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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-K (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004.
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to Commission file number 1-31951. 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.
 þ Yes o No 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. þ Indicate by check mark whether the registrant is an accelerated filer (as described in Rule 12b-2
of the Act). þ Yes o No The aggregate market value of the outstanding common equity of the registrant as of the last
business day of the registrants most recently completed second fiscal quarter was $840.0 million.
Affiliates of the Company beneficially owned, in aggregate, approximately 1.2 percent of such
shares. There were 49,420,658 shares of voting common stock with a par value of $0.01 outstanding
at February 28, 2005. Documents Incorporated by Reference




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEMS 10, 11, 12, 13 AND 14. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS, CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESEXHIBIT INDEXEX-10.9EX-10.10EX-10.11EX-10.12EX-10.13EX-10.20EX-10.24EX-21.1EX-23.1EX-23.2EX-23.3EX-24.1EX-31.1EX-31.2EX-32.1EX-99.1    Table of Contents  
 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 risk management, payment and outsourcing
solutions that strengthen our customers overall profitability through increased revenue, reduced
costs and improved operating efficiency and technology performance. We have historically delivered products and services through the four segments described below and
combinations of the products and services offered by these businesses. Our most profitable business
segments have been Electronic Payments, Risk Management and Global Outsourcing. As part of our
strategy to focus on our higher growth and high-margin businesses we sold our automated teller
machine (ATM) portfolio and concurrently entered into a five-year management services agreement
with the buyer in November 2004. We are providing the buyer with certain ATM management and
processing services under this managed services agreement. 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 Our principal focus is on issuers of transaction accounts, such as financial institutions,
financial services companies, electronic funds networks, retailers, government agencies,
telecommunications companies and other businesses. 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. During the historical periods
presented herein, our four principal business lines were:  
    Electronic Payments
    Risk Management
    Global Outsourcing
    ATM Management Following the sale of our ATM portfolio in November 2004, we stopped treating our ATM support
operations as a separate segment. Our ATM management and processing activities have now been
integrated into our Global Outsourcing and Electronic Payments segments. The business model of each of our segments is summarized below. 1




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Electronic Payments
Our Electronic Payments segment derives its revenue from processing electronic debit transactions
including electronic funds transfers (EFT), automated clearinghouse (ACH) and other payment
processing services. This segment also generates revenues from providing electronic benefit
transfer (EBT) services to government agencies and through the licensing, maintenance and support
of our EFT software. This segment had net revenues of $204 million in 2004, which represented
approximately 37% of our total net revenues in that year. We process transactions for national and regional ATM networks and financial institutions. 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 and national shared networks that provide access to devices owned by numerous device owners.
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 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
2004 our systems were available over 99.9% of the time. We are seeking to extend our processing
business by expanding our processing products to include stored value cards and more comprehensive
ACH solutions. We are also actively pursuing international processing opportunities. 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. Through this business, we drive or operate approximately 48,000
dedicated electronic benefits transfer terminals and approximately 9,000 retail terminals. We were providing services for 26 state and local governments at the end of 2004. 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 typically based on
a fixed price per recipient, variable volume models. In some jurisdictions, we serve as a
subcontractor. We have previously recorded loss contract reserves for some of our long-term government services
contracts. We have not recorded a provision for contract losses related to our long-term government
services contracts since 2001. During 2003, 2002 and 2001, we recorded net reductions to our
previous estimates for the expected future losses on our government services contracts of $3.7
million, $2.0 million and $2.5 million, respectively. 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. 2




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We license our electronic funds transfer software, the same software that drives our processing
business, to in-house processors, national and regional networks, financial institutions and
retailers in foreign countries and in the United States. Our electronic funds transfer software
runs on proprietary and open system computing platforms. We also provide related software
maintenance and support services. 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 at a point-of-sale device, physical branch location
or through the Internet. This segment had net revenues of $140 million in 2004, which represented
approximately 25% of our total net revenues for that year. This segment offers products and
services that help:  
    determine the likelihood and manage the investigation and risk 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), or
Shared Check Authorization Network, databases as well as from 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 19 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 8,500 financial
institutions. Financial institutions may access the service through a variety of online options
including the Internet 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. Our SCAN 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 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 and information (such as whether there have been previous payment
problems with the check writer or his or her account) from the database is provided to the merchant
so that they can decide whether they wish to accept the check. As of December 31, 2004, SCAN served
12 of the 20 largest retailers in the United States based on recent market data. More than 68,000
retail locations reported returned check activity to the SCAN network as of December 31, 2004. 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 check 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. We recently acquired ClearCommerce Corporation, a provider of fraud prevention and payment
processing solutions, to expand the product suite of our risk management division. 3




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Global Outsourcing
Our Global Outsourcing segment provides business process and
information technology (IT) outsourcing services. Net revenues
in this segment were $87 million in 2004, which represented 16% of our total net revenues for that
year. We provide a variety of customer account management services to the financial services, retail,
telecommunications and government sectors through our U.S. and India based delivery centers. Our
services include business process outsourcing (BPO) services such as account acquisition
assistance, credit card and brokerage support, call centers, loan processing, data entry,
collections, customer support and ATM management services as well as
IT development, systems integration and systems maintenance. We build long-term continuing
relationships with our clients, allowing them to significantly reduce the costs and improve the
quality and efficiency of their business processes. As of December 31, 2004, we had over 3,600 associates directly assigned 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 back office transactions and
providing call center support for the users of the products and services supplied by those
businesses. Historically, our former parent company has been the largest customer for our global outsourcing
offerings. We signed a five-year software development and business process outsourcing agreement
with Deluxe in 2000. If Deluxe failed to spend a minimum of $43 million for software development
services under this agreement in any year, it was 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, 2004, Deluxes spending attributable to the software development component of
this agreement was below this minimum threshold and 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 was originally scheduled to expire in March 2005, but it has
been extended for an additional year. There are no minimum spending targets or shortfall fees
associated with this extension period. ATM Management
Our ATM Management segment sold ATM equipment and provided ATM deployment, management and branding
services to retailers and financial institutions. Our net revenues in this segment were $121
million, which represented approximately 22% of our total net revenues, in 2004. As an independent
provider of ATMs, we placed ATMs with financial institutions, convenience, grocery, general
merchandise and drug stores, as well as gas stations, located throughout the United States and
Canada. We collected both ATM surcharge fees from consumers using ATMs deployed by us and
interchange fees from their banks. We also derived revenue from ATM equipment sales and maintenance
services. We sold our ATM portfolio in November 2004, and we ceased to consider our ongoing ATM
management activities as a separate segment after the consummation of this sale. 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
three remaining business segments. Our direct sales personnel 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; 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. Customer Support, Technology and Infrastructure
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 4




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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. Our products are configured to run on operating systems common in our industries. Our EFT 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. We operate two highly secure data centers in New Berlin, Wisconsin and Phoenix, Arizona with fault
tolerant transaction processing capabilities. 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 have been
devoting and plan to continue to devote significant efforts to enhancing the interoperability of
our data centers. Competition
We face intense competition from a number of companies and we expect that competition will
intensify as the movement towards increasing consolidation within the financial services industry
continues. The high levels of competition we experience have led to pricing pressures in all
aspects of our business. 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, VISA Debit
Processing Services, Fifth Third Processing Solutions, Metavante Corporation 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 and S1; and
    government service (EBT) providers including J.P. Morgan Chase and ACS. In the risk management market, our principal competitors include:  
    providers of fraud management data and software including Primary Payment Systems
(a subsidiary of First Data Corporation), Equifax, Experian, TransUnion and RiskWise (a
division of Lexis-Nexis of Reed Elsevier); 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 Spectramind/Wipro Ltd, Intelenet Global
Services Ltd., Progeon Ltd. (an Infosys Technologies company), WNS Global Services, Daksh eServices
(a subsidiary of IBM) and numerous other business process and IT outsourcing service providers. The principal factors on which we compete in the electronic payments industry are price and service
levels and the features and functionality associated with our EFT software and processing services.
Competition for our risk management products is based primarily on the quantity and quality of the
data 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 our service levels,
price and the expertise we have with the process being outsourced to us. We believe that we have competed effectively to date. In order to compete effectively in the future
we will be required to effectively manage our costs, respond promptly and effectively to changes in
the marketplace as well as innovations by our competitors and efficiently introduce new products,
services and combinations of our new and existing products and services that are reflective of the
current needs of our customers. 5




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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 5,500 full and part-time employees as of February 1, 2005. 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. Financial Information About Industry Segment; Financial Information About Domestic Operations and
Export Sales
Information about these matters appears in Note 12  BUSINESS SEGMENT INFORMATION to the
financial statements included in Part II of this Annual Report on Form 10-K. 6




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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 19, 2005. 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
    
    
    55
    
    
    
    2002Thomas S. Liston
    
    Chief Financial Officer
    
    
    66
    
    
    
    2002Tommy L. Andrews
    
    Senior Vice President, Corporate
Development
    
    
    54
    
    
    
    2003John B. (Jack) Benton
    
    Senior Vice President,
Solutions Group
    
    
    62
    
    
    
    2004Steven F. Coleman
    
    Senior Vice President, General
Counsel and Secretary
    
    
    46
    
    
    
    2000Kathleen Flanagan
    
    Senior Vice President, Global
Services
    
    
    45
    
    
    
    2002Rahul Gupta
    
    Senior Vice President, Payment
Account Solutions (Risk and
Electronic Payments)
    
    
    45
    
    
    
    2003Michele J. Langstaff
    
    Senior Vice President, Human
Resources and Administration
    
    
    50
    
    
    
    2003Clyde L. Thomas
    
    Chief Information Officer,
Senior Vice President,
Technology
    
    
    52
    
    
    
    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. Prior to these positions, Mr. Walsh held executive positions with Wright
Express Corporation (Wright Express), an information and financial services company, and BancOne, a
financial services company. 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. Mr. Liston will be retiring from his position
as our Chief Financial Officer on March 31, 2005. George W. Gresham, age 38, who has served as our
Vice President, Finance since January 2004 and served as our Corporate Controller from April 2002
to January 2004, will serve as the successor to Mr. Liston. 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 7




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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 served as our Senior Vice President, International from February 2004 until
January 2005, when he became our Senior Vice President, Solutions Group. In this role, Mr. Benton
manages our key enterprise accounts and strategic relationships and will oversee the development of
our consulting activities. 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. Kathleen Flanagan served as Senior Vice President, Division Executive-Global Outsourcing from
December 2002 until January 2005, when she became our Senior Vice President, Global Services. In
her current role, Ms. Flanagan is responsible for managing our outsourcing, ATM management and
international operations. 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 served as Senior Vice President, Division Executive-Risk Management from January 2003
until November 2004, when he also assumed responsibility for our Electronic Payments business. 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. 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. 8




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##### Table of Contents



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 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. 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. Our current network access agreement with Deluxe is scheduled to expire at the end of 2005. Under
this 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. We are seeking
to negotiate an extension of this agreement but we are unable to predict whether this contract will
be extended past its currently scheduled expiration date. 9




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##### Table of Contents



ITEM 2. PROPERTIES The following table sets forth a description of our principal facilities: Approximate
    
    Owned or LeaseLocation
    
    Square Feet
    
    Expiration Date
    
    FunctionScottsdale, Arizona
    
    
    57,500
    
    
    February 2012
    
    Corporate HeadquartersPhoenix, Arizona*
    
    
    94,400
    
    
    Owned
    
    Data centerNew Berlin, Wisconsin
    
    
    82,600
    
    
    Owned
    
    Data centerMilwaukee, Wisconsin
    
    
    82,500
    
    
    November 2013
    
    Software development centerWoodbury, Minnesota
    
    
    105,300
    
    
    September 2012
    
    Customer contact center,
DebitBureau, IT consulting and
ATM management servicesAustin, Texas
    
    
    19,100
    
    
    December 2007
    
    Retail solutionsChennai, India
    
    
    18,600
    
    
    January/June 2008
    
    Software development centerChennai, India
    
    
    48,600
    
    
    September 2008
    
    Software development centerMumbai, India
    
    
    52,500
    
    
    July 2007
    
    Outsourcing servicesMumbai, India
    
    
    32,600
    
    
    July 2006
    
    Outsourcing servicesMumbai, India
    
    
    49,300
    
    
    July 2006
    
    Outsourcing servicesGurgaon, India
    
    
    62,200
    
    
    Various January 2006 -
October 2007
    
    Outsourcing and ATM management
servicesToronto, Canada
    
    
    27,200
    
    
    October 2008
    
    Software development centerBothell, Washington
    
    
    24,700
    
    
    August 2006
    
    Vacant
   *
    
    Approximately 42,100 square feet of this facility is leased to a third party. We believe that additional space will be available at a reasonable cost to meet our expected
needs. 
 ITEM 3. LEGAL PROCEEDINGS The Company was previously 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 settled this investigation in November 2004 without admitting or
denying the SECs findings in respect of these restatements by agreeing to cease and desist from
any future violations of the Securities laws. The Company, its former chief executive and chief financial officers and its current chief
financial officer were defendants in a federal securities action (the Federal Securities Action)
that was pending in the U.S. District Court for the District of Arizona. The Consolidated Amended
Complaint (Complaint) filed in this Action alleged, 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. This Complaint was dismissed by order of the Court on
July 12, 2004. The plaintiffs appealed this order of dismissal to the Ninth Circuit Court of
Appeals on August 11, 2004. At the request of the parties, the Court vacated the original briefing
schedule of this appeal and the Court has not established a new briefing schedule. The plaintiffs
and the defendants in this action have reached a tentative settlement of this matter under which
the defendants would pay the class $2.55 million. The tentative settlement is subject to initial
documentation confirmatory discovery, final documentation and approval by the Court. Assuming that
this settlement is ultimately consummated by the parties and approved by the Court, the Company
expects that its insurance will cover the entire settlement amount. The Company is 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 in these actions 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. These actions were stayed pending the resolution of the motion to dismiss the
Federal Securities Action that is discussed above. The parties have agreed in principle to a
settlement of this litigation whereby the defendants will pay up to $150,000 of the plaintiffs
attorney fees. The tentative settlement is subject to confirmatory discover, documentation and
approval by the Court. Assuming that this settlement is ultimately consummated by the parties and
approved by the Court, the Company expects that its insurance will cover the entire settlement
amount. 10




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##### Table of Contents



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 that 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. In March 2004, the Company joined
in a motion to dismiss this case filed by a co-defendant and the Company filed its own further
motion to dismiss a portion of this case and a motion for summary judgment in June 2004. All of
these motions are pending before the Court. The Court has stayed all further proceedings in this
case pending the decision by the Eleventh Circuit of Appeals in Kehoe v. Fidelity Federal Bank &
Trust. 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. The Company is also subject to a variety of other claims and suits that arise from time to time in
the ordinary course of its business. 
 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, 2004. 
 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. Effective January 2, 2004, the shares of our Company were listed on the
New York Stock Exchange under the symbol EFD. The following table sets forth the high and low
prices of our common stock, as reported by the New York Stock Exchange and Nasdaq National Market,
for the calendar quarters indicated and the last sales price of our shares at the close of each
such quarter. 2004
    
    High
    
    
    Low
    
    
    CloseFirst Quarter
    
    $
    18.75
    
    
    $
    15.11
    
    
    $
    16.40Second Quarter
    
    $
    17.78
    
    
    $
    15.09
    
    
    $
    17.50Third Quarter
    
    $
    18.85
    
    
    $
    14.35
    
    
    $
    18.59Fourth Quarter
    
    $
    24.40
    
    
    $
    18.29
    
    
    $
    24.01
 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
 As of February 24, 2005, the closing price of our shares was $22.44 and we had 8,971 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. Stock Repurchase Plan
We have announced our intention to repurchase up to $100 million of our common stock by making
purchases in the open market, through negotiated arrangements and as block transactions in
accordance with the applicable laws at prices not to exceed $25 per share. 11




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Annual Meeting
The annual meeting of our stockholders will be held at 11:30 a.m. EST time, on May 19, 2005, at The
Charles Hotel, One Bennett Street, Cambridge, Massachusetts, 02138. 
 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 income
data shown below for each of the years in the five-year period ended December 31, 2004 and the
selected balance sheet data for each of the five years ended December 31, 2004, are derived from
our audited consolidated financial statements. Year Ended December 31,(in millions, except net income per share data)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000 (1)Statement of Income Data:Net revenue
    
    $
    552.1
    
    
    $
    532.1
    
    
    $
    543.1
    
    
    $
    537.2
    
    
    $
    439.3Operating expenses
    
    
    493.6
    
    
    
    493.3
    
    
    
    507.7
    
    
    
    486.3
    
    
    
    430.9Income from operations (2)
    
    
    58.5
    
    
    
    38.7
    
    
    
    35.4
    
    
    
    50.8
    
    
    
    8.4Other (expense) income  net
    
    
    (0.2
    )
    
    
    1.2
    
    
    
    0.7
    
    
    
    0.2
    
    
    
    (1.6
    )Income before income taxes (2)
    
    
    58.3
    
    
    
    39.9
    
    
    
    36.2
    
    
    
    51.0
    
    
    
    6.8Provision for income taxes
    
    
    (17.5
    )
    
    
    (11.0
    )
    
    
    (11.6
    )
    
    
    (17.7
    )
    
    
    (3.3
    )Net income
    
    $
    40.8
    
    
    $
    28.9
    
    
    $
    24.6
    
    
    $
    33.3
    
    
    $
    3.5Net income per share  basic
    
    $
    0.85
    
    
    $
    0.62
    
    
    $
    0.53
    
    
    $
    0.72
    
    
    $
    0.08Net income per share - diluted
    
    $
    0.83
    
    
    $
    0.61
    
    
    $
    0.53
    
    
    $
    0.70
    
    
    $
    0.08Shares used in computing:Net income per share  basic
    
    
    48.2
    
    
    
    46.9
    
    
    
    46.6
    
    
    
    46.0
    
    
    
    42.8Net income per share - diluted
    
    
    49.4
    
    
    
    47.2
    
    
    
    46.7
    
    
    
    47.4
    
    
    
    42.9
   (1)
    
    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.(2)
    
    Amounts may not sum due to rounding. December 31,(in millions)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance Sheet Data:Cash and cash equivalents
    
    $
    274.5
    
    
    $
    104.5
    
    
    $
    119.5
    
    
    $
    101.9
    
    
    $
    78.7Short-term
investments
    
    
    88.1
    
    
    
    53.7
    
    
    
    
    
    
    
    
    
    
    
    Working capital
    
    
    343.2
    
    
    
    162.7
    
    
    
    149.8
    
    
    
    118.6
    
    
    
    70.9Total assets
    
    
    643.0
    
    
    
    512.3
    
    
    
    459.4
    
    
    
    442.9
    
    
    
    389.1Long-term debt, excluding current portion
    
    
    3.6
    
    
    
    1.7
    
    
    
    1.3
    
    
    
    2.5
    
    
    
    2.2Stockholders equity
    
    
    474.2
    
    
    
    401.7
    
    
    
    363.5
    
    
    
    334.3
    
    
    
    286.2
 12




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Non-GAAP Financial Measures  Return on Invested Capital
Return on invested capital (ROIC) is a performance measure that we use to evaluate whether our
shareholders are receiving an attractive return on their investment in our Company. Among other
things, we consider ROIC when we are evaluating whether to purchase a capital asset, acquire a
business, invest resources in a project or enter into customer and vendor arrangements. The numerator in our calculation of ROIC uses net operating profit based on Accounting Principles
Generally Accepted in the United States (GAAP) adjusted for certain non-GAAP items (net operating
profit after tax, or NOPAT). The denominator in our calculation of ROIC uses our average total
assets for the trailing four quarters based on GAAP adjusted for certain non-GAAP items (invested
capital). We believe including certain non-GAAP adjustments in the NOPAT and invested capital
component of the calculation ensures that the ROIC measure reflects return on capital without
considering whether our business is financed with debt or equity. Our calculation of ROIC may not
be comparable to similarly titled measures reported by other companies and the calculation may
include amounts that may or may not be calculated from GAAP amounts presented in the financial
statements. ROIC should be considered in addition to, but not as a substitute for or superior to, the published
financial measures we present and prepare in accordance with GAAP. We would consider return on
assets (ROA) to be the most directly comparable GAAP financial measure to our calculation of ROIC.
Presented below is our calculation of ROIC as well as a reconciliation of ROIC to a comparable ROA
measure. ROIC
    
