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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934For the quarterly period ended March 31, 2005ORo
    
    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
    
    39-1506286(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification Number)Gainey Center II
8501 N. Scottsdale Road, Suite 300
Scottsdale, Arizona
    
    85253(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (480) 629-7700 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.
Yes þ No o
- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No o The number of shares outstanding of the registrants common stock, par value $.01 per share, April 30, 2005 was 45,297,242




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 5. OTHER INFORMATIONITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESIndex to ExhibitsExhibit 2.1Exhibit 2.2Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.4EX-10.5Exhibit 31.1Exhibit 31.2Exhibit 32.1    Table of Contents  
 PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS EFUNDS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)March 31,
    
    
    December 31,(dollars in thousands)
    
    2005
    
    
    2004Current assets:Cash and cash equivalents
    
    $
    200,441
    
    
    $
    274,477Short-term investments
    
    
    102,360
    
    
    
    88,140Restricted custodial cash
    
    
    6,019
    
    
    
    2,392Accounts receivable  net
    
    
    73,282
    
    
    
    73,505Deferred income taxes
    
    
    9,257
    
    
    
    14,340Prepaid expenses and other current assets
    
    
    14,757
    
    
    
    15,710Total current assets
    
    
    406,116
    
    
    
    468,564Property and equipment  net
    
    
    48,744
    
    
    
    50,320Intangible assets  net
    
    
    123,565
    
    
    
    103,672Long-term deferred income taxes
    
    
    14,326
    
    
    
    13,964Other non-current assets
    
    
    6,761
    
    
    
    6,441Total non-current assets
    
    
    193,396
    
    
    
    174,397Total assets
    
    $
    599,512
    
    
    $
    642,961Current liabilities:Accounts payable
    
    $
    18,428
    
    
    $
    21,984Accrued liabilities
    
    
    33,869
    
    
    
    44,142Accrued stock repurchase
    
    
    24,788
    
    
    
    Accrued income taxes
    
    
    6,002
    
    
    
    40,879Deferred revenue and gains
    
    
    25,684
    
    
    
    16,445Long-term debt due within one year
    
    
    1,602
    
    
    
    1,955Total current liabilities
    
    
    110,373
    
    
    
    125,405Long-term deferred gains
    
    
    35,101
    
    
    
    37,539Long-term debt
    
    
    2,513
    
    
    
    3,569Other long-term liabilities
    
    
    2,044
    
    
    
    2,244Total liabilities
    
    
    150,031
    
    
    
    168,757Commitments and contingencies (Notes 3, 12, & 13)Stockholders equity:Preferred stock $.01 par value; 100,000,000 shares authorized; no shares
issued and outstanding
    
    
    
    
    
    
    Common stock $.01 par value (authorized: 250,000,000 shares; issued
and outstanding: 49,700,122 and 47,670,922 shares,
respectively at March 31, 2005 and 49,305,446 shares at December 31,
2004)
    
    
    497
    
    
    
    493Additional paid-in capital
    
    
    453,150
    
    
    
    446,825Treasury stock at cost (2,029,200 shares at March 31, 2005)
    
    
    (43,752
    )
    
    
    Retained earnings
    
    
    36,395
    
    
    
    23,231Accumulated other comprehensive income
    
    
    3,191
    
    
    
    3,655Stockholders equity
    
    
    449,481
    
    
    
    474,204Total liabilities and stockholders equity
    
    $
    599,512
    
    
    $
    642,961
 See Notes to Condensed Consolidated Financial Statements 1




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EFUNDS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) Three Months Ended March 31,(in thousands, except per share amounts)
    
    2005
    
    
    2004Net revenue
    
    $
    114,238
    
    
    $
    140,886Operating expenses:Processing, communication and service costs
    
    
    28,903
    
    
    
    58,670Employee costs
    
    
    49,244
    
    
    
    48,942Depreciation and amortization
    
    
    8,147
    
    
    
    8,929Other operating costs
    
    
    11,153
    
    
    
    10,323Total operating expenses
    
    
    97,447
    
    
    
    126,864Income from operations
    
    
    16,791
    
    
    
    14,022Other income (expense)  net
    
    
    1,475
    
    
    
    (624
    )Income before income taxes
    
    
    18,266
    
    
    
    13,398Provision for income taxes
    
    
    (5,102
    )
    
    
    (4,019
    )Net income
    
    $
    13,164
    
    
    $
    9,379Weighted average shares outstanding
    
    
    49,302
    
    
    
    47,686Weighted average shares and potential dilutive shares outstanding
    
    
    50,964
    
    
    
    49,115Net income per share  basic
    
    $
    0.27
    
    
    $
    0.20Net income per share  diluted
    
    $
    0.26
    
    
    $
    0.19
 See Notes to Condensed Consolidated Financial Statements 2




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EFUNDS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Three Months EndedMarch 31,(in thousands)
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    13,164
    
    
    $
    9,379Adjustments to reconcile net income to net cash (used in)
provided by operating activities:Depreciation
    
    
    3,576
    
    
    
    3,503Amortization
    
    
    4,571
    
    
    
    5,426Changes in assets and liabilities, net of effects
from acquisitions and dispositions:Restricted custodial cash
    
    
    73
    
    
    
    1,533Accounts receivable
    
    
    1,111
    
    
    
    (10,843
    )Accounts payable
    
    
    (3,877
    )
    
    
    1,292Deferred revenue and gains
    
    
    5,115
    
    
    
    6,311Income taxes receivable/payable
    
    
    (33,780
    )
    
    
    (1,995
    )Other assets and liabilities
    
    
    (9,470
    )
    
    
    (8,135
    )Net cash (used in) provided by operating activities
    
    
    (19,517
    )
    
    
    6,471Cash flows from investing activities:Capital expenditures
    
    
    (6,653
    )
    
    
    (4,531
    )Acquisitions
    
    
    (18,863
    )
    
    
    (775
    )Purchase of short-term investments
    
    
    (22,100
    )
    
    
    (15,500
    )Proceeds from sale of short-term investments
    
    
    7,880
    
    
    
    17,000Other
    
    
    (236
    )
    
    
    Net cash used in investing activities
    
    
    (39,972
    )
    
    
    (3,806
    )Cash flows from financing activities:Purchase of common stock
    
    
    (18,965
    )
    
    
    Issuance of common stock
    
    
    4,842
    
    
    
    5,984Payments on long-term debt
    
    
    (424
    )
    
    
    (1,977
    )Net cash (used in) provided by financing activities
    
    
    (14,547
    )
    
    
    4,007Net (decrease) increase in cash and cash equivalents
    
    
    (74,036
    )
    
    
    6,672Cash and cash equivalents at beginning of period
    
    
    274,477
    
    
    
    104,456Cash and cash equivalents at end of period
    
    $
    200,441
    
    
    $
    111,128Supplemental disclosures:Cash paid for income taxes
    
    $
    32,640
    
    
    $
    3,505Cash paid for interest
    
    $
    128
    
    
    $
    115Noncash investing and financing activities:Purchase of common stock
    
    $
    24,788
    
    
    $
    Purchase of assets under capital lease obligations
    
    $
    424
    
    
    $
    
 See Notes to Condensed Consolidated Financial Statements 3




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EFUNDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) NOTE 1  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION: 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 its
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. 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). During the three months ended March 31, 2004, 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 and information technology services. The ATM
Management segment provided ATM deployment, management and branding services. On November 19,
2004, the Company sold its ATM deployment business and has not considered its ATM management
activities as a separate operating segment since that date (see Note 4). The unaudited condensed consolidated financial statements of the Company for the three month
periods ended March 31, 2005 and 2004 have been prepared in accordance with accounting principles
generally accepted in the United States of America and the instructions to Form 10-Q and Article 10
of Regulation S-X. All material intercompany accounts and transactions have been eliminated. In
the opinion of management, all adjustments considered necessary for a fair presentation of the
Companys results of operation and financial condition, have been included. All of these
adjustments were of a normal, recurring nature. The Company has reclassified certain amounts
within the condensed consolidated statements of cash flows for the three months ended March 31,
2004 to conform to its 2005 presentation. The March 31, 2004 condensed consolidated balance sheet
included $52.2 million of short-term investments that were previously classified as cash and cash
equivalents. Interim results are not necessarily indicative of results for a full year. The preparation of the
Companys financial statements requires management to make various estimates and it is reasonably
possible that the circumstances under which these estimates were made will change in the relatively
near term. Such a change could result in a material revision to managements estimates which would
have a material affect on the Companys financial statements. These condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and
notes thereto for the year ended December 31, 2004 included in the Companys 2004 Annual Report on
Form 10-K filed with the Securities and Exchange Commission (SEC). The Annual Report provides
additional disclosures regarding the nature of the estimates made by management in preparing the
Companys financial statements. NOTE 2  SIGNIFICANT ACCOUNTING POLICIES: Recent 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 was originally scheduled to become effective as of the 4




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beginning of the first interim reporting period that began after June 15, 2005 but the SEC has
deferred the effective date of this pronouncement to the first annual reporting period that begins
after June 15, 2005. SFAS No. 123R may be adopted earlier. The Company did not adopt SFAS No.
123R as of March 31, 2005 and as a result, SFAS No. 123R has not affected the Companys condensed
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
valuation approach it will use to estimate the fair value of the stock options it grants to its
employees and so the Company cannot precisely estimate the amount of this increase at this time.
See the Employee stock-based compensation discussion below for information regarding the effects
of expensing stock-based employee compensation. 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 American Jobs Creation Act of 2004 (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 Company has no
present intention of repatriating the undistributed earnings of its foreign subsidiaries. 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 any 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 adoption of this standard has not had a
material impact on the Companys condensed consolidated financial position or results of operation. 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: Three Months EndedMarch 31,(dollars in thousands, except per share amounts)
    
