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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549****Form 10-K**(Mark One)   þ **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934****FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005.****OR**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934****For the transition period from                      to                     .****Commission file number 1-31951.****eFunds Corporation**(Exact name of registrant as specified in its charter)   Delaware 39-1506286(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)   Gainey Center II 852538501 N. Scottsdale Road, Suite 300 (Zip Code)Scottsdale, Arizona  (Address of principal executive offices)  Registrant’s telephone number, including area code: (480) 629-7700   Securities registered pursuant to Section 12(b) of the Act: None   Securities registered pursuant to Section 12(g) of the Act: Common Stock, parvalue $.01 pershare, withPreferred StockPurchase Rights(Title of Class)Indicateby check mark if the registrant is a well-known seasoned issuer, asdefined in Rule 405 of the Securities Act. þ Yes o NoIndicateby check mark if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act.o Yes þ NoIndicate by check mark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. þ Yes o NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(Section 229.405 of this chapter) is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statements incorporated by referencein Part III of this Form 10-K or any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filerþ Accelerated filer o Non-accelerated filer oIndicate by check mark whether the registrant is a shell company (as described in Rule 12b-2 of theAct). o Yes þ NoThe aggregate market value of the outstanding common equity of the registrant as of the lastbusiness day of the registrant’s most recently completed second fiscal quarter was $816.4 million.Affiliates of the Company beneficially owned, in aggregate, approximately 2.0 percent of suchshares. There were 46,108,992 shares of outstanding voting common stock with a par value of $0.01outstanding at February 23, 2006.**Documents Incorporated by Reference**A portion of the Proxy Statement for the Annual Meeting of Stockholders of eFunds Corporation to beheld May 18, 2006 is incorporated by reference into Part III of this report.  
 

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PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESEXHIBIT INDEXExhibit 10.14Exhibit 10.20Exhibit 10.23Exhibit 10.42Exhibit 10.43Exhibit 10.44Exhibit 10.45Exhibit 21.1Exhibit 23.1Exhibit 24.1Exhibit 31.1Exhibit 31.2Exhibit 32.1

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**PART I**ITEM 1. BUSINESSINFORMATION ABOUT USOur Company was incorporated in Delaware in December 1984. Prior to our initial public offering(the IPO) in June 2000, the Company was a wholly-owned subsidiary of Deluxe Corporation (Deluxe).Following the IPO, Deluxe owned approximately 88% of our outstanding common stock until in December2000, when it distributed all of its shares of our common stock to its shareholders through aspin-off transaction. Following the spin-off, Deluxe ceased to own any shares of our common stock.Our goal is to enable a better way for trusted commerce by delivering risk management, electronicpayment and related outsourcing solutions that strengthen our customers’ overall profitabilitythrough increased revenues, reduced costs and improved operating efficiency and technologyperformance. Our principal focus is on issuers of transaction accounts, such as financialinstitutions, financial services companies, electronic funds networks, retailers, governmentagencies, telecommunications companies and other businesses. In evaluating our financial conditionand operating results, our management focuses on revenues, operating income, return on investedcapital (ROIC) and cash flows.During the historical periods presented herein, our four principal business lines were: **-** Electronic Payments  **-** Risk Management  **-** Global Outsourcing  **-** Automated Teller Machine (ATM) ManagementOur most profitable business segments were Electronic Payments and Risk Management.On November 19, 2004, we sold the portfolio of ATM machines and merchant contracts (the ATMPortfolio) associated with our former ATM Management segment and entered into a five year MasterServices Agreement (MSA) with the buyer. The ATM Portfolio represented a significant component ofour ATM Management segment and we have not presented our ATM management business as a separateoperating segment in periods subsequent to the consummation of this transaction. Pursuant to theMSA, we provide processing, residual administration, help desk, cash management and other servicesto the buyer of the ATM Portfolio. The processing service revenues and related costs of the MSAhave been reported within our Electronic Payments segment and the ATM management service revenuesand related costs have been reported within our Global Outsourcing segment (see Note 4 in the notesto the consolidated financial statements). The amortization of the gain we recognized inconnection with this sale is being recorded as a reduction in the operating expenses of our GlobalOutsourcing segment over the term of the MSA because we do not have sufficient objective andreliable evidence to determine the fair value of the MSA and so we concluded that this approach isthe only appropriate method of accounting for this arrangement.In July of 2005, we acquired WildCard Systems, Inc. (WildCard). WildCard provides prepaid productssuch as gift and payroll cards to financial institutions, retailers and other industryparticipants. WildCard provides the processing and ongoing support for all aspects of theseprograms. The results of operations of WildCard are reflected in the prepaid solutions componentof our Electronic Payments segment in periods following this acquisition.Our principal executive offices are located at Gainey Center II, 8501 N. Scottsdale Road, Suite300, Scottsdale, Arizona 85253 and our telephone number is 480-629-7700. Our Internet address iswww.efunds.com. The information contained on our web site is not a part of this document.The business model of each of our segments is summarized below.
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*Electronic Payments*Our Electronic Payments segment derives its revenue from processing electronic payment transactionsincluding electronic funds transfers (EFT), automated clearinghouse (ACH) and other paymentprocessing services. Revenues in this segment also reflect processing and other activitiesassociated with prepaid cards (such as payroll cards and gift cards) following the acquisition ofour prepaid solutions business last July. This segment also generates revenues from providingelectronic benefit transfer (EBT) services to government agencies and through the licensing,maintenance and support of our EFT software. This segment had net revenues of $255 million in2005, which represented approximately 51% of our total net revenues in that year. Revenues in thisbusiness are generated through the following product lines:EFT ProcessingWe process transactions for national and regional ATM networks and financial institutions. We alsoprovide transaction processing for retail point-of-sale terminals that accept payments from debitcards and paper checks that have been converted into electronic transactions. Transactionprocessing involves electronically transferring money from a person’s checking, savings or prepaidcard account according to his or her instructions. For example, when a cardholder inserts his orher debit card into an ATM machine and enters his or her PIN and the type and amount of thetransaction, the device contacts our systems and transmits the request. We identify the institutionthat issued the card and work through the necessary validation and authorization routines, such asensuring that the cardholder has entered the correct PIN, that the transaction is within thecardholder’s limits on withdrawals and that there are sufficient funds in the cardholder’s account.If all the routines are executed successfully, we signal the ATM or point-of-sale device tocomplete the transaction.To carry out the tasks required, each ATM or point-of-sale device is typically connected to severalcomputer networks. These networks include private networks that connect the devices of a singleowner and national shared networks that provide access to devices owned by numerous device owners.Each shared network has numerous financial institution members. For example, we provide networkswitching services for the CO-OP Network and processing services for 1,800 of its member creditunions. As part of our transaction processing services, we, and other gateway service providerslike us, provide cardholders with access across these multiple networks.We process virtually all types of debit-based transactions for our financial institution customers,including cash withdrawals, cash deposits, balance inquiries, purchases, purchases with cash backand purchase returns. In addition, we authorize cash advances and purchases initiated with creditcards at ATM or point-of-sale locations. We also provide 24 hour a day, 7 day a week monitoring ofATMs for system irregularities and our processing systems are designed to operate continuously. Wehave been actively pursuing and winning new international processing opportunities.Prepaid SolutionsWe extended our processing business through our acquisition of WildCard, which we now characterizeas our prepaid solutions business. Through our turnkey, host-based prepaid programs, we provide avariety of prepaid products including gift cards, insurance cards, healthcare reimbursement cards,travel cards, payroll cards and expense reimbursement cards.We offer comprehensive solutions to our prepaid card customers. We design and host the prepaidprograms that run on a customized processing platform through which our customers can define theservices they wish to offer cardholders. Through this platform, we provide a variety of processingservices including transaction processing, cardholder enrollment, value loading, cardholder accountmanagement and reporting. Additionally, we offer and operate customer support centers that areavailable to cardholders 24 hours a day, 7 days a week. Customers may also elect to receive riskmanagement services to reduce their risk of write-offs for fraudulent or unauthorized transactions.Government ServicesOur government services business was started in response to federal mandates that require state andlocal governmental agencies to convert to electronic payment methods for the distribution ofbenefits under entitlement programs, primarily food stamps and Transitional Aid to Needy Families(formerly Aid to Families with Dependant Children). Our EBT processing system manages, supports andcontrols the electronic payment and distribution of cash benefits to program participants throughATMs and point-of-sale networks. Our services reduce operating costs and fraud for the governmentagency administering the benefits program, eliminate the food stamp stigma for recipients throughthe use of a plastic ATM-like card and make benefits more readily available to recipients at retailpoint-of-sale terminals and ATMs. Through this business, we drive or operate approximately 43,000dedicated electronic benefits transfer terminals and approximately 10,000 retail terminals.
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We were providing services for 24 state and local governments at the end of 2005. All of ourgovernment services contracts relate to government entitlement programs. Our government contractsare generally for scheduled service periods of three to five years, although all of these contractsare terminable by the contracting governmental entity at any time. The contracts are typicallybased on a fixed price per recipient, variable volume models. In some jurisdictions, we serve as asubcontractor.SoftwareWe license electronic funds transfer software to in-house processors, national and regionalnetworks, financial institutions and retailers in foreign countries and in the United States. Ourelectronic funds transfer software runs on proprietary and open system computing platforms. We alsoprovide related maintenance and support services for the software we license.*Risk Management*Our Risk Management segment provides data-based risk management and other products to financialinstitutions, retailers and other businesses that assist in detecting fraud and assessing the riskof opening a new account or accepting a check at a point-of-sale device, physical branch locationor through the Internet. This segment had net revenues of $158 million in 2005, which representedapproximately 32% of our total net revenues for that year. This segment offers products andservices that help: **-** determine the likelihood and manage the investigation and risk of account fraud andidentity manipulation; and  **-** assess the overall risks involved in opening new accounts or accepting paymenttransactions.These products and services are based on or enhanced by our DebitBureau® database. DebitBureauincludes data from our ChexSystems(SM) and SCAN(SM), or Shared Check Authorization Network,databases as well as from other sources. We use the data in DebitBureau to screen for potentiallyincorrect, inconsistent or fraudulent social security numbers, home addresses, telephone numbers,driver license information and other indicators of possible identity manipulation. Using our data,we can perform various tests to validate a consumer’s identity and assess and rank the risk offraud associated with opening an account for or accepting a payment from that consumer.Financial InstitutionsThe primary service provided by our financial services division is ChexSystems, a new accountapplicant verification service used by financial institutions. This database provides access tomore than 22 million closed-for-cause accounts. An account is considered closed-for-cause when, forexample, a consumer refuses to pay the account fee and the bank unilaterally closes the account.This service helps financial institutions assess the risks and comply with regulations associatedwith opening an account for a new customer by supporting real-time inquiries to our database ofconsumer debit account performance. ChexSystems is used by more than 9,000 financial institutions.Financial institutions may access this service through a variety of online options including theInternet or by telephone. Service fees for our new account verification services are based on thenumber of inquiries a financial institution makes each month.This product line also includes identity verification services and a number of other productsintended to supplement credit decisioning processes and for use in making pre-approved offers ofcredit.Retail ProductsOur retail division offers our SCAN product, which helps retailers reduce the risk of write-offsfor dishonored checks and other forms of account fraud. We also have fraud prevention and paymentprocessing solutions having primary application to card-not-present credit transactions. As ofDecember 31, 2005, our SCAN check verification product served 10 of the 20 largest retailers in theUnited States based on recent market data. Our larger retail customers host our SCAN database ontheir own computers. Others access the database through our SCAN Online product. Merchantstypically pay a monthly service fee for our retail products based on their net monthly check salesif they host the database file themselves. If they use certain online products, such as SCANOnline, they are billed by the number of inquiries submitted. Additional fees apply for inquiriesby the retailers or consumers to our call centers.
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*Global Outsourcing*Our Global Outsourcing segment provides business process and information technology (IT)outsourcing services. Net revenues in this segment were $89 million in 2005, which represented 18%of our total net revenues for that year. We provide a variety of customer account managementservices to the financial services, retail, telecommunications and government sectors through ourU.S. and India based delivery centers. We build long-term continuing relationships with ourclients, allowing them to significantly reduce the costs and improve the quality and efficiency oftheir business processes. As of December 31, 2005, we had over 3,600 associates directly assignedto our outsourcing business, approximately 95% of which worked out of our locations in India.Business Process OutsourcingOur business process outsourcing (BPO) product line includes services such as account acquisitionassistance, credit card and brokerage support, call centers, loan processing, data entry,collections, customer support and ATM management services. This business also supports our otherlines of business by processing their back office transactions and providing call center supportfor the users of their products and services.IT ServicesOur IT services include the provision of IT development, systems integration and systemsmaintenance. Historically, our former parent company has been the largest customer for our globaloutsourcing offerings. The original arrangement provided for a minimum spending penalty if feesrelated to the software development component of the agreement were below a minimum threshold. In2004 and 2003 this minimum threshold was not met so shortfall fees were accrued in the fourthquarter of those years. The original contract expired in March 2005 at which time we accrued anadditional amount related to the minimum spending penalty. We have extended the original contractthrough March 2006. There were no minimum spending targets or shortfall fees associated with thisextension period, and we do not currently expect to derive material revenues from this contractfollowing March 2006.*ATM Management*Our ATM Management segment sold ATM equipment and provided ATM deployment, management and brandingservices to retailers and financial institutions. As an independent provider of ATMs, we placedATMs with financial institutions, convenience, grocery, general merchandise and drug stores, aswell as gas stations, located throughout the United States and Canada. We collected both ATMsurcharge fees from consumers using ATMs deployed by us and interchange fees from their banks. Wealso derived revenue from ATM equipment sales and maintenance services. We sold our ATM portfolioin November 2004, and we ceased to consider our ongoing ATM management activities as a separatesegment after the consummation of this sale.*Sales and Marketing*We market our products and services through a direct sales force and indirect sales channels, suchas distributors, resellers and targeted alliances. We organize our direct sales force along ourthree remaining business segments.Our direct sales personnel generally operate out of their homes or on our customers’ premises. Wealso have some direct sales personnel who work out of our offices in Milwaukee, Wisconsin;Woodbury, Minnesota; Weston, Florida and Scottsdale, Arizona. Our international sales offices arelocated in Sydney and Melbourne, Australia; Mumbai, India; Daresbury and Watford, England; andNorth York and Toronto, Canada. We build awareness of our products and services and the eFundscorporate name through targeted advertising, public relations, participating in trade shows andconferences and providing product information through our web site.*Customer Support, Technology and Infrastructure*We provide customer support services through our customer contact centers located in Woodbury,Minnesota; Gurgaon and Mumbai, India; Sunrise and Maitland, Florida; Milwaukee, Wisconsin; andPhoenix, Arizona. Most of our contact centers are open 24 hours a day, 7 days a week and provideaccess to website, e-mail and telephone support. We also provide technical and operational supportfor our customers in our data centers. In addition to user questions and technical issues, inaccordance with the Fair Credit Reporting Act, we respond to inquiries from consumers whose checkshave been declined or who have been rejected for a new banking account. We also provide on-sitecustomer support services in connection with our other products and services and we charge aseparate fee for these services based on an hourly rate.