    
    ROAYear Ended December 31,
    
    
    Year Ended December 31,(amounts in millions)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003NumeratorAdjustments to reconcile net income to NOPAT:Income from operations
    
    $
    58.5
    
    
    $
    38.7
    
    
    $
    58.5
    
    
    $
    38.7Other
(expense) income - net
    
    
    
    
    
    
    
    
    
    
    (0.2
    )
    
    
    1.2Add: Implied interest on future obligations1
    
    
    5.0
    
    
    
    4.1
    
    
    
    
    
    
    
    63.5
    
    
    
    42.8
    
    
    
    58.3
    
    
    
    39.9Provision
for income
taxes2
    
    
    (19.1
    )
    
    
    (11.8
    )
    
    
    (17.5
    )
    
    
    (11.0
    )$
    44.4
    
    
    $
    31.0
    
    
    $
    40.8
    
    
    $
    28.9DenominatorAverage total
assets3
    
    $
    564.4
    
    
    $
    486.3
    
    
    $
    564.4
    
    
    $
    486.3Less average
cash, cash equivalents and short-term investments3
    
    
    (225.7
    )
    
    
    (156.0
    )
    
    
    
    
    
    
    Less average
current liabilities excluding debt4
    
    
    (95.7
    )
    
    
    (83.3
    )
    
    
    
    
    
    
    Plus average
cash deployed in the business5
    
    
    46.8
    
    
    
    39.3
    
    
    
    
    
    
    
    Plus average net present value of future obligations1
    
    
    110.3
    
    
    
    101.5
    
    
    
    
    
    
    
    $
    400.1
    
    
    $
    387.8
    
    
    $
    564.4
    
    
    $
    486.3Return on invested capital
    
    
    11.1
    %
    
    
    8.0
    %
    
    
    7.2
    %
    
    
    5.9
    %
   1
    
    Implied interest on future obligations represents the assumed implicit interest
charge on the average present value of the future obligations using the Companys assumed
implicit interest rate (approximately 5% and 4% for 2004 and 2003, respectively). The
average present value of future obligations represents the average for the trailing four
quarters of the present value of total operating lease and vendor obligations discounted at
the Companys assumed implicit interest rate.2
    
    The tax rates used for this calculation are equal to our annualized effective tax
rates for the periods shown of 30.0% for 2004 and 27.5% for 2003.3
    
    Average total assets, cash, cash equivalents and
short-term investments is the average of the amounts shown
in the Companys financial statements at the end of the four quarters preceding the date of
the calculation.4
    
    Average current liabilities excluding debt is the average of the current
liabilities recorded on the Companys balance sheet (excluding the current portion of
long-term debt) at the end of the four quarters preceding the date of the calculation.5
    
    Average cash deployed in the business is calculated as the average balance at the
end of the four fiscal quarters preceding the date of the calculation of the total amount
of cash we had in ATMs and India plus the cash we had advanced to support the settlement
obligations of our processing customers. 13




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following 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 2004 and certain trends, risks
and challenges. We then discuss our results of operations for 2004 and 2003 compared to 2003 and
2002, 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 to an
understanding of our reported financial results and our business outlook for 2005. 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 the date of this Annual Report. EXECUTIVE OVERVIEW Our Business
Our goal is to enable a better way for trusted commerce by delivering risk management, payment and
outsourcing 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, telecommunications companies
and other businesses. In evaluating our financial condition and operating results, our management
focuses on revenues, operating income, return on invested capital (ROIC) and cash flows. During the historical periods presented herein, our four principal business lines were:  
    Electronic Payments
    Risk Management
    Global Outsourcing
    Automated Teller Machine (ATM) Management Our most profitable business segments were Electronic Payments, Risk Management and Global
Outsourcing. On November 19, 2004, we sold the portfolio of ATM machines and merchant contracts (the ATM
Portfolio) associated with our former ATM Management segment and entered into a five year Master
Services Agreement (MSA) with the buyer. The ATM Portfolio represented a significant component of
our ATM Management segment and we are not presenting our ATM management business as a separate
operating segment in periods subsequent to the consummation of this transaction. Pursuant to the
MSA, we are providing processing, help desk, cash management, and other services to the buyer. The
processing service revenues and related costs of the MSA have been reported within our Electronic
Payments segment and the ATM management service revenues and related costs have been reported
within our Global Outsourcing segment. Amounts received by us in connection with the sale of the ATM Portfolio and the MSA exceeded the
book value of the ATM Portfolio by approximately $48 million. These excess proceeds were recorded
as a deferred gain and are being amortized as a reduction in the
other operating costs of our Global Outsourcing segment on a straight-line
basis over the initial five year term of the MSA beginning on the consummation date of that
agreement. As of December 31, 2004, the total deferred gain related to the excess proceeds was $47
million of which $10 million was recorded as current deferred revenues and gains and the remainder
was included in long-term deferred gains. The amortization of the deferred gain will increase the
operating income of our Global Outsourcing segment by approximately $10 million per year during the
five year term of that agreement. We have, however, modified
our prior approach to accounting for this agreement and we will not be
recognizing any revenues as a result of this amortization in future
periods. The business model of each of our segments is summarized below. 14




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##### Table of Contents



Electronic Payments
This segment derives its revenue based upon our customers needs to process electronic
transactions. The majority of this segments revenue is derived from processing debit transactions
that originate at an ATM or point-of-sale device. We also derive revenue from providing electronic
benefit transfer (EBT) services to government agencies. The remaining revenue from this segment is
derived from the licensing, maintenance and support of our electronic funds transfer (EFT)
software. 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 differences 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 information technology (IT) personnel. The costs we incur for technology improvement are
necessary for us to ensure our products are continuously enhanced to provide our customers with
up-to-date processing capabilities. We are also required to incur compliance costs in connection
with national and regional network requirements. Other operating expenses include
telecommunications costs to support the transmission of electronic debit transactions and
settlement. We focus on increasing the recurring revenue base of this business through, among
other things, the retention of our current EFT and EBT processing customers and the acquisition of
new processing relationships. Expanding our software sales, enhancing our processing product suite
and establishing a processing presence in foreign markets are also areas of management emphasis. Risk Management
This segment derives its revenue from database inquiries from financial institutions and retailers
seeking to comply with regulations 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 2004 and the balance of the segments revenue was derived
from retail customers using our check verification service. Operating costs generally include data
acquisition and analytic development costs, the cost of technology, 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 and customer set. 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 were derived from a variety of business process outsourcing (BPO) services to the financial
services, retail, telecommunications and government sectors through our U.S. and India based
delivery centers. Our BPO services include account acquisition assistance, credit card and
brokerage support, call centers, loan processing, data entry and systems maintenance. Operating
costs in this segment are primarily related to employee expense, telecommunications and facilities
costs. Our principal goal for this business is to expand its customer base in our core target
markets of financial services, retail and telecommunications companies. Additionally, we
continually pursue opportunities to expand our service offerings to existing customers. ATM Management
Our ATM Management segment derived its revenues from the use, sale and maintenance of ATMs.
Surcharge and interchange revenue represented the majority of our revenue from this segment in
2004. Equipment sales were non-recurring and, along with branding fees, represented a minority of
the revenue in this segment. Operating costs in this segment primarily included processing and
telecommunication costs, the cost of the equipment we sold and the residual payments we made to the
merchants where the ATMs we managed were deployed. We sold our ATM Portfolio during the fourth
quarter of 2004 and we have not treated our ATM management activities as a separate operating
segment after this sale. Key Events in 2004  
    We sold our ATM Portfolio and entered into a five year Master Services Agreement under
which we provide ATM processing and management services to the buyer;
    We reached a final settlement with respect to the investigation by the Securities and
Exchange Commission (SEC) regarding the restatement of our prior period financial
statements in 2002;
    The U.S. District Court dismissed a federal securities action that had been filed
against us related to these restatements; 15




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##### Table of Contents




    Richard J. Almeida became the Chairman of the Audit Committee of our Board of Directors,
succeeding Jack Robinson;
    Hatim A. Tyabji, Richard J. Lehmann and William J. Ryan joined our Board of Directors;
    We transferred the listing of our common stock to the New York Stock Exchange;
    We acquired Penley Inc., which provides identity verification services to financial
institutions, Loss Control Solutions, which offers fraud investigation case management
software, and Benton Consulting Partners, a provider of consulting services to the
electronic payments industry;
    We executed an EFT software license with the United States Postal Service;
    Through our alliance with MasterCard, we signed a contract with a Tier I financial institution; and
    The open systems software provider we acquired during 2003 did not meet our expectations. 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
operations. We would identify the more material positive and negative trends affecting our business
as the following:  
    increased fraud and identity theft and regulatory requirements are driving a sustained
need for risk management products, although the rate of growth in this business is slowing
as many customers and potential customers have already implemented required screening
procedures;
    revenues from our legacy check verification business have been declining. We expect this trend to continue;
    there continues to be a migration from the use of traditional
paper checks to electronic payments and we are seeing an improving pipeline for our electronic payment processing business;
    we expect our revenues from our government service EBT business to decline significantly in 2005;
    our EFT software sales have tended to relate to product enhancements, customization and
maintenance as opposed to new installations;
    increased outsourcing as a means to control costs is driving demand for offshore
outsourcing services as well as an increased level of interest in developing expanded
offshore capabilities by industry participants;
    the use of offshore outsourcing services continues to be a point of political debate;
    our India operations continue to experience pressure on compensation costs as competition increases;
    our revenues from existing IT outsourcing customers declined substantially in 2004 and
will likely continue to decline;
    our earnings per share have increased proportionately more than our revenues because we
have effectively managed our costs, and we expect this trend to continue; and
    consolidation in industries we serve is resulting in increasing competition and pricing
pressures. 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:  
    Estimates of future financial results are inherently unreliable.
    Our ability to expand through acquisitions involves risks and may not be successful.
    Consolidation in the industries we serve may adversely affect our ability to sell our products and services.
    We are unable to predict the results of the purported class action lawsuit filed in Florida.
    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 could harm our business and reputation and result in
the loss of customers.
    Legislation or regulation would 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. 16




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##### Table of Contents




    Changes in India tax laws could adversely affect our results of operations.
    We face termination and compliance risks with respect to our government contracts and we
expect our revenues from this business to decline in upcoming periods.
    We may be unable to protect our intellectual property rights.
    Provisions in our charter documents and Delaware law may delay or prevent a change in
control in our Company that you may consider favorable. RESULTS OF OPERATIONS The following table presents our consolidated financial results for the three years ended December
31, 2004: Year
Ended December 31,
    
    
    % Change(dollars in millions)
    
    2004
    
    
    2003
    
    
    2002
    
    

04-03
    
    
    03-02Net revenue
    
    $
    552.1
    
    
    $
    532.1
    
    
    $
    543.1
    
    
    
    4
    %
    
    
    (2
    )%Operating expenses:Processing, communication and service costs
    
    
    217.7
    
    
    
    230.7
    
    
    
    226.2
    
    
    
    (6
    )
    
    
    2Employee costs
    
    
    189.8
    
    
    
    179.9
    
    
    
    185.7
    
    
    
    6
    
    
    
    (3
    )Depreciation and amortization
    
    
    36.2
    
    
    
    35.4
    
    
    
    37.0
    
    
    
    2
    
    
    
    (4
    )Other operating costs
    
    
    46.3
    
    
    
    46.8
    
    
    
    44.3
    
    
    
    (1
    )
    
    
    6Restructuring, asset impairment and other charges
    
    
    3.1
    
    
    
    4.2
    
    
    
    16.5
    
    
    
    (26
    )
    
    
    (75
    )Contract loss provision (reversal)
    
    
    0.5
    
    
    
    (3.7
    )
    
    
    (2.0
    )
    
    
    *
    
    
    
    (85
    )Total operating expenses
    
    
    493.6
    
    
    
    493.3
    
    
    
    507.7
    
    
    
    
    
    
    
    (3
    )Income from operations
    
    
    58.5
    
    
    
    38.7
    (1)
    
    
    35.4
    
    
    
    51
    
    
    
    9Other (expense) income  net
    
    
    (0.2
    )
    
    
    1.2
    
    
    
    0.7
    
    
    
    *
    
    
    
    71Income before income taxes
    
    
    58.3
    
    
    
    39.9
    
    
    
    36.2
    (1)
    
    
    46
    
    
    
    10Provision for income taxes
    
    
    (17.5
    )
    
    
    (11.0
    )
    
    
    (11.6
    )
    
    
    59
    
    
    
    (5
    )Net income
    
    $
    40.8
    
    
    $
    28.9
    
    
    $
    24.6
    
    
    
    41
    
    
    
    17
   (1)
    
    Amounts do not sum due to rounding.*
    
    Represents an increase or decrease in excess of 100%. Net Revenue The following table presents the net revenue by reportable segment and for the Company as a
whole for the three years ended December 31, 2004. As discussed in Note 12 of the Notes to the
Consolidated Financial Statements, prior year amounts have been reclassified to conform with
current period classification. Year
Ended December 31,
    
    
    % Change(dollars in millions)
    
    2004
    
    
    2003
    
    
    2002
    
    
    04-03
    
    
    03-02Electronic PaymentsEFT processing
    
    $
    111.0
    
    
    $
    102.2
    
    
    $
    122.3
    
    
    
    9
    %
    
    
    (16
    )%Government services (EBT)
    
    
    56.4
    
    
    
    50.3
    
    
    
    55.4
    
    
    
    12
    
    
    
    (9
    )Software sales
    
    
    36.2
    
    
    
    31.1
    
    
    
    33.0
    
    
    
    16
    
    
    
    (6
    )203.6
    
    
    
    183.6
    
    
    
    210.7
    
    
    
    11
    
    
    
    (13
    )Risk ManagementFinancial institution products
    
    
    121.6
    
    
    
    108.7
    
    
    
    92.4
    
    
    
    12
    
    
    
    18Retail products
    
    
    18.5
    
    
    
    20.9
    
    
    
    31.6
    
    
    
    (11
    )
    
    
    (34
    )140.1
    
    
    
    129.6
    
    
    
    124.0
    
    
    
    8
    
    
    
    5Global OutsourcingBPO
    
    
    54.1
    
    
    
    39.3
    
    
    
    40.6
    
    
    
    38
    
    
    
    (3
    )IT services
    
    
    33.0
    
    
    
    39.8
    
    
    
    52.2
    
    
    
    (17
    )
    
    
    (24
    )87.1
    
    
    
    79.1
    
    
    
    92.8
    
    
    
    10
    
    
    
    (15
    )ATM Management*
    
    
    121.3
    
    
    
    139.8
    
    
    
    115.6
    
    
    
    (13
    )
    
    
    21Total net revenue
    
    $
    552.1
    
    
    $
    532.1
    
    
    $
    543.1
    
    
    
    4
    
    
    
    (2
    )
   *
    
    Includes revenues through November 18, 2004. In conjunction with our enhanced segment revenue presentation, customer reimbursed fees have
been included in the related product lines within the Electronic Payments and Global Outsourcing
segments. Product line amounts in prior periods have 17




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##### Table of Contents



been reclassified to conform with this presentation. Customer reimbursed fees represent certain
telecommunications costs, network fees and travel, maintenance and repair costs that are billed to
and reimbursed by our customers. Electronic Payments
Electronic Payments segment revenues increased during 2004 as compared to 2003 because of:  
    higher EFT transaction volumes and a corresponding increase in customer reimbursed fees;
    an increase in EBT processing revenues from contracts that commenced in 2003; and
    an increase in software revenues and the fees for software related maintenance and
support due to our acquisition of an EFT software provider in late 2003. The following table provides further detail regarding the revenue we generated from our software
business during the periods indicated: Year Ended December 31,(in millions)
    
    2004
    
    
    2003
    
    
    2002License fees
    
    $
    7.0
    
    
    $
    7.9
    
    
    $
    12.8Maintenance
    
    
    20.3
    
    
    
    15.2
    
    
    
    13.4Software services
    
    
    8.9
    
    
    
    8.0
    
    
    
    6.8$
    36.2
    
    
    $
    31.1
    
    
    $
    33.0
 We expect our Electronic Payments segment revenues to improve in 2005 as compared to 2004
primarily due to higher revenues generated from our EFT processing services and software sales.
These increases will be somewhat offset by a decrease in our government services revenues due to
contract expirations. The decline in our Electronic Payments segment revenues in 2003 as compared to 2002 was due to the
expiration of certain EFT processing and government service contracts in late 2002. Competitive
pricing pressures also contributed to the decline in EFT processing revenues. Our software license
sales also declined, although our acquisition of an EFT software company in November of 2003
reduced the amount of this decline somewhat. Risk Management
The growth in the revenues from our Risk Management segment in 2004 as compared to 2003 is due to
increased revenues from our ChexSystems(SM) products. This increase was driven by an increase in
inquiries associated with new debit account openings and increased utilization rates by our
financial institution customers in response to regulatory requirements. This growth was somewhat
offset by a decrease in revenues from our retail check verification products due to pricing
concessions and customer attrition caused by declining check volumes. Revenues for this segment are expected to increase in 2005 as compared to 2004 due to increased
revenues from our ChexSystems(SM) suite of products and our retail products. Growth in our retail
risk management business should be driven by incremental revenues generated from our acquisition of
ClearCommerce Corporation. The increase in revenues in this segment in 2003 as compared to 2002 was also the result of higher
ChexSystems(SM) revenues due to inquiry volume growth and an increase in customer screening by
financial institutions in response to the requirements of the USA Patriot Act. Retail check
verification revenues were lower in 2003 than 2002 due to price concessions and customer attrition. Global Outsourcing
Revenues from our Global Outsourcing segment increased in 2004 as compared to 2003 due to increased
service volumes and the receipt of a full year of revenue from new customer contracts that
originated during the latter half of 2003 and in 2004. We also recorded a shortfall fee during the
fourth quarter of 2004 from our largest IT services customer because the customer failed to reach
certain contractually required minimum spending target levels. This fee somewhat offset a
substantial reduction in the IT services revenues we received from this customer in 2004 as
compared to 2003. We expect revenues in the Global Outsourcing segment to improve in 2005 as compared to 2004 through
the expansion of our customer base and the provision of additional services to existing customers.
These increases in revenues are expected to be partially offset by continued declines in our IT
services revenues. 18




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##### Table of Contents



Lower IT services revenues resulted in an overall decline in our global outsourcing business
revenue in 2003 as compared to 2002. BPO revenues in 2003 were consistent with revenues in 2002 as
increases in revenues related to business outsourcing services were offset by a decline in our
collection service revenues. ATM Management
The decline in revenues from the ATM Management segment in 2004 is primarily due to the sale of our
ATM Portfolio in November of 2004 and, to a lesser extent, a general decline in transaction volumes
as compared to 2003. Revenues from ATM management services are presented in the Global Outsourcing
segment subsequent to the consummation of the ATM Portfolio sale. ATM management revenues increased in 2003 as compared to 2002 due to our receipt of a full year of
revenue from acquisitions we completed in this segment in 2002 as well as from an increase in
equipment sales and branding revenues. 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, 2004: Year Ended December 31,
    
    
    % Change(dollars in millions)
    