    2005
    
    
    2004Net income, as reported
    
    $
    13,164
    
    
    $
    9,379Total stock-based employee compensation expense determined
under fair value based method for all awards, net of tax
    
    
    (1,274
    )
    
    
    (839
    )Pro forma net income
    
    $
    11,890
    
    
    $
    8,540Earnings per share:Basic-as reported
    
    $
    0.27
    
    
    $
    0.20Basic-pro forma
    
    $
    0.24
    
    
    $
    0.18Diluted-as reported
    
    $
    0.26
    
    
    $
    0.19Diluted-pro forma
    
    $
    0.23
    
    
    $
    0.17
 For purposes of applying SFAS No. 123, the weighted average estimated fair value of stock
options granted during the three month periods ended March 31, 2005 and 2004 was $9.45 and $7.86,
respectively. This value was estimated at the option grant date using a Black-Scholes
option-pricing model. The assumptions used to determine the fair value of stock options granted
during the three months ended March 31, 2005 included expected volatility of 33.2%, expected
dividend yield of 0.0%, a risk-free interest rate of 4.2% and an expected life of 5 years. The
assumptions used to determine the fair value of stock options granted during the three months ended
March 31, 2004 included expected volatility of 42.1%, expected dividend yield of 0.0%, a risk-free
interest rate of 2.9% and an expected life of 5 years. 5




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From time to time, the Company issues restricted stock unit awards to employees and directors that
generally vest over a three-year period. No consideration is paid for these awards. During the
three-month periods ended March 31, 2005 and 2004, the Company issued approximately 114,000 and
129,000 units of restricted stock, respectively. The Company recorded compensation expense for
restricted stock unit awards during the three months ended March 31, 2005 and 2004 of approximately
$426,000 and $116,000, respectively. Income Taxes During the current quarter, the Company recognized a $1.2 million tax benefit from the release of
certain tax reserves related to its foreign operations. The Company recognized these benefits in
the current quarter because certain tax rulings indicated that the reserves were no longer needed.
Accordingly, accounting principles generally accepted in the United States required that the
Company recognize the entirety of the benefit in the current quarter. The Company is currently
performing an analysis to determine if it is eligible for additional tax credits and other
benefits, which may result in possible future beneficial adjustments to the Companys tax rate.
The amount, timing and likelihood of any such benefits cannot be currently determined. NOTE 3  ACQUISITIONS: On January 31, 2005, the Company acquired ClearCommerce Corporation (ClearCommerce), a provider of
fraud prevention and payment processing solutions having primary application to card-not-present
transactions. The results of ClearCommerce have been included in the Companys condensed
consolidated financial statements since that date. 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. Up to $11
million of additional consideration could become payable to the former stockholders of
ClearCommerce if the acquired business achieves certain revenue and operational targets during the
one year period following the closing of this acquisition. At March 31, 2005, payment of
approximately $4 million of the aggregate initial 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 ClearCommerce acquisition and
the useful lives of its intangible assets: Useful(dollars in thousands)
    
    Amount
    
    
    LivesCurrent assets
    
    $
    1,230Non-current assets
    
    
    254Intangible assets:Customer relationships
    
    
    4,900
    
    
    10 yearsDeveloped technology
    
    
    4,740
    
    
    4 yearsBacklog
    
    
    210
    
    
    3 yearsGoodwill
    
    
    10,438Total assets acquired
    
    
    21,772Current liabilities
    
    
    2,907Net assets acquired
    
    $
    18,865
 The results of operations of ClearCommerce are not material to the Company, and accordingly,
pro forma results of operations for this acquisition are not disclosed herein. On March 31, 2005, the Company entered into a definitive agreement (the Agreement) to acquire India
Switch Company Private Limited (ISC). Pursuant to the Agreement, the Company will purchase ISCs
ATM management, transaction processing and debit card production businesses. These businesses are
conducted in India. Based on exchange rates between the U.S. dollar and Indian rupee as of the
date of the Agreement, the initial cash purchase price to be paid for ISC is $17.5 million subject
to working capital adjustments and holdback arrangements. An additional payment may be made
approximately one year following the closing if ISC achieves certain revenue objectives during that
period. The maximum amount payable in respect of this earn-out is $2.5 million. The Company will
also assume outstanding debt of ISC of approximately $3.1 million. The Company intends to fund the
purchase through its available cash resources. The closing of the transactions contemplated by the
Agreement is subject to customary conditions and is expected to occur in the second quarter of
2005. 6




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NOTE 4  DISPOSITIONS: On November 19, 2004, the Company consummated an agreement (the ATM Agreement) to sell the ATM
machines and merchant contracts (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, residuals 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 amounts received by the Company in connection with the ATM Agreement exceeded the book value of
the ATM Portfolio by approximately $48 million. These excess proceeds were recorded as a deferred
gain and are being ratably amortized as a reduction in the operating costs of the Companys Global
Outsourcing segment over the initial five-year term of the MSA. During the three months ended
March 31, 2005, approximately $2.4 million of the deferred gain was recognized as a reduction in
the Processing, communication and service costs incurred by this segment. At March 31, 2005,
approximately $44.8 million of the implied gain is recorded as a deferred gain of which $35.1
million is recorded as long-term liabilities and the remainder is included in current liabilities. NOTE 5  INTANGIBLES: Intangible assets consist primarily of capitalized software costs, acquired contracts and goodwill.
Intangible assets, both acquired and developed, subject to amortization are presented below. March 31, 2005
    
    
    December 31, 2004Wtd. Avg.Amort.
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    GrossPeriod
    
    
    Carrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    Accumulated(dollars in thousands)
    
    In Years
    
    
    Amounts
    
    
    Amortization
    
    
    Net
    
    
    Amounts
    
    
    Amortization
    
    
    NetSoftware-internal use
    
    
    4
    
    
    $
    96,648
    
    
    $
    (71,527
    )
    
    $
    25,121
    
    
    $
    94,272
    
    
    $
    (69,388
    )
    
    $
    24,884Software-licensing
and resale
    
    
    5
    
    
    
    33,852
    
    
    
    (23,571
    )
    
    
    10,281
    
    
    
    54,996
    
    
    
    (40,522
    )
    
    
    14,474Acquired contracts
and other
    
    
    6
    
    
    
    60,087
    
    
    
    (41,857
    )
    
    
    18,230
    
    
    
    28,755
    
    
    
    (23,703
    )
    
    
    5,052$
    190,587
    
    
    $
    (136,955
    )
    
    $
    53,632
    
    
    $
    178,023
    
    
    $
    (133,613
    )
    
    $
    44,410
 For the three-month periods ended March 31, 2005 and 2004, amortization expense for intangible
assets was $4.6 million and $5.4 million, respectively. The estimated amortization expense for
intangible assets held at March 31, 2005 is $14 million for the nine months ended December 31,
2005. For the years ended December 31, 2006, 2007, 2008, 2009 and 2010, the estimated amortization
expense for intangible assets held at March 31, 2005 is $14 million, $11 million, $7 million, $2
million, and $2 million, respectively. The change in the carrying amount of goodwill for the three months ended March 31, 2005 is as
follows: Electronic
    
    
    Risk
    
    
    Global(in thousands)
    
    Payments
    
    
    Management
    
    
    Outsourcing
    
    
    Other
    
    
    TotalBalance as of December 31, 2004
    
    $
    15,388
    
    
    $
    11,176
    
    
    $
    22,748
    
    
    $
    9,950
    
    
    $
    59,262Goodwill acquired
    
    
    
    
    
    
    10,438
    
    
    
    
    
    
    
    233
    
    
    
    10,671Balance as of March 31, 2005
    
    $
    15,388
    
    
    $
    21,614
    
    
    $
    22,748
    
    
    $
    10,183
    
    
    $
    69,933
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NOTE 6  RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGES: The following table summarizes the change in the Companys restructuring accruals for the three
month period ended March 31, 2005, including the long-term portion of lease related accruals of
approximately $1.0 million at March 31, 2005 that is payable through 2010: Lease-RelatedSeverance
    
    
    Costs &(in thousands)
    
    Related
    
    
    Other
    
    
    TotalBalance at December 31, 2004
    
    $
    2,464
    
    
    $
    1,942
    
    
    $
    4,406Cash payments
    
    
    (256
    )
    
    
    (246
    )
    
    
    (502
    )Balance at March 31, 2005
    
    $
    2,208
    
    
    $
    1,696
    
    
    $
    3,904
 NOTE 7  ACCRUED CONTRACT LOSSES: The Companys accrued contract losses are included in Accrued liabilities in the condensed
consolidated balance sheets and pertain to the Electronic Payments segment contracts for long-term
government service contracts and
long-term software services contracts. The following table summarizes the activity of the accrued
contract loss reserve: Three Months Ended March 31,(in thousands)
    
    2005
    
    
    2004Beginning balance
    
    $
    1,162
    
    
    $
    1,890Charges to reserve
    
    
    (293
    )
    
    
    (345
    )Ending balance
    
    $
    869
    
    
    $
    1,545
 NOTE 8  LONG-TERM DEBT AND BORROWING ARRANGEMENTS: Long-term debt was as follows: March 31,
    
    
    December 31,(in thousands)
    
    2005
    
    
    2004Capital leases and other
    
    $
    4,115
    
    
    $
    5,524Less amount due within one year
    
    
    (1,602
    )
    
    
    (1,955
    )Total
    
    $
    2,513
    
    
    $
    3,569
 Long-term debt consists of capital lease obligations related to purchased software and
equipment. The weighted average interest rate on capital lease obligations is approximately 10%.
Carrying value approximates fair value for these obligations, which are due through the year 2009. 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 Credit 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. As of March 31, 2005, the Company had not borrowed any funds
under this facility. 8