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Our products are configured to run on operating systems common in our industries. Our EFT softwareproducts are interoperable with a wide range of terminal types and computer networks and support avariety of communications protocols, such as TCP/IP as well as other protocols.We operate highly secure data centers in New Berlin, Wisconsin; Sunrise and Maitland, Florida; andPhoenix, Arizona with fault tolerant transaction processing capabilities. Our data centers havebeen engineered to ensure minimal exposure to system failures and unauthorized access. Each of ourdata centers contains multiple separate computer rooms to provide containment and isolation.Physical security is maintained through restricted card key access and closed circuit T.V. cameras.We use uninterruptible power supplies with battery backup and generators to ensure continuous flowof power to each data center in the event of any component failure or power outage. The facilitieshave dual-entrance, fiber optic SONET service for telecom redundancy. We have been devoting andplan to continue to devote significant efforts to enhancing the interoperability of our datacenters.*Competition*We face intense competition from a number of companies and we expect that competition willintensify as the movement towards increasing consolidation within the financial services industrycontinues. The high levels of competition we experience have led to pricing pressures in mostaspects of our business. Many of our competitors have significantly greater financial, technicaland 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 DebitProcessing Services, Fifth Third Processing Solutions, Metavante Corporation, Certegy andFiserv;  **-** financial institutions that have developed in house processing capabilities orservices similar to ours, including Bank of America, M&I Bank and Fifth Third NationalBank;  **-** prepaid providers, including First Data, VISA DebitProcessing Services, TYSYS and Metavante;  **-** government service (EBT) providers including J.P. Morgan Chase and ACS; and  **-** electronic funds transfer software providers, including Transaction System Architects and S1.In the risk management market, our principal competitors include: **-** providers of fraud management data and software including Equifax, Experian,TransUnion, RiskWise (a division of Lexis-Nexis of Reed Elsevier) and Primary PaymentSystems (a subsidiary of First Data Corporation); and  **-** retail check verification and electronic check processing providers, includingCertegy and Telecheck, a subsidiary of First Data Corporation.In the global outsourcing market, our competitors include Spectramind/Wipro Ltd, Intelenet GlobalServices Ltd., Progeon Ltd. (an Infosys Technologies company), WNS Global Services, Daksh services(a subsidiary of IBM) and numerous other business process and IT outsourcing service providers.In the market for electronic transaction processing, the principal factors on which we compete areprice and service levels and the features and functionality associated with our EFT software andprocessing services. Competition for our risk management products is based primarily on thequantity and quality of the data and data analytic capabilities available to us for this purposeand, to a somewhat lesser degree, price. Our business process management and informationtechnology solutions offerings compete primarily on the basis of the quality of our service levels,price and the expertise we have with the process being outsourced to us.We believe that we have competed effectively to date. In order to compete effectively in the futurewe will be required to effectively manage our costs, respond promptly and effectively to changes inthe marketplace as well as innovations by our competitors and efficiently introduce new products,services and combinations of our new and existing products and services that are reflective of thecurrent needs of our customers.*Government Regulation*Various aspects of our businesses are subject to federal and state regulation. Our failure tocomply with any applicable laws and regulations could result in restrictions on our ability toprovide our products and services, as well as the imposition of civil fines and criminal penalties.
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As a provider of electronic data processing services to financial institutions, we are subject toregulatory oversight and examination by the Federal Financial Institutions Examination Council, aninteragency body comprised of the various federal bank and thrift regulators and the NationalCredit Union Association. In addition, we may be subject to possible review by state agencies thatregulate banks in each state where we conduct our electronic processing activities.Because we collect and disclose transaction data and other personal information about consumers,our risk management businesses are subject to the federal Fair Credit Reporting Act and any statelaws providing greater consumer protections. The Fair Credit Reporting Act provides that consumershave the right to know the contents of the records pertaining to them which are maintained at ourconsumer reporting agencies, to challenge the accuracy of that information and to have theirinformation verified, updated or removed if it is incorrect. To comply with these requirements, wemaintain consumer relations call centers for each of our consumer reporting businesses. We are alsorequired to maintain a high level of security for the computer systems in which consumer data filesreside.Our consumer reporting agencies and collection agencies are also subject to regulation by theFederal Trade Commission. In addition, our debt collection services are subject to the Fair DebtCollection Practices Act and state collections statutes and licensing requirements. Our prepaidsolutions business is subject to various state and federal laws and regulations regarding theissuance and sale of gift cards.Financial institutions are subject to the requirements of the federal financial modernization lawknown as the Gramm-Leach-Bliley Act (the Act). The Act imposes significant requirements on anyentity engaged in the business of providing financial services, including entities that provideservices to financial institutions. The privacy provisions of the Act impose on each entity subjectto the new requirements an affirmative obligation to develop and implement policies to protect thesecurity and confidentiality of consumers’ nonpublic personal information and to disclose thosepolicies to consumers before a customer relationship is established and annually thereafter. Thebanking regulators and the Federal Trade Commission have issued regulations implementing theprivacy portions of this Act. We believe that these regulations permit banks to provide debit dataand other nonpublic personal information to us for use in our risk management businesses.*Intellectual Property Rights*We rely on a combination of trademark, copyright, trade secrets and confidentiality or licenseagreements to protect our trademarks, software and know-how. We also have applied for patentprotection on some of the features of our products. With regard to our information technologyservice business, we develop software applications. We also develop software components that can bereused in software application development and software toolsets, most of which remains ourproperty.*Employees*We had approximately 5,900 full and part-time employees as of February 1, 2006. We have a number ofemployee benefit plans, including a 401(k) plan, stock option and stock purchase plans, profitsharing plans and medical and hospitalization plans. We have never experienced a work stoppage orstrike and consider our employee relations to be good.*Financial Information About Industry Segment; Financial Information About Domestic Operations andExport Sales*Information about these matters appears in “Note 11 — BUSINESS SEGMENT INFORMATION” to thefinancial statements included in Part II of this Annual Report on Form 10-K.
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*Executive Officers*The executive officers of our Company are elected by the Board of Directors each year. The term ofoffice of each executive officer will expire at the annual meeting of the Board of Directors thatwill be held after the regular shareholders meeting on May 18, 2006. The principal occupation ofeach executive officer is with the Company and their positions are as follows:                   **EXECUTIVE OFFICER****NAME** **POSITION** **AGE** **SINCE**Paul F. Walsh Chairman of the Board and ChiefExecutive Officer  56   2002  George W. Gresham Chief Financial Officer and ExecutiveVice President, Finance  39   2005  Tommy L. Andrews Executive Vice President, CorporateDevelopment  55   2003  John B. (Jack) Benton Interim President, eFunds International  63   2004  Steven F. Coleman Executive Vice President, GeneralCounsel and Secretary  47   2000  Laura De Cespedes Executive Vice President, Human Resources  49   2005  Kathleen Flanagan Chief Administration Officer andExecutive Vice President, StrategicChange Management  46   2002  Rahul Gupta President, eFunds U.S.  46   2003  Kay J. Nichols Executive Vice President, Strategy,Marketing and Product Development  42   2005  Larence Park President, eFunds Prepaid Solutions  51   2005  Clyde L. Thomas Chief Information Officer and ExecutiveVice President, Global Technology andOperations  53   2002 Paul F. Walsh has served as Chairman of our Board of Directors and our Chief Executive Officersince September 2002. Between March 2000 and September 2002, Mr. Walsh was chairman and chiefexecutive officer of Clareon Corporation (Clareon), an electronic payments provider. Mr. Walshserved as chairman and chief executive officer of MaineStay Holdings L.L.C., a private equityinvestment firm, from September 1998 until January 1999, when MaineStay formed iDeal Partners(iDeal Partners), an equity investment partnership between MaineStay, Berkshire Partners andBancBoston Capital. Mr. Walsh served as chairman and chief executive officer of iDeal Partnersuntil he joined Clareon. Prior to these positions, Mr. Walsh held executive positions with WrightExpress Corporation (Wright Express), an information and financial services company, and BancOne, afinancial services company.George W.Gresham has served as our Chief Financial Officer since April 1, 2005. Mr. Greshamjoined the Company in April 2002 as Corporate Controller and became Vice President, Finance inJanuary 2004. Prior to joining the Company, Mr. Gresham spent over ten years with Deloitte & ToucheLLP as a senior manager of assurance and advisory services.Tommy L. Andrews has led our Corporate Development group since January 2003. From February 2001,until he joined our Company, Mr. Andrews served as senior vice president of operations for FleetCorTechnologies, Inc., a marketer of commercial fleet cards. From September 1999 to January 2001, Mr.Andrews was chief executive officer of B2Bexplorer, Inc., a provider of e-commerce solutions tosmall businesses. From 1996 to 1999, Mr. Andrews was a senior vice president for Wright Express,serving most recently as the head of its corporate development efforts.
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John B. (Jack) Benton became our Interim President, eFunds International in January 2006. FromJanuary 2005 until January 2006, Mr. Benton served as our Senior Vice President, Solutions Groupand managed our key enterprise accounts and strategic relationships and oversaw the development ofour consulting activities. Mr. Benton was originally employed by us in February 2004 as ourSenior Vice President, International. From 1978 until joining our Company, Mr. Benton directedBenton International, Inc. and Benton Consulting Partners, consulting firms in the electronicpayments industry. Mr. Benton has spent more than 30 years as an executive active within the EFTindustry.Steven F. Coleman has served as our General Counsel and Secretary since March 2000. Prior tojoining the Company, Mr. Coleman worked as an attorney in the corporate legal department of DeluxeCorporation and in private practice with Dorsey & Whitney, a law firm located in Minneapolis,Minnesota, and Fried, Frank, Harris, Shriver & Jacobson, a law firm located in New York, New York.Laura De Cespedes has led our Human Resources department since December 2005. Ms. De Cespedesserved as senior vice president, human resources for WildCard from 2004 until assuming her currentrole and as vice president human resources for Oasis Outsourcing Services, Inc. from 2003 until2004. Prior to this position, Ms. De Cespedes served as partner and senior manager with CPI Group,LLC (2002-2003), executive vice president, human resources for National Dairy Holdings, LLC (2002)and vice president human resources for Aviation Sales Company, Inc. (1999-2001).Kathleen Flanagan has served as our Chief Administration Officer and Executive Vice President,Strategic Change Management since January 2006. From January 2005 until January 2006, Ms. Flanaganserved as Senior Vice President, Global Services managing our outsourcing, ATM management andinternational operations. From December 2002 until January 2005, she was our Senior Vice President,Division Executive-Global Outsourcing. Ms. Flanagan served as the chief operations officer forClareon, and she was employed as senior vice president of client operations for Wright Express fromFebruary 1996 until November 1999.Rahul Gupta has served as our President, eFunds U.S. since January 2006. Mr. Gupta was our SeniorVice President, Division Executive-Risk Management from January 2003 until November 2004, when healso assumed responsibility for our Electronic Payments business. From October to November 2000 andfrom January to August 2002, Mr. Gupta served as vice president, network/ASP services of i2Technologies, Inc. (i2), a provider of supply chain management software. From December 2000 toDecember 2001, Mr. Gupta served as chief executive officer of Financial Settlement Matrix, a jointventure between i2 and several financial institutions that provided business-to-business paymentservices. Mr. Gupta’s previous experience includes senior management positions at FidelityInvestments and PriceWaterhouse Consulting.Kay J. Nichols served as our Senior Vice President, Strategy and Marketing from April 2005 untilJanuary 2006, when she became our Executive Vice President, Strategy, Marketing and ProductDevelopment. Ms. Nichols was employed by IBM for over ten years prior to joining our Company,serving most recently as director of business process outsourcing for financial services.Larence Park has led our Prepaid Solutions business since our acquisition of WildCard in July 2005.Mr. Park was a co-founder of WildCard and served as its chief executive officer since 1997. Priorto this position, Mr. Park served as president of an independent investment management firm and aschief operating and chief financial officer of NaBANCO, a merchant credit card processor.Clyde L. Thomas became our Chief Information Officer and Executive Vice President, GlobalTechnology and Operations in January 2006. Prior to this position, Mr. Thomas served as our ChiefInformation Officer and Senior Vice President, Technology since November 2002. From March 2000through October 2002, Mr. Thomas served as chief information officer for Clareon. From February1999 until February 2000, Mr. Thomas served as a partner of iDeal Partners. Mr. Thomas served onthe management team of Wright Express from July 1987 to January 1999, serving most recently as itssenior vice president and chief information officer. Prior to his service with Wright Express, Mr.Thomas was employed by American Airlines and Gulf Oil Corporation.Clareon filed a voluntary petition under chapter 11 of the Federal bankruptcy laws in connectionwith its sale to Fleet National Bank in November 2002. Messrs. Walsh and Thomas and Ms. Flanaganall served as executive officers of Clareon within two years of this filing.
