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Insight EnterprisesCorporate Office 255 Fiserv Drive Brookfield, Wisconsin 53045 (262) 879-5000 www.fiserv.com Investor Relations (800) 425-FISV Stock Listing Exchange: Nasdaq Symbol: FISV Transfer Agent EquiServe Trust Company, N.A. P.O. Box 43069 Providence, Rhode Island 02940-3069 (800) 446-2617 www.equiserve.com Fiserv is a registered trademark of Fiserv, Inc. All product and brand names mentioned are the property of their respective companies. © 2004 Fiserv, Inc. All rights reserved. 2 0 0 3 A N N U A L R E P O R T F I S E R V » 2 0 0 3 A N N U A L R E P O R T thinking DRIVING delivering » thinking » driving » delivering together » growth » value m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b d e n g i s e D » financial highlights » (Dollars in millions except per-share amounts and stock price data.) 2003 2002 % Change Processing and services revenues Net income Diluted earnings per share Cash flow from operations* Year-end market price per share Employees Clients $2,699.6 $2,205.7 $ 315.0 $ 266.1 $ 1.61 $ 1.37 $ 598.1 $ 515.3 $ 39.54 $ 33.95 21,700 19,400 15,000 13,000 22 18 18 16 16 12 15 Processing & Services Revenues in millions Net Income in millions Earnings Per Share—Diluted in dollars ** Cash Flow From Operations in millions * $3,000 $2,700 $350 $315 $2.00 $598 $600 2,500 2,000 1,500 1,000 500 0 300 250 200 150 100 50 0 $1.61 1.50 1.00 0.50 0 500 400 300 200 100 0 '99 '00 '01 '02 '03 '99 '00 '01 '02 '03 '99 '00 '01 '02 '03 '99 '00 '01 '02 '03 *Excludes securities processing receivables and payables. See management’s discussion and analysis for details. **Figures adjusted to recognize 3-for-2 stock splits in 1999 and 2001. Fiserv provides technology solutions to the financial industry. Our software, systems and services are used by more than 15,000 clients worldwide to process transactions, automate business operations and manage information. Made up of eight Business Groups specializing in solutions for many financial industry sectors, Fiserv delivers the technology and support our clients need to compete and flourish in today’s challenging marketplace. f i s e r v » AT A G L A N C E 2003 Processing and Services Revenues 8% Securities & Trust Services 15% Health Plan Management Services 77% Financial Institution Services and other Bank Systems & eProducts Bank Servicing Item Processing Credit Union & Industry Products Lending Systems & Services Insurance Solutions D e l i v e r i n g i n f o r m a t i o n m a n a g e m e n t t e c h n o l o g y , s y s t e m s a n d s e r v i c e s t o t h e f i n a n c i a l w o r l d FINANCIAL INSTITUTION SERVICES and Other Six of the Fiserv Business Groups specialize in outsourcing, systems and services tailored to the needs of financial institutions. C l i e n ts Banks, savings institutions, credit unions, insurance companies and agents, leasing companies, mortgage lenders M a r k e t R e a c h Client relationships with more than 9,400 financial institutions and 2,700 insurance companies » 300 million customer deposit, loan and lease accounts processed annually » 3.9 billion electronic/ATM/POS trans- actions processed annually » 4.2 billion checks processed annually » 2.8 billion images archived I t em P r o c e s s i n g Complete solution for the item and image processing needs of financial institu- tions, providing resources and technology for processing and automating paper-based payment transactions C r e di t U n io n & I n d u s t ry P r od u c ts Core account processing and value-added solutions for credit unions, plastic card production and services, high-volume laser printing and mailing, electronic document distribution and archival L e n di n g S y s t em s B a n k S y s t em s & E P r od u c ts & S e rv ic e s In-house core processing and e-based solution sets for banks and thrifts, including EFT processing, cash and treasury management solutions, risk management, imaging solutions, customer contact solutions and data warehousing Outsourced and licensed software and services for the lending industry, including mortgage loan servicing, automated property valuation, loan and lease portfolio manage- ment for the auto finance market, loan settle- ment support and contact center services B a n k S e rv ic i n g I n s u r a n c e S olu t io n s Outsourced (service bureau) core processing systems, credit processing services and value- added solutions for banks and thrifts Comprehensive insurance processing services and products, emphasizing business process outsourcing for the life, annuity and property and casualty sectors 2 HEALTH PLAN MANAGEMENT SERVICES Outsourced services for self-funded and other medical, dental, vision and disability plans, including health plan administration, care and disease management and pharmacy benefit management. C l i e n t s Self-funded commercial and government employers, health insurance companies, health maintenance organizations and pharmacies M a r k e t R e a c h » $6 billion in claims paid annually » Over 30 million claims processed annually » Over 1,000 client relationships SECURITIES & TRUST SERVICES SECURITIES & TRUST SERVICES 2003 ACQUISITIONS 2003 ACQUISITIONS Complete processing and clearing services for Complete processing and clearing services for traditional and electronic securities trading. traditional and electronic securities trading. Self-directed retirement plan administration Self-directed retirement plan administration services and mutual fund custody and trading. services and mutual fund custody and trading. C l i e n t s C l i e n t s Institutional, retail, full-service and discount Institutional, retail, full-service and discount broker-dealers, registered investment advisors, broker-dealers, registered investment advisors, municipal bond dealers, underwriters, financial municipal bond dealers, underwriters, financial institutions, insurance firms, pension administra- institutions, insurance firms, pension administra- tors and mutual fund companies tors and mutual fund companies M a r k e t R e a c h M a r k e t R e a c h » Client relationships with over 500 broker- » Client relationships with over 500 broker- dealers and financial institutions dealers and financial institutions » 1.4 million active accounts » 1.4 million active accounts » Over 4 million trades processed annually » Over 4 million trades processed annually » $30 billion in retirement trust assets » $30 billion in retirement trust assets under administration under administration The 12 companies Fiserv acquired in 2003 are listed below, along with the Business Group The 12 companies Fiserv acquired in 2003 are listed below, along with the Business Group they joined. These acquisitions encompass nearly all of our major lines of business, and they joined. These acquisitions encompass nearly all of our major lines of business, and further our goal to be the single-source technology services provider to our clients. further our goal to be the single-source technology services provider to our clients. C o m pa n y C o m pa n y Avidyn Avidyn B u s i n e s s G r o u p B u s i n e s s G r o u p Health Plan Management Health Plan Management Chase Credit Research/Chase Credit Systems Chase Credit Research/Chase Credit Systems Lending Systems and Services Lending Systems and Services EDS Credit Union Industry Group EDS Credit Union Industry Group Credit Union & Industry Products Credit Union & Industry Products Federal Home Loan Bank-Indianapolis Federal Home Loan Bank-Indianapolis Item Processing Services Item Processing Services General American Corporation General American Corporation Item Processing Item Processing Lending Systems & Services Lending Systems & Services Insurance Management Solutions Group Insurance Management Solutions Group Insurance Solutions Insurance Solutions MedPay Corporation MedPay Corporation MI-Assistant Software MI-Assistant Software Precision Computer Systems Precision Computer Systems ReliaQuote ReliaQuote Unisure Unisure Wausau Benefits Wausau Benefits Health Plan Management Health Plan Management Insurance Solutions Insurance Solutions Bank Systems & eProducts Bank Systems & eProducts Insurance Solutions Insurance Solutions Insurance Solutions Insurance Solutions Health Plan Management Health Plan Management 3 3 Fiserv provides technology solutions to the financial industry. Our software, systems and services are used by more than 15,000 clients worldwide to process transactions, automate business operations and manage information. Made up of eight Business Groups specializing in solutions for many financial industry sectors, Fiserv delivers the technology and support our clients need to compete and flourish in today’s challenging marketplace. f i s e r v » AT A G L A N C E 2003 Processing and Services Revenues 8% Securities & Trust Services 15% Health Plan Management Services 77% Financial Institution Services and other Bank Systems & eProducts Bank Servicing Item Processing Credit Union & Industry Products Lending Systems & Services Insurance Solutions D e l i v e r i n g i n f o r m a t i o n m a n a g e m e n t t e c h n o l o g y , s y s t e m s a n d s e r v i c e s t o t h e f i n a n c i a l w o r l d FINANCIAL INSTITUTION SERVICES and Other Six of the Fiserv Business Groups specialize in outsourcing, systems and services tailored to the needs of financial institutions. C l i e n ts Banks, savings institutions, credit unions, insurance companies and agents, leasing companies, mortgage lenders M a r k e t R e a c h Client relationships with more than 9,400 financial institutions and 2,700 insurance companies » 300 million customer deposit, loan and lease accounts processed annually » 3.9 billion electronic/ATM/POS trans- actions processed annually » 4.2 billion checks processed annually » 2.8 billion images archived I t em P r o c e s s i n g Complete solution for the item and image processing needs of financial institu- tions, providing resources and technology for processing and automating paper-based payment transactions C r e di t U n io n & I n d u s t ry P r od u c ts Core account processing and value-added solutions for credit unions, plastic card production and services, high-volume laser printing and mailing, electronic document distribution and archival L e n di n g S y s t em s B a n k S y s t em s & E P r od u c ts & S e rv ic e s In-house core processing and e-based solution sets for banks and thrifts, including EFT processing, cash and treasury management solutions, risk management, imaging solutions, customer contact solutions and data warehousing Outsourced and licensed software and services for the lending industry, including mortgage loan servicing, automated property valuation, loan and lease portfolio manage- ment for the auto finance market, loan settle- ment support and contact center services B a n k S e rv ic i n g I n s u r a n c e S olu t io n s Outsourced (service bureau) core processing systems, credit processing services and value- added solutions for banks and thrifts Comprehensive insurance processing services and products, emphasizing business process outsourcing for the life, annuity and property and casualty sectors 2 HEALTH PLAN MANAGEMENT SERVICES Outsourced services for self-funded and other medical, dental, vision and disability plans, including health plan administration, care and disease management and pharmacy benefit management. C l i e n t s Self-funded commercial and government employers, health insurance companies, health maintenance organizations and pharmacies M a r k e t R e a c h » $6 billion in claims paid annually » Over 30 million claims processed annually » Over 1,000 client relationships SECURITIES & TRUST SERVICES SECURITIES & TRUST SERVICES 2003 ACQUISITIONS 2003 ACQUISITIONS Complete processing and clearing services for Complete processing and clearing services for traditional and electronic securities trading. traditional and electronic securities trading. Self-directed retirement plan administration Self-directed retirement plan administration services and mutual fund custody and trading. services and mutual fund custody and trading. C l i e n t s C l i e n t s Institutional, retail, full-service and discount Institutional, retail, full-service and discount broker-dealers, registered investment advisors, broker-dealers, registered investment advisors, municipal bond dealers, underwriters, financial municipal bond dealers, underwriters, financial institutions, insurance firms, pension administra- institutions, insurance firms, pension administra- tors and mutual fund companies tors and mutual fund companies M a r k e t R e a c h M a r k e t R e a c h » Client relationships with over 500 broker- » Client relationships with over 500 broker- dealers and financial institutions dealers and financial institutions » 1.4 million active accounts » 1.4 million active accounts » Over 4 million trades processed annually » Over 4 million trades processed annually » $30 billion in retirement trust assets » $30 billion in retirement trust assets under administration under administration The 12 companies Fiserv acquired in 2003 are listed below, along with the Business Group The 12 companies Fiserv acquired in 2003 are listed below, along with the Business Group they joined. These acquisitions encompass nearly all of our major lines of business, and they joined. These acquisitions encompass nearly all of our major lines of business, and further our goal to be the single-source technology services provider to our clients. further our goal to be the single-source technology services provider to our clients. C o m pa n y C o m pa n y Avidyn Avidyn B u s i n e s s G r o u p B u s i n e s s G r o u p Health Plan Management Health Plan Management Chase Credit Research/Chase Credit Systems Chase Credit Research/Chase Credit Systems Lending Systems and Services Lending Systems and Services EDS Credit Union Industry Group EDS Credit Union Industry Group Credit Union & Industry Products Credit Union & Industry Products Federal Home Loan Bank-Indianapolis Federal Home Loan Bank-Indianapolis Item Processing Services Item Processing Services General American Corporation General American Corporation Item Processing Item Processing Lending Systems & Services Lending Systems & Services Insurance Management Solutions Group Insurance Management Solutions Group Insurance Solutions Insurance Solutions MedPay Corporation MedPay Corporation MI-Assistant Software MI-Assistant Software Precision Computer Systems Precision Computer Systems ReliaQuote ReliaQuote Unisure Unisure Wausau Benefits Wausau Benefits Health Plan Management Health Plan Management Insurance Solutions Insurance Solutions Bank Systems & eProducts Bank Systems & eProducts Insurance Solutions Insurance Solutions Insurance Solutions Insurance Solutions Health Plan Management Health Plan Management 3 3 thinking » together donald f. dillon Leslie M. Muma Leslie M. Muma President and Chief Executive Officer Donald F. Dillon Chairman of the Board February 27, 2004 To Our Shareholders In part through acquisitions, but also through thoughtful efforts, many established clients, including KeyCorp, Porsche Fiserv turned in another outstanding performance in 2003, marking its 19th consecutive record year, excluding a one- time charge in 1995 related to an acquisition. Your company again achieved or exceeded its revenue and earnings targets, and we hope that gives every shareholder a reason to smile. » Processing revenues climbed 22% to $2.7 billion. » Net income grew 18% to $315 million. » Net income per share-diluted rose to $1.61, an 18% gain over 2002. » Operating cash flow increased 16% to $598 million. Our cash position, a key indicator of the company’s financial strength, mirrored our strong net income growth. The Fiserv business model, which is built around high recurring revenues, creates a stable business base that leads to consis- tent earnings and cash flow growth. Our steady cash flow and access to debt markets enable us to act quickly when potential acquisitions or other growth opportunities appear. The year’s strong results were fueled by a combination of acquisitions and internal, or “organic,” growth. Once again, these central components of our strategy delivered the combination of consistency, growth and balance that Fiserv investors have come to expect. Acquisitions were a big part of 2003, with a dozen companies joining the Fiserv fold. Touching nearly all of our major lines of business, these fine companies brought com- bined annualized revenues of more than $610 million and increased our total employees to nearly 22,000 worldwide. strategic planning, we made great strides in positioning Financial Services, and Abbey, a UK-based banking company, and strengthening Fiserv in promising growth markets. expanded their scope of services with us, adding products Our health plan management business is rapidly becoming a such as automotive financing solutions and outsourced leader in self-funded health benefits administration. Insurance business banking support. is another area with strong growth potential, and four of Overall, industry and market forces are aiding our business our 2003 acquisitions were in this sector. Both businesses are development efforts. Legislation such as Check 21, which is focused on recurring revenues and involve transaction process- expected to encourage banks and other financial services organ- ing in large, fragmented markets where we can become a izations to adopt check imaging technology, and the Health major player. Several acquisitions also helped round out our Insurance Portability and Accountability Act, or HIPAA, which offerings for the lending market and enhanced our presence requires employers to comply with new privacy regulations, in the banking and credit union sectors. creates demand for the solutions we provide. Organic growth complements acquired growth by helping Fiserv is well known for its acquisitions, broad product to provide a predictable revenue and earnings stream for portfolio and presence across the financial services market- Fiserv. Achieving organic growth at the level we’d like was place. But the goal we reach for every day is to be recognized challenging in 2003, as soft economies in our international for superior quality in everything we do. Every system con- markets curbed spending on information technology and version, every sales call, every phone conversation. Quality is services, and low interest rates and weak trading volumes the most important tool in our kit, and it’s the one that keeps hampered the securities and trust businesses. Despite this, the client and wins the sale. Fiserv’s organic growth rate was 5% in 2003, and we con- Without question, 2003 was a year of many rewards—and tinue to deliver record earnings year after year. That’s a some challenges, too. And once again, credit for our success real testament to the value of our business model. belongs to the employees of Fiserv, who got the job done Looking at organic growth in 2003, we signed new clients with speed, efficiency and professionalism. Fiserv people are at a steady clip, including agreements with Ohio Savings the best in the business, and we thank them for another Bank, HSBC Mortgage Corporation (USA), Cardtronics and exceptional performance. We also thank you, our sharehold- Arch Coal, for services ranging from core processing and ers, for your confidence and support as Fiserv continues to call center support to loan portfolio servicing and medical drive for growth and deliver value. plan administration. Reflecting our vigorous cross-selling 4 5 thinking » together donald f. dillon Leslie M. Muma Leslie M. Muma President and Chief Executive Officer Donald F. Dillon Chairman of the Board February 27, 2004 To Our Shareholders In part through acquisitions, but also through thoughtful efforts, many established clients, including KeyCorp, Porsche Fiserv turned in another outstanding performance in 2003, marking its 19th consecutive record year, excluding a one- time charge in 1995 related to an acquisition. Your company again achieved or exceeded its revenue and earnings targets, and we hope that gives every shareholder a reason to smile. » Processing revenues climbed 22% to $2.7 billion. » Net income grew 18% to $315 million. » Net income per share-diluted rose to $1.61, an 18% gain over 2002. » Operating cash flow increased 16% to $598 million. Our cash position, a key indicator of the company’s financial strength, mirrored our strong net income growth. The Fiserv business model, which is built around high recurring revenues, creates a stable business base that leads to consis- tent earnings and cash flow growth. Our steady cash flow and access to debt markets enable us to act quickly when potential acquisitions or other growth opportunities appear. The year’s strong results were fueled by a combination of acquisitions and internal, or “organic,” growth. Once again, these central components of our strategy delivered the combination of consistency, growth and balance that Fiserv investors have come to expect. Acquisitions were a big part of 2003, with a dozen companies joining the Fiserv fold. Touching nearly all of our major lines of business, these fine companies brought com- bined annualized revenues of more than $610 million and increased our total employees to nearly 22,000 worldwide. strategic planning, we made great strides in positioning Financial Services, and Abbey, a UK-based banking company, and strengthening Fiserv in promising growth markets. expanded their scope of services with us, adding products Our health plan management business is rapidly becoming a such as automotive financing solutions and outsourced leader in self-funded health benefits administration. Insurance business banking support. is another area with strong growth potential, and four of Overall, industry and market forces are aiding our business our 2003 acquisitions were in this sector. Both businesses are development efforts. Legislation such as Check 21, which is focused on recurring revenues and involve transaction process- expected to encourage banks and other financial services organ- ing in large, fragmented markets where we can become a izations to adopt check imaging technology, and the Health major player. Several acquisitions also helped round out our Insurance Portability and Accountability Act, or HIPAA, which offerings for the lending market and enhanced our presence requires employers to comply with new privacy regulations, in the banking and credit union sectors. creates demand for the solutions we provide. Organic growth complements acquired growth by helping Fiserv is well known for its acquisitions, broad product to provide a predictable revenue and earnings stream for portfolio and presence across the financial services market- Fiserv. Achieving organic growth at the level we’d like was place. But the goal we reach for every day is to be recognized challenging in 2003, as soft economies in our international for superior quality in everything we do. Every system con- markets curbed spending on information technology and version, every sales call, every phone conversation. Quality is services, and low interest rates and weak trading volumes the most important tool in our kit, and it’s the one that keeps hampered the securities and trust businesses. Despite this, the client and wins the sale. Fiserv’s organic growth rate was 5% in 2003, and we con- Without question, 2003 was a year of many rewards—and tinue to deliver record earnings year after year. That’s a some challenges, too. And once again, credit for our success real testament to the value of our business model. belongs to the employees of Fiserv, who got the job done Looking at organic growth in 2003, we signed new clients with speed, efficiency and professionalism. Fiserv people are at a steady clip, including agreements with Ohio Savings the best in the business, and we thank them for another Bank, HSBC Mortgage Corporation (USA), Cardtronics and exceptional performance. We also thank you, our sharehold- Arch Coal, for services ranging from core processing and ers, for your confidence and support as Fiserv continues to call center support to loan portfolio servicing and medical drive for growth and deliver value. plan administration. Reflecting our vigorous cross-selling 4 5 FISERV » thinking » driving » delivering » thinking » together A true measure of a company’s vitality is the depth of its management team. At Fiserv, rising stars are encouraged, coached and trained for leadership, with a focus on strategic thinking, service excellence and business acumen. Acquisitions bring talented execu- tives who add their skills and experience to an already seasoned team, helping to keep our ideas fresh, our viewpoints open and our sights set on growth. Stock Price Performance $100 invested in Fiserv stock on December 31,1993, grew to nearly $700 at the end of 2003, delivering a 21% compounded average return per year and outperforming two major stock indexes. Fiserv Nasdaq S&P 500 $800 700 600 500 400 300 200 100 0 6 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 norman j. balthasar Senior Executive Vice President and Chief Operating Officer kenneth r. jensen Senior Executive Vice President and Chief Financial Officer leveraging our strengths Leslie M. Muma President and Chief Executive Officer driving » growth The Essential Role of