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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2003

OR

For the transition period from           to
Commission File Number 0-30791

eFunds Corporation

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 [X] No [   ]

The number of shares outstanding of the registrant’s common stock, par value $.01 per share, at May 7, 2003 was 46,749,858.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

eFUNDS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

See Notes to Condensed Consolidated Financial Statements

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eFUNDS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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eFUNDS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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eFUNDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:

eFunds Corporation and its wholly-owned subsidiaries (the Company) provide transaction processing, risk management and professional services to financial institutions, retailers, electronic funds transfer networks and government agencies. The Company has four operating segments: Electronic Payments; Automated Teller Machine (ATM) Management Services; Decision Support and Risk Management; and Professional Services. The Electronic Payments segment provides automated clearinghouse (ACH), electronic funds transfer (EFT) and other processing services as well as electronic benefit transfer (EBT) services for government agencies. The ATM Management Services segment provides ATM deployment, management and branding services. The Decision Support and Risk Management segment provides risk management based data and other products to financial institutions, retailers and other businesses that assist in detecting fraud and assessing the risk of opening a new account or accepting a check. The Professional Services segment provides EFT software sales, software applications development, maintenance and installation, and business process outsourcing services.

The Company was incorporated in Delaware in December 1984 and changed its name from Deluxe Electronic Payment Systems, Inc. to eFunds Corporation in September 1999. Previously a wholly-owned subsidiary of Deluxe Corporation (Deluxe), the Company completed its initial public offering (the IPO) in June 2000, issuing 5.5 million shares of common stock at $13.00 per share for $64.5 million, net of offering expenses. In December 2000, Deluxe distributed all of its remaining shares of the Company’s common stock to its shareholders through a tax-free spin-off transaction.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States of America and are unaudited. All material intercompany accounts and transactions have been eliminated. These interim statements necessarily rely on estimates. The results of operations and cash flows for the interim periods presented are not necessarily indicative of the results of any future period. In the opinion of management, all adjustments necessary for a fair statement of results for the interim periods have been made. All such adjustments are of a normal, recurring nature. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s 2002 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. Certain financial information that is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, but that is not required for interim reporting purposes, has been condensed or omitted.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES:

New Accounting Pronouncements

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The adoption of SFAS No. 146 did not have a material impact on the Company’s financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45), modifying the recognition and disclosure requirements of a company’s guarantee arrangements. Effective January 1, 2003, FIN 45 requires a company that enters into or modifies existing guarantee arrangements to recognize a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 also requires disclosure of all guarantees, regardless of when the guarantee originated, effective December 31, 2002 (See Note 11). The adoption of the accounting provisions of FIN 45 did not have a material effect on the Company’s financial position or results of operations.

In November 2002, the EITF reached a consensus on EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company

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does not believe that the adoption of EITF Issue No. 00-21 will have a material effect on its consolidated financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” Interpretation No. 46 prescribes how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved. Interpretation No. 46 is effective immediately for variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. The interpretation applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not believe the adoption of Interpretation No. 46 will have a material impact on its financial position or results of operations.

Employee Stock-Based Compensation

Until the IPO and the Spin-Off, the Company’s employees participated in Deluxe’s stock incentive programs. In connection with the IPO and the Spin-Off, the Company adopted new stock incentive programs for the benefit of its employees. The Company accounts for those plans using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the 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 if the Company had applied the fair value recognition provision of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

For purposes of applying SFAS No. 123, the weighted average estimated fair value of stock options granted during the three months ended March 31, 2003 and 2002 was $3.78 and $7.21, respectively. This value was estimated at the option grant date using a Black-Scholes option-pricing model with the following assumptions:

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NOTE 3 – INTANGIBLES:

Intangible assets consist primarily of goodwill, capitalized software costs and acquired contracts. Other intangible assets, both acquired and developed, subject to amortization were as follows:

For the three month periods ended March 31, 2003 and 2002, amortization expense for intangible assets was $5.1 million and $4.7 million, respectively. The estimated future annual amortization expense for intangible assets held at March 31, 2003 is $19 million, $15 million, $11 million, $6 million and $3 million for the years 2003, 2004, 2005, 2006 and 2007, respectively.

