<PAGE>
As filed with the Securities and Exchange Commission on June 5, 2000
Registration No. 333-33992
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
eFUNDS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 7374 39-1506286
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code)
organization)
400 West Deluxe Parkway
P.O. Box 12536
Milwaukee, Wisconsin 53212
(414) 341-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
John A. Blanchard III
Chairman and Chief Executive Officer
eFunds Corporation
400 West Deluxe Parkway
P.O. Box 12536
Milwaukee, Wisconsin 53212
(414) 341-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Jonathan B. Abram, Esq. Raymond W. Wagner, Esq.
Dorsey & Whitney LLP Simpson Thacher & Bartlett
Pillsbury Center South 425 Lexington Avenue
220 South Sixth Street New York, NY 10017
Minneapolis, MN 55402 (212) 455-2000
(612) 340-2600 Facsimile: (212) 455-2502
Facsimile: (612) 340-8738
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is declared effective. This +
+prospectus is not an offer to sell these securities and it is not soliciting +
+an offer to buy these securities in any state where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated June 5, 2000
PROSPECTUS
6,250,000 Shares
[LOGO]
Common Stock
--------------------------------------------------------------------------------
This is our initial public offering of shares of common stock. We are offering
6,250,000 shares. No public market currently exists for our shares. We are
presently a wholly-owned subsidiary of Deluxe Corporation. Following this
offering, Deluxe will be our controlling shareholder and continue to own
approximately 86.5% of our outstanding shares.
We anticipate that the initial public offering price will be between $14.00 and
$16.00 per share.
We have applied to list the shares on the Nasdaq National Market under the
symbol "EFDS."
Investing in our shares involves risks. Risk Factors begin on page 6.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price........................................... $ $
Underwriting Discount........................................... $ $
Proceeds to eFunds.............................................. $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 937,500
additional shares of common stock on the same terms and conditions as set forth
above to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares
on or about , 2000.
--------------------------------------------------------------------------------
Lehman Brothers Bear, Stearns & Co. Inc.
FAC/Equities
John G. Kinnard and Company
Incorporated
Fidelity Capital Markets
a division of National Financial Services
Corporation
, 2000
<PAGE>
[Photo of data center]
eFunds Products and Services
[Diagram describing products and services]
Transaction processing Professional services
Decision support/risk management
[Photo of computer screen] [Photo of service personnel]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 6
Forward-Looking Statements.......... 16
Use of Proceeds..................... 16
Dividend Policy..................... 16
Capitalization...................... 17
Dilution............................ 18
Selected Financial Data............. 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
Business............................ 35
Management.......................... 54
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Agreements Between eFunds and
Deluxe............................. 66
Principal Stockholder............... 73
Description of Capital Stock........ 73
Shares Eligible for Future Sale..... 78
Certain United States Federal Tax
Consequences to Non-United States
Holders............................ 79
Underwriting........................ 82
Legal Matters....................... 85
Experts............................. 85
Where You Can Find More
Information........................ 85
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized anyone to provide you with
different information. We are offering to sell, and seeking offers to buy,
shares of our common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
AccountChex Plus(SM), Connex(TM), ChexSystems logo, DebitBureau(SM), eFunds,
FraudFinder(SM), Integreat!(SM), New AccountChex(SM), SCAN(SM), QualiFile(SM)
and DataNavigator(TM) are our trademarks and service marks. Other trademarks and
trade names referred to in this prospectus are the property of their respective
owners.
Until , 2000, all dealers selling shares of our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
i
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary with the more detailed information and
financial statements and related notes appearing elsewhere in this prospectus.
eFunds Corporation
Our Business
We provide transaction processing and risk management services to financial
institutions, retailers, electronic funds networks, e-commerce providers and
government agencies. Our products and services enable our clients to manage the
complete electronic debit payment cycle, from account opening to transaction
authorization, to electronic funds transfer and settlement. Our services enable
our clients to reduce their transaction costs, detect potential fraud and
enhance their relationships with their customers. We also offer information
technology professional services to complement our electronic payments business
and on a stand-alone basis. We operate three principal businesses:
. electronic payments;
. professional services; and
. government services.
Electronic Payments. Our electronic payments segment provides a
comprehensive suite of transaction processing services and decision support and
risk management products for debit transactions. A debit transaction involves
the withdrawal or deposit of funds from or into a person's checking or savings
account.
Our transaction processing services capture instructions for a debit
transaction from a debit card or check and we then electronically authorize or
deny the transaction, transfer funds between appropriate accounts and settle
the accounts. We process virtually all types of debit transactions, including
cash withdrawals, cash deposits, balance inquiries and retail purchases. We
process transactions for regional networks of automated teller machines, or
ATMs, and operate more than 9,000 ATMs for clients in the United States. We
also provide transaction processing for more than 95,000 retail point-of-sale
terminals. In 1999, we processed approximately five billion debit transactions.
Our decision support and risk management products enable our clients to
combat identity fraud and account abuse in debit transactions by screening
checking account applicants and debit transactions for possible identity
manipulation and other forms of fraud and account abuse. We also provide
financial institutions with data that helps them to identify possible cross-
selling opportunities. We operate Shared Check Authorization Network, or SCAN,
a check verification database that serves 17 of the largest 20 retailers by
revenues in the United States at more than 82,000 locations. Our ChexSystems
new account applicant verification service is used at more than 86,000
financial institution locations in the United States.
We combine data from SCAN, ChexSystems and other sources in a database of
records related to checking and savings account opening and closing
information, checking account collections data, overdraft histories and check
order histories. We refer to this database as DebitBureau. DebitBureau contains
more than 2.7 billion records, which we believe makes it the most comprehensive
source of data regarding debit transactions available. We use the data from
DebitBureau in our decision support and risk management products to validate a
consumer's identification, assess and rank the risk of a fraudulent transaction
and match a customer with targeted product offerings.
We are adapting our core capabilities in transaction processing, fraud
prevention and client account management for Internet applications. Our
electronic payments segment had net sales of $241.4 million in
1
<PAGE>
1999, which represented approximately 80% of our total net sales. Our clients
for electronic payment services include 16 of the 20 largest United States
financial institutions and 17 of the 20 largest United States retailers. Net
sales for our electronic payments business are primarily derived from monthly
charges based on fixed fees and variable fees related to the number of
transactions processed.
Professional Services. Our professional services segment provides
information technology consulting and business process management services. Our
information technology professionals develop, customize and implement our
electronic payment products and services for our clients. We also develop
custom software applications, including e-commerce and Internet-related
applications, for our clients. We team onsite consultants in the United States
who analyze and manage projects with software developers in India who write the
client-specific software. Our employees in India also provide business
processing services which allow our customers to outsource business functions,
such as accounting operations, payables and receivables management and call
center operations. Financial institutions and retailers are increasing their
use of external professional services to implement new technologies and e-
commerce applications, control costs and address shortages of information
technology resources. Deluxe Corporation, our corporate parent, is the
principal customer of our professional services segment. Our professional
services segment had net sales of $12.7 million in 1999, which represented
approximately 4% of our total net sales. In 1999, sales to Deluxe represented
approximately 43% of the net sales of our professional services segment. Net
sales for our professional services business are primarily derived from hourly
fees.
Government Services. Our government services segment provides online
electronic transfer of benefits under entitlement programs on behalf of state
and local governments and Medicaid eligibility verification services. The
electronic benefits transfer business has a history of losses that have
resulted in special charges for loss contracts, asset impairments and legal
proceedings totalling approximately $83 million over the past three years. Our
government services business contributed operating losses of $6.6 million in
1999, $47.7 million in 1998 and $12.3 million in 1997, including these charges.
We also will record an additional charge of $12.2 million in the second quarter
of 2000. We have decided to exit this business as soon as we complete our
current contractual obligations in 2006.
Following the completion of this offering, Deluxe has agreed to indemnify us
against future losses on our existing unprofitable government services
contracts to the extent future losses on these contracts exceed our $29.2
million loss contract reserve as of April 30, 2000. This amount includes the
$12.2 million charge we will record in the second quarter. Deluxe has also
agreed to indemnify us against future losses related to any litigation based on
any facts or circumstances arising prior to the completion of this offering.
The indemnification obligations of Deluxe do not apply to losses contemplated
by the existing reserves and are subject to a $14.6 million limit so that they
also would not apply to any future losses on our existing unprofitable
contracts in excess of $43.8 million. If Deluxe were to make any
indemnification payments for any litigation, Deluxe's loss contract
indemnification obligations would be correspondingly reduced. In addition,
Deluxe's indeminification does not apply to any contract that was not in a loss
position as of April 30, 2000 and so if any of these profitable contracts were
to become unprofitable, no indemnification would be available.
Our government services segment had net sales of $48.3 million in 1999,
which represented 16% of our total net sales. Net sales for our government
services business are primarily derived from monthly fees that are based on the
number of benefit recipients.
Recent History of Losses. Each of our business segments operates in a highly
competitive environment. Although we have generated net income of approximately
$67.9 million since inception, we have reported aggregate losses of
approximately $62.7 million from 1996 through 1999.
2
<PAGE>
Our Separation From Deluxe
Prior to this offering, we were a wholly owned subsidiary of Deluxe. In
addition to our businesses, Deluxe is the largest check printer in the world.
The shares of Deluxe are publicly traded on the New York Stock Exchange under
the symbol "DLX."
After this offering, Deluxe will own about 86.5% of the outstanding shares
of our common stock, or about 84.8% if the underwriters exercise their over-
allotment option in full. As long as Deluxe continues to hold a majority of our
outstanding stock, Deluxe will be able to elect all our directors and determine
the outcome of all our corporate actions requiring stockholder approval. In
addition, we will continue to derive a substantial portion of our revenue from
Deluxe in future periods. In 1999, net sales to Deluxe represented 3% of our
total net sales and Deluxe has established minimum spending targets of $43
million per year for software development and maintenance services from our
professional services business for the next five years. Deluxe also has agreed
to purchase accounting and data entry services from our professional services
business. In the course of these on-going business relationships we may have
disagreements with Deluxe.
Deluxe has announced that it plans to distribute all of its shares of our
common stock to its shareholders through an exchange offer. As part of this
transaction, Deluxe shareholders would exchange their Deluxe shares for shares
of our common stock that Deluxe owns. In this prospectus we generally refer to
this exchange offer as a split-off. Deluxe's plans for the split-off are
subject to receiving a private letter ruling from the Internal Revenue Service
on its request that the split-off will be tax-free to Deluxe and its
shareholders for U.S. federal income tax purposes. Deluxe has the sole
discretion to determine whether to proceed with the split-off and to decide the
timing, structure and terms of the split-off. Subject to these conditions,
Deluxe plans to complete the split-off within one year following the completion
of this offering. If Deluxe does not complete the split-off, Deluxe will
continue to control us and we may not realize the benefits from our separation
from Deluxe that we anticipate.
Investors may review the documents filed by Deluxe with the Securities and
Exchange Commission at the Commission's web site located at http://www.sec.gov.
Deluxe's Commission file number is 1-7945.
Information About Us
Our company was incorporated in Delaware in December 1984 and historically
operated our transaction processing and government services businesses under
the names Deluxe Electronic Payment Systems, Inc. and Deluxe Government
Services. In April 1999, we changed the name of our company to eFunds
Corporation and began the process of combining four of Deluxe's other former
operating units into an integrated electronic debit payment business. The
operations combined were DebitBureau, Chex Systems, Inc., Deluxe Payment
Protection Systems, Inc. and an electronic check conversion company that was
acquired in February 1999. In January 2000, we decided to combine Deluxe's
professional services business, iDLX Technology Partners, with our electronic
payments business. On March 31, 2000, we completed our corporate reorganization
and began to operate our businesses as a separate company.
Our principal executive offices are currently located at 400 W. Deluxe
Parkway, P.O. Box 12536, Milwaukee, Wisconsin 53212 and our telephone number is
414-341-5000. We expect to relocate our headquarters to Phoenix, Arizona
following this offering. Our Internet address is www.efunds.com. The
information contained on our web site is not a part of this prospectus.
3
<PAGE>
The Offering
Common stock offered................ 6,250,000 shares
Common stock to be outstanding
after the offering................. 46,250,000 shares
Use of proceeds..................... General corporate purposes, including
acquisitions and strategic alliances,
capital expenditures, product
development, infrastructure upgrades and
working capital.
Proposed Nasdaq National Market
symbol............................. EFDS
Unless we specifically state otherwise, all information in this prospectus
reflects a 16,000 for 1 stock split on May 12, 2000 and assumes that the
underwriters do not exercise their over-allotment option. If the underwriters
exercise their over-allotment option in full, 47,187,500 shares of common stock
will be outstanding after this offering.
The number of shares of our common stock to be outstanding immediately after
this offering does not take into account 9,250,000 shares of common stock
reserved for issuance under our stock incentive plan and 3,350,000 shares of
common stock reserved for issuance, as described below, under our option
conversion plan. We expect to grant options to purchase an aggregate of
2,614,316 shares of our common stock under our stock incentive plan upon
completion of this offering with an exercise price equal to the initial public
offering price, unless a lower price is required by foreign law or government
regulation.
Immediately prior to the split-off, all outstanding options to purchase
Deluxe common stock will be converted into new options to purchase Deluxe
common stock and options to purchase our common stock. The actual number of
options will be determined immediately prior to the split-off based on the
market price of our common stock and Deluxe's common stock. Based upon an
assumed price of $15.00 per share for our common stock and assuming the market
price of Deluxe's common stock immediately prior to the split-off is the same
as its closing market price on June 2, 2000, the number of our shares for which
options would be granted under this conversion plan would be approximately 3.2
million and the weighted average exercise price would be $20.00 per share.
4
<PAGE>
Summary Financial Data
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31,
---------------------------- -----------------
1997 1998 1999 1999 2000
-------- -------- -------- ------- --------
(in thousands, except per share and
operating data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales..................... $229,065 $267,520 $302,340 $67,856 $100,255
-------- -------- -------- ------- --------
Cost of sales, excluding
loss contract and asset
impairment charges......... 143,966 171,359 185,590 43,060 58,757
Loss contract and asset
impairment charges......... 2,470 40,949 8,700 60 --
-------- -------- -------- ------- --------
Total cost of sales....... 146,436 212,308 194,290 43,120 58,757
-------- -------- -------- ------- --------
Gross margin.................. 82,629 55,212 108,050 24,736 41,498
-------- -------- -------- ------- --------
Selling, general and
administrative............. 70,542 81,198 105,382 17,887 38,178
Research and development.... 1,398 625 3,756 536 579
Asset impairment charges.... 9,361 -- -- -- --
-------- -------- -------- ------- --------
Total operating expenses.. 81,301 81,823 109,138 18,423 38,757
-------- -------- -------- ------- --------
Income (loss) from
operations................... 1,328 (26,611) (1,088) 6,313 2,741
Other income (expense)
Legal proceedings........... (40,050) 4,157 2,094 2,094 --
Other income (expense)...... (918) (3,495) (4,609) (866) 13
Interest income (expense)... (825) 2,789 963 803 (801)
-------- -------- -------- ------- --------
Income (loss) before income
taxes........................ (40,465) (23,160) (2,640) 8,344 1,953
Benefit (provision) for income
taxes........................ 6,397 8,569 (5,586) (4,530) (737)
-------- -------- -------- ------- --------
Net income (loss)............. $(34,068) $(14,591) $ (8,226) $ 3,814 $ 1,216
======== ======== ======== ======= ========
Net income (loss) per share--
basic and diluted............ $ (.85) $ (.36) $ (.21) $ .10 $ .03
Shares used in computing basic
and diluted net loss per
share........................ 40,000 40,000 40,000 40,000 40,000
Operating Data:
Account verifications
inquiries (millions)......... 28.6 30.3 32.1 8.0 9.7
Transactions processed
(millions)................... 3,313 3,944 5,019 1,106 1,360
ATMs driven at period end..... 5,766 5,623 8,626 8,465 9,027
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000
-----------------------
Actual As Adjusted(1)
-------- --------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents (2)........................... $ 26,876 $109,563
Working capital......................................... 16,052 98,738
Total assets............................................ 315,750 398,438
Long-term debt, excluding current portion............... 3,284 3,284
Total stockholder's equity.............................. 220,106 302,794
</TABLE>
--------
(1) As adjusted to reflect the sale of 6,250,000 shares of common stock in
this offering, assuming a public offering price of $15.00 per share, and
the receipt of the net proceeds after deducting the underwriting discount
and estimated offering expenses.
(2) Excludes restricted cash which represents cash that we have supplied for a
client's ATMs and cash that we temporarily hold in custodial accounts on
behalf of clients.
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below and other
information in this prospectus before making a decision to buy our common
stock.
Risks Relating to Our Business and Industry
We have had net losses over the past several years, and we may not achieve
or sustain profitability.
We had net losses of $8.2 million in 1999, $14.6 million in 1998 and $34.1
million in 1997, and we may not achieve or maintain profitability. Our ability
to achieve profitability will depend on growth in electronic debit payments,
our ability to attract new clients, the market acceptance of our new products
and services and our ability to control further losses on government services
contracts. In addition, our professional services business, which we began to
offer in September 1997, contributed operating losses of $10.7 million in
1999, $3.4 million in 1998 and $1.6 million in 1997. As a consequence, the
prospects for our professional services business must be considered in light
of the risks and uncertainties encountered by businesses in the early stage of
development in new and rapidly evolving markets.
Our government services business has not been profitable and Deluxe's
indemnification may not be adequate.
Our government services business contributed operating losses of
approximately $6.6 million in 1999, $47.7 million in 1998 and $12.3 million in
1997. These amounts include losses we recognized in 1999 and 1998 that
represent probable future losses from unprofitable long-term service contracts
and the write-off of assets associated with this business. The losses on the
long-term service contracts result from the revenues from the contracts being
lower than expected and the expenses to service the contract being higher than
anticipated. The assets associated with the government services business were
written off because this business has a negative overall cash flow and its
assets have no resale value. We will record an additional loss contract charge
of $12.2 million in the second quarter of 2000 due to the execution of a
definitive long-term agreement with Citibank relating to a coalition of states
for whom we have been providing electronic benefit transfer services. Citibank
is the prime contractor for this coalition and we have been serving as a
subcontractor to Citibank without a binding contract for approximately three
years. Although we believe that we did not have a legal obligation to provide
services to this coalition, the states included in this coalition did not have
alternate means of delivering benefits under their entitlement programs. As a
result, we believe we could not terminate the provision of services during our
contract negotiations with Citibank because any unilateral decision to do so
would have subjected us to a substantial risk of litigation by the coalition
states and Citibank. The execution of the contract allowed us to avoid the
possibility that our future losses associated with the provision of these
services would be larger than the charge we recorded if Citibank ultimately
prevailed on several points pursued by it during our negotiations. We intend
to exit the government services business after we complete our obligations
under our long-term contracts in 2006.
Deluxe has agreed to indemnify us for future losses arising from any
litigation based on the conduct of the business prior to this offering and
future losses on identified loss contracts in excess of our $29.2 million loss
contract reserves as of April 30, 2000, which amount includes the $12.2
million charge. This indemnification obligation does not apply to losses
contemplated by the existing reserve and is subject to a $14.6 million limit,
so that it would not apply to any future losses on our existing unprofitable
contracts in excess of $43.8 million. In addition, Deluxe's indemnification
does not apply to any contract that was not in a loss position as of April 30,
2000 and so if any of these profitable contracts were to become unprofitable,
no indemnification would be available. Our loss contract reserves are based on
estimates of future performance of identified contracts, and the estimated
results may not be realized. As a result, we may incur losses beyond our
current reserves and Deluxe's indemnification. For example, a continuing
strong economy, which could further reduce the number of welfare recipients
below our current expectations, could increase our projected future losses.
These excess losses would be recognized in future periods and decrease our
earnings for those future periods. In addition, we may be unable to
effectively manage our exit from the government services business if we are
unable to retain key employees and reduce our costs as currently projected,
which could result in further losses.
6
<PAGE>
We have only a limited history with our current business plan.
Our business model is still new and developing. In April 1999, we began the
process of combining five of Deluxe's former operating units into an integrated
electronic debit payment business. The businesses we combined were Deluxe
Electronic Payment Systems, Inc., DebitBureau, ChexSystems, Inc., Deluxe
Payment Protection Systems, Inc. and an electronic check conversion company
that was acquired in February 1999. Deluxe Electronic Payment Systems, Inc. and
the electronic check conversion company primarily process debit transactions.
The other companies maintain databases that assist financial institutions and
retailers to determine whether to open a new checking or savings account for or
accept a check from a consumer. We combined these businesses in order to couple
our risk management products with our transaction processing capabilities in an
effort to create more products and services than the businesses would have
created as independent operating units. In January 2000, we decided to combine
our professional services business with our electronic payments business
because the addition of the information technology expertise of this business
would enhance our ability to develop, customize, install and maintain our
products. We may not be able to realize the anticipated strategic and other
benefits of these combinations in a timely manner, or at all. Our management
has been and will continue to be required to devote substantial attention to
the process of integrating our operations, technologies and personnel and
consolidating our infrastructure. The diversion of management's attention and
any difficulties encountered during the transition could have an adverse impact
on our on-going business activities and limit our growth.
If we fail to develop and introduce new and enhanced products and services,
we will not be able to compete effectively and our ability to generate revenues
will suffer.
Our success will depend in part on our ability to continue to develop and
introduce new and enhanced electronic debit payment products and services that
keep pace with competitive introductions, technological changes and changing
customer preferences. If we fail to anticipate or respond adequately to new
developments, we may lose opportunities for business with both current and
potential customers.
Legislation relating to consumer privacy protection 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 decision support and risk management products.
The information we collect includes names and addresses, social security
numbers, drivers license numbers, checking and savings account numbers and
payment history records such as account closures and returned checks. Due to
the 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. For example, some states have restricted the sale of motor vehicle
records, including drivers license lists, and some states refuse to disclose
this information at all.
The new federal financial modernization law, known as the Gramm-Leach-Bliley
Act, imposes significant new consumer information privacy requirements on any
entity engaged in the business of providing financial services, including
entities that provide services to financial institutions. Federal agencies,
such as the Comptroller of the Currency and the Federal Trade Commission, have
issued regulations to implement these requirements. The Act requires covered
companies to develop and implement policies to protect the security and
confidentiality of consumers' nonpublic personal information and to disclose
those policies to consumers before a customer relationship is established and
annually thereafter. In addition, the Act requires covered companies to give an
opt-out notice to consumers before sharing consumer information with third
parties. The opt-out notice requirement in the Act is subject to several
exceptions for credit reporting and fraud prevention purposes. Although we
believe these exceptions apply to our business, government agencies could
interpret their regulations in a manner that could expand the scope of the Act
in ways which could adversely affect our business. In addition, even if the
regulations do not affect us directly, uncertainty over the scope of the
regulations could make financial institutions unwilling to share consumer-
related information with us.
7
<PAGE>
The Act does not prohibit state legislation or regulations that are more
restrictive on our collection and use of data. More restrictive legislation or
regulations have been introduced in the past and could be introduced in the
future in Congress and the states. 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.
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. Further, we expect
that competition will intensify as the e-commerce and Internet markets continue
to develop and expand. 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 payment management market, our principal competitors
include:
. third party network and credit card processors, including First Data,
Equifax, Total System Services, Electronic Data Systems, Concord EFS and
Alliance Data Systems;
. financial institutions that have developed internal processing
capabilities or services similar to ours, including Bank of America,
Marshall and Illsley and Fifth Third National Bank;
. electronic data interchange and cash management providers, including
Fiserv, CheckFree, M&I Data, EDS and Fundtech;
. electronic bill payment providers, including CheckFree, EDS, MasterCard,
Spectrum and Visa;
. electronic funds transfer software providers, including Transaction
Systems Architects, SLMsoft, Oasis, Mosaic and PaySys; and
. national information database companies and other content providers,
including Equifax, Experian and Trans Union.
In the market for electronic transaction processing, the principal factors
on which we compete are price and service levels. 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.
Competition for our decision support and risk management products is based
primarily on the quantity and quality of the data available to us for this
purpose and, to a somewhat lesser degree, price. Our 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 the fragmented information technology professional services market, we
compete with numerous firms. We believe that our principal competition to date
has been the internal information technology departments of current and
potential clients. In addition, we compete with systems consulting and
integration firms, application software firms, Internet professional service
companies, services divisions of computer hardware and software vendors,
facilities management and outsourcing companies, "Big 5" accounting firms and
strategic consulting firms. Competition in this area is primarily based on the
continued availability of qualified technical personnel in an extremely
competitive U.S. labor market. Our professional services business will suffer
if we are unable to attract and retain personnel with the advanced technology
skills we require.
In addition to our current competitors, we expect substantial competition
from established and new companies as the e-commerce and Internet markets
continue to develop and expand. We cannot assure you 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.
We are dependent on Deluxe for both business support and a significant
portion of our revenue.
As of the completion of this offering, Deluxe will agree to continue to
provide tax, employee benefits, accounting, treasury, legal and sales services
to us. If Deluxe fails to perform these services adequately or
8
<PAGE>
effectively, our business could be adversely affected. In addition, we will
continue to derive a substantial portion of our revenues from Deluxe in future
periods. In 1999, net sales to Deluxe represented 3% of our total net sales and
43% of the net sales of our professional services segment. Deluxe has
established minimum spending targets of $43 million per year through March 31,
2005 for software development, maintainence and support services from our
professional services business. We will also provide Deluxe with business
process outsourcing services during this period. The loss of Deluxe as a
customer or a material reduction in the amount of services it orders from us
would materially adversely affect our future results of operations and
financial condition.
Our future profitability is dependent upon the continued growth in the
market for electronic debit payment services.
If the electronic debit payments market does not grow or grows more slowly
than expected, our business will suffer. Several factors could inhibit the
acceptance and growth of electronic debit payments, including:
. these types of payments are relatively new alternatives to the more
familiar cash, check and credit card payment options. Consumers and
businesses may be unwilling to change their established payment
preferences and adopt these new forms of payment as quickly as we
expect; and
. consumers may be concerned that these newer payment options are not as
safe or reliable as more traditional payment methods. Consumers may also
believe that these payment technologies offer a lower level of privacy.
The success of our strategy to expand our Internet delivery channels depends
on product development efforts and increased adoption by businesses and
consumers of the Internet as a means for commerce.
We believe that the Internet will become an increasingly important means by
which consumers and businesses buy and sell products and services. Accordingly,
developing the means to process debit-based Internet transactions is an
important factor in our ability to increase sales of our electronic payment
services. In order to be successful with this initiative, we must develop
efficient ways for participants in Internet-based transactions to send and
receive debit payments with a minimum level of risk or inconvenience. Our
products for Internet applications are currently in development and we cannot
assure you that we can complete the development of these products or that our
Internet applications will be accepted in the market. In addition, the success
of our Internet strategy depends on the continued growth and use of the
Internet as a means of commerce. If commerce over the Internet does not become
more accepted and widespread, our business and results of operations could
suffer.
Factors that may affect Internet commerce adoption include:
. inadequate network infrastructure;
. security, privacy and authentication concerns;
. changes in, or insufficient availability of, telecommunication services
to support the Internet; and
. increased government regulations or taxation.
We may be required to expend significant sums to protect our trademarks.
In May 1999, we filed a trademark infringement lawsuit seeking to prevent
Citizens Advisers, Inc. from using the "E FUND" mark and efund.com Internet
domain. This action and any future litigation could be costly and time
consuming. If we are unsuccessful in preventing Citizens from using our name,
our business could be harmed because customers and potential customers are
confused about the origin of goods and services offered by Citizens and
ourselves and wrongfully attribute any dissatisfaction with Citizens' services
to us. Further, if we are not successful in this lawsuit, we may not be able to
obtain a registered federal trademark for the eFunds mark, which could restrict
our ability to protect our name and reputation from infringement by others.
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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 business, 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 database 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 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.
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 network systems and data centers. Any
significant interruptions could severely harm our business and reputation and
result in a loss of customers. Our systems and operations could be exposed to
damage or interruption from fire, natural disaster, power loss,
telecommunications failure, unauthorized entry and computer viruses. Although
we have taken steps to prevent a system failure, we cannot be certain that our
measures will be successful and that we will not experience system failures.
Further, our property and business interruption insurance may not be adequate
to compensate us for all losses or failures that may occur.
We may experience software defects, development delays and installation
difficulties, which would 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:
. delay in market acceptance;
. additional development costs;
. diversion of technical and other resources;
. loss of customers;
. negative publicity; or
. 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.
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Consolidation in the banking industry may adversely affect our ability to
sell our products and services.
Mergers, acquisitions and personnel changes at financial institutions may
adversely affect our business, financial condition and results of operations.
In 1999, the banking industry accounted for approximately 37% of our net sales.
Currently, the banking industry is undergoing large-scale consolidation,
causing the number of financial institutions to decline. This consolidation
could cause us to lose:
. current and potential customers;
. market share if the combined financial institution determines that it is
more efficient to develop in-house products and services similar to ours
or use our competitors' product and services; and
. revenue if the combined financial institution is able to negotiate a
greater volume discount for, or discontinue the use of, our products and
services.
We depend on the continued services of our key officers.
Our future success depends upon the continued services of a number of key
officers, including John Blanchard, our Chairman and Chief Executive Officer,
Paul Bristow, our Executive Vice President and Chief Financial Officer, and Dr.
Nikhil Sinha, our Executive Vice President for Global Corporate Development.
The loss of the technical knowledge and industry expertise of any of these
officers could seriously harm our business.
Our president and chief operating officer, Debra Janssen, resigned on June
1, 2000. Ms. Janssen cited personal reasons for her departure. We will not
replace Ms. Janssen at this time. Mr. Blanchard, Mr. Bristow and Dr. Sinha have
assumed Ms. Janssen's duties. We cannot assure you that her departure will not
harm our business.
Our attempts to expand by means of acquisitions and strategic alliances may
not be successful.
Tax requirements related to the split-off will restrict our ability to
complete significant acquisitions through the issuance of our common stock.
Further, our ability to expand in this manner involves many risks, including:
. the operations, technology and personnel of any acquired companies may
be difficult to integrate;
. the allocation of resources to consummate these transactions may disrupt
our business;
. acquired businesses may not achieve anticipated revenues, earnings or
cash flow;
. strategic alliances may not be successful or we may not realize
anticipated benefits in a timely manner, or at all; and
. our relationships with existing customers and business partners may be
weakened or terminated as a result of these transactions.
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 in Europe,
Australia and Latin America, our business is subject to risks associated with
doing business internationally. Also, we may not be successful in selling our
services outside of the United States. In 1999, we generated approximately 6.7%
of our net sales outside of the United States. 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;
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. 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.
Conditions in India could adversely affect our operations.
We maintain software development and business process management facilities
in India with approximately 680 employees. Political and economic conditions in
India could adversely affect our operations. In the past, India has experienced
significant increases in inflation, shortages of foreign exchange, civil unrest
and conflicts with other countries in South Asia.
Our software development centers are located in software technology parks in
India. Tax incentives associated with businesses which operate within these
technology parks and engage in software development generally provide us with a
complete exemption from Indian tax on business income generated through these
facilities through the end of 2006. We cannot assure you that these tax
benefits will be continued in the future at their current levels or at all. If
these tax benefits were reduced or eliminated, our taxes in future periods
would likely increase.
We face collection risks on some payments.
A debt collection service we commenced in 2000 exposes us to collection
risks. For three clients of our check authorization service, we purchase
returned checks at a discounted price to the stated check amount and assume the
collection risk on the checks. We base our discounted purchase price on the
collection history of each client. If we are unable to collect on returned
checks at the historical rate of our clients or the payment quality of the
portfolio of returned checks deteriorates, we may incur a loss on the portfolio
of purchased checks. Although we may expand this service to additional
customers, we do not expect that revenues from our debt collection services
will exceed 5% of our total net sales in 2000.
We face termination and compliance risks with respect to our government
contracts.
All of our government contracts can be terminated at any time, without
cause, by the contracting governmental entity. We realized 16% of our net sales
in 1999 pursuant to contracts of this type. If a government contract is so
terminated, the contractor generally is entitled to receive compensation only
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.
Our government services business could be harmed by cost overruns on fixed-
price contracts.
In 1999, approximately 16% of our net sales were derived from fixed-price,
variable volume contracts of our government services business. Under these
contracts, we agree to perform services for an agreed unit price and we bear
the entire risk of cost overruns and changing volumes. If we do not
successfully manage these project and contract risks or if our original
contract estimates turn out to be inaccurate, we could suffer cost overruns and
penalties and our reputation and results of operations could be harmed. We
recorded charges of $40.9 million and $8.7 million in 1998 and 1999 and we will
incur an additional $12.2 million charge in the second quarter of 2000 as a
result of these risks. We cannot assure you that we will not incur additional
charges of this type or that the indemnification Deluxe has agreed to provide
us with respect to our existing contracts will be sufficient.
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We may be unable to protect our intellectual property rights.
Despite our efforts to protect our intellectual property rights, 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 of the features of our newer products. We may be required to spend
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. In
particular, there has been a substantial increase in the issuance of business
process patents for Internet-related business processes, which may have broad
implications for all participants in Internet commerce. Claims for infringement
of these patents are becoming an increasing 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.
Risks Relating to Our Separation From Deluxe
We currently obtain check printing data through Deluxe's agreements with
financial institutions. Following the split-off, we must secure our own
agreements to obtain this data. If we are not successful, our business will
suffer.
Historically, we have obtained all of our check printing data through Deluxe
under its agreements with banks and other financial institutions and through
its direct check printing subsidiary. This data contains name and address
information and drivers license, social security and checking account numbers.
We use this data to help create the connection between our SCAN and ChexSystems
data and data we acquire from other sources as part of our decision support and
risk management tools for our electronic payments business. As a result of the
split-off from Deluxe, we must secure our own separate agreements to obtain
check printing data or similar consumer account information. We cannot be
certain that we will be successful in securing these agreements or otherwise
continuing to obtain sufficient amounts of data on reasonable terms and
conditions, if at all. Any failure by us to obtain the data we require directly
from financial institutions would have an adverse effect on our ability to
update information in DebitBureau, the performance of our products and services
based on DebitBureau and new product development. It could also result in a
delay of the split-off.
We may not realize the benefits of our separation from Deluxe and our stock
price may decline if Deluxe does not complete the split-off.
If Deluxe does not complete the split-off, Deluxe will continue to control
us and we may not fully realize the benefits we expect as a result of the
split-off. Deluxe has the sole discretion to determine the timing and terms of
any split-off and is not obligated to effect the split-off. In particular,
Deluxe will not complete the split-off unless it receives a favorable tax
ruling from the Internal Revenue Service to the effect that the split-off would
be tax-free to Deluxe and its stockholders for federal income tax purposes. We
cannot assure you whether or when Deluxe will receive a favorable tax ruling
from the IRS, or that the split-off will occur. In addition, if the split-off
is not completed, the liquidity of our shares in the market will be limited
unless and until Deluxe elects to sell some of its significant ownership.
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We will be controlled by Deluxe as long as it owns a majority of our common
stock, and our other stockholders will be unable to affect the outcome of
stockholder voting during this time.
As long as Deluxe continues to hold a majority of our outstanding stock,
Deluxe will be able to elect all of our directors and determine the outcome of
all corporate actions requiring stockholder approval. Because it controls us,
Deluxe has the power to act without taking the best interests of our company
into consideration. After the completion of this offering, Deluxe will own
approximately 86.5% of our outstanding common stock. For purposes of meeting
the tax requirements associated with the split-off, Deluxe also holds an option
to purchase additional shares of our capital stock so that it can maintain its
ownership of at least 80.1% of our outstanding voting power at all times prior
to the split-off.
While it controls us, Deluxe will control decisions with respect to:
. the business direction and policies of our company, including the
election and removal of directors;
. mergers or other business combinations involving us;
. the acquisition or disposition of assets by us;
. our financing; and
. amendments to our certificate of incorporation and bylaws.
There are potential conflicts with Deluxe and four of our directors may have
conflicts of interest because they are also directors and officers of Deluxe.
Conflicts may arise between Deluxe and us as a result of our on-going
agreements. We may not be able to resolve any potential conflicts with Deluxe,
and even if we do, the resolution may be less favorable to us than if we were
dealing with an unaffiliated third party. In addition, during the period that
Deluxe controls us, John Blanchard, Lawrence Mosner, John LeFevre and Lois
Martin, all of whom will become members of our board of directors, will
continue to be directors and officers of Deluxe. These directors will have
obligations to us as well as Deluxe and may have conflicts of interest with
respect to matters potentially or actually involving or affecting us. Matters
that could give rise to conflicts include among other things:
. our past and ongoing relationships with Deluxe, including tax matters,
employee benefits, indemnification, data sharing, and other matters
arising from our separation from Deluxe;
. the nature, quality and pricing of transitional services Deluxe has
agreed to provide us;
. the quality and pricing of services we have agreed to provide to Deluxe;
and
. sales or distributions by Deluxe of all or part of its ownership
interest in us.
For example, by virtue of its controlling beneficial ownership and the terms
of the tax-sharing agreement between us and Deluxe, Deluxe will effectively
control all of our tax decisions until the split-off is completed. Under the
tax-sharing agreement, Deluxe generally has sole authority to respond to and
conduct all tax proceedings and tax audits relating to our operations during
this period and to file all related returns on our behalf. The tax sharing
agreement also determines the amount of our liability to, or entitlement to
payment from, Deluxe with regard to taxes and tax refunds. This arrangement may
result in conflicts between us and Deluxe. Under the tax-sharing agreement,
Deluxe may choose to contest, compromise or settle any adjustment or deficiency
proposed by the relevant taxing authority in a manner that may be beneficial to
Deluxe and detrimental to us.
Our historical financial information may not necessarily reflect our results
as a separate company.
We have no operating history as an independent company. The historical
financial information we have included in this prospectus has been carved out
from Deluxe's consolidated financial statements and may not necessarily reflect
what our results of operations, financial condition and cash flows would have
been had we been a separate, stand-alone entity during the periods presented.
Following this offering, we will be required to provide our own financial,
administrative and other resources to operate as an independent public company
and to replace other services provided by Deluxe to us. As a result, the
historical financial information is not necessarily indicative of what our
results of operations, financial condition and cash flows will be in the
future.
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Risks Relating to the Securities Markets and Ownership of Our Common Stock
We cannot predict the impact of the split-off on the price of our common
stock.
We cannot predict the effect that the split-off will have on the market
price of our common stock. The split-off will involve the distribution of about
40,000,000 shares of our common stock, or 86.5% of our common stock, by Deluxe
to its stockholders. Substantially all of these shares would be eligible for
immediate resale in the public markets. Sales of substantial amounts of our
common stock in the public market, or the perception that substantial sales
might occur, whether as a result of this distribution or otherwise, could cause
the market price of our stock to decrease significantly.
Our securities have no prior market and there may be limited liquidity in
our shares.
Our common stock has not been publicly traded, and an active trading market
may not develop or be sustained after this offering. Prior to the split-off,
Deluxe will hold 86.5% of our outstanding shares and if an active trading
market does not develop for our remaining shares, your ability to sell your
shares may be limited. If the split-off is delayed or not completed at all,
this illiquidity could continue for an indefinite period and could lead to
increased volatility in our share price.
Provisions in our charter documents and Delaware law and tax considerations
related to the split-off may delay or prevent a change in control.
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 the 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; and
. 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.
