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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 March 31, 2004 OR [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to  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.

Yes [X] No [   ] Indicate
by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [   ] The number of shares outstanding of the registrants common stock, par value $.01 per share, at April 29, 2004 was 47,851,267




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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 ExhibitsEX-10.1EX-10.2EX-10.3EX-10.4EX-31.1EX-31.2EX-32.1    Table of Contents  
 PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS 
 eFUNDS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)March 31,
    
    December 31,(dollars in thousands)
    
    2004
    
    2003Current assets:Cash and cash equivalents
    
    $
    163,278
    
    
    $
    158,106Deposits subject to compensating balance arrangements
    
    
    1,585
    
    
    
    472Restricted custodial cash
    
    
    2,636
    
    
    
    4,168Accounts receivable  net
    
    
    74,684
    
    
    
    63,841Deferred income taxes
    
    
    10,119
    
    
    
    12,743Prepaid expenses and other current assets
    
    
    15,185
    
    
    
    16,979Total current assets
    
    
    267,487
    
    
    
    256,309Property and equipment  net
    
    
    48,624
    
    
    
    49,629Long-term investments
    
    
    3,305
    
    
    
    3,243Goodwill
    
    
    129,361
    
    
    
    128,586Other intangible assets  net
    
    
    67,324
    
    
    
    71,116Other non-current assets
    
    
    3,588
    
    
    
    3,454Total non-current assets
    
    
    252,202
    
    
    
    256,028Total assets
    
    $
    519,689
    
    
    $
    512,337Current liabilities:Accounts payable
    
    $
    27,877
    
    
    $
    26,585Accrued liabilities
    
    
    37,641
    
    
    
    51,646Accrued contract losses
    
    
    1,545
    
    
    
    1,890Deferred revenue
    
    
    14,211
    
    
    
    7,900Long-term debt due within one year
    
    
    3,338
    
    
    
    5,586Total current liabilities
    
    
    84,612
    
    
    
    93,607Long-term debt
    
    
    1,171
    
    
    
    1,667Deferred income taxes
    
    
    10,712
    
    
    
    11,400Other long-term liabilities
    
    
    3,073
    
    
    
    4,001Total liabilities
    
    
    99,568
    
    
    
    110,675Commitments and contingencies (Notes 10 & 11)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: 47,794,529 shares at March 31, 2004 and 47,299,742 at
December 31, 2003)
    
    
    478
    
    
    
    473Additional paid-in capital
    
    
    425,578
    
    
    
    418,496Accumulated deficit
    
    
    (8,208
    )
    
    
    (17,587
    )Accumulated other comprehensive gain
    
    
    2,273
    
    
    
    280Stockholders equity
    
    
    420,121
    
    
    
    401,662Total liabilities and stockholders equity
    
    $
    519,689
    
    
    $
    512,337
 See Notes to Condensed Consolidated Financial Statements 1




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eFUNDS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three Months EndedMarch 31,(in thousands, except per share amounts
    
    2004
    
    2003Net revenue
    
    $
    140,886
    
    
    $
    130,528Operating expenses:Processing, communication and service costs
    
    
    58,670
    
    
    
    55,706Employee costs
    
    
    48,942
    
    
    
    46,929Depreciation and amortization
    
    
    8,929
    
    
    
    8,789Other operating costs
    
    
    10,323
    
    
    
    12,527Total operating expenses
    
    
    126,864
    
    
    
    123,951Income from operations
    
    
    14,022
    
    
    
    6,577Other (expense) income  net
    
    
    (624
    )
    
    
    244Income before income taxes
    
    
    13,398
    
    
    
    6,821Provision for income taxes
    
    
    (4,019
    )
    
    
    (2,189
    )Net income
    
    $
    9,379
    
    
    $
    4,632Weighted average shares outstanding
    
    
    47,686
    
    
    
    46,703Weighted average shares and potential dilutive shares outstanding
    
    
    49,115
    
    
    
    46,713Net income per share  basic
    
    $
    0.20
    
    
    $
    0.10Net income per share  diluted
    
    $
    0.19
    
    
    $
    0.10
 See Notes to Condensed Consolidated Financial Statements 2




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eFUNDS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Three Months EndedMarch 31,(in thousands)
    
    2004
    
    2003Cash flows from operating activities:Net income
    
    $
    9,379
    
    
    $
    4,632Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    3,503
    
    
    
    3,686Amortization
    
    
    5,426
    
    
    
    5,103Loss on impairment or disposals of assets
    
    
    96
    
    
    
    255Deferred income taxes
    
    
    1,936
    
    
    
    359Changes in assets and liabilities:Restricted custodial cash
    
    
    1,533
    
    
    
    379Accounts receivable
    
    
    (10,843
    )
    
    
    (11,970
    )Accounts payable
    
    
    1,292
    
    
    
    (3,997
    )Accrued contract losses
    
    
    (345
    )
    
    
    (1,003
    )Deferred revenue
    
    
    6,311
    
    
    
    7,460Other assets and liabilities
    
    
    (11,817
    )
    
    
    5,912Net cash provided by operating activities
    
    
    6,471
    
    
    
    10,816Cash flows from investing activities:Capital expenditures
    
    
    (4,531
    )
    
    
    (4,370
    )Acquisitions
    
    
    (775
    )
    
    
    Proceeds from sale of property and equipment
    
    
    
    
    
    
    11,938Net cash (used in) provided by investing activities
    
    
    (5,306
    )
    
    
    7,568Cash flows from financing activities:Payments on long-term debt
    
    
    (1,977
    )
    
    
    (510
    )Issuance of common stock
    
    
    5,984
    
    
    
    275Net cash provided by (used in) financing activities
    
    
    4,007
    
    
    
    (235
    )Net increase in cash and cash equivalents
    
    
    5,172
    
    
    
    18,149Cash and cash equivalents at beginning of period
    
    
    158,106
    
    
    
    119,487Cash and cash equivalents at end of period
    
    $
    163,278
    
    
    $
    137,636Supplemental disclosures:Cash paid for income taxes
    
    $
    3,505
    
    
    $
    941Cash paid for interest
    
    
    115
    
    
    
