333-51564)
    
    *10.14
    
    eFunds Corporation Strategic Performance Incentive Plan
    
    Filed herewith10.15
    
    Change in Control Agreement, dated as of September 16, 2002, between
the Company and Paul F. Walsh (incorporated by reference to Exhibit
10.2 to the Companys Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002 (the September 2002 10-Q))
    
    *10.16
    
    Schedule identifying other Change in Control Agreements omitted
pursuant to Instruction 2 to Item 601 of Regulation S-K (incorporated
by reference to exhibit 10.2 to the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2003 (the March 2003 10-Q),
Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003 (the September 2003 10-Q) and
Exhibit 10.19 to the Companys Annual Report on form 10-K for the year
ended December 31, 2002 (the 2002 10-K))
    
    *10.17
    
    Executive Employment Agreement dated September 9, 2002 by and between
the Company and Paul F. Walsh (incorporated by reference to Exhibit
10.1 to the September 2002 10-Q)
    
    *10.18
    
    Non-Employee Director Deferred Compensation Plan (incorporated by
reference to Exhibit 10.38 to the 2000 10-K)
    
    *10.19
    
    Description of Compensation program for Non-Employee Directors
(incorporated by reference to Exhibit 10.10 to the March 2003 10-Q)
    
    *10.20
    
    Amendment, dated as of December 2000, to Tax Sharing Agreement, dated
effective April 1, 2000, by and between Deluxe and the Company
(incorporated by reference to Exhibit 10.42 to the 2000 10-K)
    
    *10.21
    
    Letter Agreement, dated November 19, 2001, extending the ONE
Application Development and Support Agreement, dated as of January 1,
2000, between Deluxe and the Company (incorporated by reference to
Exhibit 10.28 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2001 (the 2001 10-K))
    
    *10.22
    
    Transition Assistance Agreement, dated as of December 7, 2001, by and
between the Company and Steven F. Coleman (incorporated by reference
to Exhibit 10.29 to the 2001 10-K)
    
    *
 62




---



##### 



EXHIBIT NUMBER
    
    DESCRIPTION
    
    METHOD OF FILING10.23
    
    Transition Assistance Agreement, dated as of November 4, 2002, by and
between the Company and Clyde L. Thomas (incorporated by reference to
Exhibit 10.34 to the 2002 10-K)
    
    *10.24
    
    Schedule identifying additional Transition Assistance Agreements
omitted pursuant to Instruction 2 to Item 601 of Regulation S-K
(incorporated by reference to exhibit 10.1 to the March 2003 10-Q,
Exhibit 10.2 to the September 2003 10-Q and Exhibit 10.35 to the 2002
10-K)
    
    *10.25
    
    Amendment No. 1 to eFunds Deferred Compensation Plan Trust
(incorporated by reference to Exhibit 10.33 to the 2001 10-K)
    
    *10.26
    
    Amendment No. 2, dated January 21, 2003, to Change in Control
Agreement by and between the Company and Steven F. Coleman
(incorporated by reference to Exhibit 10.3 to the March 2003 10-Q)
    
    *10.27
    
    Amendment No. 2, dated January 21, 2003, to Change in Control
Agreement by and between the Company and Colleen McKeown Adstedt
(incorporated by reference to Exhibit 10.4 to the March 2003 10-Q)
    
    *10.28
    
    Restricted Stock Right Award Agreement, dated February 14, 2003 by and
between the Company and Steven F. Coleman (incorporated by reference
to Exhibit 10.5 to the March 2003 10-Q)
    
    *10.29
    
    Restricted Stock Right Award Agreement, dated February 14, 2003 by and
between the Company and Colleen McKeown Adstedt (incorporated by
reference to Exhibit 10.6 to the March 2003 10-Q)
    
    *10.30
    
    Mutual Release, dated February 7, 2003, by and between the Company and
Michael A. Spilsbury (incorporated by reference to Exhibit 10.7 to the
March 2003 10-Q)
    
    *10.31
    
    Release, dated January 2, 2003, by and between the Company and Paul W.
Finch (incorporated by reference to Exhibit 10.8 to the March 2003
10-Q)
    
    *10.32
    
    Employment Agreement, dated February 14, 2003, by and between the
Company and Thomas S. Liston (incorporated by reference to Exhibit
10.9 to the March 2003 10-Q)
    
    *10.33
    
    Purchase Agreement, dated January 16, 2003, by and between the Company
and Wheaton Franciscan Services, Inc. (incorporated by reference to
Exhibit 10.11 to the March 2003 10-Q)
    
    *10.34
    
    Executive Separation Agreement, dated as of August 22, 2003, by and
between the Company and Colleen M. Adstedt (incorporated by reference
to Exhibit 10.1 the September 2003 10Q)
    
    *14.1
    
    eFunds Corporation Ethics Policy (incorporated by reference to Exhibit
14.1 to the Companys current report on Form 8-K dated February 24,
2004)
    