The change in the carrying amount of goodwill for the quarter ended March 31, 2003 is as follows:

NOTE 4 – RESTRUCTURING AND ASSET IMPAIRMENT CHARGES:

Long-lived assets held for sale

During the third quarter of 2002, the Company initiated a process to sell certain facilities in Glendale, Wisconsin, and Runcorn, UK. At that time, pursuant to SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets,” the Company recorded a $3.0 million asset write-down to reflect the property and equipment at Glendale held for sale at its estimated fair value, less selling costs. During the first quarter of 2003, the Glendale facility was sold for net proceeds of approximately $12 million. The Company also entered into an agreement with the buyer for a short-term leaseback. No gain or loss was recorded on the sale.

Restructuring accruals

The following table summarizes the change in the Company’s restructuring accruals for the three months ended March 31, 2003, including the long-term portion of approximately $2.9 million at March 31, 2003:

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NOTE 5 – ACCRUED CONTRACT LOSSES:

The Company’s accrued contract losses pertain to long-term service contracts for transaction processing in the electronic payments segment.

The following table summarizes the activity of the accrued contract loss reserve:

NOTE 6 – LONG-TERM DEBT:

Long-term debt was as follows:

Long-term debt consists principally of capital lease obligations related to equipment. The capital lease obligations bear interest rates of 6.1% to 28.5% and are due through the year 2007. Carrying value approximates fair value for these obligations.

NOTE 7 – INCOME PER SHARE:

The following table reflects the calculation of basic and diluted income per share:

NOTE 8 — COMPREHENSIVE INCOME:

The Company’s total comprehensive income for the three month periods ended March 31, 2003 and 2002 was $4.9 million and $8.2 million, respectively. The Company’s total comprehensive income consists of net income and foreign currency translation adjustments.

NOTE 9 – BUSINESS SEGMENT INFORMATION:

The Company classifies its business in four segments: Electronic Payments, ATM Management Services, Decision Support and Risk Management, and Professional Services. The Company reports segment information consistent with the way management internally disaggregates its operations to assess performance and to allocate resources.

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 groups 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

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is based upon estimates of factors considered most appropriate for the cost group such as transactions, calls, customers, square footage, revenues and headcount. The Company does not allocate expenses that benefit all segments and are corporate or administrative in nature. These costs include, but are not limited to, legal, accounting, human resources, liability insurance and executive expenses.

Information concerning operations in these reportable segments of business is as follows:

The Company has not disclosed assets, depreciation, amortization, interest revenue, interest expense or income taxes by segment because this information is not reviewed by the chief operating decision maker, produced internally or practicable to prepare.

Revenue is attributed to geographic areas based on the location of the assets producing the revenue. The Company’s operations by geographic area are as follows:

NOTE 10 – LEGAL PROCEEDINGS:

The Company is party to various legal actions arising in the ordinary course of business. In the opinion of management, the final disposition of these matters will not have a material adverse effect on Company’s financial position, results of operations, or cash flows.

The Company is currently the subject of an investigation by the Securities and Exchange Commission (the SEC). In the course of its investigation, the SEC staff has sought from the Company various documents and information concerning the financial results and transactions that were the subject of restatement by the Company in March and December 2002. In January 2003, the SEC staff received a formal order of investigation, which empowers it to issue subpoenas to the Company and third parties. The Company has been cooperating fully with the SEC staff and intends to continue to do so. The Company may, however, be the subject of additional inquiries or become subject to a fine or other remedies. The Company has incurred, and may continue to incur, significant legal expenses in connection with the investigation.