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NOTE 9  INCOME PER SHARE: The following table reflects the calculation of basic and diluted income per share: Three Months EndedMarch 31,(in thousands, except per share amounts)
    
    2005
    
    
    2004Net income per share  basicNet income
    
    $
    13,164
    
    
    $
    9,379Weighted average shares outstanding
    
    
    49,302
    
    
    
    47,686Net income per share  basic
    
    $
    0.27
    
    
    $
    0.20Net income per share  dilutedNet income
    
    $
    13,164
    
    
    $
    9,379Weighted average shares outstanding
    
    
    49,302
    
    
    
    47,686Dilutive impact of options
    
    
    1,662
    
    
    
    1,429Weighted average shares and potential dilutive shares outstanding
    
    
    50,964
    
    
    
    49,115Net income per share  diluted
    
    $
    0.26
    
    
    $
    0.19
 Options to purchase approximately 0.4 million shares and 0.2 million shares of common stock
were excluded from the above calculations as they were antidilutive during the three month periods
ended March 31, 2005 and 2004, respectively. NOTE 10  COMPREHENSIVE INCOME: The Companys total comprehensive income for the three-month periods ended March 31, 2005 and 2004
was $12.7 million and $11.4 million, respectively. The Companys total comprehensive income
consists of net income and foreign currency translation adjustments. NOTE 11  BUSINESS SEGMENT INFORMATION: The Companys segment reporting was revised during the current quarter to reflect modifications in
the Companys cost allocation structure. Operating expenses have been reclassified based on an
assessment of the Companys technology and overhead costs and the realignment of these costs with
the segments that receive the primary benefit from use of the related resources. The segment
information presented below for the three months ended March 31, 2004 has been reclassified to
reflect the Companys 2005 business segments presentation. 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 the 2004
results of this segment only reflect its 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 a portion of the
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. 9




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Information concerning operations in the Companys reportable segments is as follows: Three Months Ended March 31,(in thousands)
    
    2005
    
    
    2004Net revenue:Electronic payments
    
    $
    50,771
    
    
    $
    49,683Risk management
    
    
    37,606
    
    
    
    35,124Global outsourcing
    
    
    25,861
    
    
    
    20,919ATM management1
    
    
    
    
    
    
    35,160Total net revenue
    
    
    114,238
    
    
    
    140,886Operating expenses:Electronic payments
    
    
    44,292
    
    
    
    40,154Risk management
    
    
    22,206
    
    
    
    21,480Global outsourcing
    
    
    17,603
    
    
    
    16,064ATM management1
    
    
    
    
    
    
    33,189Total operating expenses
    
    
    84,101
    
    
    
    110,887Allocated overhead:Electronic payments
    
    
    3,567
    
    
    
    2,810Risk management
    
    
    2,508
    
    
    
    2,311Global outsourcing
    
    
    2,365
    
    
    
    1,685ATM management1
    
    
    
    
    
    
    2,163Corporate
    
    
    4,906
    
    
    
    7,008Total allocated overhead
    
    
    13,346
    
    
    
    15,977Income (loss) from operations:Electronic payments
    
    
    2,912
    
    
    
    6,719Risk management
    
    
    12,892
    
    
    
    11,333Global outsourcing
    
    
    5,893
    
    
    
    3,170ATM management1
    
    
    
    
    
    
    (192
    )Corporate
    
    
    (4,906
    )
    
    
    (7,008
    )Income from operations
    
    $
    16,791
    
    
    $
    14,022
   1
    
    See Note 4. The Company has not disclosed assets, interest income, interest expense or income taxes by segment
because this information is not reviewed by the chief operating decision maker nor practicable to
prepare. Depreciation and amortization for each of the Companys reporting segments is as follows: Three Months Ended March 31,(in thousands)
    
    2005
    
    
    2004Depreciation and amortization:Electronic payments
    
    $
    3,606
    
    
    $
    3,589Risk management
    
    
    2,931
    
    
    
    2,912Global outsourcing
    
    
    1,303
    
    
    
    807ATM management
    
    
    
    
    
    
    1,351Corporate
    
    
    307
    
    
    
    270Total depreciation and amortization
    
    $
    8,147
    
    
    $
    8,929
 Net revenue, classified by the geographic billing location of the customer, is as follows: Three Months EndedMarch 31,(in thousands)
    
    2005
    
    
    2004United States
    
    $
    102,043
    
    
    $
    125,320EMEA
    
    
    8,876
    
    
    
    8,119Canada
    
    
    1,498
    
    
    
    6,207Latin America
    
    
    899
    
    
    
    781India
    
    
    767
    
    
    
    310Asia
    
    
    155
    
    
    
    149Total consolidated
    
    $
    114,238
    
    
    $
    140,886
 10




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Property and equipment  net, classified by the geographic location of the controlling
statutory entity, is as follows: March 31,
    
    
    December 31,(in thousands)
    
    2005
    
    
    2004United States
    
    $
    35,964
    
    
    $
    37,703United Kingdom and other
    
    
    475
    
    
    
    493India
    
    
    12,050
    
    
    
    11,875Canada
    
    
    255
    
    
    
    249Total consolidated
    
    $
    48,744
    
    
    $
    50,320
 NOTE 12  COMMITMENTS AND CONTINGENCIES: Future commercial commitments The following table sets forth our future commercial commitments, excluding loan commitments, as of
March 31, 2005: Commitment Expiration by Period1(in thousands)
    
    Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterLetters of credit and other
    
    $
    1,009
    
    
    $
    912
    
    
    $
    97
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Performance bonds
    
    
    14,291
    
    
    
    3,891
    
    
    
    10,365
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    15,300
    
    
    $
    4,803
    
    
    $
    10,462
    
    
    $
    35
    
    
    $
    
    
    
    $
    
    
    
    $
    
   1
    
    Represents commercial commitment expirations during the last nine months of 2005 and
the respective years ending December 31, 2006 through 2009 and thereafter. 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 March 31,
2005, mostly related to leases. These letters of credit were secured by $0.5 million in cash
collateral. In addition, the Company has $0.6 million of bank guarantees related to performance
guarantees on a customer contract and certain obligations related to local government requirements
in India. These bank guarantees are collateralized by $0.6 million of time deposits. In connection with the Companys government services and collection 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 March
31, 2005 was $14.3 million. Contractual cash obligations As of March 31, 2005, the Company had contractual cash obligations for capital leases, operating
leases, outsourcing and maintenance obligations in the aggregate amount of approximately $136.2
million. The following table sets forth the Companys obligations as of March 31, 2005 for the
time periods specified. The Companys
long-term debt consists of capital lease obligations related to purchased software and equipment. Payments Due by PeriodNine months
    
    
    Three Years
    
    
    Three YearsEnded
    
    
    Ended
    
    
    EndedDecember 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    Total
    
    
    2005
    
    
    2008
    
    
    2011
    
    
    ThereafterCapital lease obligations
    
    $
    4,115
    
    
    $
    1,268
    
    
    $
    2,817
    
    
    $
    30
    
    
    $
    Operating lease
obligations1
    
    
    46,684
    
    
    
    8,481
    
    
    
    23,321
    
    
    
    11,429
    
    
    
    3,453Vendor obligations
    
    
    85,367
    
    
    
    33,834
    
    
    
    40,597
    
    
    
    10,936
    
    
    
    Total
    
    $
    136,166
    
    
    $
    43,583
    
    
    $
    66,735
    
    
    $
    22,395
    
    
    $
    3,453
   1
    
    Future minimum lease payments for non-cancelable operating
leases are presented net of minimum sublease rentals of $2.7 million
due in the future under non-cancelable subleases. Purchase orders for goods and services are not included in the above table because 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 11




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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. The typical overnight settlement balance due to the Company ranges from $5 million to
$40 million. The Company plans to satisfy these liquidity requirements using cash and cash
equivalents on hand as well as through the credit agreement discussed in Note 8. As of March 31,
2005, approximately $6.8 million was due to the Company and it received these funds in early April
2005. The Company has also sought to maintain an adequate cash balance to ensure that it can advance
funds to one of its processing customers if unusual circumstances prevent the Company from the
timely processing of this customers settlement files. Under the current contractual arrangements,
the Company could be required to advance as much as $111 million to this processing customer if
unusual circumstances prevented the timely processing of its settlement files at a peak period.
The Company has not had to advance any funds to this customer for a number of years and the Company
has established additional redundancies in its systems to further reduce the likelihood of such an
advance being required. On February 23, 2005, the Company announced that its Board of Directors had approved a plan to buy
back up to $100 million of its common stock at prices not to exceed $25 per share. The repurchases
are being made through the use of available cash. The Company is making purchases in the open
market and through negotiated arrangements and block transactions in accordance with applicable
laws and regulations. As of March 31, 2005, the Company had repurchased 2,029,200 shares at a
total cost of $43.8 million. The transactions related to 1,148,400 of these shares ($24.8 million)
had not been settled as of March 31, 2005 and amounts owed in respect of these transactions are
classified as accrued stock repurchase liabilities on the Companys condensed consolidated balance
sheets. 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. 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. In 2004, 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 an SEC investigation related to the
Companys restatement of its previously issued financial statements in 2002. These indemnification
obligations are also 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 described
below. Other contingencies The Company, its former chief executive and two of its former chief financial officers 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 12




