##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period from  to
 Commission File Number 1-31951
 eFunds Corporation
  Delaware
    
    39-1506286(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification Number)Gainey Center II8501 N. Scottsdale Road, Suite 300Scottsdale, Arizona
    
    85253(Address of principal executive offices)
    
    (Zip Code)
   þ o
  þ o o
  o þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 5. OTHER INFORMATION CAUTIONARY STATEMENTSITEM 6. EXHIBITSSIGNATURESIndex to ExhibitsEX-10.1EX-10.2EX-10.3EX-10.4EX-10.7EX-31.1EX-31.2EX-32.1    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 EFUNDS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 September 30,
    
    
    December 31,(dollars in thousands)
    
    2006
    
    
    2005(revised)Current assets:Cash and cash equivalents
    
    $
    99,691
    
    
    $
    87,414Short term investments
    
    
    15,600
    
    
    
    Restricted cash
    
    
    3,599
    
    
    
    28,183Settlement assets
    
    
    20,489
    
    
    
    28,438Accounts receivable  net
    
    
    96,879
    
    
    
    96,115Deferred income taxes
    
    
    26,251
    
    
    
    27,422Prepaid expenses and other current assets
    
    
    20,172
    
    
    
    18,341Total current assets
    
    
    282,681
    
    
    
    285,913Property and equipment  net
    
    
    61,268
    
    
    
    63,721Intangible assets  net
    
    
    399,010
    
    
    
    398,337Other non-current assets
    
    
    17,200
    
    
    
    17,638Total non-current assets
    
    
    477,478
    
    
    
    479,696Total assets
    
    $
    760,159
    
    
    $
    765,609Current liabilities:Accounts payable
    
    $
    19,059
    
    
    $
    23,902Settlement liabilities
    
    
    20,730
    
    
    
    28,519Accrued liabilities
    
    
    42,365
    
    
    
    57,438Acquisition holdbacks and earn-outs
    
    
    5,991
    
    
    
    25,052Deferred revenue and gains
    
    
    21,799
    
    
    
    23,978Long-term debt due within one year
    
    
    4,659
    
    
    
    5,030Total current liabilities
    
    
    114,603
    
    
    
    163,919Long-term deferred gains
    
    
    20,468
    
    
    
    27,637Long-term debt
    
    
    103,274
    
    
    
    106,973Other long-term liabilities
    
    
    17,339
    
    
    
    15,481Total liabilities
    
    
    255,684
    
    
    
    314,010Commitments and contingencies (Notes 6 & 10)Stockholders equity:Preferred stock $.01 par value; 100,000,000 shares authorized; no shares
issued and outstanding
    
    
    
    
    
    
    Common stock $.01 par value (250,000,000 shares authorized; 51,386,217
shares issued and 46,794,974 shares outstanding September 30, 2006 and
50,529,045 shares issued and 45,937,802 shares outstanding at December
31, 2005)
    
    
    514
    
    
    
    505Additional paid-in capital
    
    
    517,372
    
    
    
    498,939Treasury stock at cost (4,591,243 shares)
    
    
    (100,000
    )
    
    
    (100,000
    )Retained earnings
    
    
    86,115
    
    
    
    51,144Accumulated other comprehensive income
    
    
    474
    
    
    
    1,011Stockholders equity
    
    
    504,475
    
    
    
    451,599Total liabilities and stockholders equity
    
    $
    760,159
    
    
    $
    765,609
  1




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##### Table of Contents



EFUNDS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except per share amounts)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(revised)
    
    

    

    
    (revised)Net revenue
    
    $
    139,368
    
    
    $
    133,150
    
    
    $
    411,503
    
    
    $
    363,682Operating expenses:Processing, communication and service costs
    
    
    34,703
    
    
    
    32,133
    
    
    
    103,042
    
    
    
    88,648Employee costs
    
    
    54,507
    
    
    
    57,098
    
    
    
    169,284
    
    
    
    157,978Depreciation and amortization
    
    
    11,873
    
    
    
    11,817
    
    
    
    35,505
    
    
    
    28,041Other operating costs
    
    
    16,415
    
    
    
    16,547
    
    
    
    51,450
    
    
    
    39,929Total operating expenses
    
    
    117,498
    
    
    
    117,595
    
    
    
    359,281
    
    
    
    314,596Income from operations
    
    
    21,870
    
    
    
    15,555
    
    
    
    52,222
    
    
    
    49,086Interest expense
    
    
    (1,713
    )
    
    
    (2,089
    )
    
    
    (4,713
    )
    
    
    (2,340
    )Other income  net
    
    
    768
    
    
    
    974
    
    
    
    2,754
    
    
    
    3,786Income before income taxes
    
    
    20,925
    
    
    
    14,440
    
    
    
    50,263
    
    
    
    50,532Provision for income taxes
    
    
    (6,324
    )
    
    
    (210
    )
    
    
    (15,292
    )
    
    
    (11,480
    )Net income
    
    $
    14,601
    
    
    $
    14,230
    
    
    $
    34,971
    
    
    $
    39,052Weighted average shares outstanding
    
    
    46,611
    
    
    
    45,471
    
    
    
    46,444
    
    
    
    46,761Weighted average shares and potential dilutive shares outstanding
    
    
    47,309
    
    
    
    46,741
    
    
    
    47,215
    
    
    