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The Company and its current and former chief executive and chief financial officers are defendants in three federal securities actions filed in November and December 2002 in the U.S. District Court for the Eastern District of Wisconsin (the Federal Securities Actions). The complaints in these actions are substantially identical and allege, among other things, that during the period from February 2, 2001 to October 24, 2002 the defendants made false and misleading statements and omissions of material facts and that the plaintiffs and other members of a putative class of shareholders suffered damages as a result. The defendants in the Federal Securities Actions have moved to have the actions transferred to the District of Arizona and also have moved to dismiss the actions on various grounds. These motions are pending before the Court. Also pending before the Court is a motion by one of the plaintiffs to consolidate the three actions, for his appointment as class representative and for his selection of lead counsel.

The Company is also a nominal defendant in two substantially identical shareholder derivative actions filed in the Superior Court of Arizona, Maricopa County in January 2003 (the Shareholder Derivative Actions). The complaints allege, among other things, that certain current and former Company 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 Complaint also names as a defendant the Company’s external auditor. In response to a joint motion by the parties in the Shareholder Derivative Actions to stay these proceedings pending the resolution of the motions to dismiss the Federal Securities Actions, the Court stayed these proceedings through May 30, 2003. Because the motions to dismiss the Federal Securities Actions will likely still be pending on May 30th, the Company expects the parties in the Shareholder Derivative Actions to seek an extension of this stay.

The Company believes the Federal Securities and Shareholder Derivative Actions are without merit and intends to vigorously defend itself. However, the Company cannot predict with certainty the outcome of these actions.

NOTE 11 – COMMITMENTS AND CONTINGENCIES:

Future commercial commitments

In connection with the Company’s government services, collection and ATM placement activities, the Company posts surety bonds with state agencies guaranteeing its performance of certain obligations related to the relevant contracts or state requirements. The aggregate amount of such bonds outstanding at March 31, 2003 was $4.3 million.

At March 31, 2003, the Company provided guarantees of $1.2 million on certain equipment lease payments for Canadian customers of its subsidiary Access Cash International (ACI). These guarantees were established prior to the Company’s acquisition of ACI in 2001 and expire through December 2007. The Company would be required to make payments under these guarantees in the event that the ACI customers could not meet their own payment obligations. Through March 31, 2003, the Company has been required to make payments of approximately $128,000 pursuant to these guarantees. The customers’ ATM equipment assets are utilized as collateral on these guarantees. There are no amounts being carried as liabilities for the Company’s obligations under these guarantees.

The Company has approximately $0.4 million in time deposits, denominated in Indian rupees, related to the guarantee by its Indian operations of performance on a customer contract and certain obligations related to local government requirements.

Contractual cash obligations

As of December 31, 2002, the Company had contractual cash obligations for operating leases, outsourcing and maintenance obligations in the aggregate amount of $101.0 million. These contractual cash obligations had not materially changed from this amount at March 31, 2003.

Other commitments

In December 2001, the Company entered into a subscription agreement to acquire a 15% interest in Webtel Pty. Ltd., an Australian corporation (Webtel). Pursuant to the subscription agreement, the Company invested $1.3 million in Webtel in 2001 and has committed to invest an additional $0.8 million upon the satisfaction of certain conditions specified in the subscription agreement.

The Company operates a call center in Mumbai, India under a customer contract. The customer is entitled to acquire a minority interest in, or sole ownership of, certain assets used by the Company in performing call center operations for the customer as well as transition assistance. The price at which such ownership interest may be acquired by the

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customer is to be based on a formula as set forth in the contract. As of March 31, 2003, the customer had accumulated a right to acquire up to a 9% ownership interest in these assets.

ACI has vault cash agreements with various financial institutions which provide cash to certain of the ATMs owned or managed by ACI. Although some portion of this cash may be physically located in the ATMs owned or managed by ACI, this cash is not included in cash and cash equivalents on the Company’s consolidated balance sheet because ACI does not take title to the cash under the bailee/bailor relationship established by the agreements. Based upon the daily outstanding balance of funds provided to the ATMs, ACI generally pays a monthly fee ranging from prime, as defined, plus one half percent up to prime plus 5%. The average monthly rate paid during the first quarter of 2003 approximated 7.3%. The Company indemnifies the financial institutions against any loss of the cash in the ATMs. One of the agreements requires ACI to maintain a security account equal to 1% of the daily outstanding balance. The agreements may be terminated upon notice by either party and have various expiration dates ranging from January to November 2004. Total cash provided pursuant to these vault cash agreements was approximately $30 million at March 31, 2003.