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##### Table of Contents



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 purported 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. NOTE 13  SUBSEQUENT EVENTS: On April 1, 2005, George W. Gresham was appointed as the Companys Senior Vice President and Chief
Financial Officer following the retirement of Thomas S. Liston, the Companys previous Senior Vice
President and Chief Financial Officer. Mr. Gresham joined the Company in April 2002 as Corporate
Controller and became Vice President, Finance in January 2004. On May 3, the Company announced that it had completed its $100 million stock repurchase program.
Approximately 4.6 million shares were repurchased as part of this initiative. On May 3, 2005, the
Company acquired the assets of National Check Protection Services
Business Trust (NCPS) and National Data Verification Services
Business Trust (NDVS), providers of new account verification and
employment screening services for financial services companies.
The primary purpose of this acquisition was to expand the Risk Management segments product suite
and customer base. The aggregate initial cash purchase price to be paid is approximately $17.5
million subject to working capital adjustments and a
$2.0 million holdback. Additional amounts of up to
$2.5 million could become payable to the former shareholders of
NCPS and NDVS if the acquired businesses
achieve certain revenue objectives during a one year period following the acquisition. The
Company intends to fund the purchase price through its available cash resources. 13




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our Managements Discussion and Analysis of our Financial Condition and Results of Operations
(MD&A) begins with selected financial information regarding our return on invested capital. We
then provide an executive overview of our business that includes a description of our business
goals, the business models for our segments, key events which occurred during the quarter ended
March 31, 2005 and certain trends, risks and challenges. We then discuss our results of operations
for the three-month period ended March 31, 2005 compared to the three-month period ended March 31,
2004. This is followed by a discussion of our liquidity and capital resources, including cash
resources, sources and uses of cash and commercial commitments. You should read the description of
our Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year
ending December 31, 2004 because understanding these policies and estimates is important in order
to fully understand our reported financial results and our business outlook for future periods. You should read the following discussion together with our condensed consolidated financial
statements and the notes to those financial statements included in this Quarterly Report on Form
10-Q and our 2004 Annual Report on Form 10-K. In addition to historical information, this
discussion contains forward-looking statements as defined in the U.S. Private Securities
Litigation Reform Act of 1995. All forward-looking statements are subject to various risks and
uncertainties that could cause our actual future results to differ materially from those presently
anticipated due to a variety of factors, including those discussed in the risk factors and
cautionary statements in Part II, Item 5 of this Quarterly Report on Form 10-Q. 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 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 no longer present our ATM management business as a separate
operating segment in periods subsequent to the consummation of this transaction. Pursuant to the
MSA, we provide 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 (see Note 4 in the notes to the condensed consolidated
financial statements). The business model of each of our segments is summarized below. Electronic Payments This segment derives its revenue based upon our customers needs to process electronic
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. 14




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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 expanding our 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 represents
the substantial majority of this segments revenue. The balance of the remaining revenue of the
segment is 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) and information
technology services provided 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, information technology services, credit card and brokerage support, call
centers, loan processing, collections, data entry and systems maintenance. Operating costs in this
segment are primarily related to employee expenses and 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 no longer treat our ATM management activities as a separate operating
segment after this sale. Key Events During the Three Months Ended March 31, 2005  
    We acquired ClearCommerce Corporation, a provider of fraud prevention and payment
processing solutions having particular application to card-not-present transactions;
    We executed a definitive agreement to acquire India Switch Company Private Limited, an
India-based provider of ATM management, transaction processing and debit card production
services;
    We obtained a $100 million line of credit; 15




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
    We repurchased approximately two million outstanding shares of our common stock at a
cost of $43.8 million as part of a $100 million stock repurchase program we commenced in
2005;
    We announced changes in our executive leadership and other organizational changes to
support the ongoing implementation of our corporate strategy;
    Through our alliance with MasterCard, we signed a processing contract with a Tier I
financial institution;
    We were notified that a user of our BPO services that has recently been acquired and
will be terminating their relationship with us; and
    William J. Ryan resigned from our Board of Directors. Trends Our strategic planning and forecasting processes include the consideration of economic,
industry-wide and Company specific trends that may impact our customers, competitors and
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 higher transaction volumes 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 our BPO 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 our 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 Part II, Item 5, Risk Factors and Cautionary Statements:  
    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 could harm our business and reputation and expose us to potential liability. 16




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##### Table of Contents




    There are a number of risks associated with our international sales and operations that
could harm our business.
    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 of our Company that you may consider favorable. RESULTS OF OPERATIONS The following table presents our condensed consolidated financial results for the three month
periods ended March 31, 2005 and 2004: Three Months Ended March 31,(dollars in millions)
    
    2005
    
    
    2004
    
    
    % ChangeNet revenue
    
    $
    114.2
    
    
    $
    140.9
    
    
    
    (19
    )%Operating expenses:Processing, communication and service costs
    
    
    28.9
    
    
    
    58.7
    
    
    
    (51
    )Employee costs
    
    
    49.2
    
    
    
    48.9
    
    
    
    1Depreciation and amortization
    
    
    8.1
    
    
    
    8.9
    
    
    
    (9
    )Other operating costs
    
    
    11.2
    
    
    
    10.3
    
    
    
    9Total operating expenses1
    
    
    97.4
    
    
    
    126.9
    
    
    
    (23
    )Income from operations
    
    
    16.8
    
    
    
    14.0
    
    
    
    20Other income (expense)  net
    
    
    1.5
    
    
    
    (0.6
    )
    
    
    *Income before income taxes
    
    
    18.3
    
    
    
    13.4
    
    
    
    37Provision for income taxes
    
    
    (5.1
    )
    
    
    (4.0
    )
    
    
    (28
    )Net income1
    
    $
    13.2
    
    
    $
    9.4
    
    
    
    40
   *
    
    Represents an increase or decrease in excess of 100%.1
    
    Amounts may not sum due to rounding. Net Revenue Net revenue by reportable segment and for the Company as a whole for the three month periods ended
March 31, 2005 and 2004 was as follows: Three Months Ended March 31,(dollars in millions)
    
    2005
    
    
    2004
    
    
    % ChangeElectronic PaymentsEFT processing
    
    $
    29.1
    
    
    $
    25.6
    
    
    
    14
    %Government services (EBT)
    
    
    13.3
    
    
    
    14.6
    
    
    
    (9
    )Software sales
    
    
    8.4
    
    
    
    9.5
    
    
    
    (12
    )50.8
    
    
    
    49.7
    
    
    
    2Risk ManagementFinancial institution products
    
    
    32.7
    
    
    
    30.5
    
    
    
    7Retail products
    
    
    4.9
    
    
    
    4.6
    
    
    
    737.6
    
    
    
    35.1
    
    
    
    7Global OutsourcingBPO
    
    
    16.6
    
    
    
    13.1
    
    
    
    27IT services
    
    
    9.3
    
    
    
    7.8
    
    
    
    1925.9
    
    
    
    20.9
    
    
    
    24ATM Management1
    
    
    
    
    
    
    35.2
    
    
    
    *Total net revenue2
    
    $
    114.2
    
    
    $
    140.9
    
    
    
    (19
    )
   *
    
    Represents an increase or decrease in excess of 100%.1
    
    See Note 4 in the notes to the condensed consolidated financial statements.2
    
    Amounts may not sum due to rounding. 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 17




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##### Table of Contents



prior periods have 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 The results of operations of our Electronic Payments segment during the three months ended March
31, 2005 reflect the following changes as compared to the same period in 2004:  
    EFT processing revenues increased due to higher transaction volumes and customer reimbursed fees;
    EBT processing revenues decreased due to contract expirations; and
    our software sales decreased because of lower license and software services fees. The following table provides further detail regarding the revenue we generated from our software
business during the periods indicated: Three Months EndedMarch 31,(in millions)
    
    2005
    
    
    2004License fees
    
    $
    1.0
    
    
    $
    2.0Maintenance
    
    
    5.6
    
    
    
    5.2Software services
    
    
    1.8
    
    
    
    2.3$
    8.4
    
    
    $
    9.5
 We expect the total revenues from our Electronic Payments segment to be higher in 2005 as
compared to 2004 due to increased revenues from EFT processing services, higher levels of customer
reimbursable expenses and software sales. These higher revenues are expected to be partially
offset by a decrease in our government services revenues due to contract expirations. Risk Management The increase in our Risk Management segment revenues during the first three months of 2005 is
primarily attributable to our acquisitions of Penley Inc. (Penley) and Loss Control Solutions (LCS)
during the second quarter of 2004 and, to a lesser extent, organic growth from obtaining new
financial institution product customers. Retail product revenues also increased during the first
quarter of 2005 as compared to the same period in 2004 due to our acquisition of ClearCommerce in
late January 2005. Revenues from our Risk Management segment are expected to increase in 2005 as
compared to 2004 due to higher sales of our ChexSystems(SM) suite of products and growth from
acquisitions. Global Outsourcing Revenues from our outsourcing business increased during the three months ended March 31, 2005 as
compared to the same period in 2004 due to a 27% increase in BPO revenues. IT services revenues
were higher in the current quarter as compared to the prior year quarter due to $1 million of
additional revenues from project work involving a customer that is migrating its processing
activities in-house. IT services revenues were also positively impacted by a $1 million shortfall
fee we billed to our largest IT services customer because it failed to reach certain minimum
spending targets. We will not receive similar shortfall fees in future periods. We expect our
2005 Global Outsourcing segment revenues to increase as compared to 2004 from an expansion of our
customer base and an increase in the volume and types of services provided to existing customers. ATM Management The Company sold its ATM Portfolio in the fourth quarter of 2004 and has not considered its ATM
management business as a separate operating segment since that date. See Note 4 in the notes to
the condensed consolidated financial statements for additional discussion. 18




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##### Table of Contents



Business Segment Margin Contributions The following table presents our operating income (loss) by segment and total operating income for
the three month periods ended March 31, 2005 and 2004: Three Months Ended March 31,(dollars in millions)
    