    48,111Net income per share  basic
    
    $
    0.31
    
    
    $
    0.31
    
    
    $
    0.75
    
    
    $
    0.84Net income per share  diluted
    
    $
    0.31
    
    
    $
    0.30
    
    
    $
    0.74
    
    
    $
    0.81
  2




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EFUNDS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months EndedSeptember 30,(in thousands)
    
    2006
    
    
    2005(revised)Cash flows from operating activities:Net income
    
    $
    34,971
    
    
    $
    39,052Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    13,022
    
    
    
    11,710Amortization
    
    
    22,483
    
    
    
    16,331Stock-based compensation
    
    
    6,941
    
    
    
    7,295Excess tax benefits from share-based compensation
    
    
    (1,401
    )
    
    
    (1,445
    )Deferred income taxes
    
    
    15,137
    
    
    
    3,525Other  net
    
    
    101
    
    
    
    (274
    )Changes in assets and liabilities, net of effects from acquisitions and dispositions:Restricted cash
    
    
    2,088
    
    
    
    830Accounts receivable
    
    
    (957
    )
    
    
    (7,019
    )Accounts payable
    
    
    (4,834
    )
    
    
    (10,887
    )Deferred revenue and gains
    
    
    (9,081
    )
    
    
    (4,526
    )Income taxes receivable/payable
    
    
    (9,856
    )
    
    
    (28,049
    )Other assets and liabilities
    
    
    (16,692
    )
    
    
    (12,744
    )Net cash provided by operating activities
    
    
    51,922
    
    
    
    13,799Cash flows from investing activities:Capital expenditures
    
    
    (29,400
    )
    
    
    (19,325
    )Acquisitions, net of cash acquired
    
    
    
    
    
    
    (286,883
    )Proceeds from dispositions
    
    
    2,356
    
    
    
    Purchase of short-term investments
    
    
    (15,600
    )
    
    
    (98,925
    )Proceeds from sale of short-term investments
    
    
    
    
    
    
    187,065Other  net
    
    
    (6,332
    )
    
    
    (2,875
    )Net cash used in investing activities
    
    
    (48,976
    )
    
    
    (220,943
    )Cash flows from financing activities:Purchase of common stock
    
    
    
    
    
    
    (100,000
    )Issuance of common stock
    
    
    11,924
    
    
    
    11,619Excess tax benefits from share-based compensation
    
    
    1,401
    
    
    
    1,445Proceeds on long-term debt
    
    
    92,000
    
    
    
    235,000Payments on long-term debt
    
    
    (96,106
    )
    
    
    (122,742
    )Other
    
    
    112
    
    
    
    (348
    )Net cash provided by financing activities
    
    
    9,331
    
    
    
    24,975Net increase (decrease) in cash and cash equivalents
    
    
    12,277
    
    
    
    (182,170
    )Cash and cash equivalents at beginning of period
    
    
    87,414
    
    
    
    274,477Cash and cash equivalents at end of period
    
    $
    99,691
    
    
    $
    92,307Supplemental disclosures:Cash paid for income taxes
    
    $
    11,096
    
    
    $
    34,222Cash paid for interest
    
    $
    6,139
    
    
    $
    2,161Noncash investing and financing activities:Purchase of assets under capital lease obligations
    
    $
    132
    
    
    $
    6,294
  3




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EFUNDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
    -
    
    US Payments-
    
    US Risk Management-
    
    International
   Share
Based Payments
  Recent accounting pronouncements
 Transition Election Relating to Accounting for the Tax Effects of Share-Based Payment
Awards
 4




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How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That is, Gross versus Net Presentation).
 Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109
 Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
 Fair Value Measurements
 Stock incentive plans
    5




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##### Table of Contents



Deluxe Option Conversion Plan
  Employee stock purchase plan
  Adoption of SFAS No. 123R
 Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees.
 6




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December 31, 2005(in thousands)
    
    
    
    
    
    Share-basedSelected Balance Sheet Data:
    
    As Reported
    
    Compensation (pre-tax)
    
    As RevisedLong-term deferred income tax liability
    
    $
    10,521
    
    
    $
    (5,805
    )
    
    $
    4,716Additional paid-in capital
    
    
    465,304
    
    
    
    33,635
    
    
    
    498,939Retained earnings
    
    
    78,974
    
    
    
    (27,830
    )
    
    
    51,144
 Three Months Ended September 30, 2005(in thousands, except per share data)
    
    
    
    
    
    Share-basedSelected Income Statement Data:
    
    As Reported
    
    Compensation
    
    As RevisedNet income
    
    $
    15,778
    
    
    $
    (1,548
    )
    
    $
    14,230Basic earnings per share
    
    
    0.35
    
    
    
    (0.04
    )
    
    
    0.31Diluted earnings per share
    
    
    0.34
    
    
    
    (0.04
    )
    
    
    0.30
 Nine Months Ended September 30, 2005(in thousands, except per share data)
    
    
    
    
    
    Share-basedSelected Income Statement Data:
    
    As Reported
    
    Compensation
    
    As RevisedNet income
    
    $
    43,084
    
    
    $
    (4,032
    )
    
    $
    39,052Basic earnings per share
    
    
    0.92
    
    
    
    (0.08
    )
    
    
    0.84Diluted earnings per share
    
    
    0.90
    
    
    
    (0.09
    )
    