    2004
    
    
    2003
    
    
    2002
    
    
    04-03
    
    
    03-02Operating income (loss)Electronic payments
    
    $
    32.7
    
    
    $
    40.5
    
    
    $
    50.6
    
    
    
    (19
    )%
    
    
    (20
    )%Risk management
    
    
    50.0
    
    
    
    29.5
    
    
    
    11.8
    
    
    
    69
    
    
    
    *Global outsourcing
    
    
    18.6
    
    
    
    6.1
    
    
    
    17.0
    
    
    
    *
    
    
    
    (64
    )ATM management
    
    
    (0.4
    )
    
    
    0.2
    
    
    
    (4.3
    )
    
    
    *
    
    
    
    *Corporate
    
    
    (42.4
    )
    
    
    (37.6
    )
    
    
    (39.6
    )
    
    
    (13
    )
    
    
    5Total operating income
    
    $
    58.5
    
    
    $
    38.7
    
    
    $
    35.4
    (1)
    
    
    51
    
    
    
    9
   *
    
    Represents an increase or decrease in excess of 100%.(1)
    
    Amount does not sum due to rounding. Electronic Payments
The decline in the margins associated with our electronic payments business in 2004 as compared to
2003 is primarily attributable to an increase in software development and support costs that we
experienced last year. This increase relates to the operational costs associated with the open
systems EFT software business we acquired in late 2003 and our efforts to integrate this software
with our legacy software products. The decline in our Electronic Payments segment margins in 2004
as compared to the prior year is also due to the reversal in 2003 of an EBT contract loss reserve
which resulted in a non-recurring benefit to the segment of approximately $3.7 million in 2003. No
such benefit occurred in 2004. To the contrary, we recorded a $0.5 million loss contract charge in
the first half of that year. These declines in margins were partially offset by margin
improvements that resulted from processing more EFT and EBT transactions using a relatively fixed
cost infrastructure. Our operating margins in the Electronic Payments segment are expected to increase in 2005 as
compared to 2004 because the effect of anticipated increases in our EFT processing revenues and
software sales should offset the impact of the expected decline in our EBT revenues due to contract
expirations. The decline in the margins of our electronic payments business in 2003 as compared to 2002 was
largely due to pricing concessions associated with contract renewals. An increase in
performance-based compensation expense as well as a decline in higher margin software revenues also
contributed to the decline in margins. Risk Management
The improvement in Risk Management segment margins in 2004 as compared to the prior year is due to
the increase in revenues from our ChexSystems(SM) suite of products. This improvement is also
attributable to cost reductions realized through increased utilization of our India operations for
contact center and development activities. We expect margins in our Risk Management segment to improve slightly in 2005 as compared to 2004. 19




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##### Table of Contents



The increase in margins in 2003 as compared to 2002 was achieved through the elimination of low
margin product lines and reducing expenses related to employee and third party service provider
costs through cost control initiatives, including the transition of contact center work to our
India operations. Additionally, certain restructuring costs and asset impairment charges of
approximately $5 million incurred by the segment in 2002 were not incurred in 2003. Global Outsourcing
An increase in BPO revenues and improved productivity and capacity utilization drove an increase in
our Global Outsourcing segment margins in 2004 as compared to 2003. This increase in margins was
partially offset the decline in IT services revenues. Margins for our Global Outsourcing segment in 2005 are expected to increase from 2004 due the
impact of the gain amortization associated with the Master Services Agreement we signed with the
buyer of our ATM Portfolio. This impact will be somewhat offset by anticipated declines in the
revenues we receive under our largest IT services contract. The decrease in margins in 2003 as compared to 2002 was attributable to a decline in revenues
derived from the provision of IT services to our largest customer, pricing concessions on existing
contracts and an increase in employee compensation costs. ATM Management
Consistent with our expectations, the margins derived from our ATM Management segment remained
relatively consistent during 2004 as compared to 2003. The increase in margins in 2003 as compared
to 2002 was primarily due to an improvement in equipment sales margins and the expansion of the ATM
branding services we provided to our customers. The operating results of the ATM management
business are presented in with the Global Outsourcing segment subsequent to the sale of our ATM
Portfolio in November 2004. Corporate
Unallocated corporate overhead includes, among other things, executive leadership costs, investor
relations, and certain shared legal, consulting, accounting, finance and technology expenses. The
increase in corporate overhead costs in 2004 as compared to 2003 is primarily due to an increase in
legal and other expenses related to the SEC investigation and indemnification obligations
associated with its resolution as well as higher expenses associated with and complying with the
requirements of Section 404 of the Sarbanes-Oxley Act. Corporate overhead costs in 2005 are expected to decline from the levels seen in 2004 due to the
resolution of the SEC investigation and ongoing cost reduction efforts. The decrease in corporate overhead expenses in 2003 as compared to 2002 is due to the $6.8 million
in severance benefits and lease impairment charges that were incurred in 2002. No such charges
were incurred in 2003. Additionally, corporate overhead costs were higher 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. Operating Expenses Operating expenses for the three years ended December 31, 2004 were as follows: Year Ended December 31,
    
    
    % Change(dollars in millions)
    
    2004
    
    
    2003
    
    
    2002
    
    
    04-03
    
    
    03-02Operating expenses:Processing, communication and service costs
    
    $
    217.7
    
    
    $
    230.7
    
    
    $
    226.2
    
    
    
    (6
    )%
    
    
    2
    %Employee costs
    
    
    189.8
    
    
    
    179.9
    
    
    
    185.7
    
    
    
    6
    
    
    
    (3
    )Depreciation and amortization
    
    
    36.2
    
    
    
    35.4
    
    
    
    37.0
    
    
    
    2
    
    
    
    (4
    )Other operating costs
    
    
    46.3
    
    
    
    46.8
    
    
    
    44.3
    
    
    
    (1
    )
    
    
    6Restructuring, asset impairment and other
charges
    
    
    3.1
    
    
    
    4.2
    
    
    
    16.5
    
    
    
    (26
    )
    
    
    (75
    )Contract loss provision (reversal)
    
    
    0.5
    
    
    
    (3.7
    )
    
    
    (2.0
    )
    
    
    *
    
    
    
    (85
    )Total operating expenses
    
    $
    493.6
    
    
    $
    493.3
    
    
    $
    507.7
    
    
    
    
    
    
    
    (3
    )
   *
    
    Represents an increase or decrease in excess of 100%. 20




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##### Table of Contents



Processing, communication and service costs
This category includes the cost of transaction processing, telecommunications, computer equipment
and promotional services. This category also included the residual payments we made to the
occupants of the properties where the ATMs that we owned or managed prior to the sale of our ATM
Portfolio were located. The decrease in processing, communication and service costs in 2004 is primarily due to lower
residual payments and other ATM operational costs due to the sale of our ATM Portfolio in late
2004. Additional cost reductions were realized from greater utilization of our India based
resources. This decline in costs was partially offset by an increase in customer reimbursed fees. Processing, communications and service costs are expected to be lower in 2005 as compared to 2004
due to the sale of the ATM Portfolio as well as cost reduction initiatives. During 2003, processing, communication and service costs increased as compared to 2002 due to
higher ATM processing and service expenses associated with a full year of processing for the ATM
network acquisitions that we completed in 2002. These additional costs were partially offset by a
decline in third party expenses due to the migration of support services for our risk management
business to our India operations as well as a reduction in equipment rental, maintenance and
telecommunications costs achieved through contract renegotiations. Employee costs
Expenses in this category represent employee compensation, payroll taxes, medical costs and other
employee related costs. The increases in these costs in 2004 as compared to 2003 are attributable
to an increase in our performance based compensation costs, including commissions, as well as an
increase in employee headcount in our BPO business. Company-wide headcount increased to 5,500
employees at December 31, 2004 from 5,200 employees at December 31, 2003. Excluding the impact of
acquisitions, employee costs in 2005 are expected to decline as compared to 2004 due to headcount
reductions associated with the ATM Portfolio sale. Employee costs decreased in 2003 as compared to 2002 primarily due to reductions in the U.S.
employee headcount. The reduction in employee costs was offset somewhat by higher performance-based
compensation in 2003 as compared to 2002. Depreciation and amortization
These costs represent the depreciation of the buildings and equipment we own and the amortization
of our intangible assets, such as capitalized software costs and acquired contracts. The increase
in these costs in 2004 as compared to 2003 is due to additional depreciation and amortization on
assets associated with businesses we acquired during the fourth quarter of 2003 and during the
first half of 2004. This increase was partially offset by a decline in depreciation and
amortization expenses due to the cessation of depreciation on the assets included in the ATM
Portfolio following the execution of the related sales agreement in September 2004. Depreciation and amortization costs in 2005 are expected to be consistent with the levels seen in
2004 because the decrease in depreciation and amortization expense following the sale of our ATM
Portfolio is expected to be offset by an increase in depreciation and amortization expense related
to assets we acquired during the first half of 2004 and the acquisitions we expect will occur in
2005. The decrease in depreciation and amortization costs in 2003 as compared to 2002 is primarily due to
a reduction in depreciation expense following the sale of buildings during 2003. Other operating costs
Expenditures in this category include facility costs, professional, consulting and temporary
services, bad debt expense and certain administrative costs. Other operating costs in 2004 remained
relatively flat with the corresponding expenses incurred in 2003 because the increase in costs from
legal and other expenses related to the SEC investigation and its resolution and the costs incurred
to comply with the requirements of Section 404 of the Sarbanes-Oxley Act were offset by a reduction
in certain facility and insurance costs due to cost reduction efforts. Other operating costs in 2005 are expected to decline as compared to 2004 due to, among other
things, the impact of the gain amortization associated with the
Master Services Agreement we signed with the buyer of our ATM
Portfolio, the resolution of the SEC investigation in 2004 and a reduction in costs related to
compliance with Section 404 of the Sarbanes-Oxley Act. 21




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##### Table of Contents



The increase in other operating costs during 2003 as compared to 2002 was due to an increase in
external consulting costs related to strategic planning efforts and business performance
improvement initiatives. This increase was offset somewhat by reductions in legal and accounting
expenses. 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 in that year. 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 that 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 a developer
of transaction processing software in late 2003. We incurred severance charges of approximately $3.1 million in 2004 related to the elimination of
approximately 158 positions. These charges are expected to be paid through 2005. We continue to
explore opportunities to reduce costs as part of our ongoing business improvement initiatives. Contract loss provision (reversal)
We recorded a $0.5 million loss contact charge for certain long-term software contracts during the
second quarter of 2004. These are fixed price contracts that require us to make significant
modifications to the underlying software and increases in the scope of these projects resulted in
unanticipated increases in the expense required to complete these modifications. As a result, we
now expect to incur losses in their performance. In 2003, we recorded a $3.7 million benefit related to a reduction in our estimate of future losses
on certain government EBT contracts. A similar net benefit of $2.0 million was taken in the third
quarter of 2002. Actual results on these government EBT contracts have been better than previously
estimated due to higher than expected 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, our ability to accurately estimate the required balance of the
loss contract reserve has been improving. At December 31, 2004 the balance of the contract loss
reserve for the software and government EBT contracts was approximately $1.2 million. Other (expense) income  net
Other (expense) income  net primarily includes interest and investment income, interest and
investment expense and foreign currency translation adjustments.
Interest earned on cash, cash
equivalents and short-term investments was $3.2 million in 2004, $2.1 million in 2003 and $1.7 million in 2002. We incurred
an expense in 2004 as compared to income in 2003 from unfavorable changes in foreign currency
rates, primarily attributable to changes in the exchange rate between the India rupee and the U.S.
dollar. We are considering whether to enter into a hedging arrangement to limit our exposure to
unfavorable exchange rate fluctuations. Provision for income taxes
The annualized effective tax rates for 2004, 2003 and 2002 were 30.0%, 27.5% and 32.1%,
respectively. The lower effective tax rate in 2003 relative to 2004 and 2002 reflects the benefit
of certain permanent deductions taken by the Company in 2003, some of which related to prior tax
years. We expect our annualized effective tax rate to approximate 33% in 2005 although the actual
rate incurred may vary significantly. Our effective tax rate is largely determined by our India subsidiarys proportional share of our
projected consolidated income. Our India 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 India
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 $2.8
million in 2004, $2.7 million in 2003 and $2.7 million in 2002. 22




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LIQUIDITY AND CAPITAL RESOURCES Overview
Information about our financial position as of December 31, 2004 and 2003 is presented below: (dollars in millions)
    
    2004
    
    
    2003
    
    
    % ChangeCash and cash equivalents
    
    $
    274.5
    
    
    $
    104.5
    
    
    
    *Short-term
investments
    
    
    88.1
    
    
    
    53.7
    
    
    
    64
    %Long-term debt due within one year
    
    
    2.0
    
    
    
    5.6
    
    
    
    (64
    )Long-term debt
    
    
    3.6
    
    
    
    1.7
    
    
    
    *Stockholders equity
    
    
    474.2
    
    
    
    401.7
    
    
    
    18Net working capital
    
    
    343.2
    
    
    
    162.7
    
    
    
    *
   *
    
    Represents an increase or decrease in excess of 100%. Cash Resources
In 2005, our beginning cash balance and cash provided from operations are expected to be sufficient
to meet our recurring operating commitments and to fund planned capital expenditures, share
repurchases and acquisitions. Cash and cash equivalents at December 31, 2004 included cash in
India of approximately $14 million. The funds in India are held in India bank accounts denominated
in India rupees or U.S. dollars. These funds are available for use in our India operations and
investments. Under the American Jobs Creation Act of 2004 (the Act), we have the opportunity to
receive a special one-time tax deduction on the repatriation of certain foreign earnings during
2005. Although we are still assessing the repatriation provisions of the Act, we do not currently
anticipate repatriating funds from India during 2005. 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, 2004, approximately $36 million of settlement payments were due to us and we received
these funds in early January 2005. We are required to maintain sufficient available cash 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 $40 million.
We also seek to maintain approximately $75 million available to ensure that we can advance funds
to our processing customers if unusual circumstances prevent us from timely processing their
settlement files. We plan to satisfy these liquidity requirements using the cash and cash
equivalents we have on hand as well as through the Credit Agreement described below. On February 18, 2005, we entered into a credit agreement (the Credit Agreement) with a syndicate of
banks. The Credit Agreement provides for an initial aggregate commitment under an unsecured
revolving credit facility of $100 million. We have the option to increase this commitment to $175
million if certain requirements of the Credit Agreement are satisfied. We may use amounts borrowed
under the Credit Agreement to finance permitted acquisitions and related expenses, working capital
needs and other general corporate purposes. The Credit Agreement provides for two optional interest
rates on any borrowings thereunder. The first rate is equal to the greater of the Prime Rate (as
defined) or the Federal Funds Effective Rate plus 0.5% depending on certain conditions set forth in
the Credit Agreement. The second rate is equal to the London Interbank Offering Rate multiplied by
the Statutory Reserve Rate plus an additional percentage based on our leverage ratio. The terms of
the agreement include certain defined negative and affirmative covenants customary for facilities
of this type. The Credit Agreement will mature in 2008 and, upon the lenders approval, we may
receive two one year extensions of the maturity date. On February 23, 2005, we announced that our Board of Directors had approved a plan to buy back up
to $100 million of our common stock at prices not to exceed $25 per share over an estimated six to
18 month period beginning during the first quarter of 2005. The repurchases will be made using our
available cash. We will be making purchases in the open market, and through negotiated arrangements
and block transactions in accordance with applicable laws and regulations. We have no present intention of using our available funds to pay cash dividends. 23




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The following table sets forth our contractual cash obligations as of December 31, 2004 in total
and for the time periods specified. Our long-term debt consists principally of capital lease
obligations related to purchased software and equipment. Payments Due by Period(in millions)
    
    Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterCapital lease obligations
    
    $
    5.5
    
    
    $
    2.0
    
    
    $
    1.6
    
    
    $
    1.0
    
    
    $
    0.8
    
    
    $
    0.1
    
    
    $
    Operating leaseobligations1
    
    
    52.0
    
    
    
    10.6
    
    
    
    9.0
    
    
    
    9.0
    
    
    
    6.9
    
    
    
    4.9
    
    
    
    11.6Vendor obligations
    
    
    94.8
    
    
    
    43.2
    
    
    
    25.9
    
    
    
    10.2
    
    
    
    4.5
    
    
    
    4.5
    
    
    
    6.5Total
    
    $
    152.3
    
    
    $
    55.8
    
    
    $
    36.5
    
    
    $
    20.2
    
    
    $
    12.2
    
    
    $
    9.5
    
    
    $
    18.1
   1
    
    Future minimum lease payments for non-cancelable operating
leases are presented net of minimum sublease rentals of $3.0 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. Purchase orders 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, 2004 and should be read in conjunction with our consolidated statements of cash flows: Summary of Cash FlowsYear Ended December 31,(in millions)
    
    2004
    
    
    2003
    
    
    2002Cash provided by operating activities
    
    $
    69.6
    
    
    $
    73.5
    
    
    $
    74.8Cash provided by (used in) investing activities
    
    
    82.1
    
    
    
    (91.5
    )
    
    
    (57.5
    )Cash provided by financing activities
    
    
    18.3
    
    
    
    3.0
    
    
    
    0.3Net increase
(decrease) in cash and cash equivalents
    
    $
    170.0
    
    
    $
    (15.0
    )
    
    $
    17.6
 Our current priorities for use of our cash are:  
    investment in projects intended to increase our product delivery and operational
effectiveness, enhance our product suite and the redundancy of our systems;
    funding our liquidity needs;
    complementary acquisitions; and
    executing our share repurchase plan. Operating Activities
Our primary source of operating cash flow is the profits we generate from our business. Operating
cash outflows include payments to vendors for telecommunications services, consulting services and
supplies. We also pay salaries and benefits to our employees and income taxes. Cash flows from operations decreased to $70 million in 2004 as compared to $73 million in 2003.
Although our business generated more gross profits in 2004, this higher profitability was offset by
the impact from the payment of approximately $14 million of performance bonuses in 2004. We did not
pay incentive bonuses in 2003. Additionally, the cash flow from our operations was reduced by an
increase in our accounts receivable balance due to an increase in our international operations,
which have historically had a longer collection cycle. We expect to pay approximately $23 million
in income taxes in 2005 primarily related to the sale of the ATM Portfolio. This payment is
expected to offset the cash flow increase generated from the improved operating results we
anticipate in 2005 and so we believe operating cash flows in 2005 will be consistent with the
levels achieved in 2004. 24