    2005
    
    
    2004
    
    
    % ChangeOperating income (loss)
Electronic payments
    
    $
    2.9
    
    
    $
    6.7
    
    
    
    (57
    )%Risk management
    
    
    12.9
    
    
    
    11.3
    
    
    
    14Global outsourcing
    
    
    5.9
    
    
    
    3.2
    
    
    
    84ATM management1
    
    
    
    
    
    
    (0.2
    )
    
    
    *Corporate
    
    
    (4.9
    )
    
    
    (7.0
    )
    
    
    30Total operating income2
    
    $
    16.8
    
    
    $
    14.0
    
    
    
    20
   *
    
    Represents an increase or decrease in excess of 100%.1
    
    See Note 4 in the notes to the condensed consolidated financial statements.2
    
    Amounts may not sum due to rounding. Electronic Payments The decline in margins during the three months ended March 31, 2005 as compared to the same period
in 2004 is primarily due to the allocation of additional operating expenses and overhead costs to
this segment. These allocated costs relate to common expenses we incur to support our technology
and corporate infrastructures. Prior to its disposition, our ATM Management segment used to absorb
a significant portion of these costs. The decrease in operating income is also attributable to the
decrease in revenues from our EBT and software businesses.Although we experienced an increase in
EFT processing revenues during the first quarter of 2005, a significant portion of this increase
was attributable to an increase in the reimbursable fees which we pass-through to our customers
without a significant mark-up. As a result, an increase in the level of these types of revenues
does not improve the margin contributions of our processing business. We expect that the
contribution margins of this business will improve during the remainder of 2005. Risk Management We achieved higher margins in our Risk Management segment during the three months ended March 31,
2005 as compared to the same period in 2004 due to various cost savings initiatives. The operating
margin contributions of the Risk Management segment are expected to experience a slight increase in
2005 as compared to 2004. Global Outsourcing The margins for our global outsourcing business improved during the three months ended March 31,
2005 as compared to the same period in 2004 primarily due to the amortization of the gain
associated with the sale of our ATM Portfolio last fall, which improves the contributions from the
associated Master Services Agreement we signed with the buyer of that Portfolio. We also received
a $1 million shortfall fee from our largest IT services customer and additional revenues related to
a project involving a customer that is migrating its processing activities in-house. For full year
2005, we expect the margin contributions for our Global Outsourcing business to decrease somewhat
from the levels seen in 2004. ATM Management We sold our ATM Portfolio in the fourth quarter of 2004 and we have not considered our ATM
management business as a separate operating segment since that date. See Note 4 in the notes to
the condensed consolidated financial statements for additional discussion. Corporate Unallocated corporate overhead includes, among other things, the cost of executive leadership,
investor relations, shared legal, consulting, accounting and finance functions and certain
technology expenses. Corporate expenses decreased during the three months ended March 31 2005 as
compared to the same period in 2004 due to cost reduction efforts implemented following the sale of
our ATM Portfolio and a reduction in legal expenses from the resolution of the SEC investigation.
Corporate overhead costs incurred in 2005 are expected to decrease as compared to 2004 due to the
resolution of the SEC investigation and the expected settlement of the related stockholder
litigation as well as ongoing cost reduction efforts. 19




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##### Table of Contents



Operating Expenses Operating expenses for the three months ended March 31, 2005 and 2004 were as follows: Three Months Ended March 31,(dollars in millions)
    
    2005
    
    
    2004
    
    
    % ChangeOperating expenses:Processing, communication and service costs
    
    $
    28.9
    
    
    $
    58.7
    
    
    
    (51
    )%Employee costs
    
    
    49.2
    
    
    
    48.9
    
    
    
    1Depreciation and amortization
    
    
    8.1
    
    
    
    8.9
    
    
    
    (9
    )Other operating costs
    
    
    11.2
    
    
    
    10.3
    
    
    
    9Total operating expenses1
    
    $
    97.4
    
    
    $
    126.9
    
    
    
    (23
    )
   1
    
    Amounts may not sum due to rounding. 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 during the three months ended March 31,
2005 as compared to the same period in 2004 is due to reductions in ATM residual costs, the cost of
ATM equipment sales and the impact of the amortization of the deferred gain on the ATM Portfolio
sale. Processing, communication and service costs for the full 2005 fiscal year are expected to
decline as compared to costs incurred in 2004 due to the sale of the ATM Portfolio as well as
ongoing cost reduction efforts. Employee costs Expenses in this category represent employee compensation, payroll taxes, medical costs and other
employee related costs. Employee costs were relatively flat during the three month
period ended March 31, 2005 as compared to the same period in 2004 because higher performance-based
compensation expense and increases in our India-based employee headcount were offset by reductions
in employee costs following the sale of our ATM Portfolio. Company-wide headcount at March 31,
2005 has decreased by approximately 200 since December 31, 2004. At March 31, 2005, approximately
72% of our employees were located in India. Employee costs in 2005 are anticipated to be lower
than 2004, excluding the impact of acquisitions, due to headcount reductions and the transfer of
additional support functions to our India locations. 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.
Depreciation and amortization expenses during the three months ended March 31, 2005 decreased
as compared to the same period in 2004 due to the elimination of amortization expenses for
intangible assets related to our ATM Portfolio. We expect our depreciation and amortization costs
in 2005 to be comparable to costs experienced in 2004 as reductions in the costs related to the ATM
Portfolio will be offset by an increase in costs related to acquisitions. Other operating costs Expenditures in this category include facilities costs, professional, consulting and temporary
services, bad debt write-offs and certain administrative costs. The increase in other operating
costs during the first quarter of 2005 as compared to the same quarter in 2004 is primarily due an
increase in consulting and other expenses related to technology infrastructure improvement
initiatives. Other operating costs in 2005 are expected to decrease as compared to 2004 because of
lower legal expenses following the resolution of the SEC investigation in 2004, the anticipated
settlement of the related stockholder litigation and a reduction in costs related to compliance
with Section 404 of the Sarbanes-Oxley Act. Other income (expense)  net Other income (expense)  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 $1.8 million and $0.4 million for the three-month
periods ended March 31, 2005 and 2004, respectively. The effect of foreign currency translations
was immaterial during the three months ended March 31, 2005 as compared to a $1.2 million loss
incurred during the first quarter of 2004. 20




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##### Table of Contents



Provision for income taxes Our annualized effective tax rate for the three months ended March 31, 2005 and 2004 was 28% and
30%, respectively. Our effective tax rate is largely determined by our Indian subsidiarys
proportional share of our projected consolidated income. Our Indian software development and
business process outsourcing operations qualify for tax incentives associated with businesses that
operate within designated geographic locations in India. These incentives generally provide us
with exemptions from Indian income tax on certain business income generated from these operations
and phase out through March 2009. During the current quarter, we recognized a $1.2 million tax benefit from the release of certain
tax reserves related to our foreign operations. We recognized these benefits in the current
quarter because certain tax rulings indicated that the reserves were no longer needed. The
recognition of this benefit will reduce our annual effective tax rate to approximately 33%.
However, accounting principles generally accepted in the United States requires that we recognize
the entirety of this benefit in the current quarter and so the effective tax rate for the first
quarter of 2005 is lower than the expected annual effective tax rate. We are currently performing
an analysis to determine if we are eligible for additional tax credits and other benefits, which
may result in possible future beneficial adjustments to our tax rate. The amount, timing and
likelihood of any such benefits cannot be currently determined. LIQUIDITY AND CAPITAL RESOURCES Overview Information about our financial position as of March 31, 2005 and December 31, 2004 is presented
below: March 31,
    
    
    December 31,(dollars in millions)
    
    2005
    
    
    2004
    
    
    % ChangeCash and cash equivalents
    
    $
    200.4
    
    
    $
    274.5
    
    
    
    (27
    )%Short-term investments
    
    
    102.4
    
    
    
    88.1
    
    
    
    16Long-term debt due within one year
    
    
    1.6
    
    
    
    2.0
    
    
    
    (20
    )Long-term debt
    
    
    2.5
    
    
    
    3.6
    
    
    
    (31
    )Stockholders equity
    
    
    449.5
    
    
    
    474.2
    
    
    
    (5
    )Net working capital
    
    
    295.7
    
    
    
    343.2
    
    
    
    (14
    )
 Cash Resources Our cash balance and cash flows are expected to be sufficient to meet our recurring operating
commitments and to fund planned capital expenditures and share repurchases. Cash and cash
equivalents at March 31, 2005 included cash in India of approximately $31 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 have no present intention of
repatriating the undistributed earnings of our foreign subsidiaries. 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 ATM, point-of-sale or EBT transactions 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 to us are included in cash and cash equivalents. The typical
overnight settlement balance due to us ranges from $5 million to $40 million. We plan to satisfy
these liquidity requirements using cash and cash equivalents on hand as well as through the credit
agreement described below. As of March 31, 2005, approximately $7 million was due to us and it
received these funds in early April 2005. We have also sought to maintain an adequate cash balance to ensure that we can advance funds to one
of our processing customers if unusual circumstances prevent us from the timely processing of this
customers settlement files. Under the current contractual arrangements, we could be required to
advance as much as $111 million to this processing customer if unusual circumstances prevented the
timely processing of its settlement files at a peak period. We have not had to advance any funds
to this customer for a number of years and we have established additional redundancies in our
systems to further reduce the likelihood of such an advance being required. 21