    100
 See Notes to Condensed Consolidated Financial Statements 3




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eFUNDS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) NOTE 1  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION: eFunds Corporation and its wholly-owned subsidiaries (the Company) provide
transaction processing, risk management and professional services to financial
institutions, retailers, electronic funds transfer networks and government
agencies. The Company has four operating segments: Electronic Payments;
Automated Teller Machine (ATM) Management; Risk Management; and Global
Outsourcing. The Electronic Payments segment provides electronic funds transfer
(EFT) software, software applications development, maintenance and
installation, EFT processing services, including automated clearinghouse (ACH)
processing, as well as electronic benefit transfer (EBT) services for
government agencies. The ATM Management segment provides ATM deployment,
management and branding services. The Risk Management segment provides risk
management based data and other products to financial institutions, retailers
and other businesses that assist in detecting fraud and assessing the risk of
opening a new account or accepting a check. The Global Outsourcing segment
provides information technology services and business process outsourcing
services. 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 month periods ended March 31, 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 (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Interim results are not necessarily indicative of results for a full year.
Certain amounts in prior periods have been reclassified to conform to the
current period presentation. 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  SIGNIFICANT ACCOUNTING POLICIES: New Accounting Pronouncements In December 2003, the Financial Accounting Standards Board (FASB) revised FASB
Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities (FIN
46R), which addresses how a business enterprise should evaluate whether it has
a controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN 46R replaces FIN No.
46, Consolidation of Variable Interest Entities, which was issued in January
2003. FIN 46R will be required for all enterprises with variable interests in
variable interest entities (VIEs) created after December 31, 2003. For variable
interests in VIEs created before January 1, 2004, FIN 46R will be applied
beginning on January 1, 2005, with effective dates for public enterprises
varying based on the type of VIE, whether the public enterprise is a small
business issuer and whether the original interpretation issued in January 2003
was applied to a VIE prior to the effective date of FIN 46R. For any VIEs that
must be consolidated under FIN 46R that were created before January 1, 2004,
the assets, liabilities and noncontrolling interests of the VIE initially would
be measured at their carrying amounts with any difference between the net
amount added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and noncontrolling
interest of the VIE. The adoption of FIN 46R did not have an impact on the
Companys condensed consolidated financial position or results of operations. 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-based employee compensation cost is reflected in net
income as all options granted under 4




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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 (SFAS) No. 123, Accounting for Stock-Based
Compensation, to its stock-based employee compensation during the periods
indicated: Three Months EndedMarch 31,(in thousands, except per share amounts)
    
    2004
    
    2003Net income, as reported
    
    $
    9,379
    
    
    $
    4,632Total stock-based employee compensation expense determined under fair value
based method for all awards, net of tax
    
    
    (839
    )
    
    
    (557
    )Pro forma net income
    
    $
    8,540
    
    
    $
    4,075Earnings per share:Basic-as reported
    
    $
    0.20
    
    
    $
    0.10Basic-pro forma
    
    $
    0.18
    
    
    $
    0.09Diluted-as reported
    
    $
    0.19
    
    
    $
    0.10Diluted-pro forma
    
    $
    0.17
    
    
    $
    0.09
 For purposes of applying SFAS No. 123, the weighted average estimated fair
value of stock options granted during the three month periods ended March 31,
2004 and 2003 was $7.86 and $3.79, 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 month periods
ended March 31, 2004 and 2003, the Company issued 128,751 and 16,244 units of
restricted stock, respectively. The Company recorded compensation expense for
restricted stock unit awards during the three months ended March 31, 2004 and
2003 of approximately $116,000 and $42,000, respectively. NOTE 3  INTANGIBLES: Intangible assets consist primarily of goodwill, capitalized software costs and
acquired contracts. Other intangible assets, both acquired and developed,
subject to amortization were as follows: March 31, 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
    
    
    3.8
    
    
    $
    83,444
    
    
    $
    (56,090
    )
    
    $
    27,354
    
    
    $
    82,376
    
    
    $
    (52,823
    )
    
    $
    29,553Acquired contracts
    
    
    13.8
    
    
    
    22,262
    
    
    
    (4,117
    )
    
    
    18,145
    
    
    
    22,262
    
    
    
    (3,599
    )
    
    
    18,663Other
    
    
    5.1
    
    
    
    89,976
    
    
    
    (68,151
    )
    
    
    21,825
    
    
    
    89,542
    
    
    
    (66,642
    )
    
    
    22,900$
    195,682
    
    
    $
    (128,358
    )
    
    $
    67,324
    
    
    $
    194,180
    
    
    $
    (123,064
    )
    
    $
    71,116
 Other intangibles consist primarily of capitalized costs related to software
developed for licensing and resale and other assets obtained in connection with
the acquisition of other companies, such as non-competition agreements. For
the three month periods ended March 31, 2004 and 2003, amortization expense for
intangible assets was $5.4 million and $5.1 million, respectively. The
estimated amortization expense for intangible assets held at March 31,
2004 is $15 million for the nine months ended December 31, 2004. For the years
ended December 31, 2005, 2006, 2007 and 2008, the estimated amortization
expense for intangible assets held at March 31, 2004 is $15 million, $10
million, $7 million and $4 million, respectively. 5




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The change in the carrying amount of goodwill for the three months ended March
31, 2004 is as follows: Electronic
    
    ATM
    
    Risk
    
    Global(in thousands)
    
    Payments
    
    Management
    
    Management
    
    Outsourcing
    
    Other
    
    TotalBalance as of December 31, 2003
    
    $
    14,960
    
    
    $
    77,982
    
    
    $
    5,724
    
    
    $
    20,559
    
    
    $
    9,361
    
    
    $
    128,586Goodwill acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    775
    
    
    
    775Balance as of March 31, 2004
    
    $
    14,960
    
    
    $
    77,982
    
    
    $
    5,724
    
    
    $
    20,559
    
    
    $
    10,136
    
    
    $
    129,361
 NOTE 4  RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGES: The following table summarizes the change in the Companys restructuring
accruals for the three months ended March 31, 2004, including the long-term
portion of approximately $1.6 million at March 31, 2004 that is 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
    
    
    $
    3,223
 NOTE 5  ACCRUED CONTRACT LOSSES: The Companys accrued contract losses pertain to long-term service contracts
for transaction processing in the Electronic Payments segment. The following
table summarizes the activity of the accrued contract loss reserve: Three Months EndedMarch 31,(in thousands)
    
    2004
    
    2003Beginning balance
    
    $
    1,890
    
    
    $
    7,578Charges to reserve
    
    
    (345
    )
    
    
    (1,003
    )Ending balance
    
    $
    1,545
    
    
    $
    6,575
 NOTE 6  LONG-TERM DEBT: Long-term debt was as follows: March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003Capital leases and other
    
    $
    4,509
    
    
    $
    7,253Less amount due within one year
    
    
    (3,338
    )
    
    
    (5,586
    )Total
    
    $
    1,171
    
    
    $
    1,667
 Long-term debt consists principally of capital lease obligations related to
purchased software and equipment. The average interest rate on capital lease
obligations is approximately 4%. Carrying value approximates fair value for
these obligations, which are due through the year 2008. NOTE 7  INCOME PER SHARE: The following table reflects the calculation of basic and diluted income per
share: Three Months EndedMarch 31,(in thousands, except per share amounts)
    
    2004
    
    2003Net income per share  basicNet income
    
    $
    9,379
    
    
    $
    4,632Weighted average shares outstanding
    
    
    47,686
    
    
    
    46,703Net income per share  basic
    
    $
    0.20
    
    
    $
    0.10Net income per share  dilutedNet income
    
    $
    9,379
    
    
    $
    4,632Weighted average shares outstanding
    
    
    47,686
    
    
    
    46,703Dilutive impact of options
    
    
    1,429
    
    
    
    10Weighted average shares and potential dilutive shares outstanding
    
    
    49,115
    
    
    
    46,713Net income per share  diluted
    
    $
    0.19
    
    
    $
    0.10
 Options to purchase 168,398 shares and 5,429,689 shares of common stock were
excluded from the above 6