Organic Growth For Fiserv, organic growth is driven by three primary factors: products into our base of over 15,000 clients has always been our ability to retain current clients, gain new ones, and important, but it’s become a key strategic focus throughout sell additional products and services to both. Built on solid Fiserv as we continue to drive for growth. We’ve charged experience in the financial industry, the Fiserv business model our nationwide sales force as well as more than 450 client is anchored by long-term client contracts that produce relationship managers, who have direct responsibility for predictable, recurring revenues. These steady relationships servicing client accounts, to take the lead in this effort. represent our core line of business and are an integral part Nearly half of our core processing clients already use two of our organic growth picture, accounting for approximately or more Fiserv products, and we believe that increasing the 85% of our annual revenues. interconnectivity of our products will drive up that ratio. A Our reputation for exceptional client service, comprehen- focused effort to create a technology framework to accom- sive technology solutions and solid expertise in managing plish this is well underway. With more than 60 projects information system conversions helps us maintain a 99% involving the integration of various products, we expect this retention rate with these long-term clients, and attract others initiative to play significantly in spurring organic growth over away from competitors. We have a significant share of the the long term. bank processing market, and more than 90 of America’s top Market and industry dynamics also are positive. The 100 banks are on the Fiserv client roster. demands of maintaining current technology systems can be Many factors are working in our favor. The breadth and daunting, particularly in a climate where customers expect diversity of our product line, which includes more than 200 sophisticated, easy-to-use services. As financial services organ- solution sets, presents a significant opportunity to generate izations focus on their core competencies to stay competitive, organic growth. From Internet banking and cash management they are increasingly likely to outsource some or all of their systems to trust services, securities clearing and insurance technology needs. administration, Fiserv offers an array of technology solutions One event more than any other in 2003 is prompting that spans the financial services industry. Cross-selling these banks to consider outsourcing one of their most traditional 8 » Our growth strategy pivots on satisfied clients, a steady stream of new business and acquisitions that further our position as an industry leader.» operations—check processing. The October passage of the Check Clearing for the 21st Century Act, or Check 21, encourages banks to exchange checks electronically and makes a digitally generated copy of a check the legal equiva- lent of a paper check. The new rules, which will take effect in late 2004, have sweeping implications for the technology needs of financial institutions and are expected to trigger a massive, though gradual, shift to check imaging and trans- mission technology. Check 21 creates exciting growth opportunities for Fiserv, as a provider of both outsourced imaging services and software solutions for clients with in-house applications. We operate the nation’s largest network of check processing centers—a total of 49, all equipped with imaging technology. Our national image archive already delivers imaged statements and check images over the Internet for more than 900 clients, and we average converting about one client a day from paper processing to imaging. The Fiserv Clearing Network is a clear- inghouse that enables our clients to settle their checks, and soon, their images, entirely within the Fiserv realm. And we’ve built collaborative relationships with key industry players to position Fiserv as a gateway for our clients to this new era in check processing. 9 driving » growth Acquisitions Augment Scale and Scope A disciplined and active acquirer, Fiserv has completed 126 Because good client relationships are so critical to our suc- acquisitions since the company was founded in 1984. cess, we strive to make the change in ownership as seamless Reflecting the dynamics of the financial services market- as possible for the acquired company’s clients. Any integration place, the tempo of our 2003 acquisition activity was with Fiserv systems is managed gradually, behind the scenes, brisk, generating 12 transactions that cross nearly all of with close attention to our clients’ changing technology and our major lines of business. service needs. Several key principles guide our approach to acquisitions The acquisitions we made in 2003 will contribute $610 and are instrumental in our success. The financial services million to annualized revenues and strengthen our position in industry is the backbone of Fiserv’s business, and we seek out several key markets. Three transactions expanded our pres- companies that can expand the capabilities of our organiza- ence in the health plan management business, a relatively tion in this sector. A predictable, recurring revenue stream new but very promising market for Fiserv. Two others and steady profit growth are other requirements, as are bolstered our growing business in the lending systems strong cash flow and a sound balance sheet. Solid financials market, and the remaining seven added to our capabilities help ensure that every acquisition contributes to the bottom in the insurance, credit union and bank systems markets. line within the first 12 months of joining Fiserv. Fiserv acquires companies for both strategic and oppor- However, the cornerstone of the Fiserv acquisition tunistic reasons, but acquisitions typically contribute to our strategy is finding proven companies with strong growth picture in three ways: First, they enable us to stay management and loyal, satisfied clients—and then pro- abreast of changing client and market needs by quickly viding an environment that supports their continued growth. adding new technologies, products and services; second, We encourage and enhance the strengths that attracted we can more efficiently enter new markets or capitalize on us to the company, and focus on keeping the management industry changes; and third, acquisitions help expand our team and employees together so they continue to thrive position and capabilities in existing markets. as part of the Fiserv family. Here’s a snapshot of how we’ve put a few of our recent acquisitions to work: 10 » Our reputation for blending quality and stability with an entrepreneurial environment continues to attract top-notch companies to the Fiserv family.» » Adding new technologies: With our 2001 purchase of EPSIIA Corporation, we gained an Internet-based technology for high-volume delivery and storage of electronic documents. The acquisition complemented our existing paper-based solu- tion and enabled us to respond to growing market demand for electronic document presentment and delivery with a technologically superior offering. » Entering new markets: Fiserv FSC, acquired in 2001, specializes in providing comparative insurance rating services to independent agents and brokers. A nationally recognized leader in this niche market, Fiserv FSC has developed a profitable business model that will help us take this success- ful regional operation nationwide. In 2003, we acquired MI-Assistant Software to further this expansion. » Expanding our presence: Meeting the processing and automation needs of banks, thrifts, credit unions and other financial institutions is our mainstay, and three acquisitions in 2003 added to our strength in this area. Precision Computer Systems and IntegraSys (formerly the EDS Credit Union Industry Group) specialize in core processing solutions for the bank and credit union markets, respectively. And the Indianapolis item processing operations of the Federal Home Loan Bank broad- ened our nationwide infrastructure at a time of great change in the check processing industry. 11 delivering » value c a s e s t u d y » A P a r t n e r t o C o u n t O n A Fiserv client since 1989, one of the biggest banks in the Midwest still looks to us when it’s ready to grow. Since we began running its core account processing system nearly 15 years ago, this $13 billion Omaha-based bank not only enhanced its original solution by adding item processing services, but signed on for data warehouse software, multiple loan processing tools, ATM services and a customer contact management system. All the technology this client needs is in one place—the Fiserv family of companies. 12 » Confidence. Responsiveness. Quality. Clients look to Fiserv to help manage their technology needs so they can focus on enhancing profitability and satisfying customers.» The speed of technological change can be exhilarating or Technology-driven competitive pressures also are influencing terrifying, depending on your readiness for it. In the financial the insurance industry, a sector Fiserv entered in 1998. services industry, the move to back-office automated data Mainstream insurers are beginning to embrace outsourcing processing just a few decades ago has been followed by the and as the industry’s drive for efficiency and innovation grows, rapid-fire growth of sophisticated information management Fiserv can offer a broad portfolio of software, systems systems, debit cards and Internet banking, on-line securities and services keyed to their requirements. Using a targeted, trading, digital document archiving and much more. Challenged needs-based approach, we’ve already carved a successful to stay current with new technologies and to staff up to niche in the flood insurance processing sector, ranking as support them, many financial institutions opt to hand off the nation’s largest provider of administration and claims all or part of their technology infrastructure to third-party processing services for this market. providers like Fiserv. Escalating costs, new government regulations and the sheer Clearly, changing technology is an important growth complexity of health insurance management have employers, driver for Fiserv, and so is the value clients see in our services. insurers and individuals reeling. Recognizing the demands Clients often turn to us to help them manage their technol- that health insurance administration places on self-funded ogy needs so they can focus on improving profitability and employers, in 2001 Fiserv began offering outsourced services enhancing customer satisfaction. In the banking and credit to address these needs. On behalf of our clients, we provide union business, for example, consumers now expect to have transaction processing and administration for employee health access to their financial information whenever and wherever plans, pharmacy benefits and workers compensation prescrip- they choose. We help clients evaluate how to respond to tion services. Again, our focus is on providing the expertise those expectations, and we deliver the customized tools, and support to simplify a complex problem, so our clients can services and support they need. Our strength as a business concentrate on running their businesses. partner is one reason Fiserv is the leading provider of out- sourced and in-house technology to banks, thrifts and credit unions nationwide, based on total clients served. 13 delivering » value » A time-tested approach and disciplined financial formula add up to an acquisition strategy that creates value for shareholders and clients alike. Below, the stories behind some of our more recent transactions.» » L e n d i n g S y s t e m s & S e r v i c e s » F i s e r v H e a l t h » F i s e r v E F T / C N S Making loans has always been a rather piecemeal process, As pressures mounted in the health insurance industry, we Anytime, anywhere banking has its roots in the automated from the title search to servicing the account. Now it doesn’t began building a portfolio of products and services to help teller machines that transformed branch banking years ago. have to be. Through eight acquisitions over several years, Fiserv self-funded employers grapple with rising costs and complex Fiserv has always been a player in electronic banking, building is creating true “end-to-end” business and technology support administration issues. on our presence with the acquisition of several electronic funds capable of handling every aspect of a transaction. Mortgage We entered the health care transaction processing busi- transfer (EFT) networks in the early 1990s. We continued to applications, settlement and closings. Auto loans and leases. ness in 2001 with the acquisition of Benefit Planners, which develop the business over the years, and the 2002 acquisition Collections. Appraisals. Loan evaluation and tracking. All the specializes in administering health plans for self-funded of EDS Consumer Network Services made Fiserv one of the technology a lender needs to get the job done. employers. Since then, we’ve expanded the capabilities of industry’s top five processors of EFT services. Strategic acquisitions have added vital components to the Fiserv Health group with the additions of Trewit in 2001, The combination of Consumer Network Services and our the mix. With the 2001 purchases of Case Shiller Weiss and the health administration operations of Willis Group in 2002, existing operations created Fiserv EFT/CNS, a coast-to-coast Integrated Loan Services, we gained Internet-based home val- and Avidyn, Wausau Benefits and MedPay in 2003. Each of powerhouse that drives more than 16,000 ATMs and uation technology to streamline the appraisal process and these acquisitions added another strategic component to processes nearly 4 billion EFT transactions per year. We also speedy, anytime, anywhere loan closing capability. Two 2003 our offerings for this growing market. own and operate ACCEL / Exchange(cid:2), a major United States- acquisitions, General American Corporation and Chase Credit While Fiserv Health focuses on the health plan management based EFT network with international reach, and we launched Systems, added real estate settlement technology and services market, its business model mirrors the approach we’ve used a new national brand for the network less than a year after and an important credit-reporting piece. successfully for years in the banking and insurance industries: closing the CNS acquisition. The value to clients is clear: Time- and money-saving tech- Help our clients manage through business challenges with a Cross-sell opportunities through this business are outstand- nologies, specifically designed for the lending industry and all strong product line and top-notch service. Through organic ing, ranging from ATM driving, hosting and management available from one source—Fiserv. Reflecting the vigorous growth and acquisitions, Fiserv Health has become a major services to debit card and point-of-sale transaction processing. market for these services, Lending Systems & Services is one provider of health plan administration and related services in Results in the debit card market were particularly strong for us of the fastest growing Fiserv business groups. the United States, posting an 85% gain in revenues in 2003. during the year, with processing volumes up 20% over 2002. 15 delivering » value » A time-tested approach and disciplined financial formula add up to an acquisition strategy that creates value for shareholders and clients alike. Below, the stories behind some of our more recent transactions.» » L e n d i n g S y s t e m s & S e r v i c e s » F i s e r v H e a l t h » F i s e r v E F T / C N S Making loans has always been a rather piecemeal process, As pressures mounted in the health insurance industry, we Anytime, anywhere banking has its roots in the automated from the title search to servicing the account. Now it doesn’t began building a portfolio of products and services to help teller machines that transformed branch banking years ago. have to be. Through eight acquisitions over several years, Fiserv self-funded employers grapple with rising costs and complex Fiserv has always been a player in electronic banking, building is creating true “end-to-end” business and technology support administration issues. on our presence with the acquisition of several electronic funds capable of handling every aspect of a transaction. Mortgage We entered the health care transaction processing busi- transfer (EFT) networks in the early 1990s. We continued to applications, settlement and closings. Auto loans and leases. ness in 2001 with the acquisition of Benefit Planners, which develop the business over the years, and the 2002 acquisition Collections. Appraisals. Loan evaluation and tracking. All the specializes in administering health plans for self-funded of EDS Consumer Network Services made Fiserv one of the technology a lender needs to get the job done. employers. Since then, we’ve expanded the capabilities of industry’s top five processors of EFT services. Strategic acquisitions have added vital components to the Fiserv Health group with the additions of Trewit in 2001, The combination of Consumer Network Services and our the mix. With the 2001 purchases of Case Shiller Weiss and the health administration operations of Willis Group in 2002, existing operations created Fiserv EFT/CNS, a coast-to-coast Integrated Loan Services, we gained Internet-based home val- and Avidyn, Wausau Benefits and MedPay in 2003. Each of powerhouse that drives more than 16,000 ATMs and uation technology to streamline the appraisal process and these acquisitions added another strategic component to processes nearly 4 billion EFT transactions per year. We also speedy, anytime, anywhere loan closing capability. Two 2003 our offerings for this growing market. own and operate ACCEL / Exchange(cid:2), a major United States- acquisitions, General American Corporation and Chase Credit While Fiserv Health focuses on the health plan management based EFT network with international reach, and we launched Systems, added real estate settlement technology and services market, its business model mirrors the approach we’ve used a new national brand for the network less than a year after and an important credit-reporting piece. successfully for years in the banking and insurance industries: closing the CNS acquisition. The value to clients is clear: Time- and money-saving tech- Help our clients manage through business challenges with a Cross-sell opportunities through this business are outstand- nologies, specifically designed for the lending industry and all strong product line and top-notch service. Through organic ing, ranging from ATM driving, hosting and management available from one source—Fiserv. Reflecting the vigorous growth and acquisitions, Fiserv Health has become a major services to debit card and point-of-sale transaction processing. market for these services, Lending Systems & Services is one provider of health plan administration and related services in Results in the debit card market were particularly strong for us of the fastest growing Fiserv business groups. the United States, posting an 85% gain in revenues in 2003. during the year, with processing volumes up 20% over 2002. 15 thinking » driving » delivering together » growth » value The passion of an entrepreneur and the track record of an industry veteran. That’s the Fiserv way, and it’s driven our growth for nearly 20 years. We are a strong, focused company, intent on delivering value for clients and shareholders through superior performance. In 2004, we will stretch beyond the successes of this year to deepen client relationships, build on our position as an industry leader and create solid returns for our shareholders. » financial report » consolidated statements of income consolidated balance sheets consolidated statements of shareholders’ equity consolidated statements of cash flows notes to consolidated financial statements management’s discussion and analysis of financial condition and results of operations selected financial data market price information quarterly financial information (unaudited) management’s statement of responsibility independent auditors’ report board of directors executive committee management committee executive leadership » 18 » 19 » 20 » 21 » 22 » 35 » 42 » 42 » 43 » 44 » 45 » 46 » 47 » 47 » 48 Fiserv, Inc. and Subsidiaries » 17 » consolidated statements of income » consolidated balance sheets In thousands, except per share data Y E A R S E N D E D D E C E M B E R 3 1 , 2003 2002 2001 Dollars in thousands D E C E M B E R 3 1 , 2003 2002 REVENUES: Processing and services Customer reimbursements TOTAL REVENUES COST OF REVENUES: Salaries, commissions and payroll related costs Customer reimbursement expenses Data processing costs and equipment rentals Other operating expenses Depreciation and amortization TOTAL COST OF REVENUES OPERATING INCOME Interest expense Interest income INCOME BEFORE INCOME TAXES Income tax provision NET INCOME NET INCOME PER SHARE: Basic Diluted SHARES USED IN COMPUTING NET INCOME PER SHARE: Basic Diluted See notes to consolidated financial statements. $2,699,609 $2,205,734 $1,905,531 334,061 291,245 262,151 3,033,670 2,496,979 2,167,682 1,262,209 1,090,315 334,061 217,201 516,440 171,791 291,245 165,283 363,563 141,114 936,233 262,151 148,469 314,032 147,696 2,501,702 2,051,520 1,808,581 531,968 (22,895) 7,340 516,413 201,401 445,459 (17,758) 8,589 436,290 170,153 359,101 (20,159) 8,086 347,028 138,811 $ 315,012 $ 266,137 $ 208,217 $1.63 $1.61 $1.39 $1.37 $1.11 $1.09 193,240 195,937 191,386 194,951 186,929 191,584 ASSETS Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts Securities processing receivables Prepaid expenses and other assets Investments Property and equipment Intangible assets Goodwill TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY Accounts payable Securities processing payables Short-term borrowings Accrued expenses Accrued income taxes Deferred revenues Customer funds held and retirement account deposits Deferred income taxes Long-term debt TOTAL LIABILITIES COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY Preferred stock, no par value: 25,000,000 shares authorized; none issued Common stock, $0.01 par value: 450,000,000 shares authorized; 194,260,000 and 192,450,000 shares issued Additional paid-in capital Accumulated other comprehensive income Accumulated earnings Treasury stock, at cost, 804,775 shares at December 31, 2002 TOTAL SHAREHOLDERS’ EQUITY TOTAL See notes to consolidated financial statements. $ 202,768 $ 227,239 417,521 1,940,414 120,168 1,904,161 206,076 557,822 1,865,245 339,737 1,740,512 119,882 2,115,778 223,070 342,614 1,329,873 $7,214,175 $6,438,705 $ 179,184 1,786,763 $ 122,266 1,666,863 139,000 303,765 23,313 208,996 100,000 280,614 23,711 181,173 1,582,698 1,707,458 91,532 699,116 46,127 482,824 5,014,367 4,611,036 — — 1,943 637,623 17,345 1,542,897 — 1,924 599,700 23,882 1,227,885 (25,722) 2,199,808 1,827,669 $7,214,175 $6,438,705 18 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 19 » consolidated statements of income » consolidated balance sheets In thousands, except per share data Y E A R S E N D E D D E C E M B E R 3 1 , 2003 2002 2001 Dollars in thousands D E C E M B E R 3 1 , 2003 2002 REVENUES: Processing and services Customer reimbursements TOTAL REVENUES COST OF REVENUES: Salaries, commissions and payroll related costs Customer reimbursement expenses Data processing costs and equipment rentals Other operating expenses Depreciation and amortization TOTAL COST OF REVENUES OPERATING INCOME Interest expense Interest income INCOME BEFORE INCOME TAXES Income tax provision NET INCOME NET INCOME PER SHARE: Basic Diluted SHARES USED IN COMPUTING NET INCOME PER SHARE: Basic Diluted See notes to consolidated financial statements. $2,699,609 $2,205,734 $1,905,531 334,061 291,245 262,151 3,033,670 2,496,979 2,167,682 1,262,209 1,090,315 334,061 217,201 516,440 171,791 291,245 165,283 363,563 141,114 936,233 262,151 148,469 314,032 147,696 2,501,702 2,051,520 1,808,581 531,968 (22,895) 7,340 516,413 201,401 445,459 (17,758) 8,589 436,290 170,153 359,101 (20,159) 8,086 347,028 138,811 $ 315,012 $ 266,137 $ 208,217 $1.63 $1.61 $1.39 $1.37 $1.11 $1.09 193,240 195,937 191,386 194,951 186,929 191,584 ASSETS Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts Securities processing receivables Prepaid expenses and other assets Investments Property and equipment Intangible assets Goodwill TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY Accounts payable Securities processing payables Short-term borrowings Accrued expenses Accrued income taxes Deferred revenues Customer funds held and retirement account deposits Deferred income taxes Long-term debt TOTAL LIABILITIES COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY Preferred stock, no par value: 25,000,000 shares authorized; none issued Common stock, $0.01 par value: 450,000,000 shares authorized; 194,260,000 and 192,450,000 shares issued Additional paid-in capital Accumulated other comprehensive income Accumulated earnings Treasury stock, at cost, 804,775 shares at December 31, 2002 TOTAL SHAREHOLDERS’ EQUITY TOTAL See notes to consolidated financial statements. $ 202,768 $ 227,239 417,521 1,940,414 120,168 1,904,161 206,076 557,822 1,865,245 339,737 1,740,512 119,882 2,115,778 223,070 342,614 1,329,873 $7,214,175 $6,438,705 $ 179,184 1,786,763 $ 122,266 1,666,863 139,000 303,765 23,313 208,996 100,000 280,614 23,711 181,173 1,582,698 1,707,458 91,532 699,116 46,127 482,824 5,014,367 4,611,036 — — 1,943 637,623 17,345 1,542,897 — 1,924 599,700 23,882 1,227,885 (25,722) 2,199,808 1,827,669 $7,214,175 $6,438,705 18 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 19 » consolidated statements of shareholders’ equity In thousands Balance at December 31, 2000 Net income Foreign currency translation Change in unrealized gains on available-for-sale investments—net of tax Reclassification adjustment for realized investment gains included in net income Fair market value adjustment on cash flow hedges—net of tax Other Comprehensive income Shares issued under stock plans including income tax benefits Shares issued for acquired companies Three-for-two stock split Balance at December 31, 2001 Net income Foreign currency translation Change in unrealized gains on available-for-sale investments—net of tax Reclassification adjustment for realized investment gains included in net income Fair market value adjustment on cash flow hedges—net of tax Comprehensive income Shares issued under stock plans including income tax benefits Purchase of treasury stock Balance at December 31, 2002 Net income Foreign currency translation Change in unrealized gains on available-for-sale investments—net of tax Reclassification adjustment for realized investment gains included in net income Fair market value adjustment on cash flow hedges—net of tax Comprehensive income Shares issued under stock plans including income tax benefits Shares issued for acquired companies Common Stock Shares Amount Additional Paid-In Capital 125,388 $1,254 $455,444 248 1,955 62,690 2 20 627 9,442 100,700 (627) 190,281 1,903 564,959 2,169 21 34,741 192,450 1,924 599,700 1,265 545 13 6 20,411 17,512 Accumulated Earnings $ 753,531 208,217 Treasury Stock $(37,026) Comprehensive Income $208,217 (881) Accumulated Other Comprehensive Income $ 78,869 (881) 9,710 9,710 (3,513) (3,513) (5,272) $208,261 (5,272) (2,697) $266,137 1,166 76,216 1,166 961,748 266,137 (45,184) (45,184) (1,573) (1,573) (6,743) (6,743) $213,803 $315,012 1,078 23,882 1,078 1,227,885 315,012 (927) (927) (10,264) (10,264) 3,576 3,576 $308,475 20,655 16,371 — 7,856 (33,578) (25,722) 11,761 13,961 Balance at December 31, 2003 194,260 $1,943 $637,623 $ 17,345 $1,542,897 $ — See notes to consolidated financial statements. 