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##### Table of Contents



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. As of March 31, 2005, we
had not borrowed any funds under this facility. 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. The repurchases are
made using our available cash. We are making purchases in the open market and through negotiated
arrangements and block transactions in accordance with applicable laws and regulations. As of
March 31, 2005, we have repurchased 2,029,200 shares at a total cost of $43.8 million. The
transactions related to 1,148,400 of these shares ($24.8 million) had not been settled as of March
31, 2005 and amounts owed in respect of these transactions are classified as accrued stock
repurchase liabilities on our condensed consolidated balance sheets. The following table sets forth our contractual cash obligations as of March 31, 2005 in total and
for the time periods specified. Our long-term debt consists of capital lease obligations related
to purchased software and equipment. Payments Due by PeriodNine-months
    
    
    Three Years
    
    
    Three YearsEnded
    
    
    Ended
    
    
    EndedDecember 31,
    
    
    December 31,
    
    
    December 31,(in thousands)
    
    Total
    
    
    2005
    
    
    2008
    
    
    2011
    
    
    ThereafterCapital lease obligations
    
    $
    4.1
    
    
    $
    1.3
    
    
    $
    2.8
    
    
    $
    
    
    
    $
    Operating lease
obligations1
    
    
    46.7
    
    
    
    8.5
    
    
    
    23.3
    
    
    
    11.4
    
    
    
    3.5Vendor obligations
    
    
    85.4
    
    
    
    33.8
    
    
    
    40.6
    
    
    
    11.0
    
    
    
    Total
    
    $
    136.2
    
    
    $
    43.6
    
    
    $
    66.7
    
    
    $
    22.4
    
    
    $
    3.5
   1
    
    Future minimum lease payments for non-cancelable operating
leases are presented net of minimum sublease rentals of $2.7 million
due in the future under non-cancelable subleases. 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. Purchase orders for goods and services are not included in
this table, because they may represent authorizations to purchase rather than binding agreements.
These orders are based upon our current service needs and are generally fulfilled by our vendors
within one or two months. 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 the services. These commitments are not
reflected in the table above as the associated amounts are not currently determinable. 22




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##### Table of Contents



Sources and Uses of Cash The following table sets forth a summary of our cash flow activity for the three months ended March
31, 2005 and 2004. This table should be read in conjunction with our condensed consolidated
statements of cash flows: Summary of Cash FlowsFor the Three MonthsEnded March 31,(in millions)
    
    2005
    
    
    2004Cash (used in) provided by operating activities
    
    $
    (19.5
    )
    
    $
    6.5Cash used in investing activities
    
    
    (40.0
    )
    
    
    (3.8
    )Cash (used in) provided by financing activities
    
    
    (14.5
    )
    
    
    4.0Net (decrease) increase in cash and cash equivalents
    
    $
    (74.0
    )
    
    $
    6.7
 Our current priorities for use of our cash are:  
    executing our share repurchase plan;
    acquisitions;
    investment in projects intended to increase our product delivery and operational
effectiveness, enhance our product suite and the redundancy of our systems; and
    funding our liquidity needs. We have no present intention of using our available funds to pay cash dividends. 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. The cash used in operations during the first quarter of 2005 included the payment of
performance-based bonuses of approximately $17 millions and $33 million of taxes primarily
associated with the sale of our ATM Portfolio. These reductions in cash were partially offset by
cash provided by our operating income. Investing Activities Cash used in or provided by our investing activities generally reflects the sale or acquisition of
assets. During the first three months of 2005, we disbursed approximately $19 million for our
acquisition of ClearCommerce and approximately $7 million to purchase fixed assets and develop
software. We also used $14 million of cash to purchase short-term investments. Financing Activities We receive funds from the exercise of stock options and the sale of our shares through our employee
stock purchase plan. We could also borrow money under our Credit Agreement. We disburse funds
through repurchases of our common stock and repayment of debt. Financing outflows during the
current period included the purchases of our common stock and repayment of debt. During the three
months ended March 31, 2005, we used $19 million to purchase our common stock. We received
approximately $5 million in proceeds from the exercise of stock options and the sale of shares
through our employee stock purchase plan. Commercial Commitments The following table sets forth our future commercial commitments as of March 31, 2005: Commitment Expiration by Period1(in millions)
    
    Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterLetters of credit and other
    
    $
    1.0
    
    
    $
    0.9
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Performance bonds
    
    
    14.3
    
    
    
    3.9
    
    
    
    10.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    15.3
    
    
    $
    4.8
    
    
    $
    10.5
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
   1
    
    Represents commercial commitment expirations during the last nine months of 2005 and
the respective years ending December 31, 2006 through 2009 and thereafter. 23




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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 March 31, 2005, mostly related
to leases. These letters of credit were secured by $0.5 million in cash collateral. In addition,
we have obtained $0.6 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 $0.6 million of time deposits at the banks issuing the guarantees. In connection with our government services business and collection 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 March 31, 2005
was $14 million. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The discussion and analysis of our financial condition and results of operations is based upon our
condensed consolidated financial statements. These statements 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. There were no significant changes in our
critical accounting policies during the first three months of 2005. These policies are described
in our Annual Report on Form 10-K for the year ended December 31, 2004. FORWARD-LOOKING STATEMENTS  In addition to historical and pro forma information, this Quarterly Report contains
forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of
1995. All forward-looking statements are subject to various risks and uncertainties that could
cause actual results to differ materially from those described in the statements. Some of the
factors that could cause actual results to differ from those that are presently anticipated are
discussed in Part II, Item 5 of this Quarterly Report. 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, excluding the one-time payment of the tax liabilities associated with the ATM
Portfolio sale. 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. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We operate internationally and are subject to potentially adverse movements in foreign currency
exchange rates. These exposures may change over time as our business evolves and could have an
adverse impact on our financial results. We have not entered into any derivative instruments or
hedging contracts to reduce our exposure to adverse foreign currency or interest rate changes,
although we may do so in the future. Currently, we receive non-U.S. dollar denominated revenues
and incur non-U.S. dollar denominated operating expenses in the United Kingdom, India and Canada.
We also have assets located in these countries. The principal currencies creating foreign exchange
rate risk for us are the British pound, Indian rupee and Canadian dollar. For the three months
ended March 31, 2005, approximately 7% of our net revenues and approximately 19% of our operating
expenses were denominated in these three currencies. 24




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We have prepared sensitivity analyses to assess the impact of hypothetical changes in foreign
currency rates on our income before tax for the three months ended March 31, 2005. Based upon
these analyses, we estimate that a 10% adverse change in the exchange rate between the U.S. dollar
and the British pound, Indian rupee and Canadian dollar would have reduced our reported income
before taxes in the three month periods ended March 31, 2005 by approximately $2 million. A 10%
change in the exchange rate for the British pound, Indian rupee and Canadian dollar would also have
an impact on the foreign net assets reflected in our condensed consolidated 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 March 31, 2005 would not, however, have had a material adverse effect on our net income
or financial condition for the three month periods ended March 31, 2005. 
 ITEM 4. 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 March 31, 2005. 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 March 31,
2005. 
 PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS Reference is made to the discussion of the SEC investigation, Federal Securities Action, the
Shareholder Derivative Actions, and the Florida litigation discussed in Note 12 to the Financial
Statements included in this Quarterly Report on Form 10-Q. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 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. The repurchases are
made using our available cash. We are making purchases in the open market and through negotiated
arrangements and block transactions in accordance with applicable laws and regulations. As of
March 31, 2005, we had repurchased 2,029,200 shares at a total cost of $43.8 million. The
transactions related to 1,148,400 of these shares ($24.8 million) had not been settled at this
date. The following table provides information as of March 31, 2005 with respect to shares of
Common Stock repurchased by the Company during the quarter then ended: Approximate dollarTotal number of
    
    
    value of shares thatshares purchased as
    
    
    may yet bepart of publicly
    
    
    purchased underTotal number of
    
    
    Average price paid per
    
    
    announced plans or
    
    
    the plans orFiscal Periods
    
    shares purchased
    
    
    share
    
    
    programs
    
    
    programPeriod 12/23/2005  2/28/2005
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    100,000,000Period 23/1/2005  3/31/2005
    
    
    2,029,200
    
    
    
    21.56
    
    
    
    2,029,200
    
    
    
    56,250,448Total
    
    
    2,029,200
    
    
    $
    21.56
    
    
    
    2,029,200
    
    
    $
    56,250,448
 25




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ITEM 5. OTHER INFORMATION RISK FACTORS AND CAUTIONARY STATEMENTS. When used in this Quarterly Report on Form 10-Q 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 below, which could cause our actual results to differ
materially from our historical experience and our present expectations or projections. Caution
should be taken not to place undue reliance on any such forward-looking statements, which speak
only as of the date made. The factors listed below could affect our financial performance and
could cause our actual results for future periods to differ from any opinions or statements
expressed with respect thereto. Such differences could be material and adverse. We will not
undertake and specifically decline any obligation to publicly release the result of any revisions
that may be made to any forward-looking statements to reflect events or circumstances occurring
after the date of such statements or to reflect the occurrence of anticipated or unanticipated
events. ESTIMATES OF FUTURE FINANCIAL RESULTS ARE INHERENTLY UNRELIABLE. From time to time, the Company and its representatives may make public predictions or forecasts
regarding the Companys future results, including estimates regarding future revenues, expense
levels, tax rates, acquisition expenses, capital expenditures, earnings or earnings from
operations. Any forecast regarding our future performance reflects various assumptions and
judgments by management regarding the likelihood that certain possible future events will in fact
occur. These assumptions and judgments are subject to significant uncertainties and shifting
market dynamics, and, as a matter of course, many of them will prove to be incorrect. Further,
events that may seem unlikely or relatively certain at the time a given prediction is made may in
fact occur or fail to occur. Many of the factors that can influence the outcome of any prediction
or projection are beyond our control. As a result, there can be no assurance that our performance
will be consistent with any management forecasts or that the variation from such forecasts will not
be material and adverse. Investors are cautioned that any predictions, projection or other forward
looking statement made by us should be considered current only as of the date made. Investors are
encouraged to utilize the entire available mix of historical and forward-looking information made
available by us, and other information relating to our Company and our products and services, when
evaluating our prospective results of operations. OUR ABILITY TO EXPAND THROUGH ACQUISITIONS INVOLVES RISKS AND MAY NOT BE SUCCESSFUL. We are currently considering possible acquisitions to complement and grow our existing businesses.
Our ability to expand through acquisitions involves many risks, including:  
    the operations, technology and personnel of any acquired companies may be difficult
to integrate;
    the allocation of management resources to consummate these transactions may disrupt
our day to day business;
    the acquired businesses may not achieve anticipated revenues, earnings or cash
flow. Such a shortfall could require us to write-down the goodwill associated with any
acquired company, which would adversely affect our reported earnings; and
    acquisitions may require us to revise our published earnings guidance and record
special charges that reduce our earnings. CONSOLIDATION IN THE INDUSTRIES WE SERVE MAY ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND
SERVICES. Mergers, acquisitions and personnel changes at financial institutions and electronic funds transfer
networks may adversely affect our business, financial condition and results of operations. The
banking and EFT industries continue to consolidate, causing the number of financial institutions
and processing networks to decline. This consolidation could cause us to lose:  
    current and potential customers; 26