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The cash we earned from operating activities was approximately the same for 2003 and 2002. The
benefit from the elimination of incentive payments in 2003 as compared to 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 from a
general reduction in expenses overall. Investing Activities
Cash provided by or used in our investing activities generally includes cash effects from the sale
or acquisition of assets. In 2004, we generated approximately $152 million from the sale of our
ATM Portfolio and the execution of the related Master Services Agreement with the buyer. We used
approximately $29 million for capital expenditures,
approximately $34 million to purchase short-term investments  and approximately $6 million for the acquisition
of Penley, Inc. and Loss Control Solutions. We expect to acquire additional complementary
businesses in 2005 and, although we cannot predict the amount we will spend on this activity with a
great degree of certainty, we would generally expect to expend between $75-$125 million in this
regard. We also expect our capital expenditures to increase to approximately $40 million in 2005
primarily as a result of the continued re-architecture of our technical infrastructure and product
development activities. During 2003 we used
approximately $54 million to purchase short-term investments, $27 million to acquire an open systems software company 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. Acquisitions resulted in the cash outflows of
approximately $35 million in 2002 and capital expenditures accounted for $21 million of cash used
in investing activities in that year. Financing Activities
We receive 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 capital lease
obligations. In 2004, we received approximately $25 million in proceeds from the exercise of stock
options and the sale of shares through our employee stock purchase plan and we used approximately
$6 million to pay down capital leases. We expect to spend approximately $100 million to repurchase
shares of our common stock during 2005, although the specific timing and amount of repurchases will
vary based on market conditions, securities law limitations and other factors. In 2003, we received approximately $6 million in proceeds from the exercise of stock options and
the sale of shares through our employee stock purchase plan and we used approximately $3 million to
repay capital lease obligations. Proceeds from exercise of stock options and the sale of shares
through our employee stock purchase plan was approximately $3 million in 2002 offset by
approximately $3 million of cash outflows for the repayment of capital leases. Impact from ATM Portfolio Sale
The sale of our ATM Portfolio and the execution of the related Master Services Agreement in
November 2004 resulted in cash inflows of approximately $152 million which has been classified as
cash flows received from investing activities in our 2004 Consolidated Statements of Cash Flows.
The sale of the ATM Portfolio also eliminated our guarantees on certain equipment lease payments
for Canadian customers serviced in connection with this business and the termination of the vault
cash agreements we had with the financial institutions that provided cash to certain of the ATMs
that were previously owned or managed by us. Future cash flows from operations are not expected to be significantly impacted by the sale of the
ATM Portfolio because the operating cash flow generated by the Managed Services Agreement is
expected to approximate the operating cash flows previously generated by our ATM business. Cash
flows from investing and financing activities are also not expected to be materially impacted in
future periods from the sale of the ATM Portfolio. Future Commercial Commitments
The following table sets forth our future commercial commitments as of December 31, 2004: Commitment Expiration by Period(in millions)
    
    Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    2008
    
    
    2009
    
    
    ThereafterLetters of credit and other
    
    $
    0.9
    
    
    $
    0.8
    
    
    $
    0.1
    
    
    $
    

    
    $
    
    
    
    $
    
    
    
    $
    Performance bonds
    
    
    14.9
    
    
    
    14.6
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    15.8
    
    
    $
    15.4
    
    
    $
    0.3
    
    
    $
    0.1
    
    $
    
    
    
    $
    
    
    
    $
    
 25




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We use cash collateral to secure letters of credit we issue in the ordinary course of
business. We had $0.4 million in letters of credit outstanding at December 31, 2004, mostly related
to leases. These letters of credit were secured by $0.4 million in cash collateral. In addition, we
have obtained $0.5 million of bank guarantees in India related to our performance of a customer
contract and certain obligations related to local government requirements. These guarantees are
collateralized by $0.5 million of time deposits at the banks issuing the guarantees. In connection with our government services business, collection and ATM management 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, 2004 was $15 million. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The foregoing 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 benefit distribution, business
process outsourcing and information technology consulting 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 if determinable or using a residual method if only the fair value of
the undelivered item exists. 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 rendered. These services consist of processing our
customers electronic debit transactions and settling the funds with
the financial institutions involved in the transactions. 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 rendered based
on monthly fees per benefits recipient.
    In connection with the provision of services in the ATM management
services segment, we earned 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 assumed the credit risk
associated with collection of these fees. Generally, our arrangements
called for us to pay a fee to the occupants of the property at which
the ATM was physically located. The amount of this fee typically had
some relationship to the surcharge and interchange fees that were
collected by us on individual transactions. Based upon the underlying
contractual provisions associated with our arrangements, we recorded
the surcharge and interchange fees that we collected at their gross
amounts as revenue and the residual payments to the occupant of the
property at which the ATM was physically located as a processing,
communication and service cost. Effective as of the date of the sale
of our ATM Portfolio, our ATM management services business is longer
reported as a separate operating segment. Following this sale, we no
longer provide services that earn surcharge or interchange fees. 26




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
    Risk management fees are recognized as revenue in the period the
services are rendered. 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 business process outsourcing and information technology
consulting 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 a significant portion 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, which
represents an insignificant portion of our revenues, 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 modification,
customization or production of the 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.
Service contracts in which the fees are recognized proportionately to
the percentage of completion of the project typically use the expended
method for measuring progress toward completion of the project. This
method typically measures progress toward completion using the number
of labor hours or days incurred compared to the total estimated number
of hours or days required to complete the project. This method relies
on estimates of the total effort necessary to complete the project and
these estimates are subject to revision as the projects progress
towards completion. Revisions to these estimates that result in a
material impact to our results of operations or financial position are
recorded in the periods in which we determine that a revision is
probable and subject to reasonable estimation. A material increase in
efforts to complete the project will result in a reduction in that
projects profit.
    Software and data license fees for standard products are recognized
when evidence of an arrangement exists, the license fee is fixed or
determinable, collectibility of the license fee is probable and
delivery has occurred. If a license contains customer acceptance
criteria for which significant uncertainties exist, the revenue is
recognized upon the earlier of customer acceptance or the satisfaction
of the customer acceptance criteria. 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 related to the delivered
element may be recognized as revenue if vendor specific objective
evidence of fair value exists for each of the undelivered elements. In
these instances, the total fair value of the undelivered elements,
based on vendor specific objective evidence, is recorded as deferred
revenue. The difference between the total arrangement fee and the
amount recorded as deferred revenue is recognized as revenue related
to the delivered elements. If vendor specific objective evidence of
fair value does not exist, then the total fees of the arrangement are
recognized ratably over the entire term of the underlying agreement.
    Software maintenance and support revenue is recognized ratably over
the term of the contract or as the services are rendered. The process involved in evaluating the appropriateness of revenue recognition involves judgments
about the sufficiency of the evidence regarding the fair value of each of the various elements
required to be delivered in a sale that has multiple components, the collectibility of our fees and
the costs required to complete projects for our customers. Disposition of ATM Portfolio On November 19, 2004, we consummated an agreement (the Agreement) to sell the ATM Portfolio
associated with our ATM Management segment. Concurrently with the consummation of the sale of the
ATM Portfolio, we entered into a five year ATM Master Services Agreement (MSA) with the buyer.
Pursuant to the MSA, we are providing the buyer with transaction processing, residual
administration, cash and telecommunications management, help desk and other ATM management
services. The ATM Portfolio represented a significant portion of the ATM Management segment and we
ceased presenting this business as a separate operating segment following the ATM Portfolio sale.
The services provided in accordance with the MSA are presented within our remaining segments with
processing service revenues and related costs being recorded within the Electronic Payments segment
and revenues from ATM management services, and related costs reported within the Global Outsourcing segment. The
operating results of the ATM Portfolio have not been presented as discontinued operations because
we have significant continuing involvement in the operations of the asset group through the MSA.
The major asset categories and related carrying amounts sold and disposed of included net accounts
receivable of $4 million, net property and equipment of $7 27




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million, goodwill of approximately $76 million, net other intangible assets of approximately $17
million, other current assets of approximately $2 million and accounts payable and other current
liabilities of approximately $7 million. We incurred approximately $5 million of costs in
connection with the transaction that primarily consisted of professional service fees. The amounts received by us in connection with the Agreement exceeded the book value of the ATM
Portfolio by approximately $48 million. In considering the appropriate method for accounting for
the excess proceeds from this arrangement, we considered the analogous authoritative literature.
The most directly applicable pronouncement was considered to be
Emerging Issues Task Force (EITF) 00-21, Revenue Arrangements
with Multiple Deliverables (EITF 00-21). EITF 00-21 indicates that in arrangements with multiple
elements that are deemed to be in substance one arrangement, any income or gain associated with the
arrangement should be deferred and recognized over the period of the remaining obligations unless
there is sufficient, objective and reliable evidence of the fair value of the undelivered
contractual elements. We consider the ATM Portfolio sale and the MSA to be components of a single
arrangement because these transactions were negotiated simultaneously without regard to their
individual economic characteristics. Although both factual and anecdotal evidence was considered,
we were unable to determine the fair value of the MSA with a reasonable degree of certainty due to,
among other things, the uniqueness of that contract, the lack of similar arrangements in the
industry and because the contractual cash flows expected to be generated by the MSA are not
representative of the contracts intrinsic fair value absent the compensating benefits associated
with the entirety of the arrangement represented by the ATM Portfolio sale and the MSA. Due to the
lack of sufficient, objective and reliable evidence of the fair value of the MSA, we determined
that the only appropriate method of accounting for the arrangement was to defer the entirety of the
implied gain from the transactions and amortize this amount as a
reduction in the other operating costs of our Global Outsourcing
segment over the period of the remaining
undelivered elements of the obligations of the arrangement (the initial five year term of the MSA).
At December 31, 2004, approximately $47 million of the implied gain was recorded as a deferred
gain of which $10 million was recorded as current liabilities and the remainder is included in
long-term liabilities. The long-term deferred gain will be amortized beginning in 2006 and
continuing through the expiration of the MSA. However, in the event the MSA is terminated early
and our services thereunder are discontinued, the entire unamortized deferred gain would be
recognized. We have modified our prior approach to accounting for
this agreement and we will not be recognizing any revenues as a
result of this amortization in future periods. Intangible Assets
Our intangible assets consist primarily of capitalized software costs, acquired contracts and
goodwill. Software-internal use
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, 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. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets (SFAS 144), we assess internal use software
for potential impairment when events or changes in circumstances indicate that the carrying value
of these assets may not be recovered. For example, in 2002 we discontinued certain product lines
which resulted in a charge of approximately $2 million for the impairment of the related software.
There have been no subsequent impairment charges for internal use software. Software-licensing and resale
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. Although we have never recorded
an impairment charge for software developed for resale, these capitalized costs could be impaired
if the net realizable value of that software became less than its net book value. Such an
impairment could occur if our sales of that software declined significantly. Acquired contracts and other
Contracts acquired through acquisitions are specifically identified in connection with that
acquisition. The amount recorded as intangible assets in respect of acquired contracts represents
the estimated fair value of these relationships. This estimate is 28




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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 used in estimating the value of the 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 attrition rate associated with the acquired contracts materially
exceeds the rate used to estimate the fair value of the acquired contract portfolio. To date, we
have not incurred any significant impairments with regard to our acquired contracts. Other intangibles also include other assets obtained in connection with the acquisition of other
companies, typically non-competition agreements. Non-competition agreements are recorded at their
estimated fair value at the date of acquisition and amortized ratably over the period of the
non-competition agreement. We assess acquired contracts and other intangible assets for impairment in accordance with SFAS No.
144. 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 portion of the 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 income statements 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 in
respect of our reporting segments is impaired. If changes in circumstances indicate a potential
impairment of our recorded goodwill, we compare the fair value of the segment to its carrying
value, including its associated goodwill. The carrying value of the segment includes an allocation
of those corporate assets and liabilities that have not been specifically identified with the
segment, based upon its pro-rata percentage of our total net revenue. We primarily rely on the
income method to determine a segments fair value. This valuation approach uses estimates of the
segments future revenue and costs and a discount rate based upon the estimated weighted average
cost of capital for that segment. Our estimates of a segments future cash flows 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. We have
not recorded an impairment in the goodwill of our segments in the past. Reserves and AllowancesLoss contract reserve
We maintain a reserve for expected future losses on certain of our long-term service contracts. Our
estimates of these losses are based on our best estimate of the contracts revenue and costs. Our
established contract loss reserves relate to certain of our government service contracts and
software development agreements. We use a variety of assumptions to estimate any future losses on
our government services contracts, including assumptions about future welfare case levels, the
number of transactions per case and the costs related to processing transactions and providing
support services. For our software service contracts, our assumptions include among other things
estimated costs and hours or days to complete the development project. 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,
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. Although the timing of any additional provisions for contract losses and reversals of
provisions for contract losses is not related to the contracts life, our ability to more precisely
estimate the future performance of any given contract improves as the remaining term of that
contract shortens. Changes in estimates that could result in the need for additional losses could
include lower than anticipated case levels and transactions per case for our government service
long-term contracts or higher than expected 29




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hours or days to complete our software service
contracts. During 2003 and 2002, we recorded a reversal of our loss contracts provision of $3.7
million and $2.0 million, respectively, for our government service contracts as a result of higher
than originally estimated case levels as well as lower than expected costs of supporting the
contracts. 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. 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. Such
an increase would reduce our income. Income Taxes Accounting for income taxes requires us to make significant judgments in estimating our future
income taxes. These judgments include, but are not 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 $39.3 million at December 31, 2004. Absent the effect of the American Jobs Creation
Act of 2004, 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. The Act provides us with the
opportunity to receive a special one-time tax deduction on the repatriation of certain of the
undistributed earnings of our foreign subsidiaries during 2005. Although we are still assessing
the repatriation provisions of the Act, we do not currently anticipate repatriating funds from
India during 2005. 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 them. 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 currently
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 statements of
income, our results of operations would be materially and adversely affected. The Financial
Accounting Standards Board (FASB) recently revised the current applicable accounting pronouncements
related to accounting for stock options to require us to reflect our option expense in our
statements of income no later than the third quarter of 2005 (see the discussion below regarding
SFAS No. 123R under Recent Accounting Pronouncements). The amount of stock-based compensation
expense we recognize would change if the underlying assumptions used to estimate this 30




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expense were
to change. For instance, we would expect the expense to decrease if the expected life of the
option or the volatility of our stock price were to decrease. Recent Accounting Pronouncements In December 2004, the
FASB revised SFAS No. 123, Share-Based Payment (SFAS
No. 123R). SFAS No. 123R
replaces SFAS No. 123 and, although the two pronouncements are similar in most respects, a key
difference among the pronouncements, is that SFAS No. 123R generally requires companies to recognize
the cost of employee services rendered in exchange for awards of equity instruments based on the
grant-date fair value of those awards. SFAS No. 123R is effective as of the beginning of the first
interim reporting period that begins after June 15, 2005 and may be adopted earlier. We did not
adopt SFAS No. 123R as of December 31, 2004 and as a result, SFAS No. 123R has not affected our
consolidated financial position or results of operations to date. The adoption of SFAS No. 123R will
result in an increase in our employee costs. We have not yet determined which option valuation
approach we will use to estimate the fair value of our stock option grants and so we cannot
precisely estimate the amount of this increase at this time. In December 2004, the FASB issued Staff Position No. FAS 109-1, Application of FASB Statement 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by
the American Jobs Creation Act of 2004 and Staff Position No. FAS 109-2, Accounting and
Disclosure for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 (collectively, the Provisions). The Provisions were issued in response to certain issues
surrounding the Act. The Act provides certain domestic companies a temporary opportunity to
repatriate previously undistributed earnings of controlled foreign subsidiaries at a reduced
federal tax rate, approximating 5.25%. The reduced rate is achieved via an 85% dividends received
deduction on earnings repatriated during a one-year period. The Provisions address the appropriate
treatment of this tax deduction and related accounting and disclosure requirements. Although we
are still assessing the repatriation provisions of the Act, we do not currently anticipate
repatriating funds from India during 2005. In September 2004, the EITF reached a consensus regarding Issue No. 04-1, Accounting for
Preexisting Relationships Between the Parties to a Business Combination (EITF 04-1). EITF 04-1
requires an acquirer in a business combination to evaluate any preexisting relationship with the
acquiree to determine if the business combination in effect contains a settlement of the
preexisting relationship. A business combination between parties with a preexisting relationship
should be viewed as a multiple element transaction. EITF 04-1 is effective for business
combinations after October 13, 2004, but requires goodwill resulting from prior business
combinations involving parties with a preexisting relationship to be tested for impairment by
applying the guidance in the consensus. We will apply EITF 04-1 to acquisitions subsequent to the
effective date and in our future goodwill impairment testing. 31




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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, 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 2005 The Company expects full year net revenues for 2005 to increase approximately 8 to 12 percent on a
combined organic and acquisitive basis over the $431 million baseline revenue achieved across the
Companys three remaining segments following the sale of its ATM Portfolio in November 2004. The
Company expects net income to increase 17 to 22 percent in 2005 over the net income of $40.8
million reported in 2004 and to generate operating cash flows in 2005 consistent with the level
achieved in 2004. The foregoing expectations reflect the following assumptions:  
    An effective annualized tax rate of approximately 33 percent;  
    Cash outlays for capital expenditures and product development of approximately $40 million;  
    Cash outlays for acquisitions are expected to approximate $75  $125 million; and  
    The substantial completion of the Companys $100 million stock buyback program. The foregoing does not give effect to the adoption of the recent accounting pronouncements
requiring the expensing of stock based compensation in 2005. 
 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 or positive 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
primarily 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, India
rupee and Canadian dollar. For the year ended December 31, 2004, approximately 8% of our net
revenues and 18% of our operating expenses were denominated in these three currencies. We have prepared sensitivity analyses to assess the impact of hypothetical changes in foreign
currency rates on our income before tax for the year ended December 31, 2004. Based upon these
analyses, we estimate that a 10% adverse change in the exchange rate between the U.S. dollar and
the British pound, India rupee and Canadian dollar would have reduced our reported income before
taxes during 2004 by approximately $5 million. A 10% change in the exchange rate for the British
pound, India rupee and Canadian dollar would also have an impact on the foreign net assets
reflected in our balance sheet, but we would not expect this change to be material to our total
assets. Changes in interest rates could impact our anticipated interest income on cash, cash equivalents and short-term investments. A 10%
adverse change in interest rates from the interest rates in effect at the end of 2004 would not,
however, have had a material adverse effect on our results of operations or financial condition for
2004. 32




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Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
eFunds Corporation: We have audited the accompanying consolidated balance sheets of eFunds Corporation and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income,
comprehensive income, stockholders equity and cash flows for the years ended December 31, 2004 and
2003. In connection with our audits of the consolidated financial statements, we also have audited
financial statement schedule II. These consolidated financial statements and financial statement
schedule are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement schedule based on our
audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, 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,
2004 and 2003 and the results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related 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. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of eFunds Corporation and subsidiaries internal control
over financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 14, 2005 expressed an unqualified opinion on
managements assessment of, and the effective operation of, internal control over financial
reporting. /s/ KPMG LLP
Phoenix, Arizona
March 14, 2005 33




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Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
eFunds Corporation: We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that eFunds Corporation and subsidiaries maintained
effective internal control over financial reporting as of December 31, 2004, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). eFunds Corporation and subsidiaries management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is
to express an opinion on managements assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles.
A companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that eFunds Corporation and subsidiaries maintained
effective internal control over financial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, eFunds Corporation and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on, criteria established
in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). 34




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We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of eFunds Corporation and subsidiaries as of
December 31, 2004 and 2003, and the related consolidated statements of income, comprehensive
income, stockholders equity, and cash flows for the years ended December 31, 2004 and 2003, and
our report dated March 14, 2005 expressed an unqualified opinion on those consolidated financial
statements. /s/ KPMG LLP
Phoenix, Arizona
March 14, 2005 35




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Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of
eFunds Corporation
Scottsdale, Arizona We have audited the accompanying consolidated statements of income, comprehensive income,
stockholders equity, and cash flows of eFunds Corporation and subsidiaries (the Company) for the
year ended December 31, 2002. Our audit also included the financial statement schedule listed in
the index at Item 15. 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 audit. We did not audit the
financial statements of iDLX Holdings BV (a consolidated subsidiary), which statements reflect net
revenue constituting 6 percent of consolidated net revenue and
net income constituting 30 percent of consolidated
net income for the year ended December 31, 2002. Such financial statements were audited by other
auditors whose report 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 audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of the other auditors provide a reasonable
basis for our opinion. In our opinion, based on our audit and the report of the other auditors, such consolidated
financial statements present fairly, in all material respects, the results of operations and cash
flows of eFunds Corporation and subsidiaries for the year ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion,
based on our audit 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. /s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 14, 2003
(March 14, 2005 as to the effect of the reclass of segment information as described in Note 12) 36




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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA EFUNDS CORPORATION
CONSOLIDATED BALANCE SHEETS December 31,(dollars in thousands)
    
    2004
    
    
    2003Current assets:Cash and cash equivalents
    
    $
    274,477
    
    
    $
    104,456Short-term investments
    
    
    88,140
    
    
    