20 » Fiserv, Inc. and Subsidiaries » consolidated statements of cash flows In thousands Y E A R S E N D E D D E C E M B E R 3 1 , 2003 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes Depreciation and amortization Changes in assets and liabilities, net of effects from acquisitions of businesses: Accounts receivable Prepaid expenses and other assets Accounts payable and accrued expenses Deferred revenues Accrued income taxes Securities processing receivables and payables—net $ 315,012 $ 266,137 $ 208,217 24,897 171,791 30,805 141,114 11,700 147,696 17,268 7,540 19,298 9,420 32,877 (80,002) 6,022 (7,899) 30,302 10,072 38,762 63,923 (1,656) (10,694) (7,669) 6,422 15,127 78,396 Net cash provided by operating activities 518,101 579,238 447,539 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, including capitalization of software costs for external customers Payment for acquisitions of businesses, net of cash acquired Investments Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (repayments of) short-term borrowings—net Proceeds from long-term debt Repayments of long-term debt Issuance of common stock and treasury stock Purchases of treasury stock Customer funds held and retirement account deposits Net cash provided by (used in) financing activities Change in cash and cash equivalents Beginning balance Ending balance See notes to consolidated financial statements. (143,242) (735,917) 187,968 (141,880) (406,578) (305,642) (104,609) (224,842) (77,975) (691,191) (854,100) (407,426) 39,000 248,268 (32,474) 18,585 — (124,760) 148,619 (24,471) 227,239 (12,286) 156,481 (16,908) 11,420 (33,578) 260,884 366,013 91,151 136,088 93,075 1,800 (8,113) 15,053 — (104,696) (2,881) 37,232 98,856 $ 202,768 $ 227,239 $ 136,088 Fiserv, Inc. and Subsidiaries » 21 » notes t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s For the years ended December 31, 2003, 2002 and 2001 1 » Summary of Significant Accounting Policies » Use of Estimates » Description of the Business Fiserv, Inc. and subsidiaries (the “Company”) is an inde- pendent provider of data processing systems and related information management services and products to financial institutions and other financial intermediaries. The Company’s operations are primarily in the United States and consist of four business segments based on the services provided by each: Financial institution outsourcing, systems and services; Health plan management services; Securities processing and trust services; and All other and corporate. The Financial insti- tution outsourcing, systems and services segment provides account and transaction processing products and services to financial institutions and other financial intermediaries. The Health plan management services segment provides services to employers who self-fund their health plan, including serv- ices such as handling payments to healthcare providers, assist- ing with cost controls, plan design services, medical provider administration, prescription benefit management and other related services. The Securities processing and trust services segment provides securities processing services and retirement plan administration services to brokerage firms, financial plan- ners and financial institutions. The All other and corporate segment provides plastic card and document services and includes general corporate expenses. The plastic card and doc- ument services businesses provide plastic card issuance services, card design, personalization and mailing, along with electronic document delivery and print-related services. » Principles of Consolidation The consolidated financial statements include the accounts of Fiserv, Inc. and all majority owned subsidiaries. All signifi- cant intercompany transactions and balances have been eliminated in consolidation. » Reclassifications Certain amounts reported in prior periods have been reclassified to conform to the 2003 presentation. The reclassi- fications did not impact the Company’s net income or net income per share. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. » Fair Values The fair values of cash equivalents, accounts receivable, accounts payable, securities processing receivables and payables, customer funds held and retirement account deposits, short-term borrowings and accrued expenses approximate the carrying values due to the short period of time to maturity. The fair value of investments is determined based on quoted market prices. The fair value of long-term debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rates and the fair value of derivative instruments is determined based on dealer quotes (see Note 3). » Derivative Instruments The Company uses interest rate swaps to hedge its exposure to interest rate changes. The Company’s accounting method for cash flow interest rate swaps is based upon the designation of such instruments as cash flow hedges under accounting principles generally accepted in the United States of America and changes in the fair value are recognized in other compre- hensive income until the hedged item is recognized in net income (see Note 3). It is the policy of the Company to execute such instruments with credit-worthy banks and not to enter into derivative financial instruments for speculative purposes. » Revenue Recognition Revenues from the sale of data processing services, plastic card services, document solutions, consulting and administra- tion fees on trust accounts are recognized as the related serv- ices are provided or when the product is shipped. Revenues from the sale of securities processing services are recognized as securities transactions are processed on a trade-date basis. Revenues from securities processing and trust services include net investment income of $86.9 million, $95.4 million and $101.6 million, net of direct credits to customer accounts of $13.5 million, $20.0 million and $45.2 million in 2003, 2002 and 2001, respectively. Revenues from software license fees (representing approximately 5%, 6% and 8% of 2003, 2002 and 2001 processing and services revenues, respectively) are recognized when written contracts are signed, delivery of the product has occurred, the fee is fixed or determinable and collection is probable. Maintenance fee revenues are recog- nized ratably over the term of the related support period, generally 12 months. Deferred revenues consist primarily of advance billings for services and are recognized as revenues when the services are provided. Revenues from sales of prescription drugs to members of our clients are recognized when the prescriptions are dis- pensed. Our responsibilities under our client contract to adju- dicate member claims properly, our separate contractual pricing relationships and responsibilities to the pharmacies in our networks, and our interaction with members, among other factors, qualify us as the principal under the indicators set forth in Emerging Issues Task Force No. 99-19 “Reporting Gross Revenues as a Principal vs. Net as an Agent” in the majority of our transactions with customers. Revenues from our pharmacy network contracts where we are the principal are recognized on a gross basis, at the prescription price (ingredient cost plus dispensing fee) negotiated with our clients, excluding the portion of the price to be settled directly by the member (co-payment), plus our administrative fees. » Cash and Cash Equivalents Cash and cash equivalents consist of cash and investments with original maturities of 90 days or less. » n o t e s c o n t i n u e d » » Allowance for Doubtful Accounts The Company specifically analyzes accounts receivable and historical bad debts, customer credit-worthiness, current economic trends, and changes in our customer payment terms and collection trends when evaluating the adequacy of its allowance for doubtful accounts. Any change in the assumptions used in analyzing a specific account receivable may result in additional allowance for doubtful accounts being recognized in the period in which the change occurs. The allowance for doubtful accounts increased by $12.7 mil- lion in 2003 from $13.2 million at December 31, 2002 to $25.9 million at December 31, 2003 primarily due to the acquisition of certain businesses. » Securities Processing Receivables and Payables The Company’s securities processing subsidiaries had receivables from and payables to brokers or dealers and clear- ing organizations related to the following at December 31: In thousands RECEIVABLES: Securities failed to deliver Securities borrowed Receivables from customers Other TOTAL PAYABLES: Securities failed to receive Securities loaned Payables to customers Other TOTAL 2003 2002 $ 65,660 934,816 899,574 40,364 $ 90,965 904,045 683,854 61,648 $1,940,414 $1,740,512 $ 39,919 1,004,208 615,441 127,195 $ 79,259 824,369 624,099 139,136 $1,786,763 $1,666,863 Securities failed to deliver and failed to receive represent the contract value of securities that have not been delivered or received as of the settlement date. Securities borrowed and loaned represent deposits made to or received from other broker-dealers. Receivables from and payables to cus- tomers represent amounts due or payable on cash and margin transactions. 22 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 23 » notes t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s For the years ended December 31, 2003, 2002 and 2001 1 » Summary of Significant Accounting Policies » Use of Estimates » Description of the Business Fiserv, Inc. and subsidiaries (the “Company”) is an inde- pendent provider of data processing systems and related information management services and products to financial institutions and other financial intermediaries. The Company’s operations are primarily in the United States and consist of four business segments based on the services provided by each: Financial institution outsourcing, systems and services; Health plan management services; Securities processing and trust services; and All other and corporate. The Financial insti- tution outsourcing, systems and services segment provides account and transaction processing products and services to financial institutions and other financial intermediaries. The Health plan management services segment provides services to employers who self-fund their health plan, including serv- ices such as handling payments to healthcare providers, assist- ing with cost controls, plan design services, medical provider administration, prescription benefit management and other related services. The Securities processing and trust services segment provides securities processing services and retirement plan administration services to brokerage firms, financial plan- ners and financial institutions. The All other and corporate segment provides plastic card and document services and includes general corporate expenses. The plastic card and doc- ument services businesses provide plastic card issuance services, card design, personalization and mailing, along with electronic document delivery and print-related services. » Principles of Consolidation The consolidated financial statements include the accounts of Fiserv, Inc. and all majority owned subsidiaries. All signifi- cant intercompany transactions and balances have been eliminated in consolidation. » Reclassifications Certain amounts reported in prior periods have been reclassified to conform to the 2003 presentation. The reclassi- fications did not impact the Company’s net income or net income per share. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. » Fair Values The fair values of cash equivalents, accounts receivable, accounts payable, securities processing receivables and payables, customer funds held and retirement account deposits, short-term borrowings and accrued expenses approximate the carrying values due to the short period of time to maturity. The fair value of investments is determined based on quoted market prices. The fair value of long-term debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rates and the fair value of derivative instruments is determined based on dealer quotes (see Note 3). » Derivative Instruments The Company uses interest rate swaps to hedge its exposure to interest rate changes. The Company’s accounting method for cash flow interest rate swaps is based upon the designation of such instruments as cash flow hedges under accounting principles generally accepted in the United States of America and changes in the fair value are recognized in other compre- hensive income until the hedged item is recognized in net income (see Note 3). It is the policy of the Company to execute such instruments with credit-worthy banks and not to enter into derivative financial instruments for speculative purposes. » Revenue Recognition Revenues from the sale of data processing services, plastic card services, document solutions, consulting and administra- tion fees on trust accounts are recognized as the related serv- ices are provided or when the product is shipped. Revenues from the sale of securities processing services are recognized as securities transactions are processed on a trade-date basis. Revenues from securities processing and trust services include net investment income of $86.9 million, $95.4 million and $101.6 million, net of direct credits to customer accounts of $13.5 million, $20.0 million and $45.2 million in 2003, 2002 and 2001, respectively. Revenues from software license fees (representing approximately 5%, 6% and 8% of 2003, 2002 and 2001 processing and services revenues, respectively) are recognized when written contracts are signed, delivery of the product has occurred, the fee is fixed or determinable and collection is probable. Maintenance fee revenues are recog- nized ratably over the term of the related support period, generally 12 months. Deferred revenues consist primarily of advance billings for services and are recognized as revenues when the services are provided. Revenues from sales of prescription drugs to members of our clients are recognized when the prescriptions are dis- pensed. Our responsibilities under our client contract to adju- dicate member claims properly, our separate contractual pricing relationships and responsibilities to the pharmacies in our networks, and our interaction with members, among other factors, qualify us as the principal under the indicators set forth in Emerging Issues Task Force No. 99-19 “Reporting Gross Revenues as a Principal vs. Net as an Agent” in the majority of our transactions with customers. Revenues from our pharmacy network contracts where we are the principal are recognized on a gross basis, at the prescription price (ingredient cost plus dispensing fee) negotiated with our clients, excluding the portion of the price to be settled directly by the member (co-payment), plus our administrative fees. » Cash and Cash Equivalents Cash and cash equivalents consist of cash and investments with original maturities of 90 days or less. » n o t e s c o n t i n u e d » » Allowance for Doubtful Accounts The Company specifically analyzes accounts receivable and historical bad debts, customer credit-worthiness, current economic trends, and changes in our customer payment terms and collection trends when evaluating the adequacy of its allowance for doubtful accounts. Any change in the assumptions used in analyzing a specific account receivable may result in additional allowance for doubtful accounts being recognized in the period in which the change occurs. The allowance for doubtful accounts increased by $12.7 mil- lion in 2003 from $13.2 million at December 31, 2002 to $25.9 million at December 31, 2003 primarily due to the acquisition of certain businesses. » Securities Processing Receivables and Payables The Company’s securities processing subsidiaries had receivables from and payables to brokers or dealers and clear- ing organizations related to the following at December 31: In thousands RECEIVABLES: Securities failed to deliver Securities borrowed Receivables from customers Other TOTAL PAYABLES: Securities failed to receive Securities loaned Payables to customers Other TOTAL 2003 2002 $ 65,660 934,816 899,574 40,364 $ 90,965 904,045 683,854 61,648 $1,940,414 $1,740,512 $ 39,919 1,004,208 615,441 127,195 $ 79,259 824,369 624,099 139,136 $1,786,763 $1,666,863 Securities failed to deliver and failed to receive represent the contract value of securities that have not been delivered or received as of the settlement date. Securities borrowed and loaned represent deposits made to or received from other broker-dealers. Receivables from and payables to cus- tomers represent amounts due or payable on cash and margin transactions. 22 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 23 » n o t e s c o n t i n u e d » » n o t e s c o n t i n u e d » » Investments The following summarizes the Company’s investments at December 31: In thousands Mortgage-backed obligations and U.S. Government obligations Corporate debt obligations Private mortgage-backed securities Other fixed income obligations Total held-to-maturity investments Available-for-sale investments Money market mutual funds Repurchase agreements Other investments TOTAL In thousands Mortgage-backed obligations and U.S. Government obligations Corporate debt obligations Private mortgage-backed securities Other fixed income obligations Total held-to-maturity investments Available-for-sale investments Money market mutual funds Other investments TOTAL 2003 Amortized/ Historical Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Carrying Value $1,633,133 30,527 9,468 3,847 1,676,975 8,503 98,002 55,030 20,466 $11,052 4,401 242 108 15,803 45,185 — — — $(28,732) — — — (28,732) — — — — $1,615,453 34,928 9,710 3,955 1,664,046 53,688 98,002 55,030 20,466 $1,633,133 30,527 9,468 3,847 1,676,975 53,688 98,002 55,030 20,466 $1,858,976 $60,988 $(28,732) $1,891,232 $1,904,161 Amortized/ Historical Cost Gross Unrealized Gains $1,493,668 45,121 174,579 4,420 1,717,788 34,547 283,636 18,631 $25,750 5,044 5,049 219 36,062 61,413 — — 2002 Gross Unrealized Losses $ (1,632) (146) (1) — (1,779) (237) (14) — Estimated Fair Value Carrying Value $1,517,786 50,019 179,627 4,639 1,752,071 95,723 283,622 18,631 $1,493,668 45,121 174,579 4,420 1,717,788 95,723 283,636 18,631 $2,054,602 $97,475 $ (2,030) $2,150,047 $2,115,778 The Company’s trust administration subsidiaries accept money market deposits from trust customers and invest the funds in securities. Such amounts due trust depositors rep- resent the primary source of funds for the Company’s invest- ment securities and amounted to $1.5 billion and $1.7 billion as of December 31, 2003 and 2002, respectively. The Company’s mortgage-backed obligations and U.S. Government obligations consist primarily of GNMA, FNMA and FHLMC mortgage- backed pass-through securities and collateralized mortgage obligations rated AAA by Standard & Poor’s. Mortgage-backed obligations may contain prepayment risk and the Company has never experienced a default on these types of securities. Substantially all of the trust administration subsidiary’s invest- ments are rated AAA or equivalent except for certain corpo- rate debt obligations which are classified as investment grade. Investments in mortgage-backed obligations and certain fixed income obligations had an average duration of approximately 2 years and 4 months at December 31, 2003. These invest- ments are accounted for as held-to-maturity and are carried at amortized cost as the Company has the ability and intent to hold these investments to maturity. Available-for-sale investments are carried at market, based upon quoted market prices. Unrealized gains or losses on available-for-sale investments are accumulated in sharehold- ers’ equity as accumulated other comprehensive income, net of related deferred income taxes. Realized gains or losses are computed based on specific identification of the investments sold, based on the trade date. » Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed primarily using the straight-line method over the estimated useful lives of the assets. Property and equipment consist of the following at December 31: In thousands Data processing equipment Buildings and leasehold Estimated Useful Lives 2003 2002 3 to 5 years $319,383 $299,263 improvements Furniture and equipment 5 to 40 years 3 to 10 years 122,169 146,290 123,553 127,860 Less accumulated depreciation and amortization TOTAL 587,842 550,676 381,766 327,606 $206,076 $223,070 » Intangible Assets Intangible assets consist of the following at December 31: 2003 In thousands Software development costs for external customers Purchased software Customer base Trade names Other Gross Carrying Amount Accumulated Amortization Net Book Value $ 450,346 188,484 339,824 56,911 4,846 $295,793 112,103 72,286 — 2,407 $154,553 76,381 267,538 56,911 2,439 TOTAL $1,040,411 $482,589 $557,822 2002 In thousands Software development costs for external customers Purchased software Customer base Trade names Other Gross Carrying Amount Accumulated Amortization Net Book Value $ 362,558 145,486 211,738 20,111 4,412 $245,981 90,333 63,954 — 1,423 $116,577 55,153 147,784 20,111 2,989 TOTAL $ 744,305 $401,691 $342,614 Software development costs for external customers include internally generated computer software for external customers and software acquired in conjunction with acquisitions of busi- nesses. The Company capitalizes certain costs incurred to develop new software or enhance existing software which is marketed externally or utilized by the Company to process cus- tomer transactions in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” Costs are capitalized commencing when the technological feasibility of the software has been established. Routine maintenance of software products, design costs and development costs incurred prior to establishment of a prod- uct’s technological feasibility are expensed as incurred. Amor- tization of all software is computed on a straight-line basis over the expected useful life of the product, generally three to five years. 