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
    market share if an entity resulting from a combination of our customers determines
that it is more efficient to develop in-house products and services similar to ours or to
use our competitors products and services; and
    revenue if such a combined institution is able to negotiate a greater volume
discount for, or discontinue the use of, our products and services. For example, J.P. Morgan Chase and Bank One, both of which utilize our risk management products,
merged in 2004. Similarly, the STAR network, formerly one of the larger customers of our
electronic payments processing business, was purchased by one of our competitors, Concord EFS,
during 2001. First Data Corporation, which owned a substantial equity interest in the NYCE
Network, subsequently purchased Concord EFS. Following this acquisition, First Data sold its
interest in the NYCE network to our competitor, Metavante, a subsidiary of M&I Bank. Both the STAR
and NYCE networks utilize our electronic funds transfer software. WE ARE UNABLE TO PREDICT THE RESULTS OF THE PURPORTED CLASS ACTION LAWSUIT FILED IN FLORIDA. 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 the co-defendant and the Company filed its own further
motion to dismiss a portion of this case filed by a motion for summary judgment in June 2004. All
these motions are pending before the court. The Court has stayed all further proceedings in this case pending the decision by the Eleventh
Circuit Court 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. Litigation is, however, by its
nature uncertain and an unfavorable resolution of this lawsuit could materially adversely affect
our business, results of operation or financial condition. WE FACE INTENSE COMPETITION IN ALL AREAS OF OUR BUSINESS, AND IF WE DO NOT COMPETE EFFECTIVELY, OUR
BUSINESS WILL BE HARMED. 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. 27




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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 services
(a subsidiary of IBM) and numerous other business process and IT outsourcing service providers. In the market for electronic transaction processing, the principal factors on which we compete are
price and service levels and the features and functionality associated with our EFT software and
processing services. The future growth of our revenues in this market is dependent upon securing an
increasing volume of transactions. If we cannot control our transaction processing expenses, we may
not remain price competitive and our revenues will be adversely affected. Our revenues can also be
adversely affected if we are required to make pricing concessions to retain significant processing
customers. In addition, some of our competitors have indicated that they may be prepared to provide
customer prospects with up-front cash incentives to acquire or retain their processing business.
Given that these competitors have substantially greater financial resources than we do, it will be
difficult for us to obtain significant new processing customers, or retain the customers we have,
if this approach becomes a significant competitive factor. We have also seen an effort by processors such as First Data Corporation and VISA that are
affiliated with branded networks to seek exclusive processing relationships with the debit
card-issuing financial institutions that subscribe to their networks. Ownership or control of a
branded network may also enable these competitors to influence the interchange fees financial
institutions receive from retailers who accept transactions from the debit cards issued by these
network participants. We are unable to predict whether the vertical integration between
transaction processors and branded debit networks will have a positive or negative impact upon our
processing business over the long-term. Our software business competes primarily upon the basis of the quality and reliability of our
software and its conformance to the current and future requirements of our customers. If we do not
maintain the technological relevance of our software offerings or fail to anticipate shifts in
customer requirements, our ability to sell our software products will be impaired. Competition for our risk management products is based primarily on the quantity and quality of the
data and data analytic capabilities available to us for this purpose and, to a somewhat lesser
degree, price. Our competitive position in these markets could be harmed if our competitors were
able to compile different data sources and analytical capabilities that proved to be more effective
than our products. In addition, we continue to experience competitive pressure on the pricing for
our check verification service. Our business process management and information technology solutions 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. The future growth of this aspect of our business is dependent on
demonstrating to our current and prospective customers that we are a dependable and efficient
service provider who understands their particular business needs. In addition to our current competitors, it is reasonable to expect that we will encounter
substantial competition from new companies. No assurance can be given that we will be able to
compete effectively against current and future competitors. Increased competition could result in
price reductions, reduced gross margins or loss of market share. IF WE EXPERIENCE SYSTEM FAILURES, THE PRODUCTS AND SERVICES WE PROVIDE TO OUR CUSTOMERS COULD BE
DELAYED OR INTERRUPTED, WHICH WOULD HARM OUR BUSINESS AND REPUTATION AND RESULT IN THE LOSS OF
CUSTOMERS. Our ability to provide reliable service largely depends on the efficient and uninterrupted
operations of our computer and telecommunications network systems and our data centers. Any
significant interruptions could severely harm our business and reputation and result in a loss of
revenue and customers. We could also be required to apply substantial amounts of our available cash
to fund our settlement obligations and it is possible that we would not have sufficient resources
in the event of a severe and persistent outage. Our systems and operations could be exposed to
damage or interruption from fire, natural disaster, unlawful acts, power loss, telecommunications
failure, unauthorized entry and computer viruses. Although we have taken steps to prevent system
failures, we cannot be certain that our measures will be successful and that we will not experience
service interruptions. Further, our property and business interruption insurance may not be
adequate to compensate us for all losses or failures that may occur. 28




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LEGISLATION OR REGULATION COULD HARM OUR ABILITY TO COLLECT AND USE DATA, INCREASE OUR OPERATING
COSTS OR OTHERWISE HARM OUR BUSINESS. Existing and new laws and regulations relating to consumer privacy protection could harm our
ability to collect and use consumer data, increase our operating costs or otherwise harm our
business. We collect personal data about consumers for use in our risk management products. Due to
increasing public concern over consumer privacy rights, Congress and state legislatures have
adopted and are considering adopting laws and regulations restricting the purchase, sale and
sharing of personal information about consumers. Several recent highly-publicized incidents of
large scale ID theft have heightened these concerns. A material increase in the scope of these
types of restrictions could impair the efficacy of our risk management products and impair our
ability to use our India-based resources to support our risk management business, which would
increase our costs. For example, in the past legislation has been proposed which would require consumers to opt in to
any plan which would allow their nonpublic personal information to be disclosed. We are unable to
predict whether more restrictive legislation or regulations will be adopted in the future. Any
future legislation or regulations could have a negative impact on 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. If the security of our databases is compromised, our business could be materially adversely
affected. In our electronic payments and risk management businesses, we collect personal consumer
data, such as names and addresses, social security numbers, drivers license numbers, checking and
savings account numbers and payment history records. Unauthorized access to our databases could
result in the theft or publication of personal confidential information and the deletion or
modification of personal records or otherwise cause interruptions in our operations. These concerns
about security are increased when we transmit information overseas or over the Internet. A security
or privacy breach may:  
    deter customers from using our products and services;
    harm our reputation;
    expose us to liability;
    increase our operating expenses to remediate problems caused by the breach; and
    decrease market acceptance of electronic commerce transactions in general. WE MAY EXPERIENCE SOFTWARE DEFECTS, DEVELOPMENT DELAYS AND INSTALLATION DIFFICULTIES, WHICH COULD
HARM OUR BUSINESS AND REPUTATION AND EXPOSE US TO POTENTIAL LIABILITY. Our services and products are based on sophisticated software and computing systems and we often
encounter delays when developing new products and services. Further, the software underlying our
products and services has occasionally contained and may in the future contain undetected errors or
defects when first introduced or when new versions are released. In addition, we may experience
difficulties in installing or integrating our products and technologies on platforms used by our
customers or in new environments, such as the Internet. Defects in our software products, errors
or delays in the processing of electronic transactions or other difficulties could result in:  
    delays in market acceptance;
    additional development or installation costs;
    diversion of technical and other resources;
    loss of customers;
    negative publicity; and
    exposure to liability claims. Although we attempt to limit our potential liability for warranty claims through disclaimers and
limitation-of-liability provisions in our license and client agreements, we cannot be certain that
these measures will be successful in limiting our liability. 29