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 an ATM, POS or EBT transaction and this activity results in a balance due to the Company at the end of each business day that it will recoup over the next few business days. The balances due the Company are included in cash on its consolidated balance sheets. As of March 31, 2003, approximately $10 million of settlement payments were due to the Company and it received these funds in early April 2003. The Company is required to maintain sufficient cash on hand to fund the daily settlement advances made against the payments received through the settlement process. The typical overnight settlement balance due to the Company ranges from $5 million to $20 million. The Company also seeks to maintain an additional cash balance of approximately $35 million to ensure that it can advance funds to its processing customers if unusual circumstances prevent the Company from timely processing their settlement files. The Company is evaluating means to reduce the need to maintain these minimum cash balance levels, including the possibility of obtaining an overnight credit facility to fund these obligations.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 2002 Annual Report on Form 10-K filed with the Securities Exchange Commission. 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 Item 5 of this Quarterly Report on Form 10-Q.

OVERVIEW

eFunds Corporation and its wholly-owned subsidiaries (the “Company,” “we” or “us”) provide transaction processing, risk management and professional services to financial institutions, retailers, electronic funds transfer networks and government agencies. The Company has four operating segments: Electronic Payments; Automated Teller Machine (ATM) Management Services; Decision Support and Risk Management; and Professional Services. The Electronic Payments segment provides automated clearinghouse (ACH), electronic funds transfer (EFT), and other processing services as well as electronic benefits transfer (EBT) services for government agencies. The ATM Management Services segment provides ATM deployment, management and branding services. The Decision Support and Risk Management segment provides risk management based data and other products to financial institutions, retailers and other businesses that assist in detecting fraud and assessing the risk of opening a new account or accepting a check. The Professional Services segment provides EFT software sales, software applications development, maintenance and installation and business process outsourcing services.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles that are generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, intangible assets, reserves and allowances, income taxes and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect the more significant judgments and estimates we use in the preparation of our consolidated financial statements.

Revenue recognition

Our net revenues consist of fees for transaction processing and related services, decision support, software and data licensing, maintenance and support, government services, and information technology consulting and business process management services. Our revenue recognition policies for these various fees are as follows:

•		Transaction processing and service fees are recognized in the period that the service is performed. These services consist of processing our customers’ electronic debit transactions and settling the funds with the financial institutions involved in the transactions. Additionally, these services include monitoring ATMs to alert our customers when potential problems occur. These fees are charged on a per transaction basis, depending on the contractual arrangement with the customer. Government services fees are recognized in the period services are provided based on monthly fees per benefits recipient.
		In connection with the provision of services in the ATM management services segment, we earn surcharge and interchange fees. Surcharge fees are the fees the user of an ATM pays at the time of the transaction and interchange fees are paid by that user’s financial institution. Generally, our arrangements call for us to pay a fee to the occupants of the property at which the ATM is physically located. The amount of this fee typically has some relationship to the surcharge and interchange fees that are collected by us from that ATM. Based upon the underlying contractual provisions to our arrangements, we record the surcharge and interchange fees that we