24 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 25 » n o t e s c o n t i n u e d » » n o t e s c o n t i n u e d » » Investments The following summarizes the Company’s investments at December 31: In thousands Mortgage-backed obligations and U.S. Government obligations Corporate debt obligations Private mortgage-backed securities Other fixed income obligations Total held-to-maturity investments Available-for-sale investments Money market mutual funds Repurchase agreements Other investments TOTAL In thousands Mortgage-backed obligations and U.S. Government obligations Corporate debt obligations Private mortgage-backed securities Other fixed income obligations Total held-to-maturity investments Available-for-sale investments Money market mutual funds Other investments TOTAL 2003 Amortized/ Historical Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Carrying Value $1,633,133 30,527 9,468 3,847 1,676,975 8,503 98,002 55,030 20,466 $11,052 4,401 242 108 15,803 45,185 — — — $(28,732) — — — (28,732) — — — — $1,615,453 34,928 9,710 3,955 1,664,046 53,688 98,002 55,030 20,466 $1,633,133 30,527 9,468 3,847 1,676,975 53,688 98,002 55,030 20,466 $1,858,976 $60,988 $(28,732) $1,891,232 $1,904,161 Amortized/ Historical Cost Gross Unrealized Gains $1,493,668 45,121 174,579 4,420 1,717,788 34,547 283,636 18,631 $25,750 5,044 5,049 219 36,062 61,413 — — 2002 Gross Unrealized Losses $ (1,632) (146) (1) — (1,779) (237) (14) — Estimated Fair Value Carrying Value $1,517,786 50,019 179,627 4,639 1,752,071 95,723 283,622 18,631 $1,493,668 45,121 174,579 4,420 1,717,788 95,723 283,636 18,631 $2,054,602 $97,475 $ (2,030) $2,150,047 $2,115,778 The Company’s trust administration subsidiaries accept money market deposits from trust customers and invest the funds in securities. Such amounts due trust depositors rep- resent the primary source of funds for the Company’s invest- ment securities and amounted to $1.5 billion and $1.7 billion as of December 31, 2003 and 2002, respectively. The Company’s mortgage-backed obligations and U.S. Government obligations consist primarily of GNMA, FNMA and FHLMC mortgage- backed pass-through securities and collateralized mortgage obligations rated AAA by Standard & Poor’s. Mortgage-backed obligations may contain prepayment risk and the Company has never experienced a default on these types of securities. Substantially all of the trust administration subsidiary’s invest- ments are rated AAA or equivalent except for certain corpo- rate debt obligations which are classified as investment grade. Investments in mortgage-backed obligations and certain fixed income obligations had an average duration of approximately 2 years and 4 months at December 31, 2003. These invest- ments are accounted for as held-to-maturity and are carried at amortized cost as the Company has the ability and intent to hold these investments to maturity. Available-for-sale investments are carried at market, based upon quoted market prices. Unrealized gains or losses on available-for-sale investments are accumulated in sharehold- ers’ equity as accumulated other comprehensive income, net of related deferred income taxes. Realized gains or losses are computed based on specific identification of the investments sold, based on the trade date. » Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed primarily using the straight-line method over the estimated useful lives of the assets. Property and equipment consist of the following at December 31: In thousands Data processing equipment Buildings and leasehold Estimated Useful Lives 2003 2002 3 to 5 years $319,383 $299,263 improvements Furniture and equipment 5 to 40 years 3 to 10 years 122,169 146,290 123,553 127,860 Less accumulated depreciation and amortization TOTAL 587,842 550,676 381,766 327,606 $206,076 $223,070 » Intangible Assets Intangible assets consist of the following at December 31: 2003 In thousands Software development costs for external customers Purchased software Customer base Trade names Other Gross Carrying Amount Accumulated Amortization Net Book Value $ 450,346 188,484 339,824 56,911 4,846 $295,793 112,103 72,286 — 2,407 $154,553 76,381 267,538 56,911 2,439 TOTAL $1,040,411 $482,589 $557,822 2002 In thousands Software development costs for external customers Purchased software Customer base Trade names Other Gross Carrying Amount Accumulated Amortization Net Book Value $ 362,558 145,486 211,738 20,111 4,412 $245,981 90,333 63,954 — 1,423 $116,577 55,153 147,784 20,111 2,989 TOTAL $ 744,305 $401,691 $342,614 Software development costs for external customers include internally generated computer software for external customers and software acquired in conjunction with acquisitions of busi- nesses. The Company capitalizes certain costs incurred to develop new software or enhance existing software which is marketed externally or utilized by the Company to process cus- tomer transactions in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” Costs are capitalized commencing when the technological feasibility of the software has been established. Routine maintenance of software products, design costs and development costs incurred prior to establishment of a prod- uct’s technological feasibility are expensed as incurred. Amor- tization of all software is computed on a straight-line basis over the expected useful life of the product, generally three to five years. 24 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 25 » n o t e s c o n t i n u e d » » n o t e s c o n t i n u e d » Gross software development costs for external customers capitalized for new products and enhancements to existing products totaled $52.4 million, $44.9 million and $36.6 mil- lion in 2003, 2002 and 2001, respectively. Amortization of previously capitalized development costs, included in deprecia- tion and amortization, was $47.8 million, $38.3 million and $35.5 million in 2003, 2002 and 2001, respectively, resulting in net capitalized development costs of $4.6 million, $6.6 mil- lion and $1.1 million in 2003, 2002 and 2001, respectively. Customer base intangible assets represent customer con- tracts and relationships obtained as part of acquired busi- nesses and are amortized using the straight-line method over their estimated useful lives, ranging from five to 20 years. Trade names have been determined to have indefinite lives and therefore are not amortized in accordance with the provisions of SFAS No. 142 “Goodwill and Other Intangible Assets.” Other intangible assets consist primarily of non- compete agreements, which are generally amortized over their estimated useful lives. Amortization expense for intangible assets was $90.8 mil- lion, $74.8 million and $58.0 million for the years ended December 31, 2003, 2002 and 2001, respectively. Aggregate amortization expense with respect to existing intangible assets with finite lives resulting from acquisitions of busi- nesses, excluding software amortization, should approximate $21 million annually. » Goodwill On January 1, 2002, the Company adopted SFAS No. 142, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Accordingly, effective January 1, 2002, the Company discontinued the amortization of goodwill and intangible assets with indefinite lives. The Company com- pleted its annual impairment test for goodwill and intangible assets with indefinite lives and determined that no impairment exists. Pro forma net income and net income per share for the year ended December 31, 2001, adjusted to eliminate historical amortization of goodwill and related tax effects, is as follows: In thousands, except per share data Reported net income Add: goodwill amortization, net of tax Pro forma net income Reported net income per share: Basic Diluted Pro forma net income per share: Basic Diluted 2001 $208,217 18,439 $226,656 $1.11 1.09 $1.21 1.18 The excess of the purchase price over the estimated fair value of tangible and identifiable intangible assets acquired is recorded as goodwill. The changes in the carrying amount of goodwill by business segment during the years ended December 31, 2003 and 2002 are as follows: In thousands Balance, December 31, 2001 Goodwill additions Balance, December 31, 2002 Goodwill additions Balance, December 31, 2003 Financial Institution Outsourcing, Systems and Services Health Plan Management Services Securities Processing and Trust Services All Other and Corporate $ 735,955 244,745 980,700 319,256 $148,462 22,628 171,090 216,116 $107,887 37,629 145,516 — $29,830 2,737 32,567 — Total $1,022,134 307,739 1,329,873 535,372 $1,299,956 $387,206 $145,516 $32,567 $1,865,245 » Impairment of Long-Lived Assets The Company periodically assesses the likelihood of recovering the cost of long-lived assets based on current and projected operating results and cash flows of the related business operations using undiscounted cash flow analyses. These factors, along with management’s plans with respect to the operations, are considered in assessing the recover- ability of property and equipment and intangible assets sub- ject to amortization. Measurement of any impairment loss is based on discounted operating cash flows. The computation of the number of shares used in calculating basic and diluted net income per common share is as follows: In thousands 2003 2002 2001 Weighted-average common shares outstanding used for calculation of net income per share—basic Employee stock options Total shares used for calculation of net income per share—diluted 193,240 2,697 191,386 3,565 186,929 4,655 195,937 194,951 191,584 » Short-Term Borrowings The Company’s securities and trust processing subsidiaries » Stock-Based Compensation had short-term borrowings of $139.0 million and $100.0 million as of December 31, 2003 and 2002, respectively, with an average interest rate of 1.5% and 1.9% as of December 31, 2003 and 2002, respectively, and were collateralized by investments and customers’ margin account securities valued at $148.6 million and $102.0 million at December 31, 2003 and 2002, respectively. The Company’s securities and trust processing subsidiaries had uncommitted lines of credit of $271.0 million as of December 31, 2003. » Income Taxes Deferred income taxes are provided for temporary differ- ences between the Company’s income for accounting and tax purposes. » Net Income Per Share Basic net income per share is computed using the weighted- average number of common shares outstanding during the periods. Diluted net income per share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options and are computed using the treasury stock method. During the years ended December 31, 2003, 2002 and 2001, the Company excluded 3.4 million, 1.3 million and 1.9 million weighted-average shares under stock options from the calculation of common equivalent shares as the impact was anti-dilutive. The Company accounts for its stock-based compensation plans in accordance with the intrinsic value provisions of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” Stock options are generally granted at prices equal to the fair market value of the Company’s common stock on the grant dates (see Note 5). Accordingly, the Company did not record any compensation expense in the accompanying consolidated financial statements for its stock-based compensation plans. Had compensation expense been recognized consistent with the fair value provisions of SFAS No.123, “Accounting for Stock-Based Compensation,” the Company’s net income and net income per share—basic and diluted would have been changed to the pro forma amounts indicated below for the years ended December 31: In thousands, except per share data Net income: As reported Less: stock compensation expense—net of tax 2003 2002 2001 $315,012 $266,137 $208,217 (17,000) (18,200) (13,400) Pro forma $298,012 $247,937 $194,817 Reported net income per share: Basic Diluted Pro forma net income per share: Basic Diluted $1.63 1.61 $1.54 1.52 $1.39 1.37 $1.30 1.27 $1.11 1.09 $1.04 1.02 26 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 27 » n o t e s c o n t i n u e d » » n o t e s c o n t i n u e d » Gross software development costs for external customers capitalized for new products and enhancements to existing products totaled $52.4 million, $44.9 million and $36.6 mil- lion in 2003, 2002 and 2001, respectively. Amortization of previously capitalized development costs, included in deprecia- tion and amortization, was $47.8 million, $38.3 million and $35.5 million in 2003, 2002 and 2001, respectively, resulting in net capitalized development costs of $4.6 million, $6.6 mil- lion and $1.1 million in 2003, 2002 and 2001, respectively. Customer base intangible assets represent customer con- tracts and relationships obtained as part of acquired busi- nesses and are amortized using the straight-line method over their estimated useful lives, ranging from five to 20 years. Trade names have been determined to have indefinite lives and therefore are not amortized in accordance with the provisions of SFAS No. 142 “Goodwill and Other Intangible Assets.” Other intangible assets consist primarily of non- compete agreements, which are generally amortized over their estimated useful lives. Amortization expense for intangible assets was $90.8 mil- lion, $74.8 million and $58.0 million for the years ended December 31, 2003, 2002 and 2001, respectively. Aggregate amortization expense with respect to existing intangible assets with finite lives resulting from acquisitions of busi- nesses, excluding software amortization, should approximate $21 million annually. » Goodwill On January 1, 2002, the Company adopted SFAS No. 142, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Accordingly, effective January 1, 2002, the Company discontinued the amortization of goodwill and intangible assets with indefinite lives. The Company com- pleted its annual impairment test for goodwill and intangible assets with indefinite lives and determined that no impairment exists. Pro forma net income and net income per share for the year ended December 31, 2001, adjusted to eliminate historical amortization of goodwill and related tax effects, is as follows: In thousands, except per share data Reported net income Add: goodwill amortization, net of tax Pro forma net income Reported net income per share: Basic Diluted Pro forma net income per share: Basic Diluted 2001 $208,217 18,439 $226,656 $1.11 1.09 $1.21 1.18 The excess of the purchase price over the estimated fair value of tangible and identifiable intangible assets acquired is recorded as goodwill. The changes in the carrying amount of goodwill by business segment during the years ended December 31, 2003 and 2002 are as follows: In thousands Balance, December 31, 2001 Goodwill additions Balance, December 31, 2002 Goodwill additions Balance, December 31, 2003 Financial Institution Outsourcing, Systems and Services Health Plan Management Services Securities Processing and Trust Services All Other and Corporate $ 735,955 244,745 980,700 319,256 $148,462 22,628 171,090 216,116 $107,887 37,629 145,516 — $29,830 2,737 32,567 — Total $1,022,134 307,739 1,329,873 535,372 $1,299,956 $387,206 $145,516 $32,567 $1,865,245 » Impairment of Long-Lived Assets The Company periodically assesses the likelihood of recovering the cost of long-lived assets based on current and projected operating results and cash flows of the related business operations using undiscounted cash flow analyses. These factors, along with management’s plans with respect to the operations, are considered in assessing the recover- ability of property and equipment and intangible assets sub- ject to amortization. Measurement of any impairment loss is based on discounted operating cash flows. The computation of the number of shares used in calculating basic and diluted net income per common share is as follows: In thousands 2003 2002 2001 Weighted-average common shares outstanding used for calculation of net income per share—basic Employee stock options Total shares used for calculation of net income per share—diluted 193,240 2,697 191,386 3,565 186,929 4,655 195,937 194,951 191,584 » Short-Term Borrowings The Company’s securities and trust processing subsidiaries » Stock-Based Compensation had short-term borrowings of $139.0 million and $100.0 million as of December 31, 2003 and 2002, respectively, with an average interest rate of 1.5% and 1.9% as of December 31, 2003 and 2002, respectively, and were collateralized by investments and customers’ margin account securities valued at $148.6 million and $102.0 million at December 31, 2003 and 2002, respectively. The Company’s securities and trust processing subsidiaries had uncommitted lines of credit of $271.0 million as of December 31, 2003. » Income Taxes Deferred income taxes are provided for temporary differ- ences between the Company’s income for accounting and tax purposes. » Net Income Per Share Basic net income per share is computed using the weighted- average number of common shares outstanding during the periods. Diluted net income per share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of stock options and are computed using the treasury stock method. During the years ended December 31, 2003, 2002 and 2001, the Company excluded 3.4 million, 1.3 million and 1.9 million weighted-average shares under stock options from the calculation of common equivalent shares as the impact was anti-dilutive. The Company accounts for its stock-based compensation plans in accordance with the intrinsic value provisions of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” Stock options are generally granted at prices equal to the fair market value of the Company’s common stock on the grant dates (see Note 5). Accordingly, the Company did not record any compensation expense in the accompanying consolidated financial statements for its stock-based compensation plans. Had compensation expense been recognized consistent with the fair value provisions of SFAS No.123, “Accounting for Stock-Based Compensation,” the Company’s net income and net income per share—basic and diluted would have been changed to the pro forma amounts indicated below for the years ended December 31: In thousands, except per share data Net income: As reported Less: stock compensation expense—net of tax 2003 2002 2001 $315,012 $266,137 $208,217 (17,000) (18,200) (13,400) Pro forma $298,012 $247,937 $194,817 Reported net income per share: Basic Diluted Pro forma net income per share: Basic Diluted $1.63 1.61 $1.54 1.52 $1.39 1.37 $1.30 1.27 $1.11 1.09 $1.04 1.02 26 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 27 » n o t e s c o n t i n u e d » » n o t e s c o n t i n u e d » The fair value of each stock option granted in 2003, 2002 and 2001 was estimated on the date of grant using the Black- Scholes option-pricing model with the following weighted- average assumptions: 2003 2002 2001 Expected life (in years) Risk-free interest rate Volatility Dividend yield 5.0 3.0% 5.0 5.0 4.6% 4.4% 52.3% 50.0% 49.8% 0.0% 0.0% 0.0% The weighted-average estimated fair value of stock options granted during the years ended December 31, 2003, 2002 and 2001 was $15.14, $20.24 and $18.02 per share, respectively. » Shareholder Rights Plan The Company has a shareholder rights plan. Under this plan, each shareholder holds one preferred stock purchase right for each outstanding share of the Company’s common stock held. The stock purchase rights are not exercisable until certain events occur. 2 » Acquisitions » Accumulated Other Comprehensive Income Accumulated other comprehensive income consists of the following at December 31: In thousands Unrealized gains on investments, net of tax Unrealized losses on cash flow hedges, net of tax Foreign currency translation adjustments TOTAL 2003 2002 $ 28,832 $ 40,023 (11,136) (351) (14,712) (1,429) $ 17,345 $ 23,882 » Supplemental Cash Flow Information In thousands Interest paid Income taxes paid Liabilities assumed in 2003 2002 2001 $ 22,164 144,130 $17,724 97,808 $ 19,469 117,443 acquisitions of businesses 85,072 29,033 68,833 During 2003, 2002 and 2001 the Company completed the following acquisitions of businesses. The results of operations of all of these acquired businesses have been included in the accompanying consolidated statements of income from the dates of acquisition. Company 2003: AVIDYN, Inc. Precision Computer Systems, Inc. ReliaQuote, Inc. WBI Holdings Corporation Electronic Data Systems Corporation’s Credit Union Industry Group business Chase Credit Systems Inc. & Chase Credit Research Inc. Unisure, Inc. Insurance Management Solutions Group, Inc. GAC Holdings Corporation Federal Home Loan Bank of Indianapolis IP services MI-Assistant Software, Inc. MedPay Corporation Month Acquired Jan. Mar. Apr. May July July Sept. Sept. Sept. Oct. Nov. Dec. Service Consideration Health plan management Software and services Insurance services Health plan management Credit union data processing Lending services Insurance data processing Insurance data processing Lending services Item processing Insurance software systems Health plan management Stock for stock Cash for stock Cash for stock Cash for stock Cash for assets Cash for stock Cash for assets Cash for stock Cash for stock Cash for assets Cash for assets Cash for stock Company 2002: Case, Shiller, Weiss, Inc. Investec Ernst & Company’s clearing operations Willis Group’s TPA operations Electronic Data Systems Corporation’s Consumer Network Services business Lenders Financial Services 2001: Benefit Planners Marshall & Ilsley IP services Facilities and Services Corp. Remarketing Services of America, Inc. EPSIIA Corporation Catapult Technology Limited Federal Home Loan Bank of Pittsburgh IP services NCR bank processing operations NCSI Integrated Loan Services Trewit Inc. FACT 400 credit card solution Month Acquired Service Consideration May Aug. Nov. Dec. Dec. Jan. Feb. Mar. Mar. July July Sept. Nov. Nov. Nov. Nov. Nov. Lending services Securities clearing services Health plan management EFT data processing Lending services Health plan management Item processing Insurance software systems Automobile leasing services Data processing Software and services Item processing Data and item processing Insurance data processing Lending services Health plan management Software and services Cash for stock Cash for assets Cash for assets Cash for assets Cash for stock Cash and stock for stock Cash for assets Cash for stock Cash for stock Cash for stock Cash for stock Cash for assets Cash for assets Cash for stock Cash for assets Cash and stock for stock Cash for assets During 2003, the Company completed 12 acquisitions accounted for as purchases. Net cash paid for these acquisi- tions was $702.8 million, subject to certain adjustments. In addition to cash consideration, the Company issued, in conjunction with one of the acquisitions, approximately 310,000 shares of its common stock, valued at $10.9 million. Goodwill recorded in conjunction with these acquisitions was $476.1 million. The following unaudited pro forma combined information, assuming the 2003 acquisitions and the 2002 acquisition of Electronic Data Systems (“EDS”) Corporation’s Consumer Network Services business were all completed on January 1, 2002, is provided for illustrative purposes only and should not be relied upon as necessarily being indicative of the historical results that would have been obtained if these acquisitions had actually occurred during those periods, or the results that may be obtained in the future. In thousands, except per share data Processing and services revenues Net income Reported net income per share: Basic Diluted Pro forma net income per share: Basic Diluted 2003 2002 $3,137,280 337,993 $2,873,066 294,784 $1.63 1.61 $1.75 1.73 $1.39 1.37 $1.54 1.51 During 2002, the Company completed five acquisitions accounted for as purchases. Net cash paid for these acquisi- tions was $366.9 million, subject to certain adjustments. Good- will recorded in conjunction with all of these acquisitions was $290.6 million. 28 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 29 » n o t e s c o n t i n u e d » » n o t e s c o n t i n u e d » The fair value of each stock option granted in 2003, 2002 and 2001 was estimated on the date of grant using the Black- Scholes option-pricing model with the following weighted- average assumptions: 2003 2002 2001 Expected life (in years) Risk-free interest rate Volatility Dividend yield 5.0 3.0% 5.0 5.0 4.6% 4.4% 52.3% 50.0% 49.8% 0.0% 0.0% 0.0% The weighted-average estimated fair value of stock options granted during the years ended December 31, 2003, 2002 and 2001 was $15.14, $20.24 and $18.02 per share, respectively. » Shareholder Rights Plan The Company has a shareholder rights plan. Under this plan, each shareholder holds one preferred stock purchase right for each outstanding share of the Company’s common stock held. The stock purchase rights are not exercisable until certain events occur. 