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THERE ARE A NUMBER OF RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES AND OPERATIONS THAT COULD HARM
OUR BUSINESS. Because we currently sell some of our products and services on a global basis and provide
outsourcing services from India, our business is subject to risks associated with doing business
internationally. During the first quarter of 2005, we generated
approximately 11% of our net sales
outside of the United States and we presently anticipate that our international efforts will
constitute a higher percentage of our net sales in future periods. Our future results could be
harmed by a variety of factors, including:  
    changes in foreign currency exchange rates;
    changes in a specific countrys or regions political and economic conditions,
particularly in emerging markets;
    potentially unfavorable tax rules;
    tariffs, duties and other trade barriers;
    reduced protection for intellectual property rights;
    challenges in managing widespread operations;
    changes in foreign laws and regulatory requirements or in foreign policy; and
    varying business practices in foreign countries. We have prepared sensitivity analyses to assess the impact of hypothetical changes in foreign
currency rates on our income before tax for the three month period ended March 31, 2005. Based
upon these analyses, we estimate that a 10% adverse change in the exchange rate between the U.S.
dollar and the British pound, Indian rupee and Canadian dollar would have reduced our reported
income before taxes during the three months ended March 31, 2005 by approximately $2 million. In addition, the process of selling our outsourcing services typically involves visits to our sites
in India by prospective customers. Increased levels of international tension can result in
prospective clients postponing or canceling plans to visit our facilities, lengthening the sales
cycle and otherwise inhibiting our ability to grow this business. Political opposition to the use
of offshore resources such as our India-based operations and domestic security concerns that can
make it more difficult for foreign nationals to obtain U.S. visas can potentially have a similar
effect. CHANGES IN INDIAN TAX LAWS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Our Indian software development and business process management operations qualify for tax
incentives associated with businesses that operate within designated geographic locations. These
incentives generally provide us with exemptions from Indian tax on certain business income
generated from these operations and phase out through March 2009. We cannot assure you that these
tax benefits will be continued in the future at their current levels or at all. If our Indian tax
benefits are reduced or eliminated, our taxes in future periods would increase. Such an increase
could reduce our profits. 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. All of our government EBT contracts can be terminated at any time, without cause, by the
contracting governmental entity. We realized approximately 12% of our net sales in the first
quarter of 2005 pursuant to contracts of this type. If a government contract is so terminated, we
are generally entitled only to receive compensation for the services provided or costs incurred at
the time of termination and a reasonable profit on the contract work performed prior to the date of
termination. In addition, all of our government contracts require us to comply with various
contract provisions and procurement regulations, and in some cases, accounting requirements.
Violations of some of these provisions could, if not cured, result in termination of the contract
and fines. Although we continue to pursue new EBT contracts, we cannot predict whether our bids will be
successful and, in any event, we expect the revenues we receive from EBT activities to decline
substantially during 2005 due to scheduled contract expirations. If we are not successful in
introducing additional EBT-related services or securing new contracts, we would anticipate that the
revenues from our government services business will continue to decline for the foreseeable future. WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. Despite our efforts to protect them, third parties may infringe or misappropriate our intellectual
property rights, or otherwise independently develop substantially equivalent products and services.
The loss of intellectual property protection or the inability to secure or enforce intellectual
property protection could harm our business and ability to compete. We rely on a combination of
trademark and copyright laws, trade secret protection and confidentiality and license agreements to
protect our trademarks, software and know-how. We have also applied for patent protection on some 30




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of the features of our newer products. We may be required to expend significant resources to
protect our trade secrets and monitor and police our intellectual property rights. Third parties may assert infringement claims against us in the future. Claims for infringement of
all types of patents are a common source of litigation. If we become subject to an infringement
claim, we may be required to modify our products, services and technologies or obtain a license to
permit our continued use of those rights. We may not be able to do either of these things in a
timely manner or upon reasonable terms and conditions. Failure to do so could seriously harm our
business and operating results. In addition, future litigation relating to infringement claims
could result in substantial costs to us and a diversion of management resources. Adverse
determinations in any litigation or proceeding could also subject us to significant liabilities and
could prevent us from using some of our products, services or technologies. PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT A CHANGE IN CONTROL
OF OUR COMPANY THAT YOU MAY CONSIDER FAVORABLE. Provisions of our certificate of incorporation and bylaws and Delaware law may delay or prevent a
change in control of our Company that you may consider favorable. These provisions include the
following:  
    no cumulative voting by stockholders for directors;
    a classified board of directors with three-year staggered terms;
    the ability of our board to set the size of the board of directors, to create new
directorships and to fill vacancies;
    the ability of our board to issue preferred stock, without stockholder approval,
with rights and preferences that may be superior to our common stock;
    the ability of our board to amend our bylaws;
    a prohibition of stockholder action by written consent;
    advance notice requirements for stockholder proposals and for nominating candidates to our board;
    restrictions under Delaware law on mergers and other business combinations between
us and any holder of 15% or more of our outstanding common stock;
    a requirement that 66-2/3% of our stockholders and 66-2/3% of our directors approve
certain corporate transactions, including mergers and consolidations, sales of assets or
amendments to our certificate of incorporation; and
    we have adopted a stockholder rights plan, which discourages the unauthorized
acquisition of 15% or more of our common stock or an unauthorized exchange or tender
offer. 31




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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report: ExhibitNo.
    
    Description
    
    Method of filing2.1
    
    Asset Purchase Agreement, dated as of January 11, 2005, by
and among eFunds Corporation, eFunds Government Services,
Inc., eFunds International Ltd., ClearCommerce Corporation,
ClearCommerce Europe Ltd. and certain stockholders
    
    Filed herewith2.2
    
    Business Transfer Agreement, dated March 31, 2005, between
India Switch Company Private Limited, eFunds International
India Private Limited and Classic Payment Solutions and
Services Private Limited
    
    Filed herewith3.1
    
    Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1 (the S-1) filed by the Company with
the Securities and Exchange Commission (the Commission) on
April 4, 2000, Registration No. 333-33992)
    
    *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), Registration No. 333-33992)
    
    *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 Designation 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)
    
    *10.1
    
    Credit Agreement, dated February 18, 2005, among eFunds
Corporation, J.P. Morgan Chase Bank, N.A., Wells Fargo Bank,
National Association, Bank of America, N.A. and J.P. Morgan
Securities, Inc.
    
    Filed herewith10.2
    
    eFunds Corporation 2005 Deferred Compensation Plan
    
    Filed herewith10.3
    
    Description of Compensation Program for Non-Employee Directors
    
    Filed herewith10.4
    
    Restricted Stock Right Agreement, dated as of January 13,
2005, between the Company and Paul F. Walsh
    
    Filed herewith10.5
    
    Option Agreement, dated as of January 13, 2005, between the
Company and Paul F. Walsh
    
    Filed herewith31.1
    
    Section 302 Certification by Mr. Paul F. Walsh
    
    Filed herewith31.2
    
    Section 302 Certification by Mr. George W. Gresham
    
    Filed herewith32.1
    
    Section 906 Certification by Mr. Paul F. Walsh and Mr. George
W. Gresham
    
    Filed herewith
   *Incorporated by reference(b)
    
    Reports on Form 8-K 32




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On January 14, 2005, the Company furnished a report on Form 8-K which included, pursuant to Item
1.01, an announcement that the Company and certain of its subsidiaries had entered into a
definitive agreement to acquire ClearCommerce Corporation and certain of its subsidiaries. On January 25, 2005, the Company furnished a report on Form 8-K which included, pursuant to Item
7.01 and 9.01
of that form, a press release announcing that George W. Gresham would be appointed to Senior Vice
President and Chief Financial Officer, effective April 1, 2005, following the retirement of Thomas
S. Liston, the Companys current Senior Vice President and Chief Financial Officer. On February 23, 2005, the Company furnished a report on Form 8-K announcing, pursuant to Item 1.01
of that form, that the Company has entered into a credit agreement with J.P. Morgan Chase Bank,
N.A. and other syndicate banks providing for an initial aggregate commitment of $100 million with
an option to increase the commitment to $175 million if certain requirements are satisfied.
Pursuant to Item 2.02 and 9.02 of that form, the Company also provided a press release announcing
the Companys fourth quarter 2005 financial results. This press release included the Companys
consolidated balance sheets at December 31, 2004 and 2003, the consolidated income statements for
the three months ended December 31, 2004 and 2003, and the consolidated statements of income and
cash flows for the years ended December 31, 2004 and 2003. On March 23, 2005, Company furnished a report on Form 8-K which included, pursuant to Item 5.02 of
that form, an announcement that William J. Ryan had resigned from further service on the Companys
Board of Directors on March 23, 2005. On March 23, 2005, the Company furnished a report on Form 8-K which included, pursuant to Item 1.01
of that form, an announcement that the Company had revised its Director compensation program. 33




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SIGNATURES Pursuant to the requirements 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. eFunds Corporation(Registrant)Date: May 9, 2005
    
    /s/ Paul F. WalshPaul F. WalshChief Executive Officer and ChairmanDate: May 9, 2005
    
    /s/ George W. GreshamGeorge W. GreshamChief Financial Officer
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Index to Exhibits ExhibitNo.
    
    Description
    
    Page Number2.1
    
    Asset Purchase Agreement, dated as of January 11, 2005, by
and among eFunds Corporation, eFunds Government Services,
Inc., eFunds International Ltd., ClearCommerce Corporation,
ClearCommerce Europe Ltd. and certain stockholders2.2
    
    Business Transfer Agreement, dated March 31, 2005, between
India Switch Company Private Limited, eFunds International
India Private Limited and Classic Payment Solutions and
Services Private Limited10.1
    
    Credit Agreement, dated February 18, 2005, among eFunds
Corporation, J.P. Morgan Chase Bank, N.A., Wells Fargo Bank,
National Association, Bank of America, N.A. and J.P. Morgan
Securities, Inc.10.2
    
    eFunds Corporation 2005 Deferred Compensation Plan10.3
    
    Description of Compensation Program for Non-Employee Directors10.4
    
    Restricted Stock Right Agreement, dated as of January 13,
2005, between the Company and Paul F. Walsh10.5
    
    Option Agreement, dated as of January 13, 2005, between the
Company and Paul F. Walsh31.1
    
    Section 302 Certification by Mr. Paul F. Walsh31.2
    
    Section 302 Certification by Mr. George W. Gresham32.1
    
    Section 906 Certification by Mr. Paul F. Walsh and Mr. George
W. Gresham
 35