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		collect at their gross amounts as revenue and the amounts owed to the occupant of the property at which the ATM is physically located as a processing, communication and service cost.
•		Decision support fees are recognized as revenue in the period the services are provided. Decision support services consist of new account applicant and check verification screenings to manage the risk associated with account openings and check acceptance. Decision support fees are based on the number of inquiries against the databases used for screening purposes or monthly fees based on the net monthly sales of the retailer using our check verification products or other similar measures, depending on the product and service.
•		We also provide professional services consisting of information technology consulting and business process management services. Revenue from providing such services is generally recognized under one of two methods, depending on the relevant contractual terms. Under the time and materials method, which is applied to nearly all of our Professional Services contracts, revenue is based on a fee per hour basis and is recognized as hours are completed. Under the fixed contract method, a pre-set fee is agreed upon for a project, and revenue is recognized proportionately to the percentage of completion of the project. If the information technology consulting services involve the significant customization of software that has been licensed from us, the license fee is also recognized proportionately to the percentage of completion of the project.
•		Software and data license fees for standard products are recognized when a license agreement has been signed, the license fee is fixed and determinable, collectibility of the license fee is probable, delivery has occurred and there are no uncertainties surrounding product acceptance. If a license contains customer acceptance criteria for which significant uncertainties exist, the revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. Certain software products include multiple modules and the license fee charged to the customer is based on the modules licensed. If a customer contract requires that we deliver multiple elements, then upfront fees are recognized as revenue if vendor specific objective evidence of fair value exists for each of the undelivered elements. If vendor specific objective evidence of fair value does not exist, then the total fees of the arrangement are recognized over the term of the related agreement based upon delivery of all essential elements.
•		Software maintenance and support revenue is recognized ratably over the term of the contract or as the services are provided.

The process involved in evaluating the appropriateness of revenue recognition involves judgments about vendor-specific objective evidence of the fair value of each of the various elements to be delivered in a sale that has multiple components, collectibility of fees, and projections of costs to complete projects for our customers.

Intangible Assets

Our intangible assets consist primarily of goodwill, capitalized software costs and acquired contracts. We capitalize the cost of software developed or obtained for internal use once the preliminary project stage has been completed, management commits to funding the project and it is probable that the project will be completed and that the software will be used to perform the function intended. Capitalized costs include only (1) external direct costs of materials and services consumed in developing or obtaining internal-use software, (2) payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use software project, and (3) interest costs incurred, when material, while developing internal-use software. Capitalization of costs ceases when the project is substantially complete and the software is ready for its intended use. Software developed or obtained for internal use is tested for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.

We capitalize the cost of software developed for licensing and resale once technological feasibility has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when we have completed all planning, designing, coding and testing activities that are necessary to determine that a product can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the product is available for general release to customers. Such costs are amortized on a product-by-product basis normally over three years and no longer than five years. Software developed for resale is carried at the lesser of amortized cost or net realizable value.

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When we acquire other companies, generally accepted accounting principles require that we make estimates regarding the fair values of the acquired company’s tangible assets and liabilities and identifiable intangible assets. Based upon these estimates, we then allocate the purchase price to the assets and liabilities of the acquired company for the purpose of recording these items in our financial records. Any unallocated purchase price is considered to be, and recorded as, goodwill. The distinction between the amount of the purchase price allocated either to tangible assets and liabilities or identifiable intangible assets and goodwill is significant because goodwill is not amortized to our statement of operations but is instead subject to an annual impairment test. Estimates inherent in this purchase price allocation process include assumptions regarding the timing and amounts of future cash inflows and outflows, the saleability of inventories, selection of discount rates, contract renewal rates and general market conditions. Where appropriate, we use third-party valuation professionals to assist us in making these estimates.

The process of evaluating goodwill and other intangible assets, including capitalized software costs and acquired contracts, for impairment involves judgments about market conditions and economic indicators, estimates of future cash flows and assumptions about our strategic plans with regard to our operations. To the extent additional information arises or our strategies change, it is possible that our conclusions regarding the carrying value of our intangible assets could change and materially affect our financial position or results of operations.

Reserves and Allowances

We maintain a reserve for expected future losses on certain government EBT contracts. Our estimates of these losses are based on a variety of assumptions including assumptions about future welfare case levels, number of transactions per case and the costs related to these processing transactions and providing support services. These assumptions are subject to significant uncertainties and may differ substantially from actual results. In the event such differences arise, a revision to the loss contract reserve would be required. Any such revision could have a material effect on our financial position or results of operations.