2 » Acquisitions » Accumulated Other Comprehensive Income Accumulated other comprehensive income consists of the following at December 31: In thousands Unrealized gains on investments, net of tax Unrealized losses on cash flow hedges, net of tax Foreign currency translation adjustments TOTAL 2003 2002 $ 28,832 $ 40,023 (11,136) (351) (14,712) (1,429) $ 17,345 $ 23,882 » Supplemental Cash Flow Information In thousands Interest paid Income taxes paid Liabilities assumed in 2003 2002 2001 $ 22,164 144,130 $17,724 97,808 $ 19,469 117,443 acquisitions of businesses 85,072 29,033 68,833 During 2003, 2002 and 2001 the Company completed the following acquisitions of businesses. The results of operations of all of these acquired businesses have been included in the accompanying consolidated statements of income from the dates of acquisition. Company 2003: AVIDYN, Inc. Precision Computer Systems, Inc. ReliaQuote, Inc. WBI Holdings Corporation Electronic Data Systems Corporation’s Credit Union Industry Group business Chase Credit Systems Inc. & Chase Credit Research Inc. Unisure, Inc. Insurance Management Solutions Group, Inc. GAC Holdings Corporation Federal Home Loan Bank of Indianapolis IP services MI-Assistant Software, Inc. MedPay Corporation Month Acquired Jan. Mar. Apr. May July July Sept. Sept. Sept. Oct. Nov. Dec. Service Consideration Health plan management Software and services Insurance services Health plan management Credit union data processing Lending services Insurance data processing Insurance data processing Lending services Item processing Insurance software systems Health plan management Stock for stock Cash for stock Cash for stock Cash for stock Cash for assets Cash for stock Cash for assets Cash for stock Cash for stock Cash for assets Cash for assets Cash for stock Company 2002: Case, Shiller, Weiss, Inc. Investec Ernst & Company’s clearing operations Willis Group’s TPA operations Electronic Data Systems Corporation’s Consumer Network Services business Lenders Financial Services 2001: Benefit Planners Marshall & Ilsley IP services Facilities and Services Corp. Remarketing Services of America, Inc. EPSIIA Corporation Catapult Technology Limited Federal Home Loan Bank of Pittsburgh IP services NCR bank processing operations NCSI Integrated Loan Services Trewit Inc. FACT 400 credit card solution Month Acquired Service Consideration May Aug. Nov. Dec. Dec. Jan. Feb. Mar. Mar. July July Sept. Nov. Nov. Nov. Nov. Nov. Lending services Securities clearing services Health plan management EFT data processing Lending services Health plan management Item processing Insurance software systems Automobile leasing services Data processing Software and services Item processing Data and item processing Insurance data processing Lending services Health plan management Software and services Cash for stock Cash for assets Cash for assets Cash for assets Cash for stock Cash and stock for stock Cash for assets Cash for stock Cash for stock Cash for stock Cash for stock Cash for assets Cash for assets Cash for stock Cash for assets Cash and stock for stock Cash for assets During 2003, the Company completed 12 acquisitions accounted for as purchases. Net cash paid for these acquisi- tions was $702.8 million, subject to certain adjustments. In addition to cash consideration, the Company issued, in conjunction with one of the acquisitions, approximately 310,000 shares of its common stock, valued at $10.9 million. Goodwill recorded in conjunction with these acquisitions was $476.1 million. The following unaudited pro forma combined information, assuming the 2003 acquisitions and the 2002 acquisition of Electronic Data Systems (“EDS”) Corporation’s Consumer Network Services business were all completed on January 1, 2002, is provided for illustrative purposes only and should not be relied upon as necessarily being indicative of the historical results that would have been obtained if these acquisitions had actually occurred during those periods, or the results that may be obtained in the future. In thousands, except per share data Processing and services revenues Net income Reported net income per share: Basic Diluted Pro forma net income per share: Basic Diluted 2003 2002 $3,137,280 337,993 $2,873,066 294,784 $1.63 1.61 $1.75 1.73 $1.39 1.37 $1.54 1.51 During 2002, the Company completed five acquisitions accounted for as purchases. Net cash paid for these acquisi- tions was $366.9 million, subject to certain adjustments. Good- will recorded in conjunction with all of these acquisitions was $290.6 million. 28 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 29 » n o t e s c o n t i n u e d » » n o t e s c o n t i n u e d » During 2001, the Company completed 12 acquisitions accounted for as purchases. Net cash paid for these acquisitions was $224.8 million, subject to certain adjustments. In addition to cash consideration, the Company issued, in conjunction with two of the acquisitions, approximately 3.1 million shares of its common stock, valued at approximately $117.0 million. Goodwill recorded in conjunction with the 2001 acquisitions was $285.7 million. The Company may be required to pay additional cash consideration for acquisitions up to maximum payments of $230.1 million through 2007, if certain of the acquired entities achieve specific escalating operating income targets. During 2003, as a result of previously acquired entities achieving their operating income targets, the Company paid additional cash consideration of $33.1 million and issued approximately 678,000 shares of its common stock valued at $20.6 million. The additional consideration was treated as additional purchase price. 3 » Long-Term Debt The Company has available a $510.0 million unsecured line of credit and commercial paper facility with a group of banks, of which $395.6 million was in use at December 31, 2003, with a weighted-average variable interest rate of 1.8% and 2.0% at December 31, 2003 and 2002, respectively. The credit facilities, which expire in May 2004, consist of a $250.0 million five-year revolving credit facility and a $260.0 million 364-day revolving credit facility. The Company expects to renew its debt facility agreements prior to expiration in the second quarter of 2004. There were no significant commitment fees or compensating balance requirements under these facilities. The Company must, among other requirements, maintain a minimum net worth of $976.1 million as of December 31, 2003, maintain a fixed charge coverage ratio of 1.35 to one, and limit its total debt to no more than three and one-half times the Company’s earnings before interest, taxes, depreciation and amortization. The Company was in compliance with all debt covenants throughout 2003. As of December 31, 2003, the Company has available $10.0 million in additional unsecured lines of credit, of which none was in use. As of December 31, 2003, the Company had cash flow interest rate swap agreements to fix the interest rates on cer- tain floating-rate debt at an average rate approximating 6.8% (based on current bank fees and spreads) for a principal amount of $200.0 million until 2005. During the second quar- ter of 2003, the Company entered into additional cash flow interest rate swap agreements to fix the interest rates on cer- tain floating-rate debt at an average rate approximating 5.0% (based on current bank fees and spreads) for a principal amount of $150.0 million from 2005 to 2008. The estimated fair value of the cash flow interest rate swap agreements of $18.5 million and $24.1 million as of December 31, 2003 and 2002, respectively, is included on the accompanying consolidated balance sheets in accrued expenses. During the second quarter of 2003, the Company had two note offerings totaling $250.0 million of five-year notes due in 2008. The first note offering was for $150.0 million at a 4.0% fixed interest rate. The Company entered into fixed to floating interest rate swap agreements on the $150.0 million notes until April 2008 with a weighted-average variable inter- est rate of 2.0% at December 31, 2003. The second offering of five-year notes was for $100.0 million at a 3.0% fixed interest rate. The carrying value and estimated fair values of the Company’s long-term debt are as follows at December 31: 2003 2002 Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value $395,600 $395,600 $393,347 $393,347 In thousands Bank notes and commercial paper, at short-term rates 3.0% senior notes payable, due 2008 99,900 96,921 4.0% senior notes payable, due 2008 149,897 151,540 — — — — 8.0% senior notes payable, due 2004–2005 Other 25,714 28,005 27,230 28,005 38,571 50,906 42,068 50,906 Total long-term debt $699,116 $699,296 $482,824 $486,321 Annual principal payments required under the terms of the long-term debt agreements are as follows at December 31, 2003: Significant components of the Company’s deferred tax assets and liabilities consist of the following at December 31: In thousands Years ending December 31, 2004 2005 2006 2007 2008 TOTAL 4 » Income Taxes A reconciliation of recorded income tax expense with income tax computed at the statutory federal tax rates is as follows for the three years ended December 31: In thousands Statutory federal tax rate Tax computed at statutory rate State income taxes, 2003 2002 2001 35% 35% 35% $180,745 $152,702 $121,460 net of federal effect 18,514 15,712 12,033 Non-deductible amortization expense Other—net TOTAL — 2,142 — 1,739 4,219 1,099 $434,290 14,317 491 473 249,545 $699,116 In thousands 2003 2002 Purchased incomplete software technology Accrued expenses not currently deductible Deferred revenues Unrealized losses on cash flow hedges Net operating loss carryforwards Other $ 26,672 39,375 14,203 7,003 4,487 14,323 $ 32,980 28,721 12,218 9,405 6,034 5,202 Total deferred tax assets 106,063 94,560 Software development costs for external customers Excess of tax over book depreciation Excess of tax over book amortization Unrealized gains on investments Other (43,281) (21,651) (92,921) (16,341) (23,401) (36,095) (11,127) (49,538) (25,573) (18,354) Total deferred tax liabilities (197,595) (140,687) TOTAL $ (91,532) $ (46,127) Tax benefits associated with the exercise of non-qualified employee stock options were credited directly to additional paid-in capital and amounted to $13.2 million, $31.2 million and $15.0 million in 2003, 2002 and 2001, respectively. $201,401 $170,153 $138,811 At December 31, 2003, the Company has state net oper- The provision for income taxes consisted of the following at December 31: ating loss carryforwards of $71.8 million, with expiration dates ranging from 2004 through 2023. In thousands Current: Federal State Foreign Deferred: Federal State Foreign 2003 2002 2001 $144,413 27,651 4,440 $116,021 21,564 1,763 $105,081 18,118 3,912 176,504 139,348 127,111 25,983 1,747 (2,833) 29,386 2,226 (807) 11,067 948 (315) 24,897 30,805 11,700 TOTAL $201,401 $170,153 $138,811 30 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 31 » n o t e s c o n t i n u e d » » n o t e s c o n t i n u e d » During 2001, the Company completed 12 acquisitions accounted for as purchases. Net cash paid for these acquisitions was $224.8 million, subject to certain adjustments. In addition to cash consideration, the Company issued, in conjunction with two of the acquisitions, approximately 3.1 million shares of its common stock, valued at approximately $117.0 million. Goodwill recorded in conjunction with the 2001 acquisitions was $285.7 million. The Company may be required to pay additional cash consideration for acquisitions up to maximum payments of $230.1 million through 2007, if certain of the acquired entities achieve specific escalating operating income targets. During 2003, as a result of previously acquired entities achieving their operating income targets, the Company paid additional cash consideration of $33.1 million and issued approximately 678,000 shares of its common stock valued at $20.6 million. The additional consideration was treated as additional purchase price. 3 » Long-Term Debt The Company has available a $510.0 million unsecured line of credit and commercial paper facility with a group of banks, of which $395.6 million was in use at December 31, 2003, with a weighted-average variable interest rate of 1.8% and 2.0% at December 31, 2003 and 2002, respectively. The credit facilities, which expire in May 2004, consist of a $250.0 million five-year revolving credit facility and a $260.0 million 364-day revolving credit facility. The Company expects to renew its debt facility agreements prior to expiration in the second quarter of 2004. There were no significant commitment fees or compensating balance requirements under these facilities. The Company must, among other requirements, maintain a minimum net worth of $976.1 million as of December 31, 2003, maintain a fixed charge coverage ratio of 1.35 to one, and limit its total debt to no more than three and one-half times the Company’s earnings before interest, taxes, depreciation and amortization. The Company was in compliance with all debt covenants throughout 2003. As of December 31, 2003, the Company has available $10.0 million in additional unsecured lines of credit, of which none was in use. As of December 31, 2003, the Company had cash flow interest rate swap agreements to fix the interest rates on cer- tain floating-rate debt at an average rate approximating 6.8% (based on current bank fees and spreads) for a principal amount of $200.0 million until 2005. During the second quar- ter of 2003, the Company entered into additional cash flow interest rate swap agreements to fix the interest rates on cer- tain floating-rate debt at an average rate approximating 5.0% (based on current bank fees and spreads) for a principal amount of $150.0 million from 2005 to 2008. The estimated fair value of the cash flow interest rate swap agreements of $18.5 million and $24.1 million as of December 31, 2003 and 2002, respectively, is included on the accompanying consolidated balance sheets in accrued expenses. During the second quarter of 2003, the Company had two note offerings totaling $250.0 million of five-year notes due in 2008. The first note offering was for $150.0 million at a 4.0% fixed interest rate. The Company entered into fixed to floating interest rate swap agreements on the $150.0 million notes until April 2008 with a weighted-average variable inter- est rate of 2.0% at December 31, 2003. The second offering of five-year notes was for $100.0 million at a 3.0% fixed interest rate. The carrying value and estimated fair values of the Company’s long-term debt are as follows at December 31: 2003 2002 Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value $395,600 $395,600 $393,347 $393,347 In thousands Bank notes and commercial paper, at short-term rates 3.0% senior notes payable, due 2008 99,900 96,921 4.0% senior notes payable, due 2008 149,897 151,540 — — — — 8.0% senior notes payable, due 2004–2005 Other 25,714 28,005 27,230 28,005 38,571 50,906 42,068 50,906 Total long-term debt $699,116 $699,296 $482,824 $486,321 Annual principal payments required under the terms of the long-term debt agreements are as follows at December 31, 2003: Significant components of the Company’s deferred tax assets and liabilities consist of the following at December 31: In thousands Years ending December 31, 2004 2005 2006 2007 2008 TOTAL 4 » Income Taxes A reconciliation of recorded income tax expense with income tax computed at the statutory federal tax rates is as follows for the three years ended December 31: In thousands Statutory federal tax rate Tax computed at statutory rate State income taxes, 2003 2002 2001 35% 35% 35% $180,745 $152,702 $121,460 net of federal effect 18,514 15,712 12,033 Non-deductible amortization expense Other—net TOTAL — 2,142 — 1,739 4,219 1,099 $434,290 14,317 491 473 249,545 $699,116 In thousands 2003 2002 Purchased incomplete software technology Accrued expenses not currently deductible Deferred revenues Unrealized losses on cash flow hedges Net operating loss carryforwards Other $ 26,672 39,375 14,203 7,003 4,487 14,323 $ 32,980 28,721 12,218 9,405 6,034 5,202 Total deferred tax assets 106,063 94,560 Software development costs for external customers Excess of tax over book depreciation Excess of tax over book amortization Unrealized gains on investments Other (43,281) (21,651) (92,921) (16,341) (23,401) (36,095) (11,127) (49,538) (25,573) (18,354) Total deferred tax liabilities (197,595) (140,687) TOTAL $ (91,532) $ (46,127) Tax benefits associated with the exercise of non-qualified employee stock options were credited directly to additional paid-in capital and amounted to $13.2 million, $31.2 million and $15.0 million in 2003, 2002 and 2001, respectively. $201,401 $170,153 $138,811 At December 31, 2003, the Company has state net oper- The provision for income taxes consisted of the following at December 31: ating loss carryforwards of $71.8 million, with expiration dates ranging from 2004 through 2023. In thousands Current: Federal State Foreign Deferred: Federal State Foreign 2003 2002 2001 $144,413 27,651 4,440 $116,021 21,564 1,763 $105,081 18,118 3,912 176,504 139,348 127,111 25,983 1,747 (2,833) 29,386 2,226 (807) 11,067 948 (315) 24,897 30,805 11,700 TOTAL $201,401 $170,153 $138,811 30 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 31 » n o t e s c o n t i n u e d » » n o t e s c o n t i n u e d » 5 » Employee Benefit Plans » Stock Option Plan The Company’s Stock Option Plan (the “Plan”) provides for the granting to its employees and directors of either incentive or non-qualified options to purchase shares of the Company’s common stock for a price not less than 100% of the fair value of the shares at the date of grant. Stock options are typically granted in the first quarter of the year, generally vest 20% on the date of grant and 20% each year thereafter and expire 10 years from the date of the award. Changes in stock options outstanding are as follows: Outstanding, December 31, 2000 Granted Forfeited Exercised Outstanding, December 31, 2001 Granted Forfeited Exercised Outstanding, December 31, 2002 Granted Forfeited Exercised Number of Shares In thousands Weighted- Average Exercise Price 12,458 2,277 (387) (1,345) 13,003 1,519 (116) (2,796) 11,610 1,719 (326) (1,414) $12.76 36.99 18.18 8.68 17.18 41.21 24.49 10.70 21.77 30.96 36.90 9.37 Outstanding, December 31, 2003 11,589 $24.21 The number of shares under option that were exercisable at December 31, 2003, 2002 and 2001 were 8.2 million, 8.1 mil- lion, and 9.0 million, at weighted-average exercise prices of $20.19, $16.69 and $12.80, respectively. The following summarizes information about the Company’s stock options outstanding and exercisable at December 31, 2003: Options Outstanding Options Outstanding and Exercisable Range of Exercise Prices $ 3.01 – $ 9.04 9.33 – 16.00 17.00 – 21.33 21.67 – 36.97 37.04 – 45.99 Number of Shares In thousands 1,482 2,473 2,510 1,891 3,233 $ 3.01 – $45.99 11,589 Weighted- Average Exercise Price $ 7.30 13.86 20.54 30.61 38.97 $24.21 Weighted-Average Remaining Contractual Life In years 1.6 3.7 5.5 8.8 7.5 5.7 Number of Shares In thousands 1,482 2,441 2,200 418 1,640 8,181 Weighted- Average Exercise Price $ 7.30 13.86 20.51 29.36 38.51 $20.19 At December 31, 2003, options to purchase 7.1 million shares were available for grant under the Plan. » Employee Stock Purchase Plan 7 » Leases, Other Commitments and Contingencies The Company’s employee stock purchase plan provides that eligible employees may purchase a limited number of shares of common stock each quarter through payroll deduc- tions, at a purchase price equal to 85% of the closing price of the Company’s common stock on the last business day of each calendar quarter. During the year ended December 31, 2003, 0.6 million shares were issued under the employee stock purchase plan. As of January 1, 2004, there were 1.0 mil- lion shares available for grant under this plan. » Employee Savings Plan The Company and its subsidiaries have defined contribu- tion savings plans covering substantially all employees, under which eligible participants may elect to contribute a specified percentage of their salaries, subject to certain limitations. The Company makes matching contributions, subject to certain limitations, and makes discretionary contributions based upon the attainment of certain profit goals. Company contributions vest ratably at 20% for each year of service. Company contri- butions charged to operations under these plans approximated $44.3 million, $41.5 million and $35.3 million in 2003, 2002 and 2001, respectively. 6 » Restructuring and Other Charges During 2001, the Company recorded $12.3 million of pre-tax charges consisting of severance and related termina- tion benefits, future lease and other contractual obligations, and the disposal and write-down of assets. These charges related to management’s plan to improve overall business efficiencies by consolidating the Company’s securities pro- cessing operations and eliminating duplicate operational functions. At December 31, 2003 and 2002, approximately $1.9 million and $3.4 million, respectively, of future lease and other obligations were yet to be incurred. » Leases The Company leases certain office facilities and equipment under operating leases. Future minimum rental payments on operating leases with initial noncancellable lease terms in excess of one year were due as follows as of December 31, 2003: In thousands Years ending December 31, 2004 2005 2006 2007 2008 Thereafter TOTAL $ 98,359 83,360 64,595 49,234 39,786 96,203 $431,537 Rent expense applicable to all operating leases was approximately $118.1 million, $99.7 million and $87.1 mil- lion during the years ended December 31, 2003, 2002 and 2001, respectively. » Other Commitments and Contingencies The Company’s trust administration subsidiaries had fiduci- ary responsibility for the administration of approximately $29.8 billion in trust funds as of December 31, 2003. The Company’s securities processing subsidiaries are subject to the Uniform Net Capital Rule of the Securities and Exchange Commission. At December 31, 2003, the aggregate net capi- tal of such subsidiaries was $125.1 million, exceeding the net capital requirement by $103.3 million. In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits in which claims are asserted against the Company. In the opin- ion of management, the liabilities, if any, which may ulti- mately result from such lawsuits are not expected to have a material adverse effect on the consolidated financial state- ments of the Company. 32 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 33 » n o t e s c o n t i n u e d » » n o t e s c o n t i n u e d » 5 » Employee Benefit Plans » Stock Option Plan The Company’s Stock Option Plan (the “Plan”) provides for the granting to its employees and directors of either incentive or non-qualified options to purchase shares of the Company’s common stock for a price not less than 100% of the fair value of the shares at the date of grant. Stock options are typically granted in the first quarter of the year, generally vest 20% on the date of grant and 20% each year thereafter and expire 10 years from the date of the award. Changes in stock options outstanding are as follows: Outstanding, December 31, 2000 Granted Forfeited Exercised Outstanding, December 31, 2001 Granted Forfeited Exercised Outstanding, December 31, 2002 Granted Forfeited Exercised Number of Shares In thousands Weighted- Average Exercise Price 12,458 2,277 (387) (1,345) 13,003 1,519 (116) (2,796) 11,610 1,719 (326) (1,414) $12.76 36.99 18.18 8.68 17.18 41.21 24.49 10.70 21.77 30.96 36.90 9.37 Outstanding, December 31, 2003 11,589 $24.21 The number of shares under option that were exercisable at December 31, 2003, 2002 and 2001 were 8.2 million, 8.1 mil- lion, and 9.0 million, at weighted-average exercise prices of $20.19, $16.69 and $12.80, respectively. The following summarizes information about the Company’s stock options outstanding and exercisable at December 31, 2003: Options Outstanding Options Outstanding and Exercisable Range of Exercise Prices $ 3.01 – $ 9.04 9.33 – 16.00 17.00 – 21.33 21.67 – 36.97 37.04 – 45.99 Number of Shares In thousands 1,482 2,473 2,510 1,891 3,233 $ 3.01 – $45.99 11,589 Weighted- Average Exercise Price $ 7.30 13.86 20.54 30.61 38.97 $24.21 Weighted-Average Remaining Contractual Life In years 1.6 3.7 5.5 8.8 7.5 5.7 Number of Shares In thousands 1,482 2,441 2,200 418 1,640 8,181 Weighted- Average Exercise Price $ 7.30 13.86 20.51 29.36 38.51 $20.19 At December 31, 2003, options to purchase 7.1 million shares were available for grant under the Plan. » Employee Stock Purchase Plan 7 » Leases, Other Commitments and Contingencies The Company’s employee stock purchase plan provides that eligible employees may purchase a limited number of shares of common stock each quarter through payroll deduc- tions, at a purchase price equal to 85% of the closing price of the Company’s common stock on the last business day of each calendar quarter. During the year ended December 31, 2003, 0.6 million shares were issued under the employee stock purchase plan. As of January 1, 2004, there were 1.0 mil- lion shares available for grant under this plan. » Employee Savings Plan The Company and its subsidiaries have defined contribu- tion savings plans covering substantially all employees, under which eligible participants may elect to contribute a specified percentage of their salaries, subject to certain limitations. The Company makes matching contributions, subject to certain limitations, and makes discretionary contributions based upon the attainment of certain profit goals. Company contributions vest ratably at 20% for each year of service. Company contri- butions charged to operations under these plans approximated $44.3 million, $41.5 million and $35.3 million in 2003, 2002 and 2001, respectively. 