    
    0.81
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Expected volatility
    
    
    35.1
    %
    
    
    38.6
    %
    
    
    35.0
    %
    
    
    35.5
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    3.9
    %
    
    
    4.6
    %
    
    
    3.9
    %Expected life 1
    
    5 years
    
    7 years
    
    5 years
    
    7 yearsWeighted average fair value at grant date
    
    $
    8.55
    
    
    $
    8.75
    
    
    $
    9.23
    
    
    $
    9.18
 
 1
    
    The expected term assumption represents the estimated term of the options from grant
date. For the three and nine month period ended September 30, 2006 and 2005, the expected
life of the options from their vest dates is approximately 3 years and 5 years, respectively. 7




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Wtd. Avg.ExerciseShares
    
    
    PriceOptions outstanding at January 1, 2006
    
    
    3,828,498
    
    
    $
    15.53Options granted
    
    
    969,316
    
    
    
    24.49Options exercised
    
    
    (713,550
    )
    
    
    13.72Options forfeited and cancelled
    
    
    (417,559
    )
    
    
    19.40Options outstanding at September 30, 2006
    
    
    3,666,705
    
    
    
    17.78Options exercisable
    
    
    1,811,089
    
    
    
    13.53
  Ranges of
    
    Options
    
    
    Wtd. Avg.
    
    
    Wtd. Avg.
    
    
    Options
    
    
    Wtd. Avg.Exercise Prices
    
    Outstanding
    
    
    Remaining Life
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$6.19- $12.87
    
    
    751,056
    
    
    
    6.0
    
    
    $
    8.95
    
    
    
    751,056
    
    
    $
    8.95$12.88-$15.99
    
    
    358,447
    
    
    
    4.1
    
    
    
    13.56
    
    
    
    355,376
    
    
    
    13.55$16.00-$17.75
    
    
    611,842
    
    
    
    7.3
    
    
    
    16.47
    
    
    
    392,346
    
    
    
    16.47$17.76-$22.95
    
    
    1,101,713
    
    
    
    8.5
    
    
    
    20.71
    
    
    
    305,888
    
    
    
    20.70$22.96-$27.00
    
    
    843,647
    
    
    
    9.4
    
    
    
    24.57
    
    
    
    6,423
    
    
    
    25.723,666,705
    
    
    
    
    
    
    
    
    
    
    
    1,811,089
     8




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US
    
    
    US Risk(in thousands)
    
    Payments
    
    
    Management
    
    
    International
    
    
    Other
    
    
    TotalBalance as of December 31, 2005
    
    $
    180,935
    
    
    $
    43,425
    
    
    $
    32,363
    
    
    $
    10,462
    
    
    $
    267,185Goodwill acquired and/or adjusted
    
    
    (1,934
    )
    
    
    3,128
    
    
    
    3,124
    
    
    
    178
    
    
    
    4,496Balance as of September 30, 2006
    
    $
    179,001
    
    
    $
    46,553
    
    
    $
    35,487
    
    
    $
    10,640
    
    
    $
    271,681
  Wtd. Avg.
    
    
    September 30, 2006
    
    
    December 31, 2005Amort.
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    GrossPeriod
    
    
    Carrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    Accumulated(dollars in thousands)
    
    In Years
    
    
    Amounts
    
    
    Amortization
    
    
    Net
    
    
    Amounts
    
    
    Amortization
    
    
    NetSoftware-internal use
    
    
    3
    
    
    $
    138,065
    
    
    $
    (98,764
    )
    
    $
    39,301
    
    
    $
    124,478
    
    
    $
    (87,071
    )
    
    $
    37,407Software-licensing
and resale
    
    
    5
    
    
    
    69,461
    
    
    
    (48,841
    )
    
    
    20,620
    
    
    
    64,325
    
    
    
    (45,218
    )
    
    
    19,107Acquired contracts
and other
    
    
    8
    
    
    
    102,689
    
    
    
    (35,281
    )
    
    
    67,408
    
    
    
    102,757
    
    
    
    (28,119
    )
    
    
    74,638$
    310,215
    
    
    $
    (182,886
    )
    
    $
    127,329
    
    
    $
    291,560
    
    
    $
    (160,408
    )
    
    $
    131,152
   Restructuring charges
  Lease-RelatedCosts &(in thousands)
    
    Severance Related
    
    
    Other
    
    
    TotalBalance at December 31, 2005
    
    $
    918
    
    
    $
    1,146
    
    
    $
    2,064Cash payments
    
    
    (150
    )
    
    
    (142
    )
    
    
    (292
    )Balance at March 31, 2006
    
    
    768
    
    
    
    1,004
    
    
    
    1,772Additional accrual
    
    
    
    
    
    
    184
    
    
    
    184Reversal of severance-related provision
    
    
    (444
    )
    
    
    
    
    
    
    (444
    )Cash payments
    
    
    (109
    )
    
    
    (320
    )
    
    
    (429
    )Balance at June 30, 2006
    
    
    215
    
    
    
    868
    
    
    
    1,083Cash payments
    
    
    (88
    )
    
    
    (63
    )
    
    
    (151
    )Balance at September 30, 2006
    
    $
    127
    
    
    $
    805
    
    
    $
    932
 Acquisition exit activities
  9




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Lease-RelatedSeverance
    
    
    Costs &(in thousands)
    
    Related
    
    
    Other
    
    
    TotalBalance at December 31, 2005
    
    $
    
    
    
    $
    2,444
    
    
    $
    2,444Additional accrual
    
    
    1,343
    
    
    
    3,641
    
    
    
    4,984Cash payments
    
    
    (85
    )
    
    
    (117
    )
    
    
    (202
    )Balance at March 31, 2006
    
    
    1,258
    
    
    
    5,968
    
    
    