In addition, prior to the completion of this offering, we will adopt a
stockholder rights plan which discourages the unauthorized acquisition of 15%
or more of our common stock or an unauthorized exchange or tender offer. Our
tax sharing agreement with Deluxe also provides that we will indemnify Deluxe
for any taxes due if the split-off or some of the related transactions fail to
qualify as tax-free because of our actions or inactions. An acquisition of us
by a third party could have such an effect. As a result, these tax
considerations may delay or prevent a third party from acquiring us in a
transaction you may otherwise have considered favorable or reduce the amount
you receive as part of the transaction. We also have agreed to indemnify Deluxe
for a portion of any taxes due from Deluxe if the split-off or some of the
related transactions fail to qualify as tax-free as a result of a retroactive
change of law or other reason unrelated to the action or inaction of either us
or Deluxe.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. When we use the words
"believe," "anticipate," "plan," "expect," "estimate," "will" and similar
expressions, we are identifying forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. We do not, however, represent forward-looking statements as
guarantees of future performance or results. Our actual results may vary
materially from those indicated in the forward-looking statements as a result
of a number of risks and uncertainties, including the risks described under
"Risk Factors" or elsewhere in this prospectus.
USE OF PROCEEDS
We estimate the net proceeds from the sale of our common stock in this
offering, based on an assumed public offering price of $15.00 per share and
after deducting the underwriting discount and estimated offering expenses
payable by us, will be approximately $82.7 million, or $95.8 million if the
underwriters exercise their over-allotment option in full.
We expect to use:
. approximately $10 million of these proceeds to fund the creation of the
additional infrastructure, such as management information systems,
needed to allow us to operate as an independent stand-alone company;
. approximately $25 million to fund a portion of our $62.5 million capital
expenditure budget for 2000, with the balance of this amount being
funded from our ongoing operations;
. approximately $10 million for product development activities; and
. the remaining proceeds for working capital and other general corporate
purposes.
In addition, we may use some of the net proceeds for acquisitions of
businesses, products and technologies that are complementary to ours. We do not
have any agreements with respect to any material acquisitions as of the date of
this prospectus. Pending our use of the net proceeds from this offering, we
intend to invest these proceeds in short-term, interest-bearing, investment-
grade securities.
DIVIDEND POLICY
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We currently intend to retain future earnings to fund the
development and growth of our business.
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CAPITALIZATION
The following table sets forth our actual and as adjusted capitalization at
March 31, 2000, as described below. The as adjusted column gives effect to the
sale of 6,250,000 shares of our common stock in this offering, assuming an
initial public offering price of $15.00 per share and after deducting the
underwriting discount and estimated offering expenses payable by us. This table
should be read in conjunction with our audited consolidated financial
statements and related notes, which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 2000
---------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Long-term debt, excluding current portion............ $ 3,284 $ 3,284
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 100,000,000 shares
authorized; no shares issued and outstanding....... -- --
Common stock, $.01 par value; 250,000,000 shares
authorized; 40,000,000 shares issued and
outstanding actual; and 46,250,000 shares issued
and outstanding as adjusted........................ 400 462
Additional paid-in capital.......................... 327,290 409,916
Accumulated deficit................................. (106,655) (106,655)
Accumulated other comprehensive loss................ (929) (929)
-------- --------
Total stockholders' equity......................... 220,106 302,794
-------- --------
Total capitalization................................. $223,390 $306,078
======== ========
</TABLE>
This table does not reflect 12,600,000 shares of common stock reserved for
issuance under our stock incentive plan and the plan for Deluxe conversion
options discussed below. We expect to grant options to purchase an aggregate of
2,614,316 shares of our common stock under our stock incentive plan upon
completion of this offering with an exercise price equal to the initial public
offering price, unless a lower price is required by law or government
regulation.
Immediately prior to the split-off, all outstanding options to purchase
Deluxe common stock will be converted into new options to purchase Deluxe
common stock and options to purchase our common stock. The actual number of
options will be determined immediately prior to the split-off based on the
market price of our common stock and Deluxe common stock. Based upon an assumed
price of $15.00 per share for our common shares and assuming the market price
of Deluxe's common stock immediately prior to the split-off is the same as the
closing market price of Deluxe's stock on June 2, 2000, then the number of our
shares for which options would be granted under this conversion plan would be
approximately 3.2 million and the weighted average exercise price would be
$20.00 per share.
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DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the offering price per share of our common
stock in this offering and the pro forma net tangible book value per share of
our common stock immediately after this offering. Pro forma net tangible book
value dilution per share represents the difference between the amount per share
paid by purchasers of shares of common stock in this offering and the pro forma
net tangible book value per share of common stock immediately after completion
of this offering.
Our pro forma net tangible book value as of March 31, 2000 was $133.2
million, or $3.33 per share of common stock. Pro forma net tangible book value
per share represents the amount of our stockholders' equity, less intangible
assets, divided by the total number of shares of common stock outstanding for
the period immediately prior to this offering. After giving effect to the sale
of the 6,250,000 shares of common stock offered in this prospectus at the
assumed public offering price of $15.00 per share and after deducting the
estimated underwriting discounts and offering expenses, our adjusted pro forma
net tangible book value as of March 31, 2000 would have been $215.9 million, or
$4.67 per share of common stock. This represents an immediate increase in net
tangible book value of $1.34 per share to Deluxe and an immediate dilution of
$10.33 per share to new investors purchasing shares in this offering. The
following table illustrates this per share dilution.
<TABLE>
<CAPTION>
Assumed public offering price per share....................... $15.00
<S> <C> <C>
Net tangible book value per share before the offering......... $3.33
Increase per share attributable to new investors.............. 1.34
-----
Pro forma net tangible book value per share after this
offering..................................................... 4.67
------
Dilution per share to new investors........................... $10.33
======
</TABLE>
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read together with the
consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this prospectus. The selected statement of operations data shown
below for the years ended December 31, 1997, 1998 and 1999 and the balance
sheet data as of December 31, 1998 and 1999 are derived from our audited
consolidated financial statements included in this prospectus which have been
audited by Deloitte & Touche LLP, independent auditors.
The selected statement of operations data shown below for the years ended
December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995,
1996 and 1997 are derived from our unaudited consolidated financial statements
not included in this prospectus. The selected statement of operations shown
below for first quarter ended March 31, 1999 and 2000 and the selected balance
sheet data as of March 31, 2000 are derived from our unaudited consolidated
financial statements included in this prospectus. In our opinion all
adjustments necessary for a fair presentation of our financial statements are
included. Other than the adjustments related to restructuring charges discussed
in note 7 to the consolidated financial statements, the adjustments consist
only of normal recurring items.
On February 19, 1999, we acquired all of the outstanding shares of an
electronic check conversion company. On April 13, 1999, we acquired the
remaining 50% ownership interest in a joint venture which comprises our
professional services business and which prior to the acquisition was recorded
in our financial statements under the equity method of accounting. The
acquisitions have been accounted for under the purchase method of accounting
and, as a result, our consolidated financial statements include the total
results of these businesses subsequent to their acquisition dates.
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31,
------------------------------------------------ -----------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- ------- --------
(in thousands, except per share and operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales............... $193,111 $201,681 $229,065 $267,520 $302,340 $67,856 $100,255
-------- -------- -------- -------- -------- ------- --------
Cost of sales,
excluding loss
contract and asset
impairment charges... 104,239 131,379 143,966 171,359 185,590 43,060 58,757
Loss contract and
asset impairment
charges.............. -- -- 2,470 40,949 8,700 60 --
-------- -------- -------- -------- -------- ------- --------
Total cost of
sales.............. 104,239 131,379 146,436 212,308 194,290 43,120 58,757
-------- -------- -------- -------- -------- ------- --------
Gross margin............ 88,872 70,302 82,629 55,212 108,050 24,736 41,498
-------- -------- -------- -------- -------- ------- --------
Selling, general and
administrative....... 64,330 69,544 70,542 81,198 105,382 17,887 38,178
Research and
development (1)...... -- -- 1,398 625 3,756 536 579
Asset impairment
charges.............. -- -- 9,361 -- -- -- --
-------- -------- -------- -------- -------- ------- --------
Total operating
expenses........... 64,330 69,544 81,301 81,823 109,138 18,423 38,757
-------- -------- -------- -------- -------- ------- --------
Income (loss) from
operations............. 24,542 758 1,328 (26,611) (1,088) 6,313 2,741
Other income (expense)
Legal proceedings..... -- -- (40,050) 4,157 2,094 2,094 --
Other income
(expense)............ (313) 7 (918) (3,495) (4,609) (866) 13
Interest income
(expense)............ (972) (1,463) (825) 2,789 963 803 (801)
-------- -------- -------- -------- -------- ------- --------
Income (loss) before
income taxes........... 23,257 (698) (40,465) (23,160) (2,640) 8,344 1,953
Benefit (provision) for
income taxes........... (9,733) (5,203) 6,397 8,569 (5,586) (4,530) (737)
-------- -------- -------- -------- -------- ------- --------
Net income (loss)....... $ 13,524 $ (5,901) $(34,068) $(14,591) $ (8,226) $ 3,814 $ 1,216
======== ======== ======== ======== ======== ======= ========
Net income (loss) per
share -- basic and
diluted................ $ .34 $ (.15) $ (.85) $ (.36) $ (.21) $ .10 $ .03
Shares used in computing
basic and diluted net
income (loss) per
share:................. 40,000 40,000 40,000 40,000 40,000 40,000 40,000
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------- March 31,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Account verification
inquiries (millions)... 23.7 26.3 28.6 30.3 32.1 9.7
Transactions processed
(millions)............. 1,356 2,526 3,313 3,944 5,019 1,360
ATMs driven at period
end.................... N/A N/A 5,766 5,623 8,626 9,027
Balance Sheet Data:
Cash and cash
equivalents(2)......... $ 3,967 $ 27,226 $ 23,843 $ 16,055 $ 35,849 $ 26,876
Working capital......... 8,735 38,666 39,686 1,869 25,607 16,052
Total assets............ 150,614 177,230 187,810 186,335 289,929 315,750
Long-term debt,
excluding current
portion................ 3,504 2,426 4,571 4,029 3,597 3,284
Total stockholder's
equity................. 101,201 131,897 87,690 89,803 199,105 220,106
</TABLE>
--------
(1) Research and development expenses are included in, but were not separately
recorded from, cost of sales and selling, general and administrative
expenses for the years ended December 31, 1996 and 1995.
(2) Excludes restricted cash which represents cash that we have supplied for a
client's ATMs and cash that we temporarily hold in custodial accounts on
behalf of clients.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with "Selected Financial
Data" and our consolidated financial statements and the notes to those
financial statements included in this prospectus. In addition to historical and
pro forma information, this discussion contains forward-looking information
that involves risks and uncertainties. Our actual results could differ
materially from those anticipated by us due to competitive factors, risks
associated with our expansion plans and other factors discussed under "Risk
Factors" and elsewhere in this prospectus.
Overview
We provide transaction processing and risk management services to financial
institutions, retailers, electronic funds transfer networks, e-commerce
providers and government agencies. Our electronic payments segment provides a
comprehensive suite of transaction processing services and decision support and
risk management tools for debit transactions. Our professional services segment
provides information technology consulting and business process management
services. Our government services segment provides online electronic transfer
of benefits under entitlement programs on behalf of state and local governments
and Medicaid eligibility verification services.
Our businesses have historically been operated as units of Deluxe. In April
1999, Deluxe announced that it was changing its business model to a holding
company structure with four independently operated business units: paper
payment systems, electronic payments, professional services and government
services. In January 2000, Deluxe announced that its board of directors
approved a plan to combine the latter three businesses under our company as a
separate, independent publicly traded company.
We have entered into various agreements related to transition and ongoing
relationships with Deluxe. These agreements relate to, among others,
information technology development, business process management, employee
benefits, tax sharing, real estate, data sharing, indemnification and
transition services. For transition services, we will compensate Deluxe for
providing services and negotiate third-party rates after the transition
arrangements terminate. The transition period varies depending on the agreement
but many transition services will terminate upon completion of the split-off.
See "Business--Our Separation From Deluxe." Some of the transition agreements
may be extended beyond the initial transition period.
Our consolidated financial statements have been prepared using the
historical results of operations and historical bases of the assets and
liabilities of the Deluxe businesses that comprise our company. The
consolidated financial statements also include allocations to us of certain
liabilities and expenses, including profit sharing, post-retirement, non-
qualified deferred compensation and other employee benefits; information
technology services; facility costs; and other Deluxe administrative services
costs. The expense allocations have been determined on bases that both Deluxe
and we considered to be a reasonable reflection of the utilization of the
services provided to us or the benefit received by us. The expense allocation
methods are based on headcount, transaction processing costs, square footage
and relative sales.
The financial information presented in this prospectus may not necessarily
reflect what our financial position, results of operations or cash flows would
have been had we been a separate, stand-alone entity for the periods presented
nor is it indicative of our future financial position, results of operations or
cash flows. We anticipate that many changes will occur in our funding and
operations as a result of our operation as an independent entity and through
the split-off. In particular, our business was conducted as three business
segments by Deluxe. Accordingly, our financial statements reflect those
business segments: electronic payments, professional services and government
services. It is our intention to integrate our operations more fully, which may
change our presentation of segment information in future periods.
21
<PAGE>
Net Sales. Our net sales are generally comprised of transaction processing
and service fees, decision support fees, software licensing, maintenance and
support fees, government service fees and information technology consulting and
business process management services fees. 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 through electronic funds
transfer networks and settling the funds with the financial institutions
involved in the transactions. Additionally, these services include
monitoring ATMs and point-of-sale devices 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.
. 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 aggregate dollar value
of checks authorized by the retailer, depending on the product and
service.
. Software license fees for standard software products are recognized when
delivery has occurred, the license fee is fixed and determinable,
collectibility is probable and evidence of this arrangement exists.
License fees are charged based on modules purchased by the customer. In
some situations our customers do not take possession of the software.
Instead, it remains installed on our hardware and customers access it as
needed. Revenue in these situations is recognized on a fee-for-service
basis.
. Software maintenance and support revenues are recognized ratably over
the term of the contract, and/or as the services are provided. Support
services such as customization of standard software modules, are charged
on a time and materials basis and recognized as hours are completed.
. Revenues from professional services for information technology
consulting and business process management are generally recognized
under two methods, depending on contractual terms. Under the time and
materials method, 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 completion of the project.
Cost of Sales. Cost of sales consists primarily of salaries and benefits,
depreciation and maintenance of equipment and facilities and amortization of
software used to operate our data centers. Expenses are recognized when
incurred, with the exception of installation costs. Installation costs are
capitalized and recognized ratably over the life of the contract, which
approximates the revenue recognition.
Expenses. Selling, general and administration expenses consist of salaries
and benefits, consulting fees, facilities and equipment costs, recruiting and
training, travel expenses, corporate administrative charges, depreciation and
amortization and all other corporate costs.
Research and development expenses, which are expensed as incurred, relate to
investigating new or improved processes and techniques and developing such
research findings into a potential new product or service. Research and
development expenses reflect the cost of salaries and benefits, travel costs
and testing- related costs incurred in the early stages of product development.
Interest expense represents the cost of funds for working capital and other
purposes and reflects Deluxe's internal cost of funds. Interest income consists
of interest credited to us for funds held in investment accounts.
Government Services
Our government services business was started in response to federal mandates
that require state and local governmental agencies to convert to electronic
payment methods for the distribution of benefits under entitlement programs,
including food stamps and other welfare programs. In 1993, we rolled out our
first state-wide system to electronically deliver these benefits using our
electronic funds transfer capabilities. From 1994 through 1996 we bid on
contracts that secured business as a prime or subcontractor with over 30
states,
22
<PAGE>
including three subcontracts with coalitions of states. We were providing
services in over 30 states at the end of 1999. All of our government services
contracts relate to government entitlement programs.
All of our contracts are for service periods of five to seven years and are
based on a fixed price, variable volume model. For several of the contracts, we
serve as a subcontractor for Citibank. An integral part of these arrangements
was an exclusive switching services agreement with Citibank pursuant to which
we provided services that allowed benefit recipients to use their benefit cards
to purchase goods from merchants located in a state other than their state of
residence and from merchants who were not members of our network.
In 1997, we recorded a $40.0 million charge to legal proceedings expense for
a judgment entered against us in an action brought by Mellon Bank in connection
with a potential bid to provide electronic benefit transfer services to a state
coalition. In 1998, $4.2 million of the reserve was reversed and credited to
legal proceedings expense due to the denial of Mellon's motion for prejudgment
interest. In 1999, after we paid the judgment of $32.2 million in the Mellon
litigation, we reversed the remaining reserve of $2.1 million through a credit
to legal proceedings expense.
In 1998, after a reorganization and management change in our government
services business and as many of the state systems were being fully
implemented, we concluded that net sales from our government services contracts
would be lower than anticipated because case volumes were lower due to welfare
reform and a strong economy. In addition, we underestimated the costs required
to support our services. The primary sources of additional costs were a need to
install a greater number of point-of-sale terminals, higher than expected
transaction volume per recipient and higher support costs. These higher costs
could not be recovered under our fixed-price variable volume contracts and when
combined with lower sales due to a decreased number of welfare recipients,
resulted in 1998 charges of $26.3 million and $14.7 million to write off assets
used in the government services business and to accrue for future losses on
these contracts. Subsequent to the 1998 charges, additional state systems began
operations while a continuing strong economy lead to further reductions in the
number of welfare cases. In addition, Citibank notified us that it would not
renew our exclusive switching contract. As a result, we recorded additional
charges in 1999 totaling $8.7 million, primarily for additional expected future
contract losses.
We will increase our provision for expected future losses on long-term
contracts by approximately $12.2 million in the second quarter of 2000 to
reflect the fact that we now have a definitive contract with Citibank for a
coalition of states for which Citibank serves as the prime contractor and we
serve as a subcontractor. In our role as subcontractor for this coalition, we
act as a third party acquiror of electronic benefit transactions, host the
authorization databases, and provide consumer help desk support. As the prime
contractor, Citibank serves as the lead negotiator with the states in the
coalition and retailers located in those states and is responsible for
providing overall project management. Citibank is also responsible for
coordinating the efforts of other subcontractors and for negotiating all third
party processor and regional network agreements.
Prior to executing the agreement with Citibank, we were providing services
for this coalition without a binding contract with Citibank. Although we
believe that we did not have a legal obligation to provide services to this
coalition before signing our agreement with Citibank, the states included in
this coalition did not have alternative means of delivering benefits under
their entitlement programs. As a result, we believe we could not terminate the
provision of services during our contract negotiations with Citibank because
any unilateral decision to do so would have subjected us to a substantial risk
of litigation by the coalition states and Citibank. The execution of the
agreement allowed us to avoid the possibility that our future losses could be
larger if Citibank were ultimately to prevail on several points it asserted
during our negotiations. These negotiations were conducted within the basic
framework of our initial bid to Citibank and the $12.2 million charge reflects
our estimate of the future losses that we will incur providing services under
this contract. These losses are due to the combination of lower case volumes
and higher than anticipated transaction volumes and support costs which underly
our earlier loss contract charges.
We have decided to exit the government services business as soon as our
current contractual commitments expire in 2006. During the wind down period, we
intend to continue to take steps to improve the profitability of the current
business. Deluxe has agreed to indemnify us for future losses arising from any
litigation based on
23
<PAGE>
the conduct of the business prior to this offering and from future losses on
identified loss contracts in excess of our $29.2 million loss contract reserve
as of April 30, 2000, which amount includes the $12.2 million charge. The
indemnification obligation does not apply to losses contemplated by the
existing reserves. The maximum amount of litigation and contract losses for
which Deluxe will indemnify us is $14.6 million. After the split-off, we intend
to record any indemnification payments earned from Deluxe as a reduction of
expense when the additional contract losses, if any, are recognized. Prior to
the split-off, any indemnification payments we earn from Deluxe will be
recorded as a capital contribution.
Loss Contract and Other Charges
Over the past three years, we have had significant charges for legal
proceedings, asset impairments, contract losses and restructurings. These
charges have had a significant impact on our results of operations and
financial position over this period of time. The significant charges recorded
in 1997, 1998 and 1999 are as follows, on a pretax basis (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Legal proceedings charges (reversals)................ $40,050 $(4,157) $(2,094)
Asset impairment charges............................. 11,831 26,252 492
Loss contract charges................................ -- 14,697 8,208
Restructuring charges (reversals).................... 1,516 2,151 (2,399)
------- ------- -------
Total.............................................. $53,397 $38,943 $ 4,207
======= ======= =======
These charges are reflected in the statements of operations for 1997, 1998
and 1999 as follows (dollars in thousands):
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Cost of sales........................................ $ 2,470 $40,949 $ 8,700
Operating expenses................................... 10,877 2,151 (2,399)
Other (income) expense............................... 40,050 (4,157) (2,094)
------- ------- -------
Total.............................................. $53,397 $38,943 $ 4,207
======= ======= =======
</TABLE>
For more information about these charges, we refer you to Notes 5, 6, 7 and
14 to our consolidated financial statements.
Recent Events
Acquisition of an Electronic Check Conversion Company. On February 19, 1999,
we acquired all of the outstanding shares of eFunds Corporation of Tustin,
California for $13 million in cash. This company provides electronic check
conversion and electronic funds transfer solutions for financial services
companies and retailers and is included in our electronic payments business.
The acquisition was accounted for under the purchase method of accounting. As a
result, our consolidated financial statements include the results of this
business subsequent to its acquisition date. Total cost in excess of net assets
acquired in the amount of $15.7 million is reflected as goodwill and is being
amortized over 10 years.
Acquisition of Remaining 50% Ownership Interest in HCL-Deluxe, N.V. On April
13, 1999, we acquired the remaining 50% ownership interest in HCL-Deluxe, N.V.
for $23.4 million in cash. The joint venture between Deluxe and HCL Corporation
of India commenced operations in September 1997. The acquisition of HCL's
interest in this company was accounted for under the purchase method of
accounting. This company comprises our professional services business. Total
cost in excess of net assets acquired in the amount of $24.9 million is
reflected as goodwill and is being amortized over 15 years. Prior to the
acquisition, we recorded our 50% ownership of the joint venture's results of
operations in other expense under the equity method of accounting.
Transactions With Deluxe. Deluxe has been, and is expected to continue to
be, a significant client for our professional services business. In 1999, we
provided software development and business process management services on a
project-by-project basis to Deluxe. Revenue for these professional services was
$6.3
24
<PAGE>
million on a pro forma full year basis. In 1999, sales to Deluxe represented
approximately 3% of our total net sales and approximately 43% of the net sales
of our professional services business. Sales to Deluxe for our electronic
payments business were less than 1.5% of net sales.
Beginning in 2000, our software services to Deluxe have been formalized into
a five year software development outsourcing agreement. During the term of the
agreement, we anticipate that Deluxe will spend approximately $43 million per
year for software development based on the actual number of hours of
information technology services that we provide to Deluxe. If Deluxe fails to
reach the $43 million spending target, it will be obligated to make payments
for a portion of our fees based on our estimates of lost profits. We also will
provide business process management services, including accounts receivable,
accounts payable and other general accounting services as well as data entry
services. Deluxe's annual minimum spending target for business process
management services will range from $8.1 million in 2000 to $4.2 million in
2004. The provision of services by us under the agreement is non-exclusive, and
Deluxe may contract with any third party for the provision of professional
services.
Results of Operations
The following table presents, for the periods indicated, the relative
composition of net sales and selected statements of operations data as a
percentage of net sales:
<TABLE>
<CAPTION>
Quarter
Year Ended Ended March
December 31, 31,
--------------------- ------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales:
Electronic payments...................... 88.2% 83.6% 79.8% 83.3% 69.1%
Professional services.................... -- -- 4.2 -- 19.1
Government services...................... 11.8 16.4 16.0 16.7 11.8
----- ----- ----- ----- -----
Total net sales........................ 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of sales:
Electronic payments...................... 51.2 47.5 45.6 48.9 38.9
Professional services.................... -- -- 3.0 -- 11.5
Government services:
Cost of sales, excluding loss contract
and asset impairment charges.......... 12.7 16.6 12.8 14.6 8.2
Loss contract and asset impairment
charges............................... -- 15.3 2.9 0.1 --
----- ----- ----- ----- -----
Total cost of sales.................. 63.9 79.4 64.3 63.6 58.6
----- ----- ----- ----- -----
Gross margin............................. 36.1 20.6 35.7 36.4 41.4
----- ----- ----- ----- -----
Operating expenses:
Selling, general and administrative...... 30.8 30.4 34.9 26.4 38.1
Research and development................. 0.6 0.2 1.2 0.8 0.6
Asset impairment charges................. 4.1 -- -- -- --
----- ----- ----- ----- -----
Total operating expenses............... 35.5 30.6 36.1 27.2 38.7
----- ----- ----- ----- -----
Income (loss) from operations............ 0.6 (10.0) (0.4) 9.2 2.7
Other income (expense):
Legal proceedings........................ (17.5) 1.6 0.7 3.1 --
Other income (expense)................... (0.4) (1.3) (1.5) (1.3) --
Interest income (expense)................ (0.4) 1.0 0.3 1.2 (0.8)
----- ----- ----- ----- -----
Income (loss) before income taxes........ (17.7) (8.7) (0.9) 12.2 1.9
Benefit (provision) for income taxes..... 2.8 3.2 (1.8) (6.6) (0.7)
----- ----- ----- ----- -----
Net income (loss)........................ (14.9)% (5.5)% (2.7)% 5.6% 1.2%
===== ===== ===== ===== =====
</TABLE>
25
<PAGE>
Quarter Ended March 31, 2000 Compared to the Quarter Ended March 31, 1999
Net sales. Net sales increased $32.4 million, or 47.7%, to $100.3 million
during the first quarter of 2000 from $67.9 million in the first quarter of
1999. On a pro forma basis taking into account the acquisition of HCL's
interest in our professional services business, net sales increased $30.2
million, or 43%, to $100.3 in the first quarter of 2000 from $70.1 million in
the first quarter of 1999. All segments experienced increases in net sales
during 2000.
Electronic payments net sales increased $12.8 million, or 22.6%, to $69.3
million in the first quarter of 2000 from $56.5 million during the first
quarter of 1999. This increase was due to higher transaction processing and
account verification inquiry volumes. Additionally, revenue per inquiry for our
account verification services increased due to a price increase in mid-1999.
Transaction volumes increased 23.0% in 2000 and inquiry volumes increased
21.3%. Several new customers were added in first quarter 2000 for newer
decision support and risk management products such as QualiFile and
FraudFinder.
Professional services net sales were $19.1 million for the first quarter of
2000. We recorded no net sales for professional services in 1999 because of
equity accounting prior to the acquisition of HCL's interest in our
professional services business in April 1999. On a pro forma basis taking into
account this acquisition, professional services net sales increased $16.8
million to $19.1 million in the first quarter of 2000 from $2.3 million in the
first quarter of 1999. This growth was primarily due to the initiation of
business process management and software development outsourcing services to
Deluxe and also included sales to new clients and increased sales to existing
clients.
Deluxe has been, and is expected to continue to be, a significant customer
for our professional services business. In the first quarter of 2000, sales to
Deluxe represented approximately 15.6% of our total net sales and approximately
80.5% of the net sales of our professional services business.
Government services net sales increased by $0.5 million, or 4.2%, to $11.8
million in the first quarter of 2000 from $11.3 million in the first quarter of
1999. This increase was due to the roll-out of electronic benefit transfer
services in additional states during early 1999 and price increases on contract
extensions for online Medicaid eligibility verification services. Government
services net sales will likely decrease in future periods as existing contracts
expire.
Cost of sales. Cost of sales increased $15.7 million, or 36.3%, to $58.8
million in the first quarter of 2000 from $43.1 million in the first quarter of
1999. This increase was primarily due to increased sales and the acquisition of
HCL's interest in our professional services business. As a percentage of net
sales, cost of sales decreased to 58.6% during the first quarter of 2000 as
compared to 63.5% during the first quarter of 1999.
Electronic payments cost of sales increased $5.8 million, or 17.5%, to $39.0
million in the first quarter of 2000 from $33.2 million in the first quarter of
1999. As a percentage of electronic payments net sales, cost of sales decreased
to 56.2% during the first quarter of 2000 compared to 58.7% during the first
quarter of 1999. This decrease was due primarily to an increase in online
customer inquiries, which have lower costs than telephone inquiries.
Professional services cost of sales was $11.6 million, or 60.5% in the first
quarter of 2000. We recorded no cost of sales for professional services in the
first quarter of 1999 because of equity accounting prior to the acquisition of
HCL's interest in our professional services business in April 1999. On a pro
forma basis taking into account this acquisition, professional services cost of
sales increased $10.1 million to $11.6 million in the first quarter of 2000
from $1.5 million in the first quarter of 1999. As a percentage of professional
services net sales, cost of sales decreased to 60.5% in the first quarter of
2000 compared to 66.6% in the first quarter of 1999. The decrease was due to
the execution of more profitable contracts, less reliance on sub-contractors
and an increasing portion of work being performed offshore where margins are
higher.
Government services cost of sales decreased $1.7 million, or 17.4%, to $8.2
million in the first quarter of 2000 from $9.9 million in the first quarter of
1999. The decrease during 2000 was due primarily to higher
26
<PAGE>
installation costs experienced in the first quarter of 1999 as new states were
rolled out during that timeframe. As a percentage of government services net
sales, cost of sales decreased to 69.6% during 2000 compared to 87.9% during
1999.
Gross margin. Gross margin increased $16.8 million, or 67.8%, to $41.5
million in the first quarter of 2000 from $24.7 million in the first quarter of
1999. As a percentage of net sales, gross margin increased to 41.4% during the
first quarter of 2000 compared to 36.5% during the first quarter of 1999.
Selling, general and administrative. Selling, general and administrative
expenses increased $20.3 million, or 113.4%, to $38.2 million during the first
quarter of 2000 from $17.9 million during the first quarter of 1999. As a
percentage of net sales, selling, general and administrative expenses increased
to 38.1% during the first quarter of 2000 compared to 26.4% during the first
quarter of 1999. This increase was primarily due to the acquisition of HCL's
interest in our professional services business. We recorded no selling, general
and administrative expenses for professional services in 1999 because of equity
accounting prior to this April 1999 acquisition. Other factors contributing to
the increase were additional promotional advertising geared toward creating
brand awareness of the eFunds name, increased retention accruals and recruiting
and relocation expense as a result of organizational changes and increased
consulting expense. Also, in 1999, we reversed $2.0 million of restructuring
accruals from prior periods because of our decision to retain the international
operations of our electronic payments segment.
Research and development. Research and development expenses increased by
$0.1 million to $0.6 million in the first quarter of 2000 from $0.5 million in
the first quarter of 1999. All research and development expenses were within
the electronic payments business and primarily reflect costs incurred in
conjunction with the development of DebitBureau.
Other income (expense). Other income was $13,000 during the first quarter of
2000 compared to other expense of $866,000 during the first quarter of 1999.
The expense in 1999 was primarily due to losses recorded under the equity
method of accounting for the HCL-Deluxe joint venture. Prior to our April 1999
acquisition of HCL's interest in this venture, we recorded our 50% share of the
joint venture's losses in other expense.
Interest income (expense). Interest expense was $801,000 during the first
quarter of 2000 compared to interest income of $803,000 during the first
quarter of 1999. The change resulted from intercompany interest with Deluxe and
the addition of our credit facility in India. In 1999, we earned interest from
Deluxe on our intercompany receivable balance. This intercompany receivable was
declared a dividend at the end of 1999. In the first quarter of 2000 we were in
an intercompany payable position with Deluxe and were charged intercompany
interest.
Provision for income taxes. Our effective tax rate was 37.7% in the first
quarter of 2000 compared to 54.3% in the first quarter of 1999. The decrease in
our tax rate was primarily due to reduced foreign taxes due to the utilization
of foreign net operating loss carryforwards.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales. Net sales increased $34.8 million, or 13.0%, to $302.3 million in
1999 from $267.5 million in 1998. All segments experienced increases in net
sales during 1999. On a full year pro forma basis taking into account the HCL-
Deluxe acquisition, net sales increased $27.1 million, or 9.7%, to $306.7
million in 1999 from $279.6 million in 1998.
Electronic payments net sales increased $17.9 million, or 8.0%, to $241.4
million in 1999 from $223.5 million in 1998. Increased net sales due to greater
transaction processing and account verification inquiry
27
<PAGE>
volumes and price increases were partially offset by decreased software sales
due to customer reluctance to make significant software changes prior to Year
2000. Transaction volumes increased 27.3%, and inquiry volumes increased 6.1%
as the result of higher volumes from existing customers. Net sales in 1999
included minimal contributions from several new products, such as QualiFile,
FraudFinder and Integreat!, which were launched in late 1999.
Professional services net sales were $12.7 million in 1999. We recorded no
net sales for professional services in 1998 because of equity accounting prior
to the HCL-Deluxe joint venture acquisition in April 1999. On a full year pro
forma basis taking into account the HCL-Deluxe acquisition, professional
services net sales increased $4.9 million, or 40.6%, to $17.0 million in 1999
from $12.1 million in 1998. This growth was due to new clients, increased sales
to existing clients and the initiation of business process management services
for Deluxe.
Government services net sales increased by $4.3 million, or 9.8%, to $48.3
million in 1999 from $44.0 million in 1998. This increase was due to the roll-
out of additional states during the latter half of 1998 and early 1999 and
price increases on contract extensions for online Medicaid eligibility
verification services. Government services net sales will likely decrease in
future periods as existing contracts expire because we are exiting the
government services business.
Cost of sales. Cost of sales decreased $18.0 million, or 8.5%, to $194.3
million in 1999 from $212.3 million in 1998. This decrease in 1999 is the net
result of increased cost of sales primarily due to increased volumes and the
acquisition of HCL-Deluxe, offset by a $32.2 million reduction in loss contract
and asset impairment charges related to government services. As a percentage of
net sales, cost of sales decreased to 64.3% during 1999 compared to 79.4%
during 1998, mainly due to a reduction in loss contract and asset impairment
charges. Excluding these charges, cost of sales as a percentage of net sales
would have been 61.4% in 1999 and 64.1% in 1998.
Electronic payments cost of sales increased $11.0 million, or 8.6%, to
$138.0 million in 1999 from $127.0 million in 1998. As a percentage of
electronic payments net sales, cost of sales increased to 57.2% in 1999
compared to 56.8% in 1998. This increase was due primarily to the introduction
of new services, primarily electronic check conversion services, and
amortization of software related to new products, primarily QualiFile,
DataNavigator and online banking in the United Kingdom.
Professional services cost of sales were $9.0 million, or 71.1% of
professional services net sales in 1999. We recorded no cost of sales for
professional services in 1998 because of equity accounting prior to the HCL-
Deluxe joint venture acquisition in April 1999. On a full year pro forma basis
taking into account the HCL-Deluxe acquisition, professional services cost of
sales increased $2.7 million, or 29.1%, to $11.9 million in 1999 from $9.2
million in 1998. As a percentage of professional services net sales, cost of
sales decreased to 70.0% in 1999 compared to 76.2% in 1998. This decrease was
primarily due to increased sales, execution of more profitable contracts, less
reliance on subcontractors through building of our own capabilities and
increased proportion of work being done offshore where margins are higher
despite lower billing rates.
Government services cost of sales decreased $38.0 million, or 44.6%, to
$47.3 million in 1999 from $85.3 million in 1998. The decrease during 1999 was
due primarily to the $32.2 million reduction in loss contract and asset
impairment charges, as well as lower depreciation and amortization expense in
1999 due to asset impairment charges recorded in 1998. As a percentage of
government services net sales, cost of sales decreased to 97.9% in 1999
compared to 193.9% in 1998. Excluding the loss contract and asset impairment
charges, cost of sales as a percentage of government services net sales would
have decreased to 79.9% in 1999 compared to 100.8% in 1998.
Gross margin. Gross margin increased $52.8 million, or 95.7%, to $108.1
million in 1999 from $55.2 million in 1998. As a percentage of net sales, gross
margin increased to 35.7% in 1999 compared to 20.6% in 1998. Excluding the loss
contract and asset impairment charges, our gross margin would have been 38.6%
in 1999 and 35.9% in 1998.
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<PAGE>
Selling, general and administrative. Selling, general and administrative
expenses increased $24.2 million, or 29.8%, to $105.4 million in 1999 from
$81.2 million in 1998. As a percentage of net sales, selling, general and
administrative expenses increased to 34.9% in 1999 compared to 30.4% in 1998.
This increase was predominantly related to costs incurred in conjunction with
the development of DebitBureau, infrastructure investments and goodwill
amortization. These increases were partially offset by initiatives designed to
lower selling, general and administrative expenses, such as reductions in
hiring, travel cost and consulting fees, and lower restructuring charges. In
1999, we reversed $2.4 million of restructuring accruals from prior periods. In
1998, we recorded restructuring charges of $3.2 million for severance relating
to our initiative to reduce selling, general and administrative expenses.
During 1998, we also reversed $1.0 million of a 1996 restructuring charge.
Research and development. Research and development expenses increased by
$3.1 million to $3.8 million in 1999 from $0.6 million in 1998. As a percentage
of net sales, research and development expenses increased to 1.2% in 1999
compared to 0.2% in 1998. All research and development expenses were within the
electronic payments business and primarily reflect costs incurred in
conjunction with the development of DebitBureau.
Other income (expense). Other expense increased $1.1 million, or 31.9%, to
$4.6 million in 1999 compared to $3.5 million in 1998. The increase in expense
in 1999 was primarily due to losses on the disposal of an in-house developed
system which was written off when the decision to take the assets out of
service was made and the assets were replaced with purchased software that has
greater functionality. This increase was partially offset by the reduced losses
recorded under the equity method of accounting for HCL-Deluxe. Prior to our
acquisition of the remaining ownership interest in April 1999, we recorded our
50% share of the joint venture's losses in other expense.
Provision for income taxes. We recognized a provision for income taxes of
$5.6 million in 1999 as compared to a benefit of $8.6 million in 1998. We did
not record a tax benefit on the operating loss of the professional services
business because of its lack of profitability through 1999. Increased non-
deductible goodwill amortization resulting from the acquisition of the
electronic check conversion company also contributed to the provision for
income taxes.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales. Net sales increased $38.5 million, or 16.8%, to $267.5 million in
1998 from $229.1 million in 1997. All segments experienced increases in net
sales during 1998. On a full year pro forma basis taking into account the HCL-
Deluxe acquisition, net sales increased $47.3 million, or 20.4%, to $279.6
million in 1998 from $232.3 million in 1997.
Electronic payments net sales increased $21.4 million, or 10.6%, to $223.5
million in 1998 from $202.1 million in 1997. Increased transaction processing
volume, higher inquiry volumes, higher software licensing and professional
services contributed to this increase. Transaction volumes increased 19.0% and
inquiry volumes increased 5.9% as a result of higher volumes from existing
clients. Software licensing and related services increased due to clients'
demands for new software systems to address potential Year 2000 impacts.
We recorded no net sales for professional services in 1998 and 1997 because
of equity accounting prior to the HCL-Deluxe joint venture acquisition in April
1999. On a full year pro forma basis taking into account the HCL-Deluxe
acquisition, professional services net sales increased $8.9 million, or 277.5%,
to $12.1 million in 1998 from $3.2 million in 1997 when operations for this
business commenced late in the third quarter.
Government services net sales increased by $17.0 million, or 63.1%, to $44.0
million in 1998 from $27.0 million in 1997. This increase was due to additional
state contracts and the roll-out of existing contracts.
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<PAGE>
Cost of sales. Cost of sales increased $65.9 million, or 45.0%, to $212.3
million in 1998 from $146.4 million in 1997. As a percentage of net sales, cost
of sales increased to 79.4% in 1998 compared to 63.9% in 1997. This increase
was primarily due to the $26.3 million asset impairment charges and the
$14.7 million loss contract charges recorded in the government services
business compared to only $2.4 million of asset impairment charges recorded by
the electronic payments segment in 1997. With these charges excluded in both
years, cost of sales as a percentage of net sales would have been 64.1% in 1998
compared to 62.8% in 1997.