We maintain an allowance for doubtful accounts for estimated losses resulting from our customers failing to make required payments. We develop our estimate of the allowance based on our experience with specific customers, our understanding of their current economic circumstances and our own judgment as to the likelihood of their ultimate payment. We also consider our collection experience with the balance of our receivables portfolio and make estimates regarding collectibility based on trends in aging. If the financial condition of our customers were to deteriorate, thereby impairing their ability to make payments, an increase in this allowance could be required in a future period.

Income Taxes

Accounting for income taxes requires significant judgments in the development of estimates used in income tax calculations. Such judgments include, but are not limited to, the likelihood that the Company will realize the benefits of net operating loss carry-forwards, the adequacy of valuation allowances, the rates used to measure transactions with foreign subsidiaries and the development of valuation models used for measuring the value of certain transactions. Further, our operations are governed by and subject to government regulations in the United States and in foreign countries in which we operate, including laws and regulations relating to taxation and the judgments and estimates we use are subject to challenge by domestic and foreign taxing authorities. The Company recognizes tax liabilities at such time as they are judged to be probable of being incurred and they can be reasonably estimated. It is possible that either foreign or domestic taxing authorities could challenge our judgments and estimates and draw conclusions that would cause us to incur tax liabilities in excess of those currently recorded.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Although we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we will be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period any such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period any such determination was made.

We consider the undistributed earnings of our foreign subsidiaries to be permanently invested and, accordingly, we have not provided for U.S. Federal, state income or applicable foreign withholding taxes on those amounts. Undistributed earnings of our foreign subsidiaries amounted to approximately $24.1 million at December 31, 2002.

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Upon any distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and applicable withholding taxes payable to the foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with such a hypothetical calculation.

Stock-based compensation

We issue stock options to our employees under the terms of the eFunds Corporation 2000 Stock Option Plan. Generally accepted accounting principles provide two alternative methods of accounting for stock options issued under the terms and conditions that we typically issue such options. One alternative is to estimate the fair value of the stock option at the date of grant and amortize that value as an expense to operations over the contractual vesting period. The other option available currently to companies reporting under generally accepted accounting principles is to estimate the fair value of the option at the grant date but only reflect the impact of the amortization in a footnote to the financial statements and to forgo adjusting the statement of operations. The method a company chooses to apply is a matter of policy. Consistent with our past practices, we utilize the second of these options and we reflect the impact of the option amortization in the footnotes to our financial statements. As illustrated in Note 2 to the financial statements, were we to change our accounting policy on this matter to reflect the expense in our statement of operations, or should generally accepted accounting principles change to require us to reflect this expense in our statements of operations, our results of operations would be materially and adversely affected.

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, the relative composition of net revenue and selected statements of operations data as a percentage of net revenue:

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

Net revenue – Net revenue decreased $3.5 million, or 2.6%, to $130.5 million for the first three months of 2003 from $134.0 million for the same period of 2002.

Electronic Payments net revenue decreased $8.6 million, or 18.5%, to $37.9 million in the first three months of 2003 as compared to $46.5 million for the same period of 2002. Electronic processing revenues decreased primarily due to the previously expected revenue declines associated with the discontinuance of processing services performed for the STAR network following its licensing of our processing software during 2002 and the expiration of our electronic Medicaid eligibility verification (EMEVS) contract and an additional state EBT contract at the end of 2002. The transition of the processing for the STAR network was completed in September 2002. Revenues derived from this relationship were approximately $6 million during the first three months of 2002. Revenues were also adversely affected as a result of the negotiation of a contract extension with a major electronic funds transfer customer during the first quarter of 2003. This extension resulted in lower per transaction pricing and reduced revenues from this customer during the quarter. We expect the effect of this price reduction to be somewhat offset in future quarters by increased volumes.