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ITEM 1A. RISK FACTORSWhen used in this Annual Report on Form 10-K and in future filings by the Company with theSecurities and Exchange Commission, in our press releases, letters and reports to stockholders andin oral statements made by our representatives, the words or phrases ‘should,’ ‘are expected to,’‘targeted,’ ‘will continue,’ ‘will approximate,’ ‘is anticipated,’ ‘estimate,’ ‘project’ or similarexpressions are intended to identify ‘forward-looking statements’ within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements are necessarily subject to certain risksand uncertainties, including those discussed below, which could cause our actual results to differmaterially from our historical experience and our present expectations or projections. Cautionshould be taken not to place undue reliance on any such forward-looking statements, which speakonly as of the date made. The factors listed below could affect our financial performance and couldcause our actual results for future periods to differ from any opinions or statements expressedwith respect thereto. Such differences could be material and adverse. We will not undertake andspecifically decline any obligation to publicly release the result of any revisions that may bemade to any forward-looking statements to reflect events or circumstances occurring after the dateof such statements or to reflect the occurrence of anticipated or unanticipated events.IF THE SECURITY OF OUR DATABASES IS COMPROMISED, OUR REPUTATION COULD SUFFER AND CUSTOMERS MAY NOTBE WILLING TO USE OUR PRODUCTS AND SERVICES.In our electronic payments and risk management businesses, we collect personal consumer data, suchas names and addresses, social security numbers, drivers’ license numbers, checking, savings,credit card and prepaid account numbers and payment history records. If the security of ourdatabases is compromised, our business could be materially adversely affected. Unauthorized accessto our databases could result in the theft or publication of personal confidential information andthe deletion or modification of personal records or otherwise cause interruptions in ouroperations. These concerns about security are increased when we transmit information overseas, overthe Internet or via couriers. 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.In addition, concerns about data security have led to a growing number of regulatory bodiesadopting or considering the adoption of a variety of consumer notification requirements in theevent their information is accessed by unauthorized persons. Compliance with a large number ofconflicting and complex consumer notifications laws could prove to be impossible or, at a minimum,expensive and difficult. A failure to so comply could nevertheless subject us to regulatoryscrutiny or liability.ESTIMATES OF FUTURE FINANCIAL RESULTS ARE INHERENTLY UNRELIABLE.From time to time, the Company and its representatives may make public predictions or forecastsregarding the Company’s future results, including estimates regarding future revenues, expenselevels, tax rates, acquisition expenses, capital expenditures, earnings or earnings fromoperations. Any forecast regarding our future performance reflects various assumptions andjudgments by management regarding the likelihood that certain possible future events will in factoccur. These assumptions and judgments are subject to significant uncertainties and shiftingmarket dynamics, and, as a matter of course, many of them will prove to be incorrect. Further,events that may seem unlikely or relatively certain at the time a given prediction is made may infact occur or fail to occur. Many of the factors that can influence the outcome of any predictionor projections are beyond our control. As a result, there can be no assurance that our performancewill be consistent with any management forecasts or that the variation from such forecasts will notbe material and adverse. Investors are cautioned that any predictions, projection or other forwardlooking statement made by us should be considered current only as of the date made. Investors areencouraged to utilize the entire available mix of historical and forward-looking information madeavailable by us, and other information relating to our Company and our products and services, whenevaluating our prospective results of operations.OUR ABILITY TO EXPAND THROUGH ACQUISITIONS INVOLVES RISKS AND MAY NOT BE SUCCESSFUL.We have been acquiring companies to complement and grow our existing businesses. Our ability toexpand through acquisitions involves many risks, including: **-** the operations, technology and personnel of any acquired companies may be difficultto integrate;
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 **-** the acquired businesses may not achieve anticipated revenues, earnings or cashflow. Such a shortfall could require us to write-down the goodwill associated with anyacquired company, which would adversely affect our reported earnings;  **-** the allocation of management resources to consummate these transactions may disruptour day to day business; and  **-** acquisitions may require us to revise our published earnings guidance and recordspecial charges that reduce our earnings.CONSOLIDATION IN THE INDUSTRIES WE SERVE MAY ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS ANDSERVICES.Mergers, acquisitions and personnel changes at financial institutions and electronic funds transfernetworks may adversely affect our business, financial condition and results of operations. Thebanking and EFT industries continue to consolidate, causing the number of financial institutionsand 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 determinesthat it is more efficient to develop in-house products and services similar to ours or touse our competitors’ products and services; and  **-** revenue if such a combined institution is able to negotiate a greater volumediscount for, or discontinue the use of, our products and services.For example, the STAR network, formerly one of the larger customers of our electronic paymentsprocessing business, was purchased by one of our competitors, Concord EFS, during 2001. First DataCorporation, which owned a substantial equity interest in the NYCE Network, subsequently purchasedConcord EFS. Following this acquisition, First Data sold its interest in the NYCE network to ourcompetitor, Metavante, a subsidiary of M&I Bank. Both the STAR and NYCE networks utilize ourelectronic funds transfer software.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 theCompany purchased motor vehicle records from the State of Florida and used that data for marketingand other purposes that are not permitted under the Federal Driver’s Privacy Protection Act. Theplaintiffs are seeking liquidated damages of not less than $2,500 for each affected member of apurported class, plus costs and attorney’s fees. The plaintiffs are also asking for injunctiverelief to prevent further alleged violations of the Federal Act. In March 2004, the Company joinedin a motion to dismiss this case filed by a co-defendant and the Company filed its own furthermotion to dismiss a portion of this case and a motion for summary judgment in June 2004. All ofthese motions are pending before the Court. The Court stayed all further proceedings in this casepending the decision by the Eleventh Circuit of Appeals in Kehoe v. Fidelity Federal Bank & Trust.This ruling was issued in August 2005 and the plaintiffs in this case have moved the Court tore-open these proceedings. The Court has not yet ruled on this motion and has instead ordered theparties to participate in a mandatory mediation session in early March.The Company cannot predict whether the plaintiffs in this case will be successful in certifyingtheir complaint as a class action. The Company believes that it has meritorious defenses withregard 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 couldmaterially adversely affect our business, results of operation and financial condition.WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR OTHERS MAY CLAIM THAT WE AREINFRINGING ON THEIR INTELLECTUAL PROPERTY.Third parties have asserted infringement claims against our prepaid and stored value business inthe past and others may assert these types of claims against this business, or any of our otherenterprises, in the future. Claims for infringement of all types of patents are a common source oflitigation. Infringement claims can require us to modify our products, services and technologiesor obtain a license to permit our continued use of those rights. We may not be able to do eitherof these things in a timely manner or upon reasonable terms and conditions. Failure to do so couldseriously harm our business and operating results. In addition, future litigation relating toinfringement claims could result in substantial costs to us and a diversion of managementresources. Adverse determinations in any litigation or proceeding could also subject us tosignificant liabilities and could prevent us from selling some of our products, services ortechnologies.
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Despite our efforts to protect them, third parties may infringe or misappropriate our intellectualproperty rights, or otherwise independently develop substantially equivalent products and services.The loss of intellectual property protection or the inability to secure or enforce intellectualproperty protection could harm our business and ability to compete. We may be required to expendsignificant resources to protect our trade secrets and monitor and police our intellectual propertyrights and these efforts may not be uniformly successful. These concerns are heightened when welicense our software for use in countries or regions that do not have a history of consistentlyenforcing the rights of intellectual property owners against persons who misappropriate the same.WE FACE INTENSE COMPETITION IN ALL AREAS OF OUR BUSINESS, AND IF WE DO NOT COMPETE EFFECTIVELY, OURBUSINESS WILL BE HARMED.We face intense competition from a number of companies and we expect that competition willintensify as the movement towards increasing consolidation within the financial services industrycontinues. The high levels of competition we experience have led to pricing pressures in mostaspects of our business. Many of our competitors have significantly greater financial, technicaland 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 DebitProcessing Services, Fifth Third Processing Solutions, Metavante Corporation, Certegy andFiserv;  **-** financial institutions that have developed in house processing capabilities orservices similar to ours, including Bank of America, M&I Bank and Fifth Third NationalBank;  **-** prepaid and stored value providers, including First Data,VISA Debit Processing Services, TYSYS and Metavante;  **-** government service (EBT) providers including J.P. Morgan Chase and ACS; and  **-** electronic funds transfer software providers, including Transaction System Architects and S1.In the risk management market, our principal competitors include: **-** providers of fraud management data and software including Equifax, Experian,TransUnion, RiskWise (a division of Lexis-Nexis of Reed Elsevier) and Primary PaymentSystems (a subsidiary of First Data Corporation); and  **-** retail check verification and electronic check processing providers, includingCertegy and Telecheck, a subsidiary of First Data Corporation.In the global outsourcing market, our competitors include Spectramind/Wipro Ltd, Intelenet GlobalServices Ltd., Progeon Ltd. (an Infosys Technologies company), WNS Global Services, Daksh services(a subsidiary of IBM) and numerous other business process and IT outsourcing service providers.In the market for electronic transaction processing, the principal factors on which we compete areprice and service levels and the features and functionality associated with our EFT software andprocessing services. The future growth of our revenues in this market is dependent upon securing anincreasing volume of transactions. If we cannot control our transaction processing expenses, we maynot remain price competitive and our revenues will be adversely affected. Our revenues can also beadversely affected if we are required to make pricing concessions to retain significant processingcustomers. In the current environment, price reductions typically accompany contract renewals.This dynamic will dampen the rate of growth in our processing business if we are not successful inretaining new customers or expanding the suite of services we offer to our existing clients.We have also seen an effort by processors such as First Data Corporation and VISA that areaffiliated with branded networks to seek exclusive processing relationships with the debitcard-issuing financial institutions that subscribe to their networks. Ownership or control of abranded network may also enable these competitors to influence the interchange fees financialinstitutions receive from retailers who accept transactions from the debit cards issued by thesenetwork participants. We are unable to predict what effect the vertical integration betweentransaction processors and branded debit networks will have on our processing business over thelong-term.Our software business competes primarily upon the basis of the quality and reliability of oursoftware and its conformance to the current and future requirements of our customers. If we do notmaintain the technological relevance of our software offerings or fail to anticipate shifts incustomer requirements, our ability to sell our software products will be impaired.Competition for our risk management products is based primarily on the quantity and quality of thedata and data analytic capabilities available to us for this purpose and, to a somewhat lesserdegree, price. Our competitive position in these markets
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could be harmed if our competitors were able to compile different data sources and analyticalcapabilities that proved to be more effective than our products. In addition, we continue toexperience competitive pressure on the pricing for our check verification service.Our business process management and information technology solutions offerings compete primarily onthe basis of the quality of our service levels, price and the expertise we have with the processbeing outsourced to us. The future growth of this aspect of our business is dependent ondemonstrating to our current and prospective customers that we are a dependable and efficientservice provider who understands their particular business needs.In addition to our current competitors, it is reasonable to expect that we will encountersubstantial competition from new companies. No assurance can be given that we will be able tocompete effectively against current and future competitors. Increased competition could result inprice reductions, reduced gross margins or loss of market share.IF WE EXPERIENCE SYSTEM FAILURES, THE PRODUCTS AND SERVICES WE PROVIDE TO OUR CUSTOMERS COULD BEDELAYED OR INTERRUPTED, WHICH COULD HARM OUR BUSINESS AND REPUTATION AND RESULT IN THE LOSS OFCUSTOMERS.Our ability to provide reliable service largely depends on the efficient and uninterruptedoperations of our computer and telecommunications network systems and our data centers. Anysignificant interruptions could severely harm our business and reputation and result in a loss ofrevenue and customers. We could also be required to apply substantial amounts of our available cashto fund our settlement obligations and it is possible that we would not have sufficient resourcesin the event of a severe and persistent outage. Our systems and operations could be exposed todamage or interruption from fire, natural disaster, unlawful acts, power loss, telecommunicationsfailure, unauthorized entry and computer viruses. Although we have taken steps to prevent systemfailures, we cannot be certain that our measures will be successful and that we will not experienceservice interruptions. Further, our property and business interruption insurance may not beadequate to compensate us for all losses or failures that may occur.Although our prepaid and stored value solutions business has two data centers for businesscontinuity purposes, both of these centers are located in Florida, which is a hurricane-prone area.The severe storms encountered by this region have resulted in some disruption to the day to dayoperations of this business in the past and similar occurrences are virtually certain to occur inthe future. A prolonged interruption could harm our business and our prospects.LEGISLATION OR REGULATION COULD IMPAIR OUR ABILITY TO COLLECT AND USE DATA, INCREASE OUR OPERATINGCOSTS OR OTHERWISE HARM OUR BUSINESS.Existing and new laws and regulations relating to consumer privacy protection could harm ourability to collect and use consumer data, increase our operating costs or otherwise harm ourbusiness. We collect personal data about consumers for use in our risk management products and aspart of our prepaid solutions business. Due to increasing public concern over consumer privacyrights, Congress and state legislatures have adopted and are considering adopting laws andregulations restricting the purchase, sale and sharing of personal information about consumers.For example, in the past legislation has been proposed which would require consumers to opt in toany plan which would allow their nonpublic personal information to be disclosed. We are unable topredict whether more restrictive legislation or regulations will be adopted in the future. Amaterial increase in the scope of these types of restrictions could impair the efficacy of our riskmanagement products or impair our ability to use our India-based resources to support our riskmanagement business, which would increase our costs.WE MAY EXPERIENCE SOFTWARE DEFECTS, DEVELOPMENT DELAYS AND INSTALLATION DIFFICULTIES, WHICH COULDHARM OUR BUSINESS AND REPUTATION AND EXPOSE US TO POTENTIAL LIABILITY.Our services and products are based on sophisticated software and computing systems and we oftenencounter delays when developing new products and services. Further, the software underlying ourproducts and services has occasionally contained and may in the future contain undetected errors ordefects when first introduced or when new versions are released. In addition, we have experienceddifficulties and delays in installing and integrating our products and technologies on platformsused by our customers or in new environments in the past and it is reasonable to expect that wewill encounter similar issues in the future. The probability of such occurrence is increased whenwe seek to install complex, multi-function systems for our larger customers. Projects such asthese can also divert our available IT and project resources, causing delays in other initiatives.Defects in our software products, errors or delays in the processing of electronic transactions orother difficulties could result in: **-** delays in market acceptance;