Electronic payments cost of sales increased $9.8 million, or 8.4%, to $127.0
million in 1998 from $117.2 million in 1997. The increase in 1998 was primarily
due to higher revenue volumes. As a percentage of electronic payments net
sales, cost of sales was 56.8% in 1998 and 58.0% in 1997.
We recorded no cost of sales for professional services in 1998 and 1997
because of equity accounting prior to the HCL-Deluxe joint venture acquisition
in April 1999. On a full year pro forma basis taking into account the HCL-
Deluxe acquisition, professional services cost of sales increased $6.7 million,
or 267.9%, to $9.2 million in 1998 from $2.5 million in 1997. The increase was
due to a full year of operations in 1998. As a percentage of professional
services net sales, cost of sales decreased to 76.2% in 1998 compared to 78.2%
in 1997.
Government services cost of sales increased $56.0 million, or 191.7%, to
$85.3 million in 1998 from $29.2 million in 1997. This increase was primarily
due to loss contract and asset impairment charges totaling $40.9 million. As a
percentage of government services net sales, cost of sales increased to 193.9%
in 1998 compared to 108.4% in 1997.
Gross margin. Gross margin decreased $27.4 million, or 33.2%, to $55.2
million in 1998 from $82.6 million in 1997. As a percentage of net sales, gross
margin decreased to 20.6% in 1998 compared to 36.1% in 1997, primarily due to
charges of $40.9 million for loss contracts and asset impairments in the
government services business. With these charges excluded from 1998 and the
$2.4 million of asset impairment charges discussed above excluded from 1997,
our consolidated gross margin would have been 35.9% for 1998 and 37.2% for
1997.
Selling, general and administrative. Selling, general and administrative
expenses increased $10.7 million, or 15.1%, to $81.2 million in 1998 from $70.5
million in 1997. This increase was predominantly related to increased selling
and marketing expenses associated with the electronic payments business and
$2.7 million of costs incurred in connection with the development of
DebitBureau. These increases were partially offset by decreases within the
government services business due to lower legal costs. During 1998, we recorded
restructuring charges of $3.2 million for severance relating to our initiative
to reduce selling, general and administrative expenses, while we also reversed
$1.0 million of a 1996 restructuring charge. During 1997, we recorded
restructuring charges of $1.5 million for severance within the electronic
payments business. This reduction was completed in 1998, with severance
payments of $1.4 million paid through December 31, 1999. As a percentage of net
sales, selling, general and administrative expenses were 30.4% in 1998 and
30.8% in 1997.
Research and development. Research and development expenses decreased $0.8
million, or 55.3%, to $0.6 million in 1998 from $1.4 million in 1997. As a
percentage of net sales, research and development expenses decreased to 0.2% in
1998 compared to 0.6% in 1997. All research and development was within the
electronic payments business and primarily reflects the costs incurred in
conjunction with our development of neural network and other fraud prevention
technologies.
Asset impairment charges. In 1998, there was no asset impairment charges in
operating expenses compared to $9.4 million of charges recorded in 1997. In
1997, we formulated a plan to divest the international unit of our electronic
payments business. Based on fair market value estimates, we recorded a charge
of $9.4 million to write down the carrying value of these operations to their
estimated fair value less costs to sell.
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<PAGE>
Other income (expense). Other expense increased $2.6 million to $3.5 million
in 1998 from $0.9 million in 1997. This increase is primarily due to the
increased losses recorded for our 50% ownership interest in the joint venture
HCL-Deluxe. In 1997, other expense does not include a full year of operations
because the joint venture began operations in September of that year.
Quarterly Results of Operations
The following tables present our unaudited quarterly data for each of our
nine most recently ended quarters. The data has been prepared on a basis
consistent with our audited consolidated financial statements included in this
prospectus and include all necessary adjustments that our management considers
necessary for a fair presentation of such information. This data should be read
in conjunction with our annual audited consolidated financial statements and
the notes to those statements included in this prospectus. The operating
results for any quarter are not necessarily indicative of results for any
future quarter or year.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1998 1999 1999 1999 1999 2000
-------- -------- --------- -------- -------- -------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Electronic payments..... $54,086 $55,697 $ 56,775 $56,992 $56,546 $58,768 $61,510 $64,561 $ 69,324
Professional services... -- -- -- -- -- 1,916 5,218 5,544 19,141
Government services..... 9,230 10,758 10,951 13,031 11,310 11,883 13,167 11,917 11,790
------- ------- -------- ------- ------- ------- ------- ------- --------
Total net sales........ 63,316 66,455 67,726 70,023 67,856 72,567 79,895 82,022 100,255
------- ------- -------- ------- ------- ------- ------- ------- --------
Cost of sales:
Electronic payments..... 30,204 32,642 31,365 32,823 33,180 33,019 34,629 37,169 38,974
Professional services... -- -- -- -- -- 1,465 3,666 3,888 11,577
Government services:
Cost of sales,
excluding loss
contract and asset
impairment charges.... 11,065 10,478 11,915 10,867 9,880 10,579 10,361 7,754 8,206
Loss contract and asset
impairment charges.... -- -- 40,949 -- 60 57 150 8,433
------- ------- -------- ------- ------- ------- ------- ------- --------
Total cost of sales.... 41,269 43,120 84,229 43,690 43,120 45,120 48,806 57,244 58,757
------- ------- -------- ------- ------- ------- ------- ------- --------
Gross margin............ 22,047 23,335 (16,503) 26,333 24,736 27,447 31,089 24,778 41,498
Operating expenses:
Selling, general and
administrative......... 21,861 21,345 21,375 16,617 17,887 24,844 28,378 34,273 38,178
Research and
development............ 187 172 133 133 536 1,518 1,380 322 579
------- ------- -------- ------- ------- ------- ------- ------- --------
Total operating
expenses.............. 22,048 21,517 21,508 16,750 18,423 26,362 29,758 34,595 38,757
------- ------- -------- ------- ------- ------- ------- ------- --------
Income (loss) from
operations............. (1) 1,818 (38,011) 9,583 6,313 1,085 1,331 (9,817) 2,741
Other income (expense):
Legal proceedings....... -- -- 4,157 -- 2,094 -- -- --
Other income (expense).. (271) (225) (1,542) (1,457) (866) (420) (2,870) (453) 13
Interest income
(expense).............. 877 793 369 750 803 275 (3) (112) (801)
------- ------- -------- ------- ------- ------- ------- ------- --------
Income (loss) before
income taxes........... 605 2,386 (35,027) 8,876 8,344 940 (1,542) (10,382) 1,953
(Provision) benefit for
income taxes........... (224) (883) 12,960 (3,284) (4,530) (3,419) (7,692) 10,055 (737)
------- ------- -------- ------- ------- ------- ------- ------- --------
Net income (loss)....... $ 381 $ 1,503 $(22,067) $ 5,592 $ 3,814 $(2,479) $(9,234) $ (327) $ 1,216
======= ======= ======== ======= ======= ======= ======= ======= ========
</TABLE>
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<PAGE>
Liquidity, Capital Resources and Financial Condition
As of March 31, 2000, cash and cash equivalents were $26.9 million. We also
had $4.2 million of restricted cash that we temporarily hold in custodial
accounts on behalf of clients and $24.5 million in restricted cash that we have
supplied to ATMs managed by a client who is a provider of ATM management and
outsourcing services. We have agreed to make up to $35 million of cash
available for this purpose. The client pays us a fee based on the amount of
restricted cash supplied to the ATMs.
At March 31, 2000, we also had a $10.0 million line of credit, which is
denominated in Indian rupees and guaranteed by Deluxe, available for use by our
international operations at an interest rate of 15.81%. The average amount
drawn on this line during the first quarter of 2000 was $4.1 million. The
average amount drawn on this line was $2.7 million in 1999. As of March 31,
2000, $4.5 million was outstanding. This line of credit remains guaranteed by
Deluxe until October 1, 2000.
The following table sets forth a summary of cash flow activity and should be
read in conjunction with our consolidated statements of cash flows:
<TABLE>
<CAPTION>
Summary of Cash Flows
--------------------------
Year ended Quarter ended
December 31, March 31,
1999 2000
------------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operating
activities......................... $(12,150) $ 13,626
Cash used in investing activities... (73,209) (28,846)
Cash provided by financing
activities......................... 105,153 10,374
Net cash used by the professional
services segment during December,
1999............................... -- (4,127)
-------- --------
Net increase (decrease) in cash and
cash equivalents................... $ 19,794 $ (8,973)
</TABLE>
Cash provided by operating activities during the first quarter of 2000 was
$13.6 million, primarily due to a reduction of $3.7 million in cash supplied to
ATMs operated by a client of our electronic payments business and the timing of
income tax payments. Cash used in operating activities was $12.2 million in
1999, primarily due to $32.2 million to pay a judgment to Mellon Bank in a
legal proceeding related to our government services business for which we had
accrued $40 million in 1997 and the use of $25.0 million to supply cash to ATMs
operated by a client of our electronic payments business.
Cash used in investing activities was $28.8 million during the first quarter
of 2000, due in part to capital expenditures of $8.8 million, including $5.9
million for product development related expenditures. We also invested $20.0
million to purchase a 24% interest in a provider of ATM management and
outsourcing services to retailers and financial institutions. Cash used in
investing activities was $73.2 million in 1999, primarily due to capital
expenditures of $38.2 million, including $17.3 million for product development
related expenditures. We also invested $13.0 million to purchase eFunds
Corporation of Tustin, California and $23.4 million to purchase HCL's 50%
ownership interest in our professional services business.
Cash provided from financing activities was $10.4 million during the first
quarter of 2000. Cash provided by Deluxe was $23.9 million and dividends paid
to Deluxe were $13.8 million. We obtained $0.7 million from borrowings on our
line of credit and used cash to repay debt of $0.5 million. Cash provided from
financing activities was $105.2 million in 1999, of which $108.8 million was
provided by Deluxe and $3.1 million from borrowings on our line of credit. We
used cash to repay debt of $6.7 million.
Net cash used by the professional services segment during December 1999
represents the change in the results of operations and financial position of
our professional services business. Previously, this business reported their
results of operations and financial position on a one-month lag. In January
2000, this business changed its reporting periods to coincide with the rest of
our company.
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<PAGE>
We had capital expenditures, including capitalized product development
expenditures, of $8.8 million in the first quarter of 2000, $38.2 million in
1999, $30.5 million in 1998 and $18.0 million in 1997. We anticipate a
substantial increase in our capital expenditures in 2000 to complete the
integration of our infrastructure and for continued spending on product
development. In particular, we intend to consolidate our data centers and
customer contact centers. We estimate our capital expenditures to be
approximately $62.5 million in 2000.
Deluxe has agreed to provide us with a $75 million unsecured, revolving
credit facility until the earlier of the effective date of the split-off or
December 31, 2000. We currently do not have borrowings outstanding under this
facility. Borrowings under the facility will be due at the split-off or
maturity and will accrue interest at the London Interbank Offered Rate, or
LIBOR, plus a variable additional margin. The margin above LIBOR may vary
between 0.25% and 1.3% depending on changes to Deluxe's credit rating. As of
the time of this offering, if there were borrowings the rate would consist of
LIBOR at 6.38% plus margin of 0.25 for a total rate of 6.63%. At December 31,
1999, the applicable rate would have been 6.39% per annum. The credit facility
contains financial and restrictive covenants, including limitations on our
ability to incur secured debt, to dispose of assets, to consolidate and merge
and to sell all or substantially all of our assets, and financial maintenance
ratios. We intend to replace this facility with a new credit facility with one
or more financial institutions prior to the split-off or maturity. A
replacement credit facility may not be available to us, or if available, we may
not be able to obtain it on a timely basis or on terms acceptable to us.
We believe that cash generated from operations and borrowings under our
credit facilities are sufficient to sustain our existing operations and our
current level of growth for the next 12 months. In lieu of borrowing under our
credit facility or reducing our anticipated level of capital expenditures, we
will likely expend approximately $25 million of the net proceeds of this
offering to support our capital expenditures, $10 million for the creation of
this infrastructure needed to enable us to operate as a stand-alone entity and
$10 million for product development activities. We believe that cash generated
from operations, borrowings under our credit facilities and the net proceeds
from this offering will provide sufficient funds for operations for the
foreseeable future. Based on our recent level of acquisition and investment
activity, we anticipate that we may use some of the net proceeds from this
offering to fund future acquisitions and investments, although we do not have
any agreements with respect to any material acquisitions as of the date of this
prospectus. If future acquisitions and investments should require cash in
excess of the amount of net proceeds from this offering and cash generated from
operations, we would consider our financing alternatives at that time. Other
than in connection with the possible split-off, we have no current plans for
future equity offerings in the near term.
Recently Issued Accounting Standards
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-5, Reporting the Costs of Start-up Activities, which
provides guidance on the appropriate accounting for start-up activities
beginning in 1999. Application of the SOP did not have a material impact on our
reported operating results or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which provides guidance on accounting for derivatives
and hedge transactions. We do not anticipate that the effect of this
pronouncement, which is effective for us on January 1, 2001, will have a
material impact on our reported operating results.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which provides guidance in applying generally accepted accounting principles to
revenue recognition in financial statements. Applications of this SAB did not
have a material impact on our reported operating results or financial position.
33
<PAGE>
Market Risk Disclosure
We operate internationally, and so we are subject to potentially adverse
movements in foreign currency rate changes. We have not entered into foreign
exchange forward contracts to reduce our exposure to foreign currency rate
changes on intercompany foreign currency denominated balance sheet positions.
As of March 31, 2000, we have borrowed $4.5 million on a line of credit
denominated in Indian rupees. The rate on the borrowing remains fixed for the
term of the borrowing. We do not believe that a change in interest rates would
result in a material effect on our future earnings, financial position or cash
flows. The funds borrowed are used exclusively by the business within India and
used to pay for expenses denominated in Indian rupees.
We are exposed to foreign exchange risk to the extent of adverse
fluctuations in the Indian rupee and British pounds. We do not believe that a
change in the Indian rupee and British pound exchange rates of 10% would result
in a material effect on our future earnings, financial position or cash flows.
34
<PAGE>
BUSINESS
Overview
We provide transaction processing and risk management services to financial
institutions, retailers, electronic funds transfer networks, e-commerce
providers and government agencies. Our electronic payments segment, which
accounted for approximately 80% of our total net sales in 1999, provides a
comprehensive suite of transaction processing services and decision support and
risk management products for debit transactions. Our decision support and risk
management tools enable our clients to combat identity fraud and account abuse
in debit transactions. We also provide financial institutions with customer
relationship tools for opening accounts, minimizing fraud and identifying
cross-selling opportunities. In our professional services segment, which
accounted for approximately 4% of our total net sales in 1999, we provide
information technology consulting and business process management services. We
offer online electronic transfer of benefits under entitlement programs on
behalf of state and local governments and Medicaid eligibility verification
services under our government services segment. This segment accounted for
approximately 16% of our total net sales in 1999.
Our business has been developed through the combination of several
businesses. Our core transaction processing business, SCAN check verification
service and ChexSystems new account application service were acquired by Deluxe
in several acquisitions from 1984 through 1990. In 1989, we initiated our
government services business, which rolled out our first state-wide system to
provide the electronic transfer of government entitlement benefits in 1993.
Deluxe formed a joint venture to provide professional services in 1997 and
acquired the remaining 50% interest in this venture in April 1999. In 1998,
Deluxe began to coordinate and enhance the operation of our decision support
and risk management businesses by creating our DebitBureau database. Deluxe
acquired an electronic check conversion business in February 1999.
In January 2000, as part of a strategy to create strategically focused
enterprises that independently define their business objectives, raise capital
and pursue growth opportunities, Deluxe announced that it planned to combine
our businesses under our company and to issue shares of our common stock to the
public.
Industry Background
Growth in Debit Cards. Payment methods are undergoing rapid change as new
technologies and the new business requirements, including in e-commerce, cause
newer electronic payment methods to supplant traditional paper methods.
Although paper-based payment methods, such as personal checks, cash, bank and
travelers checks and food stamps, represented more than 70% by dollar volume,
or $3,255 billion, of U.S. consumer payments in 1998, the Nilson Report
estimated in December 1999 that payments using these paper-based technologies
will decline to 52.1%, or $3,556 billion, of U.S. consumer payments by 2005.
This report also estimates that the dollar volume of debit card payments will
increase from 3.7%, or $168 billion, of U.S. consumer payments in 1998 to 10.9%
of domestic consumer payments, or $743 billion, in 2005.
The Nilson Report estimates that the number of U.S. debit cards payments
will increase from 4.9 billion transactions, or 4.9% of total consumer
transactions, in 1998 to 19.1 billion transactions, or 14.0% of total consumer
transactions, in 2005. This increase represents a compound annual growth rate
in debit transactions of 21.6%. From our perspective, this growth rate compares
favorably to the projected compound annual growth rate of only 3.1% in the
number of U.S. credit card payments, which Nilson expects to increase from 17.1
billion transactions, or 17.4% of total consumer transactions, in 1998 to 21.9
billion transactions, or 16.1% of total consumer transactions, in 2005. The
Nilson Report further estimates that the number of U.S. debit card transactions
will overtake credit cards payments by 2007. In many international markets,
including the United Kingdom and Canada, debit cards have replaced credit cards
as the leading form of consumer electronic payment. As a result, financial
institutions and retailers will require electronic payment processes that allow
for newer debit-based electronic payment methods as well as increase the
efficiency of continued paper payment transactions.
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Debit card use is increasing because it is widely accepted by retailers and
provides substantially the same level of convenience in making a purchase as
credit cards. Consumers use debit cards to direct a bank to pay money directly
from a demand deposit account, such as a checking account. Debit cards allow a
consumer to avoid accumulating credit card debt, provide a single summary of
the consumer's debit card and check transactions on the consumer's bank
statements and, in many cases, provide a cash-back feature at the point-of-
sale. For retailers, debit cards generally entail lower transaction costs than
credit cards due to higher processing costs and fees for credit card payments
and fewer fraud losses in the cases where the debit card transaction involves
the use of a unique personal identification number, or PIN, assigned to the
cardholder.
Growth in e-Commerce. Growth in e-commerce transactions is also expected to
increase the need for electronic payment solutions. According to a September
1999 report by Forrester Research, online retail purchases by U.S. consumers
will grow from $20 billion in 1999 to $184 billion in 2004, reaching 7% of
total retail spending in that year. An estimated 90% of Internet transactions
are currently paid for using credit cards. This dependence on credit cards
presents issues for e-commerce companies because they face the potential for a
substantial amount of credit card fraud due to identity manipulation. PIN-based
debit transactions could help alleviate this problem for merchants and give
consumers a higher degree of confidence in the security of Internet
transactions. By failing to provide debit payment alternatives, e-commerce
providers also exclude the estimated 32.4% of U.S. consumers who, according to
a survey published in January 2000 by the Federal Reserve Bank, do not have a
credit card. Consequently, we believe e-commerce companies are increasingly
likely to look to debit cards to expand payment options for consumers, lower
their transaction costs, provide greater transaction security and successfully
complete more transactions.
Decrease Transaction Costs. In general, merchants and financial institutions
are seeking to increase the use of electronic payment systems to decrease
transaction costs. A December 1997 study in the Journal of Banking and Finance
estimates that the cost of using electronic payments is one-third of the cost
of paper-based transactions. To facilitate electronic transactions, merchants
and financial institutions are installing greater numbers of ATMs and point-of-
sale debit terminals. The number of these devices increased by 36.6% from 1998
to 1999 according to a report published in July 1999 by Bank Network News.
Retailers and banks are also adopting new technologies to reduce costs
associated with paper checks. Electronic check conversion technologies, in
which paper checks are scanned at the point-of-sale and converted from a paper
into an electronic debit transaction, are gaining acceptance. Using electronic
check conversion, retailers and banks can realize cost savings and cash
management benefits while enabling customers to continue their check writing
practices.
A significant factor in transaction costs is fraud, such as use of a false
or stolen identity. Account abuses, such as writing checks with insufficient
funds or opening and closing accounts to avoid payments are also factors.
Losses from bad checks and check fraud totaled $1.3 billion for banks and $13
billion for merchants in the United States in 1998 according to a report
published in September 1999 by the Tower Group and bad check losses have
increased for merchants at a rate of 5% per year since 1996. In order to combat
fraud effectively, financial services companies and retailers require products
that enable them to identify and reduce potential risks. Debit card
transactions can also help to reduce fraud because transactions using PINs are
less likely to be fraudulent than signature based transactions.
Need for New Technologies. Financial service companies also face pressures
to adopt new payment technologies to better serve their customers and reduce
costs. Banks, credit unions and savings banks are making substantial
investments in online banking and brokers require efficient mechanisms for
online opening and funding of trading accounts. In each case, the financial
service companies must find online methods that reduce or eliminate the need to
deliver paper checks and manage the risk of online account funding. Financial
service companies require these services to retain highly valued customers and
to position themselves for expanded e-commerce activities. At the same time, as
financial services companies and retailers are responding to these increasing
demands for new technologies, they also must control costs and address
shortages of information technology resources. One consequence is that
financial institutions and retailers are increasing
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their use of external information technology service providers. In a February
1999 report, The Tower Group estimated that spending by U.S. commercial banks
on external information technology services will increase from $26 billion in
1998 to $33 billion in 2002.
Market Opportunity
To accommodate the variety of payment methods in use today, merchants and
financial institutions need new technologies to help them acquire, authorize
and process payment transactions. For example, a consumer may wish to use a
debit card, ATM card, credit card or paper check to effect a transaction. The
financial institution or retailer must collect the consumer's account and
transaction information through a point-of-sale device, ATM, telephone order,
check or Internet interface. This account and transaction information must then
be processed for acceptance authorization and then processed for payment and
settlement. In addition, banks and other financial service providers need
technologies that allow them to open accounts online, manage their accounts
more effectively and allow them to "cross-sell" additional services. The
following diagram illustrates the elements of the payment cycle.
[DIAGRAM ILLUSTRATING THE FLOW OF THE PAYMENT CYCLE]
In the past, financial service companies and retailers have needed to work
with separate service providers to obtain the necessary technologies because
the electronic payments industry has historically been divided between delivery
and transaction processing companies and information and analysis providers. At
the same time, financial service companies and retailers need access to
professional information technology resources so that they can exploit the
promise of new technologies. Our company provides all of these services.
Our Competitive Advantages
We offer comprehensive electronic payment services that combine our
transaction processing capabilities with our decision support and risk
management tools. Our products enable our clients to manage and combat fraud,
transfer funds and enhance their customer relationships. In addition, our
professional services provide clients with the information technology resources
they need to respond to the demands for new technology, implement and integrate
our solutions and develop new software applications. Our decision support and
risk management tools and processing capabilities can be delivered as an
integrated electronic payment process or deployed as separate modules. We
believe this mix of capabilities and flexible product offerings addresses
developing market opportunities and provides us with the following competitive
advantages.
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Comprehensive Products and Services. Our products and services enable our
clients to manage the complete electronic debit payment cycle, from account
opening, to payment approval, to electronic funds transfer and settlement. Our
services reduce transaction costs, manage risks and enhance customer
relationships for our clients by providing:
. risk management and decision support tools based on DebitBureau, our
unique debit information database;
. customer relationship tools for opening financial accounts,
electronically funding these accounts, minimizing fraud and identifying
cross-selling opportunities;
. transaction processing, monitoring and settlement on an efficient, cost-
effective and worldwide basis;
. information technology professional services to create e-commerce and
Internet solutions, integrate our products into our clients' systems and
new technologies and develop custom software applications; and
. business process management services.
In the past, merchants, banks and other financial services companies needed
to integrate debit payment services from numerous providers using disparate
technologies and platforms. We believe we are the only single-source provider
of comprehensive electronic debit payment services on an integrated basis.
Clients may choose, however, to use only those of our individual services that
fit their needs and we can implement these services in any environment.
Premier Database. We believe our DebitBureau database is the most
comprehensive source of data regarding debit transactions available. This
database contains more than 2.7 billion debit records, including account
openings and closings, checking and savings account activity, insufficient
funds check-writing histories and check order histories. Approximately 1.7
million records are added daily to DebitBureau. DebitBureau provides a unique
source of information because it aggregates data from sources such as SCAN,
which is used at more than 82,000 retail locations, and ChexSystems, which is
used by more than 86,000 financial locations. We also receive data from clients
of Deluxe and other data sources.
The breadth and depth of DebitBureau allows us to develop more powerful risk
management and analytical tools. Our clients can draw on DebitBureau to make
better risk management decisions, such as authorizing a new checking or savings
account or accepting a check, and to improve their customer relationship
decisions, such as identifying opportunities to cross-sell additional services
to their customers. We offer products that provide our clients online access to
the database and our proprietary risk assessment models. Information on a
proposed debit transaction or an account opening is entered by a client into
our system and is analyzed to determine the likelihood of identity fraud or
account abuse and to otherwise assess the overall risk of opening the new
account. The system also identifies customers of our clients who are most
likely to accept client product offers. For example, our products enable
financial institutions to identify opportunities to sell new customers credit
cards and home equity loans more effectively and to set more appropriate limits
on the customer's privileges, such as maximum withdrawals in debit card
transactions.
Global Processing Capabilities. Using our electronic processing services,
our clients have the ability to process debit payment transactions on a
worldwide basis. Our network connects with over 15,000 links to other networks
and institutions throughout the world. For example, we are the single gateway
for all of a major U.S. financial institution's ATM transactions outside its
internal network on a worldwide basis. We processed approximately 125 million
transactions in 45 countries for this client in 1999. Our processing services
can provide a single gateway for electronic funds transfers that can sort and
execute all of a client's electronic debit payment transactions using the
appropriate networks. We drive and manage the services for all major ATM models
through multiple telecommunication configurations.
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Expertise in Electronic Commerce. We have focused on electronic transaction
processing since 1976. This long history and industry focus provides us with
the experience and capabilities needed to migrate electronic debit payments to
many channels, including the Internet and point-of-sale devices. Because of our
background and skills, we believe we are uniquely positioned to enable debit
transactions on the Internet, and we recently introduced Integreat!, an online
service for opening, funding and managing accounts, to extend our fraud
management and client account management tools to this channel. We also offer
Web EFT, a browser-based Internet application that allows clients automatically
to collect and deposit pre-authorized customer payments.
Global Resources for Information Technology Solutions. Our high quality
professional services business provides information technology solutions by
teaming onsite consultants in the United States who analyze and manage projects
with software developers in India who develop client-specific software. Our
professional services business employs approximately 785 software developers
worldwide. Our global delivery capabilities give us the ability to provide high
quality, around-the-clock development services at competitive prices. We are
presently engaged by 20 companies for our information technology professional
services.
Our Strategy
Our objective is to be the leading provider of electronic debit payment
solutions and related professional services to financial and retail industries.
Key elements of our business strategy are to:
. Adapt our Products for Internet Applications. Based on our processing
and risk management capabilities and industry expertise, we believe we
are uniquely positioned to help our clients take advantage of the
efficiencies and revenue opportunities of e-commerce. We intend to
continue to adapt our core capabilities in transaction processing, fraud
prevention and client account management for Internet applications and
to develop products and services that will assist in the development of
new e-commerce channels, such as business-to-business Internet
transactions. Our services can help make debit payments, which are
under-represented on the Internet as a payment option, safer, easier to
use, and more widespread. Products under development which are scheduled
for introduction over the next 12 months are:
. PIN-secured debit payment applications for purchases on the
Internet; and
. Internet check acceptance software that can accept, authenticate,
authorize and settle a checking account-based debit transaction
initiated over the Internet.
. Extend Our Product Set. We are introducing new products, such as
Qualifile and DataNavigator. QualiFile is a new account opening service
for banks and brokerage firms that features improved risk scoring,
enhanced financial and demographic targeting of cross-selling
opportunities and an expanded set of customized instructions.
DataNavigator is a software product that enhances the ability of
financial services companies, ATM networks and independent ATM service
providers to analyze their electronic funds transfer data, helping them
to more efficiently maintain appropriate cash balances in their ATM
machines and speeding up transaction settlement, reporting and research.
As a part of our efforts to continue to extend our product set, we
intend to leverage the development skills of our information technology
professionals and expand our research and development role on behalf of
financial institutions. We believe our ability to combine information
and transaction delivery services will be a critical element in our
success. To that end, we plan to invest in the technology and personnel
required to expand our payment information capabilities and merge them
into new, broader, faster and more versatile delivery systems.
. Expand Existing Client Relationships and Attract New Clients. Most of
our clients currently use only a portion of our services. As we continue
to integrate our information and processing capabilities, we believe we
can expand our relationships with existing clients to provide additional
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products and services. In addition, we plan to provide products for our
clients' e-commerce needs as they emerge. We intend to expand our sales
force to develop new clients, build brand awareness and cross-sell all
the components of our comprehensive suite of electronic payment
management services. We also are seeking new clients in rapidly growing
Internet markets such as online banking, electronic bill presentment and
payment and business-to-business e-commerce.
. Seek Acquisition and Strategic Alliance Opportunities. We intend to
pursue acquisitions of complementary businesses, technologies or product
lines. We believe there are opportunities to make accretive acquisitions
that will add services to enhance our product suite. In addition, we
plan to seek strategic relationships with key industry participants in
order to broaden our market presence and increase our sales penetration
by leveraging each participant's technology and expertise. For example,
we recently acquired a 24% interest in a client of our transaction
processing services that is a provider of ATM management and outsourcing
services to retailers and financial institutions.
. Broaden International Sales. We currently derive approximately 6.7% of
our revenue from international sales in 22 countries. We intend to
expand in international markets by further penetrating our existing
client base and by focusing on emerging international markets lacking
established electronic payment systems.
Our Products and Services
Electronic Payments
We deliver electronic payment services to financial institutions, retailers,
electronic funds transfer networks and gateways and e-commerce providers. To
address our clients' electronic payment needs, we offer a comprehensive suite
of products and services. Our products generally fit within the following two
broad categories:
. transaction processing services; and
. decision support and risk management tools;
These products and services can be deployed on a stand-alone basis, or
combined to provide a complete payment system. This flexibility enables our
customers to select individual services they need to meet their current
business objectives and then to add additional services as their requirements
evolve.
Transaction Processing
We process transactions for regional automated teller machine, or ATM,
networks in the United States. We also provide transaction processing for
retail point-of-sale terminals that accept payments from debit cards and
electronic checks. Transaction processing involves electronically transferring
money from a person's checking or savings account according to his or her
instructions. For example, when a cardholder inserts his or her debit card into
an ATM or point-of-sale device and enters his or her PIN and the type and
amount of the transaction, the device contacts our systems and transmits the
request. We identify the institution that issued the card and work through the
necessary validation and authorization routines, such as ensuring that the
cardholder has entered the correct PIN, that the transaction is within the
cardholder's limits on withdrawals and that there are sufficient funds in the
cardholder's account. If all the routines are executed successfully, we signal
the ATM or point of sale device to complete the transaction.
To carry out the tasks required, each ATM or point-of-sale device is
typically connected to several computer networks. These networks include
private networks that connect the devices of a single owner, shared networks
that serve several device owners in a region and national shared networks that
provide access to devices across regions. Each shared network has numerous
financial institution members. For example, the NYCE network has over 2,300
financial institution members, including Chase Manhattan and FleetBoston
Financial, and the StarSystem Network has over 3,400 financial institution
members, including Bank of America and First Union. As part of our transaction
processing services, we, and other gateway service providers like us, provide
cardholders with access across these multiple networks.
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We drive or operate more than 9,000 ATMs and more than 95,000 point-of-sale
terminals. These terminals include approximately 62,300 electronic benefits
terminals, 19,500 Medicaid benefits terminals and 13,400 retail terminals. In
1999, we processed approximately five billion transactions, with 99.99% system
availability and at speeds up to 300 transactions per second. We process
virtually all types of debit-based transactions, including cash withdrawals,
cash deposits, balance inquiries, purchases, purchases with cash back and
purchase returns. In addition, we authorize cash advances and purchases
initiated with credit cards at ATM or point-of-sale locations. We have the
ability to process transactions to any electronic funds transfer network in the
world. We also provide 24 hour a day, 7 days a week monitoring of 5,200 ATMs
for system irregularities.
Our transaction processing services include: authorization of the
transaction, capture and transmission of the transaction data, settlement of
the payment transaction and information reporting. Our transaction processing
capabilities include:
. transaction processing from substantially all types of ATMs and point-
of-sale terminals;
. authorization and verification for online and offline debit and credit
cards, including Mastercard or VISA bank cards, and paper and electronic
checks;
. access to substantially all national and regional networks, such as
MasterCard/Maestro/Cirrus, Visa/PLUS, American Express, Discover, STAR,
NYCE, Pulse and MAC;
. transaction switching, allowing transactions to be routed through
different networks and internationally;
. cash management services through our DataNavigator product; and
. comprehensive settlement and reconciliation services.
For our transaction processing services, we receive fees for installation of
the software and hardware; monthly transaction processing charges, which
include a base fee plus a variable fee based on the number of transactions
processed; and additional service fees related to surcharged transactions, such
as network access and sponsorship, ATM operation, card and authorization
services, settlement services, ATM monitoring, testing resources and
professional services.
We license our electronic funds transfer software, the same software that
drives our electronic funds transfer processing business, to in-house
processors and regional networks in 22 foreign countries and in the United
States. In 1999, our licensees processed 10 billion transactions around the
world using our electronic funds transfer software. Our electronic funds
transfer software runs on IBM and Tandem computing platforms. We also provide
maintenance and support services.
DataNavigator. Our DataNavigator product is a software tool that gives
financial services companies, ATM networks and independent ATM service
providers the ability to perform real-time analysis of their electronic funds
transfer data. This monitoring capability helps our clients to maintain
appropriate cash balances in their ATM machines, thereby reducing the number of
unneeded visits to restock machines whose cash supplies are not overly depleted
and avoiding the need to maintain excessive inventories of cash in their
machines so that they do not run out of funds. DataNavigator allows our clients
to analyze their ATM transactions using a variety of parameters, such as ATM
location or withdrawal levels at a given location. Using DataNavigator, a bank
that owns multiple ATMs can, for example, determine its cash position at each
of its ATMs at any point during the day. DataNavigator also helps cut costs and
improves customer satisfaction by speeding up settlement and reporting and
streamlining transaction research and reconciliation services. DataNavigator is
fully operational in our transaction processing centers and may be accessed by
our transaction processing clients for an additional fee or may be licensed by
our software clients as an additional module.
ACH Processing. We provide processing services to the American Clearing
House Association, a private sector automated clearinghouse service, or ACH,
provider. The ACH network is an electronic payment delivery
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system used primarily to process repetitive payments, such as mortgage
payments, payroll, social security payments and utility payments. The ACH
network routes electronic funds transfers between financial institutions on
behalf of their customers. The Federal Reserve is the largest ACH service
provider. We also offer an ACH processing outsourcing service that allows a
financial institution to avoid the costs associated with operating an internal
ACH processing and settlement infrastructure. The fee structure for our ACH
services consists of installation fees, monthly fees and transaction fees.
We plan to extend our ACH processing services to help providers of
electronic bill payment services to authorize transactions and transfer funds.
We are positioning our decision support and risk management tools to address
fraud and security concerns in connection with electronic bill payment
services. In addition, we intend to use our information technology professional
service capabilities to help develop interoperability between developing
electronic bill presentment and payment systems and existing payment systems.
Decision Support and Risk Management
We offer products to help financial institutions, retailers and other
businesses that accept debit payments to:
. determine the likelihood of account fraud and identity manipulation;
. assess the overall risks involved in opening new accounts or accepting
payment transactions; and
. make better predictions about other products their customers are likely
to purchase.
Our decision support and risk management products are based on or enhanced
by our DebitBureau database. DebitBureau contains over 2.7 billion records and
includes data from our ChexSystems and SCAN businesses and other sources. We
use the data in DebitBureau to screen for potentially incorrect, inconsistent
or fraudulent social security numbers, home addresses, telephone numbers,
driver license information and other indicators of possible identity
manipulation. Using our data, we can perform various tests to validate a
consumer's identity, assess and rank the risk of fraud and match customers with
targeted product offerings.
SCAN. SCAN, or Shared Check Authorization Network, helps retailers reduce
the risk of write-offs for dishonored checks due to insufficient funds and
other forms of account fraud and identity manipulation. When a check is
presented as payment at the point-of-sale, SCAN members electronically access
our SCAN database by running the check through a scanner. The information on
the check is then compared to the database and analyzed for the likelihood of
fraud or insufficient funds. SCAN then indicates whether the retailer should
accept or reject the check. SCAN serves 17 of the top 20 retailers in the
United States. More than 82,000 retail locations report returned check activity
to the SCAN network and we verified checks with an aggregate value of
approximately $181 billion in 1998. Merchants pay a service fee for SCAN based
on the aggregate dollar value of checks authorized by them using SCAN and
additional fees per inquiry for customer or retailer calls to the call centers.
To help retailers manage their check acceptance programs, we offer
collection services to some SCAN members. We tailor our collection strategies
to specific retailer needs. The services generally involve sending letters and
follow-up telephone calls to consumers whose checks have been returned. In
addition, we currently extend to three SCAN members the option of a portfolio
purchase solution. Under this solution, we purchase the returned checks from
the retailer at a mutually agreed upon total discounted purchase price and
assume the collection liability. Although we may expand this service to
additional customers, we do not expect that revenues from our debt collection
services will exceed 5% of our total net sales in 2000.
ChexSystems. Our ChexSystems business is a provider of new account applicant
verifications services for financial institutions. ChexSystems provides access
to more than 22 million closed-for-cause account histories and 53 million
records of new account inquiries. An account is considered closed-for-cause
when, for example, a consumer refuses to pay the account fee and the bank
closes the account. ChexSystems helps financial
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institutions assess the risks involved in opening an account for a new customer
by allowing them to make inquiries against our database when a consumer applies
for a new account. This service is used by more than 86,000 financial
institution locations. ChexSystems receives an average of about 2.7 million new
account inquiries per month. Financial institutions may access the service
online or by telephone. We also are developing an Internet-based new account
verification service. Financial institutions pay a service fee for our new
account verification services based on the number of inquiries.
As a separate service, we also provide collection services to financial
institution clients of ChexSystems. We do not assume any collection liability
for these services. We contract with a third party for extended collection
activity.
QualiFile. Our QualiFile product is an online, real-time account-opening
service. It combines data from DebitBureau with comprehensive credit,
demographic and financial product-use data provided by third parties to help
financial service companies make informed decisions about opening new accounts
and offering additional financial products to new customers. QualiFile has the
following features:
. QualiFile validates an applicant's identity and predicts the likelihood
of account abuse by scoring the applicant's risk level;
. QualiFile creates a financial profile of the new customer and generates
a list of targeted products that matches the customer's likely needs
with the products offered by the financial institution; and
. QualiFile simplifies and automates the account-opening process.
QualiFile guides the new account representative through the new account
process by presenting on-screen messages indicating whether to accept or
deny the account or review the decision with a manager along with
product-offer dollar limits, rates and terms.
The fee structure for QualiFile consists of a one-time set-up fee, a charge
for each customer inquiry and a monthly minimum participation fee. We
introduced QualiFile in September 1999.
FraudFinder. We also offer FraudFinder, an identity fraud-detection service
for new accounts which are opened in person or over the Internet. FraudFinder
accesses our DebitBureau database to help financial service companies identify
potential identity manipulation and fraud. FraudFinder scores and ranks new
accounts according to their level of risk using a complex mathematical model to
predict the likelihood of future behavior by analyzing and learning from data
supplied about past behavioral patterns. The fee structure for FraudFinder
consists of a one-time set-up fee and a charge for each customer inquiry.