    7,226Reversal of lease-related provision
    
    
    
    
    
    
    (381
    )
    
    
    (381
    )Additional accrual
    
    
    369
    
    
    
    
    
    
    
    369Cash payments
    
    
    (9
    )
    
    
    (118
    )
    
    
    (127
    )Balance at June 30, 2006
    
    
    1,618
    
    
    
    5,469
    
    
    
    7,087Cash payments
    
    
    (154
    )
    
    
    (72
    )
    
    
    (226
    )Balance at September 30, 2006
    
    $
    1,464
    
    
    $
    5,397
    
    
    $
    6,861
   September 30,
    
    
    December 31,(in thousands)
    
    2006
    
    
    20055.39% Senior Notes due 2012
    
    $
    100,000
    
    
    $
    100,000Capital leases and other
    
    
    7,933
    
    
    
    12,003Less capital lease and other amounts due within one year
    
    
    (4,659
    )
    
    
    (5,030
    )Total
    
    $
    103,274
    
    
    $
    106,973
    10




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except per share amounts)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net income per share  basicNet income
    
    $
    14,601
    
    
    $
    14,230
    
    
    $
    34,971
    
    
    $
    39,052Weighted average shares outstanding
    
    
    46,611
    
    
    
    45,471
    
    
    
    46,444
    
    
    
    46,761Net income per share  basic
    
    $
    0.31
    
    
    $
    0.31
    
    
    $
    0.75
    
    
    $
    0.84Net income per share  dilutedNet income
    
    $
    14,601
    
    
    $
    14,230
    
    
    $
    34,971
    
    
    $
    39,052Weighted average shares outstanding
    
    
    46,611
    
    
    
    45,471
    
    
    
    46,444
    
    
    
    46,761Dilutive impact of options
    
    
    698
    
    
    
    1,270
    
    
    
    771
    
    
    
    1,350Weighted average shares and potential dilutive shares outstanding
    
    
    47,309
    
    
    
    46,741
    
    
    
    47,215
    
    
    
    48,111Net income per share  diluted
    
    $
    0.31
    
    
    $
    0.30
    
    
    $
    0.74
    
    
    $
    0.81
       -
    
    Processing electronic payment transactions including electronic funds transfers (EFT),
automated clearinghouse (ACH) and other payment processing services;-
    
    processing and other activities associated with prepaid cards (such as payroll cards and
gift cards) following the acquisition of the Companys prepaid solutions business in July
2005;-
    
    providing electronic benefit transfer (EBT) services to government agencies; and-
    
    licensing, maintaining and supporting our EFT software and providing ATM management
services and other business process outsourcing (BPO) services related to payment
transactions.
  11




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenue:US Payments
    
    $
    74,306
    
    
    $
    72,133
    
    
    $
    217,094
    
    
    $
    183,345US Risk Management
    
    
    48,259
    
    
    
    47,857
    
    
    
    144,504
    
    
    
    144,566International
    
    
    16,803
    
    
    
    13,160
    
    
    
    49,905
    
    
    
    35,771Total net revenue
    
    
    139,368
    
    
    
    133,150
    
    
    
    411,503
    
    
    
    363,682Operating expenses before overhead:US Payments
    
    
    60,599
    
    
    
    61,943
    
    
    
    185,195
    
    
    
    144,499US Risk Management
    
    
    25,021
    
    
    
    29,240
    
    
    
    82,276
    
    
    
    92,097International
    
    
    16,764
    
    
    
    12,946
    
    
    
    48,094
    
    
    
    36,872Total operating expenses before overhead
    
    
    102,384
    
    
    
    104,129
    
    
    
    315,565
    
    
    
    273,468Allocated overhead:US Payments
    
    
    3,416
    
    
    
    3,694
    
    
    
    10,971
    
    
    
    12,077US Risk Management
    
    
    4,247
    
    
    
    3,027
    
    
    
    10,890
    
    
    
    9,643International
    
    
    2,330
    
    
    
    1,602
    
    
    
    6,446
    
    
    
    4,060Corporate
    
    
    5,121
    
    
    
    5,143
    
    
    
    15,409
    
    
    
    15,348Total allocated overhead
    
    
    15,114
    
    
    
    13,466
    
    
    
    43,716
    
    
    
    41,128Income (loss) from operations:US Payments
    
    
    10,291
    
    
    
    6,496
    
    
    
    20,928
    
    
    
    26,769US Risk Management
    
    
    18,991
    
    
    
    15,590
    
    
    
    51,338
    
    
    
    42,826International
    
    
    (2,291
    )
    
    
    (1,388
    )
    
    
    (4,635
    )
    
    
    (5,161
    )Corporate
    
    
    (5,121
    )
    
    
    (5,143
    )
    
    
    (15,409
    )
    
    
    (15,348
    )Income from operations
    
    $
    21,870
    
    
    $
    15,555
    
    
    $
    52,222
    
    
    $
    49,086
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Depreciation and amortization:US Payments
    
    $
    6,702
    
    
    $
    6,338
    
    
    $
    20,041
    
    
    $
    12,759US Risk Management
    
    
    2,627
    
    
    
    3,418
    
    
    
    8,018
    
    
    
    10,434International
    
    
    2,178
    
    
    
    1,762
    
    
    
    6,389
    
    
    
    3,993Corporate
    
    
    366
    
    
    
    299
    
    
    
    1,057
    
    
    