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 **-** additional development or installation costs;  **-** loss of customers;  **-** negative publicity; and  **-** exposure to liability claims.Although we attempt to limit our potential liability for warranty claims through disclaimers andlimitation-of-liability provisions in our license and client agreements, we cannot be certain thatthese measures will be successful.THERE ARE A NUMBER OF RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES AND OPERATIONS THAT COULD HARMOUR BUSINESS.Because we currently sell some of our products and services on a global basis and provideoutsourcing services from India, our business is subject to risks associated with doing businessinternationally. During 2005, we generated approximately 11% of our net sales outside of the UnitedStates and we presently anticipate that our international efforts will constitute a higherpercentage of our net sales in future periods. Our future results could be harmed by a variety offactors, including: **-** changes in foreign currency exchange rates;  **-** changes in a specific country’s or region’s political and economic conditions, particularly in emerging markets;  **-** potentially unfavorable tax rules;  **-** tariffs, duties and other trade barriers;  **-** reduced protection for intellectual property rights;  **-** challenges in managing widespread operations;  **-** changes in foreign laws and regulatory requirements or in foreign policy; and  **-** varying business practices in foreign countries.We have prepared sensitivity analyses to assess the impact of hypothetical changes in foreigncurrency rates on our income before tax for the year ended December 31, 2005. Based upon theseanalyses, we estimate that a 10% adverse change in the exchange rate between the U.S. dollar andthe British pound, Indian rupee and Canadian dollar would have reduced our reported income beforetaxes during the past year by approximately $5 million.In addition, the process of selling our outsourcing services typically involves visits to our sitesin India by prospective customers. Increased levels of international tension can result inprospective clients postponing or canceling plans to visit our facilities, lengthening the salescycle and otherwise inhibiting our ability to grow this business. Political opposition to the useof offshore resources such as our India-based operations and domestic security concerns that canmake it more difficult for foreign nationals to obtain U.S. visas can potentially have a similareffect.CHANGES IN INDIAN TAX LAWS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.Our Indian software development and business process management operations qualify for taxincentives associated with businesses that operate within designated geographic locations. Theseincentives generally provide us with exemptions from Indian tax on certain business incomegenerated from these operations and phase out through March 2009. We cannot assure you that thesetax benefits will be continued in the future at their current levels or at all. If our Indian taxbenefits are reduced or eliminated, our taxes in future periods would increase. Such an increasecould reduce our profits.WE FACE TERMINATION AND COMPLIANCE RISKS WITH RESPECT TO OUR GOVERNMENT CONTRACTS.All of our government EBT contracts can be terminated at any time, without cause, by thecontracting governmental entity. We realized approximately 10% of our net sales in 2005 pursuant tocontracts of this type. If a government contract is so terminated, we are generally entitled onlyto receive compensation for the services provided or costs incurred at the time of termination anda 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 andprocurement regulations, and in some cases, accounting requirements. Violations of some of theseprovisions could, if not cured, result in termination of the contract and fines. We are also seeingincreased levels of pricing competition in this business.PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT A CHANGE IN CONTROLOF OUR COMPANY THAT YOU MAY CONSIDER FAVORABLE.Provisions of our certificate of incorporation and bylaws and Delaware law may delay or prevent achange in control of our Company that you may consider favorable. These provisions include thefollowing: **-** no cumulative voting by stockholders for directors;
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 **-** 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 betweenus 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 approvecertain corporate transactions, including mergers and consolidations, sales of assets oramendments to our certificate of incorporation; and  **-** we have adopted a stockholder rights plan, which discourages the unauthorizedacquisition of 15% or more of our common stock or an unauthorized exchange or tenderoffer.ITEM 1B. UNRESOLVED STAFF COMMENTSNot applicable.ITEM 2. PROPERTIESThe following table sets forth a description of our principal facilities:           **Approximate** **Owned or Lease**  **Location** **Square Feet** **Expiration Date** **Function**Scottsdale, Arizona  54,500  February 2012 Corporate HeadquartersPhoenix, Arizona1  92,400  Owned Shared data centerSunrise, Florida  92,200  Various July 2009-May 2010 Prepaid solutionsMaitland, Florida  16,500  July 2008 Data centerNew Berlin, Wisconsin  82,600  Owned Data centerMilwaukee, Wisconsin  82,500  January 2014 Software development centerWoodbury, Minnesota2  105,300  September 2012 Risk management and outsourcing servicesAustin, Texas  19,100  December 2007 Risk data operationsChennai, India  18,600  January 2008 Shared software development centerChennai, India  48,600  July 2006/October 2008 Shared software development centerMumbai, India  87,100  July 2006 Outsourcing servicesMumbai, India  52,500  July 2007 Outsourcing servicesMumbai, India  32,600  July 2006 Outsourcing servicesGurgaon, India  62,200  September 2007/January2008 Shared outsourcing and servicesToronto, Canada  27,500  October 2008 Software development centerBothell, Washington  24,700  August 2006 Vacant 1 Approximately 42,100 square feet of this facility is leased to a third party. 2 Approximately 12,300 square feet of this facility is leased to a third party.We believe that additional space will be available at a reasonable cost to meet our expectedneeds.ITEM 3. LEGAL PROCEEDINGSThe Company, its former chief executive and two of its former chief financial officers weredefendants in a federal securities action (the Federal Securities Action) that was pending in theU.S. District Court for the District of Arizona. The Consolidated Amended Complaint (Complaint)filed in this Action alleged, among other things, that during the period from July 21, 2000 throughOctober 24, 2002 the defendants made false and misleading statements and omissions of materialfacts and that the plaintiff and other members of a putative class of shareholders suffered damagesas a result. This Complaint was dismissed by order of the District Court in July 2004. Theplaintiffs appealed this order of dismissal to the Ninth Circuit Court of Appeals in August 2004.At the request of the parties, the Appellate Court vacated the original briefing schedule of thisappeal and the Court has not established a new briefing schedule. The plaintiffs and thedefendants in this action have reached
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a settlement of this matter under which the defendants will pay the purported class $2.55 million.This settlement is subject to final approval by the Court. Assuming that this settlement isultimately consummated by the parties and approved by the District Court, the Company expects thatits insurance will cover the entire settlement amount.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 theCompany purchased motor vehicle records from the State of Florida and used that data for marketingand other purposes that are not permitted under the Federal Driver’s Privacy Protection Act. Theplaintiffs are seeking liquidated damages of not less than $2,500 for each affected member of apurported class, plus costs and attorney’s fees. The plaintiffs are also asking for injunctiverelief to prevent further alleged violations of the Federal Act. In March 2004, the Company joinedin a motion to dismiss this case filed by a co-defendant and the Company filed its own furthermotion to dismiss a portion of this case and a motion for summary judgment in June 2004. All ofthese motions are pending before the Court. The Court stayed all further proceedings in this casepending the decision by the Eleventh Circuit of Appeals in Kehoe v. Fidelity Federal Bank & Trust.This ruling was issued in August 2005 and the plaintiffs in this case have moved the Court tore-open these proceedings. The Court has not yet ruled on this motion. The Company cannot predictwhether the plaintiffs in this case will be successful in certifying their complaint as a classaction. The Company believes that it has meritorious defenses with regard to the allegations madein this lawsuit and intends to vigorously defend this action. A mandatory mediation session washeld with respect to this matter in March 2006, but the parties were unable to negotiate a mutuallyacceptable settlement of this matter.The Company is also subject to a variety of other claims and suits that arise from time to time inthe ordinary course of its business.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNo matters were submitted to a vote of our security holders during the fourth quarter of our fiscalyear ended December 31, 2005.**PART II**ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES*Market Information*Through December 31, 2003, the shares of our Company were listed on the Nasdaq National Marketunder the symbol “EFDS.” Effective January 2, 2004, the shares of our Company were listed on theNew York Stock Exchange under the symbol “EFD.” The following table sets forth the high and lowprices of our common stock, as reported by the New York Stock Exchange for the calendar quartersindicated and the last sales price of our shares at the close of each such quarter.             **2005** **High** **Low** **Close**First Quarter $24.25  $20.77  $22.32 Second Quarter $22.88  $17.10  $17.99 Third Quarter $20.72  $17.75  $18.83 Fourth Quarter $24.10  $18.60  $23.44              **2004** **High** **Low** **Close**First Quarter $18.75  $15.11  $16.40 Second Quarter $17.78  $15.09  $17.50 Third Quarter $18.85  $14.35  $18.59 Fourth Quarter $24.40  $18.29  $24.01 As of February 23, 2006, the closing price of our shares was $26.36 and we had 8,383 record holdersof our common stock.*Dividend Policy*We have never paid a dividend on our common stock and do not presently anticipate doing so.
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*Stock Repurchase Plan*On February 23, 2005, the Company announced that its Board of Directors had approved a plan to buyback up to $100 million of common stock at prices not to exceed $25 per share. The repurchaseswere made using the Company’s available cash. The purchases were made in the open market inaccordance with applicable laws and regulations. The Company completed the repurchase plan on May3, 2005 and repurchased a total of 4.6 million shares. The following table provides informationwith respect to shares of common stock repurchased by the Company:                               **Approximate dollar**          **Total number of** **value of shares that**          **shares purchased** **may yet be**          **as part of publicly** **purchased under**  **Total number of** **Average price paid** **announced plans or** **the plans or****Period** **shares purchased** **per share** **programs** **programs** Period 1                2/23/2005 –2/28/2005  —  $—   —  $100,000,000                  Period 2                3/1/2005 – 3/31/2005  2,029,200   21.56   2,029,200   56,250,448                  Period 3                4/1/2005 – 4/30/2005  2,451,100   21.96   4,480,300   2,431,838                  Period 4                5/1/2005 – 5/3/2005  110,943   21.92   4,591,243   —                   Total  4,591,243  $21.78   4,591,243  $—  *Annual Meeting*The annual meeting of our stockholders will be held at 11:30 a.m., Phoenix, Arizona time, on May18, 2006, at the J.W. Marriott Desert Ridge Resort, 5350 East Marriott Drive, Phoenix, Arizona,85054.
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ITEM 6. SELECTED FINANCIAL DATAThe following selected financial data should be read together with the consolidated financialstatements and related notes and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included elsewhere in this annual report. The selected statement of incomedata shown below for each of the years in the five-year period ended December 31, 2005 and theselected balance sheet data for each of the five years ended December 31, 2005, are derived fromour audited consolidated financial statements.                       **Year Ended December 31,** **(in millions, except net income per share data)** **2005**  **2004**  **2003**  **2002**  **2001** Statement of Income Data:                    Net revenue $501.7  $552.1  $532.1  $543.1  $537.2 Operating expenses  426.5   493.6   493.3   507.7   486.3                 Income from operations (1)  75.2   58.5   38.7   35.4   50.8 Other(expense) income — net  0.4   (0.2)  1.2   0.7   0.2                 Income before income taxes (1)  75.7   58.3   39.9   36.2   51.0 Provision for income taxes  (19.9)  (17.5)  (11.0)  (11.6)  (17.7)                Net income (1) $55.7  $40.8  $28.9  $24.6  $33.3                 Net incomeper share — basic $1.20  $0.85  $0.62  $0.53  $0.72                 Net income per share — diluted $1.17  $0.83  $0.61  $0.53  $0.70                 Shares used in computing:                    Net incomeper share — basic  46.5   48.2   46.9   46.6   46.0 Net income per share — diluted  47.8   49.4   47.2   46.7   47.4  (1) Amounts may not sum due to rounding.                       **December 31,****(in millions)** **2005** **2004** **2003** **2002** **2001**Balance Sheet Data:                    Cash and cash equivalents $86.0  $274.5  $104.5  $119.5  $101.9 Short-term investments  —   88.1   53.7   —   — Working capital  124.9   343.2   162.7   149.8   118.6 Total assets  764.2   643.0   512.3   459.4   442.9 Long-term debt, excluding current portion  107.0   3.6   1.7   1.3   2.5 Stockholders’ equity  445.8   474.2   401.7   363.5   334.3 
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**Non-GAAPFinancial Measures — Return on Invested Capital**Return on invested capital (ROIC) is a performance measure that we use to evaluate whether ourshareholders are receiving an attractive return on their investment in our Company. Among otherthings, we consider ROIC when we are evaluating whether to purchase a capital asset, acquire abusiness, invest resources in a project or enter into customer and vendor arrangements.The numerator in our calculation of ROIC uses net operating profit based on accounting principlesgenerally accepted in the United States (GAAP) adjusted for certain non-GAAP items (net operatingprofit after tax, or NOPAT). The denominator in our calculation of ROIC uses our average totalassets for the trailing four quarters based on GAAP, adjusted for certain non-GAAP items (investedcapital). We believe including certain non-GAAP adjustments in the NOPAT and invested capitalcomponent of the calculation ensures that the ROIC measure we employ reflects return on capitalwithout considering whether our business is financed with debt or equity. Our calculation of ROICmay not be comparable to similarly titled measures reported by other companies and the calculationmay include amounts that may or may not be calculated from GAAP amounts presented in the financialstatements.ROIC should be considered in addition to, but not as a substitute for or superior to, the publishedfinancial measures we present and prepare in accordance with GAAP. We would consider return onassets (ROA) to be the most directly comparable GAAP financial measure to our calculation of ROIC.Presented below is our calculation of ROIC as well as a reconciliation of ROIC to a comparable ROAmeasure.                   **ROIC**  **ROA**   **December 31,**  **December 31,** **(dollars in millions)** **2005**  **2004**  **2005**  **2004** **Numerator**                Income from operations $75.2  $58.5  $75.2  $58.5 Other income (expense) — net  —   —   0.4   (0.2)Add: Implied interest on future obligations1  6.5   5.0   —   —                 81.7   63.5   75.6   58.3 Provision for income taxes2  (21.5)  (19.1)  (19.9)  (17.5)               $60.2  $44.4  $55.7  $40.8                               **Denominator**                Average total assets $661.1  $564.4  $661.1  $564.4 Less average cash, cash equivalents and short-term investments3  (171.9)  (225.7)  —   — Less average current liabilities excluding debt4  (126.5)  (95.7)  —   — Plus average cash deployed in the business5  48.8   46.8   —   — Plus average net present value of future obligations1  128.1   110.3   —   —                $539.6  $400.1  $661.1  $564.4                                  **11.2****%**  **11.1****%**  **8.4****%**  **7.2****%** 1 Implied interest on future obligations represents the assumed implicit interestcharge on the average present value of the future obligations using the Company’s assumedimplicit interest rate (approximately 5% for the periods presented). The average netpresent value of future obligations represents the average for the trailing four quartersof the present value of total operating lease and vendor obligations discounted at theCompany’s assumed implicit interest rate. 2 The tax rates used for this calculation are equal to our annualized effective taxrates for the periods shown of 26.3% for 2005 and 30.0% for 2004. 3 Average total assets and cash, cash equivalents and short-term investments are theaverage of the amounts shown in the Company’s financial statements at the end of the fourquarters preceding the date of the calculation. 4 Average current liabilities excluding debt is the average of the currentliabilities recorded on the Company’s balance sheet (excluding the current portion oflong-term debt) at the end of the four quarters preceding the date of the calculation. 5 Average cash deployed in the business is calculated as the average balance at theend of the four fiscal quarters preceding the date of the calculation of the total amountof cash we had in ATMs and India plus the cash we had advanced to support the settlementobligations of our processing customers.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOur Management’s Discussion and Analysis of our Financial Condition and Results of Operations(MD&A) begins with an executive overview of our business that includes a description of ourbusiness goals, the business models for our segments, key events that occurred during 2005 andcertain trends, risks and challenges. We then discuss our results of operations for 2005 and 2004compared to 2004 and 2003, respectively. This is followed by a description of our liquidity andcapital resources, including discussions about our financial condition, sources and uses of cash,long-term debt, stock repurchase plan and contractual obligations and commitments. We concludewith discussions of our hedging activities and critical accounting policies and estimates that webelieve are important to an understanding of our reported financial results and our businessoutlook for 2006.You should read the MD&A together with “Selected Financial Data” and our consolidated financialstatements and the notes to those financial statements included in this Annual Report. In additionto historical and pro forma information, the MD&A contains forward-looking information thatinvolves risks and uncertainties. Our actual future results could differ materially from thosepresently anticipated due to a variety of factors, including those discussed in Item 1A. Theforward-looking statements included in this discussion do not reflect the potential impact of anydivestitures, mergers, acquisitions or other business combinations that may be completed after thedate of this Annual Report.EXECUTIVE OVERVIEW***Our Business***Our goal is to enable a better way for trusted commerce by delivering risk management, electronicpayment and outsourcing solutions that strengthen our customers’ overall profitability throughincreased revenues, 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 networks, retailers, government agencies,telecommunications companies and other businesses. In evaluating our financial condition andoperating results, our management focuses on revenues, operating income, return on invested capitaland cash flows.During the historical periods presented herein, our four principal business lines were: **-** Electronic Payments  **-** Risk Management  **-** Global Outsourcing  **-** Automated Teller Machine (ATM) ManagementOur most profitable business segments were Electronic Payments and Risk Management.On November 19, 2004, we sold the portfolio of ATM machines and merchant contracts (the ATMPortfolio) associated with our former ATM Management segment and entered into a five year MasterServices Agreement (MSA) with the buyer. The ATM Portfolio represented a significant component ofour ATM Management segment and we have not presented our ATM management business as a separateoperating segment in periods subsequent to the consummation of this transaction. Pursuant to theMSA, we provide processing, residual administration, help desk, cash management and other servicesto the buyer of the ATM Portfolio. The processing service revenues and related costs of the MSAhave been reported within our Electronic Payments segment and the ATM management service revenuesand related costs have been reported within our Global Outsourcing segment (see Note 4 in the notesto the consolidated financial statements). The amortization of the gain we recognized inconnection with this sale is being recorded as a reduction in the operating expenses of our GlobalOutsourcing segment over the term of the MSA because we do not have sufficient objective andreliable evidence to determine the fair value of the MSA and so we concluded that this approach isthe only appropriate method of accounting for this arrangement.In July of 2005, we acquired WildCard Systems, Inc. (WildCard). WildCard provides prepaid productssuch as gift and payroll cards to financial institutions, retailers and other industryparticipants. WildCard provides the processing and ongoing support for all aspects of theseprograms. The results of operations of WildCard are reflected in the prepaid solutions componentof our Electronic Payments segment in periods following this acquisition.