FraudFinder was introduced in 1999 and is currently used by over 300 clients.
New Product Initiatives
In December 1999, we introduced Integreat!, a product that helps financial
services companies open new accounts for consumers over the Internet.
Integreat! incorporates our QualiFile service to provide real-time identity
verification, risk assessment and customized financial product offerings. Once
the new account is approved, the customer authorizes the electronic transfer of
funds from an existing outside account to the new account, eliminating the need
to deliver a paper check and speeding up the time to funding. The fee structure
for Integreat! consists of a one-time setup fee, a charge for each customer
inquiry and a monthly minimum participation fee. Although to date we have not
received revenues in material amounts from this product, we believe that our
Internet account opening and funding service has potential applications in
other customer markets. We are currently targeting online brokerage firms.
In February 2000, we began to offer reports on consumer debit transactions
that can be used as part of credit reports and scoring models that assess a
consumer's payment risk. We are targeting the service to major credit issuers
and credit bureaus.
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We recently introduced an electronic check service that converts paper
checks into electronic transactions at the point-of-sale. As part of this
system, a consumer's check is run through a point-of-sale check reader to
capture the consumer's account data. The check is then authorized through SCAN
OnLine, our real-time check verification service. Once the transaction is
accepted, the authorized amount of funds is deposited in the retailer's account
and debited from the consumer's account using the ACH network. We believe that
our electronic check service benefits retailers by reducing paper check
processing costs, minimizing bad-check write-offs and accelerating funds
collection. More than 1,950 point-of-sale devices use our electronic check
conversion service and seven companies remarket the service to their merchant
customers. We provide our electronic check service on a fee per transaction
basis.
We also offer an online banking software product for Internet delivery of
financial services to home users and businesses. Our Internet Financial
Management product offers banking customers the flexibility to access their
bank accounts 24 hours a day, 365 days a year, using a web browser or new
devices such as web-enabled mobile phones and personal digital assistants. We
introduced our Internet Financial Management product line in June 1999 and are
initially targeting this product to financial institutions in western Europe
and the United Kingdom. Currently, two clients are using the product on a test
basis. We are also developing systems and services to facilitate the web-based
delivery of various aspects of business-to-business e-commerce including
accounts receivable and accounts payable processing and reporting, payment
acquisition and settlement and the electronification of retail and wholesale
lockbox functions.
We have also developed a transaction processing software module for use with
NYCE's SafeDebit product, which will allow consumers to pay for purchases on
the Internet with funds withdrawn directly from their checking accounts.
Professional Services
We have combined the information technology professionals from the various
business units being separated from Deluxe to form a single integrated
information technology professional services group. We offer a full range of
information technology professional services to complement our electronic debit
payment business and on a stand-alone basis. We specialize in the
implementation and integration of our own and third-party software product, the
development, redevelopment and maintenance of a broad range of computer
software applications and the development of custom e-commerce and Internet
solutions. In addition, we offer our clients the ability to outsource their
business processing services, such as accounting operations, transaction
processing and call center operations, to our shared services center in
Gurgaon, India. We offer our professional services either on a fixed-price,
fixed-time basis or on a time and materials basis. In 1999, we derived
approximately 80% of our information technology service net sales from time and
materials contracts. Deluxe was the principal customer of our professional
services business in 1999, accounting for approximately 43% of this segment's
1999 net sales. We are targeting our services to financial institutions and
other businesses that accept debit payments, such as retailers and e-commerce
providers.
We provide our services through a global software development model which
combines industry, product and technical specialists based in our facilities in
the United States, United Kingdom, India and Australia. Our global delivery
capabilities give us the ability to provide high quality, a round-the-clock
development services at competitive prices. Our information technology
professional services group includes approximately 785 consultants and software
developers, including approximately 465 people in the United States and
approximately 320 people in our two software development centers in India. Our
first software development center in Chennai, India has been assessed at Level
3 of the Software Engineering Institute's Capability Maturity Model. The
Software Engineering Institute's Capability Maturity Model ratings are
internationally recognized standard for assessing the level of maturity and
consistency of software development centers. The Level 3 rating provides
evidence of the quality and consistency of our offshore software development
capabilities, placing the center in the top 10% of all software development
facilities that have been rated. We opened our second software development
center in Chennai, India in March 2000.
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We provide a variety of software development services that cover all stages
of the software development cycle. We develop new custom applications for our
clients on a variety of technology platforms, including mainframe and client-
server, and in a variety of programming languages. We specialize in developing
financial applications, particularly those used by large complex financial
institutions in the banking, insurance and securities industries. Our
experienced professional group can install, implement and integrate third party
software applications within our client's information technology
infrastructure. We perform testing and performance tuning of customer and
third-party applications, and help in the migration of customers' legacy
applications to client-server and Internet platforms. We also provide on-going
support and maintenance of customer applications. In addition, we provide a
number of specialized software application services, including workflow
management and document imaging, SAP implementation and support and project
management. Examples of our software development projects include the
development of a custody application for a major stock transfer company and
documenting management systems implementation and workflow analyses for the
corporate trust division of a major bank.
To complement and support our electronic payments business, we provide our
clients with consulting services, customization and implementation services and
educational and training programs. Our services include the installation of our
electronic debit payment products and implementation and integration of these
products within the customer's existing information technology infrastructure.
We also customize our standard products and develop new applications for
clients who want additional features and functionality. We help clients test
and refine our products in their information technology environments. In
addition, we provide on-site user training on our products and solutions for
the information technology, operations and management staff of clients. We
build long-term continuing relationships with our clients by providing on-going
maintenance and support of our software products and solutions.
We also help clients to develop e-commerce and Internet-related products.
Our services enable our clients to process business-to-customer, business-to-
business and customer-initiated transactions over the Internet. The scope of
our capabilities include: multi-channel integration for financial institutions,
such as integration of call centers, ATMs, personal computer and Internet
banking, development of client extranets and intranets and enablement of
electronic bill presentment and payments.
In addition to our information technology professional services, we offer
business process management and outsourcing services. We focus on both back-
office and customer support business processes, such as accounting operations,
transaction processing and call center operations. Our business process
outsourcing services are provided primarily at our shared services facility in
Gurgaon, India. This facility is staffed with over 150 experienced business
process personnel. Our offshore business processing capabilities allow our
clients to focus on their core processes, reduce their direct personnel costs,
avoid non-core capital investments and improve the quality of their outsourced
operations.
Currently, we provide business process management services only to Deluxe
under a five year agreement. These services consist of accounts receivable,
accounts payable and general ledger processing services. For additional
information concerning this agreement, see "Agreements Between eFunds and
Deluxe--Professional Services Agreement" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations-- Recent Events." We
have recently started to market our business process management services to
financial institutions and other clients as well. We believe this line of
business will tie in to our transaction processing services to provide a
complete back-office management solutions to our clients.
Government Services
We provide online electronic benefits transfer services on behalf of
governmental agencies responsible for the administration and management of
selected entitlement programs, primarily the Food Stamps and Transitional Aid
to Needy Families (formerly Aid to Families with Dependent Children) program.
Our electronic benefits transfer processing system manages, supports and
controls the electronic payment and distribution of cash benefits to program
participants through ATMs and point-of-sale networks. Our services
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<PAGE>
reduce operating costs and fraud for the government agency administering the
benefits program, eliminate the food stamp stigma for recipients through the
use of a plastic ATM-like card and make benefits more readily available to
recipients at retail point-of-sale terminals and ATMs.
We provide electronic benefits transfer services to individual state and
local governments or coalitions of state governments formed to purchase these
services jointly. We provide these services as a prime contractor or
subcontractor to nine individual state and local governments. We also are a
subcontractor for three coalitions of state governments, representing 21
states. Our services are typically provided for a fixed fee per welfare case
plus fixed fees per transaction through the system. State and local governments
require that we enter into long-term contracts, typically five to seven years
in duration.
The principal components of this service include:
. transaction processing;
. point-of-sale terminal deployment and terminal operation for merchants;
. telecommunications network management;
. benefits card production and database management;
. financial settlement of funds with automated clearing house transfers;
. help desk support for consumers, merchants and government personnel; and
. electronic funds transfer gateway services.
We also offer a Medicaid eligibility verification processing service that
performs online verification of a person's eligibility for Medicaid services.
Our system provides authorization services, drug utilization review and
electronic claims capture and transmissions for pharmacies and managed care
firms. Currently, we provide the service for the State of New York's Medicaid
program. This program serves over 177,800 health care providers and 4.2 million
cardholders through 19,500 point-of-sale terminals. In 1999, our Medicaid
eligibility verification processing service generated revenues of approximately
$10.1 million, or about 21% of the net sales of our government services
business.
We have had a history of operating losses and loss contract and asset
impairment charges related to our government services business as described
earlier in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." As a consequence, we have determined to exit this
business as soon as our current contractual commitments expire in 2006. During
the wind down period, we intend to continue to take steps to improve the
profitability of the current business. Deluxe has agreed to indemnify us
against future losses on our existing loss contracts in excess of our $29.2
million loss contract reserve as of April 30, 2000. Deluxe also has agreed to
indemnify us against future losses related to any litigation arising prior to
the completion of this offering. The indemnification obligation does not apply
to losses contemplated by the existing reserves and is subject to a $14.6
million limit.
Clients
The following is a list of our largest corporate clients based on our 1999
net sales.
<TABLE>
<CAPTION>
Financial
Institutions Retailers Network/Gateway International
--------------------- --------------------- ------------------------- ------------------------------
<S> <C> <C> <C>
Bank One Food Lion Access Cash International Bank of Montreal
Bank of America Home Depot Citishare Bank Pekao
Bank of the West J.C. Penney CU Cooperative Systems Cashcard Australia
Citibank Kmart NYCE International Nederlande Group
Credit Union Service Kroger Primary Payment Systems Finax Finansservice
Corp. Lowe's Companies Pulse EFT Societa per I Servizi Bancari
FleetBoston Financial National Data Funding STAR System The Royal Bank of Scotland
Wachovia Corporation Safeway
Washington Mutual Target
Savings Bank Wal-Mart
Wells Fargo Bank
</TABLE>
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<PAGE>
In 1999, none of our clients individually accounted for 10% or more of our
total net sales. In 2000, we expect that Deluxe will account for more than 10%
of our total net sales. We intend to expand our client base in new markets,
including e-commerce providers, online brokerages, telecommunication firms,
insurance companies and utilities.
Sales and Marketing
We market our electronic products and services through a direct sales force
and indirect sales channels, such as distributors, resellers and alliances. We
organize our direct sales force by customer market segment, including financial
institutions, networks and gateways, retailers and e-commerce providers. Our
direct sales force is capable of selling all or a portion of our products and
services to offer the most effective solution for each customer's particular
needs. We work collaboratively with our customers and prospective customers to
help them identify issues and create new solutions using our products and
services. Because many of our customers use a single product or service, or a
combination of products or services, our direct sales force has begun to target
existing customers to capture cross-selling opportunities. We plan to focus our
information technology services marketing efforts on large U.S. financial
institutions and other businesses that accept debit payments. Our international
sales force is focused on the sale of our transaction processing and online
banking software.
We have full service direct sales offices in Milwaukee, Wisconsin;
Minneapolis, Minnesota; Phoenix, Arizona; Dallas, Texas; San Francisco,
California; New York, New York; and Charlotte, North Carolina. These offices
coordinate direct sales and arrange indirect sales channels in the various
regions. Our international sales offices, which have a total of five sales
people, are located in Sydney, Australia, Bombay, India and Runcorn, England.
As of May 31, 2000, our domestic direct sales force had 122 full-time
professionals. We intend to increase our sales force by adding new field sales
offices and by adding sales and marketing personnel to our existing
territories.
To further facilitate broad market penetration and complement our direct
sales efforts, we plan to expand our indirect sales channels, especially in
international markets. These indirect channels include resellers, distributors
and alliances. Among others, VISA USA, Access Cash International, eProfile, IBM
Australia/NZ and Card Soft International a.s. support our indirect sales
efforts.
We build awareness of our products and services and the eFunds corporate
name through targeted advertising, public relations, participating in trade
shows and conferences and providing product information through our web site.
Customer Support, Technology and Infrastructure
Customer Support. We believe that providing superior quality and accessible
and reliable customer and technical support is essential to developing and
maintaining customer relationships in each of our business segments. We provide
customer support services through our customer contact centers located in
Bloomington, Minnesota; Bothell, Washington; Dallas, Texas; Gurgaon, India;
Milwaukee, Wisconsin; and Phoenix, Arizona. Our contact centers are open 24
hours a day, 7 days a week and provide access to website, e-mail and telephone
support. We also provide technical and operational support for our customers in
our data centers. As of May 31, 2000, we had over 1,200 employees in customer
and technical support functions. In addition to user questions and technical
issues, in accordance with the Fair Credit Reporting Act we respond to
inquiries from consumers who have been denied check authorization or rejected
for a new account. We also provide on-site customer support services in
connection with our other products and services, and charge a separate fee for
these services based on an hourly rate.
Technology. Our products are configured to run on operating systems widely
adopted by the electronic debit payment industry. These include the Tandem,
IBM, UNIX and Windows operating environments. Our software is developed using
C, C++, Cobol, HTML and other programming languages. Our software products are
modular in design and flexible in implementation so that they can accommodate
specific customer requirements. Our software products are interoperable with a
wide range of terminal types and computer networks and support a variety of
communications protocols, such as TCP/IP.
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<PAGE>
As of May 31, 2000, we employed over 1,300 software developers at our
offices in Milwaukee, Wisconsin; Minneapolis, Minnesota; Phoenix, Arizona;
Seattle, Washington; Toronto, Canada; Runcorn and Watford, United Kingdom;
Sydney, Australia; Chennai, India and Gurgaon, India.
Data Centers. We operate two highly secure, fault-tolerant data centers in
New Berlin, Wisconsin and Phoenix, Arizona. Our data centers have been
engineered to ensure minimal exposure to system failures and unauthorized
access. Each of our data centers contains multiple separate computer rooms to
provide containment and isolation. Physical security is maintained through
restricted card key access and closed circuit T.V. cameras. We use redundant
uninterruptible power supplies with battery backup and redundant generators to
ensure continuous flow of power to each data center in the event of any
component failure or power outage. The facilities have dual-entrance, fiber
optic SONET service for telecom redundancy.
Research and Product Development
We believe that our future success will depend in large part on our ability
to develop new and enhanced electronic payment products and services. We are
focusing our product development efforts on electronic payment options for
Internet and e-commerce providers, as well as insurance companies, utilities
and telecommunication companies. For example, we are currently working with a
third party to develop the application of voice authentication software and
technology to the debit payments industry.
We have developed all of our electronic payment software independently
through our software development group. Our principal research and development
sites are located in Runcorn and Watford, United Kingdom; Sydney, Australia;
and Glendale, Wisconsin. Our research and development expenses were
$3.8 million in 1999, $625,000 in 1998 and $1.4 million in 1997. Our
capitalized software development costs were $17.3 million in 1999, $3.2 million
in 1998 and $5.0 million in 1997.
Competition
We face intense competition from a number of companies. Further, we expect
that competition will intensify as the e-commerce and Internet markets continue
to develop and expand. 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 payment management market, our principal competitors
include:
. third-party network and credit card processors, including First Data,
Equifax, Total System Services, EDS, Concord EFS and Alliance Data
Systems;
. financial institutions that have developed in-house processing
capabilities or services similar to ours, including Bank of America,
Marshall and Illsley and Fifth Third National Bank;
. electronic data interchange and cash management providers, including
Fiserv, CheckFree, M&I Data, EDS and Fundtech;
. electronic bill payment providers, including CheckFree, EDS, MasterCard,
Spectrum and Visa;
. electronic funds transfer software providers, including Transaction
System Architects, SLMsoft, Oasis, Mosaic and PaySys; and
. national information database companies, including Equifax, Experian and
TransUnion, and other content providers.
In the market for electronic transaction processing, the principal factors
on which we compete are price and service levels. 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.
Competition for our decision support and risk
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<PAGE>
management products is based primarily on the quantity and quality of the data
available to us for this purpose and, to a somewhat lesser degree, price. Our
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 the fragmented information technology professional services market, we
compete with numerous firms. We believe that our principal competition to date
has been the internal information technology departments of current and
potential clients. In addition, we compete with systems consulting and
integration firms, application software firms, Internet professional service
companies, services divisions of computer hardware and software vendors,
facilities management and outsourcing companies, "Big 5" accounting firms and
strategic consulting firms. Competition in this area is primarily based on the
continued availability of qualified technical personnel in an extremely
competitive U.S. labor market. Our professional services business will suffer
if we are unable to attract and retain personnel with the advanced technology
skills we require.
In addition to our current competitors, we expect substantial competition
from established and new companies as the e-commerce and Internet markets
continue to develop and expand. We cannot assure you 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.
Data Stewardship
We collect consumer data from multiple sources, including through:
. participating members of SCAN who provide checking account numbers and
drivers license numbers related to unpaid checks;
. participating members of ChexSystems who contribute checking and savings
account closures and names and addresses associated with those records;
. Deluxe's check printing customers whose data includes names, addresses,
checking account numbers and check order histories;
. state governmental agencies (e.g., drivers license information from the
Department of Motor Vehicles); and
. federal governmental agencies (e.g., social security numbers of deceased
persons from the Social Security Administration).
We obtain the data under agreements or licenses with suppliers. Some of
these agreements impose restrictions on the use and resale of the data and
others are governed by the Fair Credit Reporting Act. We do not rent or sell
lists of data for direct marketing purposes.
We have a strong commitment to the responsible use of data, including the
protection of consumer privacy rights. We have taken several measures to
fulfill this commitment, including actively participating in the development of
industry-wide privacy standards, maintaining strict information practices and
policies and creating an internal information-practices council and systems to
oversee appropriate data usage.
Our information practices and policies include the following:
. Accuracy. We use stringent procedures to ensure that information
collected, used and exchanged will be accurate and complete.
. Security. We employ advanced security measures for protecting
information from unauthorized access, use and disclosure.
. Compliance. We collect, use and disclose information in accordance with
the federal Fair Credit Reporting Act, applicable state laws and
contractual obligations.
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. Confidentiality. We collect, use and exchange information in accordance
with strict confidentiality standards.
. Privacy. We promote self-regulation in recognition of consumers'
expectation of privacy and adhere with industry standards, such as those
established by the Direct Marketing Association and the American Bankers
Association.
. Responsiveness. We employ extensive internal monitoring systems and
conduct ongoing customer surveys to maintain high quality and timely
response standards with respect to consumer inquiries.
. Employee education. We educate our employees regarding sound information
practices and the proper handling and use of information.
Government Regulation
Various aspects of our businesses are subject to federal and state
regulation. Our failure to comply with any applicable laws and regulations
could result in restrictions on our ability to provide our products and
services, as well as the imposition of civil fines and criminal penalties.
As a provider of electronic data processing services to financial
institutions, we are subject to regulatory oversight and examination by the
Federal Financial Institutions Examination Council, an interagency body
comprised of the various federal bank and thrift regulators and the National
Credit Union Association. In addition, we may be subject to possible review by
state agencies that regulate banks in each state where we conduct our
electronic processing activities.
Because we collect and disclose debit data and other personal information
about consumers, we are subject to the federal Fair Credit Reporting Act and
any state laws providing greater consumer protections. The Fair Credit
Reporting Act provides that consumers have the right to know the contents of
the records pertaining to them which are maintained at our consumer reporting
agencies, to challenge the accuracy of the information and to have the
information verified, updated or removed. To comply with these requirements, we
maintain consumer relations call centers for each of our consumer reporting
businesses. We are also required to maintain a high level of security for the
computer systems in which consumer data files reside.
Our consumer reporting agencies and collection agencies are also subject to
regulation by the Federal Trade Commission. In addition, our debt collection
services are subject to the Fair Debt Collection Practices Act and state
collections statutes and licensing requirements.
Financial institutions will be subject to the requirements of a new federal
financial modernization law. The privacy provisions of this law, known as the
Gramm-Leach-Bliley Act, are scheduled to go into effect in July 2001. The Act
imposes significant requirements on any entity engaged in the business of
providing financial services, including entities that provide services to
financial institutions. The privacy provisions of the Act impose on each entity
subject to the new requirements an affirmative obligation to develop and
implement policies to protect the security and confidentiality of consumers'
nonpublic personal information and to disclose those policies to consumers
before a customer relationship is established and annually thereafter. The Act
directs the federal banking and thrift regulators, credit union regulators, the
Federal Trade Commission and the SEC to issue appropriate standards for
carrying out this duty. The banking regulators and the FTC have recently issued
regulations which will implement the privacy portions of the Act when they go
into effect next year.
The regulations require financial institutions to provide an "opt-out"
notice to consumers and an opportunity to opt-out before sharing nonpublic
personal information with an unaffiliated third party. There are numerous
exceptions that do not require that any notice or opportunity to opt-out be
given to consumers. These include:
. transfers of consumer information made to protect the confidentiality or
security of a consumer's records; to protect against or prevent actual
or potential fraud, unauthorized transactions, claims or other
liability; for required institutional risk control; and for resolving
customer disputes or inquires;
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. transfers of consumer information to a consumer reporting agency
pursuant to the Fair Credit Reporting Act; and
. transfers between affiliates of consumer reports produced by a consumer
reporting agency in compliance with the Fair Credit Reporting Act.
We believe these exceptions apply to our consumer reporting business and
will permit banks to provide debit data and other nonpublic personal
information to us without triggering the opt-out requirement. However,
government agencies could interpret their regulations in a manner that could
expand the scope of the Act in ways which could adversely affect our business.
In addition, even if the regulations do not affect us directly, uncertainty
over the scope of the regulations could make financial institutions unwilling
to share consumer-related information with us.
Congress and many states are considering more stringent laws or regulations
that, among other things, restrict the purchase, sale or sharing of nonpublic
personal information about consumers. For example, legislation has been
introduced in Congress to further restrict the sharing of consumer information
by financial institutions, restrict the use of social security numbers, as well
as require that a consumer opt-in prior to a financial institution's use of his
or her data in its marketing program. Given the current public concern over
consumer privacy rights, it is possible the Congress, individual states or
governmental agencies could enact new laws or regulations governing consumer
protection in the future. If enacted, these laws or regulations could directly
affect our ability to collect and use consumer data and could have a material
adverse effect on our business, results of operations and financial condition.
Laws and regulations may be adopted in the future with respect to the
Internet or e-commerce covering issues such as user privacy, pricing, content,
copyrights, consumer protections, taxation and characteristics and quality of
products and services. New laws or regulations may impede the growth of the
Internet. This could decrease the demand for our products and services and
increase our cost of doing business. Moreover, the applicability to the
Internet of existing laws governing property ownership, taxation, libel and
personal privacy is uncertain and may remain uncertain for a considerable
length of time.
Intellectual Property Rights
We rely on a combination of trademark, copyright, trade secret law and
confidentiality or license agreements to protect our trademarks, software and
know-how. We also have applied for patent protection on some of the features of
our newer products. Intellectual property laws afford limited protection. It
may be possible for a third party to copy our products and services or
otherwise obtain and use our proprietary information without our permission.
There is no assurance that our competitors will not independently develop
services and products that are substantially equivalent or superior to ours.
With regard to our information technology services, our business consists of
software applications development. Ownership of this software is generally
assigned to the client. We also develop software components that can be reused
in software application development and software toolsets, most of which
remains our property.
Employees
As of May 31, 2000, we had approximately 3,350 full and part-time employees,
including 2,550 persons employed within the United States and 800 persons
employed outside of the United States, including India. Of our total number of
employees, 1,300 persons were engaged in software development, 1,200 persons
were engaged in customer and technical support services, 145 persons were
engaged in sales and marketing and 705 persons were engaged in administrative
and other functions.
None of our employees are represented by a labor union, and we consider our
employee relations to be good.
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Facilities
The following table sets forth a description of our principal facilities:
<TABLE>
<CAPTION>
Owned or Lease
Approximate Expiration
Location Square Feet Date Function
---------------------- ----------- -------------- ---------------------------
<S> <C> <C> <C>
Milwaukee, Wisconsin 171,250 Owned Marketing, development and
administration
New Berlin, Wisconsin 82,600 Owned Data center
Phoenix, Arizona 92,813 Owned Data center
Chennai, India 18,614 January 2008 Software development center
Gurgaon, India 40,950 January 2002 Shared services center
Chennai, India 38,750 September 2002 Software development center
Bloomington, Minnesota 50,623 June 2002 Customer contact center
Shoreview, Minnesota 49,500 September 2001 DebitBureau and
professional services
Bothell, Washington 34,309 August 2004 Customer contact center
Bothell, Washington 24,702 September 2006 Office center
Dallas, Texas 42,052 January 2001 Customer contact center
Mesa, Arizona 3,208 August 2001 Business recovery site
New Berlin, Wisconsin 5,500 June 2000 Warehouse
</TABLE>
The leases set forth above generally have a term of 3 to 10 years, most of
which have options to extend for at least 3 years. We plan to relocate our
headquarters to Phoenix, Arizona following this offering. Apart from our need
to lease space for this purpose, we believe that our current facilities are
adequate to meet our anticipated space requirements. We believe that additional
space will be available at a reasonable cost to meet our future needs.
Legal Proceedings
On May 14, 1999, we filed a trademark infringement action against Citizen
Advisers, Inc. in the United States District Court for the Central District of
California. The complaint alleges false designation of origin and trademark
infringement, trade name infringement and unfair competition under California
law regarding the use of the "E FUND" mark and efund.com internet domain by
Citizen Advisers. We are seeking injunctive relief to prevent Citizen Advisers
from using the "E FUND" mark and efund.com internet domain, cancellation of
Citizen Advisers trademark registration of the "E FUND" mark and damages and
expenses, including attorneys' fees. The case is in the discovery stage and no
trial date has been set.
We have been informed that a complaint was filed on April 3, 2000 with the
Los Angeles Superior Court alleging that our ChexSystems product discriminates
against minorities. We have not been served with this complaint and so do not
consider this action to be an active lawsuit. We would, however, vigorously
contest any such allegation and consider it to be wholly without merit as we do
not maintain data describing the racial or ethnic origin of consumers. As a
consumer reporting agency we are essentially a provider of information. We do
not approve or decline accounts for financial institutions. Further, we do not
control their policies on when they close a particular account or whether they
supply the closure record to us. We also do not control any decision by a
financial institution to access our database when evaluating an application for
account. In addition, we do not have a role in determining the weight the
institution gives any information that we supply it.
Our Separation from Deluxe
Our electronic payments, professional services and government services
businesses were previously conducted through various operating units of Deluxe.
In addition to our businesses, Deluxe is the largest check printer in the
world. On January 31, 2000, as part of its strategy to create strategically
focused enterprises that can independently pursue their business objectives,
raise capital and pursue growth opportunities, Deluxe announced a plan to
combine our businesses into a separate, publicly-traded company. The separation
of our businesses from those of Deluxe has been substantially completed.
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Effects of the Separation. We believe that we will realize the following
benefits from our complete separation from Deluxe:
. Direct access to the capital markets. As a separate public company, we
will be able to directly access the capital markets to issue equity and
to use stock-based acquisition currency to finance expansion and growth
opportunities.
. Greater strategic focus. We expect to have a sharper focus on our
businesses and growth opportunities as a result of our board and
management team concentrating only on our core businesses. Further, the
separation from Deluxe will eliminate any competition for capital
generated in its or our business.
. Increased ability to attract, retain and motivate employees. We believe
that incentive compensation arrangements for key employees, directly
related to the market performance of our common stock, will provide
enhanced incentives for performance. The separation will enable us to
offer our key employees compensation directly linked to the performance
of our businesses, which we expect to enhance our ability to attract and
retain qualified personnel.
In reaching our decision to approve the separation, we also considered the
following potential disadvantages of the separation from Deluxe:
. Loss of Deluxe's support. As a separate public company we will not be
able to access cash provided from Deluxe's check printing business or
Deluxe's borrowing capacity to fund our growth.
. Potential conflicts with Deluxe. We may have difficulties resolving
potential conflicts as a result of our business relationships with, and
control by Deluxe.
. Loss of data from Deluxe. After the split-off, we will not be able to
obtain the check printing data we currently use in some of our risk
management and decision support products. As a result, we will be
required to expend significant time and resources to obtain this
information directly from financial institutions. These agreements may
not be as favorable to us as our present arrangements with Deluxe.
The Exchange Offer. After this offering, Deluxe will own about 86.5% of our
common stock, or about 84.8% if the underwriters exercise their over-allotment
option in full. As long as Deluxe continues to hold a majority of our
outstanding stock, Deluxe will be able to elect all our directors and determine
the outcome of all our corporate actions requiring stockholder approval. In
addition, we will continue to derive a substantial portion of our revenue from
Deluxe in future periods. In 1999, payments from Deluxe represented 3% of our
total net sales and Deluxe has established minimum spending targets of $43
million per year for software development and maintenance services from our
professional services business for the next several years. Deluxe also has
agreed to purchase accounting and data entry services from our professional
services business.
Deluxe has announced that it plans to distribute all of its shares of our
common stock to its shareholders through a split-off. Deluxe's plans for a
split-off are subject to receiving a private letter ruling from the Internal
Revenue Service that the split-off will be tax-free to Deluxe and its
shareholders for U.S. federal income tax purposes. Deluxe has the sole
discretion to determine whether to proceed with the split-off based on the best
interests of Deluxe's shareholders and to decide what will be the timing,
structure and terms of the split-off. Subject to these conditions, Deluxe plans
to complete the split-off within one year following the completion of this
offering. Deluxe has submitted a private letter ruling request to the Internal
Revenue Service. We cannot be certain when or whether Deluxe will receive a
favorable tax ruling from the Internal Revenue Service, or that the
distribution by Deluxe will be completed. If Deluxe does not complete the
split-off, Deluxe will continue to control us and we may not realize the
benefits from our separation from Deluxe that we anticipate.
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MANAGEMENT
Directors and Executive Officers
The following table lists our directors and executive officers and persons
who have agreed to serve as directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John A. Blanchard III... 57 Chairman of the Board and Chief Executive Officer
Paul H. Bristow......... 57 Executive Vice President and Chief Financial Officer
Dr. Nikhil Sinha........ 39 Executive Vice President, Global Corporate Development
Steven F. Coleman....... 41 Senior Vice President, General Counsel and Secretary
John J. (Jack) Boyle
III.................... 53 Director
Jack Robinson........... 45 Director
Hatim A. Tyabji......... 55 Director
John H. LeFevre......... 56 Director
Lois M. Martin.......... 37 Director
Lawrence J. Mosner...... 57 Director
</TABLE>
John A. Blanchard III has served as Chairman of our Board of Directors and
Chief Executive Officer since March 1, 2000. Mr. Blanchard has served as
President and Chief Executive Officer of Deluxe since May 1995 and as Chairman
of the Deluxe Board of Directors since May 1996 and will continue to serve in
those capacities until the completion of the split-off from Deluxe. From
January 1994 to April 1995, Mr. Blanchard was executive vice president of
General Instrument Corporation, a supplier of systems and equipment to the
cable and satellite television industry. From 1991 to 1993, Mr. Blanchard was
chairman and chief executive officer of Harbridge Merchant Services, a national
credit card processing company. Previously, Mr. Blanchard was employed by
American Telephone & Telegraph Company for 25 years, most recently as senior
vice president responsible for national business sales. Mr. Blanchard also
serves as a director of Wells Fargo and Company and ADC Telecommunications,
Inc.
Paul H. Bristow has served as Executive Vice President and Chief Financial
Officer since March 2000. From 1993 until joining our company, Mr. Bristow
served as Executive Vice President--Finance Administration and Chief Financial
Officer of Galileo International, a computer reservation system company for the
travel industry. Previously, Mr. Bristow held various finance, accounting and
auditing positions with London International Group, plc, ITT Europe, ITT
Canada, Philip Morris and Arthur Andersen.
Dr. Nikhil Sinha has served as our Executive Vice President, Global
Corporate Development since March 1, 2000. Previously, Dr. Sinha served as
President and Chief Executive Officer of iDLX Technology Partners, Deluxe's
Professional Services Division, from June 1999 to February 2000. He was a
director of the Telecommunications and Information Policy Institute at the
University of Texas at Austin from September 1997 to May 1999 and associate
professor of International Communication from 1991 to 1997. Dr. Sinha has
worked as a consultant to the Informatics and Telecommunications Division for
the World Bank and as an advisor to the Indian Telecom Commission and the
Indian Planning Commission. Dr. Sinha also serves on the advisory committee of
the Indo-US Sub-Commission on Education and Culture. He is co-founder and
director of Sinha & Lariviere, Ltd., a consulting firm providing strategic and
investment advisory services to U.S. companies doing business in South Asia.
Steven F. Coleman has served as Senior Vice President, General Counsel and
Secretary since March 2000. From 1996 until joining our company, Coleman worked
as a Senior Attorney for Deluxe. Prior to joining Deluxe, Mr. Coleman was
associated with Dorsey & Whitney, a law firm located in Minneapolis, Minnesota,
and Fried, Frank, Harris, Shriver & Jacobson, a law firm located in New York,
New York.
54
<PAGE>
John J. (Jack) Boyle III became a director in June 2000. Mr. Boyle currently
serves as Chief Executive Officer of Tuck Partners, a newly formed web
engineering company. From August 1994 to October 1999, Mr. Boyle served as
President and Chief Executive Officer of Saville Systems, PLC, a maker and
marketer of customer care and billing systems for the global telecommunications
industry. Mr. Boyle served as Chairman of the Board of Directors of Saville
Systems from April 1998 to October 1999. Saville Systems was acquired by ADC
Telecommunications, Inc. in October 1999. Mr. Boyle also serves as a director
of ADC Telecommunications, Inc.
Jack Robinson became a director in June 2000. Mr. Robinson has served as
Chief Executive Officer of Personal Cuisine, Inc., a recently formed food
service company, since January 31, 2000. From November 1998 to January 2000,
Mr. Robinson served as Vice President, Finance for the home and small business
group of Dell Computer Corporation. From February 1998 through November 1998,
Mr. Robinson served as President of the Foodservice unit of Sara Lee Bakery, a
division of Sara Lee Corporation. Between July 1996 and February 1998, Mr.
Robinson served as President of the Specialty Markets division of Sara Lee. Mr.
Robinson joined Sara Lee in June 1993 as a Senior Vice President and Chief
Financial Officer of its Sara Lee Bakery division. Sara Lee is a global
packaged food and consumer products company. Mr. Robinson has been a director
of Deluxe since June 1997 and expects to resign from that position in August
2000.
Hatim A. Tyabji became a director in June 2000. Mr. Tyabji has served as
chief executive officer and chairman of Saraide Inc., a provider of Internet
and wireless data services, since September 1998. From November 1986 until
March 1998, Mr. Tyabji served as president and chief executive officer of
VeriFone, Inc., which was acquired by Hewlett Packard Company in June 1997. Mr.
Tyabji also served as chairman of VeriFone from 1992 until 1998. VeriFone is a
global provider of transaction automation systems and Internet commerce
solutions. Mr. Tyabji has been a director of Deluxe since November 1997 and
expects to resign from that position in August 2000. Mr. Tyabji also serves as
a director of PubliCARD, Inc., Ariba, Inc., Smart Disk Corp., and Best Buy
Company, Inc.
John H. LeFevre became a director in June 2000. Mr. LeFevre has served as
Senior Vice President, General Counsel and Secretary of Deluxe since February
1994. From 1978 to February 1994, Mr. LeFevre was employed by Wang
Laboratories, Inc. From 1988 until February 1994, he held various positions in
Wang Laboratories' law department, including corporate counsel, vice president,
general counsel and secretary. Wang Laboratories was in the business of
manufacturing and selling computer hardware and software and related services.
Lois M. Martin became a director in June 2000. Ms. Martin has served as
Senior Vice President and Chief Financial Officer of Deluxe since April 2000.
From November 1997 to April 2000, Ms. Martin served as Vice President and
Corporate Controller. From December 1995 to November 1997, Ms. Martin served as
Vice President and Controller of Deluxe Financial Services Group. From December
1993 to December 1995, Ms. Martin held various accounting-related positions
with Deluxe. Ms. Martin is a certified public accountant.
Lawrence J. Mosner became a director in June 2000. Mr. Mosner has served as
Executive Vice President of Deluxe with overall responsibility for all of its
day-to-day operations since July 1997 and he became Vice-Chairman of Deluxe's
Board of Directors in August 1999. Following the split-off, Mr. Mosner is
expected to succeed Mr. Blanchard as Chairman of the Board and Chief Executive
Officer of Deluxe. From February 1997 to July 1997, Mr. Mosner served as
President of the Paper Payment Systems unit of Deluxe. From October 1996 to
February 1997, Mr. Mosner served as President of Deluxe Direct, Inc., a
subsidiary of Deluxe. Between November 1995 and October 1996, Mr. Mosner served
as Senior Vice President of Deluxe.
55
<PAGE>
Board Composition
Our board of directors is currently comprised of seven directors.
Our board of directors is divided into three classes for purposes of
election. One class will be elected at each annual meeting of stockholders to
serve for a three year term. Ms. Martin and Mr. LeFevre will serve as class I
directors, whose term expires at the 2001 annual meeting of stockholders.
Messrs. Blanchard and Mosner will serve as class II directors, whose term
expires at the 2002 annual meeting of stockholders. Messrs. Boyle, Robinson and
Tyabji will serve as class III directors, whose term expires at the 2003 annual
meeting of stockholders. Messrs. LeFevre and Mosner and Ms. Martin, each of
whom is currently an executive officer of Deluxe, have advised us that they
will resign from our board following the completion of the split-off. We intend
to seek additional independent directors.
Board Committees
Audit Committee. The audit committee is expected to consist of Jack Robinson
(chair), Jack Boyle and Hatim Tyabji. The audit committee is responsible for:
. reviewing the adequacy of our system of internal accounting controls;
. reviewing the results of the independent auditors' annual audit,
including any significant adjustments, management judgements and
estimates, new accounting policies and disagreements with management;
. determining the duties and responsibilities of the internal audit staff;
. reviewing the scope and results of our internal auditing procedures;
. reviewing our audited financial statements and discussing them with
management;
. reviewing the audit reports submitted by both the independent auditors
and our internal audit staff;
. reviewing disclosures by independent auditors concerning relationships
with our company and the performance of our independent auditors and
annually recommending independent auditors;
. adopting and annually assessing its charter; and
. preparing reports or statements required by Nasdaq or the securities
laws.
Compensation Committee. The compensation committee is expected to consist of
Jack Boyle (chair), Hatim Tyabji and Jack Robinson. The functions of the
compensation committee currently include:
. reviewing our general compensation strategy;
. reviewing the terms of employment agreements for executives earning over
a specified amount and approving compensation for executives if their
compensation is, or may become, subject to Section 162(m) of the
Internal Revenue Code; and
. administering our compensation and benefit plans.
Director Compensation
We will compensate our non-employee directors with an annual retainer of
$15,000, meeting fees of $1,000, committee chair fees of $2,500 and annual
options under the 2000 Stock Incentive Plan valued at $50,000. We expect to
allow our directors to elect to receive stock in lieu of cash or to participate
in some form of deferred compensation plan. Messrs. LeFevre and Mosner and Ms.
Martin will not be compensated for their services as directors.
Stock Ownership of Directors and Executive Officers
All of our common stock is currently owned by Deluxe, and thus none of our
directors and executive officers own any shares of our common stock. To the
extent our directors and executive officers own shares of Deluxe common stock
at the time of the split-off, they will participate in the exchange offer on
the same terms as other holders of Deluxe common stock.
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<PAGE>
The following table sets forth the number of shares of Deluxe common stock
beneficially owned on March 15, 2000 by each director, each executive officer
named in the Summary Compensation Table in the "--Executive Compensation"
section below, and all of our directors and executive officers as a group.
Except as otherwise noted, the individual director or officer had sole voting
and investment power with respect to such securities. The total number of
shares of Deluxe common stock outstanding as of March 15, 2000 was 72,218,276.
<TABLE>
<CAPTION>
Shares of Deluxe
Beneficially Owned
------------------
Name of Beneficial Owner Number Percentage
------------------------ ------- ----------
<S> <C> <C>
John A. Blanchard III (1).................................. 478,221 *
Paul H. Bristow............................................ 0 *
Dr. Nikhil Sinha (2)....................................... 14,480 *
Steven F. Coleman (3)...................................... 4,415 *
John J. (Jack) Boyle III................................... 0 *
Jack Robinson (4).......................................... 10,546 *
Hatim A. Tyabji (4)........................................ 5,407 *
John H. LeFevre (5)........................................ 79,073 *
Lois M. Martin (6)......................................... 27,244 *
Lawrence J. Mosner (7)..................................... 235,601 *
All directors and executive officers as a group (10
persons).................................................. 854,987 1.2
</TABLE>
--------
* Represents holdings of less than one percent.
(1) Includes options to purchase 414,000 shares of common stock that are
currently exercisable or will be excercisable within 60 days.
(2) Includes 11,456 restricted shares awarded January 29, 2000 under Deluxe's
Stock Incentive Plan, which restrictions will expire on the one year
anniversary of this offering if, subject to some conditions, Dr. Sinha
remains in continuous employment until that date.
(3) Includes options to purchase 3,967 shares of common stock that are
currently exercisable or will be excercisable within 60 days.
(4) Includes 333 restricted shares which will vest on the date of Deluxe's next
annual meeting of stockholders if the holder remains a director of Deluxe
after that meeting. Neither Mr. Robinson nor Mr. Tyabji is expected to
stand for re-election at Deluxe's next annual shareholder meeting.
(5) Includes 1,789 restricted stock units that will convert into shares of
Deluxe common stock on January 28, 2001 if, subject to some conditions, the
holder remains in continuous employment until such date and options to
purchase 69,667 shares of common stock that are currently exercisable or
will be exercisable within 60 days.
(6) Includes 3,093 restricted stock units that will convert into shares of
Deluxe common stock on January 28, 2001 if, subject to some conditions, the
holder remains in continuous employment until such date and, 1,000
restricted shares awarded October 31, 1997 options to purchase 18,534
shares of common stock that are currently exercisable or will be
exercisable within 60 days. The restrictions on the restricted shares will
lapse on October 31, 2000 if, subject to some conditions, Ms. Martin
remains in continuous employment until that date.
(7) Includes 16,801 restricted stock units that will convert into shares of
Deluxe common stock on January 28, 2001 if, subject to some conditions, the
holder remains in continuous employment until such date and options to
purchase 198,000 shares of common stock that are currently exercisable or
will be exercisable within 60 days.
57
<PAGE>
Executive Compensation
The following table sets forth the compensation earned by our Chief
Executive Officer and each of our other most highly compensated executive
officers who, based on the salary and bonus compensation information from
Deluxe, were the most highly compensated for the year ended December 31, 1999.
All information set forth in this table reflects compensation earned by these
individuals for services with Deluxe and its subsidiaries for each of the last
three fiscal years. Mr. Bristow was not an employee of Deluxe prior to joining
us in March 2000 and accordingly he is not shown in the table. This prospectus
refers to these individuals as the Named Executive Officers.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------ ---------------------
Restricted Securities All Other
Name and Principal Other Annual Stock Underlying Compensation
Position Year Salary Bonus(1) Compensation Awards Options (2)
------------------ ---- -------- --------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
John A. Blanchard III
(3). 1999 $680,000 $ 680,000 $22,866 -- 185,000 $136,400
Chairman and Chief 1998 600,000 1,200,000 13,848 -- 176,000 79,051
Executive Officer 1997 600,000 638,550 11,328 -- 100,000 67,745
Debra A. Janssen (4).... 1999 261,282 168,233 8,719 -- 25,000 17,476
Former President 1998 198,892 168,300 2,467 -- 10,000 --
and Chief Operating
Officer
Dr. Nikhil Sinha (5).... 1999 175,000 87,500 -- -- 25,000 28,846
Executive Vice
President, Global
Corporate Development
Steven F. Coleman....... 1999 132,000 26,400 -- -- 2,000 14,820
Senior Vice President, 1998 120,000 36,000 -- -- 1,500 15,237
General Counsel and 1997 112,500 15,964 -- -- 1,000 11,110
Secretary
</TABLE>
--------
(1) Recipients of awards under Deluxe's Annual Incentive Plan are entitled to
elect to receive all or a portion of their incentive compensation in the
form of shares of restricted stock or restricted stock units. If an
election is made to receive shares of restricted stock or restricted stock
units, the amount of cash foregone is increased by 25 percent in
determining the number of shares of restricted stock units to be awarded.
(2) All other compensation consists of (a) annual company contributions to
qualified retirement plans, (b) amounts credited to a non-qualified
supplemental retirement plan and (c) amounts credited to a non-qualified
deferred compensation plan as benefit plan equivalents. For 1999, the
amounts were: Mr. Blanchard--$16,000, $120,400 and 0; Ms. Janssen--$11,200,
$4,010 and $2,266; and Mr. Coleman--$14,260, $560 and 0. For Dr. Sinha, all
other compensation includes $28,846 paid in respect of his vacation pay
following the transfer of Deluxe employees to Deluxe Professional Services.
(3) Mr. Blanchard is entitled to supplemental retirement benefits in addition
to those ordinarily payable under Deluxe's profit-sharing, pension and
supplemental retirement plans, and with respect to any company-paid
portion of contributory retirement plans, such as Deluxe's 401(k) plan.
Deluxe is expected to make a lump-sum cash payment of approximately $3.8
million to Mr. Blanchard on January 1, 2001 in satisfaction of its
obligations in respect of the supplemental retirement benefits.
(4) Ms. Janssen resigned effective June 1, 2000.
(5) Dr. Sinha began employment with Deluxe in April 1999.
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<PAGE>
The following table contains information concerning the grant of options to
purchase shares of Deluxe common stock to the Named Executive Officers during
the fiscal year ended December 31, 1999:
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term (2)
----------------------------------------- ----------------------
Percent of
Number of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price
Granted in Fiscal Per Expiration
Name (1) Year Share Date 5% ($) 10% ($)
---- ---------- ---------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
John A. Blanchard III... 185,000 15.04% $35.9375 1/4/09 $4,181,167 $10,595,897
Debra A. Janssen........ 15,000 1.22 35.6250 1/29/09 336,066 851,656
10,000 .81 35.8125 5/04/09 225,223 570,759
Dr. Nikhil Sinha........ 25,000 2.03 37.5625 6/17/09 590,571 1,496,624
Steven F. Coleman....... 2,000 .16 35.6250 1/29/09 44,809 113,554
</TABLE>
--------
(1) All options were granted at an exercise price that equaled or exceeded the
fair market value of the common stock on the date of grant, as determined
by the last sale price as reported on the New York Stock Exchange. The
options are exercisable in cumulative installments of 33-1/3 percent on
each anniversary of the date of grant.
(2) The amounts represent hypothetical gains that might be achieved by the
optionees if the respective options are exercised at the end of their
terms. These gains are based on assumed rates of stock price appreciation
of 5% and 10% mandated by rules of the Securities and Exchange Commission.
These rates are shown for illustrative purposes only and do not represent
our prediction of our stock price performance.
The following table sets forth information regarding exercises of options to
purchase Deluxe common stock during the year ended December 31, 1999 and
unexercised options to purchase Deluxe common stock as of December 31, 1999, by
each of the Named Executive Officers:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at Fiscal Year the-Money Options at
End Fiscal Year End (1)
------------------------- -------------------------
Shares
Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John A. Blanchard III... -- -- 260,334 335,666 -- --
Debra A. Janssen........ -- -- 3,334 31,666 -- --
Dr. Nikhil Sinha........ -- -- -- 25,000 -- --
Steven F. Coleman....... -- -- 3,300 2,000 -- --
</TABLE>
--------
(1) The value of unexercised in-the-money option is determined by multiplying
the difference between the exercise price and $27.4375, the closing price
of Deluxe common stock on the NYSE on December 31, 1999, by the number of
shares underlying the options. If the exercise price is greater than the
December 31, 1999 closing price, the options are not in-the-money and no
value is listed.
Treatment of Deluxe Options
As of May 31, 2000, options to purchase 5,653,200 shares of common stock of
Deluxe were outstanding. Immediately prior to the split-off of Deluxe's
remaining interest in our company following this offering, these outstanding
options will be converted into new options to purchase Deluxe common stock and
options to purchase our common stock. All persons who hold Deluxe options will
receive new Deluxe options and eFunds options. The board of directors has
adopted the eFunds Corporation Stock Incentive Plan for Deluxe Conversion
Awards to provide for the eFunds options resulting from the conversion. Deluxe,
as our sole
59
<PAGE>
stockholder, has approved this plan, which is filed as an exhibit to our
registration statement of which this prospectus is a part. The purpose of this
plan is to allow the employees of Deluxe and eFunds to maintain the same
relative equity interest in the two companies as they held in the combined
enterprise.
The stock options granted under this plan generally will have the same terms
and conditions as the Deluxe options to which they relate. The eFunds options
will be granted immediately prior to our split-off from Deluxe. The number of
shares and the exercise price of eFunds options to be granted under this plan
will depend on a conversion equation that we summarize below. The eFunds
options will maintain the original vesting and exercisability provisions and
option period as the converted Deluxe options. Any exercisability provision or
option term that is based on past employment or contingent on continued
employment will mean and include past-employment with Deluxe and continued
employment with eFunds for those participants who are employees of eFunds as of
the split-off date.
The basic principle for the conversion of Deluxe options is to maintain the
relative value of the options based on the difference between exercise price
and market price, or intrinsic value. The conversion equation for calculating
the number of shares and the exercise price of eFunds options to be granted
under the conversion plan is summarized below.
. The pre-conversion intrinsic value of all Deluxe options outstanding is
calculated by multiplying the number of Deluxe options outstanding by
the difference between the market price of Deluxe common stock at the
close of market on the last day before the split-off and the exercise
price of the Deluxe options outstanding.
. The pre-conversion intrinsic value will be allocated between the new
Deluxe options and eFunds options according to the relative value of
Deluxe, exclusive of the value of the proportion of eFunds owned by
Deluxe, to the value of the proportion of eFunds owned by Deluxe.
. The exercise price of the eFunds options to be granted will be equal to
the market price of eFunds stock at the close of market on the last day
before the split-off multiplied by the ratio of the weighted average
exercise price of the Deluxe options outstanding to the closing price of
the Deluxe shares the last day before the split-off.
. The number of options to be granted will be calculated by dividing the
pre-conversion intrinsic value allocated to eFunds options by the
difference between the market price of eFunds common stock at the close
of market on the last day before the split and the exercise price
calculated above.
For example, assume that there are options to purchase 5.7 million shares of
Deluxe common stock outstanding prior to the split and the exercise price is
$32. The assumed market price of Deluxe common stock is $24. The pre-conversion
total intrinsic deficit value would be $45.6 million, or (($24-$32)* 5.7
million). Assume that the pre-conversion market value of shares of eFunds held
by Deluxe is $600 million and the pre-split market value of Deluxe, excluding
the market value of eFunds shares held, is $1,100 million. The relative
proportionate value is therefore (35%/65%) which results in an intrinsic
deficit value of $16 million, or (35% of $45.6 million) to be distributed in
eFunds options. The exercise price of the eFunds options in this example is
$20, or ($15*(32/24)). The number of options which would be granted is 3.2
million, or (($16) million/($15-$20)).
This example uses hypothetical numbers that are unlikely to be accurate on
the day of the split-off. The number of eFunds options granted pursuant to the
conversion plan and the exercise price of those options is subject to a large
number of variables, particularly the relative market prices for our common
stock and Deluxe's common stock on the day before the split-off. At this time,
we cannot provide any certainty regarding the number of options we will grant
under to the conversion plan or the exercise price for those options.
Employment Agreements
John A. Blanchard III. We will enter into an Executive Employment Agreement
with Mr. Blanchard related to his service as our Chairman and Chief Executive
Officer. The term of the agreement begins as of the
60
<PAGE>
date of the split-off and expires on December 31, 2002. Under the agreement,
Mr. Blanchard will receive a salary of $680,000, subject to increase at the
discretion of our board. Mr. Blanchard is also eligible to receive annual cash
bonuses on the same basis that we pay bonuses to our other executives, with a
target bonus equal to his base salary. Mr. Blanchard is eligible to participate
in our stock incentive plan. We anticipate that he will receive annual stock
option grants having a value equal to 200% of his base salary, as determined by
the Black-Scholes method. Mr. Blanchard will receive double-options in 2000,
which are listed in the table below under "-- 2000 Stock Incentive Plan
Grants." In recognition of the termination of Mr. Blanchard's existing
supplemental retirement benefits, Mr. Blanchard is also entitled to receive
$490,768 on or about January 2, 2003. This amount is reflective of the present
value on that date of the retirement benefits Mr. Blanchard would have been
entitled to under his supplemental retirement benefit plan if that plan was
continued throughout the term of his Executive Employment Agreement. Mr.
Blanchard has the option to receive the economic equivalent of this benefit on
an annuity basis for 15 years following his retirement.
If we terminate Mr. Blanchard's employment other than for cause, or if Mr.
Blanchard terminates his employment for good reason, Mr. Blanchard is entitled
to a lump sum payment equal to:
. the sum of (1) his unpaid base salary due through the date of
termination, (2) the product of his most recent annual bonus and the
fraction of the year he was employed and (3) any deferred compensation
and any accrued vacation pay;
. an amount equal to the annual base salary that Mr. Blanchard would have
earned during the remaining term of the Executive Employment Agreement
had his employment not been terminated; and
. an amount equal to the annual bonus that Mr. Blanchard would have earned
had he remained continuously employed throughout the employment period
and been awarded his annual target bonus amount to the extent this bonus
amount has not theretofore been paid.
In addition, upon any such termination of Mr. Blanchard's employment, Mr.
Blanchard will be entitled to participate in all benefits plans, including
medical, disability, life and other health insurance benefits and to certain
out-placement services. All unvested options granted to Mr. Blanchard will
immediately vest and remain exercisable for a five year period or, their
remaining term, and all other restricted shares and restricted stock units held
by Mr. Blanchard under the stock incentive plan vest and are converted into
shares of common stock on the date of any termination other than for cause or
for good reason. Mr. Blanchard would also be entitled to retain and earn any
performance-based awards previously received under our stock incentive plan as
if he had continued in our employ until the expiration of the relevant
performance period. Any options granted to Mr. Blanchard will also vest and
remain exercisable for five years following any termination of Mr. Blanchard's
employment upon the expiration of his Executive Employment Agreement.
The agreement also provides that if any payment or benefit received or to be
received by Mr. Blanchard would be subject to the federal excise tax on "excess
parachute payments," we will pay Mr. Blanchard such additional amount as may be
necessary so that he realizes, after the payment of the excise tax and any
income tax or excise tax on that additional amount, the amount of such
compensation.
Paul H. Bristow. We entered into a letter agreement with Mr. Bristow
effective as of March 1, 2000. The agreement provides for an annual base salary
of $300,000 with a bonus ranging from 0% to 100% of base salary, depending on
our performance. The target bonus is 50%, or $150,000 annually. Mr. Bristow is
eligible to receive annual stock option grants having a value equal to 150% of
his base salary, as determined by the Black-Scholes method. Mr. Bristow will
receive double-options in 2000, which are listed in the table below under "--
2000 Stock Incentive Plan Grants." Mr. Bristow's letter agreement also contains
a severance provision allowing him to receive one year's base salary plus a
second year of income continuation, if he is terminated for reasons other than
willful misconduct, gross negligence or unlawful actions toward us or toward
others involved with our business.
61
<PAGE>
Dr. Nikhil Sinha. We entered into a letter agreement with Dr. Sinha
effective as of March 1, 2000. The agreement provides for an annual base salary
of $300,000 with a bonus ranging from 0% to 100% of base salary, depending on
our performance. The target bonus is 50%, or $150,000 annually. Dr. Sinha is
eligible to receive annual stock option grants having a value equal to 115% of
his base salary, as determined by the Black-Scholes method. Dr. Sinha will
receive double-options in 2000, which are listed in the table below under "--
2000 Stock Incentive Plan Grants." Dr. Sinha also will be entitled to receive
an option grant having a value of $250,000 upon completion of this offering in
consideration of the termination of iDLX Technology Partners options provided
to him under our 1999 employment agreement. Dr. Sinha's letter agreement also
contains a severance provision allowing him to receive one year's base salary
plus a second year of income continuation, if he is terminated for reasons
other than willful misconduct, gross negligence or unlawful actions toward us
or toward others involved with our business.
Steven F. Coleman. We entered into a letter agreement with Mr. Coleman
effective as of March 1, 2000. The agreement provides for an annual base salary
of $200,000 with a bonus ranging from 0% to 80% of base salary, depending on
our performance. The target bonus is 40%, or $80,000 annually. Mr. Coleman is
eligible to receive annual stock option grants having a value equal to 100% of
his base salary, as determined by the Black-Scholes method. Mr. Coleman will
receive double-options in 2000, which are listed in the table below under "-
2000 Stock Incentive Plan Grants." Mr. Coleman's letter agreement also contains
a severance provision allowing him to receive one year's base salary plus a
second year of income continuation, if he is terminated for reasons other than
willful misconduct, gross negligence or unlawful actions toward us or toward
others involved with our business.
Change in Control Arrangements
We have entered into Change in Control Agreements with each of Messrs.
Sinha, Bristow and Coleman. These agreements are designed to diminish the
distractions that could be caused by personal uncertainties and risks
associated with changes of control and other significant business combinations
involving our company by providing these officers with assurances regarding
their compensation and benefits expectations under such circumstances.
Under the Change in Control Agreements, each of these officers agrees to
remain in our employ, and we agreed to continue to employ each officer, until
the third anniversary following any "business combination" involving our
company. During that three-year period, each officer is entitled to maintain a
position, authority, duties and responsibilities at least commensurate with the
most significant of those held by the officer during the 180 day period prior
to the effective date of the business combination or change in control. The
base salary of the officer may not be reduced below that earned by the officer
during the twelve month period preceding the effective date of the business
combination. In determining any increase in an officer's base salary during the
three year period, the officer is to be treated in a manner consistent with
other peer executives. The officers are also entitled to receive annual bonus
payments, stock option grants and other benefits during the three year period
on the same objective basis as other peer executives.
If, during the three year period, we terminate an officer's employment other
than for "cause" or "disability" or the officer terminates his or her
employment for "good reason," the officer is entitled to a lump sum payment
equal to the sum of any unpaid base salary, accrued vacation pay and any unpaid
portions of incentive awards earned by the executive prior to the date of
termination. In addition, the officer is entitled to receive a lump sum payment
equal to three times the sum of the officer's annual base salary and the
officer's historical or target incentive award, plus the amount that we would
have contributed to the retirement plans in which the officer participated
prior to his or her termination in respect of such sum. The officers are also
entitled to the continuation of their medical, disability, life and other
health insurance benefits for up to a three year period after a qualifying
termination and to certain out-placement services.
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All unvested options granted to an officer vest and remain exercisable for a
five year period or their remaining term following a qualifying termination and
all other restricted shares and restricted stock units held by the officer
under our stock incentive plan vest and are converted into shares of common
stock on the date of any such termination.
The agreements also provide that if any payment or benefit received or to be
received by an officer, whether or not pursuant to his or her change in control
agreement, would be subject to the federal excise tax on "excess parachute
payments," we will pay to the officer such additional amount as may be
necessary so that the officer realizes, after the payment of such excise tax
and any income tax or excise tax on such additional amount, the amount of such
compensation.
2000 Stock Incentive Plan
Our 2000 Stock Incentive Plan provides for grants of options to purchase
shares of common stock, stock appreciation rights, restricted stock and
restricted stock rights, performance awards and other stock-based awards. All
of our full-time employees are eligible for grants under this plan. Our
directors, consultants and advisors are also eligible for grants under this
plan.
The maximum aggregate number of shares of common stock that may be
distributed under this plan is 20% of the total number of shares of our common
stock outstanding at the time of the award, subject to adjustment.
Administration. This plan will be administered by our board of directors or
by a committee of directors appointed by our board of directors. The
compensation committee of the board will administer the plan.
Stock Options. Our committee may award stock options under this plan and set
their terms, including the number and kind of stock options granted, the
exercise price of the stock options, the vesting schedule applicable to such
stock options, the period during which they can be exercised and the form of
consideration, which may include, without limitation, cash, common stock, other
securities, any combination thereof or any other form of valid consideration
that is acceptable to the committee. The exercise price of incentive stock
options cannot be less than 100% of the fair market value of a share of common
stock on the date of grant, unless required by law or government regulation. No
stock option can be exercised more than ten years after the date of grant. The
committee may provide that any option granted under the plan contain a reload
feature. If an option containing this feature is exercised using shares of
common stock or if shares are withheld or tendered as payment of the amount to
be withheld under applicable income tax laws, the optionee will receive an
additional option on a number of shares equal to the number of shares tendered
or withheld. The exercise price of this reload option will be equal to the fair
market value of our stock on the date the reload option is granted.
Stock Appreciation Rights. Our committee may grant stock appreciation rights
under this plan and set their terms, including grant price, term, methods of
exercise, dates of exercise, methods of settlement and any other terms or
conditions of any stock appreciation right. Each stock appreciation right
entitles the holder to receive an amount equal to the excess of the fair market
value of a share of common stock on the date the holder exercises the stock
appreciation right over the grant price, as determined by the committee. The
grant price may not be less than 100% of the fair market value of a share of
common stock on the date of the grant, unless required by law or government
regulation.
Restricted Stock and Restricted Stock Units. Our committee may grant shares
of restricted stock and restricted stock units and set their terms, including
voting rights for restricted shares and dividend rights with respect to such
shares and units. The committee may determine when restrictions shall lapse. If
the participant's employment or service terminates, the participant will
forfeit unvested restricted stock and restricted stock units as of the date of
such event, unless our committee determines otherwise with respect to some or
all of the unvested restricted stock and restricted stock units.
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Performance Awards. The committee may grant performance awards, which
entitle the holder to receive payments upon the achievement of specified
performance goals and set their terms, including the performance goals to be
achieved during the performance period, the length of the performance period
and the amount and form of payment of the performance award. A performance
award may be denominated or payable in cash, shares of stock or other
securities, or other awards or property.
Other Stock-Based Awards. The committee may grant other awards denominated
or payable in, valued by reference to, or otherwise based on or related to
shares of common stock as are deemed by the committee to be consistent with the
purpose of plan. The committee will determine the terms and conditions of such
other stock-based awards, including the consideration to be paid for shares of
common stock or other securities delivered pursuant to a purchase right granted
under such award. The value of such consideration shall not be less than 100%
of the fair market value of such shares or other securities as of the date such
award is granted, unless required by law or government regulation.
Transfer Restrictions. The rights of a participant with respect to the stock
options, stock appreciation rights, restricted stock and restricted stock
rights, performance awards, dividend equivalents and other stock based awards
granted under this plan generally are not transferable by the participant other
than by will or the laws of descent and distribution.
Amendment and Termination of this Plan. This plan may be terminated and may
be altered, amended, suspended or terminated at any time, in whole or in part,
by our board of directors, except that:
. no alteration or amendment will be effective without stockholder
approval if approval is required by law or under the rules of the Nasdaq
Stock Market or any stock exchange on which our common stock is listed;
and
. no such termination, suspension, alteration or amendment may adversely
alter or affect the terms of any then outstanding awards without the
consent of the affected participant.
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Grants as of this Offering
Our board of directors has approved the grant of options to purchase up to
2,614,316 shares of our common stock under our 2000 stock incentive plan,
including the grants to individuals listed in the table below. The table has
been prepared based on an assumed initial offering price of $15.00 per share.
The exercise price of these options will be equal to the initial public
offering price. These options granted to our employees will vest in three equal
installments, beginning on the first anniversary of the date of grant, while
options granted to our outside directors will vest in two equal installments,
beginning on the first anniversary of the date of grant.
<TABLE>
<CAPTION>
Number
Name of Options
---- ----------
<S> <C>
John A. Blanchard III........................................... 362,667
Paul H. Bristow................................................. 120,000
Dr. Nikhil Sinha................................................ 125,333
Steven F. Coleman............................................... 53,333
All current executive officers as a group....................... 661,333
All directors who are not executive officers as a group......... 20,001
All employees, including current officers but excluding
directors and executive officers, as a group................... 1,932,982
</TABLE>
Related Party Transactions
Prior to joining our professional services business as its President and
Chief Executive Officer, Dr. Sinha was a 50% partner in a consulting firm
employed by Deluxe. The consulting firm provided international development
consulting services to Deluxe at per diem rates subject to minimum amounts. In
1999, Deluxe paid $28,713 to the consulting firm for services rendered. In
addition, in connection with the hiring of Dr. Sinha and the consequent
termination of the consulting agreement, Deluxe paid approximately $1.1 million
to the members of the consulting firm in lieu of an equity interest in HCL-
Deluxe N.V. Dr. Sinha received 50% of this amount.
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<PAGE>
AGREEMENTS BETWEEN eFUNDS AND DELUXE
We have provided below a summary description of the initial public offering
and distribution agreement along with the key related agreements. This
description, which summarizes the material terms of the agreements, is not
complete. You should read the full text of the agreements, which have been
filed with the Securities and Exchange Commission as exhibits to the
registration statement of which this prospectus is a part.
The following is a table summarizing the approximate value that has been or
will be exchanged between Deluxe and us in connection with the key related
agreements described below. We have also entered into several arrangements with
Deluxe for indemnification. Because it is unknown whether any value will be
exchanged pursuant to these agreements, we did not include these in the table.
<TABLE>
<CAPTION>
Agreement Value to Deluxe Value to eFunds
----------------------------------------------------------------------------------------
<S> <C> <C>
Initial Public Offering and eFunds to pay all costs and Deluxe to pay all costs and
Distribution Agreement expenses of this offering, expenses of the split-off.
which are estimated at These amounts are not yet
$4,500,000, exclusive of quantifiable.
underwriting discounts and
commissions. Deluxe also
receives an option to
purchase, at the then market
price, additional shares of
our common stock to the
extent necessary to own at
least 80.1% of the total
combined voting power of our
stock and at least 80.1% of
any class of nonvoting
stock.
----------------------------------------------------------------------------------------
Registration Rights If Deluxe does not proceed This Agreement is primarily
Agreement with the split-off, it can for the benefit of Deluxe.
request us to register
shares of our common stock
owned by Deluxe for sale
under applicable securities
laws. Deluxe will also have
the right to include its
shares in other
registrations of securities
that we initiate.
----------------------------------------------------------------------------------------
Assignment and Assumption This "as-is, where-is" Receipt of the stock of Chex
Agreement transfer was intended to Systems, Inc., Payment
align our assets and Protection Systems, Inc.
businesses in order to (SCAN), eFunds Corporation
enable us to proceed with of Tustin, California and
this offering and the split- our professional services
off. and U.K. businesses,
together with their net
receivables and payables
with Deluxe. These assets
had a net historical cost of
approximately $27.3 million
to Deluxe.
</TABLE>
--------------------------------------------------------------------------------
66
<PAGE>
<TABLE>
<CAPTION>
Agreement Value to Deluxe Value to eFunds
----------------------------------------------------------------------------------------
<S> <C> <C>
Tax-Sharing Agreement We assume liability for We receive tax return
taxes resulting from our preparation and filing
operations and we agree to assistance and Deluxe
indemnify Deluxe for any indemnifies us against any
taxes due from Deluxe if the tax liabilities of the other
split-off fails to qualify members of the Deluxe
as tax-free as a result of consolidated group.
our actions or inactions and
for a portion of any taxes
that become due as a result
of the split-off because of
a retroactive change of law
or other reason unrelated to
an action or inaction be
either us or Deluxe. Deluxe
also receives $37,500 per
month for providing us with
tax return preparation and
filing assistance.
----------------------------------------------------------------------------------------
Employee Benefits This Agreement is primarily Our employees continue to
Agreement intended to provide participate in Deluxe's
continued benefits to our benefit plans until the
employees. split-off or the time we
establish our own benefit
plans for our employees.
----------------------------------------------------------------------------------------
Real Estate Agreements $10,000,000. We received title to our
Phoenix, Arizona data center
facility.
$940 per month. We receive the right to
maintain communication nodes
at nine Deluxe facilities.
$57,400 per month. We receive office space in
Shoreview, Minnesota.
Deluxe receives space in our $116,400 per month.
Phoenix, Arizona data center
for use by its call center
operations.
----------------------------------------------------------------------------------------
Transitional Services $304,000 per month, We receive financial,
Agreement decreasing to $0 not later administrative, treasury,
than December 31, 2001. cash management, insurance,
legal, sales support and
employee benefits
administration services from
Deluxe.
Deluxe receives ACH $28,800 per month,
processing services from us. decreasing to $0 not later
than December 31, 2001.
</TABLE>
--------------------------------------------------------------------------------
67
<PAGE>
<TABLE>
<CAPTION>
Agreement Value to Deluxe Value to eFunds
----------------------------------------------------------------------------------------
<S> <C> <C>
Professional Services Deluxe receives software $43,000,000 per year*.
Agreement development and maintenance
services from us.
Deluxe receives accounts $2,200,000 per year
receivable, accounts payable decreasing 5% per year*.
and general accounting
transaction processing
services from us.
Deluxe receives data entry $5,900,000 per year*.
services from us.
----------------------------------------------------------------------------------------
Network Access $3,500,000 per year*. We receive the right to use
Agreement the system through which
Deluxe's check printing
customers order products to
deliver our ChexSystems
product set.
----------------------------------------------------------------------------------------
Data and Related Deluxe receives Deluxe provides us, at no
Agreements approximately $97,500 per cost, with check printing
year for providing us with data from its direct to
processing services. consumer check printing
business until July 1, 2001.
----------------------------------------------------------------------------------------
Loan Agreement Deluxe receives interest We receive the right to
payments from us at the borrow up to $75 million
London Interbank Offered from Deluxe until the
Rate, plus a variable earlier of the split-off or
additional margin based on December 31, 2000.
Deluxe's credit rating.
</TABLE>
*These amounts are estimated. The actual amounts paid by Deluxe and received by
us may vary based upon the actual services provided.
Initial Public Offering and Distribution Agreement
General. On March 31, 2000, we entered into an initial public offering and
distribution agreement with Deluxe, which governs offerings of our securities,
including this offering and the split-off. Although Deluxe has announced that
it currently plans to complete the split-off, Deluxe is not obligated to do so.
Deluxe has the sole discretion to determine whether or when the split-off will
occur and all terms of the split-off, including the form, structure and terms
of any transactions or offerings to effect the split-off and the timing of and
conditions to the completion of the split-off. We cannot assure you as to
whether or when the split-off will occur or as to the terms of the
distribution. We refer you to "Risk Factors -- Risks Relating to Our Separation
from Deluxe."
Offerings of Our Securities and the Split-Off. We have agreed that we will
cooperate with Deluxe in all respects to accomplish:
. any primary offerings of our common stock and other securities,
including this offering, prior to the split-off or other similar
transaction; and
. the split-off or similar transaction.
We also agreed that, at Deluxe's direction, we will promptly take all
actions necessary or desirable to effect these transactions, including the
registration under the Securities Act of shares of our common stock.
Expenses. We have agreed to pay all costs and expenses relating to any
primary offerings of our common stock and our other securities prior to the
split-off, including this offering. Deluxe has agreed to pay all costs and
expenses relating to the split-off.
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<PAGE>
Covenants. We and Deluxe have agreed to provide each other with access to
information relating to the assets, business and operations of the requesting
party. We have agreed that, for so long as Deluxe is required to consolidate
our results of operations and financial position, we will:
. provide Deluxe with financial information regarding our company and our
subsidiaries and access to our books and records;
. not select a different accounting firm than Deloitte & Touche LLP to
serve as our auditors;
. complete the audit of our financial statements on the same schedule as
the audit of Deluxe's financial statements; and
. consult with Deluxe and provide Deluxe and its auditors with notice of
any proposed determination of, or significant changes in, our accounting
estimates and accounting principles.
As long as Deluxe beneficially owns 50% or more of our outstanding common
stock, we may not take any action that may result in a contravention or an
event of default by Deluxe of:
. any provision of law, including the Internal Revenue Code or the
Employee Retirement Income Security Act of 1974, as amended;
. any provision of Deluxe's articles of incorporation or bylaws;
. any credit agreement or other material agreement binding upon Deluxe; or
. any judgment, order or decree of any governmental body, agency or court.
Options. We have granted to Deluxe options to purchase additional shares of
common stock to the extent necessary to own at least 80.1% of the total
combined voting power of all classes of our outstanding voting stock and to own
at least 80.1% of each outstanding class of nonvoting stock. These options may
be exercised immediately prior to the issuance of any of our equity securities,
other than in this offering or upon exercise of the underwriters' over-
allotment option.
The purchase price of the shares of voting stock purchased upon any exercise
will be the market price of our voting stock on the date of delivery of the
exercise notice. The purchase price of nonvoting capital stock will be the
price at which that stock may be purchased by third parties. These options will
terminate when Deluxe or its affiliates own less than 45% of the total combined
voting power of all classes of our outstanding equity of our company.
Registration Rights Agreement
We and Deluxe have entered into a registration rights agreement which only
becomes effective in the event Deluxe does not proceed with the split-off. Upon
the request of Deluxe, we must use our reasonable best efforts to register
under applicable securities laws any of the shares of our common stock owned by
Deluxe for sale in accordance with Deluxe's intended method of disposition.
Deluxe will also have the right to include shares of our common stock owned by
Deluxe in other registrations of equity securities we initiate. Deluxe will pay
all costs and expenses relating to each such registration that Deluxe requests
or in which Deluxe participates except for our out-of-pocket expenses and the
fees of our attorneys, accountants and other advisors. We have agreed to
indemnify Deluxe against liabilities in connection with registrations in which
Deluxe participates, including liabilities under the Securities Act or to
contribute to payments Deluxe may be required to make for these liabilities.
Assignment and Assumption Agreement
We have entered into an assignment and assumption agreement with Deluxe
which governs the terms of the transfer to us of assets and liabilities from
Deluxe. All transfers by Deluxe to us are on an "as is, where is" basis, and
without any representations or warranties. As a result, we have agreed to bear
the economic and
69
<PAGE>
legal risks that any conveyances of assets are insufficient to vest in us good
and marketable title to such assets and as to defects in the condition of the
assets. We and our subsidiaries assumed sole financial responsibility for all
liabilities associated with our businesses and operations other than government
services and all of the assets transferred to us as of March 31, 2000. Based on
their historical cost at March 31, 2000, the value of the net assets
transferred to us was approximately $27.3 million.
Tax-Sharing Agreement
In general, we will be included in Deluxe's consolidated group for federal
income tax purposes for so long as Deluxe beneficially owns at least 80% of the
total voting power and value of our outstanding stock. Each member of a
consolidated group is jointly and severally liable for the federal income tax
liability of each other member of the consolidated group. We have entered into
a tax-sharing agreement with Deluxe which allocates tax liabilities between us
and Deluxe during the period in which we are included in Deluxe's consolidated
group. We could, however, be liable in the event that any federal tax liability
is incurred, but not discharged, by other members of Deluxe's consolidated
group.
We and Deluxe will make payments to each other such that the amount of taxes
to be paid by us will generally be determined as though we had filed separate
federal, state and local income tax returns. We will be responsible for any
taxes with respect to tax returns that include us and our subsidiaries. In
determining the amount of our tax-sharing payments, Deluxe will prepare for us
pro forma returns with respect to federal and applicable state and local income
taxes.
Prior to the split-off, Deluxe will continue to have all the rights as our
parent for purposes of federal, state and local tax law. Deluxe will be the
sole and exclusive agent for us in any and all matters relating to our income,
franchise and similar tax liabilities. Deluxe will have sole and exclusive
responsibility for the preparation and filing of consolidated federal and
consolidated or combined or unitary state income tax returns or amended
returns. Deluxe will have the power, in its sole discretion, to contest,
compromise or settle any asserted tax adjustment or deficiency and to file,
litigate or compromise any claim for a refund on our behalf. In addition,
Deluxe has agreed to undertake to provide these services with respect to our
separate state and local tax returns and our foreign tax returns. We generally
will pay Deluxe $37,500 per month for the tax services to be provided to us by
Deluxe.
The tax-sharing agreement also provides that we will indemnify Deluxe for
any taxes due from Deluxe if the split-off or some of the related transactions
fail to qualify as tax-free as a result of our actions or inactions. We are
required under the tax sharing agreement to comply with the representations
made to the Internal Revenue Service in connection with our private letter
ruling request regarding the tax-free nature of the split-off. In addition, we
have agreed to indemnify Deluxe for a portion of any taxes due from Deluxe if
the split-off or some of the related transactions fail to qualify as tax-free
as a result of a retroactive change of law or other reason unrelated to the
action or inaction of either us or Deluxe.
Employee Benefits Agreement
As of the completion of this offering, we will enter into an employee
benefits agreement with Deluxe to allocate assets, liabilities, and
responsibilities relating to our current and former U.S. employees and their
participation in the benefit plans that Deluxe currently sponsors and
maintains.
All of our eligible employees will continue to participate in the Deluxe
benefit plans on comparable terms and conditions to those currently applicable
to them until the split-off or the time at which we establish comparable
benefit plans for our current and former employees.
At the time of the split-off, we expect to adopt benefit plans corresponding
to the Deluxe plans, including qualified retirement plans, executive deferred
compensation and supplemental benefit plans, health and welfare plans, fringe
benefit plans, and leave of absence programs. It is intended that our benefit
plans will take into account all service, compensation and other benefit
determinations that, as of the split-off, were recognized under the
corresponding Deluxe benefit plan.
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<PAGE>
It is intended that our benefit plans will generally assume any liabilities
for our employees under the corresponding Deluxe benefit plan. Assets relating
to the employee liabilities are expected to be transferred to us or our related
plans and trusts from trusts and other funding vehicles associated with
Deluxe's benefit plans.
Real Estate Agreements
We have purchased real property and a data center located in Phoenix,
Arizona and personal property from a subsidiary of Deluxe at their historical
cost for approximately $10 million. As of the completion of this offering, we
and Deluxe will enter into several agreements under which Deluxe or its
subsidiaries will agree to:
. lease nine sites to us for use as communication nodes for a period of
approximately 12 to 18 months at approximately $942 per month;
. sublease a portion of a building in Shoreview, Minnesota to us for a
period of approximately 12 months at approximately $57,445 per month;
. lease a portion of a data center in Phoenix, Arizona from us at
approximately $116,404 per month; and
. assign their rights as tenant under various leases to us.
Transitional Services Agreement
As of the completion of this offering, we and Deluxe will enter into a
transitional services agreement under which Deluxe and we will agree to provide
services to each other, including:
. financial and administrative services;
. treasury;
. cash management and insurance services;
. sales support;
. legal services; and
. employee benefits administration.
Each service provided under the transitional services agreements will be
provided for a specified time period beginning on completion of this offering
and continuing until either completion of the split off or December 31, 2001.
Either party may terminate any or all services that they receive under the
transitional services agreements at any time upon 60 days' prior written
notice. Any or all services may be extended for one additional 60 day period.
We have agreed to pay $303,797 per month to Deluxe for transitional services
provided to us. Deluxe has agreed to pay $28,800 per month to us for
transitional services provided to Deluxe. These amounts will gradually decrease
as services are terminated.
Professional Services Agreement
We will enter into a master agreement with Deluxe under which we will
provide Deluxe with:
. software development and maintenance services for information technology
applications;
. financial shared services including accounts receivable, accounts
payable and general accounting transaction processing; and
. data entry services.
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<PAGE>
This agreement will expire on March 31, 2005, and will automatically renew
each year for an additional one year term unless terminated by either party. In
addition, this agreement may be terminated by Deluxe at its option if we are
acquired, whether by merger, the sale of all or substantially all of our
assets, by a third party. During the term of the agreement, we anticipate that
Deluxe will spend approximately $43 million per year for software development
and maintenance services for information technology applications, which amounts
will be based on the actual number of hours of information technology services
that we provide to Deluxe. If Deluxe fails to reach the $43 million spending
target per year, it will be obligated to make compensatory payments for a
portion of our fees based on our estimates of lost margins. If Deluxe exceeds
the $43 million spending target per year, Deluxe will be entitled to receive
reduced rates. We also will provide business process management services,
including accounts receivable, accounts payable and other general accounting
services, and data entry services. Deluxe's annual minimum spending target for
these business process management services will range from $8.1 million in 2000
to $4.2 million in 2004. The agreement will also provide for credits to Deluxe
for unsatisfactory performance by us and bonuses for superior performances as
are typical for information technology professional services. The provision of
services by us under the agreement is non-exclusive, and Deluxe may contract
with any third party for the provision of information technology and business
process management services.
Third Party Indemnification Agreement
Under the third party indemnification agreement, we will agree to indemnify
Deluxe in connection with any liabilities incurred by Deluxe after the split-
off as a result of:
. Deluxe's purchase or lease of property or services for our benefit under
any master agreement; or
. any guaranties under which Deluxe guaranteed our performance of
agreements with third parties.
We are obligated to indemnify Deluxe for any liability to the extent such
liability primarily relates to the past, present or future operation of our
business or operations.
Network Access Agreement
Historically, some ChexSystems customers have elected to use the online
ordering connectivity provided by Deluxe's check printing operations to receive
services provided by ChexSystems. As of the completion of this offering, Deluxe
will provide us a license to use these connections to its check printing
customers in order to allow us to continue to provide our ChexSystems,
FraudFinder, QualiFile and other ChexSystems products to financial institutions
who wish to receive these products through the Deluxe network. In exchange for
access to this product delivery channel, we will pay Deluxe its cost of
providing these services during 2000 and cost plus 10% in 2001. We estimate the
cost of these services to be approximately $3.5 million in 2000. Deluxe will
maintain ownership of all rights in its network, except that we will own the
interface between the network security layer and our back-end systems. The
agreement will expire on December 31, 2001.
Data and Related Agreements
We and Deluxe will enter into several agreements which will govern the
transfer of data between us. Under a data contribution agreement, Deluxe will
provide us, at no cost, with consumer account records pertaining to its direct
to consumer check printing business. We will agree to only use this information
for purposes that are consistent with applicable federal, state and local laws,
including the Fair Credit Reporting Act. Customers of Deluxe will have the
ability to request that their information not be provided to us. The agreement
has a term that will end on July 1, 2001.
Under a processing agreement, we will provide Deluxe with bank routing
numbers to enable us to obtain check order history files from Deluxe as long as
we have obtained a consent from the applicable financial institution to receive
this data. Deluxe may only use the bank routing numbers for the purpose of
performing the processing requested by us. We estimate the cost of these
processing services to be approximately $97,472 per year. Either party may
terminate this agreement upon 30 days' prior written notice.
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<PAGE>
Loan Agreement
Deluxe has agreed to provide us with a revolving credit facility of up to
$75 million until the earlier of the effective date of the split-off, or
December 31, 2000. Borrowings under the facility will be due at the time of the
split-off or maturity and will accrue interest at the London Interbank Offered
Rate, plus a variable additional margin based on Deluxe's credit rating. The
credit facility includes financial and restrictive covenants. We intend to
replace this facility with a new credit facility with one or more financial
institutions prior to the split-off or maturity.
Indemnification Agreement
Deluxe has agreed to indemnify us for any losses on identified government
services loss contracts in excess of our $29.2 million loss contract reserves
as of April 30, 2000. We are required to calculate any charges for loss
contracts in a manner consistent with Deluxe's current loss accrual practices.
Deluxe will also indemnify us against any liabilities, losses or expenses
arising from litigation and claims asserted against us in connection with the
operation of our government services business prior to the completion of this
offering. Deluxe's indemnification obligations do not apply to losses
contemplated by existing reserves and are limited to a maximum amount equal to
$14.6 million. In addition, Deluxe's indemnification does not apply to any
contract that was not in a loss position as of April 30, 2000 and so if any of
these profitable contracts were to become unprofitable, no indemnification
would be available. We have agreed to indemnify Deluxe for all other claims
related to the operation of our government services business that occur after
the completion of this offering.
PRINCIPAL STOCKHOLDER
All of the shares of our common stock outstanding before this offering are
owned by Deluxe. After this offering, Deluxe will own about 86.5% of our
outstanding common stock. Except for Deluxe, we are not aware of any person or
group that will beneficially own more than 5% of the outstanding shares of our
common stock following this offering.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 250 million shares of common stock,
$.01 par value per share, and 100 million shares of preferred stock, $.01 par
value per share. The following discussion is a summary of the material terms of
our capital stock.
Common Stock
Each holder of our common stock is entitled to one vote for each share held
of record on all matters to be voted upon by the stockholders. There are no
cumulative voting rights. Subject to the preferences of preferred stock issued
after the sale of the common stock in this offering, holders of common stock
are entitled to receive ratably any dividends that may be declared from time to
time by the board of directors out of funds legally available for that purpose.
In the event of our liquidation, dissolution or winding up, holders of common
stock would be entitled to share in our assets remaining after the payment of
liabilities and the satisfaction of any liquidation preference granted to the
holders of any outstanding shares of preferred stock. Holders of common stock
have no preemptive or conversion rights or other subscription rights and there
are no redemption or sinking fund provisions applicable to the common stock.
All outstanding shares of common stock and the shares of common stock
offered by us in this offering, when issued and paid for, will be fully paid
and nonassessable, except for certain statutory liabilities which may be
imposed by Section 180.0622 of the Wisconsin Business Corporation Law for
unpaid employee wages. Section 180.0622 of the Wisconsin Business Corporation
Law provides that shareholders of every corporation that does business in
Wisconsin are personally liable to an amount equal to the par value of the
shares owned by them and for all debts owing to employees for services
performed for such corporation, but not exceeding six months' service in the
case of any individual employee. The rights, preferences and privileges of the
holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock that we may
designate in the future.
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Preferred Stock
Upon the closing of this offering, the board of directors will be
authorized, subject to any limitations prescribed by law, without stockholder
approval, from time to time to issue up to an aggregate of 100 million shares
of preferred stock, in one or more series, with each of such series to have
such rights and preferences, including, without limitation, voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by unlimited discretion of the board of
directors.
Issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of our
outstanding voting stock. We currently have no plans to issue any shares of
preferred stock.
Stockholder Rights Plan
Prior to the completion of this offering, we plan to declare a dividend of
one preferred share purchase right for each outstanding share of common stock
outstanding on the business day immediately preceding the date of this
prospectus to the stockholders of record on that date. Each right will entitle
the registered holder to purchase one one-hundredth of a share of Series A
Junior Participating Preferred Stock, par value $0.01 per share, at a price of
$ per one one-hundredth of a preferred share, subject to adjustment. The
description and terms of the share purchase rights are set forth in a Rights
Agreement between eFunds and EquiServe, as Rights Agent, a copy of the form of
which is filed as an exhibit to the registration statement of which this
prospectus is a part.
Initially, the certificates for shares of common stock then outstanding will
evidence the rights and we will not distribute separate right certificates. The
rights will separate from the common stock on the share purchase rights
distribution date, which is the earlier of:
. the first date of public announcement that a person or group of
affiliated or associated persons has become the beneficial owner of 15%
or more of the outstanding common stock, subject to certain exceptions;
and
. the close of business on the 10th day, or such later date as may be
determined by the board of directors prior to such time as any person
becomes the beneficial owner of 15% or more of the outstanding common
stock, following the commencement or public announcement of a tender
offer or exchange offer, the consummation of which would result in a
person or group of affiliated or associated persons becoming the
beneficial owner of 15% or more of the outstanding common stock.
Under the plan, Deluxe's ownership of our stock will not cause the rights to
separate from the common stock or result in a share purchase rights
distribution date.
The board of directors, after receiving such advice as it deems necessary
and giving due consideration to all relevant factors, may elect to approve a
tender offer or an exchange offer for all of our outstanding common stock if
the board determines the offer to be in our best interest and the best
interests of our stockholders. If the board does approve a tender offer or
exchange offer, the rights will expire.
Until the share purchase rights distribution date,
. the rights will be evidenced by the certificates for shares of common
stock and will be transferred with and only with the common stock;
. any common stock certificates issued after the business day immediately
preceding the date of this prospectus upon transfer or new issuance of
the common stock will contain a notation incorporating the Rights
Agreement by reference; and
. the transfer of any common stock will also constitute the transfer of
the rights associated with the common stock.
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As promptly as practicable following the share purchase rights distribution
date, we will mail separate certificates evidencing the share purchase rights
to holders of record of the common stock as of the close of business on that
date, and such separate certificates alone will evidence the share purchase
rights.
The holders of our common stock and the share purchase rights cannot
exercise the rights until the distribution date. The rights will expire on the
date that is ten years after the business day immediately preceding the date of
this prospectus, unless we extend or earlier redeem or exchange as described
below. We will not issue fractions of a preferred share, other than fractions
in integral multiples of one one-hundredth of a share, and, in lieu thereof, we
will make a cash adjustment on the closing price on the last trading date prior
to the date of exercise.
We will adjust the purchase price payable and the number of preferred shares
issuable upon exercise of the rights from time to time to prevent dilution:
. in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the preferred shares;
. upon the grant to holders of the preferred shares of certain rights,
options or warrants to subscribe for or purchase preferred shares or
convertible securities at less than the then current market price of the
preferred shares; or
. upon the distribution to holders of the preferred shares of any evidence
of indebtedness or assets, excluding regular periodic cash dividends or
dividends payable in preferred shares, or of subscription rights or
warrants, other than those described in clause (2) of this paragraph.
With certain exceptions, we are not required to adjust the purchase price
until cumulative adjustments require an adjustment of at least 1% in the
purchase price. We also will adjust the number of outstanding share purchase
rights and the number of preferred shares issuable upon exercise of the rights
in the event of a stock split of the common stock or a stock dividend on the
common stock payable in common stock or subdivisions, consolidations or
combinations of the common stock occurring, in any such case, prior to the
distribution date.
We cannot redeem the preferred shares purchasable upon exercise of the
rights. Each preferred share will be entitled to a minimum preferential
quarterly dividend payment of $ per share but will be entitled to an
aggregate dividend of 100 times the dividend declared per share of common
stock. In the event of liquidation, the holders of the preferred shares will be
entitled to a minimum preferential liquidation payment of $ per share
but will be entitled to an aggregate payment of 100 times the payment made per
share of common stock. Each preferred share will have 100 votes, voting
together with the common stock. Finally, in the event of any merger,
consolidation or other transaction in which common stock is exchanged, each
preferred share will be entitled to receive 100 times the amount received per
share of common stock. These rights are subject to adjustment in the event of a
stock dividend on the common stock or a subdivision, combination or
consolidation of the common stock.
In the event any person becomes the beneficial owner of 15% or more of the
outstanding common stock, each holder of a share purchase right shall
thereafter have a right to receive, in lieu of preferred shares, a number of
shares of our common stock having an aggregate market price equal to twice the
exercise price of the share purchase right. In other words, each holder of a
right will have the right to receive shares of our common stock at a 50%
discount to the then current market price. In the event that at any time after
there is a beneficial owner of 15% or more of the outstanding common stock, we
are acquired in a merger or other business combination or 50% or more of our
assets or earning power are sold, holders of the rights will thereafter have
the right to receive a number of shares of common stock of the acquiring
company at a 50% discount to its then current market price.
At any time after a person becomes the beneficial owner of 15% or more of
the outstanding common stock, subject to certain exceptions, and prior to the
acquisition by a person of 50% or more of the outstanding common stock, the
board of directors may exchange all or part of the rights for common stock at
an exchange ratio of one share of common stock per right, subject to
adjustment.
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At any time before a person has become the beneficial owner of 15% or more
of the outstanding common stock, the board of directors may redeem the rights
in whole, but not in part, at a price of $0.01 per right, subject to
adjustment. The redemption of the rights may be made effective at such time, on
such basis and with such conditions as the board of directors in its sole
discretion may establish.
Until a right is exercised, the holder of the right will have no rights as a
stockholder, including without limitation, the right to vote or to receive
dividends.
The rights have anti-takeover effects. The rights will cause substantial
dilution to a person or group that attempts to acquire us pursuant to an offer
that is not approved by the board of directors, unless the rights have been
redeemed. However, the rights should not interfere with any tender offer or
merger approved by the board because the board of directors may redeem the
rights or approve an offer at any time prior to such time as any person has
becomes the beneficial owner of 15% or more of the outstanding common stock.
Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
. breach of their duty of loyalty to the corporation or its stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal or state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
Our amended and restated certificate of incorporation provides that we will
indemnify our directors, officers, employees and other agents to the fullest
extent permitted by Delaware law. We believe that indemnification under our
amended and restated certificate of incorporation covers at least negligence
and gross negligence on the part of indemnified parties. Our amended and
restated certificate of incorporation also permits us 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
indemnifications.
At present, there is no litigation or proceeding involving any of our
directors or officers in which indemnification is required or permitted, and we
are not aware of any threatened litigation or proceeding that may result in a
claim for indemnification.
Anti-Takeover Provisions
Some provisions of our amended and restated certificate of incorporation and
bylaws could make more difficult the acquisition of control of our company, and
the removal of existing management:
. The amended and restated certificate of incorporation does not provide
for cumulative voting for directors;
. We have a classified board of directors with each class serving a
staggered three-year term;
. The board of directors fixes the size of the board of directors, may
create new directorships and may elect new directors to serve for the
full term of the class of directors in which the new directorship
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<PAGE>
was created. The board of directors (or its remaining members, even
though less than a quorum) also may fill vacancies on the board of
directors occurring for any reason for the remainder of the term of the
class of director in which the vacancy occurred.
. The board of directors may issue preferred stock without any vote or
further action by the stockholders;
. The board of directors may adopt, amend, alter or repeal the bylaws
without a vote of the stockholders;
. All stockholder actions must be taken at a regular or special meeting of
the stockholders and cannot be taken by written consent without a
meeting;
. We require advance notice procedures with respect to stockholder
proposals and the nominations of candidates for election as directors;
and
. Without the affirmative vote of the holders of at least 66-2/3% of the
outstanding shares of common stock, together with the affirmative vote
of at least 66-2/3% of the members of the board of directors, we may not
(1) consolidate or merge with any other entity, (2) convey, transfer,
lease or otherwise dispose of all or substantially all of its property
and assets, (3) amend the certificate of incorporation to permit the
removal of directors without cause or (4) amend, modify or repeal the
anti-takeover and indemnification provisions of the amended and restated
certificate of incorporation.
These provisions are expected to discourage coercive takeover practices and
inadequate takeover bids. They are also designed to encourage persons seeking
to acquire control of us to first negotiate with our board. We believe that
the benefits of increased protection give us the potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure us and outweigh the disadvantages of discouraging such
proposals. Negotiating with the proponent could result in an improvement of
the terms of the proposal.
Section 203 of the Delaware General Corporation Law
We are subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a business combination
with an interested stockholder for a period of three years following the date
the person became an interested stockholder, unless:
. the board of directors approved the transaction in which such
stockholders became an interested stockholder prior to the date the
interested stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; and
. the business combination is approved by a majority of the board of
directors and by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the interested
stockholder.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an interested stockholder is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is EquiServe.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding an aggregate of
46,250,000 shares of common stock, assuming no exercise of the underwriters'
over-allotment option. All of the shares of common stock sold in this offering
will be freely tradeable without restriction under the Securities Act, unless
such shares are purchased by our "affiliates" as that term is defined in Rule
144 under the Securities Act. Persons who are affiliates may sell shares that
are issued in this offering in the public market only through registration
under the Securities Act or under an exemption from registration, such as the
one provided by Rule 144.
Deluxe has announced that, subject to specified conditions, it intends to
distribute all of its shares of our common stock in the split-off. Any shares
distributed by Deluxe will be freely tradeable, except for shares received by
our affiliates.
Rule 144
In general, under Rule 144, beginning 91 days after the date of this
prospectus, a person who beneficially owns "restricted securities" within the
meaning of Rule 144 for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding,
which will equal approximately shares immediately after this offering;
or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice of Form 144 with respect to that sale.
Sales under Rule 144 also are subject to manner of sale and notice requirements
and to the availability of current public information about us. Our affiliates
who purchase shares of our common stock pursuant to this offering or acquire
our shares of common stock in the tax-free distribution would be subject to the
resale restrictions of Rule 144 described above.
Lock-Up Agreements
We, our executive officers and directors have agreed not to sell or
otherwise dispose of any shares of our common stock or any securities
convertible into or exchangeable for common stock, for a period of 180 days
after the date of this prospectus, without the prior written consent of Lehman
Brothers Inc., subject to limited exceptions. See "Underwriting -- No Sales of
Similar Securities."
Stock Options
We will grant shares of our common stock pursuant to our stock plans. Upon
completion of this offering, we will have reserved 9,250,000 shares of common
stock for issuance under our incentive stock option plan and 3,350,000 shares
of common stock for issuance under our plan for the conversion of Deluxe
options in connection with the split-off. We expect to grant options to
purchase an aggregate of 2,614,316 shares of our common stock under our
incentive stock option plan upon the completion of this offering with an
exercise price equal to the initial public offering price, unless a lower price
is required by law or government regulation. We currently expect to file
registration statements under the Securities Act to register shares reserved
for issuance under our stock plans. Shares issued pursuant to our stock plans
after the effective date of that registration statement, other than shares
issued to affiliates, generally will be freely tradeable without further
registration under the Securities Act. In addition, at the time of the split-
off, all outstanding options to purchase Deluxe common stock will be converted
into new options to purchase Deluxe common stock and options to purchase our
common stock. Immediately prior to the split-off, all outstanding options to
purchase Deluxe common stock will be converted into new options to purchase
Deluxe common stock and options to purchase our common stock. The actual number
of options will be determined immediately prior to the split-off based on the
market price of our common stock and Deluxe common stock. Based upon an assumed
price of $15.00 per share for our shares and assuming the market price of
Deluxe's common stock immediately prior to the split-off is the same as the
closing market price on June 2, 2000, the number of our shares for which
options would be granted under this conversion plan would be approximately 3.2
million and the weighted average exercise price would be $20.00 per share. See
"Management -- Treatment of Deluxe Options."
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following discussion is a summary of the material United States federal
income and estate tax consequences of the ownership and disposition of our
common stock by non-United States holders. This discussion does not deal with
all aspects of United States federal income and estate taxation and does not
deal with foreign, state and local tax consequences. This discussion does not
address all tax considerations that may be relevant to non-United States
holders in light of their personal circumstances, or to certain non-United
States holders that may be subject to special treatment under United States
federal income or estate tax laws. Furthermore, this discussion is based on the
Internal Revenue Code of 1986, as amended, Treasury Department regulations,
published positions of the Internal Revenue Service and court decisions now in
effect, all of which are subject to change, possibly with retroactive effect.
You are urged to consult your own tax advisor regarding the United States
federal tax consequences of owning and disposing of our common stock, as well
as the applicability and effect of any state, local or foreign tax laws.
In this section we use the term United States holder to refer to a
beneficial owner of stock that is:
. a citizen or resident of the United States;
. a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision of the
United States;
. an estate the income of which is subject to United States federal income
taxation regardless of its source; or
. a trust that:
- is subject to the supervision of a court within the United States
and the control of one or more United States persons; or
- has a valid election in effect under applicable United States
Treasury regulations to be treated as a United States person.
We use the term non-United States holder to refer to a beneficial owner of
stock that is not a United States holder.
Dividends
Generally, any dividend paid to a non-United States holder will be subject
to United States withholding tax either at a rate of 30% of the gross amount of
the dividend or at a lesser applicable treaty rate. However, dividends that are
effectively connected with the conduct of a trade or business of the non-United
States holder within the United States and, where a tax treaty applies, that
are attributable to a United States permanent establishment of the non-United
States holder are not subject to the withholding tax but instead are subject to
United States federal income tax on a net income basis at applicable graduated
individual or corporate rates.
In order for dividends paid to a non-United States holder to be exempt from
withholding under the effectively connected income exemption, the holder must
comply with certification and disclosure requirements. In some circumstances, a
foreign corporation that receives effectively connected dividends may be
subject to an additional branch profits tax at a 30% rate or a lesser
applicable treaty rate.
Until January 1, 2001, dividends paid to an address outside the United
States are presumed to be paid to a resident of that country, unless the payer
has knowledge to the contrary, for purposes of the withholding tax discussed
above and, under the current regulations, for purposes of determining the
applicability of a reduced rate of withholding under the terms of a tax treaty.
If you wish to claim the benefit of an applicable treaty rate and avoid backup
withholding, as discussed below, for dividends paid after December 31, 2000,
final regulations effective after that date will require you to satisfy
applicable certification and other requirements.
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If you are eligible for a reduced treaty rate of United States withholding
tax pursuant to an income tax treaty, you may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the Internal
Revenue Service.
Gain on Disposition of Common Stock
If you are a non-United States holder, you will generally not be subject to
United States federal income tax with respect to gain recognized on a sale or
other disposition of our common stock unless:
. the gain is effectively connected with a trade or business of yours in
the United States or, where a tax treaty provides, the gain is
attributable to a United States permanent establishment of yours;
. you are an individual and hold our common stock as a capital asset, you
are present in the United States for 183 or more days in the taxable
year of the sale or other disposition and certain other conditions are
met;
. you are subject to tax pursuant to the provisions of the United States
federal income tax laws applicable to certain United States expatriates;
or
. we are or have been a United States real property holding corporation
for United States federal income tax purposes.
We believe that we are not, and do not anticipate becoming, a United States
real property holding corporation for United States federal income tax
purposes. If we were to become a United States real property holding
corporation, so long as our common stock continues to be regularly traded on an
established securities market, you would be subject to federal income tax on
any gain from the sale or other disposition of the stock only if you actually
or constructively owned, during the five-year period preceding the disposition,
more than 5% of our common stock.
Special rules may apply to non-United States holders, such as controlled
foreign corporations, passive foreign investment companies, foreign personal
holding companies and corporations that accumulate earnings to avoid federal
income tax, that are subject to special treatment under the Code. These
entities should consult their own tax advisors to determine the United States
federal, state, local and other tax consequences that may be relevant to them.
Backup Withholding and Information Reporting
We must report annually to the Internal Revenue Service and to you the
amount of dividends paid to you and the tax withheld with respect to these
dividends, regardless of whether withholding was required. Copies of the
information returns reporting the dividends and withholding may also be made
available to the tax authorities in the country in which you reside under the
provisions of an applicable income tax treaty.
Under current law, backup withholding at the rate of 31% generally will not
apply to dividends paid to you at an address outside the United States, unless
the payer has knowledge that you are a United States person. However, under the
final regulations effective for dividends paid on or after January 1, 2001, you
will be subject to backup withholding unless applicable certification
requirements are met.
Payment of the proceeds of a sale of our common stock within the United
States or conducted through certain United States related financial
intermediaries is subject to both backup withholding and information reporting
unless you certify under penalties of perjury that you are a non-United States
holder and the payer does not have actual knowledge that you are a United
States person, or you otherwise establish an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against your United States federal income tax liability
provided you furnish the required information to the Internal Revenue Service.
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Estate Tax
Common stock held by an individual non-United States holder at the time of
death will be included in that holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise,
and may be subject to United States federal estate tax.
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UNDERWRITING
Under the terms of an underwriting agreement, which is filed as an exhibit
to the registration statement of which this prospectus is a part, the
underwriters of the offering named below, for whom Lehman Brothers Inc., Bear,
Stearns & Co. Inc., FAC/Equities, a division of First Albany Corporation, John
G. Kinnard & Company Incorporated and Fidelity Capital Markets, a division of
National Financial Services Corporation, are acting as representatives, have
each agreed to purchase from us the respective number of shares of common stock
set forth opposite its name below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Lehman Brothers Inc. .........................................
Bear, Stearns & Co. Inc. .....................................
FAC/Equities, a division of First Albany Corporation..........
John G. Kinnard and Company, Incorporated.....................
Fidelity Capital Markets, a division of National Financial
Services Corporation.........................................
---------
Total....................................................... 6,250,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, then all of the shares of common stock which the underwriters have
agreed to purchase under the underwriting agreement must be purchased. The
conditions in the underwriting agreement include the requirement that the
representations and warranties made by us to the underwriters are true, that
there is no material change in the financial markets and that we deliver to the
underwriters customary closing documents.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act or to contribute to payments that the
underwriters may be required to make for these liabilities.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter of this offering and will be
facilitating electronic distribution of information through the Internet.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed five percent of the total number of
shares of common stock offered by them.
Certain of the underwriters and their affiliates provide investment banking,
financial advisory and other services to us and Deluxe for which they may
receive customary fees and commissions. Specifically, Lehman Brothers Inc. has
been engaged by Deluxe to act as exchange agent and provide advisory services
in connection with the split-off. Lehman Brothers Inc. will receive customary
fees in connection with the split-off transaction.
Commissions and Discounts
The following table summarizes the underwriting discount we will pay and any
other amounts that are deemed to be underwriting compensation by the NASD's
rules of fair practice. The underwriting discount is equal to the public offer
price per share less the amount paid to us per share. The underwriting discount
is equal to % of the public offering price.
<TABLE>
<CAPTION>
Paid by Us No Exercise Full Exercise
---------- ----------- -------------
<S> <C> <C>
Per share......................................
Total..........................................
</TABLE>
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The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the initial public
offering price set forth on the cover of this prospectus and to dealers, who
may include the underwriters, at the same price less a selling concession not
in excess of $ per share. The underwriters may allow, and the dealers may
reallow, a concession not in excess of $ per share to brokers and dealers.
After the offering, the offering price and other selling terms may change.
The following table summarizes the costs and expenses, other than the
underwriting discount, we will pay in connection with the offering. All amounts
are estimates except the SEC Registration Fee, the NASD Filing Fee and the
Nasdaq Filing Fee.
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 30,360
NASD Filing Fee............................................... 12,000
Nasdaq Filing Fee............................................. 100,000
Blue Sky fees and expenses.................................... 10,000
Accountants' fees and expenses................................ 2,000,000
Legal fees and expenses....................................... 2,000,000
Printing and engraving expenses............................... 150,000
Transfer agent and registrar fees............................. 50,000
Miscellaneous expenses........................................ 147,640
----------
Total....................................................... $4,500,000
==========
</TABLE>
Over-Allotment Option
We have granted to the underwriters an option to purchase up to an aggregate
of 937,500 additional shares of common stock, exercisable to cover over-
allotments, if any, at the initial public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option any time during the 30-day period after
the date of this prospectus. If this option is exercised, each underwriter will
be committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of common stock
proportionate to the underwriter's initial commitment as indicated in the
preceding table and we will be obligated, under the over-allotment option, to
sell the shares to the underwriters.
No Sales of Similar Securities
We, Deluxe and our executive officers and directors have agreed not to
directly or indirectly do any of the following, whether any transaction
described in clause (1) or (2) below is to be settled by delivery of common
stock or other securities, in cash or otherwise, in each case without the prior
written consent of Lehman Brothers Inc. on behalf of the underwriters, for a
period of 180 days after the date of this prospectus:
(1) offer for sale, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected to,
result in the disposition or purchase by any person at any time in the
future of) any shares of common stock or securities convertible into or
exchangeable for common stock or substantially similar securities,
other than any of the following:
. the common stock sold under this prospectus;
. distribution of common stock pursuant to the split-off;
. shares of common stock we issue under employee benefit plans,
qualified stock option plans or other employee compensation plans
existing on the date of this prospectus or under currently
outstanding options, warrants or rights; and
. shares of common stock issued pursuant to an agreement by us to
purchase, acquire or effect the merger of another entity into us if
in connection with the transaction each initial transferee agrees to
be subject to the 180-day lock-up.
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(2) sell or grant options, rights or warrants with respect to any shares
of our common stock or securities convertible into or exchangeable for
our common stock or substantially similar securities, other than the
grant of options under option plans existing on the date of this
prospectus.
Determination of Offering Price
Prior to this offering, there has been no public market for the shares of
our common stock. The initial public offering price will be negotiated between
the representatives and us. In determining the initial public offering price of
the common stock, primary considerations of the representatives will be, among
other things and in addition to prevailing market conditions, our performance
and capital structure, estimates of our business potential and earnings
prospects, an overall assessment of our management and the consideration of the
above factors in relation to market valuation of companies in related
businesses.
Nasdaq National Market Listing
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "EFDS."
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with this offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create
a short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position
or to stabilize the price of the common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
In general, purchases of a security for the purpose of stabilization or to
reduce syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of those purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
this offering.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Reserved Shares
At our request, the underwriters have reserved up to 300,000 shares of the
common stock offered by this prospectus for sale to our directors and officers
and other persons with whom we have established business relationships at the
initial public offering price set forth on the cover page of this prospectus.
All of these
84
<PAGE>
purchases will be subject to lock-up agreements. These persons must commit to
purchase no later than the close of business on the day following the date of
this prospectus. The number of shares available for sale to the general public
will be reduced to the extent these persons purchase the reserved shares. Mr.
Blanchard has indicated that he intends to purchase up to 100,000 shares from
the underwriters pursuant to this reserved share arrangement or otherwise.
Canadian Offers
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada where the
sale is made.
LEGAL MATTERS
The validity of the issuance of shares of common stock offered by us in this
offering will be passed upon for us by Dorsey & Whitney LLP, Minneapolis,
Minnesota. Certain legal matters related to the offering will be passed upon
for the underwriters by Simpson Thacher & Bartlett, New York, New York.
EXPERTS
The consolidated financial statements as of December 31, 1999 and 1998 and
for each of the three years in the period ended December 31, 1999 included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing in this prospectus and elsewhere
in the registration statement, and are included in reliance upon the report of
such firm, given upon their authority, as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not include all of the information contained in the
registration statement. For further information about us and our common stock,
you should refer to the registration statement and the exhibits. Statements
contained in this prospectus regarding the contents of any contract or any
other document to which reference is made are not necessarily complete. In each
instance, please refer to the copy of such contract or other document filed as
an exhibit to the registration statement. Each statement about the contract or
other document contained in the prospectus is qualified in all respects to the
actual document filed with the registration statement.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934 and,
in accordance therewith, will file periodic reports, proxy statements and other
information with the Commission. Our fiscal year ends on December 31. We intend
to furnish our stockholders with annual reports containing audited financial
statements and other appropriate reports.
You may read and copy the registration statement on Form S-1 and any other
document we file with the Commission at its public reference room at 450 Fifth
Street, NW, Washington, DC 20549, as well as at its regional offices located at
7 World Trade Center, Suite 1300, New York, NY 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, IL 60661. Please call the Commission
at 1-800-SEC-0330 for further information about its public reference facilities
and copy charges. Our filings are also available to the public from the
Commission's web site at http://www.sec.gov.
Deluxe Corporation is subject to the information requirements of the
Securities Exchange Act of 1934. You may obtain copies of the documents that
Deluxe files electronically with the Commission at its web site located at
http://www.sec.gov. The documents filed by Deluxe are not deemed to be
incorporated into this prospectus or deemed to be a part of this prospectus or
the registration statement of which it forms a part.
85
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at December 31, 1998 and 1999 and March 31,
2000 (Unaudited)........................................................ F-3
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999 and the Quarters Ended March 31, 1999 and 2000
(Unaudited)............................................................. F-4
Consolidated Statements of Comprehensive Income (Loss) for the Years
Ended December 31, 1997, 1998 and 1999 and the Quarters Ended March 31,
1999 and 2000 (Unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999 and the Quarters Ended March 31, 1999 and 2000
(Unaudited)............................................................. F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
eFunds Corporation
We have audited the accompanying consolidated balance sheets of eFunds
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive income (loss) and cash
flows for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsiblity is to express and opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of eFunds Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
April 3, 2000 (May 12, 2000 as to the effects of the stock split described in
Note 2 and as to Note 15)
F-2
<PAGE>
eFUNDS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, Unaudited
------------------ March 31,
1998 1999 2000
-------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents..................... $ 16,055 $ 35,849 $ 26,876
Restricted custodial cash..................... 545 3,429 4,247
Accounts receivable--net...................... 49,620 52,834 61,931
Deferred income taxes......................... 20,755 10,552 10,552
Income taxes receivable....................... 2,799 7,109 --
Prepaid expenses and other current assets..... 3,428 3,061 4,756
-------- -------- --------
Total current assets......................... 93,202 112,834 108,362
Long-term Investments........................... 1,370 3,347 23,982
Deferred Income Taxes........................... -- 1,549 1,539
Restricted Cash................................. 3,921 28,939 24,470
Property and Equipment
Land and land improvements.................... 5,001 4,993 6,843
Buildings and building improvements........... 32,351 33,683 44,262
Computer and other equipment.................. 76,522 80,211 84,141
-------- -------- --------
Total........................................ 113,874 118,887 135,246
Less accumulated depreciation................. (55,414) (58,414) (64,786)
-------- -------- --------
Property and equipment--net.................. 58,460 60,473 70,460
Intangibles
Cost in excess of net assets acquired--net.... 9,258 46,905 45,933
Internal use software--net.................... 5,550 20,746 25,425
Other intangible assets--net.................. 14,574 15,136 15,579
-------- -------- --------
Total intangibles............................ 29,382 82,787 86,937
-------- -------- --------
Total non-current assets..................... 93,133 177,095 207,388
-------- -------- --------
Total assets............................... $186,335 $289,929 $315,750
======== ======== ========
Current Liabilities
Accounts payable.............................. $ 10,728 $ 19,791 $ 22,916
Accrued liabilities:
Accrued compensation and employee benefits... 10,480 18,172 12,030
Accrued contract losses...................... 14,697 20,599 19,542
Reserve for legal proceedings................ 35,754 1,554 1,465
Other........................................ 18,184 22,116 29,782
Borrowings on line of credit.................. -- 3,100 4,528
Long-term debt due within one year............ 1,490 1,895 2,047
-------- -------- --------
Total current liabilities.................... 91,333 87,227 92,310
Long-term Debt.................................. 4,029 3,597 3,284
Deferred Income Taxes .......................... 1,170 -- 50
Commitments and Contingencies (Notes 11 and 14)
Stockholder's Equity
Common shares $.01 par value (authorized:
250,000,000 shares;
issued and outstanding: 40,000,000 shares)... 400 400 400
Additional paid-in capital.................... 14,564 292,198 327,290
Retained earnings (accumulated deficit)....... 74,967 (92,946) (106,655)
Accumulated other comprehensive loss.......... (128) (547) (929)
-------- -------- --------
Stockholder's equity......................... 89,803 199,105 220,106
-------- -------- --------
Total liabilities and stockholder's
equity.................................... $186,335 $289,929 $315,750
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
eFUNDS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited
Quarter Ended
Year Ended December 31, March 31,
---------------------------- -----------------
1997 1998 1999 1999 2000
-------- -------- -------- ------- --------
(dollars and shares in thousands, except
per share amounts)
<S> <C> <C> <C> <C> <C>
Net Sales..................... $229,065 $267,520 $302,340 $67,856 $100,255
-------- -------- -------- ------- --------
Cost of sales, excluding
loss contract and asset
impairment charges......... 143,966 171,359 185,590 43,060 58,757
Loss contract and asset
impairment charges......... 2,470 40,949 8,700 60 --
-------- -------- -------- ------- --------
Total cost of sales....... 146,436 212,308 194,290 43,120 58,757
-------- -------- -------- ------- --------
Gross Margin.................. 82,629 55,212 108,050 24,736 41,498
-------- -------- -------- ------- --------
Selling, general and
administrative............. 70,542 81,198 105,382 17,887 38,178
Research and development.... 1,398 625 3,756 536 579
Asset impairment charges.... 9,361 -- -- -- --
-------- -------- -------- ------- --------
Total operating expenses.. 81,301 81,823 109,138 18,423 38,757
-------- -------- -------- ------- --------
Income (loss) from
operations................. 1,328 (26,611) (1,088) 6,313 2,741
Other Income (Expense)
Legal proceedings........... (40,050) 4,157 2,094 2,094 --
Other income (expense)...... (918) (3,495) (4,609) (866) 13
Interest income (expense)... (825) 2,789 963 803 (801)
-------- -------- -------- ------- --------
Income (Loss) Before Income
Taxes........................ (40,465) (23,160) (2,640) 8,344 1,953
Benefit (Provision) for Income
Taxes........................ 6,397 8,569 (5,586) (4,530) (737)
-------- -------- -------- ------- --------
Net Income (Loss)............. $(34,068) $(14,591) $ (8,226) $ 3,814 $ 1,216
======== ======== ======== ======= ========
Net Income (Loss) per Share--
Basic and Diluted............ $ (0.85) $ (0.36) $ (0.21) $ 0.10 $ 0.03
======== ======== ======== ======= ========
Weighted Average Common Shares
Outstanding--Basic and
Diluted...................... 40,000 40,000 40,000 40,000 40,000
======== ======== ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
eFUNDS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Unaudited
Quarter Ended
Year Ended December 31, March 31,
--------------------------- --------------
1997 1998 1999 1999 2000
-------- -------- ------- ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net Income (Loss) ................ $(34,068) $(14,591) $(8,226) $3,814 $1,216
Other Comprehensive (Loss) Income,
Net of Tax--
Foreign currency translation
adjustments.................... (972) 44 (419) (164) (382)
-------- -------- ------- ------ ------
Comprehensive Income (Loss) ...... $(35,040) $(14,547) $(8,645) $3,650 $ 834
======== ======== ======= ====== ======
Related Tax Benefit (Expense) of
Other Comprehensive Income
(Loss)--
Foreign currency translation
adjustments.................... $ 182 $ (26) $ (795) $ 312 $ (144)
======== ======== ======= ====== ======
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
eFUNDS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
Quarter Ended
Year Ended December 31, March 31,
---------------------------- ----------------
1997 1998 1999 1999 2000
-------- -------- -------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities
Net income (loss)............ $(34,068) $(14,591) $ (8,226) $ 3,814 $ 1,216
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation................ 9,914 12,015 12,519 2,998 2,900
Amortization of
intangibles................ 12,834 9,504 9,982 2,000 3,639
Asset impairment charges.... 11,831 26,252 492 60 --
Equity in pre-acquisition
earnings of the
professional services
segment.................... 665 1,759 1,114 852 --
Loss on sales of capital
assets..................... 449 2,635 4,973 391 69
Deferred income taxes....... (13,521) (6,529) 8,927 16 9
Changes in assets and
liabilities, net of effects
from acquisitions:
Restricted cash........... -- (4,466) (27,902) (480) 3,651
Accounts receivable....... (5,256) (6,629) 393 (6,294) (8,649)
Accounts payable.......... 1,996 (6,571) 7,963 1,805 4,507
Income taxes
receivable/payable....... (119) (10,218) (4,310) 3,715 8,450
Reserve for legal
proceedings.............. 41,982 (6,228) (34,200) (34,134) (89)
Accrued contract losses... -- 14,697 5,902 (1,299) (1,058)
Other assets and
liabilities.............. (769) (3,809) 10,223 (3,351) (1,019)
-------- -------- -------- ------- -------
Net cash provided by (used
in) operating
activities............... 25,938 7,821 (12,150) (29,907) 13,626
-------- -------- -------- ------- -------
Cash Flows from Investing
Activities
Capital expenditures......... (17,985) (30,468) (38,225) (7,614) (8,797)
Payments for acquisitions and
investments, net of cash
acquired.................... -- -- (35,667) (13,038) (20,000)
Proceeds from sales of
capital assets.............. 131 70 1,229 -- --
Other........................ (665) (1,139) (546) (40) (49)
-------- -------- -------- ------- -------
Net cash used in investing
activities............... (18,519) (31,537) (73,209) (20,692) (28,846)
-------- -------- -------- ------- -------
Cash Flows from Financing
Activities
Net borrowings on lines of
credit...................... -- -- 3,054 -- 739
Proceeds from issuance of
long-term debt.............. 290 61 11 -- 7
Payments on long-term debt... (2,293) (2,125) (6,665) (2,796) (477)
(Distributions to)
contributions by Deluxe,
net......................... (8,799) 17,992 268,440 55,417 23,905
Dividends paid to Deluxe..... -- -- (159,687) -- (13,800)
-------- -------- -------- ------- -------
Net cash (used in)
provided by financing
activities............... (10,802) 15,928 105,153 52,621 10,374
-------- -------- -------- ------- -------
Net Cash Used by the
Professional Services Segment
During December, 1999 (see
Note 1)....................... -- -- -- -- (4,127)
-------- -------- -------- ------- -------
Net (Decrease) Increase in Cash
and Cash Equivalents.......... (3,383) (7,788) 19,794 2,022 (8,973)
Cash and Cash Equivalents at
Beginning of Period........... 27,226 23,843 16,055 16,055 35,849
-------- -------- -------- ------- -------
Cash and Cash Equivalents at
End of Period................. $ 23,843 $ 16,055 $ 35,849 $18,077 $26,876
======== ======== ======== ======= =======
Supplementary cash flow
disclosure:
Interest paid................ $ 949 $ 673 $ 1,091 $ 119 $ 430
======== ======== ======== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
eFUNDS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (INFORMATION AS
OF MARCH 31, 2000
AND FOR THE QUARTERS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
Note 1: Split-off and basis of presentation
In January 2000, Deluxe Corporation (Deluxe) announced that its board of
directors approved a plan (the Plan) to combine its electronic payments,
professional services and government services businesses into a separate,
independent publicly traded company to be called eFunds Corporation (the
Company). 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. The Company's business is conducted through three segments:
electronic payments, professional services and government services. Electronic
payments provides a comprehensive suite of transaction processing services and
decision support and risk management products for debit transactions to the
financial services and retail industries. Professional services provides
information technology consulting and business process management services to
financial services companies and to all of the Company's and Deluxe's
businesses. Government services provides online electronic benefits transfer
(EBT) services under entitlement programs on behalf of state and local
governments and Medicaid eligibility verification services.