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calculations as they were antidilutive for the three months ended March 31,
2004 and 2003, respectively. NOTE 8  COMPREHENSIVE INCOME: The Companys total comprehensive income for the three month periods ended
March 31, 2004 and 2003 was $11.4 million and $4.9 million, respectively. The
Companys total comprehensive income consists of net income and foreign
currency translation adjustments. NOTE 9  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. Currently, the
Companys business segments are: Electronic Payments; ATM Management; Risk
Management; and Global Outsourcing. 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 software sales, ACH, EFT and other processing services as well as
EBT services for government agencies. The ATM Management segment provides ATM
deployment, management and branding services. The Risk Management segment
provides risk management based data and other products to financial
institutions, retailers and other businesses that assist in detecting fraud and
assessing the risk of opening a new account or accepting a check. The Global
Outsourcing segment provides information technology and business process
outsourcing services. 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. 7




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Information concerning operations in the Companys reportable segments is as
follows: Three Months EndedMarch 31,(in thousands)
    
    2004
    
    2003Net revenue:Electronic payments
    
    $
    49,683
    
    
    $
    43,067ATM management
    
    
    35,160
    
    
    
    33,827Risk management
    
    
    35,124
    
    
    
    32,000Global outsourcing
    
    
    20,919
    
    
    
    21,634Total net revenue
    
    
    140,886
    
    
    
    130,528Operating expenses before allocated overhead:Electronic payments
    
    
    38,855
    
    
    
    32,039ATM management
    
    
    32,784
    
    
    
    32,046Risk management
    
    
    20,954
    
    
    
    22,756Global outsourcing
    
    
    15,204
    
    
    
    17,839Total operating expenses before allocated overhead
    
    
    107,797
    
    
    
    104,680Allocated overhead:Electronic payments
    
    
    2,800
    
    
    
    1,902ATM management
    
    
    2,102
    
    
    
    2,219Risk management
    
    
    2,397
    
    
    
    2,773Global outsourcing
    
    
    1,673
    
    
    
    2,375Corporate
    
    
    10,095
    
    
    
    10,002Total allocated overhead
    
    
    19,067
    
    
    
    19,271Income (loss) from operations:Electronic payments
    
    
    8,028
    
    
    
    9,126ATM management
    
    
    274
    
    
    
    (438
    )Risk management
    
    

    11,773
    
    
    
    6,471Global outsourcing
    
    
    4,042
    
    
    
    1,420Corporate
    
    
    (10,095
    )
    
    
    (10,002
    )Income from operations
    
    $
    14,022
    
    
    $
    6,577
 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 EndedMarch 31,(in thousands)
    
    2004
    
    2003Depreciation and amortization:Electronic payments
    
    $
    3,575
    
    
    $
    2,752ATM management
    
    
    1,337
    
    
    
    1,411Risk management
    
    
    2,895
    
    
    
    3,269Global outsourcing
    
    
    793
    
    
    
    897Corporate
    
    
    329
    
    
    
    460Total depreciation and amortization
    
    $
    8,929
    
    
    $
    8,789
 Revenue is attributed to geographic areas based on the location of the assets
producing the revenue. The Companys operations by geographic area are as
follows: Net Revenue
    
    Property and EquipmentThree Months EndedMarch 31,
    
    March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003
    
    2004
    
    2003United States
    
    $
    123,786
    
    
    $
    119,756
    
    
    $
    36,652
    
    
    $
    38,594United Kingdom
    
    
    6,081
    
    
    
    3,747
    
    
    
    492
    
    
    
    493India
    
    
    4,571
    
    
    
    4,568
    
    
    
    10,366
    
    
    
    9,445Canada
    
    
    5,526
    
    
    
    2,457
    
    
    
    1,079
    
    
    
    1,060Other
    
    
    922
    
    
    
    
    
    
    
    35
    
    
    
    37Total consolidated
    
    $
    140,886
    
    
    $
    130,528
    
    
    $
    48,624
    
    
    $
    49,629
 8




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##### Table of Contents



NOTE 10  COMMITMENTS AND CONTINGENCIES: Future commercial commitments In connection with the Companys government services, collection and ATM
placement activities, the Company posts surety bonds with state agencies
guaranteeing its performance of certain obligations related to the relevant
contracts or state requirements. The aggregate amount of such bonds outstanding
at March 31, 2004 was $13.9 million. At March 31, 2004, the Company provided guarantees of $0.8 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. (ACI) in 2001 and expire through December 2007. 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
March 31, 2004, the Company has been required to make payments of approximately
$176,000 pursuant to these guarantees. The customers ATM equipment assets are
utilized as collateral on these guarantees. There are no amounts being carried
as liabilities for the Companys obligations under these guarantees. The Company uses time deposits to secure letters of credit it uses in the
ordinary course of business in India. The Company had $1.4 million in letters
of credit outstanding at March 31, 2004, mostly related to leases. These
letters of credit were secured by $1.6 million in cash collateral. The Company
has also pledged $0.5 million of time deposits as collateral related to the
performance on a customer contract and certain obligations related to local
government requirements. Contractual cash obligations As of March 31, 2004, the Company had contractual cash obligations for capital
leases, operating leases, outsourcing and maintenance obligations in the
aggregate amount of approximately $131.7 million. The following table sets
forth our obligations as of March 31, 2004 for the time periods specified. Our
long-term debt consists primarily of capital lease obligations related to
equipment. Payments Due by PeriodNine-months
    
    Three Years
    
    Three Yearsended
    
    ended
    
    endedDecember 31,
    
    December 31,
    
    December 31,(in thousands)
    
    Total
    
    2004
    
    2007
    
    2010
    
    ThereafterCapital lease obligations
    
    $
    4,509
    
    
    $
    3,218
    
    
    $
    1,207
    
    
    $
    84
    
    
    $
    Operating lease
obligations1
    
    
    61,597
    
    
    
    9,884
    
    
    
    26,492
    
    
    
    17,335
    
    
    
    7,886Vendor obligations
    
    
    65,592
    
    
    
    28,777
    
    
    
    36,815
    
    
    
    
    
    
    
    Total
    
    $
    131,698
    
    
    $
    41,879
    
    
    $
    64,514
    
    
    $
    17,419
    
    
    $
    7,886
  1 Future minimum lease payments for
non-cancelable operating leases are presented net of
minimum sublease rentals of $4.2 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 5%. The average monthly rate paid during
the first three months of 2004 approximated 7%. The Company indemnifies the
financial institutions against any loss of the cash in the ATMs. One of the
agreements requires the Company to maintain a security amount 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 May 2004 to March
2005. Total cash provided pursuant to these vault cash agreements was
approximately $35 million at March 31, 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 9