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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 paymenttransactions. The majority of this segment’s revenue is derived from processing debit transactionsthat originate at an ATM or point-of-sale device. Revenues in this segment also reflect processingand other activities associated with prepaid cards (such as payroll cards and gift cards) followingour acquisition of our prepaid solutions business last July. We also derive revenue in thissegment from the provision of electronic benefit transfer (EBT) services to government agencies.The remaining revenue from this segment is derived from the licensing, maintenance and support ofour electronic funds transfer (EFT) software.The provision of processing services requires substantial capital investment for computers andrelated peripherals, maintenance, system modifications and upgrades, security and redundancy.Although these requirements add barriers to competitive entrance, they also create a relativelyhigh ratio of fixed operating costs to total costs. Processors are also required to maintainsignificant cash reserves to cover temporary differences in the flow of funds associated withelectronic funds transfers. Additionally, the software applications used for processingtransactions at our data centers and which we license to our software customers are primarilydeveloped in-house and frequently require complex network compliance updates and competitiveupgrades, creating a dependence upon experienced and qualified information technology (IT)personnel. The costs we incur for technology improvements are necessary for us to ensure ourproducts are continuously enhanced to provide our customers with up-to-date processingcapabilities. Other operating expenses include telecommunications costs to support thetransmission of electronic transactions and settlement. We focus on increasing the recurringrevenue base of this business through, among other things, the retention of our current processingcustomers and the acquisition of new processing relationships. Increasing our software sales,enhancing and extending our processing capabilities and expanding our processing presence inforeign markets are also areas of management emphasis.*Risk Management*This segment derives its revenue from inquiries from financial institutions and retailers seekingto comply with regulations or mitigate the risk associated with accepting checks, providing credit,engaging in card-not-present transactions or opening debit accounts for new consumers. Revenuefrom financial institutions using our new account screening services represents the substantialmajority of this segment’s revenue. The balance of the remaining revenue of the segment is derivedfrom retail customers using our check verification and card-not-present risk management services.Operating costs generally include data acquisition and analytic development costs, the cost oftechnology, regulatory compliance infrastructure and customer support centers. Our primary effortsin managing this business are directed towards increasing its revenues by improving customer usagerates and expanding our product suite and customer set.*Global Outsourcing*Our global outsourcing business derives its revenues from the need of companies to remaincompetitive by reducing costs while maintaining or improving service levels. Revenues in thissegment were derived from a variety of business process outsourcing (BPO) and informationtechnology services provided to the financial services, retail, telecommunications and governmentsectors through our U.S. and India based delivery centers. Our BPO services include accountacquisition, telesales, credit card and brokerage support, call centers, loan processing,collections, data entry, ATM services and systems maintenance. Operating costs in this segment areprimarily related to employee expenses and telecommunications and facilities costs. Our principalgoal for this business is to expand its customer base in our core target markets of financialservices, retail and telecommunications companies. Additionally, we continually pursueopportunities to expand our service offerings to existing customers.*ATM Management*Our ATM Management segment derived its revenues from the use, sale and maintenance of ATMs.Surcharge and interchange revenue represented the majority of our revenue from this segment in2004. Equipment sales were non-recurring and, along with branding fees, represented a minority ofthe revenue in this segment. Operating costs in this segment primarily included processing andtelecommunication costs, the cost of the equipment we sold and the residual payments we made to themerchants where the ATMs we managed were deployed. We sold our ATM Portfolio during the fourthquarter of 2004 and we no longer treat our ATM management activities as a separate operatingsegment.***Key Events in 2005*** **•** We acquired WildCard Systems, a leading provider of prepaid solutions.  **•** We entered into a new $150 million revolving credit facility.
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 **•** We issued $100 million of seven year notes through a private placement.  **•** We completed our $100 million stock repurchase program by repurchasing approximately 4.6million outstanding shares of our common stock.  **•** We acquired National Check Protection Services Business Trust (NCPS), a new accountverification and employment screening service provider; India Switch Company (ISC), anIndia-based provider of ATM management and processing services; and ClearCommerceCorporation, a provider of fraud prevention and payment processing solutions directed atcard-not-present transactions.  **•** George W. Gresham was promoted and became our Chief Financial Officer following theretirement of Thomas S. Liston.  **•** We signed an agreement with Société Générale, a major European financial institution, toprovide a comprehensive suite of card processing services to its internationalsubsidiaries.  **•** One of our BPO customers was acquired and the acquiring entity discontinued the use of our services.  **•** Through our alliance with MasterCard, we began processing for two Tier I financial institutions.  **•** We executed a five year agreement through which we will perform setup, hosting,maintenance and support activities to the United States Postal Service.***Trends***Our strategic planning and forecasting processes include the consideration of economic andindustry-wide trends that may impact our business. We would identify the more material positiveand negative trends affecting our business as the following: **•** prepaid solution products are experiencing the highest growth rate of any payment cardproduct and this trend is expected to continue over the next several years, although weexpect to see some moderation in growth levels seen in this industry in future periods;  **•** increased fraud and regulatory requirements are driving a sustained need for riskmanagement products, although the rate of growth in this business is slowing somewhat asmany customers and potential customers have already implemented required screeningprocedures;  **•** there continues to be a migration from the use of traditional paper checks and cash toelectronic payments;  **•** larger financial institutions are developing increasing expectations regarding theability of their payment technology providers to deliver complex, comprehensive solutionsaddressing all forms of electronic payment types;  **•** there has been an increase in regulatory and legislative activity regarding noticerequirements associated with incidents involving the misappropriation of consumer datacausing participants in the financial service and other industries to devote additionalefforts to maintain the security of their data files; and  **•** the use of outsourcing as a means to control costs is driving demand for offshoreoutsourcing services as well as an increased level of interest in developing expandedoffshore capabilities by industry participants and our competitors.***Risks and Challenges***In addition to the trends affecting our industry and Company as noted above, we consider risks andchallenges that could impact the Company’s future financial results, including the following andthose described at ITEM 1A in this Annual Report on Form 10-K: **•** If the security of our databases is compromised, our reputation could suffer andcustomers may not be willing to use our products and services.  **•** Estimates of future financial results are inherently unreliable.  **•** Our ability to expand through acquisitions involves risks and may not be successful.  **•** Consolidation in the industries we serve may adversely affect our ability to sell our products and services.  **•** We are unable to predict the results of the purported class action lawsuit filed in Florida.  **•** We may be unable to protect our intellectual property rights or others may claim that weare infringing on their intellectual property.  **•** We face intense competition in all areas of our business, and if we do not competeeffectively, our business will be harmed.  **•** If we experience system failures, the products and services we provide to our customerscould be delayed or interrupted, which could harm our business and reputation and result inthe loss of customers.
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 **•** Legislation or regulation could impair our ability to collect and use data, increase ouroperating costs or otherwise harm our business.  **•** We may experience software defects, development delays and installation difficulties,which could harm our business and reputation and expose us to potential liability.  **•** There are a number of risks associated with our international sales and operations that could harm our business.  **•** Changes in India tax laws could adversely affect our results of operations.  **•** We face termination and compliance risks with respect to our government contracts.  **•** Provisions in our charter documents and Delaware law may delay or prevent a change incontrol of our Company that you may consider favorable.RESULTS OF OPERATIONSThe following table presents our consolidated financial results for the three years ended December31, 2005:                       **Year Ended December 31,**  **% Change** **(dollars in millions)** **2005**  **2004**  **2003**  **‘05-’04**  **‘04-’03** Net revenue $501.7  $552.1  $532.1   (9)%  4%                  Operating expenses:                    Processing, communication and service costs  120.4   217.7   230.7   (45)  (6)Employee costs  207.7   189.8   179.9   9   6 Depreciation and amortization  39.8   36.2   35.4   10   2 Other operating costs  58.6   46.3   46.8   27   (1)Restructuring and other charges  —   3.1   4.2   *   (26)Contract loss provision (reversal)  —   0.5   (3.7)  *   *                   Total operating expenses  426.5   493.6   493.3   (14)  —                   Income from operations  75.2   58.5   38.7**(1)**  29   51 Interest expense  (4.3)  (0.4)  (1.0)  *   60 Other income— net  4.7   0.2   2.2   *   (91)                  Income before income taxes  75.7**(1)**  58.3   39.9   30   46 Provision for income taxes  (19.9)  (17.5)  (11.0)  14   59                   Net income $55.7**(1)** $40.8  $28.9   37   41                    **(1)** Amounts do not sum due to rounding. * Represents an increase or decrease in excess of 100%.
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*Net Revenue*The following table presents the net revenue by reportable segment and the related productlines for the three years ended December 31, 2005. As discussed in Note 11 of the Notes to theConsolidated Financial Statements, prior year amounts have been reclassified to conform withcurrent period classification.                       **Year Ended December 31,**  **% Change** **(dollars in millions)** **2005**  **2004**  **2003**  **‘05-’04**  **‘04-’03** Electronic Payments                    EFT processing $126.8  $111.0  $102.2   14%  9%Prepaid solutions  45.0   —   —   *   * Government services (EBT)  48.3   56.4   50.3   (14)  12 Software  34.7   36.2   31.1   (4)  16                      254.8   203.6   183.6   25   11                                        Risk Management                    Financial institution products  136.8   121.6   108.7   13   12 Retail products  21.5   18.5   20.9   16   (11)                     158.3   140.1   129.6   13   8                                        Global Outsourcing                    BPO  59.4   54.1   39.3   10   38 IT services  29.2   33.0   39.8   (12)  (17)                     88.6   87.1   79.1   2   10                                        ATM Management1  —   121.3   139.8   *   (13)                                       Total net revenues $501.7  $552.1  $532.1   (9)  4                    1 Includes revenues through November 18, 2004. * Represents an increase or decrease in excess of 100%.***Electronic Payments***The revenues of our Electronic Payments segment increased during 2005 as compared to 2004 due toour acquisition of a prepaid solutions business, the acquisition of new processing customers and anincrease in customer reimbursed fees. We also recognized higher revenues due to increasedtransaction volumes from our existing customers. These increases in revenues were partially offsetby a decline in government services revenues following the expiration of certain customer contractsand lower software license sales. The following table provides further detail regarding therevenues our Electronic Payments segment generated from our software business during the periodsindicated:               **Year Ended December 31,** **(in millions)** **2005**  **2004**  **2003** License fees $5.4  $7.0  $7.9 Maintenance  21.9   20.3   15.2 Software services  7.4   8.9   8.0             $34.7  $36.2  $31.1           We expect our Electronic Payments segment revenues to increase substantially in 2006 ascompared to 2005 because we will receive an additional six months of revenues from the prepaidsolutions business we acquired last July and due to higher EFT processing revenues from new andexisting accounts. We expect to see a somewhat increased level ofseasonality in our electronic payments business in the future becausethe highest level of activity in our prepaid solutions business istypically seen in the fourth quarter of each year due to holiday sales. 2006 software revenues are also expected to improve somewhat over 2005.Government services revenues are expected to continue to trend lower in 2006.Electronic Payments segment revenues increased during 2004 as compared to 2003 because of: **•** higher EFT transaction volumes and a corresponding increase in customer reimbursed fees;  **•** an increase in EBT processing revenues from contracts that commenced in 2003; and  **•** an increase in software revenues and the fees for software related maintenance andsupport due to our acquisition of an EFT software provider in late 2003.***Risk Management***The increase in our Risk Management segment revenues in 2005 as compared to 2004 is primarily dueto growth from acquisitions that we completed in 2005 and in the second quarter of 2004 and organicgrowth from our financial institution
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products. Revenues for our Risk Management segment are expected to increase in 2006 as compared to2005 primarily due to higher revenues from financial institutions. Revenues from our retailproducts are expected to be generally consistent with the levels seen in 2005.The growth in the revenues from our Risk Management segment in 2004 as compared to 2003 was due toincreased revenues from our ChexSystems(SM) products. This increase was driven by an increase ininquiries associated with new debit account openings and increased utilization rates by ourfinancial institution customers in response to regulatory requirements. This growth was somewhatoffset by a decrease in revenues from our retail check verification products due to pricingconcessions and customer attrition caused by declining check volumes.***Global Outsourcing***Our Global Outsourcing segment revenues increased in 2005 as compared to 2004 due to the revenueswe received for providing ATM management services to the buyer of our ATM portfolio and ouracquisition of India Switch Company during the second quarter of 2005. These increases were offsetby lower BPO revenues from a customer that was acquired after the acquiring entity discontinued itsuse of our services. IT services revenues decreased in 2005 as compared to 2004 because theshortfall fee we received from our largest IT services customer in the fourth quarter of 2004 didnot recur in 2005.Global Outsourcing segment revenues are expected to decrease in 2006 as compared to 2005 becausethe contract with our largest IT services customer expires in March 2006 and we do not expect it tobe renewed. IT services revenues will also be lower because a customer migration project that wecompleted in 2005 will not recur in 2006. These declines are expected to be partially offset by anincrease in revenues due primarily to our acquisition of ISC in mid-2005.Revenues from our Global Outsourcing segment increased in 2004 as compared to 2003 due to increasedservice volumes and the receipt of a full year of revenue from new customer contracts thatoriginated during the latter half of 2003 and in 2004. We also recorded a shortfall fee during thefourth quarter of 2004 from our largest IT services customer because the customer failed to reachcertain contractually required minimum spending target levels. This fee somewhat offset asubstantial reduction in the IT services revenues we received from this customer in 2004 ascompared to 2003.***ATM Management***We have not presented our ATM management business as a separate operating segment since the sale ofour ATM Portfolio in November of 2004. The revenues we derive from ATM management services werereflected in our Global Outsourcing segment during 2005.The decline in revenues from the ATM Management segment in 2004 is primarily due to the sale of ourATM Portfolio in November of 2004 and, to a lesser extent, a general decline in transaction volumesas compared to 2003.*Business Segment Operating Income*We revised our segment reporting during the first quarter of 2005 to reflect modifications in ourcost allocation structure. Operating expenses were reclassified based on an assessment of ourtechnology and overhead costs to realign those costs with the segments that receive the primarybenefit from the related resources. The segment information presented below for 2004 has beenreclassified to reflect our 2005 segment presentation.               **Year Ended December 31,**     **(dollars in millions)** **2005**  **2004**  **% Change** Operating income (loss)            Electronic payments $22.5  $26.5   (15)%Risk management  56.7   47.9   18 Global outsourcing  14.1   16.0   (12)ATM management  —   (2.3)  * Corporate  (18.0)  (29.6)  (39)           Total operatingincome(1) $75.2  $58.5   29             * Represents an increase or decrease in excess of 100%. (1) Amounts may not sum due to rounding.The discussions below regarding the comparison between the operating income of our businesssegments in 2005 and 2004 reflect the reclassifications shown above.
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Theoperating income (loss) by segment for 2003 has not been adjusted to reflect the 2005reclassification of operating costs because the 2003 segment expenses were maintained in a manualsystem and it is not practicable to extract the data needed to reclassify these amounts tocorrespond to the 2005 presentation. In order to provide comparable business segment information,we have presented the business segment operating results for the years ended December 31, 2004 and2003 using the same methodology as was applied in our Annual Report on Form 10-K for the year endedDecember 31, 2004 (the 2004 10-K) and the impact of the 2005 reclassification onthe results for 2004 contained in the 2004 10-K. The informationshown below for 2003 using the original 2004 presentation should not beconsidered directly comparable to the 2005 business segment operatingresults shown above.                       **Year Ended**  **Impact from**  **Year Ended**  **Year Ended**    **(dollars in millions)** **December 31, 2004**  **Reclassifications**  **December 31, 2004**  **December 31, 2003**  **% Change****(2)**   **(2005 presentation)**      **(2004 presentation)**  **(2004 presentation)**     Operating income (loss)                    Electronic payments $26.5  $6.2  $32.7  $40.5   (19)%Risk management  47.9   2.1   50.0   29.5   69 Global outsourcing  16.0   2.6   18.6   6.1   * ATM management  (2.3)  1.9   (0.4)  0.2   * Corporate  (29.6)  (12.8)  (42.4)  (37.6)  (13)                 Total operatingincome(1) $58.5  $—  $58.5  $38.7   51                   * Represents an increase or decrease in excess of 100%. (1) Amounts may not sum due to rounding. (2) Represents the change between the 2004 presentation of segment operating income forthe years ended December 31, 2004 and 2003.The discussions below regarding the comparison between the operating income of our businesssegments in 2004 and 2003 is based upon the original 2004 presentations described above. If theoperating income results for the year ended December 31, 2003 could be reclassified to conform tothe 2005 presentation, management would expect that the principal factors driving the variationsbetween 2003 and 2004 would remain unchanged from those identified below.***Electronic Payments***The operating income of our Electronic Payments segment decreased in 2005 as compared to 2004primarily due to additional costs incurred for new client installations, a decline in governmentservices revenues and a reduction in software license sales. Also contributing to the decline inoperating income was the allocation of additional operating and overhead expenses to this segmentin 2005 following the sale of our ATM Management segment in late 2004. The increase in revenuesduring 2005 associated with customer reimbursed fees did not impact our operating income becausethese fees are recorded as both revenues and corresponding expenses. Operating income from thissegment is expected to increase in 2006 as compared to 2005 due to higher EFT processing revenuesand prepaid solutions revenues, offset somewhat by an expected continued decline in governmentservices revenues.The decline in the margins associated with our electronic payments business in 2004 as compared to2003 was primarily attributable to an increase in software development and support costs. Thisincrease relates to the operational costs associated with the open systems EFT software business weacquired in late 2003 and our efforts to integrate this software with our legacy software products.The decline in our Electronic Payments segment margins in 2004 as compared to the prior year isalso due to the reversal in 2003 of an EBT contract loss reserve which resulted in a non-recurringbenefit to the segment of approximately $3.7 million in 2003. No such benefit occurred in 2004.To the contrary, we recorded a $0.5 million loss contract charge in the first half of that year.These declines in margins were partially offset by margin improvements that resulted fromprocessing more EFT and EBT transactions using a relatively fixed cost infrastructure.***Risk Management***Operating income was higher in 2005 as compared to 2004 because the increase we saw in revenuesfrom our financial institution suite of products was derived from a relatively fixed coststructure. The acquisitions we completed in 2005 and the second quarter of 2004 also contributedto the increase in operating income. Operating income is expected to increase in 2006 as comparedto 2005 as a result of higher financial institution revenues and the acquisitions we completed in2005.The improvement in Risk Management segment margins in 2004 as compared to the prior year was due tothe increase in revenues from our ChexSystems(SM) suite of products. This improvement is alsoattributable to cost reductions realized through increased utilization of our India operations forcontact center and development activities.
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***Global Outsourcing***The operating income of our Global Outsourcing segment decreased in 2005 due to the effect of lowerIT services revenues and reduced shortfall fees from our largest IT services customer. We received$4 million in shortfall fees from this customer in 2004 as compared to $1 million in 2005. Anincrease in allocated operating and corporate expenses following the sale of our ATM Portfolio in2004 also contributed to the decline in operating income in 2005. These declines were partiallyoffset by the impact of the managed services agreement we signed with the buyer of our ATMPortfolio and the customer migration project we completed in 2005.Operating income from this segment in 2006 will be lower than 2005 because our largest IT servicescontract will expire in the first quarter of 2006 and the customer migration project we completedin 2005 will not recur in 2006. We will not receive any shortfall fees in 2006.An increase in BPO revenues and improved productivity and capacity utilization drove an increase inour Global Outsourcing segment margins in 2004 as compared to 2003. This increase in margins waspartially offset by a decline in IT services revenues.***ATM Management***Our ATM management business was not presented as a separate operating segment in 2005 following thesale of our ATM Portfolio in November 2004. The margins derived from our ATM Management segmentremained relatively consistent during 2004 as compared to 2003.***Corporate***Unallocated corporate overhead includes, among other things, executive leadership costs, investorrelations and certain shared legal, consulting, accounting, finance and technology expenses. Thedecrease in corporate overhead costs in 2005 as compared to 2004 is primarily due to a reduction inexternal consulting costs and the reduction in legal and other related expenses associated with theresolution of an SEC investigation and the settlement of the related stockholders litigation. Weexpect corporate overhead costs in 2006 to be largely flat to those seen in 2005.The increase in corporate overhead costs in 2004 as compared to 2003 was primarily due to anincrease in legal and other expenses related to an SEC investigation and indemnificationobligations associated with its resolution as well as higher expenses incurred to comply with therequirements of Section 404 of the Sarbanes-Oxley Act.*Operating Expenses*Operating expenses for the three years ended December 31, 2005 were as follows:                       **Year Ended December 31,**  **% Change** **(dollars in millions)** **2005**  **2004**  **2003**  **‘05-’04**  **‘04-’03** Operating expenses:                    Processing, communication and service costs $120.4  $217.7  $230.7   (45)%  (6)%Employee costs  207.7   189.8   179.9   9   6 Depreciation and amortization  39.8   36.2   35.4   10   2 Other operating costs  58.6   46.3   46.8   27   (1)Restructuring and other charges  —   3.1   4.2   *   (26)Contract loss provision (reversal)  —   0.5   (3.7)  *   *                   Total operating expenses $426.5  $493.6  $493.3   (14)  —                    * Represents an increase or decrease in excess of 100%.***Processing, communication and service costs***This category includes the cost of transaction processing, telecommunications, computer equipmentand promotional services. This category also included the residual payments we made to theoccupants of the properties where the ATMs that we owned or managed prior to the sale of our ATMPortfolio were located.The decrease in processing, communication and service costs in 2005 is primarily due to the sale ofour ATM Portfolio in late 2004 and the impact of the amortization of the deferred gain from thatsale. This decrease was partially offset during the second half of 2005 due to the acquisition ofour prepaid solutions business.
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Processing, communications and service costs are expected to be higher in 2006 as compared to 2005due to expected increases in EFT processing revenues and the additional costs associated with theprepaid solutions business we acquired in July 2005.The decrease in processing, communication and service costs in 2004 was primarily due to lowerresidual payments and other ATM operational costs due to the sale of our ATM Portfolio in late2004. Additional cost reductions were realized from greater utilization of our India basedresources. This decline in costs was partially offset by an increase in customer reimbursed fees.***Employee costs***Expenses in this category represent employee compensation, payroll taxes, medical costs and otheremployee related costs. Employee costs increased in 2005 as compared to 2004 due to the additionof employees from acquisitions. Company-wide headcount increased from 5,500 employees at December31, 2004 to 6,000 employees at December 31, 2005. We expect employee costs to increase in 2006 ascompared to 2005 due largely to these acquisitions. We will begin expensing employee stock optionsand other equity-based awards in 2006 which will also result in higher employee costs as comparedto 2005.The increases in these costs in 2004 as compared to 2003 were attributable to an increase in ourperformance based compensation costs, including commissions, as well as an increase in employeeheadcount in our BPO business.***Depreciation and amortization***These costs represent the depreciation of the buildings and equipment we own and the amortizationof our intangible assets, such as capitalized software costs and acquired contracts. The increasein depreciation and amortization expenses in 2005 as compared to 2004 is due to additional expensesrelated to the acquisitions we completed during 2005, including WildCard. Because we receivetangible and intangible assets with finite lives when we acquire a company, the depreciation andamortization we record for those assets results in an incremental increase in our costs. Theseincreases were partially offset by a decrease in amortization expenses for intangible assetsfollowing the sale of our ATM Portfolio. Depreciation and amortization costs are expected to behigher in 2006 than 2005 due to additional costs we will incur associated with the acquisitions wecompleted during 2005.The increase in these costs in 2004 as compared to 2003 was due to additional depreciation andamortization on assets associated with businesses we acquired during the fourth quarter of 2003 andduring the first half of 2004. This increase was partially offset by a decline in depreciation andamortization expenses due to the cessation of depreciation on the assets included in the ATMPortfolio following the execution of the related sales agreement in September 2004.***Other operating costs***Expenditures in this category include facility costs, professional, consulting and temporaryservices, bad debt expense and certain administrative costs. Other operating costs increased in2005 as compared to 2004 due to an increase in consulting and temporary service costs andadditional costs associated with the operations of our acquisitions. These higher costs werepartially offset by a decline in legal expenses following the settlement of an SEC investigationand related litigation in 2004 as well as a $1.8 million refund of business and occupancy statetaxes during the second quarter of 2005 that we credited against this expense category. Otheroperating costs are expected to increase in 2006 as compared to 2005 primarily due to the full yearimpact of the acquisitions we completed during 2005.Other operating costs in 2004 remained relatively flat with the corresponding expenses incurred in2003 because the increase in costs from legal and other expenses related to the SEC investigationand its resolution and the costs incurred to comply with the requirements of Section 404 of theSarbanes-Oxley Act were offset by a reduction in certain facility and insurance costs due to costreduction efforts.***Restructuring and other charges***During 2002, we initiated a significant effort to reduce our cost structure by eliminatingunprofitable product lines, improving our internal business processes and increasing theutilization of our India based resources. These measures resulted in restructuring and assetimpairment charges of $16.5 million in that year. During 2003, we reversed $0.9 million of leaserelated charges that we recorded in 2002 to reflect the successful subletting of a portion of theproperties subject to those leases. Due to the business process improvement initiatives identifiedduring 2003, we recorded restructuring charges for severance benefits of $3.6 million. We alsorecorded a $1.5 million charge for the write-off of in-process research and development inconnection with our acquisition of a developer of transaction processing software in late 2003.During 2004,
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we incurred severance charges of approximately $3.1 million related to the elimination ofapproximately 158 positions. These charges are expected to be paid through 2006. We did notrecord any restructuring charges in 2005.***Contract loss provision (reversal)***During the second quarter of 2004, we recorded a $0.5 million loss contact charge for certain fixedlong-term software contracts that we determined were unlikely to be profitable. In 2003, werecorded a $3.7 million benefit related to a reduction in our estimate of future losses on certaingovernment EBT contracts. Actual results on the government EBT contracts were better thanpreviously estimated due to higher than expected case counts and cost savings. The projectsrelated to our contract loss provisions have been completed and we have no outstanding losscontract reserve balance at December 31, 2005.***Other income — net***Other income — net primarily includes interest and investment income and foreign currencytranslation adjustments. Income earned on cash, cash equivalents and investments was $4.5 millionin 2005, $3.2 million in 2004 and $2.1 million in 2003. We incurred an expense in 2005 and 2004from unfavorable changes in foreign currency rates of $0.5 million and $2.4 million, respectively.The impact from changes in foreign currency rates during 2003 was insignificant. We areconsidering whether to enter into hedging arrangements to limit our exposure to unfavorableexchange rate fluctuations.***Provision for income taxes***Our effective tax rate is largely determined by our Indian subsidiary’s proportional share of ourprojected consolidated income. Our Indian software development and BPO operations qualify for taxincentives associated with businesses that operate within designated geographic locations in India.These incentives generally provide us with exemptions from Indian income tax on certain businessincome generated from these operations and phase out through March 2009.Our annualized effective tax rate for 2005, 2004 and 2003 was 26%, 30% and 28%, respectively. Thesignificant decrease in our effective tax rate during 2005 reflects a $5 million tax benefitprimarily from an Advanced Pricing Agreement that we signed with the Internal Revenue Service inAugust 2005 related to our foreign operations. As a result of this agreement, certain tax reservesthat we had previously created were no longer considered necessary and we reduced our tax provisionto reflect their reversal. Also contributing to the decline in our effective tax rate during 2005was our recognition of a $1 million tax benefit during the first quarter of 2005 from our releaseof tax reserves related to our foreign operations because certain tax rulings indicated that thesereserves were no longer needed.LIQUIDITY AND CAPITAL RESOURCES             **(dollars in millions)** **2005** **2004** **% Change**Cash and cash equivalents $86.0  $274.5   (69)%Short-term investments  —   88.1   * Long-term debt due within one year  5.0   2.0   * Long-term debt  107.0   3.6   * Stockholders’ equity  445.8   474.2   (6)Net working capital  124.9   343.2   (64) * Represents an increase or decrease in excess of 100%.***Financial Condition***Our cash balance, cash flows and credit facilities are expected to be sufficient to meet ourrecurring operating commitments and to fund planned capital expenditures. Cash and cashequivalents at December 31, 2005 included cash in India of approximately $14 million. The funds inIndia are held in India bank accounts denominated in India rupees or U.S. dollars. These funds areavailable for use in our India operations and investments. Under the American Jobs Creation Act of2004 (the Act), we had the opportunity to receive a special one-time tax deduction on therepatriation of certain foreign earnings during 2005, but we elected not to do so.As part of our transaction processing business, we provide cash settlement services to financialinstitutions and state and local governments. These services involve the movement of funds betweenthe various parties associated with ATM, point-of-sale or EBT transactions and this activityresults in a balance due to us at the end of each business day that we recoup over the next fewbusiness days. The balances due to us are included in cash and cash equivalents. The typicalovernight settlement balance due to us ranges from $7 million to $45 million. We plan to satisfythese liquidity requirements using cash and cash
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equivalents on hand as well as through the Revolving Credit Agreement described below. As ofDecember 31, 2005, approximately $41 million was due to us and we received these funds in earlyJanuary.Historically, we have sought to maintain adequate cash balances and credit facilities to ensurethat we could advance funds to one of our processing customers if unusual circumstances preventedus from processing this customer’s settlement files on time. In January of 2006, we renegotiatedthe terms of this arrangement and are no longer obligated to advance funds to this customer underthese circumstances, although the renegotiated contract terms do require us to reimburse thecustomer for any additional fees that the customer might incur if we are unable to process itssettlement files in a timely manner. The impact from such an event would not be material to ourfinancial position or results of operations.***Sources and Uses of Cash***The following table sets forth a summary of our cash flow activity for the three years endedDecember 31, 2005 and should be read in conjunction with our consolidated statements of cash flows:               **Summary of Cash Flows**   **Year Ended December 31,** **(in millions)** **2005**  **2004**  **2003** Cash provided by operating activities $44.4  $69.6  $73.5 Cash (used in) provided by investing activities  (236.4)  82.1   (91.5)Cash provided by financing activities  3.5   18.3   3.0           Net (decrease) increase in cash and cashequivalents $(188.5) $170.0  $(15.0)          Our current priorities for the use of our cash are: **•** investment in projects intended to increase our product delivery and operationaleffectiveness, enhance our product suite and the security and redundancy of our systems;and  **•** funding our liquidity needs.We have no present intention of using our available funds to pay cash dividends.*Operating Activities*Our primary source of operating cash flow is the profits we generate from our business. Operatingcash outflows include payments to vendors for telecommunications services, consulting services andsupplies. We also pay salaries and benefits to our employees and income taxes.Cash flows provided by operations decreased to $44 million in 2005 as compared to $70 million in2004 primarily due to the payment of income taxes related to the sale of our ATM Portfolio andlower accounts receivable collection rates at acquired companies and our international businesses.The sale of the ATM Portfolio also contributed to these lower collection rates because thatbusiness had rapid rate of turnover for its accounts receivable.Although our business generated more gross profits in 2004, our cash flows declined as compared to2003 because we paid $14 million in incentive bonuses in 2004 whereas we did not pay incentivebonuses in 2003. Cash flows from our operations were also reduced by an increase in our accountsreceivable balance due to an increase in our international operations, which have historically hada longer collection cycle.*Investing Activities*Cash provided by or used in our investing activities generally reflects the sale or acquisition ofassets. During 2005, we used approximately $288 million for acquisitions and $29 million forcapital expenditures. We received $88 million in net cash during 2005 from the sale of short-terminvestments in order to fund these expenditures.In 2004, we generated approximately $152 million from the sale of our ATM Portfolio and theexecution of the related Master Services Agreement with the buyer. Approximately $29 million ofcash was used for capital expenditures, $34 million of net cash was used to purchase short-terminvestments and $6 million was used for acquisitions*Financing Activities*We receive funds from the exercise of stock options and the sale of our shares through our employeestock purchase plan. We could also obtain funds through borrowings under our bank lines. Wedisburse funds if we repurchase shares of our common stock or repay debt. In 2005, we received netproceeds from long term debt of approximately $89 million which was used to
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fund our acquisition of WildCard. We also received proceeds from the exercise of stock options andthe sale of shares through our employee stock purchase plan of $15 million. We used $100 millionto repurchase shares of our common stock.In 2004, we received approximately $25 million in proceeds from the exercise of stock options andthe sale of shares through our employee stock purchase plan and we used approximately $6 million topay down capital leases.***Long-term Debt***On February 18, 2005, we entered into a credit agreement (the Credit Agreement) with a syndicate ofbanks. The Credit Agreement provided for an initial aggregate commitment under an unsecuredrevolving credit facility of $100 million. We had the option to increase this commitment to $175million if certain requirements of the Credit Agreement were satisfied. Amounts borrowed under theCredit Agreement could have been used to finance permitted acquisitions and related expenses,working capital needs and other general corporate purposes. The Credit Agreement provided for twooptional interest rates on any borrowings thereunder. The first rate was equal to the greater ofthe Prime Rate (as defined) or the Federal Funds Effective Rate plus 0.5%, depending on certainconditions set forth in the Credit Agreement. The second rate was equal to the London InterbankOffering Rate multiplied by the Statutory Reserve Rate, plus an additional percentage based on ourleverage ratio. The terms of the Credit Agreement included certain defined negative andaffirmative covenants customary for facilities of this type. The Credit Agreement was scheduled tomature in 2008, and upon the lenders’ approval, we could have received two one-year extensions ofthe maturity date. We did not make any borrowings under this agreement.In connection with our acquisition of WildCard, we terminated the Credit Agreement and entered intoa new credit agreement (the Revolving Credit Agreement) on July 1, 2005. We did not incur fees inconnection with the termination of the Credit Agreement. The Revolving Credit Agreement providesfor an initial aggregate commitment under an unsecured revolving credit facility of $150 million.We have the option to increase this commitment to $200 million if certain requirements of theRevolving Credit Agreement are satisfied. We can use amounts borrowed under the Revolving CreditAgreement to finance permitted acquisitions and related expenses, working capital needs and othergeneral corporate purposes. The optional interest rates under this facility are the same as thoseprovided for under the Credit Agreement. The terms of the Revolving Credit Agreement includecertain defined negative and affirmative covenants customary for facilities of this type. We aresubject to a non-use fee ranging from 0.15% to 0.30% of the unused commitment depending on ourleverage ratio as defined by the agreement. This facility will mature in 2010. During 2005, theinterest rate on borrowings under the Revolving Credit Agreement ranged from 4.2% to 6.3%. We hadno outstanding borrowings under the Revolving Credit Agreement at December 31, 2005. Certain ofour domestic subsidiaries guarantee our obligations under the Revolving Credit Agreement.Concurrently with the execution of the Revolving Credit Agreement, we entered into a loan agreement(the Loan Agreement) providing for a six month unsecured term loan of $100 million. The LoanAgreement provided for the same two optional interest rates on any borrowings thereunder as theRevolving Credit Agreement. The Loan Agreement included certain defined negative and affirmativecovenants customary for facilities of this type and was scheduled to mature on December 31, 2005.We borrowed $100 million under the Loan Agreement in connection with the acquisition of WildCard.We repaid this amount and terminated the Loan Agreement on September 30, 2005 when we issued theNotes discussed below. During the term of the Loan Agreement, the interest rate on borrowingsthereunder ranged from 4.2% to 4.6%.On September 30, 2005, we issued $100 million of senior unsecured notes (the Notes) in a privateoffering under Rule 144A of the Securities Act of 1933, as amended. The Notes bear interest at afixed interest rate of 5.39%, with interest payable semi-annually, and will mature on September 30,2012. The indebtedness represented by the Notes ranks pari passu with our obligations under theRevolving Credit Agreement and our obligations with respect to the Notes are guaranteed by certainof our domestic subsidiaries. The Note Purchase Agreement between us and the purchasers of theNotes contains certain negative and affirmative covenants customary for transactions of this type.***Stock Repurchase Plan***On February 23, 2005, we announced that our Board of Directors had approved a plan to buy back upto $100 million of common stock at prices not to exceed $25 per share. The repurchases were madeusing our available cash. The purchases were made in the open market in accordance with applicablelaws and regulations. We completed this program on May 3, 2005 and repurchased a total of 4.6million shares.***Contractual Obligations and Commitments***The following table sets forth our contractual cash obligations as of December 31, 2005 in totaland for the time periods specified:
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                               **Payments Due by Period** **(in millions)** **Total**  **2006**  **2007**  **2008**  **2009**  **2010**  **Thereafter** Long-term debt $100.0  $—  $—  $—  $—  $—  $100.0 Capital lease obligations  12.0   5.0   4.4   2.5   0.1   —   — Operating lease obligations1  80.0   13.5   14.9   12.2   9.4   7.5   22.5 Vendor obligations  76.1   28.6   23.1   14.9   3.5   3.4   2.6                       Total $268.1  $47.1  $42.4  $29.6  $13.0  $10.9  $125.1                        1 Future minimum lease payments for non-cancelable operatingleases are presented net of minimum sublease rentals of $3.2 million duein the future under non-cancelable subleases.For the purposes of this table, contractual obligations for purchases of services are definedas agreements that are enforceable and legally binding and that specify all significant terms, suchas fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and theapproximate timing of the transaction. Purchase orders for goods and services are not included inthis table because they may represent authorizations to purchase rather than binding agreements.These orders are based upon our current service needs and are generally fulfilled by our vendorswithin one or two months.We are party to certain other contracts with third parties whereby the third party providesservices to us. These services are operational in nature and our obligations under these contractsvary from period to period based on our utilization of the services. These commitments are notreflected in the table above as the associated amounts are not currently determinable.The following table sets forth our future commercial commitments as of December 31, 2005:                               **Commitment Expiration by Period** **(in millions)** **Total**  **2006**  **2007**  **2008**  **2009**  **2010**  **Thereafter** Letters of credit and other $0.7  $0.7  $—  $—  $—  $—  $— Performance bonds  12.5   12.3   0.1   0.1   —   —   —                       Total commitments1 $13.2  $12.9  $0.1  $0.1  $—  $—  $—                        1 Amounts may not sum due to rounding.In connection with our government services business and collection activities, we post suretybonds with state agencies guaranteeing our performance of certain obligations related to therelevant contracts or state requirements. The aggregate amount of such bonds outstanding atDecember 31, 2005 was $13 million. We also had approximately $0.7 million of outstanding lettersof credit and performance guarantees in India as of such date. These obligations were secured bytime deposits in an equivalent amount.HEDGING ACTIVITIESOn July 27, 2005, we entered into an interest-rate-related derivative instrument to manage theexposure we had to variations in interest rates pending the anticipated issuance of the $100million of Notes described above. The Notes have a fixed interest rate that was based on theseven-year interpolated rate on federal treasury securities plus a credit spread, and so we wereexposed to variability in the future interest payments on the Notes if treasury note rates changedprior to the completion of the Notes offering. The notional amount of the derivative was $75million and its scheduled maturity date was three months from the date of its execution. OnSeptember 20, 2005, we unwound the derivative instrument when we locked the interest rate on theNotes and, due to changes in treasury rates during the derivative instrument’s term, we paid $0.3million to settle this arrangement. The derivative instrument we entered into was effective andqualified for hedge accounting and so the loss we incurred in connection with it was deferred instockholders’ equity (as a component of accumulated other comprehensive income) and will berecognized as incremental interest expense in our income statement over the seven year term of theNotes. We did not have any derivative instruments at December 31, 2005.CRITICAL ACCOUNTING POLICIES AND ESTIMATESThe foregoing discussion and analysis of our financial condition and results of operations is basedupon our consolidated financial statements, which have been prepared in accordance with accountingprinciples that are generally accepted in the United States of America. The preparation of thesefinancial statements requires us to make estimates and judgments that affect the reported amountsof assets, liabilities, revenues and expenses and related disclosure of contingent assets and
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liabilities. On an on-going basis, we evaluate our estimates and judgments, including those relatedto revenue recognition, intangible assets, reserves and allowances, income taxes and stock-basedcompensation. We base our estimates on our historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances. The results of these estimates form thebasis for making judgments about the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.We believe the following critical accounting policies reflect the more significant judgments,estimates and considerations used in the preparation of our consolidated financial statements.*Revenue Recognition*Our net revenues consist primarily of fees for transaction processing and related servicesincluding government benefit distribution, prepaid card services, software licensing and relatedservices, risk management services, and business process outsourcing and information technologyconsulting services. Revenue is recognized when persuasive evidence of an arrangement exists,delivery has occurred or services have been rendered, the fee is fixed and determinable andcollectibility is probable. These criteria are applied to each accounting unit identified withinan arrangement. The process involved in evaluating the appropriateness of revenue recognitioninvolves judgments about vendor specific objective evidence of fair value, collectibility of feesand projections of costs to complete projects for our customers.We frequently enter into contracts to provide multiple products and services (multiple elements).We evaluate contracts with multiple elements to determine if the elements can be divided into morethan one unit of accounting for revenue recognition purposes. An item can generally be considered aseparate unit of accounting if the delivered items have value to the customer on a standalonebasis, there is objective and reliable evidence of the fair value of the undelivered items and, ifthe arrangement includes a general right of return relative to the delivered items, delivery orperformance of the undelivered items is considered probable and substantially in our control.Items which do not meet these criteria are combined into a single unit of accounting for revenuerecognition purposes. If we have established the fair value for all units of accounting within amultiple element arrangement, the total consideration associated with that arrangement is allocatedto the separate units of accounting based on their relative fair values. In arrangements wherethere is objective and reliable evidence of the fair value of only the undelivered items, we usethe residual method of revenue recognition to allocate the total consideration derived from thearrangement. Under the residual method of revenue recognition, the total arrangement value isallocated to the undelivered element based on its fair value and the remaining value of thecontract is allocated to the delivered element.Transaction processing and related services Transaction processing and service fees, including government benefit distribution fees, arerecognized in the period that the service is rendered. These services typically consist ofprocessing customers’ electronic debit transactions and settling the funds with the financialinstitutions involved in the transactions. Transaction processing and service fees are charged on aper transaction basis, depending on the contractual arrangement with the customer. Governmentservices fees are recognized in the period services are rendered based on monthly fees per benefitsrecipient.Prepaid solutionsWe receive fees from prepaid and stored value card transactions through the provision oftransaction processing services, program and account set-up services, card origination and otherprofessional services. We recognize revenues for transaction processing fees as described above.Fees for program and account set-ups and related professional services are recognized over theeconomic life of the cards related to the program because these services do not have stand-alonevalue to the customer. All other card service revenue is recognized when services are rendered.Software licensing and related services Software license fees for standard products are recognized upon delivery of the software or, forelectronic deliveries, when the customer takes possession of the software via a download or hasbeen provided with access codes that allow the customer to take immediate possession of thesoftware on its hardware. If a license contains customer acceptance criteria for which significantuncertainties exist, revenue is recognized upon the earlier of customer acceptance or satisfactionof the contractual customer acceptance criteria. Certain software licensing arrangements includemultiple elements. We generally allocate the total consideration from these types of arrangementsusing the residual revenue recognition methodology. The fair value of the undelivered elementsunder this methodology is determined using the sales price of each undelivered element when soldseparately (vendor specific objective evidence).
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From time to time, we enter into arrangements that require significant modification, customizationor production of software we license to others. We typically will charge separate fees for thesoftware license and for the professional services associated with the software’s customization. Inthese circumstances, the total license fee and service fees are recognized proportionately with thepercentage of completion of the project. The percentage of completion of the project is typicallydetermined using the expended method. This method measures progress toward completion using theactual labor hours or days incurred compared to the total estimated number of hours or daysrequired to complete the project. These estimates are subject to revision as the projects progresstowards completion. Revisions to these estimates that result in a material impact to our resultsof operations or financial position are recorded in the periods in which we determine that arevision is probable and the revision value can be reasonably estimated.We typically bill customers in advance for software maintenance services. Revenues associated withthese services are recognized ratably over the service period. Professional service revenuesrelated to installed copies of our software are recognized as the related services are rendered.Risk management servicesRisk management fees are recognized as revenue in the period the services are rendered. Riskmanagement services consist of new account applicant and check verification screenings to managethe risk associated with account openings, check acceptance and card-not-present transactions. Riskmanagement fees are based on the number of inquiries against the databases used for screeningpurposes or monthly fees based on the net monthly sales of the user of our products or othersimilar measures, depending on the product and service.Business process outsourcing and information technology consulting servicesWe provide business process outsourcing and information technology consulting services. Revenuefrom providing these services is generally recognized under one of two methods, depending on therelevant contractual terms. Under the time and materials method, which is applied to a significantportion of our contracts, revenues are based on a fee per hour or transaction basis and arerecognized as hours or transactions are completed. Under the fixed contract method, whichrepresents only a very small portion of our revenues, a pre-set fee is agreed upon for a projectand revenue is recognized proportionately to the percentage of completion of the project using theexpended method described above.*Intangible Assets*Our intangible assets consist primarily of goodwill, capitalized software costs and acquiredcontracts.GoodwillWhen we acquire other companies, accounting principles generally accepted in the United States ofAmerica require that we make estimates regarding the fair value of the acquired company’s tangibleassets and liabilities and its identifiable intangible assets. Based upon these estimates, we thenallocate the purchase price to the assets and liabilities of the acquired company for the purposeof recording these items in our financial records. Any unallocated portion of the purchase price isrecorded as goodwill. The distinction between the amount of the purchase price allocated either totangible assets and liabilities or identifiable intangible assets and goodwill is significantbecause goodwill is not amortized to our income statements but is instead subject to an annualimpairment test. Estimates inherent in the process of this purchase price allocation includeassumptions regarding the timing and amounts of future cash inflows and outflows, the salability ofinventories, selection of discount rates, contract renewal rates and general market conditions.Where appropriate, we use third-party valuation professionals to assist us in making theseestimates.We perform an annual review in the fourth quarter of each year, or more frequently if changes incircumstances indicate a potential impairment, to determine if the goodwill we have recorded inrespect of our reporting segments is impaired. If changes in circumstances indicate a potentialimpairment of our recorded goodwill, we compare the fair value of the segment to its carryingvalue, including its associated goodwill. The carrying value of the segment includes an allocationof those corporate assets and liabilities that have not been specifically identified with thesegment, based upon its pro-rata percentage of our total net revenue. We primarily rely on theincome method to determine a segment’s fair value. This valuation approach uses estimates of thesegment’s future revenue and costs and a discount rate based upon the estimated weighted averagecost of capital for that segment. Our estimates of a segment’s future cash flows are based uponhistorical data, various internal estimates and external sources. We develop these estimates aspart of our routine long-term strategic planning. We test the reasonableness of the assumptionsunderlying our discounted cash flow analysis by using comparable market data to the extent it isavailable. We have not recorded an impairment in the goodwill of our segments in the past.