    855Total depreciation and amortization
    
    $
    11,873
    
    
    $
    11,817
    
    
    $
    35,505
    
    
    $
    28,041
 12




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Stock based employee compensation:US Payments
    
    $
    459
    
    
    $
    926
    
    
    $
    1,923
    
    
    $
    1,823US Risk Management
    
    
    420
    
    
    
    577
    
    
    
    1,256
    
    
    
    1,656International
    
    
    319
    
    
    
    333
    
    
    
    884
    
    
    
    853Corporate
    
    
    424
    
    
    
    509
    
    
    
    1,363
    
    
    
    1,614Total stock based employee compensation
    
    $
    1,622
    
    
    $
    2,345
    
    
    $
    5,426
    
    
    $
    5,946
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005United States
    
    $
    122,565
    
    
    $
    119,990
    
    
    $
    361,598
    
    
    $
    327,911EMEA
    
    
    10,646
    
    
    
    8,175
    
    
    
    31,874
    
    
    
    25,370India
    
    
    3,023
    
    
    
    2,222
    
    
    
    8,027
    
    
    
    2,694Canada
    
    
    1,439
    
    
    
    1,602
    
    
    
    5,844
    
    
    
    4,160Latin America
    
    
    1,038
    
    
    
    933
    
    
    
    3,296
    
    
    
    3,079Asia
    
    
    657
    
    
    
    228
    
    
    
    864
    
    
    
    468Total consolidated
    
    $
    139,368
    
    
    $
    133,150
    
    
    $
    411,503
    
    
    $
    363,682
  September 30,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005United States
    
    $
    44,838
    
    
    $
    46,706India
    
    
    15,329
    
    
    
    15,650Canada
    
    
    529
    
    
    
    581United Kingdom and other
    
    
    572
    
    
    
    784Total consolidated
    
    $
    61,268
    
    
    $
    63,721
  Contractual cash obligations
  Payments Due by December 31,(in thousands)
    
    Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterLong-term debt
    
    $
    100,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100,000Capital lease obligations
    
    
    7,933
    
    
    
    913
    
    
    
    4,411
    
    
    
    2,472
    
    
    
    137
    
    
    
    
    
    
    
    Operating lease obligations1
    
    
    82,181
    
    
    
    3,839
    
    
    
    18,799
    
    
    
    14,881
    
    
    
    9,697
    
    
    
    7,567
    
    
    
    27,398Vendor obligations
    
    
    47,751
    
    
    
    7,339
    
    
    
    22,610
    
    
    
    13,069
    
    
    
    1,700
    
    
    
    1,566
    
    
    
    1,467Total
    
    $
    237,865
    
    
    $
    12,091
    
    
    $
    45,820
    
    
    $
    30,422
    
    
    $
    11,534
    
    
    $
    9,133
    
    
    $
    128,865
 
 1
    
    Future minimum lease payments for non-cancelable operating
leases are presented net of minimum sublease rentals of $2.0 million
due in the future under non-cancelable subleases.  13




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Future commercial commitments
  Commitment Expiration by Period1(in thousands)
    
    Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterLetters of credit and other
    
    $
    47,134
    
    
    $
    419
    
    
    $
    
    
    
    $
    19
    
    
    $
    46,696
    
    
    $
    
    
    
    $
    Performance bonds
    
    
    11,852
    
    
    
    1,105
    
    
    
    10,507
    
    
    
    175
    
    
    
    65
    
    
    
    
    
    
    
    Total commitments
    
    $
    58,986
    
    
    $
    1,524
    
    
    $
    10,507
    
    
    $
    194
    
    
    $
    46,761
    
    
    $
    
    
    
    $
    
 
 1
    
    Represents commercial commitment expirations during the last three months of 2006 and
the respective years ending December 31, 2007 through 2010 and thereafter.  Acquisition holdbacks and earn-outs
  Other commitments
    14




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Other contingencies
      15




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    Our Business
   16




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##### Table of Contents



-
    
    US Payments-
    
    US Risk Management-
    
    International
    US Payments
   US Risk Management
  17




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##### Table of Contents



®
 International
  Key Event During the Three Months Ended September 30, 2006
 
    
    Shailesh Kotwal joined the Company as President of eFunds International.
 Trends
  
    
    prepaid solution products are experiencing the highest growth rate of any payment card
product and this trend is expected to continue over the next several years, although we
expect to see some moderation in growth levels seen in this industry in future periods;
    
    increased fraud and regulatory requirements are driving sustained growth in the need for
risk management products in the US and abroad;
    
    there continues to be a migration from the use of traditional paper checks and cash to
electronic payments;
    
    larger financial institutions are developing increasing expectations regarding the
ability of their payment technology providers to deliver complex, comprehensive solutions
addressing all forms of electronic payment types across multiple geographies; and
    
    there has been an increase in regulatory and legislative activity regarding notice
requirements associated with incidents involving the misappropriation of consumer data,
causing participants in the financial service and other industries to devote additional
efforts to maintaining the security of their data files.
 Risks and Challenges
  
    
    Changes in India tax laws or in the interpretation or enforcement of those laws could
adversely affect our results of operations.
    
    If the security of our databases is compromised, our reputation could suffer and
customers may not be willing to use our products and services.
    
    Estimates of future financial results are inherently unreliable.
    
    Our ability to expand through acquisitions involves risks and may not be successful.
    
    Consolidation in the industries we serve may adversely affect our ability to sell our products and services.
 18




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##### Table of Contents




    
    We are unable to predict the results of the purported class action lawsuit filed in Florida.
    
    We may be unable to protect our intellectual property rights or others may claim that we
are infringing on their intellectual property.
    
    We face intense competition in all areas of our business, and if we do not compete
effectively, our business will be harmed.
    
    If we experience system failures, the products and services we provide to our customers
could be delayed or interrupted, which could harm our business and reputation and result in
the loss of customers.
    
    Legislation or regulation could impair our ability to collect and use data, increase our
operating costs or otherwise harm our business.
    
    We may experience software defects, development delays and installation difficulties,
which could harm our business and reputation and expose us to potential liability.
    
    There are a number of risks associated with our international sales and operations that
could harm our business.
    
    We face termination and compliance risks with respect to our government contracts.
    
    Provisions in our charter documents and Delaware law may delay or prevent a change in
control of our Company that you may consider favorable.
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    
    
    
    
    
    
    
    
    2005(dollars in millions)
    
    2006
    
    
    (revised)
    
    
    % Change
    
    
    2006
    
    
    (revised)
    
    
    % ChangeNet revenue
    
    $
    139.4
    
    
    $
    133.2
    
    
    
    5
    %
    
    $
    411.5
    
    
    $
    363.7
    
    
    
    13
    %Operating expenses:Processing, communication and
service costs
    
    
    34.7
    
    
    
    32.1
    
    
    
    8
    
    
    
    103.0
    
    
    
    88.6
    
    
    
    16Employee costs
    
    
    54.5
    
    
    
    57.1
    
    
    
    (5
    )
    
    
    169.3
    
    
    
    158.0
    
    
    
    7Depreciation and amortization
    
    
    11.9
    
    
    
    11.8
    
    
    
    1
    
    
    
    35.5
    
    
    
    28.0
    
    
    
    27Other operating costs
    
    
    16.4
    
    
    
    16.5
    
    
    
    (1
    )
    
    
    51.5
    
    
    
    39.9
    
    
    
    29Total operating expenses1
    
    
    117.5
    
    
    
    117.6
    
    
    
    
    
    
    
    359.3
    
    
    
    314.6
    
    
    
    14Income from operations1
    
    
    21.9
    
    
    
    15.6
    
    
    
    40
    
    
    
    52.2
    
    
    
    49.1
    
    
    
    6Interest expense
    
    
    (1.7
    )
    
    
    (2.1
    )
    
    
    (19
    )
    
    
    (4.7
    )
    
    
    (2.3
    )
    
    
    *Other income  net
    
    
    0.8
    
    
    
    1.0
    
    
    
    (20
    )
    
    
    2.8
    
    
    
    3.8
    
    
    
    (26
    )Income before income taxes1
    
    
    20.9
    
    
    
    14.4
    
    
    
    45
    
    
    
    50.3
    
    
    
    50.5
    
    
    
    Provision for income taxes
    
    
    (6.3
    )
    
    
    (0.2
    )
    
    
    *
    
    
    
    (15.3
    )
    
    
    (11.5
    )
    
    
    33Net income1
    
    $
    14.6
    
    
    $
    14.2
    
    
    
    3
    
    
    $
    35.0
    
    
    $
    39.1
    
    
    
    (10
    )
 
 *
    
    Represents an increase or decrease in excess of 100%.1
    
    Amounts may not sum due to rounding. 19




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Net Revenue
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(dollars in millions)
    
    2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % ChangeUS PaymentsEFT processing
    
    $
    37.4
    
    
    $
    32.2
    
    
    
    16
    %
    
    $
    108.5
    
    
    $
    91.8
    
    
    
    18
    %Prepaid Solutions
    
    
    23.7
    
    
    
    19.8
    
    
    
    20
    
    
    
    63.4
    
    
    
    19.8
    
    
    
    *Government services (EBT)
    
    
    10.3
    
    
    
    11.3
    
    
    
    (9
    )
    
    
    30.6
    
    
    
    37.8
    
    
    
    (19
    )Software sales and other services
    
    
    2.9
    
    
    
    8.8
    
    
    
    (67
    )
    
    
    14.6
    
    
    
    33.9
    
    
    
    (57
    )74.3
    
    
    
    72.1
    
    
    
    3
    
    
    
    217.1
    
    
    
    183.3
    
    
    
    18US Risk ManagementFinancial institution products
    
    
    39.5
    
    
    
    36.3
    
    
    
    9
    
    
    
    114.1
    
    
    
    103.5
    
    
    
    10Retail products
    
    
    4.7
    
    
    
    5.4
    
    
    
    (13
    )
    
    
    14.3
    
    
    
    16.0
    
    
    
    (11
    )BPO
    
    
    4.1
    
    
    
    6.2
    
    
    
    (34
    )
    
    
    16.1
    
    
    
    25.1
    
    
    
    (36
    )48.3
    
    
    
    47.9
    
    
    
    1
    
    
    
    144.5
    
    
    
    144.6
    
    
    
    InternationalSoftware sales
    
    
    7.7
    
    
    
    5.9
    
    
    
    31
    
    
    
    22.8
    
    
    
    18.4
    
    
    
    24BPO
    
    
    7.5
    
    
    
    6.9
    
    
    
    9
    
    
    
    22.4
    
    
    
    16.8
    
    
    
    33EFT processing
    
    
    1.6
    
    
    
    0.4
    
    
    
    *
    
    
    
    4.7
    
    
    
    0.6
    
    
    
    *16.8
    
    
    
    13.2
    
    
    
    27
    
    
    
    49.9
    
    
    
    35.8
    
    
    
    39Total net revenue1
    
    $
    139.4
    
    
    $
    133.2
    
    
    
    
    
    
    $
    411.5
    
    
    $
    363.7
 
 *
    
    Represents an increase or decrease in excess of 100%.1
    
    Amounts may not sum due to rounding. US Payments
   US Risk Management
  International
  20




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Business Segment Operating Income
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(dollars in millions)
    
    2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % ChangeOperating income (loss)US Payments
    
    $
    10.3
    
    
    $
    6.5
    
    
    
    58
    %
    
    $
    20.9
    
    
    $
    26.8
    
    
    
    (22
    )%US Risk Management
    
    
    19.0
    
    
    
    15.6
    
    
    
    22
    
    
    
    51.3
    
    
    
    42.8
    
    
    
    20International
    
    
    (2.3
    )
    
    
    (1.4
    )
    
    
    (64
    )
    
    
    (4.6
    )
    
    
    (5.2
    )
    
    
    12Corporate
    
    
    (5.1
    )
    
    
    (5.1
    )
    
    
    
    
    
    
    (15.4
    )
    
    
    (15.3
    )
    
    
    (1
    )Total operating income1
    
    $
    21.9
    
    
    $
    15.6
    
    
    
    40
    
    
    $
    52.2
    
    
    $
    49.1
    
    
    
    6
 
 1
    
    Amounts may not sum due to rounding. US Payments
  US Risk Management
  International
  Corporate
  21




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Operating Expenses
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    
    
    
    
    
    
    
    
    2005(dollars in millions)
    
    2006
    
    
    (revised)
    
    
    % Change
    
    
    2006
    
    
    (revised)
    
    
    % ChangeOperating expenses:Processing, communication and
service costs
    
    $
    34.7
    
    
    $
    32.1
    
    
    
    8
    %
    
    $
    103.0
    
    
    $
    88.6
    
    
    
    16
    %Employee costs
    
    
    54.5
    
    
    
    57.1
    
    
    
    (5
    )
    
    
    169.3
    
    
    
    158.0
    
    
    
    7Depreciation and amortization
    
    
    11.9
    
    
    
    11.8
    
    
    
    1
    
    
    
    35.5
    
    
    
    28.0
    
    
    
    27Other operating costs
    
    
    16.4
    
    
    
    16.5
    
    
    
    (1
    )
    
    
    51.5
    
    
    
    39.9
    
    
    
    29Total operating expenses1
    
    $
    117.5
    
    
    $
    117.6
    
    
    
    
    
    
    $
    359.3
    
    
    $
    314.6
    
    
    
    14
 
 1
    
    Amounts may not sum due to rounding. Processing, communication and service costs
  Employee costs
  Depreciation and amortization
  Other operating costs
  22




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##### Table of Contents



Interest expense
  Other income  net
  Provision for income taxes
      23




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Overview
  September 30,
    
    December 31,(dollars in millions)
    
    2006
    
    2005
    
    % Change(revised1)Cash and cash equivalents
    
    $
    99.7
    
    
    $
    87.4
    
    
    
    14
    %Long-term debt due within one year
    
    
    4.7
    
    
    
    5.0
    
    
    
    (6
    )Long-term debt
    
    
    103.3
    
    
    
    107.0
    
    
    
    (3
    )Stockholders equity
    
    
    504.5
    
    
    
    451.6
    
    
    
    12Net working capital
    
    
    168.1
    
    
    
    122.0
    
    
    
    38
 
 1
    
    Amounts have been revised to reflect the adoption of SFAS No. 123R. Cash Resources
    Sources and Uses of Cash
  Summary of Cash FlowsFor the Nine MonthsEnded September 30,(in millions)
    
    2006
    
    
    2005(revised1)Cash provided by operating activities
    
    $
    51.9
    
    
    $
    13.8Cash used in investing activities
    
    
    (49.0
    )
    
    
    (220.9
    )Cash provided by financing activities
    
    
    9.3
    
    
    
    25.0Net increase (decrease) in cash and cash equivalents2
    
    $
    12.3
    
    
    $
    (182.2
    )
 
 1
    
    Amounts have been revised to reflect the adoption of SFAS No. 123R.2
    
    Amounts may not sum due to rounding. 24




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##### Table of Contents




    
    investment in projects intended to increase our product delivery and operational
effectiveness, enhance our product suite and the security and redundancy of our systems;
and
    
    funding our liquidity needs.
  Operating Activities
   Investing Activities
  Financing Activities
  Long-term Debt
  25




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##### Table of Contents



Contractual Obligations and Commitments
  Payments Due by Period2Three months
    
    
    Three Years
    
    
    Three YearsEnded
    
    
    Ended
    
    
    EndedDecember 31,
    
    
    December 31,
    
    
    December 31,(in millions)
    
    Total
    
    
    2006
    
    
    2009
    
    
    2012
    
    
    ThereafterLong-term debt
    
    $
    100.0
    
    
    $
    
    
    
    $
    
    
    
    $
    100.0
    
    
    $
    Capital lease obligations
    
    
    7.9
    
    
    
    0.9
    
    
    
    7.0
    
    
    
    
    
    
    
    Operating lease
obligations1
    
    
    82.2
    
    
    
    3.8
    
    
    
    43.4
    
    
    
    19.7
    
    
    
    15.3Vendor obligations
    
    
    47.8
    
    
    
    7.3
    
    
    
    37.4
    
    
    
    3.1
    
    
    
    Total
    
    $
    237.9
    
    
    $
    12.0
    
    
    $
    87.8
    
    
    $
    122.8
    
    
    $
    15.3
 
 1
    
    Future minimum lease payments for non-cancelable operating
leases are presented net of minimum sublease rentals of $2.0 million
due in the future under non-cancelable subleases.2
    
    Amounts may not sum due to rounding.    Commitment Expiration by Period1(in millions)
    
    Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterLetters of credit and other
    
    $
    47.1
    
    
    $
    0.4
    
    
    $
    
    
    
    $
    
    
    
    $
    46.7
    
    
    $
    
    
    
    $
    Performance bonds
    
    
    11.9
    
    
    
    1.1
    
    
    
    10.5
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    
    
    
    
    Total commitments
    
    $
    59.0
    
    
    $
    1.5
    
    
    $
    10.5
    
    
    $
    0.2
    
    
    $
    46.8
    
    
    $
    
    
    
    $
    
 
 1
    
    Represents commercial commitment expirations during the last three months of 2006 and
the respective years ending December 31, 2007 through 2010 and thereafter. 26




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##### Table of Contents



Stock-based
Compensation
 FORWARD-LOOKING STATEMENTS 
   
    
    An effective tax rate of approximately 35% percent for the balance of 2006;
    
    Cash outlays for capital expenditures and product development activities in 2006 will be
approximately $40 million;
    
    Revenues from our prepaid business will be between $90 and $93 million for 2006, with
this unit reporting an operating profit of approximately $4 to $5 million in the fourth
quarter of 2006.
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   27




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
  
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 5. OTHER INFORMATION CAUTIONARY STATEMENTS
  28




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##### Table of Contents



ITEM 6. EXHIBITS
  Exhibit No.
    
    Description
    
    Method of filing3.1
    
    Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 (the S-1) filed by the
Company with the Commission on April 4, 2000, Registration
No. 333-33992)
    
    *3.2
    
    Bylaws (incorporated by reference to Exhibit 3.2 to the S-1)
    
    *4.1
    
    Form of common stock certificate (incorporated by reference
to Exhibit 4.1 to Amendment No. 1 to the S-1 filed by the
Company with the Commission on May 15, 2000 (Amendment No.
1), Registration No. 333-33992)
    
    *4.2
    
    Form of Rights Agreement by and between the Company and
Rights Agent, (incorporated by reference to Exhibit 4.2 to
Amendment No. 1)
    
    *4.3
    
    Certificate of Designation of Series A Participating
Preferred Stock (incorporated by reference to Exhibit 4.3
to the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000)
    
    *10.1
    
    Release, dated July 8, 2006, by and between the Company and
Larence Park
    
    Filed herewith10.2
    
    Earnout Reconciliation Agreement, dated as of July 17,
2006, by and between the Company and JackMac, Inc. (f/k/a
Benton Consulting Partners)
    
    Filed herewith10.3
    
    Schedule identifying additional transition assistance
agreements omitted pursuant to Instruction 2 to Item 601 of
Regulation S-K
    
    Filed herewith10.4
    
    Schedule identifying additional change in control
agreements omitted pursuant to Instruction 2 to Item 601 of
Regulation S-K
    
    Filed herewith10.5
    
    eFunds Corporation Non-Employee Directors Deferred
Compensation Program, (as amended September 22, 2006)
(incorporated by reference to Exhibit 10-1 to the Current
Report on Form 8-K filed by the Company on September 28,
2006 (the September 8-K)
    
    *10.6
    
    eFunds Corporation 2006 Stock Incentive Plan, (as amended
September 22, 2006) (incorporated by reference to Exhibit
10.2 to the September 8-K)
    
    *10.7
    
    eFunds Corporation Employee Stock
Purchase Plan, as amended July 1, 2006
    
    Filed herewith31.1
    
    Section 302 Certification by Mr. Paul F. Walsh
    
    Filed herewith31.2
    
    Section 302 Certification by Mr. George W. Gresham
    
    Filed herewith32.1
    
    Section 906 Certification by Mr. Paul F. Walsh and Mr.
George W. Gresham
    
    Filed herewith
 
  29




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##### Table of Contents



SIGNATURES
  eFunds Corporation(Registrant)Date: November 1, 2006
    
    /s/ Paul F. WalshPaul F. WalshChief Executive Officer and Chairman(Principal Executive Officer)Date: November 1, 2006
    
    /s/ George W. GreshamGeorge W. GreshamChief Financial Officer(Principal Financial and Accounting Officer)
 30




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##### Table of Contents



Index to Exhibits
 Exhibit No.
    
    Description
    
    Page Number10.1
    
    Release, dated July 8, 2006, by and between the Company
and Larence Park10.2
    
    Earnout Reconciliation Agreement, dated as of July 17,
2006, by and between the Company and JackMac, Inc. (f/k/a
Benton Consulting Partners)10.3
    
    Schedule identifying additional transition assistance
agreements omitted pursuant to Instruction 2 to Item 601
of Regulation S-K10.4
    
    Schedule identifying additional change in control
agreements omitted pursuant to Instruction 2 to Item 601
of Regulation S-K10.7
    
    eFunds Corporation Employee Stock
Purchase Plan, as amended July 1, 200631.1
    
    Section 302 Certification by Mr. Paul F. Walsh31.2
    
    Section 302 Certification by Mr. George W. Gresham32.1
    
    Section 906 Certification by Mr. Paul F. Walsh and Mr.
George W. Gresham
 31