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Company are included in cash and cash equivalents. As of March 31, 2004,
approximately $27.0 million was due to the Company and it received these funds
in early April 2004. The Company seeks to maintain an adequate cash balance to ensure that it can
advance funds to its processing customers if unusual circumstances prevent the
Company from the timely processing of its settlement files. Although highly
infrequent, the Company has funded approximately $30 million under such a
circumstance in the past. 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. 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, officers, employees and other agents to
the fullest extent permitted by Delaware law. 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 Actions and Shareholder Derivative Actions described below.
Historically, the Companys costs to indemnify its directors, officers,
employees and other agents have not been material. 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. The Company has incurred,
and may continue to incur, significant legal expenses in connection with this
investigation. The Company, its former chief executive and chief financial officers and its
current chief financial officer are defendants in a federal securities action
(the Federal Securities Action) pending in the U.S. District Court for the
District of Arizona. On December 30, 2003, the plaintiff in the Federal
Securities Action filed a Consolidated Amended Complaint (the Complaint). The
Complaint alleges, 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. The
defendants have filed a motion to dismiss this action and this motion is
pending before the Court. The Company is also a nominal defendant in two substantially identical
shareholder derivative actions filed in the Superior Court of Arizona, Maricopa
County in January 2003 (the Shareholder Derivative Actions). The complaints 10




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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. With the agreement of
the parties, the Court has entered an order staying these actions pending the
resolution of the motion to dismiss the Federal Securities Action. The Company believes the Federal Securities Action and the Shareholder
Derivative Actions are without merit and intends to vigorously defend itself.
However, the Company cannot predict the 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 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. 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. NOTE 11  SUBSEQUENT EVENTS: 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 aggregate initial purchase price of approximately $6 million for
Penley and LCS was funded from existing cash on hand. Additional amounts could
become payable to the former stockholders of Penley if the acquired business
exceeds certain revenue and income targets during the two year period following
the acquisition. The maximum additional amount payable to such stockholders is
$21 million. 11




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our Managements Discussion and Analysis of 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 three months ended March 31, 2004 and
certain trends, risks and challenges. We then discuss our results of operations
for the three months ended March 31, 2004 compared to the three months ended
March 31, 2003. This is followed by a discussion of our liquidity and capital
resources, including cash resources, sources and uses of cash and commercial
commitments. We conclude with a reference to our Critical Accounting Policies
and Estimates, described in our Annual Report on Form 10-K for the period
ending December 31, 2003, that we believe are important for the reader to
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 the 2003 Annual Report on
Form 10-K we previously filed with the Securities and Exchange Commission. In
addition to historical information, this discussion contains forward-looking
statements as defined in the U.S. Private Securities Litigation Reform Act of
1995. All forward-looking statements are subject to various risks and
uncertainties that could cause our actual future results to differ materially
from those presently anticipated due to a variety of factors, including those
discussed in 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 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 ATM Management segments
also contribute to our overall value proposition. 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 debit transactions. The majority of this segments revenue is
derived from processing debit transactions that originate at an automated
teller machine (ATM) or point-of-sale device. The remaining revenue is derived
from the licensing and maintenance of the electronic funds transfer (EFT)
software used 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. The acquisition of Oasis Technology Ltd. (Oasis) in November 2003
expanded this segments software offerings from our legacy platforms to lower
cost open platforms. 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 processing customers and the acquisition of new
processing relationships. 12




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Expanding our software sales and establishing a processing presence in foreign
markets are also areas of management emphasis. ATM Management Our ATM Management segment derives its revenues from the use, sale, branding,
and managing of ATMs. Surcharge and interchange revenue represented the
majority of our revenue from this segment during the three months ended March
31, 2004. Equipment sales are non-recurring and, along with branding fees,
represent a minority of the revenue in this segment. Operating costs in this
segment primarily include processing and telecommunication costs, the cost of
the equipment we sell and the residual payments we make to the merchants where
the ATMs we manage are deployed. Our primary goal for this business is to
continue to improve its margins by lowering its costs and providing additional
services. Risk Management This segment derives its revenue from database inquiries by 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
substantial majority of this segments revenue during the three months ended
March 31, 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 and the cost of technology and
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. Towards this end, subsequent to the quarter ended March 31, 2004, we
acquired Penley Inc., which provides identity verification services to
financial institutions, and Loss Control Systems, which offers fraud
investigation case management software. We believe the services offered by
Penley may also have application for credit card issuers and broker dealer
markets. 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 are from a variety of business process
outsourcing (BPO) services (such as call centers, account application
processing and data entry) and IT outsourcing. Operating costs in this segment
are primarily related to employee expense and telecommunications and facilities
costs. Our principal goal for this business is to expand its customer base in
our core target markets of financial service, retail and telecommunications
companies. Key Events During the Three Months Ended March 31, 2004  
    
    We transferred the listing of our common stock to the New York Stock Exchange.
    
    US Central selected our Automated Clearing House Processing System to support its ACH business.
    
    We renewed an ATM branding contract with CO-OP Network and
increased the number of ATMs included in our branding programs to over
7,500.
    
    We executed an agreement to provide point-of-sale risk management
services to Rite Aid Corporation.
    
    The results of operations of Oasis Technology following our
acquisition of this Company did not meet our expectations.
    
    In our Global Outsourcing segment, we converted one customer from a
pilot program to a long-term contract.
    
    We acquired Benton Consulting Partners, a provider of consulting
services to the electronic payments industry. One of the principals of
Benton Consulting, John B. (Jack) Benton, became our Senior Vice
President, International following this transaction. 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 our operations. We would 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; 13




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
    
    we are seeing an improving pipeline for 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;
    
    there is continued political opposition to the use of offshore
outsourcing services;
    
    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;
    
    our sales of IT outsourcing services to Deluxe continue to decline;
    
    the rate of new ATM deployment and per ATM transaction volumes in the United States is declining;
    
    ATM markets outside the United States are growing; and
    
    our India operations continue to experience pressure on
compensation costs and employee attrition 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 pending stockholders litigation or the purported class action
litigation filed in Florida.
    
    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 efforts to improve the margins of our ATM Management business may not be successful.
    
    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 to Deluxe have been declining.
    
    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.
    
    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.
    
    We may be unable to protect our intellectual property rights. 14




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RESULTS OF OPERATIONS The following table presents our condensed consolidated financial results for
the three months ended March 31, 2004 and 2003: Three Months EndedMarch 31,(dollars in thousands)
    
    2004
    
    2003
    
    % ChangeNet revenue
    
    $
    140,886
    
    
    $
    130,528
    
    
    
    7.9
    %Operating expenses:Processing, communication and service costs
    
    
    58,670
    
    
    
    55,706
    
    
    
    5.3Employee costs
    
    
    48,942
    
    
    
    46,929
    
    
    
    4.3Depreciation and amortization
    
    
    8,929
    
    
    
    8,789
    
    
    
    1.6Other operating costs
    
    
    10,323
    
    
    
    12,527
    
    
    
    (17.6
    )Total operating expenses
    
    
    126,864
    
    
    
    123,951
    
    
    
    2.4Income from operations
    
    
    14,022
    
    
    
    6,577
    
    
    
    *Other (expense) income  net
    
    
    (624
    )
    
    
    244
    
    
    
    *Income before income taxes
    
    
    13,398
    
    
    
    6,821
    
    
    
    96.4Provision for income taxes
    
    
    (4,019
    )
    
    
    (2,189
    )
    
    
    83.6Net income
    
    $
    9,379
    
    
    $
    4,632
    
    
    