    53,650Restricted custodial cash
    
    
    2,392
    
    
    
    4,168Accounts receivable  net
    
    
    73,505
    
    
    
    63,841Deferred income taxes
    
    
    14,340
    
    
    
    12,743Prepaid expenses and other current assets
    
    
    15,710
    
    
    
    17,451Total current assets
    
    
    468,564
    
    
    
    256,309Property and equipment  net
    
    
    50,320
    
    
    
    49,629Long-term deferred income taxes
    
    
    13,964
    
    
    
    Intangibles:Goodwill
    
    
    59,262
    
    
    
    128,586Other intangible assets
    
    
    44,410
    
    
    
    71,116Total intangibles  net
    
    
    103,672
    
    
    
    199,702Other non-current assets
    
    
    6,441
    
    
    
    6,697Total non-current assets
    
    
    174,397
    
    
    
    256,028Total assets
    
    $
    642,961
    
    
    $
    512,337Current liabilities:Accounts payable
    
    $
    21,984
    
    
    $
    26,585Accrued liabilities:Accrued compensation and employee benefits
    
    
    24,914
    
    
    
    16,552Accrued contract losses
    
    
    1,162
    
    
    
    1,890Accrued income taxes
    
    
    40,879
    
    
    
    15,037Deferred revenue and gains
    
    
    16,445
    
    
    
    7,900Restructuring accruals
    
    
    3,261
    
    
    
    2,475Other
    
    
    14,805
    
    
    
    17,582Long-term debt due within one year
    
    
    1,955
    
    
    
    5,586Total current liabilities
    
    
    125,405
    
    
    
    93,607Long-term deferred gains
    
    
    37,539
    
    
    
    Long-term debt
    
    
    3,569
    
    
    
    1,667Deferred income taxes
    
    
    

    
    
    
    11,400Other long-term liabilities
    
    
    2,244
    
    
    
    4,001Total liabilities
    
    
    168,757
    
    
    
    110,675Commitments and contingencies (Notes 3, 7, 10, 13, 14 and 15)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: 49,305,446 and 47,299,742 shares at December 31,
2004 and 2003, respectively)
    
    
    493
    
    
    
    473Additional paid-in capital
    
    
    446,825
    
    
    
    418,496Retained earnings (accumulated deficit)
    
    
    23,231
    
    
    
    (17,587
    )Accumulated other comprehensive income
    
    
    3,655
    
    
    
    280Stockholders equity
    
    
    474,204
    
    
    
    401,662Total liabilities and stockholders equity
    
    $
    642,961
    
    
    $
    512,337
 See Notes to Consolidated Financial Statements 37




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EFUNDS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31,(in thousands, except per share amounts)
    
    2004
    
    
    2003
    
    
    2002Net revenue
    
    $
    552,148
    
    
    $
    532,054
    
    
    $
    543,107Operating expenses:Processing, communication and service costs
    
    
    217,736
    
    
    
    230,724
    
    
    
    226,151Employee costs
    
    
    189,762
    
    
    
    179,896
    
    
    
    185,719Depreciation and amortization
    
    
    36,201
    
    
    
    35,385
    
    
    
    36,972Other operating costs
    
    
    46,325
    
    
    
    46,780
    
    
    
    44,321Restructuring, asset impairment and other charges
    
    
    3,093
    
    
    
    4,209
    
    
    
    16,525Contract loss provision (reversal)
    
    
    501
    
    
    
    (3,650
    )
    
    
    (2,000
    )Total operating expenses
    
    
    493,618
    
    
    
    493,344
    
    
    
    507,688Income from operations
    
    
    58,530
    
    
    
    38,710
    
    
    
    35,419Other (expense) income  net
    
    
    (218
    )
    
    
    1,157
    
    
    
    734Income before income taxes
    
    
    58,312
    
    
    
    39,867
    
    
    
    36,153Provision for income taxes
    
    
    (17,494
    )
    
    
    (10,959
    )
    
    
    (11,599
    )Net income
    
    $
    40,818
    
    
    $
    28,908
    
    
    $
    24,554Weighted average shares outstanding:Basic
    
    
    48,201
    
    
    
    46,854
    
    
    
    46,588Diluted
    
    
    49,405
    
    
    
    47,239
    
    
    
    46,738Net income per share:Basic
    
    $
    0.85
    
    
    $
    0.62
    
    
    $
    0.53Diluted
    
    $
    0.83
    
    
    $
    0.61
    
    
    $
    0.53
 See Notes to Consolidated Financial Statements 38




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EFUNDS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31,(in thousands)
    
    2004
    
    
    2003
    
    
    2002Net income
    
    $
    40,818
    
    
    $
    28,908
    
    
    $
    24,554Other comprehensive income:Foreign currency translation adjustments
    
    
    3,375
    
    
    
    2,183
    
    
    
    407Comprehensive income
    
    $
    44,193
    
    
    $
    31,091
    
    
    $
    24,961
 See Notes to Consolidated Financial Statements 39




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EFUNDS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY Retained
    
    
    AccumulatedAdditional
    
    
    earnings
    
    
    other
    
    
    TotalCommon Stock
    
    
    paid-in
    
    
    (accumulated
    
    
    comprehensive
    
    
    stockholders(in thousands)
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    deficit)
    
    
    income (loss)
    
    
    equityBalance, 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
    
    
    
    401,662Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,818
    
    
    
    
    
    
    
    40,818Proceeds from exercise of stock options
    
    
    1,879
    
    
    
    19
    
    
    
    23,217
    
    
    
    
    
    
    
    
    
    
    
    23,236Restricted stock units
    
    
    29
    
    
    
    
    
    
    
    323
    
    
    
    
    
    
    
    
    
    
    
    323Proceeds from employee stock purchase plan
    
    
    97
    
    
    
    1
    
    
    
    1,431
    
    
    
    
    
    
    
    
    
    
    
    1,432Tax benefits attributable to stock
options exercised
    
    
    
    
    
    
    
    
    
    
    3,358
    
    
    
    
    
    
    
    
    
    
    
    3,358Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,375
    
    
    
    3,375Balance, December 31, 2004
    
    
    49,305
    
    
    $
    493
    
    
    $
    446,825
    
    
    $
    23,231
    
    
    $
    3,655
    
    
    $
    474,204
 See Notes to Consolidated Financial Statements 40




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EFUNDS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31,(in thousands)
    
    2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income
    
    $
    40,818
    
    
    $
    28,908
    
    
    $
    24,554Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    14,689
    
    
    
    14,768
    
    
    
    17,725Amortization
    
    
    21,512
    
    
    
    20,617
    
    
    
    19,247Loss on impairment or disposals of property, equipment and intangibles
    
    
    769
    
    
    
    1,731
    
    
    
    7,980Deferred income taxes
    
    
    (26,961
    )
    
    
    1,035
    
    
    
    2,430Write-off of purchased in-process research and development
    
    
    
    
    
    
    1,493
    
    
    
    Provision (reversal) for contract losses
    
    
    501
    
    
    
    (3,650
    )
    
    
    (2,000
    )Changes in assets and liabilities, net of effects from acquisitions and
dispositions:Restricted custodial cash
    
    
    1,776
    
    
    
    (1,122
    )
    
    
    (1,922
    )Accounts receivable
    
    
    (13,801
    )
    
    
    (209
    )
    
    
    20,199Accounts payable
    
    
    (1,999
    )
    
    
    (8,130
    )
    
    
    7,285Accrued compensation and employee benefits
    
    
    7,944
    
    
    
    12,502
    
    
    
    (12,975
    )Income taxes receivable/payable
    
    
    29,201
    
    
    
    7,714
    
    
    
    2,302Accrued contract losses
    
    
    (1,230
    )
    
    
    (2,038
    )
    
    
    (5,199
    )Other assets and liabilities
    
    
    (3,623
    )
    
    
    (171
    )
    
    
    (4,834
    )Net cash provided by operating activities
    
    
    69,596
    
    
    
    73,448
    
    
    
    74,792Cash flows from investing activities:Capital expenditures
    
    
    (28,651
    )
    
    
    (21,954
    )
    
    
    (20,861
    )Payments for acquisitions and investments, net of cash acquired
    
    
    (6,079
    )
    
    
    (27,456
    )
    
    
    (35,184
    )Proceeds from sales of property and equipment
    
    
    
    
    
    
    13,310
    
    
    
    Proceeds from sale of ATM portfolio
    
    
    152,056
    
    
    
    
    
    
    
    Net
purchases of short-term investments
    
    
    (34,490
    )
    
    
    (53,650
    )
    
    
    Other
    
    
    (712
    )
    
    
    (1,748
    )
    
    
    (1,425
    )Net cash provided by (used in) investing activities
    
    
    82,124
    
    
    
    (91,498
    )
    
    
    (57,470
    )Cash flows from financing activities:Proceeds from exercise of stock options and employee stock purchase plan
    
    
    24,668
    
    
    
    6,267
    
    
    
    3,129Payments on long-term debt
    
    
    (6,367
    )
    
    
    (3,248
    )
    
    
    (2,835
    )Net cash provided by financing activities
    
    
    18,301
    
    
    
    3,019
    
    
    
    294Net increase
(decrease) in cash and cash equivalents
    
    
    170,021
    
    
    
    (15,031
    )
    
    
    17,616Cash and cash equivalents at beginning of period
    
    
    104,456
    
    
    
    119,487
    
    
    
    101,871Cash and cash equivalents at end of period
    
    $
    274,477
    
    
    $
    104,456
    
    
    $
    119,487Supplemental cash flow dataCash paid during the year for:Interest
    
    $
    548
    
    
    $
    527
    
    
    $
    390Income taxes
    
    
    16,268
    
    
    
    2,702
    
    
    
    5,407Noncash investing and financing activities:Purchase of assets under capital lease obligations
    
    $
    5,524
    
    
    $
    7,762
    
    
    $
    
 See Notes to Consolidated Financial Statements 41




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EFUNDS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 NOTE 1  DESCRIPTION OF BUSINESS: The goal of eFunds Corporation and its wholly-owned subsidiaries (the Company) is to enable trusted
commerce by delivering risk management, payment and outsourcing solutions that strengthen their
customers overall profitability through increased revenue, reduced costs and improved operating
efficiency and technology performance. The Companys principal focus is on issuers of transaction
accounts, such as financial institutions, financial services companies, electronic funds transfer
networks, retailers, government agencies, telecommunications companies and other businesses. During the first ten months of 2004 and during the years ended December 31, 2003 and 2002, the
Company had four operating segments: Electronic Payments; Risk Management; Global Outsourcing; and
Automated Teller Machine (ATM) Management. The Electronic Payments segment provides electronic
funds transfer (EFT) processing services, including automated clearinghouse (ACH) processing and
electronic benefit transfer (EBT) services for government agencies, EFT software, software
applications development, maintenance and installation. The Risk Management segment provides data
based risk management services and other related 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 business process outsourcing services
and information technology services. The ATM Management segment provided ATM deployment, management
and branding services. On November 19, 2004, the Company sold a significant component of the ATM
Management segment and has not considered its ATM management business as a separate operating
segment since that date (see Note 4). 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 that 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. It is reasonably
possible that there will be changes in these assumptions and estimates in the near term if it
becomes reasonably possible that a condition, situation or set of circumstances that existed at the
date of the financial statements changes in the near term due to one or more future confirming
events and the effect of the change would be material to the financial statements. These estimates
and assumptions include, but are not limited to:  -
    estimates of the fair value of the Companys reporting segments that are used to
determine whether the goodwill recorded in respect of these segments has been impaired;-
    estimates of the fair value and estimated costs of disposal of assets held for sale and their related liabilities;-
    estimates of the useful lives and residual values of property and equipment;-
    estimates of the fair value of intangible assets;-
    estimates of the fair value of stock options granted to employees;-
    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 associated with
deferred tax assets will be realized. Cash and cash equivalents The Company considers all cash on hand, money market funds and other highly liquid investments with
original maturities of three months or less to be cash and cash equivalents. Interest earned on
cash, cash equivalents and short-term investments (discussed below) was $3.2 million in 2004, 42




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$2.1 million in 2003 and $1.7 million in 2002
and is included in Other (expense) income  net. 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 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 business days. The
balances due the Company are included in cash and cash equivalents. As of December 31, 2004,
approximately $35.5 million of settlement payments were due to the Company and it received these
funds in early January 2005. As of December 31, 2003, approximately $23.0 million was due to the
Company and it received these funds in early January 2004. Short-term investments Short-term investments
consist of auction rate securities with remaining time to maturity
greater than 90 days that are available for sale. The
investments are classified in the consolidated balance sheets as current assets
because they can be readily converted into cash or into securities
with a shorter remaining time to maturity and because the Company is
not committed to holding the investments until maturity. The Company
determines the appropriate classification of its investments at the
time of purchase and re-evaluates such designations as of each
balance sheet date. Short-term investments are stated at amounts that
approximate fair market value, based on quoted market prices. The Company has reclassified
its consolidated balance sheet at December 31, 2003 and
consolidated statement of cash flow for the year ended
December 31, 2003 to conform to its presentation of short-term
investments in 2004. The Company did not have any short-term
investments in 2002. Restricted custodial cash In connection with the Companys electronic payments 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 $2.4 million and
$3.1 million at December 31, 2004 and 2003, respectively. Management develops its estimate of this
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. Bad debt is
reflected as a component of other operating costs in the consolidated income statements 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. Bad debt expense was not material in 2004 or 2002. When a specific account
receivable is determined to be uncollectible, the Company reduces both its accounts receivable and
allowances for uncollectible accounts accordingly. At December 31, 2004, one customer accounted for
approximately 10% of the Companys total receivables. Assets and liabilities related to assets held for sale When management determines that a material long-lived asset or a long-lived asset that is part of a
group that includes other assets and liabilities (an asset group) is to be disposed of within a
twelve-month period and all other criteria required under Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
No. 144), have been met, that material asset or asset group is reclassified to assets held for
sale. Depreciation and amortization on any related property and equipment of that asset or asset
group is discontinued. Assets and liabilities related to 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, the Company had classified two administrative facilities as assets held
for sale, one located in Glendale, Wisconsin and the other located in Runcorn, United Kingdom. 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 6). This amount is
reflected in the 2002 Restructuring, asset impairment and other charges in the accompanying
consolidated statements of income. 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 (expense) income  net in the accompanying
consolidated statements of income. In the third quarter of 2004, the Company entered into a definitive agreement to sell the ATM
machines and merchant contracts (the ATM Portfolio) associated with its ATM Management segment.
Following the execution of this agreement, the Company classified the assets and liabilities
related to the ATM Portfolio as held for sale. The Company sold the ATM Portfolio during the
fourth quarter of 2004 (see Note 4). There are no items recorded as assets held for sale at
December 31, 2004. 43




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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 lives of the property or the life of the lease,
whichever is shorter. Machinery and equipment is depreciated on a straight-line basis over the
estimated useful live of the asset, which is typically three to eight years. Property and equipment
are tested for impairment in accordance with SFAS No. 144 (see Note 6). At December 31, property and equipment consisted of the following: (in thousands)
    
    2004
    
    
    2003Land and improvements
    
    $
    3,070
    
    
    $
    3,070Buildings and improvements
    
    
    31,206
    
    
    
    29,776Machinery and equipment
    
    
    31,485
    
    
    
    31,957Computer equipment
    
    
    76,912
    
    
    
    81,875Total property and equipment
    
    
    142,673
    
    
    
    146,678Accumulated depreciation and amortization
    
    
    (92,353
    )
    
    
    (97,049
    )Property and equipment  net
    
    $
    50,320
    
    
    $
    49,629
 Intangible assetsand goodwill 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 and other
applicable pronouncements. These assets are amortized on the straight-line and accelerated methods,
as appropriate, over their estimated useful lives or period of expected benefit. Effective January
1, 2002, intangible assets with indefinite lives are no longer amortized but instead are subject to
periodic impairment testing in accordance with SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). In accordance with SFAS No. 142, goodwill is no longer amortized but instead is subject to periodic
impairment testing. 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 segment with its carrying amount, including
its goodwill. The Company reviewed its recorded goodwill for potential impairment as of December
31, 2004 and concluded that its goodwill was not impaired. Fair value of financial instruments The fair value of the Companys financial instruments was not materially different from their
carrying or contract values at December 31, 2004 and 2003. Accrued contract losses Provisions for anticipated losses on long-term service contracts are recorded in full in the period
in which such losses become probable and reasonably estimable. On a periodic basis, the Company
compares the actual losses on any long-term service contracts that are projected to be in a loss
position with the associated loss estimates and assumptions used to record the provision. Reversals
or increases in the estimated loss are recognized as changes to those loss provisions become
probable and reasonably estimable. Although the timing of any reversals or increases in the
provision for anticipated losses is not related to the contracts life, the Companys ability to
more precisely estimate the future performance of any given contract improves as the remaining term
of that contract shortens (see Note 7). 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 $39.3 million at December 31, 2004. Those earnings are currently considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has
been provided for these undistributed earnings. The American Jobs Creation Act of 2004 (the Act) provides for a special one-time tax deduction on the repatriation of certain of the undistributed earnings of the Companys foreign subsidiaries during 2005. Although the
Company is still assessing the repatriation provisions of the Act, it does not currently anticipate repatriating funds from India during 2005. 44




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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 benefit distribution,
business process outsourcing and information technology consulting 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 if determinable or using a residual method if only
the fair value of the undelivered item exists. 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
rendered. These services consist of processing customers electronic debit transactions and
settling the funds with the financial institutions involved in the transactions. 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 rendered based on monthly fees per benefits recipient.
    In connection with the provision of services in the ATM management services segment, the
Company earned 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 Company assumed credit risk
associated with collection of these fees. Generally, the Companys arrangements called for
it to pay a fee to the occupant of the property at which the ATM was physically located. The
amount of this fee typically had some relationship to the surcharge and interchange fees
that were collected by the Company on individual transactions. Based upon the underlying
contractual provisions associated with the Companys arrangements, the Company recorded the
surcharge and interchange fees that it collected at their gross amounts as revenue and the
residual payments to the occupant of the property at which the ATM was physically located as
a processing, communication and service cost. Effective as of the date of the sale of the
Companys ATM Portfolio, the Companys ATM management business segment is no longer reported
as a separate operating segment. Following this sale, the Company no longer provides ATM
managed services that earn surcharge or interchange fees.
    Risk management fees are recognized as revenue in the period the services are rendered.
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 provides business process outsourcing and information technology consulting
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 a significant portion 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, which represents an insignificant portion of the Companys revenues,
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 the significant modification, customization or production of the 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. Service contracts in which
the fees are recognized proportionately to the percentage of completion of the project
typically use the expended method for measuring progress toward completion of the project.
This method typically measures progress toward completion using labor hours or days incurred
compared to the total estimated number of hours or days required to complete the project.
This method relies on estimates of the total effort necessary to complete the project and
these estimates are subject to revision as the projects progress towards completion.
Revisions to these estimates that result in a material impact to the Companys results of
operations or financial position are recorded in the periods in which the Company determines
that a revision is probable and subject to reasonable estimation.
    Software and data license fees for standard products are recognized when evidence of an
arrangement exists, the license fee is fixed or determinable, collectibility of the license
fee is probable and delivery has occurred. If a license 45




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contains customer acceptance criteria for which significant uncertainties exist, the revenue
is recognized upon the earlier of customer acceptance or the satisfaction of the customer
acceptance criteria. 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 related to the delivered element may
be recognized as revenue if vendor specific objective evidence of fair value exists for each
of the undelivered elements. In these instances, the total fair value of the undelivered
elements, based on vendor specific objective evidence, is recorded as deferred revenue. The
difference between the total arrangement fee and the amount recorded as deferred revenue is
recognized as revenue related to the delivered elements. If vendor specific objective
evidence of fair value does not exist, then the total fees of the arrangement are recognized
ratably over the entire term of the underlying agreement.
    Software maintenance and support revenue is recognized ratably over the term of the
contract or as the services are rendered.The following table illustrates the Companys revenue generated from software sales. Amounts
have been reclassified in prior years to conform with current year presentation, which
reflects the inclusion of customer reimbursed fees with the related software product lines: Year Ended December 31,(in thousands)
    