The two government contracts that expired at the end of 2002 generated approximately $4 million in revenue during the first three months of 2002. This decline in government contract revenue in the first three months of 2003 was

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partially offset with approximately $1 million of additional revenues generated under an EBT contract in which we were awarded the prime contractor position as opposed to our prior subcontractor position. Additional EBT contracts expected to begin or renew will provide incremental revenues of approximately $3 million for the remainder of 2003. Citibank has been awarded the new EBT contract for the Western States EBT Alliance (WSEA) and we currently act as a subcontractor to Citibank servicing this coalition. We expect, however, that our role as subcontractor to the WSEA will be discontinued under the new contract. This transition will begin to impact our business late in the second quarter of 2003 and we expect to see the significant contracts for this coalition largely roll-off by the end of 2004.

ATM Management Services net revenue increased $13.2 million, or 64.1%, to $33.8 million in the first three months of 2003 from $20.6 million for the same period in 2002. These increases are primarily due to our acquisition of independent ATM networks in 2002. In addition, ATM equipment sales increased by $2.8 million for the first three months of 2003 compared to the same period of 2002. We expect that this level of equipment sales is somewhat higher than we would expect to occur in future periods.

Decision Support and Risk Management net revenue decreased $1.1 million, or 2.9%, to $36.2 million for the first quarter in 2003 from $37.3 million in the first quarter of 2002. Revenues from our ChexSystems^SM suite of products increased in the first quarter of 2003 as compared to the same quarter of the prior year. We also experienced an increased demand in the first three months of 2003 for our fraud detection services from financial institutions compared to the same period of the prior year.

These increases were, however, offset by declines in sales of our SCAN^SM and collection products over the prior year period. The decrease in revenues from SCAN products was attributable to pricing concessions. We expect that revenues from our ChexSystems suite of products and our fraud protection products will continue to increase during 2003 and that revenues from sales of our SCAN product may continue to decline somewhat.

Professional Services net revenue decreased $6.9 million, or 23.4%, to $22.6 million for the first quarter of 2003 from $29.5 million for the same period of the prior year primarily due to reduced software sales and a decline in the revenues we received from Deluxe Corporation.

Revenues from software sales declined by $5.2 million in the first three months of 2003 as compared to the same period of the prior year. The following table illustrates our revenue generated from software sales:

Revenues from information technology services provided under our contract with Deluxe were $8.9 million for the first three months of 2003 as compared to $10.3 million for the same period in 2002. In accordance with our agreement with Deluxe, a minimal short-fall fee, based upon a formula in the contract reflective of our estimated lost profits, will be billed to Deluxe if it fails to reach the minimum target level of $43 million for software development services for 2003.

Business process management (BPM) revenues, which include outsourcing and customer contact center services, remained relatively flat for the first quarter of 2003 as compared to the same period of the prior year at approximately $6 million. Future growth in our BPM business will depend on the acquisition of new clients and the expansion of the services offered to existing clients.

Processing, communication and service costs – This category includes the cost of processing, telecommunications, computer equipment, promotional services as well as residual payments we make to the occupants of the property where the ATMs we own or manage are located. Total category costs increased $4.9 million, or 9.6%, to $55.7 million for the first three months of 2003 from $50.8 million for the same period of the prior year. Processing, communication and service costs were 42.7% of net revenues in the first quarter of 2003, compared to 37.9% in the

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same period of 2002. Third party processing charges have increased in relation to the increased ATM processing revenues associated with acquisitions in the ATM management services segment. We provide the processing for approximately 11,000 of the 15,700 U.S. ATM machines in our network and we expect the processing for the approximately 4,700 remaining U.S. ATMs will be transitioned to our networks as existing contractual commitments expire or as the economics associated with accelerated contract cancellations make it logical to do so, with approximately 2,300 such conversions expected to occur in the remainder of 2003. Due to existing contractual commitments, processing for the approximately 1,400 ATMs we have in Canada will not likely be transitioned to our networks for a substantial period of time. The increase in ATM processing costs was partially offset by reductions in costs associated with the EMEVS contract that expired at the end of 2002, reductions in equipment rent and related maintenance costs due to data center consolidations and reductions in services contracts related to our risk products, including the transitioning of certain contact center operations from subcontractors to our contact center in India.