    *
  *
    
    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
months ended March 31, 2004 and 2003 was as follows: Three Months EndedMarch 31,(dollars in thousands)
    
    2004
    
    2003
    
    % ChangeNet revenueElectronic payments
    
    $
    49,683
    
    
    $
    43,067
    
    
    
    15.4
    %ATM management
    
    
    35,160
    
    
    
    33,827
    
    
    
    3.9Risk management
    
    
    35,124
    
    
    
    32,000
    
    
    
    9.8Global outsourcing
    
    
    20,919
    
    
    
    21,634
    
    
    
    (3.3
    )Total net revenue
    
    $
    140,886
    
    
    $
    130,528
    
    
    
    7.9
 Electronic Payments Processing revenues increased approximately $4 million during the three months
ended March 31, 2004 as compared to the same period ended 2003 due primarily to
electronic benefit transfer (EBT) service contracts that commenced subsequent
to the first quarter of 2003. Processing revenues for financial institution
customers increased modestly during the quarter ended March 31, 2004 as
compared to the same quarter ended 2003. During 2004, we expect that our
processing revenues from financial institutions will increase as compared to
2003 due to increased volumes and our success in securing new financial
institution processing customers and we expect to see the benefits from these
new relationships begin in late 2004. We expect these increases to be offset
somewhat by declines in EBT revenues due to anticipated contract expirations
that will not be fully offset by the new EBT contracts described above. We are
pursuing new EBT contracts as existing contracts held by us and our competitors
expire, but it is difficult to predict whether our bids will be successful. In
general, we expect our revenues from this activity to decline over the course
of 2004. Approximately $2 million of the increase in Electronic Payments revenue is
attributable to an increase in software revenues during the quarter ended March
31, 2004 as compared to the same quarter ended 2003, primarily related to our
acquisition of an open-platform software provider in the fall of 2003. We
expect software related sales to 15




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##### Table of Contents



increase in 2004 as compared to the prior year due to this acquisition. The
following table illustrates our revenue generated from software sales, and
maintenance: Three Months EndedMarch 31,(in thousands)
    
    2004
    
    2003License fees
    
    $
    1,964
    
    
    $
    1,735Maintenance
    
    
    5,227
    
    
    
    3,765Software modifications
    
    
    2,156
    
    
    
    1,842$
    9,347
    
    
    $
    7,342
 ATM Management The increase in ATM revenues during the three months ended March 31, 2004 as
compared to the same period in 2003 is due to higher transaction volumes and a
one-time contract termination fee of approximately $0.5 million. Equipment
sales and branding revenues remained relatively consistent with the prior year
quarter. We continue to redirect the focus of the ATM business towards offering
end-to-end ATM portfolio management as well as branding services to financial
institutions and retailers. We expect annual revenues from this segment to
increase modestly in 2004 as compared to the prior year. Risk Management Revenues from our ChexSystems(SM) and other financial institution products
increased in this segment for the three months ended March 31, 2004 as compared
to the same period in 2003 due to volume growth from financial institutions
associated with new debit account openings. This increase was partially offset
by revenue declines attributable to the elimination of unprofitable product
lines in 2003. Our SCAN(SM) product revenues were relatively flat in the
current quarter as compared to the prior year. We expect that revenues from our
Risk Management segment will increase in 2004 as compared to 2003 due to
increased demand for our financial institution products and, to a lesser
degree, the acquisitions of Penley and LCS in April 2004. Revenues from our
SCAN(SM) product line will likely remain relatively flat with 2003. Global Outsourcing Global Outsourcing revenues declined approximately 3% during the three months
ended March 31, 2004 as compared to the same period ended 2003 due to a decline
in information technology revenues. This decline was partially offset by
increased BPO revenues. BPO revenues, which include outsourcing and customer
contact center services, increased approximately 26% during the three months
ended March 31, 2004 as compared to the same period in the prior year due
primarily to higher volumes experienced by our BPO customers. We expect
continued growth in our BPO business through the acquisition of new client
relationships and the expansion of services provided to existing clients.
However, we expect the rate of growth in our BPO business over the remainder of
2004 will be somewhat less than that seen in the first quarter due to the
seasonal nature of some of the activity. Revenues from information technology (IT) services declined approximately 32%
during the three months ended March 31, 2004 as compared to the same period in
2003 due to a decline in our revenues from Deluxe. In accordance with our
agreement with Deluxe, a minimal short-fall fee, based upon a formula in the
contract reflective of our estimated lost profits, will be billed to Deluxe if
it fails to reach the minimum target level of $43 million for software
development services for 2004. We do not expect the revenues from Deluxe in
2004 to approach this level. Any amounts that may ultimately become billable
to Deluxe under this arrangement will be recognized as revenue by us during the
fourth quarter of 2004. 16




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BUSINESS SEGMENT MARGIN CONTRIBUTIONS The following table presents our operating income (loss) by segment and total
operating income for the three months ended March 31, 2004 and 2003: Three Months EndedMarch 31,(dollars in thousands)
    
    2004
    
    2003
    
    % ChangeOperating income (loss)Electronic payments
    
    $
    8,028
    
    
    $
    9,126
    
    
    
    (12.0
    )%ATM management
    
    
    274
    
    
    
    (438
    )
    
    
    *Risk management
    
    
    11,773
    
    
    
    6,471
    
    
    
    81.9Global outsourcing
    
    
    4,042
    
    
    
    1,420
    
    
    
    *Corporate
    
    
    (10,095
    )
    
    
    (10,002
    )
    
    
    (0.9
    )Total operating income
    
    $
    14,022
    
    
    $
    6,577
    
    
    
    *
  *
    
    Represents an increase or decrease in excess of 100%. Electronic Payments During the first quarter of 2004, margins in this segment were adversely
impacted by operating losses related to Oasis due to lower than anticipated
sales. This result was partially offset by increased revenues from EFT and EBT
processing services. Total operating income for this segment is expected to
decline slightly in 2004 as compared to the prior year because we currently
expect additional losses from Oasis and we will not realize the favorable
impact ($3.7 million) from the reversals of the provision for government
services loss contracts we recorded in 2003. We are actively exploring means
to reduce Oasis expense base and expect the losses from this business to
narrow throughout 2004. ATM Management Our ATM Management segment experienced an increase in margins during the three
months ended March 31, 2004 as compared to the same period ended 2003 primarily
as a result of one-time contract termination fees of approximately $0.5
million. We will continue to focus on improving the margins in this business
through our efforts to provide ATM management and branding services to large
retailers and financial institutions and we expect margins from this business
to improve in 2004 as compared to 2003. Risk Management The margin improvement during first quarter of 2004 as compared to the same
quarter in 2003 for our risk management business is due to the increase in
ChexSystem(SM) revenue from financial institution customers. Margins also
improved during the current quarter due to the reduction of third party and
internal costs through the increased utilization of our Indian operations for
contact center and software development work. We expect an increase in the
margins from this segment in 2004 as compared to 2003 as a result of a full
year of savings on our operating costs and higher transaction volumes from our
ChexSystem(SM) suite of products. Global Outsourcing The results of our global outsourcing business during the three months ended
March 31, 2004 as compared to the same period ended 2003 were positively
impacted by an increase in our BPO revenues. Operating costs in this segment
were reduced as we achieved a more favorable balance of on-shore and off-shore
activities. We plan to expand capacity in 2004 to meet immediate and future
business demands, which will result in an increase in our fixed costs and as a
result we expect only a moderate increase in margins for 2004 as compared to
2003. Corporate Unallocated corporate overhead includes, among other things, executive
leadership costs, investor relations, general legal, consulting and accounting
and finance costs and certain technology costs. Corporate expenses remained
flat during the first quarter of 2004 as compared to the same quarter in 2003,
and we expect corporate expenses to remain relatively flat throughout 2004. 17




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OPERATING EXPENSES Operating expenses for the three months ended March 31, 2004 and 2003 were as
follows: Three Months EndedMarch 31,(dollars in thousands)
    
    2004
    
    2003
    
    % ChangeOperating expenses:Processing, communication and service costs
    
    $
    58,670
    
    
    $
    55,706
    
    
    
    5.3
    %Employee costs
    
    
    48,942
    
    
    
    46,929
    
    
    
    4.3Depreciation and amortization
    
    
    8,929
    
    
    
    8,789
    
    
    
    1.6Other operating costs
    
    
    10,323
    
    
    
    12,527
    
    
    
    (17.6
    )Total operating expenses
    
    $
    126,864
    
    
    $
    123,951
    
    
    
    2.4
 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 increased during the three months
ended March 31, 2004 as compared to the same period ended 2003 primarily due to
an increase in residual payments consistent with the increase in ATM revenues
and a price increase on fees related to certain processing in Electronic
Payments. We expect processing, communication and service costs to increase in
2004 as compared to the prior year on a basis consistent with the anticipated
increase in transaction volumes. Employee costs Employee compensation, payroll taxes and medical expenses increased during the
three months ended March 31, 2004 primarily due to an expansion in our employee
base associated with our acquisition activities and an increase in India
headcount associated with growth in our BPO business. Company-wide headcount
increased approximately 400 to 5,600 at March 31, 2004. At March 31, 2004,
approximately 71% of our employees were located in India. The
increases in costs were
partially offset by savings on compensation resulting from the business
improvement initiatives in 2003. We expect future employee costs and headcount
to increase during the remainder of 2004 to support anticipated BPO business
growth. As part of our business improvement initiatives, we continue, however,
to seek opportunities to reduce employee costs. Depreciation and amortization These costs represent the depreciation of our facilities and equipment and the
amortization of intangible assets, such as capitalized software costs and
acquired contracts. The increase in these expenses during the first quarter of
2004 as compared to the same quarter ended 2003 is primarily due to the impact
of three months of depreciation and amortization on assets obtained through the
Oasis acquisition. Other operating costs Expenditures in this category include facility costs, professional, consulting
and temporary services, bad debt, and certain administrative costs. External
consulting costs decreased approximately $1.7 million during the three months
ended 2004 over the same period ended 2003 due to reduced consulting fees for
market and customer analysis to support our strategic planning process. We
also saw a decline in the external legal costs associated with the SEC
investigation. We expect to continue to incur expenses for legal services
associated with the SEC investigation and stockholder litigation, for external
consultants related to the business improvement initiatives we commenced in
early 2003 and for costs related to compliance with Section 404 of the
Sarbanes-Oxley Act. Other (expense) income  net Other (expense) income  net primarily includes interest and investment income
that is enhanced or reduced by gains and losses on the disposal of assets,
interest and investment expense and foreign currency translation adjustments.
Interest earned on cash and cash equivalents was $0.4 million for the first
quarter in 2004 and $0.5 million for the first quarter in 2003. The increase
in expenses during the three months ended March 31, 2004 as compared to the
same period ended 2003 is primarily due to the impact of unfavorable foreign
currency translation adjustments. 18




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##### Table of Contents



Provision for income taxes The annualized effective tax rates for the three months ended March 31, 2004
and 2003 were 30.0% and 32.1%, respectively. 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 within India which
generally provide us with exemptions from Indian income tax on certain business
income generated from these operations and phase out through March 2009. We
expect our annualized effective tax rate for 2004 to approximate the rate seen
in the first quarter. LIQUIDITY AND CAPITAL RESOURCES Overview Information about our financial position as of March 31, 2004 and December 31,
2003 is presented below: March 31,
    
    December 31,(dollars in thousands)
    
    2004
    
    2003
    
    % ChangeCash and cash equivalents
    
    $
    163,278
    
    
    $
    158,106
    
    
    
    3.3
    %Long-term debt due within one year
    
    
    3,338
    
    
    
    5,586
    
    
    
    (40.2
    )Long-term debt
    
    
    1,171
    
    
    
    1,667
    
    
    
    (29.8
    )Stockholders equity
    
    
    420,121
    
    
    
    401,662
    
    
    
    4.6Net working capital
    
    
    182,875
    
    
    
    162,702
    
    
    
    12.4
 Cash Resources We expect our beginning 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 any acquisitions. Cash and cash
equivalents at March 31, 2004 included cash in ATMs of approximately $6 million
and cash in India of approximately $15 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 consider
these funds to be permanently invested and have no current intention of
repatriating them to the United States. 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 on our consolidated
balance sheets. As of March 31, 2004, approximately $27 million of settlement
payments were due to us and we received these funds in early April 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 $5
million to $30 million. We also seek to maintain an additional cash balance of
approximately $35 million to ensure that we can advance funds to our processing
customers if unusual circumstances prevent us from timely processing their
settlement files. 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 5%. We indemnify the
financial institutions against any loss of the vault cash in the ATMs. One of
the agreements requires us to maintain a security deposit equal to 1% of the
daily outstanding balance. The average monthly rate paid during the three
months ended March 31, 2004 approximated 7%. The agreements may be terminated
upon notice by either party and have various expiration dates through March
2005. Cash provided at March 31, 2004 and December 31, 2003 pursuant to
agreements with third-party vault cash providers was approximately $35 million
and $41 million, respectively. 19




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##### Table of Contents



The following table sets forth our contractual cash obligations as of March 31,
2004 in total and for the time periods specified. Our long-term debt consists
principally of capital lease obligations related to equipment: Payments Due by PeriodNine-months
    
    Three Years
    
    Three Yearsended
    
    ended
    
    endedDecember 31,
    
    December 31,
    
    December 31,(in thousands)
    
    Total
    
    2004
    
    2007
    
    2010
    
    ThereafterCapital lease obligations
    
    $
    4,509
    
    
    $
    3,218
    
    
    $
    1,207
    
    
    $
    84
    
    
    $
    Operating lease
obligations1
    
    
    61,597
    
    
    
    9,884
    
    
    
    26,492
    
    
    
    17,335
    
    
    
    7,886Vendor obligations
    
    
    65,592
    
    
    
    28,777
    
    
    
    36,815
    
    
    
    
    
    
    
    Total
    
    $
    131,698
    
    
    $
    41,879
    
    
    $
    64,514
    
    
    $
    17,419
    
    
    $
    7,886
  1 Future minimum lease payments for non-cancelable operating leases are presented net of
minimum sublease rentals of $4.2 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. Our purchase orders 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
three months ended March 31, 2004 and 2003 and should be read in conjunction
with our condensed consolidated statements of cash flows: Summary of Cash FlowsFor the Three MonthsEnded March 31,(in thousands)
    
    2004
    
    2003Cash provided by operating activities
    
    $
    6,471
    
    
    $
    10,816Cash (used in) provided by investing
activities
    
    
    (5,306
    )
    
    
    7,568Cash provided by (used in) financing
activities
    
    
    4,007
    
    
    
    (235
    )Net increase in cash and cash equivalents
    
    $
    5,172
    
    
    $
    18,149
 Our current priorities for use of our cash are:  
    
    investment in projects intended to increase our product delivery
and operational effectiveness and enhance our product suite and the
redundancy of our systems;
    
    complementary acquisitions; and
    
    ensuring we can fund our settlement obligations. We do not currently anticipate using our funds to pay cash dividends or
repurchase our 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. The payment of performance-based bonuses during the first quarter of 2004
resulted in a cash outflow of approximately $13.9 million. Cash flow from
operations also decreased due to an increase in accounts receivable related to
annual software maintenance billing and extended receivables related to our
recently acquired EFT software business. These decreases were offset by cash
flows associated with our positive operating results. 20




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Investing Activities Cash from investing activities generally includes cash effects from the sale or
acquisition of assets. During the first quarter of 2004, we disbursed
approximately $775,000 for our acquisition of Benton Consulting Partners and
approximately $4.5 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 three months ended March 31, 2004, we used
cash to repay debt of approximately $2.0 million and we received approximately
$6.0 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 March
31, 2004: Commitment Expiration by Period*(in thousands)
    
    Total
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterLetters of credit and other
    
    $
    1,976
    
    
    $
    1,232
    
    
    $
    730
    
    
    $
    14
    
    
    $
    
    
    
    $
    
    
    
    $
    Guarantees
    
    
    838
    
    
    
    26
    
    
    
    167
    
    
    
    398
    
    
    
    210
    
    
    
    37
    
    
    
    Performance bonds
    
    
    13,876
    
    
    
    2,710
    
    
    
    11,021
    
    
    
    110
    
    
    
    35
    
    
    
    
    
    
    
    Total commitments
    
    $
    16,690
    
    
    $
    3,968
    
    
    $
    11,918
    
    
    $
    522
    
    
    $
    245
    
    
    $
    37
    
    
    $
    
  *
    
    Represents commercial commitment expirations during the nine months
ended December 31, 2004, during the respective years ended 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 March
31, 2004, were guaranteeing lease payments amounting to approximately $0.8
million. Through March 31, 2004, we have been required to make payments of
$176,000 pursuant to these guarantees. We use cash collateral to secure letters of credit we issue in the ordinary
course of business. We had $1.4 million in letters of credit outstanding at
March 31, 2004, mostly related to leases. These letters of credit were secured
by $1.6 million in cash collateral. We have also pledged $0.5 million of time
deposits as collateral related to the guarantee of performance on a customer
contract and certain obligations related to local government requirements. 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 March 31, 2004
was $13.9 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, which
have been prepared in accordance with accounting principles that are generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates and judgments, including those related to revenue recognition,
intangible assets, reserves and allowances, income taxes and stock-based
compensation. We base our estimates on 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 changes in our critical
accounting policies during the first quarter of 2004. These policies are
described in our Annual Report on Form 10-K for the period ending December 31,
2003. 21




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Recent Accounting Pronouncements In December 2003, the FASB revised FIN No. 46, Consolidation of Variable
Interest Entities (FIN 46R), which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and accordingly should consolidate the entity.
FIN 46R replaces FIN No. 46, Consolidation of Variable Interest Entities,
which was issued in January 2003. FIN 46R will be required for all enterprises
with variable interests in variable interest entities (VIEs) created after
December 31, 2003. For variable interests in VIEs created before January 1,
2004, FIN 46R will be applied beginning on January 1, 2005, with effective
dates for public enterprises varying based on the type of VIE, whether the
public enterprise is a small business issuer, and whether the original
interpretation issued in January 2003 was applied to a VIE prior to the
effective date of FIN 46R. For any VIEs that must be consolidated under FIN 46R
that were created before January 1, 2004, the assets, liabilities and
noncontrolling interests of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the
balance sheet and any previously recognized interest being recognized as the
cumulative effect of an accounting change. If determining the carrying amounts
is not practicable, fair value at the date FIN 46R first applies may be used to
measure the assets, liabilities and noncontrolling interest of the VIE. The
adoption of FIN 46R did not have an impact on our condensed consolidated
financial position or results of operations. 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 that full year net revenues for 2004 will increase
approximately 5 to 10 percent over the net revenues recorded in 2003 of
approximately $532.1 million. Additionally, the Company 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. The foregoing expectations reflect the following assumptions:  
    
    an effective annualized tax rate of approximately 30 percent;  
    
    fully diluted shares outstanding of approximately 48 million; and  
    
    expected cash outlays of approximately $40 million for capital expenditures and product development. These expectations give effect to the acquisitions of Penley and LCS, but do
not include the impact of other acquisitions that may be completed during 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 months ended March 31,
2004, approximately 8% of our net revenues and approximately 19% of our
operating expenses 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 quarter
ended March 31, 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 that
quarter by approximately $1.6 million. 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 total assets. 22




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Changes in interest rates could impact our anticipated interest income on cash
equivalents and interest expense on variable short-term debt. A 10% adverse
change in interest rates from the interest rates in effect at the end of March
31, 2004 would not, however, have had a material adverse effect on our net
income or financial condition for the three months ended March 31, 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 March 31, 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 March 31, 2004. 
 PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS Reference is made to the discussion of the SEC investigation, the Federal
Securities Actions, the Shareholder Derivative Actions, and the Florida
litigation discussed in Note 10 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
PENDING 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. The Company has incurred, and may continue to incur,
significant legal expenses in connection with this investigation. The Company, its former chief executive and chief financial officers and its
current chief financial officer are defendants in a federal securities action
(the Federal Securities Action) pending in the U.S. District Court for the
District of Arizona. On December 30, 2003, the plaintiff in the Federal
Securities Action filed a Consolidated Amended Complaint (the Complaint). The
Complaint alleges, 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. The
defendants have filed a motion to dismiss this action and this motion is
pending before the Court. The Company is also a nominal defendant in two substantially identical
shareholder derivative actions filed in the Superior Court of Arizona, Maricopa
County in January 2003 (the Shareholder Derivative Actions). The complaints 23




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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. With the agreement of
the parties, the Court has entered an order staying these actions pending the
resolution of the motion to dismiss the Federal Securities Action. The Company believes the Federal Securities Action and the Shareholder
Derivative Actions are without merit and intends to vigorously defend itself.
However, the Company cannot predict the outcome of these actions with
certainty. We are likely to incur significant legal expense in connection with
the defense of these claims. In addition, if we are not successful in our
efforts to seek dismissal of these actions, we could incur substantial other
expenses. 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 information made available by us, and other information
relating to our Company and our products and services, when evaluating our
prospective results of operations. 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. 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. 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
product 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. 24




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##### Table of Contents



For example, J.P. Morgan Chase and Bank One, both of which utilize our risk
management products, have agreed to merge. Similarly, the STAR network was one
of the larger processing customers of our electronic payments business before
it was purchased by one of our competitors, Concord EFS, during 2001. First
Data Corporation, which owns a substantial equity interest in the NYCE Network,
has now purchased Concord EFS, although it is a condition of this acquisition
that First Data divest its interest in the NYCE network. Both the STAR and NYCE
networks utilize our electronic funds transfer software. We cannot predict what
effect the combination of First Data and Concord EFS will have on our business. OUR EFFORTS TO IMPROVE THE MARGINS OF OUR ATM MANAGEMENT BUSINESS MAY NOT BE
SUCCESSFUL. During 2001 and 2002, we acquired a number of independent ATM management
companies and our ATM Management segment now operates the largest network of
off-premise ATMs in North America. For the first quarter of 2004, this business
segment contributed revenues of $35.2 million, or 25% of our total revenues, at
an operating margin of 0.8%. Our strategy to improve margins of this business is directed towards providing
an end-to-end ATM management service to financial institutions and retailers.
We believe that effectively changing the focus of this business should allow us
to improve on its historical returns. We also expect improvement in our ATM
business to come from cost reduction efforts and additional revenues from
branding and other value-added services. If we are not successful in our effort to improve the revenues and
profitability of our ATM business, our future results of operations will be
adversely affected and we could be required to write-down the value of the
goodwill we recorded as a result of our ATM management company acquisitions. 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. 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 providers including J.P. Morgan Chase and ACS. 25




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In the ATM management market, our competitors include First Data Corporation,
DataCard, Genpass, eTrade, Cardtronix, certain ATM equipment manufacturers and
numerous independent service organizations (ISOs). 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 global outsourcing market, our competitors include:  -
    
    outsourcing solutions companies, including IBM (which has
recently agreed to acquire another of our competitors, Daksh
eServices), Spectramind/Wipro 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 by pricing concessions, such as those
we made in 2003, 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/Concord EFS 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. 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 machines and processing
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 growth objectives we have for our ATM
management business. 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. 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. 26




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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. We expect to expend significant amounts to upgrade the
redundancy of our data centers during 2004. OUR SALES TO DELUXE HAVE BEEN DECLINING. The revenues we received from Deluxe declined by approximately $15 million
during 2003 compared to 2002. Revenues from Deluxe declined approximately 36%
during the three months ended March 31, 2004 as compared to the same period
ended 2003. Although Deluxe has established minimum spending targets of $43
million per year through March 31, 2005 for software development and
maintenance services it obtains from us, further efforts at expense reduction
by Deluxe could cause the revenues we receive from Deluxe to continue to
decline. We expect that sales to Deluxe in 2004 will decline from the levels
seen in 2003. A continuing material reduction in the amount of services Deluxe
orders from us would materially adversely affect our future results of
operations. Our current contract with Deluxe expires in March 2005. We cannot
predict whether this contract will be renewed or extended after its scheduled
expiration, although we would not expect any extension of this contract to
incorporate minimum spending targets approximating those in the current
agreement. 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 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. 27




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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.
Although these regulations and requirements could result in increased
opportunities for ATM sales by us, they could also 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 database could
result in the theft or publication of personal confidential information and the
deletion or modification of personal records or otherwise cause interruptions
in our operations. These concerns about security are increased when we transmit
information 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. Our acquisition of
Oasis Technology will increase our exposure to these risks. 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 costs;-
    
    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. In the first quarter 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: 28




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-
    
    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. 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. All of our government contracts can be terminated at any time, without cause,
by the contracting governmental entity. We realized approximately 9% of our net
sales in the first quarter of 2004 (before reimbursed expenses) 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. 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 spend
significant resources to protect our trade secrets and monitor and police our
intellectual property rights. Third parties may assert infringement claims against us in the future. In
particular, there has been a substantial increase in the issuance of business
process patents, which may have broad commercial implications. Claims for
infringement of all types of patents are becoming an increasing source of
litigation. If we become subject to an infringement claim, we may be required
to modify our products, services and technologies or obtain a license to permit
our continued use of those rights. We may not be able to do either of these
things in a timely manner or upon reasonable terms and conditions. Failure to
do so could seriously harm our business and operating results. In addition,
future litigation relating to infringement claims could result in substantial
costs to us and a diversion of management resources. Adverse determinations in
any litigation or proceeding could also subject us to significant liabilities
and could prevent us from using some of our products, services or technologies. 29




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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. 30




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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report: ExhibitNo.
    
    Description
    
    Method of filing3.1
    
    Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form S-1
(the S-1) filed by the Company with the 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
    
    Schedule identifying additional Transition Assistance Agreements
omitted pursuant to Instruction 2 to Item 601 of Regulation S-K
    
    Filed herewith10.2
    
    Schedule identifying additional Change in Control Agreements omitted
pursuant to Instruction 2 to Item 601 of Regulation S-K
    
    Filed herewith10.3
    
    Asset Purchase Agreement, dated January 30, 2004 (the Benton
Acquisition Agreement), by and between the Company and Benton
Consulting Partners
    
    Filed herewith10.4
    
    Amendment, dated March 18, 2004, to the Benton Acquisition Agreement
    
    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 March 3, 2004, the Company furnished a report on Form 8-K which included,
pursuant to Items 7 and 9 of that form, a press release announcing the
Companys fourth quarter 2003 financial results. This press release included
the Companys condensed consolidated balance sheets at December 31, 2003 and
December 31, 2002, the condensed consolidated statements of operations for the
three and twelve month periods ended December 31, 2003 and December 31, 2002,
and the condensed consolidated statement of cash flows for the twelve month
periods ended December 31, 2003 and December 31, 2002. On February 25, 2004, the Company furnished a report on Form 8-K which
described certain amendments to the Companys Ethics Policy designed to, among
other things, expand the scope of the Policy to include members of the
Companys Board of Directors and to conform the Policy to the new governance
requirements of the New York Stock Exchange. 31




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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: May 10, 2004
    
    /s/ Paul F. WalshPaul F. WalshChief Executive Officer and ChairmanDate: May 10, 2004
    
    /s/ Thomas S. ListonThomas S. ListonChief Financial Officer
 32




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Index to Exhibits ExhibitNo.
    
    Description
    
    Page Number10.1
    
    Schedule identifying additional Transition Assistance Agreements
omitted pursuant to Instruction 2 to Item 601 of Regulation S-K10.2
    
    Schedule identifying additional Change in Control Agreements omitted
pursuant to Instruction 2 to Item 601 of Regulation S-K10.3
    
    Asset Purchase Agreement, dated January 30, 2004 (the Benton
Acquisition Agreement), by and between the Company and Benton
Consulting Partners10.4
    
    Amendment, dated March 18, 2004, to the Benton Acquisition Agreement31.1
    
    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
 33