    2004
    
    
    2003
    
    
    2002License fees
    
    $
    6,952
    
    
    $
    7,880
    
    
    $
    12,835Maintenance
    
    
    20,317
    
    
    
    15,264
    
    
    
    13,362Software services
    
    
    8,947
    
    
    
    7,966
    
    
    
    6,793$
    36,216
    
    
    $
    31,110
    
    
    $
    32,990
 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 the Companys customers. 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 compensation cost related to the issuance of stock
options 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)
    
    2004
    
    
    2003
    
    
    2002Net income, as reported
    
    $
    40,818
    
    
    $
    28,908
    
    
    $
    24,554Total stock-based employee compensation expense determined
under fair value based method for all awards, net of tax
    
    
    (3,788
    )
    
    
    (2,718
    )
    
    
    (6,960
    )Pro forma net income
    
    $
    37,030
    
    
    $
    26,190
    
    
    $
    17,594Earnings per share:Basic-as reported
    
    $
    0.85
    
    
    $
    0.62
    
    
    $
    0.53Basic-pro forma
    
    $
    0.77
    
    
    $
    0.56
    
    
    $
    0.38Diluted-as reported
    
    $
    0.83
    
    
    $
    0.61
    
    
    $
    0.53Diluted-pro forma
    
    $
    0.75
    
    
    $
    0.55
    
    
    $
    0.38
 For purposes of applying SFAS No. 123, the estimated fair value of stock options granted
during 2004, 2003 and 2002 was $7.86, $4.35 and $7.32, respectively. The fair value of these
options was estimated at the date of grant using a Black-Scholes option-pricing model with the
following assumptions: 2004
    
    
    2003
    
    
    2002Expected volatility
    
    
    38.6
    %
    
    
    48.6
    %
    
    
    68.1
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rate
    
    
    3.5
    %
    
    
    2.9
    %
    
    
    3.2
    %Expected life
    
    5 years
    
    5 years
    
    5 years
 46




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Translation adjustments The financial position and results of operations of the Companys international subsidiaries are
measured using local currencies as the functional currencies. The 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 income or loss in the stockholders equity section of the
consolidated balance sheets. Income and losses that result from foreign currency transactions are
included in earnings. The Company incurred a loss from foreign currency transactions of $2.4
million in 2004 which is included in Other (expense) income  net. Amounts incurred in 2003 and
2002 were not material. 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 income or loss in the Companys consolidated balance sheets. Recent accounting pronouncements In December 2004, the Financial Accounting Standards Board (FASB) revised SFAS No. 123,
Share-Based Payment (SFAS No. 123R). SFAS No. 123R replaces SFAS No. 123 and, although the two
pronouncements are similar in most respects, a key difference among the pronouncements is that SFAS
No. 123R generally requires companies to recognize the cost of employee services rendered in
exchange for awards of equity instruments based on the grant-date fair value of those awards. SFAS
No. 123R is effective as of the beginning of the first interim reporting period that begins after
June 15, 2005 and may be adopted earlier. The Company did not adopt SFAS No. 123R as of December
31, 2004 and as a result, SFAS No. 123R has not affected the Companys consolidated financial
position or results of operations to date. The adoption of SFAS 123R will result in an increase in
the Companys employee costs. The Company has not yet determined which option valuation approach
it will use to estimate the fair value of the stock option grants and so the Company cannot
precisely estimate the amount of this increase at this time. In December 2004, the FASB issued Staff Position No. FAS 109-1, Application of FASB Statement 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by
the American Jobs Creation Act of 2004 and Staff Position No. FAS 109-2, Accounting and
Disclosure for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 (collectively, the Provisions). The Provisions were issued in response to certain issues
surrounding the Act. This Act provides certain domestic companies a temporary opportunity to
repatriate previously undistributed earnings of controlled foreign subsidiaries at a reduced
federal tax rate, approximating 5.25%. The reduced rate is achieved via an 85% dividends received
deduction on earnings repatriated during a one-year period. The Provisions address the appropriate
treatment of the tax deduction as well as accounting and disclosure requirements related to the
deduction. Although the Company is still assessing the repatriation provisions of the Act, it does
not currently anticipate repatriating funds from India during 2005. In September 2004, the
Emerging Issues Task Force (EITF) reached a consensus regarding Issue No. 04-1, Accounting for
Preexisting Relationships Between the Parties to a Business Combination (EITF 04-1). EITF 04-1
requires an acquirer in a business combination to evaluate any preexisting relationship with the
acquiree to determine if the business combination in effect contains a settlement of the
preexisting relationship. A business combination between parties with a preexisting relationship
should be viewed as a multiple element transaction. EITF 04-1 is effective for business
combinations after October 13, 2004, but requires goodwill resulting from prior business
combinations involving parties with a preexisting relationship to be tested for impairment by
applying the guidance in the consensus. The Company will apply EITF 04-1 to acquisitions subsequent
to the effective date and in its future goodwill impairment testing. NOTE 3  BUSINESS COMBINATIONS: Acquisitions during the years ended December 31, 2003 and 2002
During 2002, the Company acquired four independent ATM networks through stock or asset purchases:
Hanco Systems, Inc. (Hanco); Samsar ATM Company, Inc. (Samsar); Evergreen Teller Services, Inc.
(Evergreen); 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. 47




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##### Table of Contents



The total purchase price of these acquisitions was approximately $40 million of which approximately
$35 million was paid in cash. 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. The following table summarizes the estimated fair value of assets acquired and
liabilities assumed at the date of each acquisition and the weighted average useful lives of the
acquired intangible assets: Wtd. Avg(dollars in thousands)
    
    Amount
    
    
    Useful LivesCurrent 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 ATM networks acquired during 2002 were included in the ATM Portfolio sale the Company
completed in November 2004 (see Note 4). 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. At December 31, 2004, payment of approximately $1.6 million of the aggregate purchase
price remained 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 the
Oasis acquisition and the useful lives of its intangible assets: Useful(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
 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 income. 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 2003 and 2002. 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
    
    
    2002Net revenue
    
    $
    547,594
    
    
    $
    579,094Net income
    
    
    29,067
    
    
    
    16,119Net income per share:Basic
    
    $
    0.62
    
    
    $
    0.35Diluted
    
    $
    0.62
    
    
    $
    0.34
 48




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Acquisitions during the year ended December 31, 2004 In April of 2004, the Company acquired Penley, Inc. (Penley), which provides identity verification
services, and Loss Control Solutions (LCS), which offers fraud investigation case management
software for the financial services industry. The primary reason for these acquisitions was to
expand the product suite and customer set within the Risk Management segment. The results of
operations for the acquired entities have been included in the Companys consolidated income
statements since the acquisition dates. The aggregate initial purchase price paid for the entities
was approximately $6 million, of which approximately $5 million was funded from existing cash on
hand. Approximately $1 million of the purchase price was placed in escrow subject to the
satisfaction of certain post-closing conditions and the distribution of this amount remained
subject to such conditions at December 31, 2004. Additional amounts could become payable to the
former stockholders of Penley if the acquired business achieves certain revenue and income targets
during the two year period following the acquisition. The maximum additional amount payable to
such stockholders is $21 million. The results of operations of Penley and LCS are not material to the Company, and accordingly, pro
forma results of operations for the acquisitions have not been provided. The estimated fair value
of the net assets acquired was approximately $6 million, which included approximately $5 million of
goodwill and approximately $1 million of intangible assets related to acquired contracts which have
an estimated life of approximately 6 years. All of the goodwill and intangible assets associated
with this transaction were assigned to the Risk Management segment. NOTE 4  DISPOSITIONS: On November 19, 2004, the Company consummated an agreement (the Agreement) to sell the ATM
Portfolio associated with its ATM Management segment. Concurrently with the consummation of the
sale of the ATM Portfolio, the Company entered into a five year Master Services Agreement (MSA)
with the buyer. Pursuant to the MSA, the Company is providing the buyer with transaction
processing, residual administration, cash and telecommunications management, help desk and other
ATM management services. The ATM Portfolio represented a significant portion of the ATM Management
segment and the Company ceased presenting this business as a separate operating segment following
the ATM Portfolio sale. The services provided in accordance with the MSA are presented within the
Companys remaining segments with processing service revenues and related costs being recorded
within the Electronic Payments segment and revenues from ATM management services and costs reported
within the Global Outsourcing segment. The operating results of the ATM Portfolio have not been
presented as discontinued operations because the Company has significant continuing involvement in
the operations of the asset group through the MSA. The major asset categories and related carrying
amounts sold and disposed of included net accounts receivable of $4 million, net property and
equipment of $7 million, goodwill of approximately $76 million, net other intangible assets of
approximately $17 million, other current assets of approximately $2 million and accounts payable
and other current liabilities of approximately $7 million. The Company incurred approximately $5
million of costs in connection with the transaction that primarily consisted of professional
service fees. The amounts received by the Company in connection with the Agreement exceeded the book value of the
ATM Portfolio by approximately $48 million. In considering the appropriate method for accounting
for the excess proceeds from this arrangement, the Company considered the analogous authoritative
literature. The most directly applicable pronouncement was considered
to be EITF 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). EITF 00-21
indicates that in arrangements with multiple elements that are deemed to be in substance one
arrangement, any income or gain associated with the arrangement should be deferred and recognized
over the period of the remaining obligations unless there is sufficient, objective and reliable
evidence of the fair value of the undelivered contractual elements. The Company considers the ATM
Portfolio sale and the MSA to be components of a single arrangement because these transactions were
negotiated simultaneously without regard to their individual economic characteristics. Although
both factual and anecdotal evidence was considered, the Company was unable to determine the fair
value of the MSA with a reasonable degree of certainty due to, among other things, the uniqueness
of that contract, the lack of similar arrangements in the industry and because the contractual cash
flows expected to be generated by the MSA are not representative of the contracts intrinsic fair
value absent the compensating benefits associated with the entirety of the arrangement represented
by the ATM Portfolio sale and the MSA. Due to the lack of sufficient, objective and reliable
evidence of the fair value of the MSA, the Company determined that the only appropriate method of
accounting for the arrangement was to defer the entirety of the implied gain from the transactions
and amortize this amount as a reduction in the other operating costs
of the Global Outsourcing segment over the period of the remaining undelivered elements of the obligations
of the arrangement (the initial five year term of the MSA). At December 31, 2004, approximately
$47 million of the implied gain was recorded as a deferred gain of which $10 million was 49




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recorded as current
liabilities and the remainder is included in long-term liabilities. The Company has modified its approach to accounting for
this agreement and will not be recognizing any revenues as a result
of this amortization in future periods. The following table summarizes the unaudited pro forma results of operations of the Company as
though the disposition of the ATM Portfolio had occurred at the beginning of each period presented.
Pro forma adjustments include only the effects of events directly related to the divestiture that
are factually supported and expected to have a continuing impact. The pro forma results contained
in the table below include adjustments to remove all revenues and controllable costs related to the
ATM Portfolio as well as adjustments to reflect the application of the Companys income tax rate to
the pro forma net income. The adjustments do not reflect the elimination of certain technology and
corporate overhead costs as a result of the ATM Portfolio sale. Approximately $11 million and $10
million of these indirect costs were allocated to the operations included in the ATM Portfolio sale
during the years ended December 31, 2004 and 2003, respectively. The pro forma adjustments also do
not include revenues from the MSA or the amortization of the gain on the ATM Portfolio in periods
prior to the consummation date of the ATM Portfolio sale as these were derived from the prospective
transaction. (unaudited)(in thousands, except per share amounts)
    
    2004
    
    
    2003Net revenue
    
    $
    430,829
    
    
    $
    392,257Net income
    
    
    33,486
    
    
    
    21,848Net income per share:Basic
    
    $
    0.69
    
    
    $
    0.47Diluted
    
    $
    0.68
    
    
    $
    0.46
 NOTE 5  INTANGIBLES: Intangible assets consist primarily of capitalized software costs, acquired contracts and goodwill. 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, it is
probable that the project will be completed and 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. Software-licensing and resale 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, taking into account such factors as the effects of
obsolescence, technological advances and competition. Software developed for resale is carried at
the lesser of amortized cost or net realizable value. Acquired contracts and other 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. Where appropriate, third-party valuation professionals are
used to assist management in making these estimates. Other intangibles include 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. 50




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Intangible assets, both acquired and developed, subject to amortization are presented in the table
below. Certain intangible assets presented in the table for 2003 were reclassified during the
fourth quarter of 2004 to conform with the current period presentation. The reclassification reflects the recharacterization of internally developed
software amounts to present those amounts in the intangible assets category that is consistent with
the related softwares primary use. Wtd. Avg.
    
    
    December 31, 2004
    
    
    December 31, 2003Amort.
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    GrossPeriod
    
    
    Carrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    Accumulated(dollars in thousands)
    
    In Years
    
    
    Amounts
    
    
    Amortization
    
    
    Net
    
    
    Amounts
    
    
    Amortization
    
    
    NetSoftware-internal use
    
    
    4
    
    
    $
    94,272
    
    
    $
    (69,388
    )
    
    $
    24,884
    
    
    $
    90,770
    
    
    $
    (59,340
    )
    
    $
    31,430Software-licensing
and resale
    
    
    5
    
    
    
    54,996
    
    
    
    (40,522
    )
    
    
    14,474
    
    
    
    51,505
    
    
    
    (37,442
    )
    
    
    14,063Acquired contracts
and other
    
    
    6
    
    
    
    28,755
    
    
    
    (23,703
    )
    
    
    5,052
    
    
    
    51,905
    
    
    
    (26,282
    )
    
    
    25,623$
    178,023
    
    
    $
    (133,613
    )
    
    $
    44,410
    
    
    $
    194,180
    
    
    $
    (123,064
    )
    
    $
    71,116
 For the years ended December 31, 2004, 2003 and 2002 amortization expense for intangible
assets was $21.5 million, $20.6 million and $19.2 million, respectively. The estimated future
annual amortization expense for intangible assets held at December 31, 2004 is $16 million, $12
million, $8 million, $5 million, $2 million and $1 million for the years 2005, 2006, 2007, 2008,
2009 and 2010, respectively. 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 statements of income 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. Following the ATM Portfolio sale, certain goodwill amounts that were previously classified within
the ATM Management segment but which were not associated with the ATM Portfolio have been
reclassified to the Global Outsourcing segment because that segment employs the goodwill in
performing its obligations under the MSA (see Note 4). The changes in the carrying amount of
goodwill for the years ended December 31, 2004 and 2003 are as follows: Electronic
    
    
    Risk
    
    
    Global
    
    
    ATM(in thousands)
    
    Payments
    
    
    Management
    
    
    Outsourcing
    
    
    Management
    
    
    Other
    
    
    TotalBalance as of January 1, 2003
    
    $
    1,600
    
    
    $
    5,724
    
    
    $
    20,559
    
    
    $
    75,547
    
    
    $
    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
    
    
    
    5,724
    
    
    
    20,559
    
    
    
    77,982
    
    
    
    9,361
    
    
    
    128,586Goodwill acquired during year
    
    
    428
    
    
    
    5,452
    
    
    
    
    
    
    
    
    
    
    
    796
    
    
    
    6,676Disposition of ATM Portfolio
    
    
    
    
    
    
    
    
    
    
    2,189
    
    
    
    (77,982
    )
    
    
    (207
    )
    
    
    (76,000
    )Balance as of December 31, 2004
    
    $
    15,388
    
    
    $
    11,176
    
    
    $
    22,748
    
    
    $
    
    
    
    $
    9,950
    
    
    $
    59,262
 NOTE 6  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. 51




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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s value 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 associated with the asset be less than its carrying
value, an impairment loss equal to the amount by which the carrying value of the asset exceeds its
fair value would be recognized. 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 their carrying amount with their estimated fair value less costs to
sell. Should the estimated fair value less costs to sell be less than the carrying value of a
long-lived asset, an impairment loss would be recognized. The impairment loss would be equal to the
amount by which the carrying value of the asset exceeded its estimated fair value 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)
    
    2004
    
    
    2003
    
    
    2002Property and equipment
    
    $
    
    
    
    $
    
    
    
    $
    5,067Software
    
    
    
    
    
    
    
    
    
    
    2,122In-process research and development
    
    
    
    
    
    
    1,493
    
    
    
    Total asset impairment and other charges
    
    
    
    
    
    
    1,493
    
    
    
    7,189Reversal of lease-related provision (see table below)
    
    
    
    
    
    
    (854
    )
    
    
    Restructuring charges (see table below)
    
    
    3,093
    
    
    
    3,570
    
    
    
    9,336Total restructuring, asset impairment and other charges
    
    $
    3,093
    
    
    $
    4,209
    
    
    $
    16,525
 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 payment of the severance benefits is
considered probable and the amount of those benefits can be reasonably estimated. These charges are
included in Restructuring, asset impairment and other charges in the Companys consolidated
statements of income. 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 $3.1 million, $2.7 million and $16.5 million in 2004, 2003 and 2002, respectively. Severance
charges recorded in 2004 of $3.1 million relate to the elimination of approximately 158 positions.
These charges are expected to be paid through 2005. 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 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 software impairment charge of $2.1
million related to products that were discontinued. The following table summarizes the change in the Companys restructuring accruals for 2004, 2003
and 2002 including the long-term portion of approximately $1.1 million, $1.9 million and $4.6
million at December 31, 2004, 2003 and 2002, respectively. The Company expects to pay the remaining
severance related accruals in 2005 and the lease-related costs over 52




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the terms of the leases. The lease-related costs are payable through 2010. Severance
    
    
    Lease Related(in thousands)
    
    Related
    
    
    Cost & Other
    
    
    TotalBalance 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
    
    
    
    4,354Expense provision
    
    
    3,093
    
    
    
    
    
    
    
    3,093Cash payments
    
    
    (2,197
    )
    
    
    (844
    )
    
    
    (3,041
    )Balance December 31, 2004
    
    $
    2,464
    
    
    $
    1,942
    
    
    $
    4,406
 NOTE 7  ACCRUED CONTRACT LOSSES: From time to time the Company enters into long-term 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 Electronic Payments segment contracts for long-term
government service contracts and long-term software services contracts. 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, days of professional services, 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
established a reserve in prior years 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. Although
the timing of any additional provisions for contract losses and reversals of provision for contract
losses is not related to the contracts life, the Companys ability to more precisely estimate the
future performance of any given contract improves as the remaining term of that contract shortens.
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 income and are reflected in the Electronic Payments segment. During each
of the years 2003 and 2002, the Company recorded reversals of the provision of $3.7 million and
$2.0 million, respectively, to reflect a reduction in the expected future losses related to its
government services contracts. 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 indemnify 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 53




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the government services business are limited to $14.6 million. No such indemnification obligations
have been incurred through December 31, 2004. The following table summarizes the activity of the accrued contract loss reserve: Year Ended December 31,(in thousands)
    
    2004
    
    
    2003
    
    
    2002Beginning balance
    
    $
    1,890
    
    
    $
    7,578
    
    
    $
    14,777Provision for contract losses
    
    
    501
    
    
    
    
    
    
    
    Reversal of provision for contract losses
    
    
    
    
    
    
    (3,650
    )
    
    
    (2,000
    )Charges to reserve
    
    
    (1,229
    )
    
    
    (2,038
    )
    
    
    (5,199
    )Ending balance
    
    $
    1,162
    
    
    $
    1,890
    
    
    $
    7,578
 NOTE 8  PROVISION FOR INCOME TAXES: Income before income taxes consists of: Year Ended December 31,(in thousands)
    
    2004
    
    
    2003
    
    
    2002Domestic
    
    $
    52,726
    
    
    $
    29,961
    
    
    $
    28,846Foreign
    
    
    5,586
    
    
    
    9,906
    
    
    
    7,307Total
    
    $
    58,312
    
    
    $
    39,867
    
    
    $
    36,153
 The components of the provision for income taxes are as follows: Year Ended December 31,(in thousands)
    
    2004
    
    
    2003
    
    
    2002Current tax provision
Federal
    
    $
    (37,679
    )
    
    $
    (8,438
    )
    
    $
    (7,339
    )Foreign
    
    
    (824
    )
    
    
    (404
    )
    
    
    (854
    )State
    
    
    (5,952
    )
    
    
    (1,082
    )
    
    
    (1,456
    )Total
    
    
    (44,455
    )
    
    
    (9,924
    )
    
    
    (9,649
    )Deferred tax benefit (provision)Federal
    
    
    23,052
    
    
    
    (809
    )
    
    
    (1,620
    )Foreign
    
    
    423
    
    
    
    
    
    
    
    State
    
    
    3,486
    
    
    
    (226
    )
    
    
    (330
    )Total
    
    $
    (17,494
    )
    
    $
    (10,959
    )
    
    $
    (11,599
    )
 The Companys effective tax rate on pretax income differs from the U.S. Federal statutory tax
rate of 35% as follows: Year Ended December 31,(in thousands)
    
    2004
    
    
    2003
    
    
    2002Income tax at Federal statutory rate
    
    $
    (20,409
    )
    
    $
    (13,953
    )
    
    $
    (12,652
    )State income taxes net of Federal income tax benefit
    
    
    (1,603
    )
    
    
    (850
    )
    
    
    (1,161
    )Difference between Federal statutory rate and
foreign tax rate
    
    
    2,416
    
    
    
    2,310
    
    
    
    2,531Change in valuation allowance
    
    
    
    
    
    
    1,246
    
    
    
    2,083Extraterritorial income exclusion
    
    
    265
    
    
    
    547
    
    
    
    Other
    
    
    1,837
    
    
    
    (259
    )
    
    
    (2,400
    )Provision for income taxes
    
    $
    (17,494
    )
    
    $
    (10,959
    )
    
    $
    (11,599
    )
 54




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Tax effected temporary differences, which give rise to a significant portion of deferred tax
assets and liabilities are as follows: Year Ended December 31,(in thousands)
    
    2004
    
    
    2003Deferred income tax assets:Net operating loss carryforwards
    
    $
    9,490
    
    
    $
    9,768Restructuring and other accruals
    
    
    1,685
    
    
    
    1,802Property and equipment
    
    
    1,574
    
    
    
    815Employee benefit and incentive plans
    
    
    7,215
    
    
    
    4,388Deferred revenue
    
    
    19,316
    
    
    
    1,261All other
    
    
    1,827
    
    
    
    3,43841,107
    
    
    
    21,472Valuation allowance
    
    
    (8,581
    )
    
    
    (8,729
    )Deferred income tax assets
    
    $
    32,526
    
    
    $
    12,743Deferred income tax liabilities:Intangibles
    
    
    2,677
    
    
    
    9,502Prepaid expenses
    
    
    1,545
    
    
    
    1,898Deferred income tax liabilities
    
    
    4,222
    
    
    
    11,400Net deferred income tax assets
    
    $
    28,304
    
    
    $
    1,343Amount included in:Current assets
    
    $
    14,340
    
    
    $
    12,743Non-current assets
    
    
    13,964
    
    
    
    Non-current liabilities
    
    
    
    
    
    
    (11,400
    )$
    28,304
    
    
    $
    1,343
 The valuation allowance relates principally to the uncertainty of realizing foreign and state
net operating loss carryforwards. At December 31, 2004, net operating loss carryforwards relating to federal, state and foreign
jurisdictions amounted to $2.6 million, $128.6 million and $14.2 million, respectively. Of these
carryforwards, the $14.2 million of foreign net operating losses may be carried forward
indefinitely. It is anticipated that benefits associated with the utilization of the $14.2 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
    
    
    Total2005-2007
    
    $
    
    
    
    $
    618
    
    
    $
    6182008-2012
    
    
    77
    
    
    
    34,583
    
    
    
    34,6602013
    
    
    
    
    
    
    30,857
    
    
    
    30,8572014
    
    
    
    
    
    
    31,298
    
    
    
    31,2982015
    
    
    
    
    
    
    1
    
    
    
    12016
    
    
    
    
    
    
    3,012
    
    
    
    3,0122017
    
    
    2,300
    
    
    
    21,058
    
    
    
    23,3582018
    
    
    
    
    
    
    2,124
    
    
    
    2,1242019
    
    
    
    
    
    
    1,380
    
    
    
    1,3802021
    
    
    5
    
    
    
    471
    
    
    
    4762022
    
    
    217
    
    
    
    2,712
    
    
    
    2,9292023
    
    
    
    
    
    
    452
    
    
    
    452Total
    
    $
    2,599
    
    
    $
    128,566
    
    
    $
    131,165
 The Companys India 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 India 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 $2.8 million, $2.7 million and
$2.7 million in the years ended December 31, 2004, 2003 and 2002, respectively. 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 55




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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 9  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 were eligible to
participate in the ESPP in 2004, 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). The Company
did not record compensation expense as a result of the conversion process. 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. As of December 31, 2004, approximately 0.7 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. From time to time the Company issues restricted stock unit awards to employees and directors that
generally vest over periods ranging from one to three years. The Company issued 137,000 restricted
stock units in 2004, 32,000 restricted stock units in 2003 and 53,000 of such units in 2002. 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 $769,000, $259,000 and
$42,000 for restricted stock unit awards for the years ended December 31, 2004, 2003 and 2002,
respectively. In lieu of cash compensation, members of the Companys Board of Directors elected to
receive an aggregate of approximately 11,000 restricted stock units in 2004, 6,000 restricted stock
units in 2003 and 8,000 units in 2002. Information with respect to stock option activity is as follows: Year Ended December 31,2004
    
    
    2003
    
    
    2002Wtd. Avg.
    
    
    
    
    
    
    Wtd. Avg.
    
    
    
    
    
    
    Wtd. Avg.Exercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOptions outstanding at beginning of year
    
    
    5,221,872
    
    
    $
    12.09
    
    
    
    5,867,201
    
    
    $
    12.84
    
    
    
    5,671,385
    
    
    $
    12.95Options granted
    
    
    912,045
    
    
    
    16.52
    
    
    
    1,046,232
    
    
    
    9.01
    
    
    
    1,468,317
    
    
    
    12.22Options exercised
    
    
    (1,878,914
    )
    
    
    12.39
    
    
    
    (439,911
    )
    
    
    11.84
    
    
    
    (105,186
    )
    
    
    12.46Options cancelled
    
    
    (369,076
    )
    
    
    13.14
    
    
    
    (1,251,650
    )
    
    
    13.16
    
    
    
    (1,167,315
    )
    
    
    12.85Options outstanding at end of year
    
    
    3,885,927
    
    
    $
    12.88
    
    
    
    5,221,872
    
    
    $
    12.09
    
    
    
    5,867,201
    
    
    $
    12.84Options exercisable
    
    
    2,358,946
    
    
    $
    12.53
    
    
    
    3,661,768
    
    
    $
    13.00
    
    
    
    4,362,040
    
    
    $
    13.15
 56




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##### Table of Contents



For options outstanding and exercisable at December 31, 2004, the exercise price ranges and
average remaining lives in years were as follows: Options
    
    
    Wtd. Avg.
    
    
    Wtd. Avg.
    
    
    Options
    
    
    Wtd. Avg.Ranges of Exercise Prices
    
    Outstanding
    
    
    Remaining Life
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$  6.19-$12.87
    
    
    1,304,901
    
    
    
    7.7
    
    
    $
    8.68
    
    
    
    711,023
    
    
    $
    9.10$13.00-$13.78
    
    
    1,056,889
    
    
    
    5.9
    
    
    
    13.26
    
    
    
    1,004,110
    
    
    
    13.24$13.83-$23.95
    
    
    1,524,137
    
    
    
    7.0
    
    
    
    15.99
    
    
    
    643,813
    
    
    
    15.213,885,927
    
    
    
    7.0
    
    
    $
    12.88
    
    
    
    2,358,946
    
    
    $
    12.53
 Profit sharing, defined contribution and 401(k) plans The Company established a 401(k) plan effective on January 1, 2001. During 2004, highly compensated
employees, as defined by the IRS tax code, could contribute the lesser of $13,000 or 10% of their
eligible wages to the plan. Non-highly compensated employees could contribute the lesser of $13,000
or 15% of their eligible wages to the plan. Employees age 50 or over could contribute up to an
additional $3,000 during 2004. 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 $8.0 million for the year ended December 31,
2004, $8.4 million for the year ended December 31, 2003, and $5.2 million for the year ended
December 31, 2002. The Company also maintains a defined contribution plan for its UK based
employees. Expenses under this plan amounted to $0.3 million, $0.2 million and $0.2 million in
2004, 2003 and 2002, respectively. The Company established a Retirement Savings Plan for its Canadian associates on March 1, 2004.
Under this plan, the Company contributes 2% of eligible earnings and matches employee optional
contributions of up to 3%. Employee contributions under the plan are limited based on the
requirements of certain Canadian regulations. Expenses under this plan were $0.4 million during
2004. 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 $34,000 for 2004, $23,000 for 2003 and $0.1 million
for 2002. NOTE 10  LEASE AND DEBT COMMITMENTS: Long-term debt was as follows: December 31,(in thousands)
    
    2004
    
    
    2003Capital leases and other
    
    $
    5,524
    
    
    $
    7,253Less amount due within one year
    
    
    (1,955
    )
    
    
    (5,586
    )Total
    
    $
    3,569
    
    
    $
    1,667
 Long-term debt consists of capital lease obligations related to purchased software and
equipment. The weighted average interest rates on capital lease obligations is approximately 9%.
Carrying value approximates fair value for these obligations, which are due throughout the year
2009. Maturities of long-term debt for the five years ending December 31, 2009, are $2.0 million in
2005, $1.6 million in 2006, $1.0 million in 2007, $0.8 million in 2008 and $0.1 million in 2009.
The net book value of assets under capital leases was $8.8 million at December 31, 2004.
Amortization of assets held under capital leases is included with depreciation and amortization
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 $3.0 million
due in the future under non-cancelable subleases, is $52.0 million and includes $10.6 million in
2005, $9.0 million in 2006, $9.0 million in 2007, $6.9 million in 2008, $4.9 million in 2009 and
$11.6 million thereafter. Rental expense was $12.6 million, $15.0 million and $17.8 million in
2004, 2003 and 2002, respectively. 57




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NOTE 11  INCOME PER SHARE AND STOCKHOLDERS EQUITY: The following table reflects the calculation of basic and diluted income per share: Year Ended December 31,(in thousands, except per share amounts)
    
    2004
    
    
    2003
    
    
    2002Net income per share - basicNet income
    
    $
    40,818
    
    
    $
    28,908
    
    
    $
    24,554Weighted average shares outstanding
    
    
    48,201
    
    
    
    46,854
    
    
    
    46,588Net income per share - basic
    
    $
    0.85
    
    
    $
    0.62
    
    
    $
    0.53Net income per share - dilutedNet income
    
    $
    40,818
    
    
    $
    28,908
    
    
    $
    24,554Weighted average shares outstanding
    
    
    48,201
    
    
    
    46,854
    
    
    
    46,588Dilutive impact of options
    
    
    1,204
    
    
    
    385
    
    
    
    150Weighted average shares and potential
dilutive shares outstanding
    
    
    49,405
    
    
    
    47,239
    
    
    
    46,738Net income per share - diluted
    
    $
    0.83
    
    
    $
    0.61
    
    
    $
    0.53
 Options to purchase 116,000 shares, 3.4 million shares and 4.4 million shares of common stock
were excluded from the above calculation as they were antidilutive for the years ended December 31,
2004, 2003 and 2002, 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 12  BUSINESS SEGMENT INFORMATION: The Companys segment reporting was revised during the quarter ended March 31, 2004 to reflect
additional organizational and cost group changes. Certain revenues and expenses from collection
activities were reclassified between the Electronic Payments, Risk Management and Global
Outsourcing segments. Certain amortization cost groups were realigned with the respective business
segments that benefited from the use of the related assets. The segment information presented
below for the years ended December 31, 2003 and 2002 has been reclassified to reflect the Companys
current business segments. During the periods presented, the Companys business segments were: Electronic Payments; Risk
Management; Global Outsourcing; and ATM Management. 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 processing services,
including ACH processing, EBT services for government agencies, EFT software, software applications
development, maintenance and installation. The Risk Management segment provides data based risk
management services and other related 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 business process outsourcing and
information technology services. The ATM Management segment provided ATM deployment, management
and branding services. Following the consummation of the ATM Portfolio sale in November 2004, the
Company ceased reporting the ATM Management segment as a separate operating segment and so in 2004
the ATM Management segment only includes results of operations from January 1 to November 18. 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 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 are designated as Corporate
expenses and include, among other things, executive leadership costs, investor relations and
general legal, consulting, accounting and finance costs. 58




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Information concerning operations in these reportable segments of business is as follows: Year Ended December 31,(in thousands)
    
    2004
    
    
    2003
    
    
    2002Net revenue:Electronic payments
    
    $
    203,609
    
    
    $
    183,556
    
    
    $
    210,698Risk management
    
    
    140,099
    
    
    
    129,560
    
    
    
    124,011Global outsourcing
    
    
    87,121
    
    
    
    79,141
    
    
    
    92,801ATM management1
    
    
    121,319
    
    
    
    139,797
    
    
    
    115,597Total net revenue
    
    
    552,148
    
    
    
    532,054
    
    
    
    543,107Operating expenses before overhead, restructuring, asset impairment, other charges and
contract loss provision (reversal):Electronic payments
    
    
    157,986
    
    
    
    135,773
    
    
    
    147,028Risk management
    
    
    80,274
    
    
    
    89,138
    
    
    
    96,121Global outsourcing
    
    
    60,736
    
    
    
    64,070
    
    
    
    65,198ATM management1
    
    
    113,337
    
    
    
    131,939
    
    
    
    112,211Total operating expenses before overhead, restructuring, asset impairment, other charges
and contract loss provision (reversal)
    
    
    412,333
    
    
    
    420,920
    
    
    
    420,558Allocated overhead:Electronic payments
    
    
    11,398
    
    
    
    8,370
    
    
    
    11,741Risk management
    
    
    9,476
    
    
    
    10,084
    
    
    
    11,103Global outsourcing
    
    
    6,670
    
    
    
    8,088
    
    
    
    9,396ATM management1
    
    
    7,957
    
    
    
    7,437
    
    
    
    7,651Corporate
    
    
    42,190
    
    
    
    37,886
    
    
    
    32,714Total allocated overhead
    
    
    77,691
    
    
    
    71,865
    
    
    
    72,605Restructuring, asset impairment, other charges and contract loss provision (reversal):Electronic payments
    
    
    1,540
    
    
    
    (1,082
    )
    
    
    1,369Risk management
    
    
    355
    
    
    
    824
    
    
    
    4,998Global outsourcing
    
    
    1,103
    
    
    
    877
    
    
    
    1,216ATM management1
    
    
    371
    
    
    
    244
    
    
    
    82Corporate
    
    
    225
    
    
    
    (304
    )
    
    
    6,860Total restructuring, asset impairment, other charges and contract loss provision (reversal)
    
    
    3,594
    
    
    
    559
    
    
    
    14,525Income (loss) from operations:Electronic payments
    
    
    32,685
    
    
    
    40,495
    
    
    
    50,560Risk management
    
    
    49,994
    
    
    
    29,514
    
    
    
    11,789Global outsourcing
    
    
    18,612
    
    
    
    6,106
    
    
    
    16,991ATM management1
    
    
    (346
    )
    
    
    177
    
    
    
    (4,347
    )Corporate
    
    
    (42,415
    )
    
    
    (37,582
    )
    
    
    (39,574
    )Income from operations
    
    $
    58,530
    
    
    $
    38,710
    
    
    $
    35,419
   1
    
    See Note 4. 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)
    
    2004
    
    
    2003
    
    
    2002Depreciation and amortization:Electronic payments
    
    $
    15,381
    
    
    $
    11,489
    
    
    $
    13,671Risk management
    
    
    11,439
    
    
    
    13,136
    
    
    
    7,217Global outsourcing
    
    
    3,292
    
    
    
    3,746
    
    
    
    3,393ATM management1
    
    
    4,538
    
    
    
    4,971
    
    
    
    3,571Corporate
    
    
    1,551
    
    
    
    2,043
    
    
    
    9,120Total depreciation and amortization
    
    $
    36,201
    
    
    $
    35,385
    
    
    $
    36,972
   1
    
    See Note 4. No customers accounted for more than 10% of the Companys total net revenue before reimbursed
expenses during 2004, 2003 or 2002. 59




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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 Equipment - netYear Ended December 31,
    
    
    December 31,(in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003United States
    
    $
    486,307
    
    
    $
    482,251
    
    
    $
    495,768
    
    
    $
    37,703
    
    
    $
    38,594United Kingdom and other
    
    
    26,980
    
    
    
    18,352
    
    
    
    14,853
    
    
    
    493
    
    
    
    530India
    
    
    22,369
    
    
    
    18,817
    
    
    
    23,169
    
    
    
    11,875
    
    
    
    9,445Canada
    
    
    16,492
    
    
    
    12,634
    
    
    
    9,317
    
    
    
    249
    
    
    
    1,060Total consolidated
    
    $
    552,148
    
    
    $
    532,054
    
    
    $
    543,107
    
    
    $
    50,320
    
    
    $
    49,629
 NOTE 13  LEGAL PROCEEDINGS:

The Company was previously 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 settled this investigation in November 2004 without admitting or
denying the SECs findings in respect of these restatements by agreeing to cease and desist from
any future violations of the Securities laws. The Company, its former chief executive and chief financial officers and its current chief
financial officer were defendants in a federal securities action (the Federal Securities Action)
that was pending in the U.S. District Court for the District of Arizona. The Consolidated Amended
Complaint (Complaint) filed in this Action alleged, 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. This Complaint was dismissed by order of the Court on
July 12, 2004. The plaintiffs appealed this order of dismissal to the Ninth Circuit Court of
Appeals on August 11, 2004. At the request of the parties, the Court vacated the original briefing
schedule of this appeal and the Court has not established a new briefing schedule. The plaintiffs
and the defendants in this action have reached a tentative settlement of this matter under which
the defendants would pay the class $2.55 million. The tentative settlement is subject to initial
documentation confirmatory discovery, final documentation and approval by the Court. Assuming that
this settlement is ultimately consummated by the parties and approved by the Court, the Company
expects that its insurance will cover the entire settlement amount. The Company is 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 in these actions 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. These actions were stayed pending the resolution of the motion to dismiss the
Federal Securities Action that is discussed above. The parties have agreed in principle to a
settlement of this litigation whereby the defendants will pay up to $150,000 of the plaintiffs
attorney fees. The tentative settlement is subject to confirmatory discover, documentation and
approval by the Court. Assuming that this settlement is ultimately consummated by the parties and
approved by the court, the Company expects that its insurance will cover the entire settlement
amount. 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 that 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. In March 2004, the Company joined
in a motion to dismiss this case filed by a co-defendant and the Company filed its own further
motion to dismiss a portion of this case and a motion for summary judgment in June 2004. All of
these motions are pending before the Court. The Court has stayed all further proceedings in this
case pending the decision by the Eleventh Circuit of Appeals in Kehoe v. Fidelity Federal Bank &
Trust. 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. The Company is also subject to a variety of other claims and suits that arise from time to time in
the ordinary course of its business. 60