Deluxe has announced that it plans to issue shares of the Company's common
stock to the public through an initial public offering (IPO). After the IPO,
Deluxe will own at least 80.1% of the Company's outstanding shares. Deluxe
plans to distribute all of its shares of the Company's common stock to its
shareholders who tender shares of Deluxe's common stock in an exchange offer
(the Split-off). Deluxe has requested a private letter ruling from the Internal
Revenue Service that the Split-off would be a tax-free transaction to Deluxe
and its shareholders. The Split-off is contingent upon Deluxe receiving a
favorable tax ruling from the IRS. In accordance with Emerging Issues Task
Force No. 96-4, Accounting for Reorganizations Involving a Non-Pro Rata Split-
Off of Certain Nonmonetary Assets to Owners, and Accounting Principles Board
No. 29, Accounting for Nonmonetary Transactions, Deluxe will account for the
Split-off as a non-pro rata split-off of a segment of the business in a
corporate plan of reorganization and will account for the transaction at fair
value.
As part of the Split-off, the Company and Deluxe have entered into various
agreements that address matters, such as information technology consulting and
business processing management services, indemnification, data sharing, real
estate, tax-sharing and transitional services. The Company does not believe
that the effect of these agreements, if applied to the Company's historical
financial statements, would result in a material difference to the financial
statements presented herein.
Certain of these agreements between the Company and Deluxe relate to
services that each party also provides to external customers, i.e. revenue-
generating services. These agreements are intended to be on-going once the
Company is split-off from Deluxe. The Company will provide information
technology consulting, data entry and financial services to Deluxe as it would
to any other external customers. Conversely, Deluxe will provide the Company
certain development and support services as it would to any external customer.
Deluxe has agreed to indemnify the Company for future losses arising from
litigation as well as future losses on identified loss contracts. The Company
plans to record any amounts received from Deluxe under the indemnification
agreement prior to the Split-off as a capital contribution. The Company plans
to record any amounts earned from Deluxe under the indemnification agreement
after the Split-off as a reduction of expense. Under the indemnification
agreement, the Company is required to calculate increases or decreases to the
loss contract reserve in a manner consistent with Deluxe's loss accrual
practices as of the date of the Agreement. Deluxe will also indemnify the
Company against any liabilities, losses or expenses arising from the litigation
or claims asserted against the Company in connection with the operation of the
government services business prior to the completion of the IPO. Deluxe's total
indemnification obligations to the Company are limited to $14.6 million. Due to
the uncertainty associated with the transactions underlying the indemnification
agreement, the Company cannot state the impact to the Company's financial
condition or results of operations.
F-7
<PAGE>
Deluxe will assist the Company with certain treasury, accounting, legal and
sales services through the Split-off date. Deluxe will also assist the Company
in the administration of benefit and compensation plans, and rent certain
facilities to the Company through September 30, 2001. The purpose of these
transitional service agreements is to allow the party receiving the services to
locate another source for such service. As such, the party receiving the
transitional service may discontinue the service at any time prior to the
termination date contained within the agreement, or may extend the service
period for an additional 60 days if necessary. In addition, the Company will
lease portions of a facility to Deluxe for various periods through December
2003.
Deluxe contributed the ownership of various subsidiaries and certain assets
and liabilities of business operations (the Transferred Businesses) to the
Company on March 31, 2000. As the Company and the Transferred Businesses are
under common control, the consolidated financial statements of the Company
include all of the assets, liabilities, revenues and expenses of the businesses
conducted through the electronic payments, professional services and government
services segments.
All transactions between the entities included in the consolidated financial
statements have been eliminated. Because the Transferred Businesses are under
common control, the accompanying consolidated financial statements have been
retroactively restated to reflect the historical consolidated financial
position as of December 31, 1999 and 1998 and the consolidated results of
operations and cash flows for each of the three years in the period ended
December 31, 1999 as if the contribution of the Transferred Business described
above had occurred and been operating as a stand-alone business throughout the
periods presented, on an "as-if-pooled" basis.
Included in the consolidated financial statements are allocated portions of
Deluxe's corporate assets, liabilities and expenses relating to the Transferred
Businesses. Deluxe and the Company believe the allocation method and the
allocations are reasonable; however, the Company has no history as an
independent operating company. The historical financial information the Company
has included in the consolidated financial statements may not be reflective of
what the results of operations, financial condition and cash flows would have
been had the Company had been a separate, stand-alone entity during the periods
presented. Following the IPO, the Company will be required to have its own
financial, administrative and other resources to operate as an independent
public company and to replace other services provided by Deluxe. As a result,
the historical financial information may not necessarily be indicative of what
the results of operations, financial condition and cash flows will be in the
future. The Company has not made adjustments to reflect changes that may occur
to its cost structure, funding and operations as a result of the separation
from Deluxe.
Prior to 2000, the allocations of common expenses, which were calculated
based on a percentage of Company revenue to total Deluxe revenue, headcount,
square footage and transaction processing costs, included costs for various
support functions such as human resources, information services and finance.
These common costs to the Company and Deluxe were allocated since specific
identification of the actual costs incurred was not practicable. In addition,
historically, the Deluxe corporate entity has purchased certain assets or paid
certain liabilities that were attributable to the Company. These items were
specifically identified from within the Deluxe consolidated financial
statements and have been recorded in the Company's consolidated financial
statements.
Note 2: Significant accounting policies
Consolidation--The consolidated financial statements include the accounts of
the Company and the Transferred Businesses. All significant intercompany
accounts, transactions and profits have been eliminated. For purposes of
consolidating the professional services segment, which is primarily based in
India, the Company has used financial statements with a November 30 fiscal
period end.
Effective January 1, 2000, the professional services segment, which had
previously reported their results of operations and financial position on a
one-month lag, changed their reporting dates to coincide with the rest of the
Company's subsidiaries. This change, which was made in conjunction with the
implementation of the
F-8
<PAGE>
Company's central accounting and financial reporting system, will reflect the
financial results of that segment on a timely basis and improve operating and
planning efficiencies. The results of operations for the professional services
segment for the month of December 1999 were excluded from the Company's
consolidated statements of operations and were reflected as an adjustment to
accumulated deficit during the first quarter of 2000. This segment generated a
net loss of $1.1 million in the month of December 1999.
Cash and cash equivalents--The Company considers all cash on hand, money
market funds, outstanding transfers of cash for authorized settlement of
automated teller machines (ATMs) with financial institutions and other highly
liquid investments with original maturities of three months or less to be cash
and cash equivalents. The carrying amounts reported in the consolidated balance
sheets for cash and cash equivalents approximate fair value.
Restricted cash--The Company has entered into agreements with a third party
to supply cash for ATMs maintained by the third party in various locations
throughout the United States. The agreements provide that the Company retains
control over and ownership of this cash. Subject to the approval of the
Company, the other party to the agreements determines the level of cash
required to be maintained within the ATMs up to an authorized level. The
Company currently has an aggregated outstanding authorized cash level of $35
million. The agreements are effective through August 31, 2004. The cash in the
ATMs is not available for general operating use and is reflected in the
Company's consolidated balance sheets as a non-current asset.
In connection with the Company's electronic payment transactions, the
Company also has cash belonging to customers that temporarily resides in
custodial accounts maintained by the Company. The Company records these amounts
as current restricted custodial cash with a corresponding liability within
other accrued liabilities in the consolidated balance sheets.
Accounts receivable--Accounts receivable are stated net of allowances for
uncollectible accounts of $2.1 million, $4.5 million and $4.0 million at
December 31, 1998 and 1999 and March 31, 2000, respectively. The Company
records allowances for uncollectible accounts when it is probable that the full
amount of its accounts receivable balance will not be collected and when this
uncollectible amount can be reasonably estimated. When estimating the
allowances for uncollectible accounts, the Company takes into consideration
such factors as its day-to-day knowledge of specific customers, the industry
and size of its customers, the overall composition of its accounts receivable
aging, prior history of accounts receivable write-offs and prior history of
allowances in proportion to the overall receivable balance. Increases in the
allowances for uncollectible accounts are recorded as bad debt expense and are
reflected in selling, general and administrative expense in the Company's
consolidated statements of operations. Bad debt expense was $1.5 million in
1997, $1.1 million in 1998, $2.9 million in 1999 and $(0.1) million and $0.7
million for the quarters ended March 31, 1999 and 2000, respectively. When a
specific account receivable is determined to be uncollectible, the Company
reduces both its accounts receivable and allowances for uncollectible accounts
accordingly. As of December 31, 1998 and 1999, no one customer accounted for
10% or more of total receivables.
Long-term investments--At December 31, 1997, 1998, and 1999, long-term
investments consisted principally of cash surrender values of insurance
contracts. The carrying values approximate their fair values. See Note 15.
Property and equipment--Property and equipment, including leasehold and
other improvements that extend an asset's useful life or productive
capabilities, are stated at historical cost. Buildings with 40-year lives and
computer and other equipment with lives of three to eight years are generally
depreciated using accelerated methods. Leasehold and building improvements are
depreciated on a straight-line basis over the estimated useful life of the
property or the life of the lease, whichever is shorter.
Intangibles--Intangibles are presented in the consolidated balance sheets
net of accumulated amortization. Amortization expense is determined on the
straight-line basis over periods of 10 to 30 years for cost in excess of net
assets acquired (goodwill) and one to five years for internal use software and
other intangibles. Other
F-9
<PAGE>
intangibles consist primarily of licensed software and software held for sale.
The Company continually re-evaluates the original assumptions and rationale
utilized in the establishment of the estimated lives of its identifiable
intangible assets and goodwill. The carrying values of its intangible assets
are evaluated for impairment in accordance with the Company's policy on
impairment of long-lived assets and intangibles. Total intangibles were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, Unaudited
----------------- March 31,
1998 1999 2000
-------- -------- ---------
<S> <C> <C> <C>
Cost in excess of net assets acquired (see
Note 4)................................... $ 21,431 $ 61,577 $61,657
Internal use software...................... 11,729 34,164 41,109
Other intangible assets.................... 68,711 69,784 70,675
-------- -------- --------
Total.................................... 101,871 165,525 173,441
Less accumulated amortization.............. 72,489 82,738 86,504
-------- -------- --------
Intangibles--net........................... $ 29,382 $ 82,787 $ 86,937
======== ======== ========
</TABLE>
Impairment of long-lived assets and intangibles--The Company periodically
evaluates the recoverability of property, plant, equipment and identifiable
intangibles not held for sale by measuring the carrying amount of the asset
against the estimated undiscounted future cash flows associated with it. When
the asset being evaluated was acquired in a purchase business combination in
which goodwill was recorded, a pro rata portion of the goodwill value is
included in the carrying amount of the asset. This pro rata portion of goodwill
is based on the relative fair values at the date of acquisition of the long-
lived assets and identifiable intangibles acquired. Should the sum of the
expected future net cash flows be less than the carrying value of the asset
being evaluated, an impairment loss would be recognized. The impairment loss
would be calculated as the amount by which the carrying value of the asset
exceeds the fair value of the asset and the pro rata portion of the goodwill
would be eliminated before recording any reduction of the original carrying
amount of the long-lived assets and identifiable intangibles. In evaluating
whether there is any impairment of long-lived asset associated with a long-term
service contract, the amount of any loss contract accrual is excluded from the
undiscounted future cash flows associated with the long-lived asset when
determining whether the asset is impaired.
The Company periodically evaluates the recoverability of property, plant,
equipment and identifiable intangibles held for disposal by comparing the
asset's carrying amount with its fair value less costs to sell. If a large
segment or separable group of assets which were acquired in a purchase business
combination were held for disposal, all of the unamortized goodwill associated
with those assets would be included in the carrying amount of the assets for
purposes of this evaluation. Should the fair value less costs to sell be less
than the carrying value of the long-lived asset(s), an impairment loss would be
recognized. The impairment loss would be calculated as the amount by which the
carrying value of the asset(s) exceeds the fair value of the asset(s) less
costs to sell. The unamortized goodwill associated with those assets would be
eliminated before recording any reduction in the original carrying value of the
asset(s).
The Company evaluates the carrying value of goodwill at an enterprise level
when events or changes in circumstances at the businesses to which the goodwill
relates indicate that recoverability of the carrying amount may not be
recoverable. Such circumstances could include, but are not limited to, (1) a
current period operating or cash flow loss combined with a history of operating
or cash flow losses, (2) a forecast that demonstrates continuing losses, (3) a
significant adverse change in legal factors or in business climate, or (4) an
adverse action or assessment by a regulator. In evaluating the recoverability
of enterprise goodwill, the Company measures the carrying amount of the
goodwill against the estimated undiscounted future cash flows of the businesses
to which the goodwill relates. In determining the future cash flows, the
Company looks to historical results, current forecasts and internal earnings
targets. The estimated net cash flows include the effects of income tax
payments and interest charges. Should the sum of the expected future net cash
flows be less than the carrying value of the goodwill, an impairment loss would
be recognized. The impairment loss would be
F-10
<PAGE>
calculated as the amount by which the net book value of the related businesses
exceeds the fair value of these businesses.
Income taxes--In most cases, the Company's domestic businesses are included
in the Deluxe consolidated tax return. Tax payments are made to Deluxe and tax
benefits are reimbursed by Deluxe to the extent they are used. The consolidated
financial statements include income tax provisions and liabilities calculated
as if separate tax returns were prepared for the periods covered. Deferred
income taxes result from temporary differences between the financial reporting
basis of assets and liabilities and their respective tax reporting bases.
Future tax benefits are recognized to the extent that realization of such
benefits is more likely than not.
Translation adjustment--The financial position and results of operations of
the Company's international subsidiaries are measured using local currencies as
the functional currencies. Assets and liabilities of these operations are
translated at the exchange rate in effect at the balance sheet date. Income
statement accounts are translated at the average exchange rate during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in other comprehensive income in the
stockholder's equity section of the consolidated balance sheets. Gains and
losses that result from foreign currency transactions are included in earnings.
Revenue recognition--Revenues are recorded net of any applicable discounts.
Transaction processing and service fees are recognized in the period that the
service is performed. These services consist of processing the Company's
customers' electronic debit transactions through electronic funds transfer
networks and settling the funds with the financial institutions involved in the
transactions. Additionally, these services include monitoring ATMs and point-
of-sale devices to alert the Company's 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.
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 aggregate dollar value of checks authorized by the retailer,
depending on the product and service.
Software license fees for standard software products are recognized when
delivery has occurred, the license fee is fixed and determinable,
collectibility is probable and evidence of this arrangement exists. License
fees are charged based on modules purchased by the customer. In some
situations, the Company's customers do not take possession of the software.
Instead, it remains installed on the Company's hardware and customers access it
as needed. Revenue in these situations is recognized on a fee-for-service
basis.
Software maintenance and support revenues are recognized ratably over the
term of the contract, and/or as the services are provided. Support services
such as customization of standard software modules, are charged on a time and
materials basis and recognized as hours are completed.
Revenues from professional services for information technology consulting
and business process management services are generally recognized under two
methods, depending on contractual terms. Under the time and materials method,
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 completion
of the project.
Long-term service contracts--Long-term service contracts are definitive
agreements to provide services over a period of time in excess of one year and
with respect to which the Company has no contractual right to adjust the prices
or terms at or on which its services are supplied during the term of the
contract. The Company's long-term service contracts are for transaction
processing in the government services segment and
F-11
<PAGE>
business process management services in the professional services segment.
Total revenues for some long-term service contracts may vary based on the
demand for services. Revenues on long-term service contracts are recognized
under the applicable revenue recognition policy above. Expenses are recognized
when incurred, with the exception of installation costs. In existing long-term
service contracts, installation costs are not recovered at the time of
installation. Rather they are factored into billing rates over the term of the
contract. Accordingly, installation costs for long-term service contracts are
initially capitalized and then amortized over the life of the contract. Any
equipment and software purchased to support a long-term service contract is
capitalized and depreciated or amortized over the life of the related contract
or the life of the asset, whichever is shorter.
In determining the profitability of a long-term service contract, only
direct and allocable indirect costs associated with the contract are included
in the calculation. The appropriateness of allocations of indirect costs
depends on the circumstances and involves the judgment of management, but such
costs may include the costs of indirect labor, contract supervision, tools and
equipment, supplies, quality control and inspection, insurance, repairs and
maintenance, depreciation and amortization and, in some circumstances, support
costs. The method of allocating any indirect costs included in the analysis is
also dependent upon the circumstances and the judgment of management, but the
allocation method must be systematic and rational. General and administrative
costs and selling costs are not included in the analysis. Provisions for
estimated losses on long-term service contracts, if any, are made in the period
in which the loss first becomes probable and reasonably estimable. Projected
losses are based on management's best estimates of a contract's revenue and
costs. Actual losses on individual long-term service contracts are compared to
the loss projections periodically, with any changes in the estimated total
contract loss recognized as they become probable and reasonably estimable.
Certain direct costs associated with the EBT contracts discussed in Note 5
are common to a number of contracts and are attributed to each contract based
on its use of the services associated with these common direct costs. Revenues,
case counts or other applicable statistics are used to attribute these costs to
individual contracts.
In the event an asset impairment loss is recognized on long-lived assets
used to support a long-term service contract, the original estimation of the
contract's costs is revised to reduce the depreciation and amortization
associated with the impaired assets.
Research and development expense--Research and development costs, which are
expensed as incurred, relate to investigating new or improved processes and
techniques and developing such research findings into a potential new product
or service.
Advertising expense--Advertising and promotional costs are expensed as
incurred. The Company incurred advertising and promotional expense of $0.3
million, $0.4 million, and $0.7 million in 1997, 1998 and 1999, respectively,
and $0.1 million and $3.9 million for the quarters ended March 31, 1999 and
2000, respectively.
Capitalization of internal-use software--The Company capitalizes costs 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 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 ready for its intended use. The carrying value of
internal-use software is reviewed in accordance with the Company's policy on
impairment of long-lived assets and intangibles.
Capitalization of software developed for resale--The Company capitalizes
costs of software developed for licensing and resale once technological
feasibility has been established. Costs incurred prior to establishing
technological feasibility are expensed as incurred and are included in research
and development expense in the Company's consolidated financial statements.
Technological feasibility is established when the Company has
F-12
<PAGE>
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, but no longer than five years. The carrying value of software developed
for resale is reviewed in accordance with the Company's policy on impairment of
long-lived assets and intangibles.
In some situations the Company's customers do not take possession of the
software. Instead, it remains installed on the Company's hardware and customers
access it as needed. The software utilized under these arrangements is also
sold to customers. Thus, the development costs of these software products are
accounted for under the Company's policy on capitalization of software
developed for resale.
Web site development costs--The Company capitalizes costs associated with
the development of web sites in accordance with its policy on capitalization of
internal-use software. Costs incurred in populating the site with information
on the Company or on products available to customers are expensed as incurred.
Employee stock-based compensation--The Company participates in Deluxe's
stock incentive program. In connection with the IPO and the Split-off, the
Company intends to adopt new stock incentive programs. As permitted by
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, the Company continues to account for its employee
stock-based compensation in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. No compensation cost has been
recognized for fixed stock options issued under the Deluxe stock incentive or
DeluxeSHARES programs. The Company discloses pro forma net loss and net loss
per share as if the fair value method of SFAS No. 123 had been used (see Note
9).
Income (loss) per share and stockholder's equity--The following table
reflects the calculation of basic and diluted income (loss) per share (dollars
and shares outstanding in thousands, except per share amounts).
<TABLE>
<CAPTION>
Unaudited
Quarter Ended
Year Ended December 31, March 31,
--------------------------- ---------------
1997 1998 1999 1999 2000
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net income (loss)................ $(34,068) $(14,591) $(8,226) $ 3,814 $ 1,216
Weighted average shares
outstanding..................... 40,000 40,000 40,000 40,000 40,000
-------- -------- ------- ------- -------
Net income (loss) per share--
basic and diluted............... $ (0.85) $ (0.36) $ (0.21) $ 0.10 $ 0.03
======== ======== ======= ======= =======
</TABLE>
On January 27, 2000, the Company increased the number of authorized shares
from 2,500 to 250 million. On May 12, 2000, the Company declared a 16,000 to
one stock split, increasing the shares issued and outstanding from 2,500 to 40
million. The income (loss) per share is presented as if the 40 million shares
had been outstanding for all periods presented.
Comprehensive income--Comprehensive income includes charges and credits to
equity that are not the result of transactions with stockholders. The Company's
total comprehensive income consists of net income or loss and foreign currency
translation adjustments. The foreign currency translation adjustments are
reflected as accumulated other comprehensive loss on the Company's consolidated
balance sheets and in the Company's stockholder's equity statement presented in
Note 12.
Unaudited interim financial information--The consolidated balance sheet as
of March 31, 2000 and the consolidated statements of operations and the
consolidated statements of cash flows for the quarters ended March 31, 1999 and
2000 are unaudited. In the opinion of management, all adjustments necessary for
a fair presentation of such consolidated financial statements are included.
Other than the adjustments related to restructuring charges (see Note 7), the
adjustments consist only of normal recurring items. Interim results are not
necessarily indicative of results for a full year.
F-13
<PAGE>
Use of estimates--The Company has prepared the accompanying consolidated
financial statements in conformity with accounting principles generally
accepted in the United States of America. In this process, it is necessary for
management to make certain assumptions and related estimates affecting the
amounts reported in the consolidated financial statements and attached notes.
These estimates and assumptions are developed based upon all information
available using management's best efforts. However, actual results can differ
from assumed and estimated amounts.
New accounting pronouncements--In April 1998, the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, Reporting the Costs of Start-up
Activities, which provides guidance on the appropriate accounting for start-up
activities beginning in 1999. Application of the SOP did not have a material
impact on the Company's reported operating results or financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which provides
guidance on accounting for derivatives and hedge transactions. This statement
is effective for the Company on January 1, 2001. The Company does not
anticipate that the effect of this pronouncement will have a material impact on
reported operating results.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which provides guidance in applying generally accepted accounting principles to
revenue recognition in financial statements. Applications of this SAB did not
have a material impact on the Company's reported operating results or financial
position.
Note 3: Transactions with Deluxe
Purchase and sale transactions between the Company and Deluxe are executed
at either current market pricing or agreed-upon transfer prices. Purchases from
Deluxe were $1.0 million, $0.2 million, $2.9 million, zero and $3.4 million for
the years ended December 31, 1997, 1998 and 1999 and the quarters ended March
31, 1999 and 2000, respectively. Sales to Deluxe were $2.4 million, $1.6
million, $8.8 million, $58,000 and $15.6 million for the years ended December
31, 1997, 1998 and 1999 and the quarters ended March 31, 1999 and 2000,
respectively. Under Deluxe's centralized cash management system, advances from
Deluxe and excess cash sent to Deluxe are reflected as contributions by and
distributions to Deluxe and are included in stockholder's equity in the
consolidated balance sheets.
Deluxe allocated to the Company $15.5 million, $25.3 million, $25.6 million,
$2.8 million and $1.9 million for the years ended December 31, 1997, 1998 and
1999 and the quarters ended March 31, 1999 and 2000, respectively, for the
costs of corporate services provided. Prior to 2000, these allocations, which
were calculated based on a percentage of Company revenue to total Deluxe
revenue, headcount and transaction processing costs, included expenses for
various support functions such as human resources, information services and
finance. These common costs to the Company and Deluxe were allocated since
specific identification of the actual costs incurred was not practicable. The
Company and Deluxe believe that this allocation method was reasonable. The
amounts allocated to the Company are included in selling, general and
administrative expense in the consolidated statements of operations. During
2000, the majority of the costs for these support functions are incurred
directly by the Company. The remaining corporate services provided by Deluxe
were allocated to the Company based on estimates of the costs which would be
incurred by the Company if it were a stand-alone, independent company. The
amounts allocated to the Company are included in selling, general and
administrative expense in the consolidated statements of operations.
Deluxe also charges the Company for interest expense or credits the Company
for interest income based on the cash the Company has borrowed from or provided
to Deluxe. The Company was charged or credited net interest (expense) income
from Deluxe of $(0.7) million, $3.0 million, $2.8 million, $0.8 million and
$(0.5) million for the years ended December 31, 1997, 1998 and 1999 and the
quarters ended March 31, 1999 and 2000, respectively. The interest rates used
to calculate these amounts were 7.5%, 5.4%, 5.1%, 5.0% and 5.8% for
F-14
<PAGE>
the years ended December 31, 1997, 1998, and 1999 and the quarters ended March
31, 1999 and 2000, respectively. These amounts are included in interest
(expense) income in the consolidated statements of operations. The interest
rate for net receivables from Deluxe is based on the average 30-day commercial
paper composite rate. The interest rate for net payables is based on the
average 30-day commercial paper composite rate plus 2%. At December 31, 1999
and March 31, 2000, Deluxe forgave the net outstanding debt that the Company
owed Deluxe. The Company recorded this as a capital contribution. After March
31, 2000, the Company and Deluxe will repay any net amounts owed to each other.
Note 4: Business combinations
On February 19, 1999, Deluxe acquired all of the outstanding shares of
eFunds Corporation of Tustin California, an electronic check conversion
company, for $13 million in cash. The company provides electronic check
conversion and electronic funds transfer solutions for financial services
companies and retailers. The ownership of this company was transferred to the
Company under the Plan discussed in Note 1. The acquisition was accounted for
under the purchase method of accounting. Accordingly, the consolidated
financial statements of the Company include the results of this business
subsequent to its acquisition date. This business is included in the electronic
payments segment in Note 13. The purchase price was allocated to the assets
acquired and liabilities assumed based on their fair values on the date of
purchase. Total cost in excess of net assets acquired in the amount of $15.7
million is reflected as goodwill and is being amortized over 10 years.
On April 13, 1999, Deluxe acquired the remaining 50% ownership interest in
HCL-Deluxe, N.V. (HCL) for $23.4 million in cash. The joint venture, which
Deluxe entered into with HCL Corporation of India in 1996, commenced operations
in September 1997. The company provides information technology consulting and
business process management services to financial services companies and to all
of the Company's and Deluxe's businesses. The ownership of this company was
transferred to the Company under the Plan discussed in Note 1. The acquisition
was accounted for under the purchase method of accounting. Accordingly, the
consolidated financial statements of the Company include the entire results of
this business from the date the Company acquired 100% ownership. Prior to this,
the Company recorded its 50% ownership of the joint venture's results under the
equity method of accounting. As such, its results of operations prior to the
acquisition are included in other expense in the consolidated statements of
operations. This business comprises the professional services segment in Note
13. The purchase price was allocated to the assets acquired and liabilities
assumed based on their fair values on the date of purchase. Total cost in
excess of net assets acquired in the amount of $24.9 million is reflected as
goodwill and is being amortized over 15 years.
Note 5: Contract losses
During 1998, the Company recorded charges of $14.7 million to provide for
expected future losses on existing long-term service contracts of the
government services segment. These charges are reflected in cost of sales in
the 1998 consolidated statement of operations. Due to a continuing strong
economy, record low unemployment and welfare reform, the actual transaction
volumes and expected future revenues of this business are well below original
expectations. Additionally, actual and expected future telecommunications,
installation, help desk and other costs are significantly higher than
originally anticipated. These factors resulted in expected future losses on the
existing EBT contracts of this business.
During 1999, charges of $8.2 million were recorded to provide for additional
expected future losses on the contracts of the government services segment.
These charges are reflected in cost of sales in the 1999 consolidated statement
of operations. A majority of the charges resulted from the conclusion of
negotiations with a prime contractor regarding the timing and costs of
transitioning switching services from the Company to a new processor. Also,
lower than projected actual transaction volumes (primarily related to states
fully rolled-out in 1999) contributed to the changes in the estimates
underlying the 1998 charges. These increases to the reserve for accrued
contract losses were partially offset by the application of $2.3 million of
contract losses against the reserve during 1999.
F-15
<PAGE>
Note 6: Impairment losses
During 1997, the Company determined that it would dispose of certain
international operations of its electronic payments segment. Based on fair
market value estimates, the Company determined that the long-lived assets of
these operations were impaired and recorded a charge of $11.8 million to write
down the carrying value of these operations to their estimated fair value less
costs to sell. Of this total, $2.4 million related to capitalized software is
recorded in cost of sales and $9.4 million for goodwill is recorded in
operating expenses in the 1997 consolidated statement of operations. During
1998, there was a change in the management of the electronic payments segment.
As a result, in January 1999, the Company determined that the international
operations of this segment maintained a continuing strategic importance and
were no longer considered held for sale. The assets that were written off in
1997 remain at zero book value.
During 1998, the Company recorded impairment charges of $26.3 million to
write down the carrying value of long-lived assets of the government services
segment. The assets consisted of point-of-sale equipment, internal-use software
and capitalized installation costs utilized in the EBT activities of this
segment. The Company concluded that the operating losses incurred by this
business would continue. This is primarily due to the fact that the variable
costs associated with supporting benefit recipient activity are higher than
originally anticipated and actual transaction volumes are below original
expectations. In calculating the impairment charge, the Company determined that
the assets utilized by this business have no fair market value. The point-of-
sale equipment was purchased via capital leases. The lease buy-out prices for
this equipment plus the deinstallation costs exceeded the amount equipment
resellers were willing to pay for the equipment. The utility of the internal-
use software was limited to its use in supporting the EBT business, and the
installation costs could not be resold. Thus, the long-lived assets and
intangibles of this business were reduced to a carrying value of zero. These
impairment charges are reflected as cost of sales in the 1998 consolidated
statement of operations.
During 1999, due to the continued operating losses of the government
services segment, additional impairment charges of $0.5 million were recorded.
These charges represent the write-down of long-lived assets and intangibles
purchased by this segment during 1999. These assets consisted primarily of
software and installation costs associated with the continued roll-out of
additional states. All assets purchased were reduced to a carrying value of
zero, as they were in 1998. These impairment charges are reflected in cost of
sales in the 1999 consolidated statement of operations.
Note 7: Restructuring charges
During 1997, the Company recorded restructuring charges of $1.5 million for
severance relating to management changes within the electronic payments
segment. This reduction of four employees was completed in 1998. These charges
are reflected in selling, general and administrative (SG&A) expense in the 1997
consolidated statement of operations.
During 1998, the Company recorded restructuring charges of $3.2 million for
severance associated with the Company's initiative to reduce its SG&A expense.
The Company anticipated eliminating 76 positions in various support functions
within sales, marketing, finance, human resources and information services
through 2000. As of December 31, 1999, 33 of the positions have been
eliminated. Also during 1998, the Company reversed $1.0 million of a 1996
restructuring charge. The 1996 charge related to planned reductions in various
support functions at the international operations of the electronic payments
segment. Due to higher than anticipated attrition, it was necessary to reduce
this reserve. This accrual reversal and the new restructuring accruals are
reflected in SG&A expense in the 1998 consolidated statement of operations.
During 1999, the Company reversed $2.4 million of restructuring accruals
relating to its 1998 initiative to reduce SG&A expense and the 1996 plan to
reduce the workforce at the international operations of the electronic payments
segment. The reduction in the SG&A expense initiative accrual was due to higher
than anticipated attrition, resulting in severance payments to 37 fewer
employees than originally anticipated. Also, due to the Company's decision in
1999 to retain the international operations of its electronic payments segment
F-16
<PAGE>
(see Note 6), planned reductions within that business were canceled. These
accrual reversals are reflected in SG&A expense in the 1999 consolidated
statement of operations.
The Company's consolidated balance sheets reflect restructuring accruals for
employee severance costs of $4.7 million, $1.2 million and $1.3 million as of
December 31, 1998 and 1999 and March 31, 2000, respectively.
During the first quarter of 1999, restructuring accruals of $2.0 million
were reversed. These reversals related to the Company's decision in 1999 to
retain the international operations of its electronic payments segment. These
reversals are reflected in selling, general and administrative expenses in the
consolidated statement of operations for the quarter ended March 31, 1999.
During the first quarter of 2000, additional restructuring accruals of $0.2
million were recorded relating to the continuing reorganization of the Company.
Additionally, accruals of $0.1 million were reversed.
The following table summarizes the change in the Company's restructuring
accruals for 1997, 1998 and 1999 and the quarter ended March 31, 2000 (dollars
in thousands):
<TABLE>
<CAPTION>
Unaudited
Year Ended December 31, Quarter Ended
------------------------------------------------------ March 31,
1997 1998 1999 2000
---------------- ----------------- ----------------- ----------------
Number of Number of Number of Number of
employees employees employees employees
affected Amount affected Amount affected Amount affected Amount
--------- ------ --------- ------- --------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--beginning of
year................... 190 $3,500 174 $ 4,574 186 $ 4,672 6 $1,242
Severance paid.......... (20) (442) (19) (2,053) (18) (1,031) (3) (91)
Adjustments to accrual.. 4 1,516 31 2,151 (162) (2,399) 1 110
--- ------ --- ------- ---- ------- --- ------
Balance--end of year.... 174 $4,574 186 $ 4,672 6 $ 1,242 4 $1,261
=== ====== === ======= ==== ======= === ======
</TABLE>
Note 8: Benefit (provision) for income taxes
(Loss) income before income taxes consists of (dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
Domestic..................................... $(25,620) $(24,591) $(2,163)
Foreign...................................... (14,845) 1,431 (477)
-------- -------- -------
Total...................................... $(40,465) $(23,160) $(2,640)
======== ======== =======
</TABLE>
The components of the benefit (provision) for income taxes are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------ --------
<S> <C> <C> <C>
Current tax benefit (provision):
Federal..................................... $(6,866) $1,324 $ 5,527
State....................................... (1,345) 1,169 (271)
------- ------ --------
Total..................................... (8,211) 2,493 5,256
Deferred tax benefit (provision):
Federal..................................... 14,574 6,157 (10,811)
State....................................... 34 (81) (31)
------- ------ --------
Total..................................... $ 6,397 $8,569 $ (5,586)
======= ====== ========
</TABLE>
F-17
<PAGE>
The Company's effective tax rate on pretax loss differs from the U.S.
Federal statutory tax rate of 35% as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------ -------
<S> <C> <C> <C>
Income tax at Federal statutory rate............. $14,163 $8,106 $ 924
State income taxes net of Federal income tax
benefit......................................... (852) 707 (196)
Amortization and write-down of non-deductible
intangibles..................................... (3,132) (231) (1,074)
Change in valuation allowance.................... (1,810) 636 (4,591)
Other............................................ (1,972) (649) (649)
------- ------ -------
Benefit (provision) for income taxes............. $ 6,397 $8,569 $(5,586)
======= ====== =======
</TABLE>
Tax effected temporary differences which give rise to a significant portion
of deferred tax assets and liabilities at December 31, 1998 and 1999, are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
------------------------- -------------------------
Deferred tax Deferred tax Deferred tax Deferred tax
assets liabilities assets liabilities
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net operating loss carry
forwards............... $ 8,123 $ -- $ 13,249 $--
Reserve for legal
proceedings............ 12,669 -- 646 --
Accrued contract
losses................. 5,664 -- 8,085 --
Restructuring accruals.. 1,793 -- 476 --
Property and equipment.. -- 1,941 954 --
Intangibles............. 1,343 -- 718 --
Employee benefit plans.. 840 -- 879 --
Miscellaneous reserves
and accruals........... 854 -- 1,327 --
All other............... 175 595 131 239
------- ------ -------- ----
Subtotal................ 31,461 2,536 26,465 239
Valuation allowance..... (9,340) -- (14,125) --
------- ------ -------- ----
Total deferred taxes.... $22,121 $2,536 $ 12,340 $239
======= ====== ======== ====
</TABLE>
The valuation allowance at both dates relates to the uncertainty of
realizing foreign and state deferred tax assets.
At December 31, 1999, net operating loss carryforwards relating to both
foreign and state jurisdictions totaled $92.1 million. Of these carryforwards,
$83.0 million expire in various years between 2001 and 2014 and $9.1 million
may be carried forward indefinitely.
Note 9: Employee benefit plans
Stock purchase plan--The Company participates in Deluxe's employee stock
purchase plan that enables eligible employees to purchase Deluxe's common stock
at 75% of its fair market value on the first business day following each three-
month purchase period. Compensation expense recognized for the difference
between the employees' purchase price and the fair value of the stock was $0.6
million, $0.7 million and $0.7 million in 1997, 1998 and 1999, respectively.
Stock incentive plan--The Company participates in Deluxe's stock incentive
plan. In connection with the IPO, the Company intends to adopt a new stock
incentive program. Under these plans, stock-based awards may be issued to
employees via a broad range of methods, including non-qualified or incentive
stock options, restricted stock and restricted stock units, stock appreciation
rights and other awards based on the value of the respective Company's common
stock. Options become exercisable in varying amounts beginning generally one
year after the date of grant.
F-18
<PAGE>
The Company also participates in Deluxe's DeluxeSHARES program. In 1998,
under this program, options were awarded to substantially all employees of the
Company (excluding foreign employees), allowing them, subject to certain
conditions, to purchase 100 shares of Deluxe common stock. The options become
exercisable when the value of Deluxe's common stock reaches $49.50 per share or
January 30, 2001, whichever occurs first.
All options issued under the Deluxe stock incentive and DeluxeSHARES
programs allow for the purchase of shares of Deluxe's common stock at prices
equal to their market value at the date of grant. Options issued to Company
employees under these Deluxe plans for the purchase of 698,000 and 1.1 million
shares were outstanding at December 31, 1998 and 1999, respectively.
Deluxe issued restricted shares and restricted stock units to Company
employees as follows: 1,338 shares and units at a weighted-average fair value
of $33.00 per share during 1997, 979 shares and units at a weighted-average
fair value of $35.63 per share during 1998, and 6,264 shares and units at a
weighted-average fair value of $26.19 per share during 1999. These awards
generally vest over periods ranging from one to five years. No consideration is
paid by the employees for these awards. As such, the Company recorded
compensation expense of $23,000, $57,000 and $164,000 for restricted share and
restricted stock unit awards for the years ended December 31, 1997, 1998 and
1999, respectively.
In connection with the Split-off (see Note 1), Deluxe and the Company have
decided that options outstanding as of the Split-off date will be converted to
options of the Company and options of Deluxe based on a formula. The formula
will be based on the market value of the Company's and Deluxe's common stock at
the Split-off date and is designed to maintain an equivalent intrinsic value
for the option holder utilizing the criteria described in Emerging Issues Task
Force No. 90-9, Changes to Fixed Employee Stock Option Plans as a Result of
Equity Restructuring. The Company does not expect a compensation charge to
result from this conversion process.
Pro forma information regarding net loss and net loss per share has been
determined as if the Company had accounted for its employee stock-based
compensation under the fair value method. The fair value of options was
estimated at the date of grant using a Black-Scholes option pricing model. The
following weighted-average assumptions were used in valuing options issued in
1997, 1998 and 1999, respectively: risk-free interest rate of 6.0%, 5.9% and
6.7%; dividend yield of 4.0%, 4.5% and 4.6%; and expected volatility of 23.0%,
21.8% and 24.0%. The weighted-average expected option life was 7.2 years, 5.9
years and 9.0 years for 1997, 1998 and 1999, respectively. The weighted-average
fair value of options granted in 1997, 1998 and 1999 was $6.87, $6.13 and $8.28
per share, respectively. For purposes of pro forma disclosures, the estimated
fair value of the options was recognized as expense over the options' vesting
periods. The Company's pro forma net loss and net loss per share were as
follows (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported.............................. $(34,068) $(14,591) $ (8,226)
Pro forma................................ $(34,501) $(15,299) $(10,638)
Basic and diluted net loss per share:
As reported.............................. $ (0.85) $ (0.36) $ (0.21)
Pro forma................................ $ (0.86) $ (0.38) $ (0.27)
</TABLE>
These pro forma calculations only include the effects of grants made
subsequent to January 1, 1995. As such, these impacts are not necessarily
indicative of the pro forma effects on reported net income of future years.
Also, these calculations relate to options issued under the Deluxe plan that
will be converted into options of the Company as noted above. The Company
intends to establish a new stock incentive plan, the provisions and assumptions
of which may be different from the Deluxe Plan.
F-19
<PAGE>
Profit sharing, defined contribution and 401(k) plans--The Company
participates in Deluxe's profit sharing plans, defined contribution pension
plan and plans established under section 401(k) of the Internal Revenue Code to
provide retirement benefits for certain employees. The plans cover
substantially all full-time employees with approximately 15 months of service.
Contributions to the profit sharing and defined contribution plans are made
solely by the Company. Employees may contribute up to the lesser of $10,000 or
10% of their wages to the 401(k) plan. The Company will match the first 1% of
wages contributed and 50% of the next 4% of wages contributed. All
contributions are remitted to the plans' respective trustees, and benefits
provided are paid from accumulated funds of the trusts.
Contributions to the defined contribution pension plan equaled 6% of
eligible compensation in 1997 and 4% of eligible compensation in 1998 and 1999.
Related expense allocated to the Company for these years was $2.1 million, $2.5
million and $3.2 million, respectively. Contributions to the profit sharing
plans vary based on the Company's performance. Related expense allocated to the
Company for these plans was $2.2 million, $4.6 million and $4.8 million in
1997, 1998 and 1999, respectively. Company contributions to the 401(k) plan
were $1.2 million, $1.5 million and $1.5 million in 1997, 1998 and 1999,
respectively.
Profit sharing and defined contribution expenses are recorded by the Company
based on system generated payroll reports detailing the eligible wages on which
the contribution is based. The expense is determined based on Deluxe's
contribution percentage for the plan year multiplied by the applicable wages.
Prior to 1999, 401(k) expense was allocated to the Company through the
Company's payroll system and determined based on the employee's 401(k)
withholding. During 1999, the allocation for 401(k) expense was based on a
fixed percentage of the Company's salaries and wages and varied by business
segment. The rate ranged from 1.4% to 2.3% of the Company's salaries and wages
and was determined based on the history of 401(k) expense for each particular
business segment.
As part of the Split-off (see Note 1), the Company intends to establish its
own employee benefit plans. The specific provisions of such plans have not yet
been determined and may be different than the provisions of Deluxe's plans.
Note 10: Post-retirement benefits
The Company provides certain health care benefits for a portion of its
retirees. The plan covers employees in the former Deluxe Electronic Payment
Systems, Inc. business. Although the plan was combined with the Deluxe
Corporation Post-retirement Health Care Plan (the Deluxe plan), the Company did
not change the eligibility requirements to match those of the Deluxe plan. The
actuarial valuation for the Company's plan is calculated separately from the
rest of the Deluxe plan. Employees included in the plan may become eligible for
such benefits if they attain the appropriate years of service and age while
working for the Company. The Company's benefit obligation under this plan is
not funded.
The following table summarizes the change in benefit obligation during 1998
and 1999 (dollars in thousands):
<TABLE>
<S> <C>
Benefit obligation, January 1, 1998................................ $ 577
Service cost..................................................... 69
Interest cost.................................................... 41
Actuarial (gains) and losses..................................... 125
Benefits paid from general funds of the Company.................. (8)
-----
Benefit obligation, December 31, 1998.............................. 804
Service cost..................................................... 86
Interest cost.................................................... 54
Actuarial (gains) and losses..................................... (138)
Benefits paid from general funds of the Company.................. (5)
-----
Benefit obligation, December 31, 1999.............................. $ 801
=====
</TABLE>
F-20
<PAGE>
The status of the plan was as follows at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Accumulated post-retirement benefit obligation................ $804 $801
Less:
Unrecognized net loss....................................... 296 141
Unrecognized transition obligation.......................... 71 66
---- ----
Accrued post-retirement liability recognized in the
consolidated balance sheets................................ $437 $594
==== ====
</TABLE>
Net post-retirement benefit cost for the years ended December 31 consisted
of the following components (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Service cost--benefits earned during the year............ $62 $ 69 $ 86
Interest cost on the accumulated post-retirement benefit
obligation.............................................. 22 41 54
Amortization of transition obligation.................... 5 6 5
Recognized net amortization of gains and losses.......... -- 6 17
--- ---- ----
Total post-retirement benefit cost....................... $89 $122 $162
=== ==== ====
</TABLE>
In measuring the accumulated post-retirement benefit obligation as of
December 31, 1999, the Company's health care inflation rate for 2000 and beyond
was assumed to be 5%. A one percentage point increase in the health care
inflation rate for each year would increase the accumulated post-retirement
benefit obligation by $139,000 and the service and interest cost components of
the net post-retirement benefit cost by $29,000. A one percentage point
decrease in the health care inflation rate for each year would decrease the
accumulated post-retirement benefit obligation by $119,000 and the service and
interest cost components of the net post-retirement benefit cost by $24,000.
The discount rate used in determining the accumulated post-retirement benefit
obligation as of December 31, 1998 and 1999 was 6.75% and 7.50%, respectively.
The Company intends to terminate this plan as of the Split-off (see Note 1).
Employees and retirees who are currently eligible for retiree medical benefits
as of the Split-off would continue to receive this benefit. Deluxe will assume
the obligation for the eligible employees and retirees as of the Split-off. The
Company intends to account for this as a reduction of liabilities and a capital
contribution. As of December 31, 1999, the contribution would be approximately
$150,000.
Note 11: Lease and debt commitments
Long-term debt was as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, Unaudited
---------------- March 31,
1998 1999 2000
------- ------- ---------
<S> <C> <C> <C>
Capital leases and other...................... $ 5,519 $ 5,492 $ 5,331
Less amount due within one year............... (1,490) (1,895) (2,047)
------- ------- -------
Total....................................... $ 4,029 $ 3,597 $ 3,284
======= ======= =======
</TABLE>
Long-term debt consists principally of equipment capital leases on
equipment. The capital lease obligations bear interest rates of 6.7% to 15.7%
and are due through the year 2004. Carrying value materially approximates fair
value for these obligations. Maturities of long-term debt for the five years
ending December 31, 2004, are $1.9 million, $2.1 million, $1.3 million, $0.1
million and $0.1 million.
F-21
<PAGE>
The Company has entered into operating leases on certain facilities and
equipment. Future minimum lease payments for all noncancelable operating leases
for the five years ending December 31, 2004, are $17.0 million, $10.1 million,
$4.3 million, $2.2 million and $1.6 million and $2.9 million thereafter. Rental
expense was $14.7 million, $18.8 million and $20.7 million in 1997, 1998 and
1999, respectively, and $6.2 million and $5.0 million for the quarters ended
March 31, 1999 and 2000, respectively.
As of December 31, 1999, the Company had a $5.0 million line of credit,
which is denominated in Indian rupees and guaranteed by Deluxe, available to
its international operations at an interest rate of 15.81%. The average amount
drawn on this line during 1999 was $2.7 million. As of December 31, 1999, $3.1
million was outstanding. The line of credit was increased on March 9, 2000 to
$10.0 million and remains guaranteed by Deluxe until October 1, 2000. The
average amount drawn on this line during the first three months of 2000 was
$4.1 million. As of March 31, 2000, $4.5 million was outstanding.
Note 12: Stockholder's equity
<TABLE>
<CAPTION>
Retained Accumulated
Common stock Additional earnings other Total
------------- paid-in (accumulated comprehensive stockholder's
Shares Amount capital deficit) income (loss) equity
------ ------ ---------- ------------ ------------- -------------
(dollars and shares in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 40,000 $400 $ 7,071 $ 123,626 $ 800 $ 131,897
Net loss ............... -- -- -- (34,068) -- (34,068)
Distributions to Deluxe,
net.................... -- -- (9,167) -- -- (9,167)
Translation adjustment.. -- -- -- -- (972) (972)
------ ---- -------- --------- ----- ---------
Balance, December 31,
1997................... 40,000 400 (2,096) 89,558 (172) 87,690
Net loss ............... -- -- -- (14,591) -- (14,591)
Contributions by Deluxe,
net.................... -- -- 16,660 -- -- 16,660
Translation adjustment.. -- -- -- -- 44 44
------ ---- -------- --------- ----- ---------
Balance, December 31,
1998................... 40,000 400 14,564 74,967 (128) 89,803
Net loss ............... -- -- -- (8,226) -- (8,226)
Contributions by Deluxe,
net.................... -- -- 277,634 -- -- 277,634
Dividends paid to
Deluxe................. -- -- -- (159,687) -- (159,687)
Translation adjustment.. -- -- -- -- (419) (419)
------ ---- -------- --------- ----- ---------
Balance, December 31,
1999................... 40,000 400 292,198 (92,946) (547) 199,105
Net income (unaudited).. -- -- -- 1,216 -- 1,216
Adjustment for lag in
financial reporting
(see Note 2)
(unaudited)............ -- -- -- (1,125) -- (1,125)
Contributions by Deluxe,
net (unaudited)........ -- -- 35,092 -- -- 35,092
Dividends paid to Deluxe
(unaudited)............ -- -- -- (13,800) -- (13,800)
Translation adjustment
(unaudited)............ -- -- -- -- (382) (382)
------ ---- -------- --------- ----- ---------
Balance, March 31, 2000
(unaudited)............ 40,000 $400 $327,290 $(106,655) $(929) $ 220,106
====== ==== ======== ========= ===== =========
</TABLE>
Note 13: Business segment information
The Company has organized its business units into three operating segments
based on the nature of the products and services offered by each: electronic
payments, professional services and government services. Electronic payments
provides a comprehensive suite of transaction processing services and decision
support and risk management products for debit transactions to the financial
services and retail industries. Professional services provides information
technology consulting and business process management services to financial
F-22
<PAGE>
services companies and to all of the Company's and Deluxe's businesses.
Government services provides online EBT services under entitlement programs on
behalf of state and local government and Medicaid eligibility verification
services. The Company's segments operate primarily in the United States. The
electronic payments and professional services segments also have international
operations. No single customer of the Company accounted for more than 10% of
total net sales in 1997, 1998 or 1999. Deluxe accounted for 15.6% of the
Company's total net sales during the quarter ended March 31, 2000.
The accounting policies of the segments are the same as those described in
Note 2. In evaluating segment performance, management focuses on income from
operations. The income from operations measurement utilized by management
excludes special charges (e.g., restructuring charges, asset impairment
charges, certain one-time charges that management believes are not reflective
of on-going operations, etc.). During the quarters ended March 31, 1999 and
2000, no such charges were excluded from the segments' operating results.
Prior to the acquisition of the remaining 50% interest in HCL-Deluxe, N.V.
in 1999 (see Note 4), the results of this business were recorded under the
equity method of accounting. As such, the Company recorded its 50% ownership of
the joint venture's results of operations prior to the acquisition in other
expense in the consolidated statements of operations. To be consistent with
management reporting, the entire results of the joint venture for the pre-
acquisition periods are reflected in the business segment information as if the
business had been a consolidated entity.
<TABLE>
<CAPTION>
Electronic Professional Government Total
Year Ended December 31, 1997 Payments Services Services Segments
---------------------------- ---------- ------------ ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales to unaffiliated
external customers.............. $199,662 $ 1,589 $ 26,965 $228,216
Net sales to external
affiliates...................... 2,438 1,615 -- 4,053
Total net sales to external
customers....................... 202,100 3,204 26,965 232,269
Intersegment sales............... -- 76 -- 76
Operating income (loss) excluding
special charges................. 27,744 (1,590) (12,269) 13,885
Asset impairment charges......... 11,831 -- -- 11,831
Other special charges............ 2,316 -- -- 2,316
Operating income (loss) including
special charges................. 13,597 (1,590) (12,269) (262)
Depreciation and amortization
expense......................... 19,168 12 3,580 22,760
Segment assets................... 141,360 3,704 46,115 191,179
Capital purchases................ 17,295 151 690 18,136
</TABLE>
<TABLE>
<CAPTION>
Electronic Professional Government Total
Year Ended December 31, 1998 Payments Services Services Segments
---------------------------- ---------- ------------ ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales to unaffiliated
external customers.............. $221,964 $7,994 $ 43,970 $273,928
Net sales to external
affiliates...................... 1,586 4,100 -- 5,686
Total net sales to external
customers....................... 223,550 12,094 43,970 279,614
Intersegment sales............... -- 1,134 -- 1,134
Operating income (loss) excluding
special charges................. 23,459 (3,406) (6,496) 13,557
Asset impairment charges......... -- -- 26,252 26,252
Other special charges............ 2,375 -- 14,928 17,303
Operating income (loss) including
special charges................. 21,084 (3,406) (47,676) (29,998)
Depreciation and amortization
expense......................... 17,294 260 4,225 21,779
Segment assets................... 145,572 5,410 37,286 188,268
Capital purchases................ 30,148 1,934 320 32,402
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
Electronic Professional Government Total
Year Ended December 31, 1999 Payments Services Services Segments
---------------------------- ---------- ------------ ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales to unaffiliated
external customers.............. $237,885 $ 10,745 $48,277 $296,907
Net sales to external
affiliates...................... 3,500 6,258 -- 9,758
Total net sales to external
customers....................... 241,385 17,003 48,277 306,665
Intersegment sales............... -- 2,372 -- 2,372
Operating income (loss) excluding
special charges................. 14,842 (7,809) 3,454 10,487
Special charges (recoveries)..... (225) 2,938 10,096 12,809
Operating income (loss) including
special charges................. 15,067 (10,747) (6,642) (2,322)
Depreciation and amortization
expense......................... 20,681 1,963 -- 22,644
Segment assets................... 210,661 36,200 34,410 281,271
Capital purchases................ 34,068 3,373 929 38,370
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended March 31, 1999 Electronic Professional Government Total
(unaudited) Payments Services Services Segments
---------------------------- ---------- ------------ ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales to unaffiliated external
customers......................... $ 56,488 $ 1,755 $ 11,310 $ 69,553
Net sales to external affiliates... 58 533 -- 591
Total net sales to external
customers......................... 56,546 2,288 11,310 70,144
Intersegment sales................. -- 259 -- 259
Operating income (loss)............ 6,137 (650) 179 5,666
Depreciation and amortization
expense........................... 4,998 93 -- 5,091
Segment assets..................... 174,135 8,575 36,909 219,619
Capital purchases.................. 7,537 145 77 7,759
<CAPTION>
Quarter Ended March 31, 2000 Electronic Professional Government Total
(unaudited) Payments Services Services Segments
---------------------------- ---------- ------------ ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales to unaffiliated external
customers......................... $ 69,086 $ 3,738 $ 11,790 $ 84,614
Net sales to external affiliates... 238 15,403 -- 15,641
Total net sales to external
customers......................... 69,324 19,141 11,790 100,255
Intersegment sales................. -- 1,740 -- 1,740
Operating income (loss)............ 1,849 (1,143) 2,035 2,741
Depreciation and amortization
expense........................... 5,665 874 -- 6,539
Segment assets..................... 252,795 37,080 24,336 314,211
Capital purchases.................. 6,684 2,113 -- 8,797
</TABLE>
F-24
<PAGE>
Segment information reconciles to consolidated amounts as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Unaudited
Quarter Ended
Year Ended December 31, March 31,
---------------------------- -----------------
1997 1998 1999 1999 2000
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Total net sales to external
customers
Total segment net sales to
external customers........... $232,269 $279,614 $306,665 $70,144 $100,255
Professional services pre-
acquisition elimination...... (3,204) (12,094) (4,325) (2,288) --
-------- -------- -------- ------- --------
Total consolidated net sales
to external customers...... $229,065 $267,520 $302,340 $67,856 $100,255
======== ======== ======== ======= ========
Operating income (loss)
including special charges
Total segment operating loss.. $ (262) $(29,998) $ (2,322) $ 5,666 $ 2,741
Professional services pre-
acquisition elimination...... 1,590 3,387 1,234 647 --
-------- -------- -------- ------- --------
Total consolidated operating
income (loss).............. $ 1,328 $(26,611) $ (1,088) $ 6,313 $ 2,741
======== ======== ======== ======= ========
Depreciation and amortization
expense
Total segment depreciation and
amortization expense......... $ 22,760 $ 21,779 $ 22,644 $ 5,091 $ 6,539
Professional services pre-
acquisition elimination...... (12) (260) (143) (93) --
-------- -------- -------- ------- --------
Total consolidated
depreciation and
amortization expense....... $ 22,748 $ 21,519 $ 22,501 $ 4,998 $ 6,539
======== ======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Unaudited
December 31, March 31,
---------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total assets
Total segment assets........ $191,179 $188,268 $281,271 $219,619 $314,211
Professional services pre-
acquisition elimination.... (3,369) (4,732) -- (6,950) --
Income tax receivable and
long-term deferred tax
asset not allocated to
segments................... -- 2,799 8,658 -- 1,539
-------- -------- -------- -------- --------
Total consolidated
assets................... $187,810 $186,335 $289,929 $212,669 $315,750
======== ======== ======== ======== ========
<CAPTION>
Unaudited
Quarter Ended
Year Ended December 31, March 31,
---------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Capital purchases
Total segment capital
purchases.................. $ 18,136 $ 32,402 $ 38,370 $7,759 $8,797
Professional services pre-
acquisition
elimination................ (151) (1,934) (145) (145) --
-------- -------- -------- -------- --------
Total consolidated capital
purchases................ $ 17,985 $ 30,468 $ 38,225 $7,614 $8,797
======== ======== ======== ======== ========
</TABLE>
F-25
<PAGE>
Revenues are attributed to geographic areas based on the location of the
assets producing the revenues. The Company's operations by geographic area are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
Total External Net Sales Long-Lived Assets
------------------------------------------- -------------------------------
Unaudited
Quarter Ended Unaudited
Year Ended December 31, March 31, December 31, March 31,
-------------------------- ---------------- --------------- ---------------
1997 1998 1999 1999 2000 1998 1999 1999 2000
-------- -------- -------- ------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States........... $214,741 $245,682 $281,933 $63,443 $94,158 $55,763 $55,587 $55,222 $64,490
United Kingdom.......... 12,801 21,555 17,468 4,413 3,783 2,647 1,948 2,486 1,952
India................... -- -- 2,939 -- 2,314 -- 2,904 -- 3,984
Other foreign
countries.............. 1,523 283 -- -- -- 50 34 44 34
-------- -------- -------- ------- -------- ------- ------- ------- -------
Total consolidated..... $229,065 $267,520 $302,340 $67,856 $100,255 $58,460 $60,473 $57,752 $70,460
======== ======== ======== ======= ======== ======= ======= ======= =======
</TABLE>
Note 14: Legal proceedings
During 1997, a judgment was entered against the Company in the U.S. District
Court for the Western District of Pennsylvania. The case was brought against
the Company by Mellon Bank (Mellon) in connection with a potential bid to
provide electronic benefit transfer services for the Southern Alliance of
States. In September 1997, the Company recorded a charge of $40 million to
reserve for this judgment and other related costs. This charge is reflected in
legal proceedings in the 1997 consolidated statement of operations.
In 1998, Mellon's motion for prejudgment interest was denied by the district
court. The Company reversed $4.2 million of the $40 million liability. This
reversal is reflected in legal proceedings in the 1998 consolidated statement
of operations. At December 31, 1998, the remaining liability of $34.4 million
was included in the reserve for legal proceedings in the consolidated balance
sheet.
In January 1999, the United States Court of Appeals for the Third Circuit
affirmed the judgment of the district court and the Company paid $32.2 million
to Mellon in February 1999. The portion of the reserve remaining after the
payment of this judgment ($2.1 million) was reversed and is reflected in legal
proceedings in the 1999 consolidated statement of operations.
Note 15: Subsequent events
In March 2000, the Company paid $20.0 million for an approximately 24%
interest in a limited liability company that provides automated teller machine
management and outsourcing services to retailers and financial institutions.
This investment is being accounted for under the equity method of accounting
and is included in other long-term investments in the Company's consolidated
balance sheet as of March 31, 2000. The Company's consolidated statements of
operations reflect the Company's share of the results of this business
subsequent to its acquisition date in other income (expense) within the
Company's electronic payments segment. The difference between the carrying
value of the investment and the underlying equity in the net assets of the
limited liability company is being accounted for in the same manner as goodwill
and is being amortized over 15 years.
On March 31, 2000, the Company purchased real property and a data center
located in Phoenix, Arizona and personal property from a subsidiary of Deluxe
for $10.0 million. The Company previously rented portions of this facility. The
purchase price of the property and data center was at the net book value that
was recorded on the Deluxe subsidiary's general ledger.
On April 4, 2000, the Company authorized 100 million shares of preferred
stock with a par value of $.01 per share. No such shares are issued or
outstanding.
F-26
<PAGE>
On April 17, 2000, the Company completed negotiations with the prime
contractor for a state coalition for which the Company's government services
segment provides EBT services. Prior to this, the Company and the prime
contractor were operating without a binding, legally enforceable contract for
this coalition. The Company will increase its provision for expected future
losses on long-term contracts by approximately $12.2 million in the second
quarter of 2000 to reflect the fact that the Company now has a definitive
agreement with this contractor.
Deluxe has agreed to provide the Company with an unsecured revolving credit
facility of up to $75 million until the earlier of the effective date of the
Split-off or December 31, 2000. There is currently no amount outstanding under
this facility. Borrowings under the facility will be due at the Split-off or
maturity and will accrue interest at the London Interbank Offered Rate, or
LIBOR, plus a variable additional margin based on Deluxe's credit rating. If
there were currently borrowings the interest rate would be 6.63%. The credit
facility includes financial and restrictive covenants. The Company is currently
in compliance with all covenants.
Beginning in 2000 the Company's information technology consulting services
to Deluxe have been formalized into a five year outsourcing agreement. During
the term of the agreement, the Company anticipates Deluxe will spend
approximately $43 million per year for information technology consulting
services for information technology applications. Amounts will be based on the
actual number of hours of information technology services that the Company
provides to Deluxe. If Deluxe fails to reach the $43 million spending target
per year, it will be obligated to make liquidated damages payments for a
portion of the Company's fees based on its estimates of lost margins. The
Company also will provide business process management services to Deluxe.
Deluxe's annual minimum spending target for business process management
services will range from $8.1 million in 2000 to $4.2 million in 2004. The
agreement will also provide for liquidated damages for non-performance by the
Company and bonuses for superior performances. The provision of services by the
Company under the agreement is non-exclusive, and Deluxe may contract with any
third party for the provision of professional services.
Deluxe has agreed to indemnify the Company for future losses arising from
litigation as well as future losses on identified loss contracts. The Company
plans to record any amounts received from Deluxe under the indemnification
agreement prior to the Split-off as a capital contribution. The Company plans
to record any amounts earned from Deluxe under the indemnification agreement
after the Split-off as a reduction of expense. Under the indemnification
agreement, the Company is required to calculate increases or decreases to the
loss contract reserve in a manner consistent with Deluxe's current loss accrual
practices as of the date of the agreement. Deluxe will also indemnify the
Company against any liabilities, losses or expenses arising from litigation or
claims asserted against the Company in connection with the operation of the
government services business prior to the completion of the IPO. Deluxe's total
indemnification obligations to the Company are limited to $14.6 million. Due to
the uncertainty associated with the transactions underlying the indemnification
agreement, the Company cannot state the impact to the Company's financial
condition or results of operations.
Under a registration rights agreement, the Company has agreed to indemnify
Deluxe against liabilities in connection with registrations in which Deluxe
participates, including liabilities under the Securities Act or to contribute
to payments Deluxe may be required to make for these liabilities.
The Company has entered into a tax-sharing agreement with Deluxe which
allocates tax liabilities between the Company and Deluxe during the period in
which the Company is included in Deluxe's consolidated group. The Company
could, however, be liable in the event that any federal tax liability is
incurred, but not discharged, by other members of Deluxe's consolidated group.
In determining the amount of the Company's tax-sharing payments, Deluxe will
prepare for the Company pro forma returns with respect to federal and
applicable state and local income taxes.
F-27
<PAGE>
eFUNDS CORPORATION
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998 Quarter Ended
-------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales.......................... $63,316 $66,455 $ 67,726 $70,023
Cost of sales...................... 41,269 43,120 84,229 43,690
Net income (loss).................. 381 1,503 (22,067)(1) 5,592
Per share of common stock
Net income (loss)--basic and
diluted......................... $ 0.01 $ 0.04 $ (0.55) $ 0.14
</TABLE>
<TABLE>
<CAPTION>
1999 Quarter Ended
------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales......................... $67,856 $72,567 $79,895 $82,022
Cost of sales..................... 43,120 45,120 48,806 57,244
Net income (loss)................. 3,814 (2,479) (9,234) (327)(2)
Per share of common stock
Net income (loss)--basic and
diluted........................ $ 0.10 $ (0.06) $ (0.23) $ (0.01)
</TABLE>
--------
(1) 1998 third quarter results include charges of $14.7 million for losses
on existing contracts of the government services segment, asset
impairment charges of $26.3 million on the long-lived assets of the
government services segment and restructuring charges of $2.2 million.
(2) 1999 fourth quarter results include charges of $8.2 million to reserve
for additional expected future losses on existing contracts of the
government services segment.
F-28
<PAGE>
Schedule II,
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at the Balance at
Beginning the End
Description of the Year Additions Deductions of the Year
----------- -------------- --------- ---------- -----------
<S> <C> <C> <C> <C>
(dollars in thousands)
Allowance for Doubtful
Accounts, year ended:
December 31, 1997........... $3,457 $1,462 $(1,421) $3,498
December 31, 1998........... 3,498 1,078 (2,454) 2,122
December 31, 1999........... 2,122 2,968(A) (577) 4,513
</TABLE>
--------
(A) Includes $19,000 acquired with the purchase of the professional
services segment.
<PAGE>
[Photo of building] [Photo of sign]
eFunds
Glendale, Wis.
Make every transaction more valuable(SM)
Locations: United States, Canada, United Kingdom,
Australia, India
[Photo of building]
Shared Service Center
Gurgaon, India
[Photo of building]
Chennai, India
[Logo]
<PAGE>
[LOGO]
6,250,000 Shares
[LOGO]
Common Stock
-----------------
PROSPECTUS
, 2000
-----------------
Lehman Brothers
Bear, Stearns & Co. Inc.
FAC/Equities
John G. Kinnard and Company
Incorporated
Fidelity Capital Markets
a division of National Financial Services Corporation
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
common stock offered hereby, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 30,360
NASD Filing Fee............................................... 12,000
Nasdaq Filing Fee............................................. 100,000
Blue Sky fees and expenses.................................... 10,000
Accountants' fees and expenses................................ 2,000,000
Legal fees and expenses....................................... 2,000,000
Printing and engraving expenses............................... 150,000
Transfer agent and registrar fees............................. 50,000
Miscellaneous expenses........................................ 147,640
----------
Total....................................................... $4,500,000
==========
</TABLE>
Item 14. Indemnification of Officers and Directors
Section 145 of the Delaware General Corporation Law (DGCL) authorizes a
corporation's board of directors to grant indemnity to directors and officers
in terms sufficiently broad to permit indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act.
As permitted by the DGCL, the Registrant's certificate of incorporation
provides that the Registrant shall indemnify its directors, officers, employees
and agents to the fullest extent permitted by the DGCL. As permitted by the
DGCL, the Registrant's certificate of incorporation also includes a provision
that eliminates the personal liability of its directors for monetary damages
for breach of the director's fiduciary duty, except for liability (1) for any
breach of the director's duty of loyalty to the Registrant or its stockholders;
(2) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (3) under Section 174 of the DGCL
regarding payments of dividends, stock purchases or redemptions which are
unlawful; or (4) for any transaction from which the director derived an
improper personal benefit.
The Registrant also intends to maintain director and officer liability
insurance.
The underwriting agreement filed as Exhibit 1.1 to this Registration
Statement contains provisions indemnifying officers and directors of the
Registrant against liabilities arising under the Securities Act, or otherwise.
Item 15. Recent Sales of Unregistered Securities
None.
II-1
<PAGE>
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1*** Form of Underwriting Agreement
2.1* Initial Public Offering and Distribution Agreement, dated as of March
31, 2000, by and between Deluxe and eFunds
3.1* Amended and Restated Certificate of Incorporation of eFunds
Corporation
3.2* Bylaws of eFunds Corporation
4.1 Form of eFunds common stock certificate
4.2* Form of Rights Agreement, by and between eFunds and EquiFax the Rights
Agent
5.1 Opinion of Dorsey & Whitney LLP
10.2* Third Party Indemnification Agreement, dated as of , 2000, by and
between eFunds and Deluxe
10.3* Registration Rights Agreement, dated as of March 31, 2000, by and
between Deluxe and eFunds
10.4* Tax Sharing Agreement, dated as of April 1, 2000, by and between
eFunds and Deluxe
10.5* Employee Matters Agreement, dated as of , 2000, by and between
eFunds and Deluxe
10.6* Sublease, dated as of May 15, 2000, by and between eFunds and Deluxe
Financial Services, Inc., for property located in Shoreview, Minnesota
10.7* Lease, dated as of May 15, 2000, by and between eFunds and Deluxe
Financial Services, Inc., for property located in Phoenix, Arizona
10.8* Purchase Agreement, dated as of April 3, 2000, by and between eFunds
and Deluxe Financial Services, Inc., for property located in Phoenix,
Arizona
10.9* Transitional Services Agreement, dated as of May , 2000, by and
between eFunds and Deluxe
10.10* Professional Services Agreement, dated as of April 1, 2000, by and
between eFunds and Deluxe**
10.11* ONE Application Development and Support Agreement, dated as of January
1, 2000, by and between eFunds and Deluxe Financial Services, Inc.
10.12* EBT Support Services Agreement, effective as of April 1, 1996, by and
between eFunds and Citicorp Services, Inc.
10.13* Data Contribution Agreement, dated as of May 1, 2000, by and between
eFunds and Direct Checks Unlimited, Inc.
10.14* Processor Agreement, dated as of , 2000 by and between eFunds and
Deluxe
10.15 Amendment to ATM Cash Agreements, dated February 20, 2000**
10.16* Credit Agreement, dated as of April 1, 2000, by and between eFunds and
Deluxe
10.17* Government Services Indemnification Agreement, dated as of May ,
2000, by and between eFunds and Deluxe
10.18* eFunds Corporation 2000 Stock Incentive Plan
10.19 eFunds Corporation Stock Incentive Plan for Deluxe Conversion Awards
10.20* Form of Change in Control Agreement
10.21* Executive Employment Agreement, dated as of May 9, 2000, by and
between eFunds and John. A. Blanchard III.
10.22* Letter Agreement, dated as of February 28, 2000, by and between eFunds
and Debra Janssen
10.23* Letter Agreement, dated as of February 29, 2000, by and between eFunds
and Dr. Nikhil Sinha
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.24* Letter Agreement, dated as of February 7, 2000, by and between eFunds
and Paul H. Bristow
10.25* Letter Agreement, dated as of February 14, 2000, by and between eFunds
and Steven F. Coleman
10.26* Form of Automated Teller Machine Cash Agreement
21.1* Subsidiaries of eFunds
23.1* Consent of Deloitte & Touche LLP
23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
23.3* Consent of Debra A. Janssen
23.4* Consent of John J. Boyle
23.5* Consent of Jack Robinson
23.6* Consent of Hatim A. Tyabji
23.7* Consent of John H. LeFevre
23.8* Consent of Lois M. Martin
23.9* Consent of Lawrence J. Mosner
24.1 Power of Attorney (included on signature page)
27.1* Financial Data Schedule
27.2* Financial Data Schedule
</TABLE>
--------
* Previously filed.
** Pursuant to Rule 406 of Regulation C, confidential portions have been
omitted and filed separately with the Commission.
*** To be filed by amendment.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that (1) for purposes of
determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective; and (2) for the purpose of determining any liability under
the Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Shoreview, State of Minnesota, on June 5, 2000.
eFunds Corporation
By: /s/ John A. Blanchard III
----------------------------------
John A. Blanchard III
Chairman of the Board andChief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul H. Bristow and Steven F. Coleman, and each
of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
(or any other registration statement for the same offering that is effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933) and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully and to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement on Form S-1 has been signed by the following persons
in the indicated capacities on June 5, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S>
By: /s/ John A. Blanchard III Chairman of the Board and Chief
------------------------------------ Executive Officer (Principal
John A. Blanchard III Executive Officer)
By: /s/ Paul H. Bristow Executive Vice President and
------------------------------------ Chief Financial Officer
Paul H. Bristow (Principal Financial and
Accounting Officer)
By: /s/ John J. Boyle III Director
------------------------------------
John J. Boyle III
By: /s/ Jack Robinson Director
------------------------------------
Jack Robinson
By: /s/ Hakim A. Tyabji Director
------------------------------------
Hakim A. Tyabji
By: /s/ John H. LeFevre Director
------------------------------------
John H. LeFevre
By: /s/ Lois M. Martin Director
------------------------------------
Lois M. Martin
By: /s/ Lawrence J. Mosner Director
------------------------------------
Lawrence J. Mosner
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1*** Form of Underwriting Agreement
2.1* Initial Public Offering and Distribution Agreement, dated as of March
31, 2000, by and between Deluxe and eFunds
3.1* Amended and Restated Certificate of Incorporation of eFunds
Corporation
3.2* Bylaws of eFunds Corporation
4.1 Form of eFunds common stock certificate
4.2* Form of Rights Agreement, by and between eFunds and EquiFax the Rights
Agent
5.1 Opinion of Dorsey & Whitney LLP
10.2* Third Party Indemnification Agreement, dated as of , 2000, by and
between eFunds and Deluxe
10.3* Registration Rights Agreement, dated as of March 31, 2000, by and
between Deluxe and eFunds
10.4* Tax Sharing Agreement, dated as of April 1, 2000, by and between
eFunds and Deluxe
10.5* Employee Matters Agreement, dated as of , 2000, by and between
eFunds and Deluxe
10.6* Sublease, dated as of May 15, 2000, by and between eFunds and Deluxe
Financial Services, Inc., for property located in Shoreview, Minnesota
10.7* Lease, dated as of May 15, 2000, by and between eFunds and Deluxe
Financial Services, Inc., for property located in Phoenix, Arizona
10.8* Purchase Agreement, dated as of April 3, 2000, by and between eFunds
and Deluxe Financial Services, Inc., for property located in Phoenix,
Arizona
10.9* Transitional Services Agreement, dated as of May , 2000, by and
between eFunds and Deluxe
10.10* Professional Services Agreement, dated as of April 1, 2000, by and
between eFunds and Deluxe**
10.11* ONE Application Development and Support Agreement, dated as of January
1, 2000, by and between eFunds and Deluxe Financial Services, Inc.
10.12* EBT Support Services Agreement, effective as of April 1, 1996, by and
between eFunds and Citicorp Services, Inc.
10.13* Data Contribution Agreement, dated as of May 1, 2000, by and between
eFunds and Direct Checks Unlimited, Inc.
10.14* Processor Agreement, dated as of , 2000 by and between eFunds and
Deluxe
10.15 Amendment to ATM Cash Agreements, dated February 20, 2000**
10.16* Credit Agreement, dated as of April 1, 2000, by and between eFunds and
Deluxe
10.17* Government Services Indemnification Agreement, dated as of May ,
2000, by and between eFunds and Deluxe
10.18* eFunds Corporation 2000 Stock Incentive Plan
10.19 eFunds Corporation Stock Incentive Plan for Deluxe Conversion Awards
10.20* Form of Change in Control Agreement
10.21* Executive Employment Agreement, dated as of May 9, 2000, by and
between eFunds and John. A. Blanchard III.
10.22* Letter Agreement, dated as of February 28, 2000, by and between eFunds
and Debra Janssen
10.23* Letter Agreement, dated as of February 29, 2000, by and between eFunds
and Dr. Nikhil Sinha
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.24* Letter Agreement, dated as of February 7, 2000, by and between eFunds
and Paul H. Bristow
10.25* Letter Agreement, dated as of February 14, 2000, by and between eFunds
and Steven F. Coleman
10.26* Form of Automated Teller Machine Cash Agreement
21.1* Subsidiaries of eFunds
23.1* Consent of Deloitte & Touche LLP
23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
23.3* Consent of Debra A. Janssen
23.4* Consent of John J. Boyle
23.5* Consent of Jack Robinson
23.6* Consent of Hatim A. Tyabji
23.7* Consent of John H. LeFevre
23.8* Consent of Lois M. Martin
23.9* Consent of Lawrence J. Mosner
24.1 Power of Attorney (included on signature page)
27.1* Financial Data Schedule
27.2* Financial Data Schedule
</TABLE>
--------
* Previously filed.
** Pursuant to Rule 406 of Regulation C, confidential portions have been
omitted and filed separately with the Commission.
*** To be filed by amendment.