Employee costs – Expenditures in this category represent employee compensation and related employee expenses, benefits and travel. These costs decreased $4.1 million, or 8.0%, to $46.9 million for the first quarter of 2003 from $51.0 million for the same period of 2002. As a percentage of net revenue, employee costs were 35.9% in the first quarter of 2003 compared to 38.1% for the same period of the prior year. We began to experience costs savings late in 2002 from our restructuring efforts and the curtailment of travel expenditures.

Although we had approximately 160 more full-time equivalent employees at March 31, 2003 than we did at March 31, 2002, we have realized cost savings from our cost reduction measures, including the re-deployment of certain product development and business process activities to our India based operations. We expect this trend to continue in future periods. At March 31, 2003, more than 50% of our full-time equivalent employees are located at our Indian facilities.

Depreciation and amortization – These costs represent the depreciation of facilities and equipment and the amortization of intangible assets, such as capitalized software costs and acquired contracts. Depreciation and amortization expense decreased $0.7 million, or 7.4%, to $8.8 million for the first three months of 2003 from $9.5 million for the same period of 2002. These costs were 6.7% of net revenue for the first three months of 2003 and 7.1% of revenue for the same period of the prior year. The decrease is due to a reduction in depreciable assets during the third quarter of 2002 which resulted from the reclassification of certain assets as held for sale and a reduction in amortizable intangible assets due to impairments taken in the second and third quarters of the prior year. These reductions were partially offset by an increase in the amortization of contracts acquired with the independent ATM businesses.

Other operating costs – Expenditures in this category include facility costs, professional, consulting and temporary services, bad debt, and certain administrative costs. Other operating expenses increased $2.3 million, or 22.5%, to $12.5 million for the first quarter of 2003 from $10.2 million for the same period of 2002. These expenses were 9.6% of net revenue for the first three months of 2003 and 7.6% for the same period in the prior year. The increase is primarily due to increased consulting fees related to the business performance initiatives we commenced in 2003. These initiatives are focused on process enhancements that we believe will ultimately result in cost savings through improved operating efficiencies. We expect to continue to incur consulting fees related to the initiatives into the third quarter of 2003.

Income from operations – Income from operations decreased $5.9 million, or 47.2%, to $6.6 million for the first quarter of 2003 compared to $12.5 million for the same period of 2002. Income from operations was 5.1% of net revenue for the first quarter of 2003 compared to 9.3% for the same period of the prior year. The decrease in operating income is a result of a higher concentration of software sales in 2002 as opposed to the more recurring, but lower margin, ATM revenue seen in 2003. An increase in costs for consulting fees related to our business performance initiatives also contributed to this decline.

Other income – net – Other income – net was $0.2 million for the first quarter of 2003 compared to $0.4 million for the same period of the prior year. Interest and investment income increased $0.2 million to $0.5 million for the first quarter of 2003 compared to $0.3 million for the same period of the prior year as a result of the interest income included in the $5 million tax-related payment received from Deluxe. This increase was offset by an increase in interest and investment expense, including foreign currency losses, of $0.4 million.

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Provision for income taxes – The provision for income taxes was $2.2 million for the first quarter of 2003, resulting in an annualized effective tax rate of 32.1%, which is consistent with our effective tax rate at the end of 2002. Our effective tax rate is determined largely by the proportional share of our projected consolidated income earned by our Indian subsidiary. Our Indian software development and business process management operations qualify for tax incentives associated with businesses that operate within designated geographic locations within India. These incentives generally provide us with exemptions from Indian income tax on certain business income generated from these operations. As a result of a change in Indian tax law, 10% of this previously tax-exempt income became subject to Indian income tax at the rate of 36.75% from April 1, 2002 through March 31, 2003. The remaining tax incentives phase out through March 2009.

Business Segment Information

The following table presents, for the periods indicated, operating income by segment as a percentage of segment revenue and the unallocated corporate expenses and income from operations as a percentage of total revenue: