News

eFunds under SEC investigation

A complicated relationship between eFunds and Access Cash, the ISO it purchased late last year, resulted in eFunds' restatement of revenues for the first three quarters of 2001 and an SEC investigation.

April 15, 2002

Reprinted with permission from ATM&Debit News, a weekly electronic newsletter based in Chicago. Subscriptions available at 212-631-9780 or go to thisWeb site.

The news is both good and bad for eFunds Corp. The bad news is that the U.S. Securities and Exchange Commission is investigating the Scottsdale, Ariz.-based company over an accounting snafu involving the acquisition last year of the Access Cash International ATM independent sales organization. The good news is that restated revenues are only slightly lower than initially reported, and a loss of revenue from two key clients is being offset somewhat by contractual parachutes.

In a March report to the SEC, eFunds notes a $4.6 million reduction in revenue from what it reported originally for the first three quarters of 2001. EFunds now reports $383.5 million in total revenue for the period, down from the $388.1 million originally reported.

The restatement and SEC inquiry was sparked by an existing complicated relationship between the ISO and eFunds. In mid 2001 eFunds, already a 24 percent investor in Access Cash, was paid various fees by Access Cash for ATM management services. But Access Cash's ATM program failed to perform up to fee commitments the ISO made, so eFunds later sought and received added fee revenue from Access Cash and eventually negotiated a lower purchase price for Access Cash.

'Informal inquiry'

But the added fee payments and various financial incentives for the Access Cash sellers were counted as revenue for eFunds instead of repayments and cash advances connected to the purchase. A review of the accounting problem led eFunds to restate its finances during 2001, but allegations by a former Access Cash employee of improper conduct were not substantiated, says eFunds CEO Gus Blanchard.

Although the value of the restatement was relatively minor, the SEC is very sensitive to accounting problems after the Enron Corp. debacle. "In the current environment of Enronitis, we decided not to fight it," Blanchard says of restating eFunds' finances. He described the SEC investigation as an "informal inquiry."

Access Cash was unprofitable when eFunds acquired the company for more than $40 million. But eFunds predicts substantial cost savings when it takes over the processing-through contract expirations-of more than 5,000 Access Cash ATMs from Concord EFS Inc., USPI LLC and Metavante Corp. later this year.

The savings will be needed as eFunds at the end of this year no longer will process Concord's Star network transactions. The Star contract once represented about $24.7 million in annual revenues.

EFunds, however, struck a deal with Concord in which Concord will pay licensing fees to use eFunds' transaction software.

EFunds also revealed that business with its former parent and one of its biggest customers, Milwaukee-based Deluxe Corp., dropped substantially in 2001. Total net revenue from Deluxe was $35.8 million, or 9.3 percent of eFunds' total sales for the first nine months of 2001. That compares with $44.1 million, or 14.5 percent of net revenue for the same period in 2000.

In the SEC report, eFunds projects that 2001 sales to Deluxe will total about $41 million. However, that figure is $2 million short of a $43 million revenue guarantee from Deluxe for 2001, and eFunds expects Deluxe to make up the difference.