##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One)[X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended September 30, 2004 OR [X]
    
    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)
 Registrants telephone number, including area code: (480) 629-7700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days.  Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  The number of shares outstanding of the registrants common stock, par value $.01 per share, at October 29, 2004 was 48,831,054




---



TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONDENSED CONSOLIDATED 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 INFORMATIONITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESIndex to ExhibitsExhibit 2.1Exhibit 10.1Exhibit 10.2Exhibit 31.1Exhibit 31.2Exhibit 32.1    Table of Contents  
 PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS eFUNDS CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)September 30,
    
    December 31,(dollars in thousands)
    
    2004
    
    2003Current assets:Cash and cash equivalents
    
    $
    202,135
    
    
    $
    158,106Deposits subject to compensating balance arrangements
    
    
    1,657
    
    
    
    472Restricted custodial cash
    
    
    2,932
    
    
    
    4,168Accounts receivable  net
    
    
    66,267
    
    
    
    63,841Deferred income taxes
    
    
    12,158
    
    
    
    12,743Prepaid expenses and other current assets
    
    
    10,481
    
    
    
    16,979Assets held for sale
    
    
    106,145
    
    
    
    Total current assets
    
    
    401,775
    
    
    
    256,309Property and equipment  net
    
    
    48,008
    
    
    
    49,629Long-term investments
    
    
    2,683
    
    
    
    3,243Goodwill
    
    
    59,009
    
    
    
    128,586Other intangible assets  net
    
    
    46,340
    
    
    
    71,116Other non-current assets
    
    
    3,119
    
    
    
    3,454Total non-current assets
    
    
    159,159
    
    
    
    256,028Total assets
    
    $
    560,934
    
    
    $
    512,337Current liabilities:Accounts payable
    
    $
    16,050
    
    
    $
    26,585Accrued liabilities
    
    
    56,116
    
    
    
    51,646Accrued contract losses
    
    
    1,600
    
    
    
    1,890Deferred revenue
    
    
    9,539
    
    
    
    7,900Long-term debt due within one year
    
    
    2,007
    
    
    
    5,586Liabilities related to assets held for sale
    
    
    9,744
    
    
    
    Total current liabilities
    
    
    95,056
    
    
    
    93,607Long-term debt
    
    
    3,292
    
    
    
    1,667Deferred income taxes
    
    
    9,592
    
    
    
    11,400Other long-term liabilities
    
    
    2,614
    
    
    
    4,001Total liabilities
    
    
    110,554
    
    
    
    110,675Commitments and contingencies (Notes 3, 4 & 12)Stockholders equity:Preferred stock $.01 par value; 100,000,000 shares authorized; no shares
issued and outstanding
    
    
    
    
    
    
    Common stock $.01 par value (authorized: 250,000,000 shares; issued and
outstanding: 48,735,585 shares at September 30, 2004 and 47,299,742 at
December 31, 2003)
    
    
    487
    
    
    
    473Additional paid-in capital
    
    
    437,586
    
    
    
    418,496Retained earnings (accumulated deficit)
    
    
    11,904
    
    
    
    (17,587
    )Accumulated other comprehensive income
    
    
    403
    
    
    
    280Stockholders equity
    
    
    450,380
    
    
    
    401,662Total liabilities and stockholders equity
    
    $
    560,934
    
    
    $
    512,337
 See Notes to Condensed Consolidated Financial Statements 1




---



##### Table of Contents



eFUNDS CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(in thousands, except per share amounts)
    
    2004
    
    2003
    
    2004
    
    2003Net revenue
    
    $
    140,054
    
    
    $
    133,141
    
    
    $
    421,652
    
    
    $

    396,625Operating expenses:Processing, communication and service costs
    
    
    57,634
    
    
    
    58,037
    
    
    
    172,965
    
    
    
    173,682Employee costs
    
    
    46,261
    
    
    
    44,391
    
    
    
    142,990
    
    
    
    136,404Depreciation and amortization
    
    
    9,722
    
    
    
    8,424
    
    
    
    27,678
    
    
    
    26,047Other operating costs
    
    
    11,230
    
    
    
    9,714
    
    
    
    34,661
    
    
    
    34,426Restructuring and asset impairment charges
    
    
    
    
    
    
    2,645
    
    
    
    752
    
    
    
    2,645Contract loss provision (reversal)
    
    
    
    
    
    
    (2,250
    )
    
    
    501
    
    
    
    (2,250
    )Total operating expenses
    
    
    124,847
    
    
    
    120,961
    
    
    
    379,547
    
    
    
    370,954Income from operations
    
    
    15,207
    
    
    
    12,180
    
    
    
    42,105
    
    
    
    25,671Other income (expense)  net
    
    
    63
    
    
    
    (915
    )
    
    
    24
    
    
    
    (55
    )Income before income taxes
    
    
    15,270
    
    
    
    11,265
    
    
    
    42,129
    
    
    
    25,616Provision for income taxes
    
    
    (4,581
    )
    
    
    (2,193
    )
    
    
    (12,638
    )
    
    
    (6,799
    )Net income
    
    $
    10,689
    
    
    $
    9,072
    
    
    $
    29,491
    
    
    $
    18,817Weighted average shares outstanding
    
    
    48,258
    
    
    
    46,848
    
    
    
    47,944
    
    
    
    46,769Weighted average shares and potential dilutive shares outstanding
    
    
    49,424
    
    
    
    47,442
    
    
    
    49,151
    
    
    
    47,006Net income per share  basic
    
    $
    0.22
    
    
    $
    0.19
    
    
    $
    0.62
    
    
    $
    0.40Net income per share  diluted
    
    $
    0.22
    
    
    $
    0.19
    
    
    $
    0.60
    
    
    $
    0.40
 See Notes to Condensed Consolidated Financial Statements 2




---



##### Table of Contents



eFUNDS CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine Months EndedSeptember 30,(in thousands)
    
    2004
    
    2003Cash flows from operating activities:Net income
    
    $
    29,491
    
    
    $
    18,817Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    10,848
    
    
    
    10,917Amortization
    
    
    16,830
    
    
    
    15,130Loss on impairment or disposals of assets
    
    
    757
    
    
    
    1,637Contract loss provision (reversal)
    
    
    501
    
    
    
    (2,250
    )Changes in assets and liabilities, net of
acquisitions and classification of assets and
liabilities related to assets held for sale:Restricted custodial cash
    
    
    1,236
    
    
    
    1,964Accounts receivable
    
    
    (7,027
    )
    
    
    767Accounts payable
    
    
    (1,442
    )
    
    
    (11,047
    )Accrued contract losses
    
    
    (792
    )
    
    
    (2,166
    )Deferred revenue
    
    
    1,332
    
    
    
    3,033Other assets and liabilities
    
    
    7,864
    
    
    
    20,514Net cash provided by operating activities
    
    
    59,598
    
    
    
    57,316Cash flows from investing activities:Capital expenditures
    
    
    (20,569
    )
    
    
    (15,133
    )Acquisitions
    
    
    (6,079
    )
    
    
    (2,218
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    11,938Other
    
    
    (682
    )
    
    
    Net cash used in investing activities
    
    
    (27,330
    )
    
    
    (5,413
    )Cash flows from financing activities:Payments on long-term debt
    
    
    (5,752
    )
    
    
    (1,220
    )Issuance of common stock
    
    
    17,513
    
    
    
    1,951Net cash provided by financing activities
    
    
    11,761
    
    
    
    731Net increase in cash and cash equivalents
    
    
    44,029
    
    
    
    52,634Cash and cash equivalents at beginning of period
    
    
    158,106
    
    
    
    119,487Cash and cash equivalents at end of period
    
    $
    202,135
    
    
    $
    172,121Supplemental disclosures:Cash paid for income taxes
    
    $
    6,334
    
    
    $
    1,333Cash paid for interest
    
    $
    331
    
    
    $
    443Noncash investing and financing activities:Purchase of assets under capital lease obligations
    
    $
    4,682
    
    
    $
    5,795
 See Notes to Condensed Consolidated Financial Statements 3




---



##### Table of Contents



eFUNDS CORPORATION AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE 1  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION: The goal of eFunds Corporation and its wholly-owned subsidiaries (the Company)
is to enable trusted commerce by delivering integrated information, payment and
technology solutions that strengthen their customers overall profitability
through increased revenue, reduced costs and improved operating efficiency and
technology performance. The Companys principal focus is on issuers of
transaction accounts, such as financial institutions, financial services
companies, electronic funds transfer networks, retailers, government agencies,
telecommunications companies and other businesses. The Company delivers
information, payment and technology solutions through four basic business units
and through combinations of the products and services offered by these units. For the periods presented, the Company had four operating segments: Electronic
Payments; Risk Management; Global Outsourcing; and Automated Teller Machine
(ATM) Management. The Electronic Payments segment provides electronic funds
transfer (EFT) processing services, including automated clearinghouse (ACH)
processing and electronic benefit transfer (EBT) services for government
agencies, EFT software, software applications development, maintenance and
installation. The Risk Management segment provides data based risk management
services and other related products to financial institutions, retailers and
other businesses that assist in detecting fraud and assessing the risk of
opening a new account or accepting a check. The Global Outsourcing segment
provides business process outsourcing services and information technology
services. The ATM Management segment provides ATM deployment, management and
branding services. On September 20, 2004, the Company entered into a
definitive agreement to sell a component of the ATM Management segment (Note
4). The Company was incorporated in Delaware in December 1984. Prior to its
initial public offering (the IPO) in June 2000, the Company was a wholly-owned
subsidiary of Deluxe Corporation (Deluxe). In December 2000, Deluxe distributed
all of its remaining shares of the Companys common stock to its shareholders
through a spin-off transaction (Spin-Off). The unaudited condensed consolidated financial statements of the Company for
the three and nine month periods ended September 30, 2004 and 2003 have been
prepared in accordance with accounting principles generally accepted in the
United States of America and the instructions to Form 10-Q and Article 10 of
Regulation S-X. All material intercompany accounts and transactions have been
eliminated. In the opinion of management, all adjustments considered necessary
for a fair presentation, which are of a normal recurring nature, have been
included. Interim results are not necessarily indicative of results for a full
year. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for
the year ended December 31, 2003 included in the Companys 2003 Annual Report
on Form 10-K filed with the Securities and Exchange Commission (SEC). NOTE 2  EMPLOYEE STOCK-BASED COMPENSATION: The Company accounts for the issuance of stock options to employees using the
intrinsic value method prescribed by Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock option based employee compensation cost is reflected
in net income as all options granted under the Companys plans had an exercise
price at least equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share that would result if the Company had applied the fair value
recognition provision of Statement of Financial Accounting Standards 4




---



##### Table of Contents



(SFAS) No. 123, Accounting for Stock-Based Compensation, to its stock-based
employee compensation during the periods indicated: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(in thousands, except per share amounts)
    
    2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    10,689
    
    
    $
    9,072
    
    
    $
    29,491
    
    
    $
    18,817Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of tax
    
    
    (911
    )
    
    
    (719
    )
    
    
    (2,771
    )
    
    
    (2,011
    )Pro forma net income
    
    $
    9,778
    
    
    $
    8,353
    
    
    $
    26,720
    
    
    $
    16,806Earnings per share:Basic-as reported
    
    $
    0.22
    
    
    $
    0.19
    
    
    $
    0.62
    
    
    $
    0.40Basic-pro forma
    
    $
    0.20
    
    
    $
    0.18
    
    
    $
    0.56
    
    
    $
    0.36Diluted-as reported
    
    $
    0.22
    
    
    $
    0.19
    
    
    $
    0.60
    
    
    $
    0.40Diluted-pro forma
    
    $
    0.20
    
    
    $
    0.18
    
    
    $
    0.54
    
    
    $
    0.36
 For purposes of applying SFAS No. 123, the weighted average estimated fair
value of stock options granted during the three and nine month periods ended
September 30, 2004 was $7.74 and $7.82, respectively, and for the same periods
in 2003 was $5.11 and $3.82, respectively. This value was estimated at the
option grant date using a Black-Scholes option-pricing model. From time to time the Company issues restricted stock unit awards to employees
and directors that generally vest over periods ranging from one to three years.
No consideration is paid for these awards. During the three and nine month
periods ended September 30, 2004, the Company issued approximately 3,000 and
134,000 units of restricted stock, respectively, and for the same periods in
2003 issued approximately 1,000 and 19,000 units, respectively. The Company
recorded compensation expense for restricted stock unit awards during the three
and nine months ended September 30, 2004 of approximately $214,000 and
$557,000, respectively, and for the same periods in 2003 the Company recorded
compensation expense for restricted stock unit awards of approximately $67,000
and $193,000, respectively. NOTE 3  ACQUISITIONS: In April of 2004, the Company acquired Penley, Inc. (Penley), which provides
identity verification services, and Loss Control Solutions (LCS), which offers
fraud investigation case management software for the financial services
industry. The primary reason for these acquisitions was to expand the product
suite and customer set within the Risk Management segment. The results of
operations for the acquired entities have been included in the Companys
condensed consolidated statements of operations since the acquisition dates. The aggregate initial purchase price paid for the entities was approximately $6
million, of which approximately $5 million was funded from existing cash on
hand. Approximately $0.6 million of the purchase price was placed in escrow
subject to the satisfaction of certain post-closing conditions. Additional
amounts could become payable to the former stockholders of Penley if the
acquired business achieves certain revenue and income targets during the two
year period following the acquisition. The maximum additional amount payable
to such stockholders is $21 million. The results of operations of Penley and LCS are not material to the Company,
and accordingly, pro forma results of operations for the acquisitions are not
disclosed. The estimated fair value of the net assets acquired was
approximately $6 million, which included approximately $5 million of goodwill
and approximately $1 million of intangible assets related to acquired contracts
which have an estimated life of approximately 6 years. All of the goodwill and
intangible assets associated with this transaction were assigned to the Risk
Management segment. NOTE 4  ASSETS AND LIABILITIES RELATED TO ASSETS HELD FOR SALE: At such time as management determines that a material long-lived asset or a
long-lived asset that is part of a group that includes other assets and
liabilities (asset group) is to be disposed of within a twelve-month period and
all other criteria required under SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, have been met, that material asset or asset
group is reclassified on the condensed consolidated balance sheet as held for
sale and recorded at the lower of its carrying amount or fair value less cost
to sell. 5




---



##### Table of Contents



On September 20, 2004, the Company entered into a definitive agreement (the
Agreement) to sell the ATM machines and merchant contracts (the ATM Portfolio)
associated with the ATM Management segment. The consummation of this
transaction is subject to customary closing conditions and is currently
expected to occur during the fourth quarter of 2004. The ATM Portfolio
represents a significant component of the ATM Management segment and the
Company does not expect to present the ATM Management segment as a separate
operating segment in periods subsequent to the closing of the transaction.
Amounts received by the Company that exceed the recorded book value of the ATM
Portfolio will be deferred and recognized as revenues over the five year term
of the Master Services Agreement discussed below. Concurrently with the execution of the Agreement, the Company entered into a
five year Master Services Agreement with the buyer of the ATM Portfolio that is
to become effective upon the closing of the transactions contemplated by the
Agreement. Pursuant to the Master Services Agreement, the Company will provide
processing, help desk, monitoring and other ATM management services to the
buyer. The processing service revenues and related costs will be reported
within the Electronic Payments segment and the ATM management service revenues
and related costs will be reported within the Global Outsourcing segment. In accordance with SFAS No. 144, the assets and liabilities related to the ATM
Portfolio asset group have been classified as assets held for sale and
liabilities related to assets held for sale. The results of the ATM Portfolio
are not recorded as discontinued operations because the Company will have
significant continuing involvement in the operation of the asset group
following the sale through the Master Services Agreement. The carrying amounts
of the major classes of assets classified as held for sale are net accounts
receivable of approximately $4.9 million, net property and equipment of
approximately $6.3 million, goodwill of approximately $76.0 million, net other
intangible assets of approximately $17.2 million and other current assets of
approximately $1.7 million. The liabilities related to assets held for sale
consist of accounts payable and other current liabilities of approximately $9.7
million. NOTE 5  INTANGIBLES: Intangible assets consist primarily of goodwill, capitalized software costs and
acquired contracts. Intangible assets, both acquired and developed, subject to
amortization are presented below. Certain intangible assets presented in the
table for 2003 have been reclassified to conform with current period
presentation. September 30, 2004
    
    December 31, 2003Wtd. Avg.Amort.
    
    Gross
    
    
    
    
    
    
    
    
    
    GrossPeriod
    
    Carrying
    
    Accumulated
    
    
    
    
    
    Carrying
    
    Accumulated(dollars in thousands)
    
    In Years
    
    Amounts
    
    Amortization
    
    Net
    
    Amounts
    
    Amortization
    
    NetSoftware-internal use
    
    
    3.9
    
    
    $
    87,117
    
    
    $
    (61,026
    )
    
    $
    26,091
    
    
    $
    82,376
    
    
    $
    (52,823
    )
    
    $
    29,553Software-licensing
and resale
    
    
    4.9
    
    
    
    61,359
    
    
    
    (46,708
    )
    
    
    14,651
    
    
    
    59,899
    
    
    
    (43,959
    )
    
    
    15,940Acquired contracts
and other
    
    
    6.0
    
    
    
    28,707
    
    
    
    (23,109
    )
    
    
    5,598
    
    
    
    51,905
    
    
    
    (26,282
    )
    
    
    25,623$
    177,183
    
    
    $
    (130,843
    )
    
    $
    46,340
    
    
    $
    194,180
    
    
    $
    (123,064
    )
    
    $
    71,116
 For the three and nine month periods ended September 30, 2004, amortization
expense for intangible assets was $5.4 million and $16.8 million, respectively,
and for the three and nine month periods ended September 30, 2003 the
amortization expense for intangible assets was $4.9 million and $15.1 million,
respectively. The estimated amortization expense for intangible assets held at
September 30, 2004 is $5 million for the three months ended December 31, 2004.
For the years ended December 31, 2005, 2006, 2007, 2008 and 2009, the estimated
amortization expense for intangible assets held at September 30, 2004 is $14
million, $9 million, $6 million, $3 million, and $1 million, respectively. 6




---



##### Table of Contents



The change in the carrying amount of goodwill for the nine months ended
September 30, 2004 is as follows: Electronic
    
    Risk
    
    Global
    
    ATM(in thousands)
    
    Payments
    
    Management
    
    Outsourcing
    
    Management
    
    Other
    
    TotalBalance as of December 31, 2003
    
    $
    14,960
    
    
    $
    5,724
    
    
    $
    20,559
    
    
    $
    77,982
    
    
    $
    9,361
    
    
    $
    128,586Goodwill acquired
    
    
    428
    
    
    
    5,199
    
    
    
    
    
    
    
    
    
    
    
    796
    
    
    
    6,423Reclassification of goodwill to
assets held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76,000
    )
    
    
    
    
    
    
    (76,000
    )Balance as of September 30, 2004
    
    $
    15,388
    
    
    $
    10,923
    
    
    $
    20,559
    
    
    $
    1,982
    
    
    $
    10,157
    
    
    $
    59,009
 NOTE 6  RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGES: During the third quarter of 2003, the Company recorded restructuring charges of
$3.6 million for severance benefits related to business process improvement
initiatives and reversed $0.9 million of lease related reserves to reflect the
subleasing of certain properties for which a restructuring charge was initially
recorded in 2002. During the three months ended June 30, 2004, the Company
recorded approximately $0.8 million of restructuring charges related to
severance benefits for approximately 35 employees. These charges are expected
to be paid through 2005. The following table summarizes the change in the
Companys restructuring accruals for the nine months ended September 30, 2004,
including the long-term portion of lease related accruals of approximately $1.3
million at September 30, 2004 that are payable through January 2010: Lease-RelatedSeverance
    
    Costs &(in thousands)
    
    Related
    
    Other
    
    TotalBalance at December 31, 2003
    
    $
    1,568
    
    
    $
    2,786
    
    
    $
    4,354Cash payments
    
    
    (881
    )
    
    
    (250
    )
    
    
    (1,131
    )Balance at March 31, 2004
    
    
    687
    
    
    
    2,536
    
    
    
    3,223Expense provision
    
    
    752
    
    
    
    
    
    
    
    752Cash payments
    
    
    (657
    )
    
    
    (219
    )
    
    
    (876
    )Balance at June 30, 2004
    
    
    782
    
    
    
    2,317
    
    
    
    3,099Cash payments
    
    
    (440
    )
    
    
    (219
    )
    
    
    (659
    )Balance at September 30, 2004
    
    $
    342
    
    
    $
    2,098
    
    
    $
    2,440
 NOTE 7  ACCRUED CONTRACT LOSSES: Through March 31, 2004, the Companys accrued contract losses pertained to
long-term service contracts for electronic benefits processing in the
Electronic Payments segment. In the third quarter of 2003, the Company
recorded a $2.3 million benefit related to a reduction in the estimate of
future losses on certain government EBT contracts. During the second quarter of 2004, a $0.5 million provision for expected losses
was recorded for certain long-term software contracts held by the Electronic
Payments segment. These contracts require significant modification to the
underlying software and the revenue associated with the contracts was
recognized using the percentage-of-completion method, which relies on estimates
of total expected contract costs. Unexpected increases in the scope of these
projects resulted in unanticipated increases in the expense required to perform
the contracts with the result that the Company now expects to incur losses in
the performance of these contracts. The losses recorded are based on the
Companys best current estimates of the contracts ultimate revenues and
expenses. Actual results may differ from the Companys estimates. In the event
such differences arise, a revision to the loss reserve would be required. The
following table summarizes the activity of the accrued contract loss reserve: (in thousands)
    
    2004
    
    2003Balance at beginning of year
    
    $
    1,890
    
    
    $
    7,578Charges to reserve
    
    
    (345
    )
    
    
    (1,003
    )Balance at March 31
    
    
    1,545
    
    
    
    6,575Provision for contract losses
    
    
    501
    
    
    
    Charges to reserve
    
    
    (345
    )
    
    
    (917
    )Balance at June 30
    
    
    1,701
    
    
    
    5,658Charges to reserve
    
    
    (101
    )
    
    
    (246
    )Reversal of provision for contract losses
    
    
    
    
    
    
    (2,250
    )Balance at September 30
    
    $
    1,600
    
    
    $
    3,162
 7




---



##### Table of Contents



NOTE 8  LONG-TERM DEBT: Long-term debt was as follows: September 30,
    
    December 31,(in thousands)
    
    2004
    
    2003Capital leases and other
    
    $
    5,299
    
    
    $
    7,253Less amount due within one year
    
    
    (2,007
    )
    
    
    (5,586
    )Total
    
    $
    3,292
    
    
    $
    1,667
 Long-term debt consists of capital lease obligations related to purchased
software and equipment. The range of interest rates on capital lease
obligations is approximately 2% to 6%. Carrying value approximates fair value
for these obligations, which are due through the year 2009. NOTE 9  INCOME PER SHARE: The following table reflects the calculation of basic and diluted income per
share: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(in thousands, except per share amounts)
    
    2004
    
    2003
    
    2004
    
    2003Net income per share  basicNet income
    
    $
    10,689
    
    
    $
    9,072
    
    
    $
    29,491
    
    
    $
    18,817Weighted average shares outstanding
    
    
    48,258
    
    
    
    46,848
    
    
    
    47,944
    
    
    
    46,769Net income per share  basic
    
    $
    0.22
    
    
    $
    0.19
    
    
    $
    0.62
    
    
    $
    0.40Net income per share  dilutedNet income
    
    $
    10,689
    
    
    $
    9,072
    
    
    $
    29,491
    
    
    $
    18,817Weighted average shares outstanding
    
    
    48,258
    
    
    
    46,848
    
    
    
    47,944
    
    
    
    46,769Dilutive impact of options
    
    
    1,166
    
    
    
    594
    
    
    
    1,207
    
    
    
    237Weighted average shares and potential dilutive shares outstanding
    
    
    49,424
    
    
    
    47,442
    
    
    
    49,151
    
    
    
    47,006Net income per share  diluted
    
    $
    0.22
    
    
    $
    0.19
    
    
    $
    0.60
    
    
    $
    0.40
 Options to purchase approximately 0.9 million shares and 0.2 million shares of
common stock were excluded from the above calculations as they were
antidilutive during the three and nine month periods ended September 30, 2004,
respectively. Options to purchase approximately 3.1 million shares and 4.3
million shares of common stock were excluded from the above calculations as
they were antidilutive during the three and nine month periods ended September
30, 2003, respectively. NOTE 10  COMPREHENSIVE INCOME: The Companys total comprehensive income for the three month periods ended
September 30, 2004 and 2003 was $10.9 million and $9.6 million, respectively.
The Companys total comprehensive income for the nine month periods ended
September 30, 2004 and 2003 was $29.6 million and $20.5 million, respectively.
The Companys total comprehensive income consists of net income and foreign
currency translation adjustments. NOTE 11  BUSINESS SEGMENT INFORMATION: The Companys segment reporting was revised during the quarter ended March 31,
2004 to reflect additional organizational and cost group changes. Certain
revenues and expenses from collection activities have been reclassified between
the Electronic Payments, Risk Management and Global Outsourcing segments.
Certain amortization cost groups were realigned with the respective business
segments that benefited from the use of the related assets. During the periods
presented, the Companys business segments were: Electronic Payments; Risk
Management; Global Outsourcing; and ATM Management. The Company reports segment
information consistent with the way management internally disaggregates its
operations to assess performance and to allocate resources. The Electronic
Payments segment provides EFT processing services, including ACH processing,
EBT services for government agencies, EFT software, software applications
development, maintenance and installation. The Risk Management segment provides
data based risk management services and other related products to financial
institutions, retailers and other businesses that assist in detecting fraud and
assessing the risk of opening a new account or accepting a check. The Global
Outsourcing segment provides business process outsourcing and information
technology services. The ATM Management segment provides ATM deployment,
management and branding services. 8




---



##### Table of Contents



The accounting policies of the segments are the same as those applied by the
Company on a consolidated basis. For internal reporting purposes, the Company
aggregates costs based upon managerial control. The majority of these managed
cost groups are directly assigned to a reportable segment. For cost groups
supporting more than one reportable segment, the costs are assigned based upon
the product line or project benefited. The assignment of costs is based upon
estimates of factors considered most appropriate for the cost group such as
transactions, calls, customers, square footage, revenues and headcount. The
Company does not allocate expenses that benefit all segments and are corporate
or administrative in nature. These costs are designated as Corporate expenses
and include, among other things, executive leadership costs, investor relations
and general legal, consulting, accounting and finance costs. Information concerning operations in the Companys reportable segments is as
follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Net revenue:Electronic payments
    
    $
    49,276
    
    
    $
    45,050
    
    
    $
    150,678
    
    
    $
    133,317Risk management
    
    
    36,839
    
    
    
    33,931
    
    
    
    106,996
    
    
    
    97,955Global outsourcing
    
    
    20,305
    
    
    
    17,974
    
    
    
    60,611
    
    
    
    58,994ATM management1
    
    
    33,634
    
    
    
    36,186
    
    
    
    103,367
    
    
    
    106,359Total net revenue
    
    
    140,054
    
    
    
    133,141
    
    
    
    421,652
    
    
    
    396,625Operating expenses before
restructuring, asset
impairment and contract loss
provision (reversal):Electronic payments
    
    
    38,480
    
    
    
    33,374
    
    
    
    117,718
    
    
    
    99,752Risk management
    
    
    20,329
    
    
    
    22,611
    
    
    
    61,556
    
    
    
    68,357Global outsourcing
    
    
    14,884
    
    
    
    15,213
    
    
    
    44,727
    
    
    
    49,866ATM management1
    
    
    31,386
    
    
    
    33,784
    
    
    
    96,170
    
    
    
    99,890Total operating expenses
before restructuring, asset
impairment and contract
loss provision (reversal)
    
    
    105,079
    
    
    
    104,982
    
    
    
    320,171
    
    
    
    317,865Allocated overhead:Electronic payments
    
    
    3,228
    
    
    
    2,260
    
    
    
    8,799
    
    
    
    5,755Risk management
    
    
    2,316
    
    
    
    2,417
    
    
    
    7,037
    
    
    
    7,666Global outsourcing
    
    
    1,630
    
    
    
    1,908
    
    
    
    4,962
    
    
    
    6,107ATM management1
    
    
    1,987
    
    
    
    1,752
    
    
    
    6,207
    
    
    
    5,600Corporate
    
    
    10,607
    
    
    
    7,247
    
    
    
    31,118
    
    
    
    27,566Total allocated overhead
    
    
    19,768
    
    
    
    15,584
    
    
    
    58,123
    
    
    
    52,694Restructuring, asset
impairment and contract loss
provision (reversal):Electronic payments
    
    
    
    
    
    
    (1,271
    )
    
    
    1,178
    
    
    
    (1,271
    )Risk management
    
    
    
    
    
    
    884
    
    
    
    (8
    )
    
    
    884Global outsourcing
    
    
    
    
    
    
    842
    
    
    
    41
    
    
    
    842ATM management1
    
    
    
    
    
    
    244
    
    
    
    9
    
    
    
    244Corporate
    
    
    
    
    
    
    (304
    )
    
    
    33
    
    
    
    (304
    )Total restructuring, asset
impairment and contract
loss provision (reversal)
    
    
    
    
    
    
    395
    
    
    
    1,253
    
    
    
    395Income (loss) from operations:Electronic payments
    
    
    7,568
    
    
    
    10,687
    
    
    
    22,983
    
    
    
    29,081Risk management
    
    
    14,194
    
    
    
    8,019
    
    
    
    38,411
    
    
    
    21,048Global outsourcing
    
    
    3,791
    
    
    
    11
    
    
    
    10,881
    
    
    
    2,179ATM management1
    
    
    261
    
    
    
    406
    
    
    
    981
    
    
    
    625Corporate
    
    
    (10,607
    )
    
    
    (6,943
    )
    
    
    (31,151
    )
    
    
    (27,262
    )Income from operations
    
    $
    15,207
    
    
    $
    12,180
    
    
    $
    42,105
    
    
    $
    25,671
 1 See Note 4. 9




---



##### Table of Contents



The Company has not disclosed assets, interest income, interest expense or
income taxes by segment because this information is not reviewed by the chief
operating decision maker, produced internally nor practicable to prepare.
Depreciation and amortization for each of the Companys reporting segments is
as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Depreciation and amortization:Electronic payments
    
    $
    4,227
    
    
    $
    2,610
    
    
    $
    11,436
    
    
    $
    8,182Risk management
    
    
    2,941
    
    
    
    3,402
    
    
    
    8,624
    
    
    
    9,989Global outsourcing
    
    
    983
    
    
    
    836
    
    
    
    2,313
    
    
    
    2,664ATM management
    
    
    1,150
    
    
    
    1,151
    
    
    
    4,168
    
    
    
    3,817Corporate
    
    
    421
    
    
    
    425
    
    
    
    1,137
    
    
    
    1,395Total depreciation and amortization
    
    $
    9,722
    
    
    $
    8,424
    
    
    $
    27,678
    
    
    $
    26,047
 Revenue is attributed to geographic areas based on the location of the assets
producing the revenue. Certain amounts presented for 2003 have been
reclassified to conform with current period presentation. The Companys
operations by geographic area are as follows: Total Net RevenueThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(in thousands)
    
    2004
    
    2003
    
    2004
    
    2003United States
    
    $
    123,617
    
    
    $
    120,748
    
    
    $
    370,323
    
    
    $
    360,305United Kingdom and other
    
    
    6,425
    
    
    
    4,666
    
    
    
    19,524
    
    
    
    14,174India
    
    
    5,783
    
    
    
    4,606
    
    
    
    16,365
    
    
    
    13,618Canada
    
    
    4,229
    
    
    
    3,121
    
    
    
    15,440
    
    
    
    8,528Total consolidated
    
    $
    140,054
    
    
    $
    133,141
    
    
    $
    421,652
    
    
    $
    396,625
 Property and Equipment - NetSeptember 30,
    
    December 31,(in thousands)
    
    2004
    
    2003United States
    
    $
    35,709
    
    
    $
    38,594United Kingdom and other
    
    
    471
    
    
    
    530India
    
    
    11,411
    
    
    
    9,445Canada
    
    
    417
    
    
    
    1,060Total consolidated
    
    $
    48,008
    
    
    $
    49,629
 NOTE 12  COMMITMENTS AND CONTINGENCIES: Future commercial commitments In connection with the Companys government services, collection and ATM
placement activities, the Company posts surety bonds with state agencies
guaranteeing its performance of certain obligations related to the relevant
contracts or state requirements. The aggregate amount of such bonds outstanding
at September 30, 2004 was $14.9 million. At September 30, 2004, the Company provided guarantees of $0.5 million on
certain equipment lease payments for Canadian customers of its ATM management
business. These guarantees were established prior to the acquisition of Access
Cash International, L.L.C. in 2001 and expire through 2008. The Company would
be required to make payments under these guarantees in the event that these
customers could not meet their own payment obligations. Through September 30,
2004, the Company has been required to make payments of approximately $0.3
million pursuant to these guarantees. The customers ATM equipment assets are
utilized as collateral on these guarantees. There are no amounts being carried
as liabilities for the Companys obligations under these guarantees. The Company uses cash collateral to secure letters of credit it issues in the
ordinary course of business. The Company had $1.2 million in letters of credit
outstanding in the United States at September 30, 2004, mostly related to
leases. These letters of credit were secured by $1.3 million in cash
collateral. In addition, the Company obtained bank guarantees of $0.5 million
related to the performance on a customer contract and certain obligations
related to local government requirements in India. These bank guarantees in
India are collateralized by $0.5 million of time deposits. 10




---



##### Table of Contents



Contractual cash obligations As of September 30, 2004, the Company had contractual cash obligations for
capital leases, operating leases, outsourcing and maintenance obligations in
the aggregate amount of approximately $107.6 million. The following table sets
forth the Companys obligations as of September 30, 2004 for the time periods
specified. The Companys long-term debt consists of capital lease obligations
related to purchased software and equipment. Payments Due by PeriodThree-months
    
    Three Years
    
    Three Yearsended
    
    ended
    
    endedDecember 31,
    
    December 31,
    
    December 31,(in thousands)
    
    Total
    
    2004
    
    2007
    
    2010
    
    ThereafterCapital lease obligations
    
    $
    5,299
    
    
    $
    555
    
    
    $
    4,000
    
    
    $
    744
    
    
    $
    Operating lease
obligations1
    
    
    52,359
    
    
    
    4,745
    
    
    
    24,613
    
    
    
    15,772
    
    
    
    7,229Vendor obligations
    
    
    49,921
    
    
    
    9,526
    
    
    
    40,395
    
    
    
    
    
    
    
    Total
    
    $
    107,579
    
    
    $
    14,826
    
    
    $
    69,008
    
    
    $
    16,516
    
    
    $
    7,229
  1
    
    Future minimum lease payments for
non-cancelable operating leases are presented net of
minimum sublease rentals of $3.2 million due in the
future under non-cancelable subleases. Other commitments The Company has vault cash agreements with various financial institutions who
provide cash to certain of the ATMs owned or managed by the Company. Although
some portion of this cash may be physically located in the ATMs managed by the
Company, this cash is not included in cash and cash equivalents on the
Companys condensed consolidated balance sheet because the Company does not
take title to the cash under the bailee/bailor relationship established by the
agreements. Based upon the daily outstanding balance of funds provided to the
ATMs, the Company generally pays a monthly fee ranging from prime, as defined,
plus one half percent up to prime plus 3%. The average monthly rate paid during
the first nine months of 2004 approximated 7%. The Company indemnifies the
financial institutions against any loss of the cash in the ATMs. Two of the
agreements require the Company to maintain a security deposit equal to 1% of
the daily outstanding balance. The agreements may be terminated upon notice by
either party and have various expiration dates ranging from November 2004 to
June 2005. Total cash provided pursuant to these vault cash agreements was
approximately $37 million at September 30, 2004 and approximately $41 million
at December 31, 2003. As part of its transaction processing business, the Company provides cash
settlement services to financial institutions and state and local governments.
These services involve the movement of funds between the various parties
associated with ATM, point-of-sale or EBT transactions and this activity
results in a balance due to the Company at the end of each business day that it
recoups over the next few business days. The balances due to the Company are
included in cash and cash equivalents. As of September 30, 2004, approximately
$25 million was due to the Company and it received these funds in early October
2004. The Company seeks to maintain cash balances that are adequate to ensure that it
can advance funds to its processing customers if unusual circumstances prevent
the Company from being able to process their settlement files in a timely
fashion. Although highly infrequent, the Company has funded approximately $30
million under such a circumstance in the past. The Company currently seeks to
maintain a cash balance of approximately $75 million to ensure that it can fund
this obligation. The Company is evaluating means to reduce the need for it to maintain these
minimum cash balance levels, including the possibility of obtaining an
overnight credit facility to fund these obligations. Under a third party indemnification agreement, the Company agreed to indemnify
Deluxe in connection with any liabilities incurred by Deluxe after the Spin-Off
as a result of Deluxes purchase or lease of property or services for the
Companys benefit under any master agreement. The Company also agreed to
indemnify Deluxe in connection with any guarantees under which Deluxe
guaranteed the Companys performance of agreements with third parties. The
Company is obligated to indemnify Deluxe for any liability to the extent such
liability primarily relates to the past, present or future operation of the
Companys business or operations. No amounts have been paid to Deluxe under
this agreement. 11




---



##### Table of Contents



The Company and Deluxe also entered into a Cross-Indemnification Agreement
pursuant to which both the Company and Deluxe agreed to indemnify each other
against any liabilities arising out of the underwriting agreement related to
the Companys IPO, except insofar as any such liability arises out of a breach
of such agreement by the party seeking indemnification. No payments have been
made pursuant to this agreement. The Companys agreements with users of its products and services generally
contain indemnity clauses under which the Company agrees to indemnify its
customers and hold them harmless from and against liabilities arising from
claims of patent, copyright or other intellectual property infringement brought
by a third party related to those products or services. The Companys
agreements may also provide indemnification for claims relating to property
damage or personal injury resulting from the performance of services by the
Company or its subcontractors. Historically, the Companys costs to defend
lawsuits or settle claims relating to these indemnity agreements have not been
significant. The Companys amended and restated certificate of incorporation and by-laws
require it to indemnify its directors and officers to the fullest extent
permitted by Delaware law. Indemnification of the Companys employees and
other agents is permitted to the same extent. The Companys amended and
restated certificate of incorporation also permits the Company to secure
insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in such capacity, regardless of
whether the amended and restated certificate of incorporation would permit such
indemnification. These indemnification obligations are implicated with respect
to the directors and officers of the Company named as defendants in the Federal
Securities Action and Shareholder Derivative Actions described below, and could
be implicated if any of the Companys former officers are named as individual
respondents in connection with the SEC investigation described below. Although
the Company maintains insurance policies providing coverage for these types of
matters, the Companys insurance carriers may decline coverage, or the coverage
may be insufficient to cover the Companys expenses and liability. Other contingencies The Company is currently the subject of an investigation by the SEC with
respect to restatements of its prior period financial statements that occurred
in 2002. The Company has been cooperating fully with the SEC staff and intends
to continue to do so. The Company may, however, become subject to a fine or
other remedies in connection with the investigation and may be required to
indemnify certain of its former officers for expenses incurred in connection
with the SEC inquiry. The Company has incurred, and may continue to incur,
significant additional legal expenses in connection with this investigation and
the outcome of the SEC investigation may affect the course of the Federal
Securities Action and the Shareholder Derivative Actions described below. The Company, its former chief executive and chief financial officers and its
current chief financial officer were defendants in a federal securities action
(the Federal Securities Action) that was pending in the U.S. District Court for
the District of Arizona. The Consolidated Amended Complaint (Complaint) filed
in this Action alleged, among other things, that during the period from July
21, 2000 through October 24, 2002 the defendants made false and misleading
statements and omissions of material facts and that the plaintiff and other
members of a putative class of shareholders suffered damages as a result. This
Complaint was dismissed by order of the Court on July 12, 2004. The plaintiffs
appealed this order of dismissal to the Ninth Circuit Court of Appeals on
August 11, 2004. At the request of the parties, the Court vacated the original
briefing schedule of this appeal. The Court has not established a new briefing
schedule. The Company is a nominal defendant in two substantially identical shareholder
derivative actions filed in the Superior Court of Arizona, Maricopa County in
January 2003 (the Shareholder Derivative Actions). The complaints in these
actions allege, among other things, that certain of the Companys current and
former directors named in the complaints as defendants breached their fiduciary
duties to the Company in connection with certain alleged issues involving the
Companys accounting practices and internal controls. The complaints also name
as a defendant the Companys former external auditor. These actions were
stayed pending the resolution of the motion to dismiss the Federal Securities
Action that is discussed above and the parties are now considering the possible
settlement of this litigation. The Company cannot, however, predict the
ultimate outcome of these actions with certainty. The Company, along with numerous other defendants, is a defendant in an action
pending in the U.S. District Court for the Southern District of Florida. The
complaint in this action alleges that the Company purchased motor vehicle
records from the State of Florida and used that data for marketing and other
purposes that are not permitted under 12




---



##### Table of Contents



the Federal Drivers Privacy Protection Act. The plaintiffs are seeking
liquidated damages of not less than $2,500 for each affected member of a
purported class, plus costs and attorneys fees. The plaintiffs are also asking
for injunctive relief to prevent further alleged violations of the Federal Act.
On March 11, 2004, the Company joined in a motion to dismiss this case filed
by a co-defendant and the Company filed its own further motion to dismiss a
portion of this case on June 23, 2004. On June 25, 2004 the Company filed a
motion for summary judgment. All of these motions are pending before the court.
The Company cannot predict whether the plaintiffs in this case will be
successful in certifying their complaint as a class action. The Company
believes that it has meritorious defenses with regard to the allegations made
in this lawsuit and intends to vigorously defend this action. 13




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our Managements Discussion and Analysis of our Financial Condition and Results
of Operations (MD&A) begins with an executive overview of our business. This
overview includes a description of our business goals, the business models for
our segments, key events during the quarter ended September 30, 2004 and
certain trends, risks and challenges. We then discuss our results of operations
for the three and nine month periods ended September 30, 2004 compared to the
three and nine month periods ended September 30, 2003. This is followed by a
discussion of our liquidity and capital resources, including cash resources,
sources and uses of cash and commercial commitments. You should read the
description of our Critical Accounting Policies and Estimates in our Annual
Report on Form 10-K for the year ending December 31, 2003 because understanding
these policies and estimates is important in order to fully understand our
reported financial results and our business outlook for future periods. You should read the following discussion together with our condensed
consolidated financial statements and the notes to those financial statements
included in this Quarterly Report on Form 10-Q and our 2003 Annual Report on
Form 10-K. In addition to historical information, this discussion contains
forward-looking statements as defined in the U.S. Private Securities
Litigation Reform Act of 1995. All forward-looking statements are subject to
various risks and uncertainties that could cause our actual future results to
differ materially from those presently anticipated due to a variety of factors,
including those discussed in the risk factors and cautionary statements in Part
II, Item 5 of this Quarterly Report on Form 10-Q. EXECUTIVE OVERVIEW Our Business Our goal is to enable trusted commerce by delivering integrated information,
payment and technology solutions that strengthen our customers overall
profitability through increased revenue, reduced costs and improved operating
efficiency and technology performance. Our principal focus is on issuers of
transaction accounts, such as financial institutions, financial services
companies, electronic funds transfer networks, retailers, government agencies,
telecommunications companies and other businesses. In evaluating our financial
condition and operating results, our management focuses on revenues, operating
income, return on invested capital and cash flows. We currently deliver our information, payment and technology solutions through
four basic business units and through combinations of the products and services
offered by these units. Our most profitable business segments are Electronic
Payments and Risk Management, although our Global Outsourcing and Automated
Teller Machine (ATM) Management segments also contribute to our overall value
proposition. On September 20, 2004, we entered into a definitive agreement (the Agreement)
to sell the ATM machines and merchant contracts (the ATM Portfolio) associated
with our ATM Management segment. The consummation of this transaction is
subject to customary closing conditions and is currently expected to occur
during the fourth quarter of 2004. The ATM Portfolio represents a significant
component of our ATM Management segment, and we do not expect to present the
ATM Management segment as a separate operating segment in periods subsequent to
the closing of this transaction. Amounts received by us that exceed the
recorded book value of the ATM Portfolio will be deferred and recognized as
revenues over the five year term of the Master Services Agreement discussed
below. Concurrently with the execution of the Agreement, we entered into a five year
Master Services Agreement with the buyer of the ATM Portfolio that is to become
effective upon the closing of the transactions contemplated by the Agreement.
Pursuant to the Master Services Agreement, we will provide processing, help
desk, monitoring and other ATM management services to the buyer. The
processing service revenues and related costs will be reported within our
Electronic Payments segment and the ATM management service revenues and related
costs will be reported within our Global Outsourcing segment. We expect a
significant reduction in revenues and the related controllable costs upon
consummation of the sale of the ATM Portfolio because the revenues we expect to
receive from the Master Services Agreement, including amounts recognized from
the amortization of the gain on the ATM Portfolio sale, are not expected to
initially exceed 15% of the revenues previously generated by the ATM Portfolio. 14




---



##### Table of Contents



One of our goals is to enhance our ability to market and sell comprehensive
solutions incorporating multiple elements of the products and services offered
by our business lines to our customers. The business model of each of our
segments is summarized below. Electronic Payments This segment derives its revenue based upon our customers needs to process
electronic transactions. The majority of this segments revenue is derived from
processing debit transactions that originate at an ATM or point-of-sale device.
We also derive revenue from providing electronic benefit transfer (EBT)
services for government agencies. The remaining revenue from this segment is
derived from the licensing and maintenance of the electronic funds transfer
(EFT) software that our customers use to process electronic debit transactions.
The provision of EFT processing services requires substantial capital
investment for computers and related peripherals, maintenance, system
modifications and upgrades, security and redundancy. Although these
requirements add barriers to competitive entrance, they also create a
relatively high ratio of fixed operating costs to total costs. Processors are
also required to maintain significant cash reserves to cover temporary
imbalances in the flow of funds associated with electronic funds transfers.
Additionally, the software applications used for processing at our data centers
and which we license to our software customers are primarily developed in-house
and require frequent compliance updates and competitive upgrades, creating a
dependence upon experienced and qualified information technology (IT)
personnel. Other operating expenses include telecommunications costs to
support the transmission of electronic debit transactions and settlement. When
evaluating the performance of this business, we focus primarily on increasing
its recurring revenue base through, among other things, the retention of our
current EFT and EBT processing customers and the acquisition of new processing
relationships. Expanding our software sales and establishing a processing
presence in foreign markets are also areas of management emphasis. Risk Management This segment derives its revenue from database inquiries primarily from
financial institutions and retailers seeking to comply with regulations or
mitigate the risk associated with accepting checks, providing credit or opening
debit accounts for new consumers. Revenue from financial institutions
represented the majority of this segments revenue during the three and nine
month periods ended September 30, 2004, and the balance of the segments
revenue was derived from retail customers using our check verification service.
Operating costs generally include data acquisition costs, the cost of
technology, regulatory compliance infrastructure and customer support centers.
Our primary efforts in managing this business are directed towards increasing
its revenues by improving customer usage rates and expanding our product suite
and customer set. Global Outsourcing Our global outsourcing business derives its revenues from the need of companies
to remain competitive by reducing costs while maintaining or improving service
levels. Revenues in this segment can be from a variety of business process
outsourcing (BPO) services (such as transaction account acquisition, credit
card operations, brokerage support, customer support, credit decisioning, loan
operations and collections) and IT outsourcing. Operating costs in this segment
are primarily related to employee expense, telecommunications costs and
facilities costs. Our principal goal for this business is to expand its
customer base in our core target markets of financial services, retail and
telecommunications companies. ATM Management

Our ATM Management segment derived its revenues from the use, sale, branding
and management of ATMs. Surcharge and interchange revenue represented the
majority of our revenue from this segment during the three and nine month
periods ended September 30, 2004. Equipment sales were non-recurring and,
along with branding fees, represented a minority of the revenue in this
segment. Operating costs in this segment primarily included processing and
telecommunication costs, the cost of the equipment we sold and the residual
payments we made to the merchants where the ATMs we managed were deployed. As
noted above, we entered into a definitive agreement to sell certain assets and
ownership interests of the ATM Management segment during the third quarter. Key Events During the Three Months Ended September 30, 2004  
    
    We entered into a definitive agreement to sell the ATM Portfolio
and a five year Master Services Agreement under which our Electronic
Payments and Global Outsourcing segments will provide ATM processing
and management services to the buyer.  
    
    We reached record levels of inquiry volumes in our Risk Management
segment. 15




---



##### Table of Contents




    
    The District Court in Arizona dismissed a federal securities class
action lawsuit filed against us and the plaintiffs in this case
appealed this decision to the Ninth Circuit Court of Appeals.  
    
    Richard J. Lehmann and William J. Ryan joined our Board of
Directors.  
    
    Oasis Technology Ltd. continued to incur operating losses and has
not performed up to the original expectations developed during our
acquisition of this Company. Trends Our strategic planning and forecasting processes include the consideration of
economic, industry-wide and Company specific trends that may impact our
customers, competitors and operations. We identify the more material positive
and negative trends affecting our business below:  
    
    increased fraud and identity theft and regulatory requirements are
driving an increasing need for risk management products;  
    
    consolidation in industries we serve is resulting in increasing competition and pricing pressures;  
    
    we are seeing an improving pipeline and volume growth in our electronic payment processing business;  
    
    increased outsourcing as a means to control costs is driving a
demand for offshore outsourcing services as well as an increased level
of interest in developing expanded offshore capabilities by industry
participants;  
    
    the use of offshore outsourcing services continues to be a point of
political debate;  
    
    a continued shift in the mix of payment mechanisms toward debit
transactions is driving a need for electronic payment solutions and
associated risk management services;  
    
    we have not been successful in obtaining new EBT contracts and
expect our revenues from this business to begin to decline in 2005;  
    
    the demand from financial institutions for access to surcharge free ATMs is increasing;  
    
    our revenues from existing IT outsourcing customers continue to decline;  
    
    the rate of new ATM deployment and per ATM transaction volumes in the United States is declining;  
    
    there continues to be a migration from the use of traditional paper checks to electronic payments;  
    
    the independent ATM management industry is consolidating;  
    
    the market for EFT software is soft and sales in this area
currently relate more to product enhancements, customization and
maintenance rather than new software sales;  
    
    ATM markets outside the United States are growing; and  
    
    our India operations continue to experience pressure on compensation costs as competition increases. Risks and Challenges In addition to the trends affecting our industry and our Company as noted
above, we consider risks and challenges that could impact the Companys future
financial results, including the following and those described in Part II, Item
5, Risk Factors and Cautionary Statements:  
    
    We are unable to predict the results of the investigation by the
SEC, the stockholders litigation or the purported class action
litigation filed in Florida.  
    
    Our business may be adversely affected if the proposed sale of our
ATM Portfolio is not completed.  
    
    Estimates of future financial results are inherently unreliable.  
    
    Consolidation in the industries we serve may adversely affect our
ability to sell our products and services.  
    
    Our ability to expand through acquisitions involves risks and may
not be successful.  
    
    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.  
    
    Our sales of IT services have been declining and our largest IT
services contract has been extended on less favorable terms than the
original contract.  
    
    Legislation or regulation could harm our ability to collect and use
data, increase our operating costs or otherwise harm our business.  
    
    If the security of our databases is compromised, our reputation
could suffer and customers may not be willing to use our products and
services. 16




---



##### Table of Contents




    
    We may experience software defects, development delays and
installation difficulties, which would 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.  
    
    Changes in Indian tax laws could adversely affect our results of
operations.  
    
    We face termination and compliance risks with respect to our
government contracts and we expect our revenues from this business to
decline in upcoming periods.  
    
    We may be unable to protect our intellectual property rights.  
    
    Provisions in our charter documents and Delaware law may delay or prevent a change in control. RESULTS OF OPERATIONS The following table presents our condensed consolidated financial results for
the three and nine month periods ended September 30, 2004 and 2003: Three Months Ended September 30,
    
    Nine Months Ended September 30,(dollars in thousands)
    
    2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % ChangeNet revenue
    
    $
    140,054
    
    
    $
    133,141
    
    
    
    5.2
    %
    
    $
    421,652
    
    
    $
    396,625
    
    
    
    6.3
    %Operating expenses:Processing,
communication and
service costs
    
    
    57,634
    
    
    
    58,037
    
    
    
    (0.7
    )
    
    
    172,965
    
    
    
    173,682
    
    
    
    (0.4
    )Employee costs
    
    
    46,261
    
    
    
    44,391
    
    
    
    4.2
    
    
    
    142,990
    
    
    
    136,404
    
    
    
    4.8Depreciation and
amortization
    
    
    9,722
    
    
    
    8,424
    
    
    
    15.4
    
    
    
    27,678
    
    
    
    26,047
    
    
    
    6.3Other operating costs
    
    
    11,230
    
    
    
    9,714
    
    
    
    15.6
    
    
    
    34,661
    
    
    
    34,426
    
    
    
    0.7Restructuring and asset
impairment charges
    
    
    
    
    
    
    2,645
    
    
    
    *
    
    
    
    752
    
    
    
    2,645
    
    
    
    (71.6
    )Contract loss provision
(reversal)
    
    
    
    
    
    
    (2,250
    )
    
    
    *
    
    
    
    501
    
    
    
    (2,250
    )
    
    
    *Total operating
expenses
    
    
    124,847
    
    
    
    120,961
    
    
    
    3.2
    
    
    
    379,547
    
    
    
    370,954
    
    
    
    2.3Income from operations
    
    
    15,207
    
    
    
    12,180
    
    
    
    24.9
    
    
    
    42,105
    
    
    
    25,671
    
    
    
    64.0Other income
(expense) 
net
    
    
    63
    
    
    
    (915
    )
    
    
    *
    
    
    
    24
    
    
    
    (55
    )
    
    
    *Income before income taxes
    
    
    15,270
    
    
    
    11,265
    
    
    
    35.6
    
    
    
    42,129
    
    
    
    25,616
    
    
    
    64.5Provision for income taxes
    
    
    (4,581
    )
    
    
    (2,193
    )
    
    
    *
    
    
    
    (12,638
    )
    
    
    (6,799
    )
    
    
    85.9Net income
    
    $
    10,689
    
    
    $
    9,072
    
    
    
    17.8
    
    
    $
    29,491
    
    
    $
    18,817
    
    
    
    56.7
  *
    
    Represents an increase or decrease in excess of 100%. Net Revenue Net revenue by reportable segment and for the Company as a whole for the three
and nine month periods ended September 30, 2004 and 2003 was as follows: Three Months Ended September 30,
    
    Nine Months Ended September 30,(in millions)
    
    2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % ChangeElectronic PaymentsEFT processing
    
    $
    27.0
    
    
    $
    25.0
    
    
    
    8.0
    %
    
    $
    81.2
    
    
    $
    74.4
    
    
    
    9.1
    %Government services (EBT)
    
    
    14.2
    
    
    
    13.5
    
    
    
    5.2
    
    
    
    42.9
    
    
    
    36.9
    
    
    
    16.3Software sales
    
    
    8.1
    
    
    
    6.6
    
    
    
    22.7
    
    
    
    26.6
    
    
    
    22.0
    
    
    
    20.949.3
    
    
    
    45.1
    
    
    
    9.3
    
    
    
    150.7
    
    
    
    133.3
    
    
    
    13.1Risk ManagementFinancial institution products
    
    
    32.1
    
    
    
    29.1
    
    
    
    10.3
    
    
    
    93.0
    
    
    
    82.1
    
    
    
    13.3Retail products
    
    
    4.7
    
    
    
    4.8
    
    
    
    (2.1
    )
    
    
    14.0
    
    
    
    15.9
    
    
    
    (11.9
    )36.8
    
    
    
    33.9
    
    
    
    8.6
    
    
    
    107.0
    
    
    
    98.0
    
    
    
    9.2Global OutsourcingBPO
    
    
    13.0
    
    
    
    9.9
    
    
    
    31.3
    
    
    
    39.0
    
    
    
    29.5
    
    
    
    32.2IT services
    
    
    7.3
    
    
    
    8.1
    
    
    
    (9.9
    )
    
    
    21.6
    
    
    
    29.5
    
    
    
    (26.8
    )20.3
    
    
    
    18.0
    
    
    
    12.8
    
    
    
    60.6
    
    
    
    59.0
    
    
    
    2.7ATM Management
    
    
    33.6
    
    
    
    36.2
    
    
    
    (7.2
    )
    
    
    103.4
    
    
    
    106.4
    
    
    
    (2.8
    )Total net revenue
    
    $
    140.1
    (1)
    
    $
    133.1
    (1)
    
    
    5.2
    
    

    $
    421.7
    
    
    
    396.6
    (1)
    
    
    6.3
  (1)
    
    Amounts do not sum due to rounding. 17




---



##### Table of Contents



In conjunction with our enhanced segment revenue presentation, customer
reimbursed fees have been included in the related product lines within the
Electronic Payments and Global Outsourcing segments. Amounts in prior periods
have been reclassified to conform with this presentation. Electronic Payments

The increase in the Electronic Payments segment revenues during the three and
nine months ended September 30, 2004 as
compared to the same periods in 2003 is due to:  
    
    an increase in EFT processing revenues resulting from higher
transaction volumes and customer reimbursed fees;  
    
    an increase in EBT processing revenues from new contracts that
commenced primarily during the second and third quarter of 2003; and  
    
    an increase in software revenues from open systems software sales
attributable to our acquisition of Oasis Technology Ltd. in November
2003. The following table provides further detail regarding the revenue we generated
from our software business during the periods indicated: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 30(in thousands)
    
    2004
    
    2003
    
    2004
    
    2003License fees
    
    $
    1,477
    
    
    $
    1,606
    
    
    $
    5,354
    
    
    $
    5,877Maintenance
    
    
    5,011
    
    
    
    3,498
    
    
    
    15,315
    
    
    
    10,901Software services
    
    
    1,626
    
    
    
    1,495
    
    
    
    5,968
    
    
    
    5,270$
    8,114
    
    
    $
    6,599
    
    
    $
    26,637
    
    
    $
    22,048
 We expect the total revenues from our Electronic Payments segment to be higher
in 2004 as compared to 2003 due to increased volumes from our existing
financial institution processing customers, our success in securing new
financial institution customers and higher software sales. Additionally, we
expect revenues generated through EBT contracts that began in 2003 will
contribute to the increase in revenues in 2004. Although we continue to pursue
new EBT contracts, we cannot predict whether our bids will be successful and,
in any event, we expect the revenues we receive from EBT activities to begin to
decline due to scheduled contract expirations in future periods. We expect
this trend to begin in 2005. Risk Management An increase in ChexSystems(SM) transaction volumes associated with new debit
account openings resulted in an improvement in our financial institution
product revenues of 10% and 13% during the three and nine month periods ended
September 30, 2004, respectively, as compared to the same periods in 2003. The
increase in revenues from our financial institution products was partially
offset by declines in revenues from our retail check verification customers
during the three and nine months ended September 30, 2004 due to price
concessions and customer attrition. Revenues from our Risk Management segment
are expected to be higher in 2004 as compared to 2003 due to increased demand
for our financial institution products and services offset somewhat by lower
retail products revenues due to the impact of price concessions and customer
attrition. We expect that future revenues from our retail products will be
relatively flat. Global Outsourcing Revenues from our outsourcing business increased during the three and nine
months ended September 30, 2004 as compared to the same periods in 2003 due to
an increase in BPO service volumes and the impact of new BPO client contracts
that commenced subsequent to the third quarter of 2003. The increase in BPO
revenues was partially offset
by decreases in our IT services revenues. We continue to focus on obtaining
revenue growth in our BPO business by establishing new client relationships and
through an expansion of the services provided to our existing clients. For the
full year 2004, we expect net revenue from our Global Outsourcing segment will
increase as compared to 2003 because of growth in our BPO business. 18




---



##### Table of Contents



ATM Management The decrease in the revenues we received from our ATM business during the three
and nine month periods ended September 30, 2004 as compared to the same periods
in 2003 is due to a general decline in transaction volumes. The revenues for
this segment are expected to decline for the full year 2004 as compared to 2003
due to the anticipated completion of the ATM Portfolio sale in the fourth
quarter and lower transaction volumes. Business Segment Margin Contributions The following table presents our operating income (loss) by segment and total
operating income for the three and nine month periods ended September 30, 2004
and 2003: Three Months Ended September 30,
    
    Nine Months Ended September 30,(dollars in thousands)
    
    2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % ChangeOperating income
(loss)Electronic payments
    
    $
    7,568
    
    
    $
    10,687
    
    
    
    (29.2
    )%
    
    $
    22,983
    
    
    $
    29,081
    
    
    
    (21.0
    )%Risk management
    
    
    14,194
    
    
    
    8,019
    
    
    
    77.0
    
    
    
    38,411
    
    
    
    21,048
    
    
    
    82.5Global outsourcing
    
    
    3,791
    
    
    
    11
    
    
    
    *
    
    
    
    10,881
    
    
    
    2,179
    
    
    
    *ATM management
    
    
    261
    
    
    
    406
    
    
    
    (35.7
    )
    
    
    981
    
    
    
    625
    
    
    
    57.0Corporate
    
    
    (10,607
    )
    
    
    (6,943
    )
    
    
    (52.8
    )
    
    
    (31,151
    )
    
    
    (27,262
    )
    
    
    (14.3
    )Total operating income
    
    $
    15,207
    
    
    $
    12,180
    
    
    
    24.9
    
    
    $
    42,105
    
    
    $
    25,671
    
    
    
    64.0
  *
    
    Represents an increase or decrease in excess of 100%. Electronic Payments The decline in margins during the three and nine months ended September 30,
2004 as compared to the same periods in 2003 is primarily due to the favorable
impact of a $2.3 million reduction of a loss contract provision during the
third quarter of 2003. There was no similar benefit recorded in 2004. Also
contributing to the decline in margins was an increase in our fixed costs
associated with our acquisition of Oasis Technology in November 2003. The
decrease in margins was somewhat offset by improvements in our EFT processing
and EBT revenues during the quarter and nine months ended September 30, 2004 as
compared to the same periods in 2003. Operating margins for the Electronic
Payments segment for 2004 are expected to be lower than those seen in 2003 due
to a smaller proportion of the revenues from this business being derived from
software license fees and the absence of the loss contract reversals we
recorded in 2003. We continue to focus on reducing expenses associated with
our open systems software product line in order to improve the operating
margins of this segment. Risk Management We achieved higher margins in our Risk Management segment during the three and
nine months ended September 30, 2004 as compared to the same periods in 2003
from an increase in ChexSystems(SM) revenues and a reduction in costs through
the utilization of our India operations for contact center and software
development work. We expect that cost reductions and higher transaction
volumes from our ChexSystems(SM) products will result in higher margins for
this segment in 2004 as compared to 2003. Global Outsourcing The margins for our global outsourcing business improved during the three and
nine months ended September 30, 2004 as compared to the same periods in 2003
due to an increase in BPO revenues and from cost reductions related to
increased productivity and capacity utilization. We expect that margins in
this business will increase in 2004 as compared to 2003 due to increased BPO
revenues, continued cost reductions and increased shortfall fees under our
primary IT services contract that will be recognized in the fourth quarter of
2004. We have recently amended our primary IT services contract to extend its
scheduled expiration date of March 31, 2005 by one year. There are, however,
no minimum spending targets associated with this extension period. We expect
that the revenues we receive from this contract will continue to decline. ATM Management The decline in operating margins in this segment during the third quarter of
2004 as compared to the third quarter of 2003 is due to the decrease in
processing revenues resulting from lower transaction volumes. The increase in
operating margins during the nine month period ended September 30, 2004 as
compared to the same period in 2003 is attributable to cost reduction efforts.
We expect that the operating margins for the ATM Management segment for the
full year 2004 will be consistent with the 2003 operating margins. 19




---



##### Table of Contents



Corporate Unallocated corporate overhead includes, among other things, the cost of
executive leadership, investor relations, shared legal, consulting, accounting
and finance functions and certain technology expenses. Corporate expenses
during the three and nine months ended September 30, 2003 were unusually low
due to benefits from reductions in telecommunication costs and other certain
non-recurring cost reductions specific to those periods in 2003. We did not
experience a similar level of cost reductions during the three and nine months
ended September 30, 2004. Corporate overhead costs incurred for the remainder
of 2004 are expected to be generally consistent with the costs experienced
during the first nine months of 2004. Operating Expenses Operating expenses for the three and nine months ended September 30, 2004 and
2003 were as follows: Three Months Ended September 30,
    
    Nine Months Ended September 30,(dollars in thousands)
    
    2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % ChangeOperating expenses:Processing, communication
and service costs
    
    $
    57,634
    
    
    $
    58,037
    
    
    
    (0.7
    )%
    
    $
    172,965
    
    
    $
    173,682
    
    
    
    (0.4
    )%Employee costs
    
    
    46,261
    
    
    
    44,391
    
    
    
    4.2
    
    
    
    142,990
    
    
    
    136,404
    
    
    
    4.8Depreciation and amortization
    
    
    9,722
    
    
    
    8,424
    
    
    
    15.4
    
    
    
    27,678
    
    
    
    26,047
    
    
    
    6.3Other operating costs
    
    
    11,230
    
    
    
    9,714
    
    
    
    15.6
    
    
    
    34,661
    
    
    
    34,426
    
    
    
    0.7Restructuring and asset
impairment charges
    
    
    
    
    
    
    2,645
    
    
    
    *
    
    
    
    752
    
    
    
    2,645
    
    
    
    (71.6
    )Contract loss provision
(reversal)
    
    
    
    
    
    
    (2,250
    )
    
    
    *
    
    
    
    501
    
    
    
    (2,250
    )
    
    
    *Total operating expenses
    
    $
    124,847
    
    
    $
    120,961
    
    
    
    3.2
    
    
    $
    379,547
    
    
    $
    370,954
    
    
    
    2.3
  *
    
    Represents an increase or decrease in excess of 100%. Processing, communication and service costs This category includes the cost of transaction processing, telecommunications,
computer equipment and promotional services. This category also includes the
residual payments we make to the occupants of the properties where the ATMs
that we own or manage are located. Processing, communication and service costs decreased slightly during the three
and nine months ended September 30, 2004 as compared to the same periods in
2003 due to reductions in costs related to outside processing fees, ATM
residual costs and fees associated with certain equipment leases. These cost
reductions were partially offset by higher customer reimbursed fees.
Processing, communication and service costs for the full 2004 fiscal year are
expected to be consistent with amounts incurred in 2003. Employee costs Expenses in this category represent employee compensation, payroll taxes,
medical costs and other related employee costs. Employee costs increased
during the three and nine month periods ended September 30, 2004 as compared to
the same periods in 2003 due to higher performance-based compensation expenses
and increases in our India-based employee headcount. These increases were
partially offset by reductions in employee costs related to business
improvement initiatives undertaken in 2003. Company-wide headcount increased
approximately 600 from the third quarter of 2003 due to acquisition activity
and growth in our BPO business. At September 30, 2004, approximately 71% of
our employees were located in India. We expect employee costs for 2004 will
increase as compared to 2003 as a result of the increased headcount needed to
support anticipated business growth and increased accruals related to our
performance-based compensation plans. Depreciation and amortization These costs represent the depreciation of our facilities and equipment and the
amortization of our intangible assets, such as capitalized software costs and
acquired contracts. Depreciation and amortization expenses during the three and
nine months ended September 30, 2004 increased as compared to the same periods
in 2003 due to the additional depreciation and amortization costs related to
acquisitions completed in the fourth quarter of 2003 and during the first half
of 2004. The increase was partially offset by a reduction in expenses of
approximately $0.4 million from the cessation of depreciation and amortization
for the month of September 2004 on assets held for sale. We expect
depreciation and amortization costs to be higher for the full year 2004 as
compared to 2003 due to the acquisitions discussed above and due to an increase
in our capital expenditures. 20




---



##### Table of Contents



Other operating costs Expenditures in this category include facilities costs, professional,
consulting and temporary services, bad debt write-offs and certain
administrative costs. The increase in other operating costs during the third
quarter of 2004 as compared to the same quarter in 2003 is due to additional
infrastructure security improvement projects. Other operating costs during the
nine months ended September 30, 2004 remained consistent with costs during the
same period in 2003. We expect other operating costs in 2004 will be higher
than they were in 2003 due to legal and other expenses associated with the SEC
investigation and outstanding litigation and for costs related to compliance
with Section 404 of the Sarbanes-Oxley Act. Restructuring and asset impairment charges During the nine months ended September 30, 2004, we incurred approximately $0.8
million of restructuring charges in severance benefits for approximately 35
employees who primarily support our open systems software product line. We
continue to seek opportunities to reduce employee costs as part of our ongoing
business improvement initiatives. During the third quarter of 2003, we recorded restructuring charges of $3.6
million for severance benefits related to business process improvement
initiatives and reversed $0.9 million of lease related reserves to reflect the
subleasing of certain properties for which a restructuring charge was initially
recorded in 2002. Contract loss provision (reversal) We recorded a $0.5 million provision for contract loss charge for certain
long-term software contracts during the nine months ended September 30, 2004.
These contracts require significant modification to the underlying software and
the revenue associated with the contracts was recognized using the
percentage-of-completion method, which relies on estimates of total expected
contract costs. Increases in the scope of these projects resulted in
unanticipated increases in the expense required to perform the contracts with
the result that we now expect to incur losses in the performance of these
contracts. The losses recorded are based on our best current estimates of the
contracts ultimate revenues and expenses. Actual results may differ from our
estimates. In the event such differences arise, a revision to the loss reserve
would be required. During the third quarter of 2003, we recorded a $2.3 million benefit related to
a reduction in our estimate of future losses on certain government EBT
contracts. Other income (expense)  net Other income (expense)  net primarily includes interest and investment income,
interest and investment expense and foreign currency translation adjustments.
Interest earned on cash and cash equivalents was $0.4 million and $1.3 million
for the three and nine month periods ended September 30, 2004, respectively, as
compared to $0.4 million and $1.6 million for the same periods in 2003,
respectively. Other income (expense)  net during the nine months ended
September 30, 2004 increased to an income of $24,000 from an expense of $55,000
for the same period in 2003. We recorded other income during the third
quarter of 2004 as compared to an other expense during the same quarter in 2003
due to a $1.2 million write down in 2003 of an investment in order to reduce
the carrying value of that investment to its estimated fair value. Provision for income taxes Our annualized effective tax rate for the three and nine months ended September
30, 2004 was 30.0%. For the three and nine month periods ended September 30,
2003, the annualized effective tax rates were 19.5% and 26.5%, respectively.
These rates reflect the benefit of certain permanent deductions taken by us in
the third quarter of 2003, some of which related to prior tax years. Our
effective tax rate is largely determined by our Indian subsidiarys
proportional share of our projected consolidated income. Our Indian software
development and business process outsourcing operations qualify for tax
incentives associated with businesses that operate within designated geographic
locations in India. These incentives generally provide us with exemptions from
Indian income tax on certain business income generated from these operations
and phase out through March 2009. We are currently performing an analysis to
determine if we are eligible for certain tax credits and other benefits, which
may result in possible beneficial adjustments to our tax rate. The amount,
timing and likelihood of any such benefits cannot be currently determined. 21




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES Overview Information about our financial position as of September 30, 2004 and December
31, 2003 is presented below: September 30,
    
    December 31,(dollars in thousands)
    
    2004
    
    2003
    
    % ChangeCash and cash equivalents
    
    $
    202,135
    
    
    $
    158,106
    
    
    
    27.8
    %Long-term debt due within one year
    
    
    2,007
    
    
    
    5,586
    
    
    
    (64.1
    )Long-term debt
    
    
    3,292
    
    
    
    1,667
    
    
    
    97.5Stockholders equity
    
    
    450,380
    
    
    
    401,662
    
    
    
    12.1Net working capital
    
    
    306,719
    

    
    
    162,702
    
    
    
    88.5
 Cash Resources We expect our cash balance and cash provided from operations in future periods
to be sufficient to meet our normal operating commitments and to fund planned
capital expenditures and complementary acquisitions. Cash and cash equivalents
at September 30, 2004 included cash in ATMs of approximately $5 million and
cash in India of approximately $13 million. The funds in India are held in
Indian bank accounts denominated in Indian rupees or U.S. dollars. These funds
are available for use in our Indian operations and investments. We have no
current intention of repatriating these funds to the United States. We would
be required to pay taxes on these funds were we to do so. As part of our transaction processing business, we provide cash settlement
services to financial institutions and state and local governments. These
services involve the movement of funds between the various parties associated
with an ATM, point-of-sale or EBT transaction and this activity results in a
balance due to us at the end of each business day that we recoup over the next
few business days. The balances due us are included in cash and cash
equivalents on our consolidated balance sheets. As of September 30, 2004,
approximately $25 million of settlement payments were due to us and we received
these funds in early October 2004. We are required to maintain sufficient cash
on hand to fund the daily settlement advances we make against the payments we
receive through the settlement process. The typical overnight settlement
balance due to us ranges from $25 million to $35 million. We also seek to
maintain an additional cash balance of approximately $75 million to ensure that
we can advance funds to our processing customers if unusual circumstances
prevent us from processing their settlement files in a timely fashion. We are
considering an overnight credit facility to fund these potential obligations. We have vault cash agreements with various financial institutions that provide
cash to certain of the ATMs owned or managed by us. Although some portion of
this cash may be physically located in the ATMs that we own or manage, these
funds are not included in cash and cash equivalents on our consolidated balance
sheet because we do not take title to it under the bailee/bailor relationship
as established by the agreements. Based upon the daily outstanding balance of
funds provided to the ATMs, we generally pay a monthly fee ranging from prime,
as defined, plus one half percent up to prime plus 3%. The average monthly rate
paid during the nine months ended September 30, 2004 approximated 7%. We
indemnify the financial institutions against any loss of the vault cash in the
ATMs. Two of the agreements require us to maintain a security deposit equal to
1% of the daily outstanding balance. Our vault cash agreements may be
terminated upon notice by either party and have various expiration dates
through June 2005. Cash provided at September 30, 2004 and December 31, 2003
pursuant to agreements with third-party vault cash providers was approximately
$37 million and $41 million, respectively. We expect to terminate these
agreements in connection with the planned sale of our ATM Portfolio. 22




---



##### Table of Contents



The following table sets forth our contractual cash obligations as of September
30, 2004 in total and for the time periods specified. Our long-term debt
consists of capital lease obligations related to purchased software and
equipment. Payments Due by PeriodThree-months
    
    Three Years
    
    Three Yearsended
    
    ended
    
    endedDecember 31,
    
    December 31,
    
    December 31,(in thousands)
    
    Total
    
    2004
    
    2007
    
    2010
    
    ThereafterCapital lease obligations
    
    $
    5,299
    
    
    $
    555
    
    
    $
    4,000
    
    
    $
    744
    
    
    $
    Operating lease
obligations1
    
    
    52,359
    
    
    
    4,745
    
    
    
    24,613
    
    
    
    15,772
    
    
    
    7,229Vendor obligations
    
    
    49,921
    
    
    
    9,526
    
    
    
    40,395
    
    
    
    
    
    
    
    Total
    
    $
    107,579
    
    
    $
    14,826
    
    
    $
    69,008
    
    
    $
    16,516
    
    
    $
    7,229
  1
    
    Future minimum lease payments for
non-cancelable operating leases are presented net of
minimum sublease rentals of $3.2 million due in the
future under non-cancelable subleases. For the purposes of this table, contractual obligations for purchases of
services are defined as agreements that are enforceable and legally binding and
that specify all significant terms, such as fixed or minimum quantities to be
purchased, fixed, minimum or variable price provisions and the approximate
timing of the transaction. Purchase orders for goods and services are not
included in this table, because they may represent authorizations to purchase
rather than binding agreements. These orders are based upon our current
service needs and are generally fulfilled by our vendors within one or two
months. We are party to certain other contracts with third parties whereby the third
party provides services to us. These services are operational in nature and our
obligations under these contracts vary from period to period based on our
utilization of the services. These commitments are not reflected in the table
above as the associated amounts are not currently determinable. Sources and Uses of Cash The following table sets forth a summary of our cash flow activity for the nine
months ended September 30, 2004 and 2003. This table should be read in
conjunction with our condensed consolidated statements of cash flows: Summary of Cash FlowsFor the Nine MonthsEnded September 30,(in thousands)
    
    2004
    
    2003Cash provided by operating activities
    
    $
    59,598
    
    
    $
    57,316Cash used in investing activities
    
    
    (27,330
    )
    
    
    (5,413
    )Cash provided by financing activities
    
    
    11,761
    
    
    
    731Net increase in cash and cash equivalents
    
    $
    44,029
    
    
    $
    52,634
 Our current priorities for use of our cash are:  
    
    investment in projects intended to increase our product delivery
and operational effectiveness, enhance our product suite and the
redundancy of our systems;  
    
    complementary acquisitions; and  
    
    ensuring we can fund our settlement obligations. We have no present intention of using our available funds to pay cash dividends
or repurchase shares of our common stock. Operating Activities Our primary source of liquidity is the profits we generate from our business.
Operating cash outflows include payments to vendors for processing and
telecommunications services, consulting services and supplies. We also pay
salaries and benefits to our employees and income taxes. Positive cash flows generated from our operating income represents the primary
source of cash provided by operating activities during the nine months ended
September 30, 2004. The increase in cash flows was partially 23




---



##### Table of Contents



offset by the
payment of performance-based bonuses during the first quarter of 2004 resulting
in a cash outflow of approximately $13.9 million. Cash flow from operations
was also reduced by an increase in extended accounts receivables associated
with our EFT software business. Investing Activities Cash used in or provided by our investing activities generally reflects the
sale or acquisition of assets. During the first nine months of 2004, we
disbursed approximately $6.1 million for our acquisitions of Penley, LCS and
Benton Consulting Partners and approximately $20.6 million to purchase fixed
assets and develop software. Financing Activities We receive funds from the exercise of stock options and the sale of our shares
through our employee stock purchase plan. Financing outflows generally include
the repayment of debt. During the nine months ended September 30, 2004, we
used cash to repay debt of approximately $5.8 million and we received
approximately $17.5 million in proceeds from the exercise of stock options and
the sale of shares through our employee stock purchase plan. Commercial Commitments The following table sets forth our future commercial commitments as of
September 30, 2004: Commitment Expiration by Period*(in thousands)
    
    Total
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterLetters of credit and other
    
    $
    1,706
    
    
    $
    793
    
    
    $
    899
    
    
    $
    14
    
    
    $
    
    
    
    $
    
    
    
    $
    Guarantees
    
    
    543
    
    
    
    2
    
    
    
    140
    
    
    
    268
    
    
    
    117
    
    
    
    16
    
    
    
    Performance bonds
    
    
    14,921
    
    
    
    1,050
    
    
    
    13,701
    
    
    
    135
    
    
    
    35
    
    
    
    
    
    
    
    Total commitments
    
    $
    17,170
    
    
    $
    1,845
    
    
    $
    14,740
    
    
    $
    417
    
    
    $
    152
    
    
    $
    16
    
    
    $
    
  *
    
    Represents commercial commitment expirations during the last quarter of
2004 and the respective years ending December 31, 2005 through 2008 and
thereafter. Prior to our acquisition of Access Cash International, L.L.C. (ACI) in 2001, we
had committed to guarantee up to approximately $1.8 million of equipment lease
payments for Canadian customers of our ATM management business and as of
September 30, 2004, were guaranteeing lease payments amounting to approximately
$0.5 million. Through September 30, 2004, we have been required to make
payments of $0.3 million pursuant to these guarantees. We use cash collateral to secure letters of credit we issue in the ordinary
course of business. We had $1.2 million in letters of credit outstanding in the
United States at September 30, 2004, mostly related to leases. These letters of
credit were secured by $1.3 million in cash collateral. In addition, we
obtained bank guarantees of $0.5 million related to the performance on a
customer contract and certain obligations related to local government
requirements in India. These bank guarantees in India are collateralized by
$0.5 million of time deposits. In connection with our government services business, collection and ATM
placement activities, we post surety bonds with state agencies guaranteeing our
performance of certain obligations related to the relevant contracts or state
requirements. The aggregate amount of such bonds outstanding at September 30,
2004 was $14.9 million. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The discussion and analysis of our financial condition and results of
operations is based upon our condensed consolidated financial statements.
These statements have been prepared in accordance with accounting principles
that are generally accepted in the United States of America. The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates and judgments, including those related to revenue
recognition, intangible assets, reserves and allowances, income taxes and
stock-based compensation. We base our estimates on our historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances. The results of these estimates form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. There were no significant 24




---



##### Table of Contents



changes in our critical accounting
policies during the first nine months of 2004. These policies are described in
our Annual Report on Form 10-K for the year ended December 31, 2003. FORWARD-LOOKING STATEMENTS - In addition to historical and pro forma information, this Quarterly Report
contains forward-looking statements as defined in the U.S. Private Securities
Litigation Reform Act of 1995. All forward-looking statements are subject to
various risks and uncertainties that could cause actual results to differ
materially from those described in the statements. Some of the factors that
could cause actual results to differ from those that are presently anticipated
are discussed in Part II, Item 5 of this Quarterly Report. The Company expects its three core business segments, Electronic Payments, Risk
Management and Global Outsourcing, will achieve full year net revenues for 2004
of approximately $425 million to $435 million. Full year 2004 revenues for the
ATM Management segment will depend upon the consummation date of the ATM
Portfolio sale. This segment had revenues of $103 million during the nine
months ended September 30, 2004. The Company does not provide
quarterly guidance and has not revised its previous guidance that it expects full year diluted
earnings per share to increase 25 to 30 percent in 2004 over the diluted
earnings per share of $0.61 reported in 2003. The Company expects to generate
operating cash flows in 2004 in line with the level achieved in 2003. Capital
expenditures are expected to be approximately $30 million to $35 million for
2004. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We operate internationally and are subject to potentially adverse movements in
foreign currency exchange rates. These exposures may change over time as our
business evolves and could have an adverse impact on our financial results. We
have not entered into any derivative instruments or hedging contracts to reduce
our exposure to adverse foreign currency or interest rate changes, although we
may do so in the future. Currently, we receive non-U.S. dollar denominated
revenues and incur non-U.S. dollar denominated operating expenses in the United
Kingdom, India and Canada. We also have assets located in these countries. The
principal currencies creating foreign exchange rate risk for us are the British
pound, Indian rupee and Canadian dollar. For the three and nine months ended
September 30, 2004, approximately 7% and 8% of our net revenues, respectively,
and approximately 15% and 16% of our operating expenses, respectively, were
denominated in these three currencies. We have prepared sensitivity analyses to assess the impact of hypothetical
changes in foreign currency rates on our income before tax for the three and
nine months ended September 30, 2004. Based upon these analyses, we estimate
that a 10% adverse change in the exchange rate between the U.S. dollar and the
British pound, Indian rupee and Canadian dollar would have reduced our reported
income before taxes in the three and nine month periods ended September 30,
2004 by approximately $1 million and $4 million, respectively. A 10% change in
the exchange rate for the British pound, Indian rupee and Canadian dollar would
also have an impact on the foreign net assets reflected in our balance sheet,
but we would not expect this change to be material to our total assets. Changes in interest rates could impact our anticipated interest income on cash
equivalents and monthly vault cash fee on our ATM vault cash agreements. A 10%
adverse change in interest rates from the interest rates in effect at September
30, 2004 would not, however, have had a material adverse effect on our net
income or financial condition for the three or nine month periods ended
September 30, 2004. 
 ITEM 4. CONTROLS AND PROCEDURES The Companys management, under the supervision and with the participation of
its Chief Executive Officer and Chief Financial Officer, evaluated the
Companys disclosure controls and procedures as of September 30, 2004. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that these disclosure controls and procedures are effective.
There have been no significant changes in the internal controls related to
financial reporting that have materially affected, or are reasonably likely to
materially affect, these controls since September 30, 2004. 25




---



##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS Reference is made to the discussion of the SEC investigation, the Federal
Securities Action, the Shareholder Derivative Actions, and the Florida
litigation discussed in Note 12 to the Financial Statements included in this
Quarterly Report on Form 10-Q. 
 ITEM 5. OTHER INFORMATION RISK FACTORS AND CAUTIONARY STATEMENTS. When used in this Quarterly Report on Form 10-Q and in future filings by the
Company with the Securities and Exchange Commission, in our press releases,
letters and reports to stockholders and in oral statements made by our
representatives, the words or phrases should result, are expected to,
targeted, will continue, will approximate, is anticipated, estimate,
project or similar expressions are intended to identify forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are necessarily subject to certain risks and
uncertainties, including those discussed below, which could cause our actual
results to differ materially from our historical experience and our present
expectations or projections. Caution should be taken not to place undue
reliance on any such forward-looking statements, which speak only as of the
date made. The factors listed below could affect our financial performance and
could cause our actual results for future periods to differ from any opinions
or statements expressed with respect thereto. Such differences could be
material and adverse. We will not undertake and specifically decline any
obligation to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect events or circumstances occurring
after the date of such statements or to reflect the occurrence of anticipated
or unanticipated events. WE ARE UNABLE TO PREDICT THE RESULTS OF THE INVESTIGATION BY THE SEC AND THE
STOCKHOLDERS LITIGATION. The Company is currently the subject of an investigation by the Securities and
Exchange Commission (the SEC) with respect to restatements of its prior period
financial statements that occurred in 2002. The Company has been cooperating
fully with the SEC staff and intends to continue to do so. The Company may,
however, become subject to a fine or other remedies in connection with the
investigation and may be required to indemnify certain of its former officers
for expenses incurred in connection with the SEC inquiry. The Company has
incurred, and may continue to incur, significant legal expenses in connection
with this investigation and the findings and outcome of the SEC investigation
may affect the course of the Federal Securities Action and the Shareholder
Derivative Actions described below. The Company, its former chief executive and chief financial officers and its
current chief financial officer were defendants in a federal securities action
(the Federal Securities Action) that was pending in the U.S. District Court for
the District of Arizona. The Consolidated Amended Complaint (Complaint) filed
in this Action alleged, among other things, that during the period from July
21, 2000 through October 24, 2002 the defendants made false and misleading
statements and omissions of material facts and that the plaintiff and other
members of a putative class of shareholders suffered damages as a result. This
Complaint was dismissed by order of the Court on July 12, 2004. The plaintiffs
appealed this order of dismissal to the Ninth Circuit Court of Appeals on
August 11, 2004. At the request of the parties, the Court vacated the original
briefing schedule of this appeal. The Court has not established a new briefing
schedule. The Company is a nominal defendant in two substantially identical shareholder
derivative actions filed in the Superior Court of Arizona, Maricopa County in
January 2003 (the Shareholder Derivative Actions). The complaints in these
actions allege, among other things, that certain of the Companys current and
former directors named in the complaints as defendants breached their fiduciary
duties to the Company in connection with certain alleged issues involving the
Companys accounting practices and internal controls. The complaints also name
as a defendant the Companys former external auditor. These actions were
stayed pending the resolution of the motion to dismiss the Federal Securities
Action and the parties are now considering the possible settlement of this
litigation. The Company cannot, however, predict the outcome of these actions
with certainty. 26




---



##### Table of Contents



In addition, the Companys insurance carriers may decline coverage, or the
coverage may be insufficient to cover the Companys expenses and liability, in
some or all of the matters described above. At this time, it is not possible
to estimate the amount of loss or probable losses, if any, that might result
from an adverse resolution of these matters. OUR BUSINESS MAY BE ADVERSELY AFFECTED IF THE PROPOSED SALE OF OUR ATM
PORTFOLIO IS NOT COMPLETED. Our ATM Management segment currently operates one of the largest networks of
off-premise ATMs in North America. For the nine months ended September 30,
2004, this business segment contributed revenues of $103.4 million, or 24% of
our total revenues. On September 20, 2004, we entered into a definitive agreement (the Agreement)
to sell our portfolio of ATM machines and ATM management contracts (the ATM
Portfolio) to TRM Corporation. The consummation of this transaction is
subject to customary closing conditions and is currently expected to occur
during the fourth quarter of 2004. Concurrently with the execution of the
Agreement, we entered into a Master Services Agreement with the buyer that is
to become effective upon the closing of the transactions contemplated by the
Agreement. Pursuant to the Master Services Agreement, we will provide
processing and other ATM management services to the buyer for an initial
contract period of five years. The negotiation of this transaction and the activities that we are undertaking
in order to close it have somewhat diverted the attention of some of the
members of the Companys senior management and employees from the Companys
day-to-day business and there is the potential of employee turnover due to the
inevitable uncertainties associated with these types of transactions.
Additionally, if the transaction is not completed, we will not realize the
benefits we expect from the sale of our ATM Portfolio or the Master Services
Agreement with the buyer. A failure to consummate the sale could also depress
the expected growth rate of our business in future periods. ESTIMATES OF FUTURE FINANCIAL RESULTS ARE INHERENTLY UNRELIABLE. From time to time, the Company and its representatives may make public
predictions or forecasts regarding the Companys future results, including
estimates regarding future revenues, expense levels, tax rates, capital
expenditures, earnings or earnings from operations. Any forecast regarding our
future performance reflects various assumptions. These assumptions are subject
to significant uncertainties, and, as a matter of course, many of them will
prove to be incorrect. Further, the achievement of any forecast depends on
numerous factors, including the considerations specific to our business that
are outlined in this discussion as well as general economic and geopolitical
trends that can adversely affect the market for our products and services. Many
of the factors that can adversely affect our business are beyond our control.
As a result, there can be no assurance that our performance will be consistent
with any management forecasts or that the variation from such forecasts will
not be material and adverse. Investors are cautioned not to base their entire
analysis of our business and prospects upon isolated predictions, but instead
are encouraged to utilize the entire available mix of historical and
forward-looking 27




---



##### Table of Contents



information made available by us, and other information relating to our Company
and our products and services, when evaluating our prospective results of
operations. CONSOLIDATION IN THE INDUSTRIES WE SERVE MAY ADVERSELY AFFECT OUR ABILITY TO
SELL OUR PRODUCTS AND SERVICES. Mergers, acquisitions and personnel changes at financial institutions and
electronic funds transfer networks may adversely affect our business, financial
condition and results of operations. Currently, the banking and EFT industries
are consolidating, causing the number of financial institutions and processing
networks to decline. This consolidation could cause us to lose:  -
    
    current and potential customers;-
    
    market share if an entity resulting from a combination of our
customers determines that it is more efficient to develop in-house
products and services similar to ours or to use our competitors
products and services; and-
    
    revenue if such a combined institution is able to negotiate a
greater volume discount for, or discontinue the use of, our products
and services. For example, J.P. Morgan Chase and Bank One, both of which utilize our risk
management products, have recently merged. Similarly, the STAR network,
formerly one of the larger customers of our electronic payments processing
business, was purchased by one of our competitors, Concord EFS, during 2001.
First Data Corporation, which owned a substantial equity interest in the NYCE
Network, has now purchased Concord EFS. Following this acquisition, First Data
sold its interest in the NYCE network to our competitor, Metavante, a
subsidiary of M&I Bank. Both the STAR and NYCE networks utilize our electronic
funds transfer software. OUR ABILITY TO EXPAND THROUGH ACQUISITIONS INVOLVES RISKS AND MAY NOT BE
SUCCESSFUL. We are currently considering possible acquisitions to complement and grow our
existing businesses. Our ability to expand through acquisitions involves many
risks, including:  -
    
    the operations, technology and personnel of any acquired
companies may be difficult to integrate;-
    
    the allocation of management resources to consummate these
transactions may disrupt our day to day business;-
    
    the acquired businesses may not achieve anticipated revenues,
earnings or cash flow. Such a shortfall could require us to write-down
the goodwill associated with any acquired company, which would
adversely affect our reported earnings; and-
    
    acquisitions may require us to record special charges that reduce
our earnings, such as the $1.5 million charge we recorded in 2003 to
write-off in-process research and development in connection with our
acquisition of Oasis Technologies Ltd. WE ARE UNABLE TO PREDICT THE RESULTS OF THE PURPORTED CLASS ACTION LAWSUIT
FILED IN FLORIDA. The Company, along with numerous other defendants, is a defendant in an action
pending in the U.S. District Court for the Southern District of Florida. The
complaint in this action alleges that the Company purchased motor vehicle
records from the State of Florida and used that data for marketing and other
purposes that are not permitted under the Federal Drivers Privacy Protection
Act. The plaintiffs are seeking liquidated damages of not less than $2,500 for
each affected member of a purported class, plus costs and attorneys fees. The
plaintiffs are also asking for injunctive relief to prevent further alleged
violations of the Federal Act. On March 11, 2004, the Company joined in a
motion to dismiss this case filed by a co-defendant and the Company filed its
own further motion to dismiss a portion of this case on June 23, 2004. On June
25, 2004, the Company filed a motion for summary judgment. All these motions
are pending before the court. The Company cannot predict whether the plaintiffs
in this case will be successful in certifying their complaint as a class
action. The Company believes that it has meritorious defenses with regard to
the allegations made in this lawsuit and intends to vigorously defend this
action. Litigation is, however, by its nature uncertain and an unfavorable
resolution of this lawsuit could materially adversely affect our business,
results of operation or financial condition. 28




---



##### Table of Contents



WE FACE INTENSE COMPETITION IN ALL AREAS OF OUR BUSINESS, AND IF WE DO NOT
COMPETE EFFECTIVELY, OUR BUSINESS WILL BE HARMED. We face intense competition from a number of companies and we expect that
competition will intensify as the movement towards increasing consolidation
within the financial services industry continues. The high levels of
competition we experience have led to pricing pressures in all aspects of our
business. Many of our competitors have significantly greater financial,
technical and marketing resources, greater name recognition and a larger
installed customer base than we do. In the electronic payments market, our principal competitors include:  -
    
    third-party debit network processors, including First Data
Corporation, VISA Debit Processing Services, Midwest Payment Systems
and Fiserv;-
    
    financial institutions that have developed in-house processing
capabilities or services similar to ours, including Wells Fargo, M&I
Bank and Fifth Third National Bank;-
    
    electronic funds transfer software providers, including
Transaction System Architects, S2 and Mosaic; and-
    
    government service (EBT) providers including J.P. Morgan Chase
and ACS. In the risk management market, our principal competitors include:  -
    
    providers of fraud management data and software including Primary
Payment Systems (a subsidiary of First Data Corporation), Equifax,
Experian, TransUnion and RiskWise (a division of Lexis-Nexis of Reed
Elsevier); and-
    
    retail check verification and electronic check processing
providers, including Certegy and Telecheck, a subsidiary of First Data
Corporation. In the ATM management market, our competitors include Cardtronics, First Data
Corporation, Genpass, certain ATM equipment manufacturers and numerous
independent service organizations (ISOs). In the global outsourcing market, our competitors include:  -
    
    outsourcing solutions companies, including IBM (which has
recently acquired another of our competitors, Daksh eServices),
Spectramind/Wipro Ltd, Intelenet Global Services Ltd. and Infosys
Technologies. In the market for electronic transaction processing, the principal factors on
which we compete are price and service levels. The future growth of our
revenues in this market is dependent upon securing an increasing volume of
transactions. If we cannot control our transaction processing expenses, we may
not remain price competitive and our revenues will be adversely affected. Our
revenues can also be adversely affected if we are required to make pricing
concessions to retain significant processing customers. In addition, some of
our competitors have indicated that they may be prepared to provide customer
prospects with up-front cash incentives to acquire or retain their processing
business. Given that these competitors have substantially greater financial
resources than we do, it will be difficult for us to obtain significant new
processing customers, or retain the customers we have, if this approach becomes
a significant competitive factor. We have also seen an effort by processors such as First Data Corporation and
VISA that are affiliated with branded networks to seek exclusive processing
relationships with the debit card-issuing financial institutions that subscribe
to their networks. Ownership or control of a branded network may also enable
these competitors to influence the interchange fees financial institutions
receive from retailers who accept transactions from the debit cards issued by
these network participants. We are unable to predict whether this trend towards
an increasing level of vertical integration between transaction processors and
branded debit networks, and the horizontal integration resulting from the
combination of First Data Corporation and Concord EFS, will have a positive or
negative impact upon our processing business over the long-term. Our software business competes primarily upon the basis of the quality and
reliability of our software and its conformance to the current and future
requirements of our customers. If we do not maintain the technological
relevance of our software offerings or fail to anticipate shifts in customer
requirements, our ability to sell our software products will be impaired. 29




---



##### Table of Contents



Competition for our risk management products is based primarily on the quantity
and quality of the data and data analytic capabilities available to us for this
purpose and, to a somewhat lesser degree, price. Our competitive position in
these markets could be harmed if our competitors were able to compile different
data sources and analytical capabilities that proved to be more effective than
our products. In addition, we continue to experience competitive pressure on
the pricing for our check verification service. In the market for ATM deployment, processing and management services, the
primary basis of competition is industry knowledge and experience, price and
service levels. Our ability to sell additional ATM management contracts in this
market is dependant on our ability to control our costs while maintaining
effective levels of customer service. If we are not successful in these efforts
we will not achieve the objectives we have for our ATM management business. Our business process management and information technology services offerings
compete primarily on the basis of the quality of service levels and, to some
degree, price. The future growth of this aspect of our business is dependent on
demonstrating to our current and prospective customers that we are a dependable
and efficient service provider. In addition to our current competitors, it is reasonable to expect that we will
encounter substantial competition from new companies. No assurance can be given
that we will be able to compete effectively against current and future
competitors. Increased competition could result in price reductions, reduced
gross margins or loss of market share. IF WE EXPERIENCE SYSTEM FAILURES, THE PRODUCTS AND SERVICES WE PROVIDE TO OUR
CUSTOMERS COULD BE DELAYED OR INTERRUPTED, WHICH WOULD HARM OUR BUSINESS AND
REPUTATION AND RESULT IN THE LOSS OF CUSTOMERS. Our ability to provide reliable service largely depends on the efficient and
uninterrupted operations of our computer and telecommunications network systems
and our data centers. Any significant interruptions could severely harm our
business and reputation and result in a loss of revenue and customers. We could
also be required to apply substantial amounts of our available cash to fund our
settlement obligations and it is possible that we would not have sufficient
resources in the event of a severe and persistent outage. Our systems and
operations could be exposed to damage or interruption from fire, natural
disaster, unlawful acts, power loss, telecommunications failure, unauthorized
entry and computer viruses. Although we have taken steps to prevent system
failures, we cannot be certain that our measures will be successful and that we
will not experience service interruptions. Further, our property and business
interruption insurance may not be adequate to compensate us for all losses or
failures that may occur. OUR SALES OF IT SERVICES HAVE BEEN DECLINING AND OUR LARGEST IT SERVICES
CONTRACT HAS BEEN EXTENDED ON LESS FAVORABLE TERMS THAN THE ORIGINAL CONTRACT. The revenues we received under our largest IT services contract declined
approximately 30% during the nine months ended September 30, 2004 as compared
to the same period in 2003. Although the original version of this contract
contains minimum spending targets of $43 million per year for the software
development and maintenance services, this contract was scheduled to expire on
March 31, 2005. We have recently entered into an amendment to this agreement
that extends its term for an additional year, but there are no minimum spending
targets associated with this extension. We expect that the revenues we receive
from this relationship will continue to decline. LEGISLATION OR REGULATION COULD HARM OUR ABILITY TO COLLECT AND USE DATA,
INCREASE OUR OPERATING COSTS OR OTHERWISE HARM OUR BUSINESS. Existing and new laws and regulations relating to consumer privacy protection
could harm our ability to collect and use consumer data, increase our operating
costs or otherwise harm our business. We collect personal data about consumers
for use in our risk management products. Due to the increasing public concern
over consumer privacy rights, Congress and state legislatures have adopted and
are considering adopting laws and regulations restricting the purchase, sale
and sharing of personal information about consumers. A material increase in the
scope of these types of restrictions could impair the efficacy of our risk
management products. The federal financial modernization law, known as the Gramm-Leach-Bliley Act,
imposes significant consumer information privacy requirements on any entity
engaged in the business of providing financial services, including entities
that provide services to financial institutions. Federal agencies, such as the
Comptroller of the Currency and the Federal Trade Commission, have issued
regulations to implement these requirements. The Act requires covered 30




---



##### Table of Contents



companies to develop and implement policies to protect the security and
confidentiality of consumers nonpublic personal information and to disclose
those policies to consumers before a customer relationship is established and
annually thereafter. In addition, the Act requires covered companies to give an
opt-out notice to consumers before sharing consumer information with third
parties. The opt-out notice requirement in the Act is subject to several
exceptions for credit reporting and fraud prevention purposes. Although we
believe these exceptions apply to our business, government agencies could
interpret their regulations in a manner that could expand the scope of the Act
in ways that could adversely affect our business. In addition, even if the
regulations do not affect us directly, uncertainty over the scope of the
regulations could make financial institutions unwilling or reluctant to share
consumer-related information with us. The Gramm-Leach-Bliley Act does not prohibit state legislation or regulations
that are more restrictive on our collection and use of data. More restrictive
legislation or regulations have been introduced in the past and could be
introduced in the future in Congress and the states. For example, in the past
legislation has been proposed which would require consumers to opt in to any
plan, which would allow their nonpublic personal information to be disclosed.
We are unable to predict whether more restrictive legislation or regulations
will be adopted in the future. Any future legislation or regulations could have
a negative impact on our business. Regulations are currently being considered regarding the application of the
Americans with Disabilities Act (ADA) to ATM networks. In addition, the
network rules that govern the transmission of transactions originating at ATMs
will require us and the customers of our ATM management business to upgrade the
encryption capabilities of our collective ATM devices by the end of 2006. If
we cannot complete the sale of our ATM Portfolio, these regulations and
requirements could require us to retire or retrofit portions of the ATM base we
own and could motivate some of our customers to elect to retire their ATMs. It
is also possible that existing ATM networks will be exempted from any future
regulations under the ADA. We are unable at this time to determine whether, and
to what extent, any final regulations issued under the ADA or the network rule
revisions will impact our business. IF THE SECURITY OF OUR DATABASES IS COMPROMISED, OUR REPUTATION COULD SUFFER
AND CUSTOMERS MAY NOT BE WILLING TO USE OUR PRODUCTS AND SERVICES. If the security of our databases is compromised, our business could be
materially adversely affected. In our electronic payments and risk management
businesses, we collect personal consumer data, such as names and addresses,
social security numbers, drivers license numbers, checking and savings account
numbers and payment history records. Unauthorized access to our databases could
result in the theft or publication of personal confidential information and the
deletion or modification of personal records or otherwise cause interruptions
in our operations. These concerns about security are increased when we transmit
information overseas or over the Internet. A security or privacy breach may:  -
    
    deter customers from using our products and services;-
    
    harm our reputation;-
    
    expose us to liability;-
    
    increase our operating expenses to remediate problems caused by the breach; and-
    
    decrease market acceptance of electronic commerce transactions in general. WE MAY EXPERIENCE SOFTWARE DEFECTS, DEVELOPMENT DELAYS AND INSTALLATION
DIFFICULTIES, WHICH COULD HARM OUR BUSINESS AND REPUTATION AND EXPOSE US TO
POTENTIAL LIABILITY. Our services and products are based on sophisticated software and computing
systems and we often encounter delays when developing new products and
services. Further, the software underlying our products and services has
occasionally contained and may in the future contain undetected errors or
defects when first introduced or when new versions are released. In addition,
we may experience difficulties in installing or integrating our products and
technologies on platforms used by our customers or in new environments, such as
the Internet. These types of issues required us to record a $0.5 million
provision for anticipated contract losses in the second quarter of 2004.
Defects in our software products, errors or delays in the processing of
electronic transactions or other difficulties could result in:  -
    
    delays in market acceptance;-
    
    additional development or installation costs; 31




---



##### Table of Contents



-
    
    diversion of technical and other resources;-
    
    loss of customers;-
    
    negative publicity; and-
    
    exposure to liability claims. Although we attempt to limit our potential liability for warranty claims
through disclaimers and limitation-of-liability provisions in our license and
client agreements, we cannot be certain that these measures will be successful
in limiting our liability. THERE ARE A NUMBER OF RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES AND
OPERATIONS THAT COULD HARM OUR BUSINESS. Because we currently sell some of our products and services on a global basis
and provide outsourcing services from India, our business is subject to risks
associated with doing business internationally. During the first nine months of
2004, we generated approximately 12% of our net sales outside of the United
States and we presently anticipate that our international efforts will
constitute a higher percentage of our net sales in future periods. Our future
results could be harmed by a variety of factors, including:  -
    
    changes in foreign currency exchange rates;-
    
    changes in a specific countrys or regions political and
economic conditions, particularly in emerging markets;  -
    
    potentially unfavorable tax rules;-
    
    tariffs, duties and other trade barriers;-
    
    reduced protection for intellectual property rights;-
    
    challenges in managing widespread operations;-
    
    changes in foreign laws and regulatory requirements or in foreign policy; and-
    
    varying business practices in foreign countries. We have prepared sensitivity analyses to assess the impact of hypothetical
changes in foreign currency rates on our income before tax for the three and
nine months ended September 30, 2004. Based upon these analyses, we estimate
that a 10% adverse change in the exchange rate between the U.S. dollar and the
British pound, Indian rupee and Canadian dollar would have reduced our reported
income before taxes in the three and nine month periods ended September 30,
2004 by approximately $1 million and $4 million, respectively. In addition, the process of selling our outsourcing services typically involves
visits to our sites in India by prospective customers. Increased levels of
international tension can result in prospective clients postponing or canceling
plans to visit our facilities, lengthening the sales cycle and otherwise
inhibiting our ability to grow this business. Political opposition to the use
of offshore resources such as our India-based operations and domestic security
concerns that can make it more difficult for foreign nationals to obtain U.S.
visas can potentially have a similar effect. CHANGES IN INDIAN TAX LAWS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Our Indian software development and business process management operations
qualify for tax incentives associated with businesses that operate within
designated geographic locations. These incentives generally provide us with
exemptions from Indian tax on certain business income generated from these
operations and phase out through March 2009. We cannot assure you that these
tax benefits will be continued in the future at their current levels or at all.
If our Indian tax benefits are reduced or eliminated, our taxes in future
periods would increase. Such an increase could reduce our profits. WE FACE TERMINATION AND COMPLIANCE RISKS WITH RESPECT TO OUR GOVERNMENT
CONTRACTS AND WE EXPECT OUR REVENUES FROM THIS BUSINESS TO DECLINE IN UPCOMING
PERIODS. All of our government EBT contracts can be terminated at any time, without
cause, by the contracting governmental entity. We realized approximately 10% of
our net sales in the first nine months of 2004 pursuant to contracts of this
type. If a government contract is so terminated, we are generally entitled only
to receive compensation for the services provided or costs incurred at the time
of termination and a reasonable profit on the contract work performed prior to
the date of termination. In addition, all of our government contracts require
us to comply with various contract provisions and procurement regulations, and
in some cases, accounting requirements. Violations of some of these provisions
could, if not cured, result in termination of the contract and fines. 32




---



##### Table of Contents



Although we continue to pursue new EBT contracts, we cannot predict whether our
bids will be successful and, in any event, we expect the revenues we receive
from EBT activities to decline during the remainder of 2004 due to scheduled
contract expirations. We expect this trend to accelerate during 2005. In
addition, if we are not successful in introducing additional EBT-related
services, we would anticipate that the revenues from our government services
business will continue to decline for the foreseeable future. WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. Despite our efforts to protect them, third parties may infringe or
misappropriate our intellectual property rights, or otherwise independently
develop substantially equivalent products and services. The loss of
intellectual property protection or the inability to secure or enforce
intellectual property protection could harm our business and ability to
compete. We rely on a combination of trademark and copyright laws, trade secret
protection and confidentiality and license agreements to protect our
trademarks, software and know-how. We have also applied for patent protection
on some of the features of our newer products. We may be required to expend
significant resources to protect our trade secrets and monitor and police our
intellectual property rights. Third parties may assert infringement claims against us in the future. In
particular, there has been a substantial increase in the issuance of business
process patents, which may have broad commercial implications. Claims for
infringement of all types of patents are a common source of litigation. If we
become subject to an infringement claim, we may be required to modify our
products, services and technologies or obtain a license to permit our continued
use of those rights. We may not be able to do either of these things in a
timely manner or upon reasonable terms and conditions. Failure to do so could
seriously harm our business and operating results. In addition, future
litigation relating to infringement claims could result in substantial costs to
us and a diversion of management resources. Adverse determinations in any
litigation or proceeding could also subject us to significant liabilities and
could prevent us from using some of our products, services or technologies. PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT A
CHANGE IN CONTROL. Provisions of our certificate of incorporation and bylaws and Delaware law may
delay or prevent a change in control of our Company that you may consider
favorable. These provisions include the following:  -
    
    no cumulative voting by stockholders for directors;-
    
    a classified board of directors with three-year staggered terms;  -
    
    the ability of our board to set the size of the board of
directors, to create new directorships and to fill vacancies;-
    
    the ability of our board to issue preferred stock, without
stockholder approval, with rights and preferences that may be superior
to our common stock;  -
    
    the ability of our board to amend our bylaws;-
    
    a prohibition of stockholder action by written consent;-
    
    advance notice requirements for stockholder proposals and for nominating candidates to our board;  -
    
    restrictions under Delaware law on mergers and other business
combinations between us and any holder of 15% or more of our
outstanding common stock;-
    
    a requirement that 66-2/3% of our stockholders and 66-2/3% of our
directors approve certain corporate transactions, including mergers
and consolidations, sales of assets or amendments to our certificate
of incorporation; and-
    
    we have adopted a stockholder rights plan, which discourages the
unauthorized acquisition of 15% or more of our common stock or an
unauthorized exchange or tender offer. 33




---



##### Table of Contents



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report: Exhibit No.
    
    Description
    
    Method of filing2.1
    
    Purchase Agreement, made as of September 20, 2004, by and among eFunds
Corporation, eFunds (Canada) Corporation, TRM ATM Corporation and TRM
Canada Corporation
    
    Filed herewith3.1
    
    Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form S-1
(the S-1) filed by the Company with the Securities and Exchange
Commission (the Commission) on April 4, 2000, Registration No.
333-33992)
    
    *3.2
    
    Bylaws (incorporated by reference to Exhibit 3.2 to the S-1)
    
    *4.1
    
    Form of common stock certificate (incorporated by reference to Exhibit
4.1 to Amendment No. 1 to the S-1 filed by the Company with the
Commission on May 15, 2000 (Amendment No. 1), Registration No.
333-33992)
    
    *4.2
    
    Form of Rights Agreement by and between the Company and Rights Agent,
(incorporated by reference to Exhibit 4.2 to Amendment No. 1)
    
    *4.3
    
    Certificate of Designation of Series A Participating Preferred Stock
(incorporated by reference to Exhibit 4.3 to the Companys Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000)
    
    *10.1
    
    eFunds Corporation 2000 Stock Incentive Plan, as amended as of
September 17, 2004
    
    Filed herewith10.2
    
    eFunds Corporation Deferred Compensation Plan as Amended and Restated
Effective January 1, 2004
    
    Filed herewith31.1
    
    Section 302 Certification by Mr. Paul F. Walsh
    
    Filed herewith31.2
    
    Section 302 Certification by Mr. Thomas S. Liston
    
    Filed herewith32.1
    
    Section 906 Certification by Mr. Paul F. Walsh and Mr. Thomas S. Liston
    
    Filed herewith
  *
    
    Incorporated by reference (b) Reports on Form 8-K On July 13, 2004, the Company furnished a report on Form 8-K which included,
pursuant to Item 5 of that form, an announcement that the Company was meeting
with current and potential investors and that the Company was not revising its
previously issued revenue and earnings guidance for the current year. On August 4, 2004, the Company furnished a report on Form 8-K which included,
pursuant to Items 7 and 12 of that form, a press release announcing the
Companys second quarter 2004 financial results. This press release included
the Companys condensed consolidated balance sheets at June 30, 2004 and
December 31, 2003, its condensed consolidated statements of operations for the
three month periods ended June 30, 2004 and June 30, 2003, and the condensed
consolidated statements of operations and cash flows for the six month periods
ended June 30, 2004 and June 30, 2003. On September 16, 2004, the Company furnished a report on Form 8-K which
announced, pursuant to Item 5.02 of 34




---



##### Table of Contents



that form, that the Board of Directors had appointed Richard J. Lehmann and
William J. Ryan to our Board of Directors. Mr. Lehmann and Mr. Ryan were both
elected to the Nominating and Corporate Governance Committee of the Board. Mr.
Lehmann was also elected to the Boards Compensation Committee and Mr. Ryan
joined the Audit Committee. On September 23, 2004, the Company furnished a report on Form 8-K a press
release announcing, pursuant to Item 1.01 and 9 of that form, the Companys
entry into a definitive Purchase Agreement to sell certain ATM Management
segment assets and interests to TRM Corporation and certain of its subsidiaries
(TRM). In connection with the Purchase Agreement, the Company entered into a
Master Services Agreement with TRM to provide processing and management
services to TRM for a period of five years. This Services Agreement will
become effective upon the closing of the transactions contemplated by the
Purchase Agreement. 35




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. eFunds Corporation(Registrant)Date: November 5, 2004
    
    /s/ Paul F. WalshPaul F. WalshChief Executive Officer and ChairmanDate: November 5, 2004
    
    /s/ Thomas S. ListonThomas S. ListonChief Financial Officer
 36




---



##### Table of Contents



Index to Exhibits Exhibit No.
    
    Description
    
    Page Number2.1
    
    Purchase Agreement, made as of September 20, 2004, by and among eFunds
Corporation, eFunds (Canada) Corporation, TRM ATM Corporation and TRM
Canada Corporation10.1
    
    eFunds Corporation 2000 Stock Incentive Plan, as amended as of
September 17, 200410.2
    
    eFunds Corporation Deferred Compensation Plan as Amended and Restated
Effective January 1, 200431.1
    
    Section 302 Certification by Mr. Paul F. Walsh31.2
    
    Section 302 Certification by Mr. Thomas S. Liston32.1
    
    Section 906 Certification by Mr. Paul F. Walsh and Mr. Thomas S. Liston
 37