6 » Restructuring and Other Charges During 2001, the Company recorded $12.3 million of pre-tax charges consisting of severance and related termina- tion benefits, future lease and other contractual obligations, and the disposal and write-down of assets. These charges related to management’s plan to improve overall business efficiencies by consolidating the Company’s securities pro- cessing operations and eliminating duplicate operational functions. At December 31, 2003 and 2002, approximately $1.9 million and $3.4 million, respectively, of future lease and other obligations were yet to be incurred. » Leases The Company leases certain office facilities and equipment under operating leases. Future minimum rental payments on operating leases with initial noncancellable lease terms in excess of one year were due as follows as of December 31, 2003: In thousands Years ending December 31, 2004 2005 2006 2007 2008 Thereafter TOTAL $ 98,359 83,360 64,595 49,234 39,786 96,203 $431,537 Rent expense applicable to all operating leases was approximately $118.1 million, $99.7 million and $87.1 mil- lion during the years ended December 31, 2003, 2002 and 2001, respectively. » Other Commitments and Contingencies The Company’s trust administration subsidiaries had fiduci- ary responsibility for the administration of approximately $29.8 billion in trust funds as of December 31, 2003. The Company’s securities processing subsidiaries are subject to the Uniform Net Capital Rule of the Securities and Exchange Commission. At December 31, 2003, the aggregate net capi- tal of such subsidiaries was $125.1 million, exceeding the net capital requirement by $103.3 million. In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits in which claims are asserted against the Company. In the opin- ion of management, the liabilities, if any, which may ulti- mately result from such lawsuits are not expected to have a material adverse effect on the consolidated financial state- ments of the Company. 32 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 33 » n o t e s c o n t i n u e d » 8 » Business Segment Information Due to the recent growth of the health plan management services of the Company, the Company changed its reportable business segments in 2003 to add the Health Plan Management Services segment. All amounts previously presented have been reclassified to conform with the current presentation. The following table excludes the revenues and expenses associated with customer reimbursements because management believes that it is not appropriate to include the customer reimbursements in analyzing the current performance of the Company as these balances offset in revenues and expenses with no impact on operating income and these amounts are not an indicator of current or future business trends. Summarized financial informa- tion by business segment is as follows for each of the three years ended December 31: In thousands 2003 Processing and services revenues Operating income Identifiable assets Capital expenditures, including capitalization of software development costs for external customers Depreciation and amortization expense 2002 Processing and services revenues Operating income Identifiable assets Capital expenditures, including capitalization of software development costs for external customers Depreciation and amortization expense 2001 Processing and services revenues Operating income Identifiable assets Capital expenditures, including capitalization of software development costs for external customers Depreciation and amortization expense Financial Institution Outsourcing, Systems and Services Health Plan Management Services Securities Processing and Trust Services All Other and Corporate Total $1,974,406 458,883 2,370,324 $399,066 49,674 598,163 $ 224,405 27,778 4,118,418 $101,732 (4,367) 127,270 $2,699,609 531,968 7,214,175 123,695 131,569 10,141 11,852 8,212 21,793 1,194 6,577 143,242 171,791 $1,665,976 384,760 1,864,252 $216,145 34,064 257,339 $ 230,621 31,259 4,136,980 $ 92,992 (4,624) 180,134 $2,205,734 445,459 6,438,705 118,057 106,287 7,580 7,371 12,306 22,127 3,937 5,329 141,880 141,114 $1,498,703 311,369 1,456,136 $ 55,610 10,704 209,739 $ 264,841 40,197 3,560,483 $ 86,377 (3,169) 95,884 $1,905,531 359,101 5,322,242 87,461 113,026 3,573 2,803 10,092 25,004 3,483 6,863 104,609 147,696 The Company’s domestic operations comprised approximately 96%, 95% and 92% of processing and services revenues for the years ended December 31, 2003, 2002 and 2001, respectively. No single customer accounted for more than 3% of consolidated processing and services revenues during the years ended December 31, 2003, 2002 and 2001. » management’s discussion a n d a n a l y s i s o f f i n a n c i a l c o n d i t i o n a n d r e s u l t s o f o p e r a t i o n s » Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Certain matters discussed herein are “forward-looking statements” intended to qualify for the safe harbor from lia- bility established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as “believes,” “anticipates” or “expects,” or words of similar import. Similarly, statements that describe future plans, objectives or goals of the Company are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those currently anticipated. Factors that could affect results include, among others, economic, competitive, governmental, regulatory and technological factors affecting the Company’s operations, markets, services and related products, prices and other factors discussed in the Company’s prior filings with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these fac- tors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The Company assumes no obli- gation to update any forward-looking statements, whether as a result of new information, future events or otherwise. » Critical Accounting Policies The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company’s management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The Company continually evaluates the accounting policies and estimates it uses to prepare the consolidated financial statements. The Company bases its estimates on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. The majority of the Company’s revenues are generated from monthly account and transaction-based fees in which revenue is recognized when the related services have been rendered. The revenues are recognized under service agree- ments having stipulated terms and conditions which are long term in nature, generally three to five years, and do not require management to make significant judgments or assump- tions. Given the nature of the Company’s business and the applicable rules guiding revenue recognition, the Company’s revenue recognition practices do not contain significant esti- mates that materially affect its results of operations. The Company has reviewed the carrying value of good- will and other intangible assets by comparing such amounts to their fair values and has determined that the carrying amounts of goodwill and other intangible assets do not exceed their respective fair values. The Company is required to perform this comparison at least annually or more fre- quently if circumstances indicate possible impairment. When determining fair value, the Company uses various assump- tions, including projections of future cash flows. Given the significance of goodwill and other intangible asset balances, an adverse change to the fair value could result in an impair- ment charge, which could be material to the Company’s financial statements. The Company does not participate in, nor has it created, any off-balance sheet variable interest entities or other off- balance sheet financing, other than operating leases. In addi- tion, the Company does not enter into any derivative financial instruments for speculative purposes and uses derivative financial instruments primarily for managing its exposure to changes in interest rates and managing its ratio of fixed to floating-rate long-term debt. 34 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 35 » n o t e s c o n t i n u e d » 8 » Business Segment Information Due to the recent growth of the health plan management services of the Company, the Company changed its reportable business segments in 2003 to add the Health Plan Management Services segment. All amounts previously presented have been reclassified to conform with the current presentation. The following table excludes the revenues and expenses associated with customer reimbursements because management believes that it is not appropriate to include the customer reimbursements in analyzing the current performance of the Company as these balances offset in revenues and expenses with no impact on operating income and these amounts are not an indicator of current or future business trends. Summarized financial informa- tion by business segment is as follows for each of the three years ended December 31: In thousands 2003 Processing and services revenues Operating income Identifiable assets Capital expenditures, including capitalization of software development costs for external customers Depreciation and amortization expense 2002 Processing and services revenues Operating income Identifiable assets Capital expenditures, including capitalization of software development costs for external customers Depreciation and amortization expense 2001 Processing and services revenues Operating income Identifiable assets Capital expenditures, including capitalization of software development costs for external customers Depreciation and amortization expense Financial Institution Outsourcing, Systems and Services Health Plan Management Services Securities Processing and Trust Services All Other and Corporate Total $1,974,406 458,883 2,370,324 $399,066 49,674 598,163 $ 224,405 27,778 4,118,418 $101,732 (4,367) 127,270 $2,699,609 531,968 7,214,175 123,695 131,569 10,141 11,852 8,212 21,793 1,194 6,577 143,242 171,791 $1,665,976 384,760 1,864,252 $216,145 34,064 257,339 $ 230,621 31,259 4,136,980 $ 92,992 (4,624) 180,134 $2,205,734 445,459 6,438,705 118,057 106,287 7,580 7,371 12,306 22,127 3,937 5,329 141,880 141,114 $1,498,703 311,369 1,456,136 $ 55,610 10,704 209,739 $ 264,841 40,197 3,560,483 $ 86,377 (3,169) 95,884 $1,905,531 359,101 5,322,242 87,461 113,026 3,573 2,803 10,092 25,004 3,483 6,863 104,609 147,696 The Company’s domestic operations comprised approximately 96%, 95% and 92% of processing and services revenues for the years ended December 31, 2003, 2002 and 2001, respectively. No single customer accounted for more than 3% of consolidated processing and services revenues during the years ended December 31, 2003, 2002 and 2001. » management’s discussion a n d a n a l y s i s o f f i n a n c i a l c o n d i t i o n a n d r e s u l t s o f o p e r a t i o n s » Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Certain matters discussed herein are “forward-looking statements” intended to qualify for the safe harbor from lia- bility established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as “believes,” “anticipates” or “expects,” or words of similar import. Similarly, statements that describe future plans, objectives or goals of the Company are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those currently anticipated. Factors that could affect results include, among others, economic, competitive, governmental, regulatory and technological factors affecting the Company’s operations, markets, services and related products, prices and other factors discussed in the Company’s prior filings with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these fac- tors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The Company assumes no obli- gation to update any forward-looking statements, whether as a result of new information, future events or otherwise. » Critical Accounting Policies The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company’s management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The Company continually evaluates the accounting policies and estimates it uses to prepare the consolidated financial statements. The Company bases its estimates on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. The majority of the Company’s revenues are generated from monthly account and transaction-based fees in which revenue is recognized when the related services have been rendered. The revenues are recognized under service agree- ments having stipulated terms and conditions which are long term in nature, generally three to five years, and do not require management to make significant judgments or assump- tions. Given the nature of the Company’s business and the applicable rules guiding revenue recognition, the Company’s revenue recognition practices do not contain significant esti- mates that materially affect its results of operations. The Company has reviewed the carrying value of good- will and other intangible assets by comparing such amounts to their fair values and has determined that the carrying amounts of goodwill and other intangible assets do not exceed their respective fair values. The Company is required to perform this comparison at least annually or more fre- quently if circumstances indicate possible impairment. When determining fair value, the Company uses various assump- tions, including projections of future cash flows. Given the significance of goodwill and other intangible asset balances, an adverse change to the fair value could result in an impair- ment charge, which could be material to the Company’s financial statements. The Company does not participate in, nor has it created, any off-balance sheet variable interest entities or other off- balance sheet financing, other than operating leases. In addi- tion, the Company does not enter into any derivative financial instruments for speculative purposes and uses derivative financial instruments primarily for managing its exposure to changes in interest rates and managing its ratio of fixed to floating-rate long-term debt. 34 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 35 » m a n a g e m e n t ’ s d i s c u s s i o n c o n t i n u e d » » m a n a g e m e n t ’ s d i s c u s s i o n c o n t i n u e d » » Market Risk Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, correlations or other market factors, such as liquidity, will result in losses for a certain financial instrument or group of financial instru- ments. The Company is exposed primarily to interest rate risk and market price risk on investments and borrowings. The Company actively monitors these risks through a variety of control procedures involving senior management. The Company’s trust administration subsidiaries accept money market account deposits from trust customers and invest those funds in marketable securities. Substantially all of the investments are rated within the highest investment grade categories for securities. The Company’s trust administration subsidiaries utilize simulation models for measuring and moni- toring interest rate risk and market value of portfolio equities. A formal Asset Liability Committee of the Company meets quarterly to review interest rate risks, capital ratios, liquidity levels, portfolio diversification, credit risk ratings and adher- ence to investment policies and guidelines. Substantially all of the investments at December 31, 2003 have contractual maturities of one year or less except for mortgage-backed obligations and U.S. Government obligations, which have an average duration of approximately 2 years and 4 months. The Company does not believe any significant changes in interest rates would have a material impact on the consolidated financial statements. The Company manages its debt structure and interest rate risk through the use of fixed and floating-rate debt and through the use of interest rate swaps. The Company uses interest rate swaps to partially hedge its exposure to interest rate changes, and to control its financing costs. Generally, under these swaps, the Company agrees with a counter party to exchange the difference between fixed-rate and floating- rate interest amounts based on an agreed principal amount. While changes in interest rates could decrease the Company’s interest income or increase its interest expense, the Company does not believe that it has a material exposure to changes in interest rates, primarily due to approximately 45% of the Company’s long-term debt having fixed interest rates as of December 31, 2003. Based on the Company’s long-term debt with variable interest rates as of December 31, 2003, a 1% increase in the Company’s borrowing rate would increase annual interest expense by $3.7 million. Based on the controls in place, management believes the risks associated with finan- cial instruments at December 31, 2003, will not have a mate- rial effect on the Company’s consolidated financial position or results of operations. » Results of Operations The Company is an independent provider of financial data processing systems and related information management services and products to financial institutions and other finan- cial intermediaries. The Company’s operations have been classified into four business segments: Financial institution outsourcing, systems and services (“FIS”); Health plan man- agement services (“Health”); Securities processing and trust services (“Securities and Trust”); and All other and corporate. The following table presents, for the period indicated, certain amounts included in the Company’s consolidated statements of income, the relative percentage that those amounts represent to processing and services revenues, and the percentage change in those amounts from year to year. This information should be read along with the consolidated financial statements and notes thereto. This table and the following discussion exclude the revenues and expenses associated with customer reim- bursements because management believes that it is not appropriate to include the customer reimbursements in analyzing the current performance of the Company as these balances offset in revenues and expenses with no impact on operating income and these amounts are not an indicator of current or future business trends. Customer reimbursements, which primarily consist of pass-through expenses such as postage and data communication costs, were $334.1 million, $291.2 million and $262.2 mil- lion for the years ended December 31, 2003, 2002 and 2001, respectively. Year ended December 31, In millions Percent of Processing Revenue Year ended December 31, Percent Increase (Decrease) 2003 2002 2001 2003 2002 2001 PROCESSING AND SERVICES REVENUES: Financial institution outsourcing, systems and services Health plan management services Securities processing and trust services All other and corporate $1,974.4 399.1 224.4 101.7 $1,666.0 216.1 230.6 93.0 $1,498.7 55.6 264.8 86.4 73% 15% 8% 4% 76% 10% 10% 4% 79% 3% 14% 5% TOTAL $2,699.6 $2,205.7 $1,905.5 100% 100% 100% 2003 vs. 2002 2002 vs. 2001 19% 85% (3)% 9% 22% 11% 289% (13)% 8% 16% COST OF REVENUES: Salaries, commissions and payroll related costs Data processing costs and equipment rentals Other operating expenses Depreciation and amortization $1,262.2 $1,090.3 $ 936.2 47% 49% 49% 16% 16% 217.2 516.4 171.8 165.3 363.6 141.1 148.5 314.0 147.7 TOTAL $2,167.6 $1,760.3 $1,546.4 OPERATING INCOME: Financial institution outsourcing, systems and services(1) Health plan management services(1) Securities processing and trust services(1) All other and corporate(2) $ 458.9 49.7 27.8 (4.4) $ 384.8 34.1 31.3 (4.6) $ 311.4 10.7 40.2 (3.2) 8% 19% 6% 80% 23% 12% 12% 7% 16% 6% 80% 23% 16% 14% 8% 16% 8% 81% 21% 19% 15% 31% 42% 22% 23% 11% 16% (4)% 14% 19% 46% (11)% 24% 218% (22)% TOTAL $ 532.0 $ 445.5 $ 359.1 20% 20% 19% 19% 24% (1) Percent of segment revenues is calculated as a percent of FIS, Health, and Securities and Trust revenues. (2) Percents not meaningful, amounts include corporate expenses. 36 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 37 » m a n a g e m e n t ’ s d i s c u s s i o n c o n t i n u e d » » m a n a g e m e n t ’ s d i s c u s s i o n c o n t i n u e d » » Market Risk Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, correlations or other market factors, such as liquidity, will result in losses for a certain financial instrument or group of financial instru- ments. The Company is exposed primarily to interest rate risk and market price risk on investments and borrowings. The Company actively monitors these risks through a variety of control procedures involving senior management. The Company’s trust administration subsidiaries accept money market account deposits from trust customers and invest those funds in marketable securities. Substantially all of the investments are rated within the highest investment grade categories for securities. The Company’s trust administration subsidiaries utilize simulation models for measuring and moni- toring interest rate risk and market value of portfolio equities. A formal Asset Liability Committee of the Company meets quarterly to review interest rate risks, capital ratios, liquidity levels, portfolio diversification, credit risk ratings and adher- ence to investment policies and guidelines. Substantially all of the investments at December 31, 2003 have contractual maturities of one year or less except for mortgage-backed obligations and U.S. Government obligations, which have an average duration of approximately 2 years and 4 months. The Company does not believe any significant changes in interest rates would have a material impact on the consolidated financial statements. The Company manages its debt structure and interest rate risk through the use of fixed and floating-rate debt and through the use of interest rate swaps. The Company uses interest rate swaps to partially hedge its exposure to interest rate changes, and to control its financing costs. Generally, under these swaps, the Company agrees with a counter party to exchange the difference between fixed-rate and floating- rate interest amounts based on an agreed principal amount. While changes in interest rates could decrease the Company’s interest income or increase its interest expense, the Company does not believe that it has a material exposure to changes in interest rates, primarily due to approximately 45% of the Company’s long-term debt having fixed interest rates as of December 31, 2003. Based on the Company’s long-term debt with variable interest rates as of December 31, 2003, a 1% increase in the Company’s borrowing rate would increase annual interest expense by $3.7 million. Based on the controls in place, management believes the risks associated with finan- cial instruments at December 31, 2003, will not have a mate- rial effect on the Company’s consolidated financial position or results of operations. » Results of Operations The Company is an independent provider of financial data processing systems and related information management services and products to financial institutions and other finan- cial intermediaries. The Company’s operations have been classified into four business segments: Financial institution outsourcing, systems and services (“FIS”); Health plan man- agement services (“Health”); Securities processing and trust services (“Securities and Trust”); and All other and corporate. The following table presents, for the period indicated, certain amounts included in the Company’s consolidated statements of income, the relative percentage that those amounts represent to processing and services revenues, and the percentage change in those amounts from year to year. This information should be read along with the consolidated financial statements and notes thereto. This table and the following discussion exclude the revenues and expenses associated with customer reim- bursements because management believes that it is not appropriate to include the customer reimbursements in analyzing the current performance of the Company as these balances offset in revenues and expenses with no impact on operating income and these amounts are not an indicator of current or future business trends. Customer reimbursements, which primarily consist of pass-through expenses such as postage and data communication costs, were $334.1 million, $291.2 million and $262.2 mil- lion for the years ended December 31, 2003, 2002 and 2001, respectively. Year ended December 31, In millions Percent of Processing Revenue Year ended December 31, Percent Increase (Decrease) 2003 2002 2001 2003 2002 2001 PROCESSING AND SERVICES REVENUES: Financial institution outsourcing, systems and services Health plan management services Securities processing and trust services All other and corporate $1,974.4 399.1 224.4 101.7 $1,666.0 216.1 230.6 93.0 $1,498.7 55.6 264.8 86.4 73% 15% 8% 4% 76% 10% 10% 4% 79% 3% 14% 5% TOTAL $2,699.6 $2,205.7 $1,905.5 100% 100% 100% 2003 vs. 2002 2002 vs. 2001 19% 85% (3)% 9% 22% 11% 289% (13)% 8% 16% COST OF REVENUES: Salaries, commissions and payroll related costs Data processing costs and equipment rentals Other operating expenses Depreciation and amortization $1,262.2 $1,090.3 $ 936.2 47% 49% 49% 16% 16% 217.2 516.4 171.8 165.3 363.6 141.1 148.5 314.0 147.7 TOTAL $2,167.6 $1,760.3 $1,546.4 OPERATING INCOME: Financial institution outsourcing, systems and services(1) Health plan management services(1) Securities processing and trust services(1) All other and corporate(2) $ 458.9 49.7 27.8 (4.4) $ 384.8 34.1 31.3 (4.6) $ 311.4 10.7 40.2 (3.2) 8% 19% 6% 80% 23% 12% 12% 7% 16% 6% 80% 23% 16% 14% 8% 16% 8% 81% 21% 19% 15% 31% 42% 22% 23% 11% 16% (4)% 14% 19% 46% (11)% 24% 218% (22)% TOTAL $ 532.0 $ 445.5 $ 359.1 20% 20% 19% 19% 24% (1) Percent of segment revenues is calculated as a percent of FIS, Health, and Securities and Trust revenues. (2) Percents not meaningful, amounts include corporate expenses. 