    *21.1
    
    Subsidiaries of the Company
    
    Filed herewith23.1
    
    Consent of KPMG LLP
    
    Filed herewith23.2
    
    Consent of S.R. Batliboi & Associates
    
    Filed herewith23.3
    
    Consent of Deloitte & Touche LLP
    
    Filed herewith23.4
    
    Consent of Arthur Andersen & Associates (incorporated by reference to
Exhibit 23.3 to the 2002 10-K)
    
    *
 63




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##### 



EXHIBIT NUMBER
    
    DESCRIPTION
    
    METHOD OF FILING24.1
    
    Power of Attorney
    
    Filed herewith31.1
    
    Section 302 Certification by Mr. Paul F. Walsh
    
    Filed herewith31.2
    
    Section 302 Certification by Mr. Thomas S. Liston
    
    Filed herewith32.1
    
    Section 906 Certification by Mr. Paul F. Walsh and Mr. Thomas S. Liston
    
    Filed herewith99.1
    
    Risk Factors and Cautionary Statements
    
    Filed herewith99.2
    
    Independent Auditors Report of S.R. Batliboi & Associates
(incorporated by reference to Exhibit 99.2 to the 2002 10-K)
    
    *99.3
    
    Independent Auditors Report of Arthur Andersen (incorporated by
reference to Exhibit 99.3 to the 2002 10-K)
    
    *
   *
    
    Incorporated by reference 64




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##### 



Note to recipients of Form 10-K: Copies of exhibits will be furnished upon
written request and payment of the Companys reasonable expenses ($.25 per
page) in furnishing such copies. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Scottsdale, Arizona. eFUNDS CORPORATIONDate: March 15, 2004
    By:
    /s/ Paul F. WalshPaul F. WalshChairman of the Board of Directors and
Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated on March 15, 2004 SIGNATURE
    
    TITLEBy:
    
    /s/ Paul F. Walsh

Paul F. Walsh
    
    Chairman of the Board and Chief Executive
Officer
(Principal Executive Officer)By:
    
    /s/ Thomas S. Liston

Thomas S. Liston
    
    Chief Financial Officer
(Principal Financial and Accounting Officer)By:
    
    *
    
    DirectorRichard J. AlmeidaBy:
    
    *
    
    DirectorJohn J. (Jack) Boyle IIIBy:
    
    *
    
    DirectorJanet M. ClarkBy:
    
    *
    
    DirectorRobert C. NakasoneBy:
    
    *
    
    DirectorSheila A. PenroseBy:
    
    *
    
    DirectorJack Robinson*By:
    
    /s/ Paul F. Walsh
    
    DirectorPaul F. Walsh
Attorney-in-Fact
 65




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##### 



eFUNDS CORPORATION AND SUBSIDIARIES
SCHEDULE RE: VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002 and 2001 (in thousands)
    
    
    
    
    
    
    
    
    
    AdditionsBalance
    
    Charged to
    
    Charged to
    
    
    
    
    
    Balanceat beginning
    
    costs and
    
    other
    
    
    
    
    
    at end ofDescription
    
    Year
    
    of period
    
    expenses
    
    accounts
    
    Deductions(1)
    
    periodAllowance for Doubtful Accounts
    
    
    2003
    
    
    $
    3,012
    
    
    $
    899
    
    
    $
    307
    (2)
    
    $
    (1,069
    )
    
    $
    3,1492002
    
    
    
    4,791
    
    
    
    (182
    )(3)
    
    
    
    
    
    
    (1,597
    )
    
    
    3,0122001
    
    
    
    5,296
    
    
    
    1,755
    
    
    
    
    
    
    
    (2,260
    )
    
    
    4,791
  (1)
    
    Deductions from the reserve represent write-offs and recoveries of
amounts for which specific reserves had been previously established.(2)
    
    Amount represents the balance of allowance for doubtful accounts assumed
upon acquisition of Oasis Technology, Ltd.(3)
    
    During 2002, management changed its estimates related to the
collectibility of accounts receivable resulting in reduction to bad debt
expense of $2.5 million. F-1




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##### 



EXHIBIT INDEX EXHIBIT NUMBER
    
    DESCRIPTION OF EXHIBIT
    
    PAGE NO.2.1
    
    Asset Purchase Agreement, dated as of October 17,
2003, by and between eFunds International Limited and
Oasis Technology Ltd., Oasis Technology USA Inc. and
Oasis Technology UK Ltd.4.4
    
    Shareholder Agreement, dated as of November 19, 2003,
by and between the Company and MasterCard
International Incorporated10.14
    
    eFunds Corporation Strategic Performance Incentive Plan21.1
    
    Subsidiaries of the Company23.1
    
    Consent of KPMG LLP23.2
    
    Consent of S.R. Batliboi & Associates23.3
    
    Consent of Deloitte & Touche LLP24.1
    
    Power of Attorney31.1
    
    Section 302 Certification by Mr. Paul F. Walsh31.2
    
    Section 302 Certification by Mr. Thomas S. Liston32.1
    
    Section 906 Certification by Mr. Paul F. Walsh and Mr.
Thomas S. Liston99.1
    
    Risk Factors and Cautionary Statements
 F-2