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NOTE 14  COMMITMENTS AND CONTINGENCIES:Future commercial commitments
The following table sets forth our future commercial commitments,
excluding loan commitments, as of
December 31, 2004: Commitment Expiration by Period(in thousands)
    
    Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterLetters of credit and other
    
    $
    960
    
    
    $
    853
    
    
    $
    107
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Performance bonds
    
    
    14,861
    
    
    
    14,646
    
    
    
    180
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    15,821
    
    
    $
    15,499
    
    
    $
    287
    
    
    $
    35
    
    
    $
    
    
    
    $
    
    
    
    $
    
 The Company uses time deposits to secure letters of credit it uses in the ordinary course of
business in India. The Company had $0.4 million in letters of credit outstanding at December 31,
2004, mostly related to leases. These letters of credit were secured by $0.4 million in cash
collateral. In addition, the Company obtained $0.5 million related to the performance on a customer
contract and certain obligations related to local government requirements in India. These bank
guarantees in India are collateralized by $0.5 million of time deposits. In connection with the Companys government services, collection and ATM management 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, 2004 was $14.9 million. Contractual cash obligations As of December 31, 2004, the Company had contractual cash obligations for capital leases, operating
leases, outsourcing and maintenance obligations in the aggregate amount of approximately $152.3
million. Amounts due under these obligations are $55.8 million in 2005, $36.5 million in 2006,
$20.2 million in 2007, $12.2 million in 2008, $9.5 million in 2009 and $18.1 million thereafter.
Operating lease amounts included in the cash obligations described above are net of $3.0 million of
minimum sublease rentals due in the future under non-cancelable subleases. Purchase orders for
goods and services are not included in these amounts. Purchase orders may represent authorizations
to purchase rather than binding agreements and are based upon current service needs that are
generally fulfilled by vendors within one or two months. For the purposes of the amounts above,
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. The Company is also party to certain other contracts with third parties whereby the
third party provides services to the Company. These services are operational in nature and the
obligations under these contracts vary from period to period based on the utilization of these
services. These commitments are also not reflected in the above amounts as the associated amounts
are not currently determinable. Other commitments As part of its 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 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 business days. The balances due to the Company are included in cash and cash
equivalents. As of December 31, 2004, approximately $35.5 million was due to the Company and it
received these funds in early January 2005. 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 $36 million under such a circumstance in the past. The Company
maintains a cash balance of approximately $75 million to ensure that it can fund this obligation.
The Company plans to satisfy these liquidity requirements using cash and cash equivalents on hand
as well as through the credit agreement described in Note 15. 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. Historically, the Companys costs to defend lawsuits or settle claims relating
to these indemnity agreements have not been significant. 61




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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. Indemnification of the Companys employees and other agents is permitted to the same extent.
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. The Company reimbursed three former officers
for an aggregate of approximately $0.1 million of disgorgement obligations such officers incurred
to the SEC in connection with the settlement of the SEC investigation discussed in Note 13. 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
that are also described in that Note. Although the Company maintains insurance policies providing
coverage for these types of matters, the Companys insurance carriers may decline coverage, or the
coverage may be insufficient to cover the Companys expenses and liabilities. NOTE 15  SUBSEQUENT EVENTS: On January 31, 2005, the Company acquired ClearCommerce Corporation (ClearCommerce), a
provider of fraud prevention and payment processing solutions. The primary purpose of this
acquisition was to expand the Risk Management segments retail product suite and customer base.
The aggregate initial purchase price was approximately $19 million, subject to certain closing
adjustments. Additional amounts up to $11 million could become payable to the former stockholders
of ClearCommerce if the acquired business achieves certain revenue and operational targets during a
one year period following the acquisition. The results of operations of ClearCommerce will be
included in the Companys consolidated statements of income beginning on the consummation date of
this transaction. On February 18, 2005, the Company entered into a credit agreement (the Credit Agreement) with a
syndicate of banks. The Credit Agreement provides for an initial aggregate commitment under an
unsecured revolving credit facility of $100 million. The Company has the option to increase this
commitment to $175 million if certain requirements of the Credit Agreement are satisfied. The
Company may use amounts borrowed under the Credit Agreement to finance permitted acquisitions and
related expenses, working capital needs and other general corporate purposes. The Credit Agreement
provides for two optional interest rates on any borrowings thereunder. The first rate is equal to
the greater of the Prime Rate (as defined) or the Federal Funds Effective Rate plus 0.5% depending
on certain conditions set forth in the Credit Agreement. The second rate is equal to the London
Interbank Offering Rate multiplied by the Statutory Reserve Rate plus an additional percentage
based on the Companys leverage ratio. The terms of the agreement include certain defined negative
and affirmative covenants customary for facilities of this type. The Credit Agreement will mature
in 2008, and upon the lenders approval, the Company may receive two one year extensions of the
maturity date. On February 23, 2005, the Company announced that its Board of Directors had approved a plan
pursuant to which the Company would buy back up to $100 million of its common stock at prices not
to exceed $25 per share over an estimated six to 18 month period beginning during the first quarter
of 2005. The repurchases will be made using the Companys available cash. The Company will be
making purchases in the open market, and through negotiated arrangements and block transactions in
accordance with applicable laws and regulations. 62




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SUPPLEMENTAL INFORMATION: EFUNDS CORPORATION
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) 2004 Quarters Ended(1)(in thousands except per share amounts)
    
    March 31
    
    
    June 30
    
    
    September 30
    
    
    December 31Net revenue
    
    $
    140,886
    
    
    $
    140,712
    
    
    $
    140,054
    
    
    $
    130,496Operating expenses
    
    
    126,864
    
    
    
    127,836
    
    
    
    124,847
    
    
    
    114,071Net income
    
    
    9,379
    
    
    
    9,423
    
    
    
    10,689
    
    
    
    11,327Per share of common stock:Net income - basic
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.22
    
    
    $
    0.23Net income - diluted
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.22
    
    
    $
    0.22
 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
   (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. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On December 1, 2002, iDLX Holdings B.V. engaged SR Batliboi and Associates, an Indian accounting
firm that is a member of Ernst & Young Global (SR Batliboi), as its independent auditor. The
decision to engage SR Batliboi was made by management and the Audit Committee of the Board of
Directors did not recommend this change in accountants or provide formal prior approval of the
change. Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu and their respective affiliates
(collectively, Deloitte), the Companys former principal accountant, did not audit the financial
statements of iDLX Holdings B.V., which statements reflected total assets constituting 11% of the
consolidated total assets of the Company as of December 31, 2002 and 6% and 30% of the Companys
consolidated net revenue and net income, respectively, for the year then ended. These statements
were audited by SR Batliboi and SR Batliboi expressed an unqualified opinion on these financial
statements in their report. The report of SR Batliboi was furnished to Deloitte and its opinion
regarding the Companys financial statements for 2002, insofar as it relates to the amounts
included for iDLX Holdings B.V., was based solely on the reports of SR Batliboi. Deloittes report on the Companys financial statements for 2002 did not contain an adverse opinion
or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or
accounting principles. Deloitte resigned as the Companys independent auditors following the completion of an engagement
to review the Companys interim consolidated financial statements as of and for the three-and
nine-month periods ended September 30, 2003. This engagement was completed on November 14, 2003
and Deloittes resignation was effective as of that date. The Companys Audit Committee did not
recommend that Deloitte resign. During the 2002 fiscal year, and the subsequent interim period through the date of Deloittes
resignation, there were no disagreements between the Company and Deloitte on any matter of
accounting principles or practices, financial statement disclosure or auditing scope or procedure,
which disagreements, if not resolved to Deloittes satisfaction, would have caused
Deloitte to make reference to the subject matter of the disagreement in connection with its
reports, other than as described in the following two paragraphs. 63




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The Company and Deloitte had a difference of opinion with respect to the accounting for revenue
related to a contract executed in March 2003 between the Company and an electronic funds processing
customer. The Company and Deloitte disagreed about whether an option included in the contract that
allows the customer to license the Companys software under certain circumstances following the
termination of the processing services provided by the Company had value such that a portion of the
revenues from the contract would be required to be deferred over a four year period. Deloitte and
the Company also differed on the methodology to be used to determine any value that may be
attributable to the option. The difference between the accounting treatment afforded to the
contract by the Company and the accounting treatment proposed by Deloitte was not material to the
Companys results of operations or financial position as of or for any of the quarterly periods
ended March 31, 2003 or June 30, 2003. The Audit Committee has discussed this matter with
Deloitte. This disagreement was satisfactorily resolved prior to the filing of the Companys Quarterly Report
on Form 10-Q for the period ended September 30, 2003, when the Company agreed to use the
methodology that had been recommended by Deloitte to determine the value that should get attributed
to the option. The application of this methodology to the contract resulted in an adjustment that
served to defer approximately $550,000 in revenues from the contract for the nine-month period
ended September 30, 2003. This adjustment was included in the Companys interim consolidated
financial statements as of and for the three and nine-month periods ended September 30, 2003. The Company authorized Deloitte to respond fully to any inquiries by its successor as the Companys
independent accountants concerning the accounting treatment afforded by the Company to this
contract. On November 20, 2003, the Companys Audit Committee engaged KPMG LLP as the Companys new
independent principal accountant to audit the Companys financial statements. Effective December 11, 2003, the Audit Committee of the Board of Directors of eFunds Corporation
voted to dismiss SR Batliboi and retain KPMG India Private Limited as independent auditor for iDLX
Holdings B.V. During the Companys two most recent fiscal years and subsequent interim periods
there were no disagreements with SR Batliboi on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures, which disagreements, if not
resolved to the satisfaction of SR Batliboi would have caused them to make reference to such
disagreements in their reports. SR Batlibois report on the 2002 financial statements of iDLX
Holdings B.V. did not contain an adverse opinion or a disclaimer of opinion, and was not qualified
or modified as to uncertainty, audit scope or accounting principles. 
 ITEM 9A. CONTROLS AND PROCEDURES Conclusion Regarding the Effectiveness of Disclosure 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, 2004. 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, 2004. Managements Report on Internal Control Over Financial Reporting The management of eFunds Corporation is responsible for establishing and maintaining adequate
internal control over financial reporting. The Companys system of internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements for external purposes in
accordance with accounting principles generally accepted in the United States (GAAP). The
Companys internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the Companys assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with GAAP, and that the Companys receipts and expenditures are being made only in accordance with
authorizations of its management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the Companys
assets that could have a material effect on the financial statements. Management has assessed the effectiveness of the Companys internal control system as of December
31, 2004 based on the criteria for effective internal control over financial reporting described in
Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on this assessment, 64




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management believes that, as of December 31, 2004, eFunds Corporations system of internal control over financial reporting is effective. The Companys independent registered public accounting firm, KPMG LLP, has issued an attestation
report on managements assessment of its internal control over financial reporting. 
 PART III 
 ITEMS 10, 11, 12, 13 AND 14. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE
COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS, CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND PRINCIPAL ACCOUNTANT FEES
AND SERVICES The Companys proxy statement, which will be filed with the Securities and Exchange Commission on
or before April 29, 2005, is incorporated by reference. Information regarding the executive
officers of the Registrant appears on page 7 of this Annual Report on Form 10-K. 
 PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  (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 ReportReports of Independent Registered Public Accounting Firms
    
    
    33-36Consolidated Balance Sheets at December 31, 2004 and 2003
    
    
    37Consolidated
Statements of Income for each of the three years in
the period ended December 31, 2004
    
    
    38Consolidated Statements of Comprehensive Income for each of
the three years in the period ended December 31, 2004
    
    
    39Consolidated Statements of Stockholders Equity
    
    
    40Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2004
    
    
    41Notes to Consolidated Financial Statements
    
    
    42-62Supplemental Information:Summarized
Quarterly Financial Data (Unaudited)
    
    
    63Schedule II 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. 65




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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
    
    Purchase Agreement, made as of September 20, 2004, by and
among eFunds Corporation, eFunds (Canada) Corporation, TRM
ATM Corporation and TRM Canada Corporation (incorporated by
reference to Exhibit 2.1 to the Companys Quarterly Report
on Form 10-Q for the quarter ended September 30, 2004 (the
September 2004 10-Q))
    
    *2.2
    
    Purchase and Sale Agreement, dated April 13, 2004, by and
between the Company, Penley, Inc. and certain individual
parties thereto (incorporated by reference to Exhibit 2.1
to the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004)
    
    *3.1
    
    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 (incorporated by reference to Exhibit 4.4 to
the Companys Annual Report on Form 10-K for the year ended
December 31, 2003 (the 2003 10-K))
    
    *10.1
    
    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)
    
    *10.2
    
    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)
    
    *10.3
    
    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)
    
    *10.4
    
    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))
    
    *
 66




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##### Table of Contents



EXHIBIT NUMBER
    
    DESCRIPTION
    
    METHOD OF FILING10.5
    
    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)
    
    *10.6
    
    eFunds Corporation Annual
Incentive Plan (incorporated by
reference to Exhibit 10.27 to
the 2000 10-K)
    
    *10.7
    
    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)
    
    *10.8
    
    eFunds Corporation Strategic
Performance Incentive Plan
(incorporated by reference to
Exhibit 10.14 to the 2003 10-K)
    
    *10.9
    
    Amended and Restated Change in
Control Agreement, dated as of
November 3, 2004, between the
Company and Paul F. Walsh
    
    Filed herewith10.10
    
    Retention Agreement dated as of
November 3, 2004 by and between
the Company and Paul F. Walsh
    
    Filed herewith10.11
    
    Restricted Stock Right Award
Agreement, dated as of November
3, 2004, between the Company and
Paul F. Walsh
    
    Filed herewith10.12
    
    Amendment to 2004 Award
Agreement, dated as of November
3, 2004, between the Company and
Paul F. Walsh
    
    Filed herewith10.13
    
    Schedule identifying Change in
Control Agreements omitted
pursuant to Instruction 2 to Item
601 of Regulation S-K
    
    Filed herewith10.14
    
    Non-Employee Director Deferred
Compensation Plan (incorporated
by reference to Exhibit 10.38 to
the 2000 10-K)
    
    *10.15
    
    Description of Compensation
program for Non-Employee
Directors (incorporated by
reference to Exhibit 10.10 to the
Companys Quarterly Report on
Form 10-Q for the quarter ended
March 31, 2003 (the March 2003
10-Q))
    
    *10.16
    
    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)
    
    *10.17
    
    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))
    
    *10.18
    
    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)
    
    *10.19
    
    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
Companys Annual Report on Form 10-K for the year ended
December 31, 2002 (the 2002 10-K))
    
    *10.20
    
    Schedule identifying additional Transition Assistance Agreements
omitted pursuant to Instruction 2 to Item 601 of Regulation S-K
    
    Filed herewith
 67




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##### Table of Contents



EXHIBIT NUMBER
    
    DESCRIPTION
    
    METHOD OF FILING10.21
    
    Amendment No. 1 to eFunds Deferred Compensation Plan Trust
(incorporated by reference to Exhibit 10.33 to the 2001 10-K)
    
    *10.22
    
    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)
    
    *10.23
    
    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)
    
    *10.24
    
    Resignation Letter, dated October 8, 2004, from Michael A. Feliciano
    
    Filed herewith10.25
    
    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)
    
    *10.26
    
    eFunds Corporation 2000 Stock Incentive Plan, as amended as of
September 17, 2004 (incorporated by reference to Exhibit 10.1 to the
September 2004 10-Q)
    
    *10.27
    
    eFunds Corporation Deferred Compensation Plan as Amended and Restated
Effective January 1, 2004 (incorporated by reference to Exhibit 10.2
to the September 2004 10-Q)
    
    *10.28
    
    Asset Purchase Agreement, dated January 30, 2004 (the Benton
Acquisition Agreement), by and between the Company and Benton
Consulting Partners (incorporated by reference to Exhibit 10.3 to the
Companys Quarterly Report on Form 10-Q for the quarter ended March
31, 2004 (the March 2004 10-Q))
    
    *10.29
    
    Amendment, dated March 18, 2004, to the Benton Acquisition Agreement
(incorporated by reference to Exhibit 10.4 to the March 2004 10-Q)
    
    *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 herewith24.1
    
    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)
    
    *
   *
    
    Incorporated by reference 68




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##### Table of Contents



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. 69




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##### Table of Contents



eFunds CorporationDate: March 16, 2005
    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 16, 2005 SIGNATURE
    
    
    
    TITLEBy:
    
    /s/ Paul F. Walsh
    
    
    
    Chairman of the Board and Chief Executive OfficerPaul F. Walsh
    
    
    
    (Principal Executive Officer)By:
    
    /s/ Thomas S. Liston
    
    
    
    Chief Financial OfficerThomas S. Liston
    
    
    
    (Principal Financial and Accounting Officer)By:
    
    *
    
    
    
    DirectorRichard J. AlmeidaBy:
    
    *
    
    
    
    DirectorJohn J. (Jack) Boyle IIIBy:
    
    *
    
    
    
    DirectorJanet M. ClarkeBy:
    
    *
    
    
    
    DirectorRichard J. LehmannBy:
    
    *
    
    
    
    DirectorRobert C. NakasoneBy:
    
    *
    
    
    
    DirectorSheila A. PenroseBy:
    
    *
    
    
    
    DirectorWilliam J. RyanBy:
    
    *
    
    
    
    DirectorHatim A. Tyabji*By:
    
    /s/ Paul F. Walsh
    
    
    
    DirectorPaul F.
WalshAttorney-in-Fact
 70




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##### Table of Contents



EFUNDS CORPORATION AND SUBSIDIARIES
SCHEDULE II RE: VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2004, 2003 and 2002 Balance
    
    
    Charged to
    
    
    
    
    
    
    
    
    
    
    Balanceat beginning
    
    
    costs and
    
    
    Other (deductions)
    
    
    
    
    
    
    at end ofDescription
    
    Year
    
    
    of period
    
    
    expenses
    
    
    charges
    
    
    Deductions(1)
    
    
    periodAllowance for Doubtful Accounts
    
    
    2004
    
    
    $
    3,149
    
    
    $
    18
    
    
    $
    (145
    )(2)
    
    $
    (666
    )
    
    $
    2,3562003
    
    
    
    3,012
    
    
    
    899
    
    
    
    307
    (3)
    
    
    (1,069
    )
    
    
    3,1492002
    
    
    
    4,791
    
    
    
    (182
    )(4)
    
    
    
    
    
    
    (1,597
    )
    
    
    3,012
   (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 eliminated upon the
disposition of the ATM Portfolio.(3)
    
    Amount represents the balance of allowance for doubtful accounts assumed upon acquisition of
Oasis Technology, Ltd.(4)
    
    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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##### Table of Contents



EXHIBIT INDEX EXHIBIT NUMBER
    
    DESCRIPTION OF EXHIBIT
    
    PAGE NO.10.9
    
    Amended and Restated Change in Control
Agreement, dated as of November 3, 2004, between
the Company and Paul F. Walsh10.10
    
    Retention Agreement dated as of November 3, 2004
by and between the Company and Paul F. Walsh10.11
    
    Restricted Stock Right Award Agreement, dated as of November 3, 2004
 between the Company and Paul F. Walsh10.12
    
    Amendment to 2004 Award Agreement, dated as
of November 3, 2004, between the Company and
Paul F. Walsh10.13
    
    Schedule identifying Change in Control
Agreements omitted pursuant to Instruction 2 to
Item 601 of Regulation S-K10.20
    
    Schedule identifying additional Transition
Assistance Agreements omitted pursuant to
Instruction 2 to Item 601 of Regulation S-K10.24
    
    Resignation Letter, dated October 8, 2004, from
Michael A. Feliciano21.1
    
    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