36 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 37 » m a n a g e m e n t ’ s d i s c u s s i o n c o n t i n u e d » » m a n a g e m e n t ’ s d i s c u s s i o n c o n t i n u e d » » Internal Revenue Growth » Processing and Services Revenues » Cost of Revenues Internal revenue growth percentages are measured as the increase or decrease in total processing and services revenues for the current period less “acquired revenue from acquisitions” divided by total processing and services revenues from the prior year period plus “acquired revenue from acquisitions.” “Acquired revenue from acquisitions” represents pre-acquisition normal- ized revenue of acquired companies for the comparable prior year periods. Internal revenue growth percentage is a non-GAAP financial measure that the Company believes is useful to investors because it provides an alternative to measure revenue growth excluding the impact of acquired revenues. The following table sets forth the calculation of internal revenue growth percentages: Year ended December 31, In millions 2003 2002 Increase (Decrease) 2003 Internal Growth % Year ended December 31, In millions 2002 2001 Increase (Decrease) 2002 Internal Growth % TOTAL COMPANY: Processing and services revenue Acquired revenue from acquisitions $2,699.6 $2,205.7 373.5 $ 493.9 (373.5) $2,205.7 $1,905.5 243.1 $ 300.2 (243.1) Adjusted revenues $2,699.6 $2,579.2 $ 120.4 5% $2,205.7 $2,148.6 $ 57.1 3% BY SEGMENT: Financial institution outsourcing, systems and services Processing and services revenue Acquired revenue from acquisitions $1,974.4 $1,666.0 270.8 $ 308.4 (270.8) $1,666.0 $1,498.7 106.9 $ 167.3 (106.9) Adjusted revenues $1,974.4 $1,936.8 $ 37.6 2% $1,666.0 $1,605.6 $ 60.4 4% Health plan management services Processing and services revenue Acquired revenue from acquisitions $ 399.1 $ 216.1 88.5 $ 182.9 (88.5) $ 216.1 $ 55.6 128.7 $ 160.5 (128.7) Adjusted revenues $ 399.1 $ 304.6 $ 94.4 31% $ 216.1 $ 184.3 $ 31.8 17% Securities processing and trust services Processing and services revenue Acquired revenue from acquisitions $ 224.4 $ 230.6 14.2 $ (6.2) (14.2) $ 230.6 $ 264.8 7.5 $ (34.2) (7.5) Adjusted revenues $ 224.4 $ 244.8 $ (20.4) (8)% $ 230.6 $ 272.3 $ (41.7) (15)% All other and corporate Processing and services revenue $ 101.7 $ 93.0 $ 8.7 9% $ 93.0 $ 86.4 $ 6.6 8% Total processing and services revenues increased $493.9 mil- lion, or 22%, in 2003 compared to 2002 and $300.2 million, or 16%, in 2002 compared to 2001. Internal revenue growth was 5% in 2003 and 3% in 2002 with the remaining growth result- ing from acquisitions. Internal revenue growth was derived from sales to new clients, cross-sales to existing clients, increases in transaction volumes from existing clients and price increases. The FIS segment had positive revenue growth of $308.4 mil- lion, or 19%, in 2003 compared to 2002 and $167.3 million, or 11%, in 2002 compared to 2001. Internal revenue growth in our FIS segment was 2% in 2003 and 4% in 2002 with the remaining growth resulting from acquisitions. The Health segment had positive revenue growth of $182.9 million, or 85%, in 2003 compared to 2002 and $160.5 million, or 289%, in 2002 compared to 2001. Internal revenue growth in our Health segment was 31% in 2003 (18% related to the prescription benefit management business that generates operating margins in the low single digits and 13% related to the remaining businesses in the segment) and 17% in 2002 with the remaining growth resulting from acquisitions. Revenue in the Securities and Trust segment decreased by $6.2 million, or 3%, in 2003 compared to 2002 and $34.2 mil- lion, or 13%, in 2002 compared to 2001. The internal revenue growth percentage decrease in our Securities and Trust seg- ment was 8% in 2003 and 15% in 2002, offset by growth related to one acquisition. The Securities and Trust segment’s revenue in 2003 continued to be impacted by the weak, but improving U.S. retail securities financial market trading environ- ment which impacts the Securities division and lower interest rates which negatively impact both our Securities and Trust divisions. During 2003, the Securities and Trust segment recog- nized an increase in revenues of $15.8 million from the sale of available-for-sale investment securities and incurred a decrease in revenues of $17.0 million that resulted from an apparently fraudulent trading scheme at one of its broker-dealer clients. The Company has insurance that may cover part or all of this loss; however, no recovery amount is being recorded pending resolution of a claim. The Company also intends to pursue all recovery methods from the broker-dealer and its principals. Total cost of revenues increased $407.4 million, or 23%, in 2003 compared to 2002 and $213.9 million, or 14%, in 2002 compared to 2001. As a percent of processing and services revenues, cost of revenues were 80% in 2003, 80% in 2002, and 81% in 2001. The make up of cost of revenues each year has been affected by business acquisitions and changes in the mix of the Company’s business. As a percent of processing and services revenues, salaries, commissions and payroll related costs were 47% in 2003, 49% in 2002, and 49% in 2001, and data processing costs and equipment rentals were 8% in 2003, 7% in 2002, and 8% in 2001, respectively. The Company completed the acquisitions of EDS Corporation’s Consumer Network Serv- ices in December 2002 and EDS Corporation’s Credit Union Industry Group in July 2003, which both have higher data processing costs and equipment rentals and lower salary costs. These acquisitions have contributed to an increase in data processing costs and equipment rentals and a decrease in salary costs as a percentage of revenues in 2003 compared to 2002. As a percent of processing and services revenues, other operating expenses were 19% in 2003, 16% in 2002, and 16% in 2001. The increase in other operating expenses as a percentage of revenues in 2003 compared to 2002 was primarily due to the growth in the Health segment’s pre- scription benefit management (“PBM”) business. The PBM business has a very high proportion of costs included in other operating expenses due to the nature of its business (see Note 1). Depreciation and amortization expense increased $30.7 mil- lion in 2003 compared to 2002 and decreased $6.6 million in 2002 compared to 2001. The decrease in 2002 was prima- rily attributable to the adoption of SFAS No. 142 that resulted in a reduction of goodwill amortization expense of approxi- mately $24.0 million in 2002 compared to 2001, offset prima- rily by incremental depreciation and amortization expense from capital expenditures and other intangible assets subject to amortization. 38 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 39 » m a n a g e m e n t ’ s d i s c u s s i o n c o n t i n u e d » » m a n a g e m e n t ’ s d i s c u s s i o n c o n t i n u e d » » Internal Revenue Growth » Processing and Services Revenues » Cost of Revenues Internal revenue growth percentages are measured as the increase or decrease in total processing and services revenues for the current period less “acquired revenue from acquisitions” divided by total processing and services revenues from the prior year period plus “acquired revenue from acquisitions.” “Acquired revenue from acquisitions” represents pre-acquisition normal- ized revenue of acquired companies for the comparable prior year periods. Internal revenue growth percentage is a non-GAAP financial measure that the Company believes is useful to investors because it provides an alternative to measure revenue growth excluding the impact of acquired revenues. The following table sets forth the calculation of internal revenue growth percentages: Year ended December 31, In millions 2003 2002 Increase (Decrease) 2003 Internal Growth % Year ended December 31, In millions 2002 2001 Increase (Decrease) 2002 Internal Growth % TOTAL COMPANY: Processing and services revenue Acquired revenue from acquisitions $2,699.6 $2,205.7 373.5 $ 493.9 (373.5) $2,205.7 $1,905.5 243.1 $ 300.2 (243.1) Adjusted revenues $2,699.6 $2,579.2 $ 120.4 5% $2,205.7 $2,148.6 $ 57.1 3% BY SEGMENT: Financial institution outsourcing, systems and services Processing and services revenue Acquired revenue from acquisitions $1,974.4 $1,666.0 270.8 $ 308.4 (270.8) $1,666.0 $1,498.7 106.9 $ 167.3 (106.9) Adjusted revenues $1,974.4 $1,936.8 $ 37.6 2% $1,666.0 $1,605.6 $ 60.4 4% Health plan management services Processing and services revenue Acquired revenue from acquisitions $ 399.1 $ 216.1 88.5 $ 182.9 (88.5) $ 216.1 $ 55.6 128.7 $ 160.5 (128.7) Adjusted revenues $ 399.1 $ 304.6 $ 94.4 31% $ 216.1 $ 184.3 $ 31.8 17% Securities processing and trust services Processing and services revenue Acquired revenue from acquisitions $ 224.4 $ 230.6 14.2 $ (6.2) (14.2) $ 230.6 $ 264.8 7.5 $ (34.2) (7.5) Adjusted revenues $ 224.4 $ 244.8 $ (20.4) (8)% $ 230.6 $ 272.3 $ (41.7) (15)% All other and corporate Processing and services revenue $ 101.7 $ 93.0 $ 8.7 9% $ 93.0 $ 86.4 $ 6.6 8% Total processing and services revenues increased $493.9 mil- lion, or 22%, in 2003 compared to 2002 and $300.2 million, or 16%, in 2002 compared to 2001. Internal revenue growth was 5% in 2003 and 3% in 2002 with the remaining growth result- ing from acquisitions. Internal revenue growth was derived from sales to new clients, cross-sales to existing clients, increases in transaction volumes from existing clients and price increases. The FIS segment had positive revenue growth of $308.4 mil- lion, or 19%, in 2003 compared to 2002 and $167.3 million, or 11%, in 2002 compared to 2001. Internal revenue growth in our FIS segment was 2% in 2003 and 4% in 2002 with the remaining growth resulting from acquisitions. The Health segment had positive revenue growth of $182.9 million, or 85%, in 2003 compared to 2002 and $160.5 million, or 289%, in 2002 compared to 2001. Internal revenue growth in our Health segment was 31% in 2003 (18% related to the prescription benefit management business that generates operating margins in the low single digits and 13% related to the remaining businesses in the segment) and 17% in 2002 with the remaining growth resulting from acquisitions. Revenue in the Securities and Trust segment decreased by $6.2 million, or 3%, in 2003 compared to 2002 and $34.2 mil- lion, or 13%, in 2002 compared to 2001. The internal revenue growth percentage decrease in our Securities and Trust seg- ment was 8% in 2003 and 15% in 2002, offset by growth related to one acquisition. The Securities and Trust segment’s revenue in 2003 continued to be impacted by the weak, but improving U.S. retail securities financial market trading environ- ment which impacts the Securities division and lower interest rates which negatively impact both our Securities and Trust divisions. During 2003, the Securities and Trust segment recog- nized an increase in revenues of $15.8 million from the sale of available-for-sale investment securities and incurred a decrease in revenues of $17.0 million that resulted from an apparently fraudulent trading scheme at one of its broker-dealer clients. The Company has insurance that may cover part or all of this loss; however, no recovery amount is being recorded pending resolution of a claim. The Company also intends to pursue all recovery methods from the broker-dealer and its principals. Total cost of revenues increased $407.4 million, or 23%, in 2003 compared to 2002 and $213.9 million, or 14%, in 2002 compared to 2001. As a percent of processing and services revenues, cost of revenues were 80% in 2003, 80% in 2002, and 81% in 2001. The make up of cost of revenues each year has been affected by business acquisitions and changes in the mix of the Company’s business. As a percent of processing and services revenues, salaries, commissions and payroll related costs were 47% in 2003, 49% in 2002, and 49% in 2001, and data processing costs and equipment rentals were 8% in 2003, 7% in 2002, and 8% in 2001, respectively. The Company completed the acquisitions of EDS Corporation’s Consumer Network Serv- ices in December 2002 and EDS Corporation’s Credit Union Industry Group in July 2003, which both have higher data processing costs and equipment rentals and lower salary costs. These acquisitions have contributed to an increase in data processing costs and equipment rentals and a decrease in salary costs as a percentage of revenues in 2003 compared to 2002. As a percent of processing and services revenues, other operating expenses were 19% in 2003, 16% in 2002, and 16% in 2001. The increase in other operating expenses as a percentage of revenues in 2003 compared to 2002 was primarily due to the growth in the Health segment’s pre- scription benefit management (“PBM”) business. The PBM business has a very high proportion of costs included in other operating expenses due to the nature of its business (see Note 1). Depreciation and amortization expense increased $30.7 mil- lion in 2003 compared to 2002 and decreased $6.6 million in 2002 compared to 2001. The decrease in 2002 was prima- rily attributable to the adoption of SFAS No. 142 that resulted in a reduction of goodwill amortization expense of approxi- mately $24.0 million in 2002 compared to 2001, offset prima- rily by incremental depreciation and amortization expense from capital expenditures and other intangible assets subject to amortization. 38 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 39 » m a n a g e m e n t ’ s d i s c u s s i o n c o n t i n u e d » » m a n a g e m e n t ’ s d i s c u s s i o n c o n t i n u e d » » Operating Income Operating income increased $86.5 million, or 19%, in 2003 compared to 2002 and $86.4 million, or 24%, in 2002 compared to 2001. The operating income increase in 2003 compared to 2002 was primarily derived from the FIS segment which increased $74.1 million in 2003 compared to 2002 and $73.4 million in 2002 compared to 2001 and the Health segment which increased $15.6 million in 2003 compared to 2002 and $23.4 million in 2002 compared to 2001. The increase in operating income in 2003 compared to 2002 in the FIS segment was due to a number of factors, including continued strong operating margins of 23% and revenue growth. Operating margins in the Health segment were 12% in 2003, 16% in 2002 and 19% in 2001. The decrease in operating margins in the Health segment in 2003 compared to 2002 was due primarily to the low single digit operating margins in the PBM business. Operating income in the Secu- rities and Trust segment decreased $3.5 million in 2003 and $8.9 million in 2002, primarily due to continued weakness in the United States retail securities financial markets and the lower interest rate environment. » Income Tax Provision The effective income tax rate was 39% in 2003 and 2002 and 40% in 2001. The income tax rate for 2004 is expected to remain at 39%. » Net Income Per Share—Diluted Net income per share—diluted for 2003 was $1.61 com- pared to $1.37 in 2002 and $1.09 in 2001. The impact of adopting SFAS No. 142 would have increased 2001 net income per share—diluted by approximately $0.09 per share due to the elimination of goodwill amortization. The Company’s growth has been accomplished, to a sig- nificant degree, through the acquisition of businesses which are complementary to its operations. Management believes that a number of acquisition candidates are available which would further enhance the Company’s competitive position and plans to pursue them vigorously. Management is engaged in an ongoing program to reduce expenses related to acquisi- tions by eliminating operating redundancies. The Company’s approach has been to move slowly in achieving this goal in order to minimize the amount of disruption experienced by its clients and the potential loss of clients due to this program. » Liquidity and Capital Resources Free cash flow is measured as net cash provided by operating activities before changes in securities processing receivables and payables less capital expenditures including capitalization of software costs for external customers, as reported in the Company’s consolidated statements of cash flows. As the changes in securities processing receivables and payables are generally offset by changes in short-term borrowings and investments, which are included in financing and investing activities, management believes it is more meaningful to ana- lyze changes in operating cash flows before the changes in securities processing receivables and payables. Free cash flow is a non-GAAP financial measure that the Company believes is useful to investors because it provides another measure of available cash flow after the Company has satisfied the capital requirements of its operations. The following table summa- rizes free cash flow for the Company during the years ended December 31: In millions Net cash provided by operating activities Changes in securities processing receivables and payables—net Net cash provided by operating activities before changes in securities processing receivables and payables—net Capital expenditures, including capitalization of software costs for external customers 2003 2002 2001 $ 518.1 $ 579.2 $ 447.5 80.0 (63.9) (78.4) 598.1 515.3 369.1 (143.2) (141.9) (104.6) Free cash flow $ 454.9 $ 373.4 $ 264.5 Free cash flow increased by $81.5 million, or 22%, in 2003 compared to 2002. In 2003, the Company primarily used its free cash flow of $454.9 million and net proceeds from long-term borrowings of $215.8 million to fund the 12 acquisitions closed in 2003 totaling $702.8 million. At December 31, 2003, the Company had $699.1 million of long-term debt, while shareholders’ equity was $2.2 billion. Long-term debt includes $395.6 million borrowed under the Company’s $510.0 million credit and commercial paper facility which is payable in May 2004 or earlier at the Company’s option. The Company expects to renew its debt facility agreements prior to expiration in the second quarter of 2004. The Company has $93.6 million available under its credit facility at December 31, 2003. The Company must, among other requirements, maintain a minimum net worth of $976.1 million as of December 31, 2003, maintain a fixed charge coverage ratio of 1.35 to one, and limit its total debt to no more than three and one-half times the Company’s earnings before interest, taxes, depreciation and amortization. The Company was in compliance with all debt covenants throughout 2003. During the second quarter of 2003, the Company had two note offerings totaling $250.0 million of five-year notes due in 2008. The first note offering was for $150.0 million at a 4% fixed interest rate. The Company entered into fixed to floating interest rate swap agreements on the $150.0 million notes to manage its total ratio of fixed to floating-rate long- term debt over the period of these notes. The second offering of five-year notes was for $100.0 million at a 3% fixed inter- est rate. The Company used the net proceeds from the offer- ings primarily to repay existing credit facilities and for general corporate purposes including the funding of acquisitions. At December 31, 2003, the Company has operating lease commitments for office facilities and equipment aggregating $431.5 million, of which $98.3 million will be incurred in 2004. The Company believes that its cash flow from operations together with other available sources of funds will be ade- quate to meet its operating requirements, debt repayments, contingent payments in connection with business acquisitions and ordinary capital spending needs. At December 31, 2003, the Company had $103.6 million available for borrowing and $202.8 million in cash and cash equivalents. In the event that the Company makes significant future acquisitions, how- ever, it may raise funds through additional borrowings or the issuance of securities. The Company’s current policy is to retain earnings to sup- port future business opportunities, rather than to pay dividends. During 1999, the Company’s Board of Directors authorized the repurchase of up to 4.9 million shares of the Company’s common stock. Shares purchased under the authorization will be made through open market transactions that may occur from time to time as market conditions warrant. Shares acquired will be held for issuance in connection with acqui- sitions and employee stock option and purchase plans. As of December 31, 2003, approximately 1.7 million shares remained available under the repurchase authorization. » Off-Balance Sheet Arrangements and Contractual Obligations The Company does not have any material off-balance sheet arrangements. The following table details certain of the Company’s contractual cash obligations at December 31, 2003. In millions Total Less than 1 year 1–3 years 3–5 years More than 5 years Long-term debt Minimum operating lease payments Short-term debt Purchase obligations $ 699.1 $434.3 $ 14.8 $250.0 $ — 431.5 139.0 98.3 139.0 148.0 — 89.0 — 96.2 — 7.5 2.6 4.1 0.8 — TOTAL $1,277.1 $674.2 $166.9 $339.8 $96.2 40 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 41 » m a n a g e m e n t ’ s d i s c u s s i o n c o n t i n u e d » » m a n a g e m e n t ’ s d i s c u s s i o n c o n t i n u e d » » Operating Income Operating income increased $86.5 million, or 19%, in 2003 compared to 2002 and $86.4 million, or 24%, in 2002 compared to 2001. The operating income increase in 2003 compared to 2002 was primarily derived from the FIS segment which increased $74.1 million in 2003 compared to 2002 and $73.4 million in 2002 compared to 2001 and the Health segment which increased $15.6 million in 2003 compared to 2002 and $23.4 million in 2002 compared to 2001. The increase in operating income in 2003 compared to 2002 in the FIS segment was due to a number of factors, including continued strong operating margins of 23% and revenue growth. Operating margins in the Health segment were 12% in 2003, 16% in 2002 and 19% in 2001. The decrease in operating margins in the Health segment in 2003 compared to 2002 was due primarily to the low single digit operating margins in the PBM business. Operating income in the Secu- rities and Trust segment decreased $3.5 million in 2003 and $8.9 million in 2002, primarily due to continued weakness in the United States retail securities financial markets and the lower interest rate environment. » Income Tax Provision The effective income tax rate was 39% in 2003 and 2002 and 40% in 2001. The income tax rate for 2004 is expected to remain at 39%. » Net Income Per Share—Diluted Net income per share—diluted for 2003 was $1.61 com- pared to $1.37 in 2002 and $1.09 in 2001. The impact of adopting SFAS No. 142 would have increased 2001 net income per share—diluted by approximately $0.09 per share due to the elimination of goodwill amortization. The Company’s growth has been accomplished, to a sig- nificant degree, through the acquisition of businesses which are complementary to its operations. Management believes that a number of acquisition candidates are available which would further enhance the Company’s competitive position and plans to pursue them vigorously. Management is engaged in an ongoing program to reduce expenses related to acquisi- tions by eliminating operating redundancies. The Company’s approach has been to move slowly in achieving this goal in order to minimize the amount of disruption experienced by its clients and the potential loss of clients due to this program. » Liquidity and Capital Resources Free cash flow is measured as net cash provided by operating activities before changes in securities processing receivables and payables less capital expenditures including capitalization of software costs for external customers, as reported in the Company’s consolidated statements of cash flows. As the changes in securities processing receivables and payables are generally offset by changes in short-term borrowings and investments, which are included in financing and investing activities, management believes it is more meaningful to ana- lyze changes in operating cash flows before the changes in securities processing receivables and payables. Free cash flow is a non-GAAP financial measure that the Company believes is useful to investors because it provides another measure of available cash flow after the Company has satisfied the capital requirements of its operations. The following table summa- rizes free cash flow for the Company during the years ended December 31: In millions Net cash provided by operating activities Changes in securities processing receivables and payables—net Net cash provided by operating activities before changes in securities processing receivables and payables—net Capital expenditures, including capitalization of software costs for external customers 2003 2002 2001 $ 518.1 $ 579.2 $ 447.5 80.0 (63.9) (78.4) 598.1 515.3 369.1 (143.2) (141.9) (104.6) Free cash flow $ 454.9 $ 373.4 $ 264.5 Free cash flow increased by $81.5 million, or 22%, in 2003 compared to 2002. In 2003, the Company primarily used its free cash flow of $454.9 million and net proceeds from long-term borrowings of $215.8 million to fund the 12 acquisitions closed in 2003 totaling $702.8 million. At December 31, 2003, the Company had $699.1 million of long-term debt, while shareholders’ equity was $2.2 billion. Long-term debt includes $395.6 million borrowed under the Company’s $510.0 million credit and commercial paper facility which is payable in May 2004 or earlier at the Company’s option. The Company expects to renew its debt facility agreements prior to expiration in the second quarter of 2004. The Company has $93.6 million available under its credit facility at December 31, 2003. The Company must, among other requirements, maintain a minimum net worth of $976.1 million as of December 31, 2003, maintain a fixed charge coverage ratio of 1.35 to one, and limit its total debt to no more than three and one-half times the Company’s earnings before interest, taxes, depreciation and amortization. The Company was in compliance with all debt covenants throughout 2003. During the second quarter of 2003, the Company had two note offerings totaling $250.0 million of five-year notes due in 2008. The first note offering was for $150.0 million at a 4% fixed interest rate. The Company entered into fixed to floating interest rate swap agreements on the $150.0 million notes to manage its total ratio of fixed to floating-rate long- term debt over the period of these notes. The second offering of five-year notes was for $100.0 million at a 3% fixed inter- est rate. The Company used the net proceeds from the offer- ings primarily to repay existing credit facilities and for general corporate purposes including the funding of acquisitions. At December 31, 2003, the Company has operating lease commitments for office facilities and equipment aggregating $431.5 million, of which $98.3 million will be incurred in 2004. The Company believes that its cash flow from operations together with other available sources of funds will be ade- quate to meet its operating requirements, debt repayments, contingent payments in connection with business acquisitions and ordinary capital spending needs. At December 31, 2003, the Company had $103.6 million available for borrowing and $202.8 million in cash and cash equivalents. In the event that the Company makes significant future acquisitions, how- ever, it may raise funds through additional borrowings or the issuance of securities. The Company’s current policy is to retain earnings to sup- port future business opportunities, rather than to pay dividends. During 1999, the Company’s Board of Directors authorized the repurchase of up to 4.9 million shares of the Company’s common stock. Shares purchased under the authorization will be made through open market transactions that may occur from time to time as market conditions warrant. Shares acquired will be held for issuance in connection with acqui- sitions and employee stock option and purchase plans. As of December 31, 2003, approximately 1.7 million shares remained available under the repurchase authorization. » Off-Balance Sheet Arrangements and Contractual Obligations The Company does not have any material off-balance sheet arrangements. The following table details certain of the Company’s contractual cash obligations at December 31, 2003. In millions Total Less than 1 year 1–3 years 3–5 years More than 5 years Long-term debt Minimum operating lease payments Short-term debt Purchase obligations $ 699.1 $434.3 $ 14.8 $250.0 $ — 431.5 139.0 98.3 139.0 148.0 — 89.0 — 96.2 — 7.5 2.6 4.1 0.8 — TOTAL $1,277.1 $674.2 $166.9 $339.8 $96.2 40 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 41 » selected financial data The following data, which has been affected by acquisitions, should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report. In thousands, except per share data Y E A R S E N D E D D E C E M B E R 3 1 , 2003 2002 2001 2000 1999 Processing and services revenues Income before income taxes Income tax provision Net income Net income per share: Basic Diluted Total assets Long-term debt Shareholders’ equity $2,699,609 $2,205,734 $1,905,531 $1,681,871 $1,407,545 516,413 201,401 315,012 1.63 1.61 436,290 170,153 266,137 1.39 1.37 347,028 138,811 208,217 1.11 1.09 300,035 123,014 177,021 0.96 0.93 233,675 95,807 137,868 0.75 0.73 $7,214,175 $6,438,705 $5,322,242 $5,586,320 $5,307,710 699,116 2,199,808 482,824 343,093 334,958 472,824 1,827,669 1,604,826 1,252,072 1,091,016 Note: The above information excludes the revenues and expenses associated with customer reimbursements recorded in accordance with EITF No. 01-14. Processing and services revenues and cost of revenues were reclassified in the first nine months of 2003 and for the full years 2002, 2001 and 2000 to reflect the preferred industry methods of accounting for flood insurance processing and prescription benefit management revenues. The reclassifications attributable to flood insurance processing reduced processing and services revenues and cost of revenues by $78 million in the first nine months of 2003, $74 million in 2002, $27 million in 2001 and $4 million in 2000. The reclassification attributable to prescription benefit management services increased processing and services revenues and cost of revenues by $32 million in the first nine months of 2003. These reclassifications did not impact the Company’s financial position, operating income or net income. » market price information The following information relates to the closing price of the Company’s common stock, which is traded on the Nasdaq Stock Market under the symbol FISV. 2003 2002 Quarter ended High Low High Low March 31 June 30 September 30 December 31 $35.85 37.05 40.20 40.00 $27.57 28.77 35.93 33.81 $46.60 46.08 39.25 35.04 $39.88 35.16 28.08 22.60 At December 31, 2003, the Company’s common stock was held by 10,513 shareholders of record. It is estimated that an additional 45,000 shareholders own the Company’s stock through nominee or street name accounts with brokers. The closing sale price for the Company’s stock on January 23, 2004, was $37.71 per share. 42 » Fiserv, Inc. and Subsidiaries » quarterly financial information (unaudited) In thousands, except per share data 2003 Processing and services revenues Cost of revenues Operating income Interest expense—net Income before income taxes Income tax provision Net income Net income per share: Basic Diluted 2002 Processing and services revenues Cost of revenues Operating income Interest expense—net Income before income taxes Income tax provision Net income Net income per share: Basic Diluted Quarters First Second Third Fourth Total $604,262 $643,888 $701,956 $749,503 $2,699,609 479,665 511,829 565,661 610,486 2,167,641 124,597 (2,977) 121,620 47,432 132,059 (3,474) 128,585 50,148 136,295 (4,472) 131,823 51,411 139,017 (4,632) 134,385 52,410 531,968 (15,555) 516,413 201,401 $ 74,188 $ 78,437 $ 80,412 $ 81,975 $ 315,012 $0.39 $0.38 $0.41 $0.40 $0.42 $0.41 $0.42 $0.42 $1.63 $1.61 $543,204 $543,858 $543,406 $575,266 $2,205,734 433,775 432,426 433,157 460,917 1,760,275 109,429 (2,687) 106,742 41,629 111,432 (2,178) 109,254 42,609 110,249 (1,804) 108,445 42,294 114,349 (2,500) 111,849 43,621 445,459 (9,169) 436,290 170,153 $ 65,113 $ 66,645 $ 66,151 $ 68,228 $ 266,137 $0.34 $0.33 $0.35 $0.34 $0.34 $0.34 $0.36 $0.35 $1.39 $1.37 Note: The above information excludes the revenues and expenses associated with customer reimbursements recorded in accordance with EITF No. 01-14. Fiserv, Inc. and Subsidiaries » 43 » management’s statement of responsibility » independent auditors’ report The management of Fiserv, Inc. assumes responsibility for the integrity and objectivity of the information appearing in the 2003 Annual Report. This information was prepared in conformity with accounting principles generally accepted in the United States of America and necessarily reflects the best estimates and judgment of management. To provide reasonable assurance that transactions authorized by management are recorded and reported properly and that assets are safeguarded, the Company maintains a system of internal controls. The concept of reasonable assurance implies that the cost of such a system is weighed against the benefits to be derived therefrom. The control environment is complemented by the Company’s internal audit function, which evaluates the adequacy of the controls, policies and procedures in place, as well as adherence to them, and recommends improvements for implementation when applicable. In addition, Deloitte & Touche LLP, certified public accountants, audits the consolidated financial statements of the Company in accordance with auditing standards generally accepted in the United States of America. Improvements are made to the system based upon recommendations proposed as a result of observations made during the course of their audit. The Audit Committee ensures that management and the independent auditors are properly discharging their financial reporting responsibilities. In performing this function, the Committee meets with management and the independent auditors throughout the year. Additional access to the Committee is provided to Deloitte & Touche LLP on an unrestricted basis, allowing discussion of audit results and opinions on the adequacy of internal accounting controls and the quality of financial reporting. LESLIE M. MUMA, President and Chief Executive Officer Shareholders and Directors of Fiserv, Inc. We have audited the accompanying consolidated balance sheets of Fiserv, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an 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 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 Fiserv, Inc. and subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. As described in Note 1 to the consolidated financial statements, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” Deloitte & Touche LLP Milwaukee, Wisconsin January 30, 2004 44 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 45 » management’s statement of responsibility » independent auditors’ report The management of Fiserv, Inc. assumes responsibility for the integrity and objectivity of the information appearing in the 2003 Annual Report. This information was prepared in conformity with accounting principles generally accepted in the United States of America and necessarily reflects the best estimates and judgment of management. To provide reasonable assurance that transactions authorized by management are recorded and reported properly and that assets are safeguarded, the Company maintains a system of internal controls. The concept of reasonable assurance implies that the cost of such a system is weighed against the benefits to be derived therefrom. The control environment is complemented by the Company’s internal audit function, which evaluates the adequacy of the controls, policies and procedures in place, as well as adherence to them, and recommends improvements for implementation when applicable. In addition, Deloitte & Touche LLP, certified public accountants, audits the consolidated financial statements of the Company in accordance with auditing standards generally accepted in the United States of America. Improvements are made to the system based upon recommendations proposed as a result of observations made during the course of their audit. The Audit Committee ensures that management and the independent auditors are properly discharging their financial reporting responsibilities. In performing this function, the Committee meets with management and the independent auditors throughout the year. Additional access to the Committee is provided to Deloitte & Touche LLP on an unrestricted basis, allowing discussion of audit results and opinions on the adequacy of internal accounting controls and the quality of financial reporting. LESLIE M. MUMA, President and Chief Executive Officer Shareholders and Directors of Fiserv, Inc. We have audited the accompanying consolidated balance sheets of Fiserv, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an 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 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 Fiserv, Inc. and subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. As described in Note 1 to the consolidated financial statements, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” Deloitte & Touche LLP Milwaukee, Wisconsin January 30, 2004 44 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 45 » board of directors » executive committee Donald F. Dillon Glenn M. Renwick Norman J. Balthasar Kenneth R. Jensen 63, Chairman of the Board of Directors of Fiserv, Inc. With more 48, President and Chief Executive Officer of The Progressive 57, Senior Executive Vice President and Chief Operating Officer. See Board of Directors for profile. than 35 years in the financial and data processing businesses, Corporation. With more than 15 years in the insurance industry, Mr. Dillon has served on the Fiserv Board since 1995. Mr. Renwick has served as a Director since 2001. Kenneth R. Jensen Kim M. Robak 60, Senior Executive Vice President, Chief Financial Officer, 48, Vice President for External Affairs and Corporation Secretary, Treasurer and Assistant Secretary of Fiserv, Inc. With more than University of Nebraska. With more than 20 years of experience 40 years in the data processing industry, Mr. Jensen has served in the fields of law, education and public service, Ms. Robak as a Director since 1984. joined the Fiserv Board in 2003. Daniel P. Kearney L. William Seidman 64, Financial Consultant. With more than 30 years in the 82, Chief Commentator for CNBC-TV, Publisher of Bank Director banking, insurance and legal professions, Mr. Kearney has and Board Member magazines, and Industry Consultant. With served as a Director since 1999. more than 45 years in the business, financial and political arenas, Mr. Seidman has served as a Director since 1992. Gerald J. Levy 71, Lead Director, Fiserv, Inc.; Chairman of the Board and Chief Thekla R. Shackelford Executive Officer of Guaranty Bank, S.S.B. With over 40 years 69, Educational Consultant. With more than 25 years in the experience in the financial and business arenas, Mr. Levy has fields of education and public service, Ms. Shackelford has served as a Director since 1986. served as a Director since 1994. Leslie M. Muma Thomas C. Wertheimer 59, President and Chief Executive Officer of Fiserv, Inc. With 63, Consultant. With more than 35 years in the financial services more than 35 years in the data processing industry, Mr. Muma profession, Mr. Wertheimer joined the Fiserv Board in 2003. has served as a Director since 1984. With more than 30 years in the financial services industry, Mr. Balthasar has been with Fiserv and its predecessor company since 1974. Leslie M. Muma See Board of Directors for profile. » management committee Robert H. Beriault Rodney D. Poskochil 52, Group President, Securities & Trust Services. With more than 51, Group President, Bank Systems & eProducts. With more 20 years in the financial services industry, Mr. Beriault has been than 25 years in the financial and data processing industries, with Fiserv since 1995. Mr. Poskochil has been with Fiserv since 1995. James W. Cox James C. Puzniak 40, Group President, Fiserv Health. With more than 15 years 57, Group President, Lending Systems & Services. With more in the financial services and health administration industries, than 35 years in the financial services industry, Mr. Puzniak has Mr. Cox has been with Fiserv since 2001. been with Fiserv since 1993. Douglas J. Craft Dean C. Schmelzer 50, Executive Vice President, Operating Group Chief Financial 53, Group President, Marketing & Sales. With nearly 30 years Officer. With more than 20 years in the financial industry, in the data processing industry, Mr. Schmelzer has been with Mr. Craft has been with Fiserv since 1985. Fiserv since 1992. Mark J. Damico Charles W. Sprague 35, Group President, Item Processing. With nearly 15 years in 54, Executive Vice President, General Counsel & Chief the financial and data processing industries, Mr. Damico has Administrative Officer. With more than 27 years in the legal been with Fiserv since 1995. profession and the financial services industry, Mr. Sprague has Patrick C. Foy 49, Group President, Bank Servicing. With more than 20 years Terry R. Wade been with Fiserv since 1994. in the financial services industry, Mr. Foy has been with Fiserv 43, Group President, Insurance Solutions. With nearly 20 years since 2001. Thomas A. Neill 54, Group President, Credit Union & Industry Products. With nearly 30 years in the financial services industry, Mr. Neill has been with Fiserv since 1993. in the insurance, technology and outsourcing industries, Mr. Wade has been with Fiserv since 2003. For complete profiles of the Fiserv Board of Directors, please see the proxy statement. 46 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 47 » board of directors » executive committee Donald F. Dillon Glenn M. Renwick Norman J. Balthasar Kenneth R. Jensen 63, Chairman of the Board of Directors of Fiserv, Inc. With more 48, President and Chief Executive Officer of The Progressive 57, Senior Executive Vice President and Chief Operating Officer. See Board of Directors for profile. than 35 years in the financial and data processing businesses, Corporation. With more than 15 years in the insurance industry, Mr. Dillon has served on the Fiserv Board since 1995. Mr. Renwick has served as a Director since 2001. Kenneth R. Jensen Kim M. Robak 60, Senior Executive Vice President, Chief Financial Officer, 48, Vice President for External Affairs and Corporation Secretary, Treasurer and Assistant Secretary of Fiserv, Inc. With more than University of Nebraska. With more than 20 years of experience 40 years in the data processing industry, Mr. Jensen has served in the fields of law, education and public service, Ms. Robak as a Director since 1984. joined the Fiserv Board in 2003. Daniel P. Kearney L. William Seidman 64, Financial Consultant. With more than 30 years in the 82, Chief Commentator for CNBC-TV, Publisher of Bank Director banking, insurance and legal professions, Mr. Kearney has and Board Member magazines, and Industry Consultant. With served as a Director since 1999. more than 45 years in the business, financial and political arenas, Mr. Seidman has served as a Director since 1992. Gerald J. Levy 71, Lead Director, Fiserv, Inc.; Chairman of the Board and Chief Thekla R. Shackelford Executive Officer of Guaranty Bank, S.S.B. With over 40 years 69, Educational Consultant. With more than 25 years in the experience in the financial and business arenas, Mr. Levy has fields of education and public service, Ms. Shackelford has served as a Director since 1986. served as a Director since 1994. Leslie M. Muma Thomas C. Wertheimer 59, President and Chief Executive Officer of Fiserv, Inc. With 63, Consultant. With more than 35 years in the financial services more than 35 years in the data processing industry, Mr. Muma profession, Mr. Wertheimer joined the Fiserv Board in 2003. has served as a Director since 1984. With more than 30 years in the financial services industry, Mr. Balthasar has been with Fiserv and its predecessor company since 1974. Leslie M. Muma See Board of Directors for profile. » management committee Robert H. Beriault Rodney D. Poskochil 52, Group President, Securities & Trust Services. With more than 51, Group President, Bank Systems & eProducts. With more 20 years in the financial services industry, Mr. Beriault has been than 25 years in the financial and data processing industries, with Fiserv since 1995. Mr. Poskochil has been with Fiserv since 1995. James W. Cox James C. Puzniak 40, Group President, Fiserv Health. With more than 15 years 57, Group President, Lending Systems & Services. With more in the financial services and health administration industries, than 35 years in the financial services industry, Mr. Puzniak has Mr. Cox has been with Fiserv since 2001. been with Fiserv since 1993. Douglas J. Craft Dean C. Schmelzer 50, Executive Vice President, Operating Group Chief Financial 53, Group President, Marketing & Sales. With nearly 30 years Officer. With more than 20 years in the financial industry, in the data processing industry, Mr. Schmelzer has been with Mr. Craft has been with Fiserv since 1985. Fiserv since 1992. Mark J. Damico Charles W. Sprague 35, Group President, Item Processing. With nearly 15 years in 54, Executive Vice President, General Counsel & Chief the financial and data processing industries, Mr. Damico has Administrative Officer. With more than 27 years in the legal been with Fiserv since 1995. profession and the financial services industry, Mr. Sprague has Patrick C. Foy 49, Group President, Bank Servicing. With more than 20 years Terry R. Wade been with Fiserv since 1994. in the financial services industry, Mr. Foy has been with Fiserv 43, Group President, Insurance Solutions. With nearly 20 years since 2001. Thomas A. Neill 54, Group President, Credit Union & Industry Products. With nearly 30 years in the financial services industry, Mr. Neill has been with Fiserv since 1993. in the insurance, technology and outsourcing industries, Mr. Wade has been with Fiserv since 2003. For complete profiles of the Fiserv Board of Directors, please see the proxy statement. 46 » Fiserv, Inc. and Subsidiaries Fiserv, Inc. and Subsidiaries » 47 » executive leadership Bank Servicing Group Patrick C. Foy, 49 President, SourceOne Max S. Narro, 41 President, Credit Services Michael J. Rigney, 53 President, VISION David W. Santi, 43 President, CBS Outsourcing Frank M. Smeal, 61 President, Bank Servicing Division III Bank Systems & eProducts Group Anthony S. Catalfano, 40 President & COO, Fiserv EFT/CNS Bruce C. Christensen, 53 President, Precision Computer Systems Grant P. Christenson, 52 CEO, Fiserv EFT/CNS Paul A. Frank, 60 President, Fiserv ePayments Division; President, Banklink Julie Gabelmann, 48 General Manager, Customer Contact Solutions Alexander H. Groenendyk, 47 President, CBS Worldwide Ronald E. Thompson, 56 President, Imagesoft Technologies David E. Ulrich, 47 President, IPS-Sendero Michael K. Young, 48 President, Information Technology, Inc. Credit Union & Industry Products Group Joseph A. Antellocy, 44 President, AFTECH Joseph A. Barry, 50 President, Credit Union Eastern Region Jeffery S. Butler, 41 President, IntegraSys Dennis L. Connick, 55 President, CUSA Jorge M. Diaz, 39 President, Personix John A. Edwards, 57 President, XP Systems Richard P. Fitzgerald, 54 President, Document Solutions Pedro E. Kaufmann, 45 President, EPSIIA Roger L. Kuhns, 56 President, Credit Union Western Region Timothy M. Milz, 41 President, GalaxyPlus John N. Schooler, 49 President, USERS Kevin L. Sparks, 47 President, Summit Fiserv Health Group Jay M. Anliker, 42 Executive Vice President & COO, Wausau Benefits Rita M. Ayers, 47 Senior Vice President & General Manager, DirectCompRx Mark Campbell, Pharm.D., 42 President & CEO, Innoviant Joseph A. Hensley, 49 Division President Jeffrey D. Mills, 44 President, Harrington Benefit Services Elaine H. Mischler, M.D., 60 Executive Vice President & Chief Medical Officer, Avidyn Health Alfred P. Moore, 58 Division President James R. Petrich, 50 President, Fiserv Health Kansas and Tennessee Omar Rodriguez, 45 President, Benefit Planners Andrew M. Thompson, 59 President, Benesight J.R. Thompson, 47 President & COO, Third Party Solutions John D. Weymer, 52 Executive Vice President & COO, Avidyn Health Insurance Solutions Group Craig J. Faulkner, 50 President, Emerald Publications William E. Jerro, 32 President, ReliaQuote Curtis M. Lund, 63 President, Flood Insurance Division Robert Meyerson, 57 President, Fiserv FSC Anthony T. Perdichezzi, 54 President, Administrative Solutions Division Item Processing Group Kenneth R. Acheson, 55 President, Fiserv Solutions of Canada & INTRIA Items Inc. Therese K. Carstensen, 48 President, Western Region Frank E. Eisel, Jr., 46 President, Rocky Mountain Region Richard J. Franas, 55 President, Fiserv-JPM Chase Guy J. Fries, 46 President, Southern Region W. David Hamilton, 52 President, Midwest Region Norman S. Himes, 60 President, Mid-Atlantic Region Robert F. McPherson, 57 President, Northern Region Anna M. Quinlan, 52 President, RemitStream Solutions Thomas R. Taylor, 56 Executive Vice President, Item Processing Technology & Support Kenneth P. True, 39 President, Fiserv-The Northern Trust IP Operations Stephen J. Ward, 51 Executive Vice President, Item Processing Market Development Lending Systems & Services Group Stuart H. Angert, 62 Co-CEO, Remarketing Services of America Paul Brammeier, 61 Chief Operating Officer, Chase Credit Kevin J. Collins, 46 President, Fiserv LeMans Leslie J. Howlett III, 44 President, Integrated Loan Services Andrew J. Shaevel, 39 Co-CEO, Remarketing Services of America Gerald A. Smith, 57 CEO, Integrated Loan Services Richard A. Snedden, 50 President & CEO, General American Corporation John R. Tenuta, 56 President, Fiserv Lending Solutions; President, MortgageServ Allan N. Weiss, 44 President, Case Shiller Weiss Securities & Trust Services Group Walter J. Koller, 39 President, Securities Division D. Terry Reitan, 57 President, Trust Division Nancy M. Sympson, 51 President, Fiserv Investor Services & TradeStar Corporate Management Jack P. Bucalo, 65 Senior Vice President, Human Resources Christina Slemon-Dokos, 48 Senior Vice President, Marketing Thomas J. Hirsch, 40 Senior Vice President & Controller Daniel F. Murphy, 54 Senior Vice President, Director of Audit 48 » Fiserv, Inc. and Subsidiaries thinking » driving » delivering together » growth » value m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b d e n g i s e D Corporate Office 255 Fiserv Drive Brookfield, Wisconsin 53045 (262) 879-5000 www.fiserv.com Investor Relations (800) 425-FISV Stock Listing Exchange: Nasdaq Symbol: FISV Transfer Agent EquiServe Trust Company, N.A. P.O. Box 43069 Providence, Rhode Island 02940-3069 (800) 446-2617 www.equiserve.com Fiserv is a registered trademark of Fiserv, Inc. All product and brand names mentioned are the property of their respective companies. © 2004 Fiserv, Inc. All rights reserved. 2 0 0 3 A N N U A L R E P O R T F I S E R V » 2 0 0 3 A N N U A L R E P O R T thinking DRIVING delivering »
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