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Software-internal useWe capitalize the cost of software developed or obtained for internal use once the preliminaryproject stage has been completed, management commits to funding the project, it is probable thatthe project will be completed and that the software will be used to perform the function intended.Capitalized costs include only (1) external direct costs of materials and services consumed indeveloping or obtaining internal-use software, (2) payroll and payroll-related costs for employeeswho are directly associated with and who devote time to the internal-use software project and (3)interest costs incurred, when material, while developing internal-use software. Capitalization ofcosts ceases when the project is substantially complete and the software is ready for its intendeduse. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets” (SFAS 144), we assess internal use softwarefor potential impairment when events or changes in circumstances indicate that the carrying valueof these assets may not be recovered. For example, in 2002 we discontinued certain product lineswhich resulted in a charge of approximately $2 million for the impairment of the related software.There have been no subsequent impairment charges for internal use software.Software-licensing and resaleWe capitalize the cost of software developed for licensing and resale once its technologicalfeasibility has been established. Costs incurred prior to establishing technological feasibilityare expensed as incurred. Technological feasibility is established when we have completed allplanning, designing, coding and testing activities that are necessary to determine that a productcan be produced to meet its design specifications. Capitalization of costs ceases when the productis available for general release to customers. Capitalized costs are amortized on aproduct-by-product basis normally over three years and no longer than five years. Softwaredeveloped for resale is carried at the lesser of its amortized cost or net realizable value.Although we have never recorded an impairment charge for software developed for resale, thesecapitalized costs could be impaired if the net realizable value of that software became less thanits net book value. Such an impairment could occur if our sales of that software declinedsignificantly.Acquired contracts and otherContractsacquired through acquisitions are specifically identified in connection with thatacquisition. The amount recorded as intangible assets for acquired contracts represents theestimated fair value of these relationships. This estimate is based on the present value ofthe estimated future net cash flows from the contracts, including expected renewals. The majorityof these intangibles are amortized using a straight-line basis. Where appropriate, we usethird-party valuation professionals to assist us in determining the fair value and amortizable lifeof contracts at the time of their acquisition. This type of intangible asset could be impaired ifthe attrition rate associated with the acquired contracts materially exceeds the rate used toestimate the fair value of the acquired contract portfolio. To date, we have not incurred anysignificant impairments with regard to our acquired contracts.Other intangibles also include miscellaneous assets obtained in connection with the acquisition ofother companies, typically non-competition agreements. Non-competition agreements are recorded attheir estimated fair value at the date of acquisition and amortized ratably over the period of thenon-competition agreement.We assess acquired contracts and other intangible assets for impairment in accordance with SFAS No.144.*Allowance for doubtful accounts*We maintain an allowance for doubtful accounts based on our estimates of how often our customerswill fail to make their required payments. We develop this allowance based on our experience withspecific customers, our understanding of their current economic circumstances and our own judgmentas to the likelihood of their ultimate payment. We also consider our collection experience with thebalance of our receivables portfolio and make estimates regarding collectibility based on trends inaging. If the financial condition of our customers were to deteriorate, thereby impairing theirability to make payments, an increase in this allowance could be required in a future period. Suchan increase would reduce our income.*Income Taxes*Accounting for income taxes requires us to make significant judgments to estimate our future incometaxes. These judgments include, but are not limited to, the likelihood we will realize the benefitsof net operating loss carryforwards, the adequacy of our valuation allowances, the rates to be usedto measure transactions with foreign subsidiaries and the valuation models to be used for measuringthe value of certain transactions. Further, our operations are governed by and subject togovernment regulations in the United States and in foreign countries in which we operate, includinglaws and regulations relating to taxation and the judgments and estimates we use are subject tochallenge by domestic and foreign taxing authorities. We
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recognize tax liabilities when we believe that they are probable of being incurred and we canreasonably estimate their amount. It is possible that either foreign or domestic taxing authoritiescould challenge our judgments and estimates and draw conclusions that would cause us to incur taxliabilities in excess of those currently recorded.We record a valuation allowance to reduce our deferred tax assets to the amount that is more likelythan not to be realized. Although we have considered future taxable income and ongoing prudent andfeasible tax planning strategies in assessing the need for the valuation allowance, in the event wewere to determine that we will be able to realize our deferred tax assets in the future in excessof the net recorded amount, an adjustment to the deferred tax asset would increase income in theperiod such a determination was made. Likewise, should we determine that we would not be able torealize all or part of our net deferred tax asset in the future, an adjustment to the deferred taxasset would be charged to income in the period such a determination was made. We currently expectthat it is more likely than not that our future operations will generate sufficient taxable incometo realize our deferred tax assets.We consider the undistributed earnings of our foreign subsidiaries to be permanently invested and,accordingly, we have not provided for U.S. Federal, state income or applicable foreign withholdingtaxes on those amounts. Undistributed earnings of our foreign subsidiaries amounted toapproximately $47 million at December 31, 2005. Upon any distribution of those earnings in the formof dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustmentfor foreign tax credits) and applicable withholding taxes payable to the foreign countries. TheAmerican Jobs Creation Act of 2004 provided us with the opportunity to receive a special one-timetax deduction on the repatriation of certain of the undistributed earnings of our foreignsubsidiaries during 2005, but we elected not to undertake any such repatriation.*Stock-based Compensation*We issue stock options to our employees under the terms of the eFunds Corporation 2000 Stock OptionPlan. Accounting principles generally accepted in the United States of America (GAAP) provide twoalternative methods of accounting for stock options issued under the terms and conditions that wetypically issue them. One alternative is to estimate the fair value of the stock option at the dateof grant and amortize that value as an expense to operations over the contractual vesting period.The other option currently available to companies reporting under GAAP is to estimate the fairvalue of the option at the grant date, but only reflect the impact of the amortization in afootnote to the financial statements and to forgo adjusting the statement of operations. The methoda company chooses to apply is a matter of policy. Consistent with our past practices, we currentlyutilize the second of these options and we reflect the impact of option amortization in thefootnotes to our financial statements. As illustrated in Note 2 to the financial statements, werewe to change our accounting policy on this matter to reflect option expense in our statements ofincome, our results of operations would be adversely affected. The amount of stock-basedcompensation expense we recognize would change if the underlying assumptions used to estimate itwere to change. For instance, we would expect the expense to decrease if the expected life of theoption or the volatility of our stock price were to decrease. The Financial Accounting StandardsBoard (FASB) recently revised the current applicable accounting pronouncements related toaccounting for stock options to require us to reflect our option expense in our statements ofincome no later than the first quarter of 2006 (see the discussion below regarding SFAS No. 123Runder “Recent Accounting Pronouncements”).*Disposition of ATM Portfolio*On November 19, 2004, we consummated an agreement (the Agreement) to sell the ATM Portfoliopreviously associated with our ATM Management segment. Concurrently with the consummation of thesale of the ATM Portfolio, we entered into a five year ATM Master Services Agreement (MSA) with thebuyer. Pursuant to the MSA, we are providing the buyer with transaction processing, residualadministration, cash and telecommunications management, help desk and other ATM managementservices. The ATM Portfolio represented a significant portion of the ATM Management segment and weceased presenting this business as a separate operating segment following its sale. The servicesprovided in accordance with the MSA are presented within our remaining segments with processingservice revenues and related costs being recorded within the Electronic Payments segment andrevenues from ATM management services and related costs reported within the Global Outsourcingsegment. The operating results of the ATM Portfolio have not been presented as discontinuedoperations because we have significant continuing involvement in the operations of the asset groupthrough the MSA. The major asset categories and related carrying amounts sold and disposed ofincluded net accounts receivable of $4 million, net property and equipment of $7 million,goodwill of approximately $76 million, net other intangible assets of approximately $17 million,other current assets of approximately $2 million and accounts payable and other current liabilitiesof approximately $7 million. We incurred approximately $5 million of costs in connection with thetransaction that primarily consisted of professional service fees.
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The amounts received by us in connection with the Agreement exceeded the book value of the ATMPortfolio by approximately $48 million. In considering the appropriate method for accounting forthe excess proceeds from this arrangement, we considered the analogous authoritative accountingliterature. The most directly applicable pronouncement was considered to be Emerging Issues TaskForce (EITF) 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21). EITF 00-21indicates that in arrangements with multiple elements that are deemed to be in substance onearrangement, any income or gain associated with the arrangement should be deferred and recognizedover the period of the remaining obligations unless there is sufficient, objective and reliableevidence of the fair value of the undelivered contractual elements. We consider the ATM Portfoliosale and the MSA to be components of a single arrangement because these transactions werenegotiated simultaneously without regard to their individual economic characteristics. Althoughboth factual and anecdotal evidence was considered, we were unable to determine the fair value ofthe MSA with a reasonable degree of certainty due to, among other things, the uniqueness of thatcontract, the lack of similar arrangements in the industry and because the contractual cash flowsexpected to be generated by the MSA are not representative of the contract’s intrinsic fair valueabsent the compensating benefits associated with the entirety of the arrangement represented by theATM Portfolio sale and the MSA. Due to the lack of sufficient, objective and reliable evidence ofthe fair value of the MSA, we determined that the only appropriate method of accounting for thearrangement was to defer the entirety of the implied gain from the transactions and amortize thisamount as a reduction in the other operating costs of our Global Outsourcing Segment over theperiod of the remaining undelivered elements of the obligations of the arrangement (the initialfive year term of the MSA). At December 31, 2005, approximately $37 million of the implied gainwas recorded as a deferred gain of which $10 million was recorded as current liabilities and theremainder is included in long-term liabilities. Approximately $10 million of the deferred gain wasrecognized as a reduction in the Global Operating segment’s other operating costs during 2005. Inthe event the MSA is terminated early and our services thereunder are discontinued, the entireunamortized deferred gain would be recognized.*Recent Accounting Pronouncements*In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (SFAS No.154) which replaces Accounting Principles Board Opinion (APB) No. 20 “Accounting Changes” and SFASNo. 3, “Reporting Accounting Changes in Interim Financial Statements – An Amendment of APB OpinionNo. 28.” SFAS No. 154 provides guidance on the methods issuers should use to account for and reportaccounting changes and error corrections. Specifically, this statement requires that issuersretrospectively apply any voluntary change in accounting principles to prior period financialstatements, if it is practicable to do so. This principle replaces APB No. 20, which required thatmost voluntary changes in accounting principle be recognized by including the cumulative effect ofthe change to the new accounting principle on prior periods in the net income reported by theissuer in the period in which it instituted the change. SFAS No. 154 also redefines the term“restatement” to mean the correction of an error by revising previously issued financialstatements. Unless adopted early, SFAS No. 154 is effective for accounting changes and correctionsof errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption ofSFAS No. 154 to have an impact on our financial position or results of operations.In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No.123R). SFAS No. 123R replaces SFAS No. 123 and, although the two pronouncements are similar inmost respects, a key difference among the pronouncements is that SFAS No. 123R generally requirescompanies to recognize the cost of employee services rendered in exchange for awards of equityinstruments based on the fair value of those awards on their date of grant. SFAS No. 123R is nowscheduled to become effective as of the beginning of the first annual reporting period that beginsafter June 15, 2005. We have not adopted SFAS No. 123R as of December 31, 2005 and as a result,SFAS No. 123R has not affected our consolidated financial position or results of operations todate. We will adopt SFAS No. 123R in 2006 which will result in an increase in our employee costs.We presently expect to use a Black-Scholes option-pricing model to implement SFAS No. 123R and theexpected impact from the adoption of this standard has been considered in the 2006 forecastincluded in the “FORWARD LOOKING STATEMENTS” below. We have not yet determined whether we willapply SFAS No. 123R on a retrospective basis.In December 2004, the FASB issued Staff Position No. FAS 109-1, “Application of FASB Statement 109,Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided bythe American Jobs Creation Act of 2004” and Staff Position No. FAS 109-2, “Accounting andDisclosure for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of2004” (collectively, the Provisions). The Provisions were issued in response to certain issuessurrounding the American Jobs Creation Act of 2004 (the Act). The Act provided certain domesticcompanies a temporary opportunity to repatriate previously undistributed earnings of controlledforeign subsidiaries at a reduced federal tax rate, approximating 5.25%. We did not repatriatefunds from our foreign subsidiaries under the Act and so the Provisions will not have an impact onour financial position or results of operation.
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**FORWARD LOOKING STATEMENTS**When used in this Annual Report on Form 10-K and in future filings by us with the Securities andExchange Commission, in our press releases, letters and reports to stockholders and in oralstatements made by our representatives, the words or phrases “should,” “are expected to,”“targeted,” “will continue,” “will approximate,” “is anticipated,” “estimate,” “project” or similarexpressions are intended to identify “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements are necessarily subject to certain risksand uncertainties, including those discussed in ITEM 1A. within this Annual Report on Form 10-K,that could cause our actual results to differ materially from our historical experience and ourpresent expectations or projections. Such differences could be material and adverse. Caution shouldbe taken not to place undue reliance on any such forward-looking statements, which speak only as ofthe date made.***Business Outlook for 2006***The Company reported that it expects full-year net revenue for 2006 to increase approximately 15 -25 percent over full-year 2005 net revenue. Diluted earnings per share are expected to be between$1.15 and $1.25 for 2006 after giving effect to the adoption of SFAS 123R, which requires theexpensing of stock options beginning January 1, 2006. Excluding the impact of SFAS 123R, theCompany’s outlook equates to $1.26 — $1.36 per diluted share in 2006.The foregoing expectations reflect the following assumptions:**•** An effective tax rate of approximately 34 percent for 2006; **•** Cash outlays for capital expenditures and product development activities will be somewhathigher than the amounts disbursed in 2005.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKWe operate internationally and are subject to potentially adverse movements in foreign currencyexchange rates and interest rates. These exposures may change over time as our business evolves andcould have positive or negative impacts on our financial results. We had not entered into anyderivative instruments or hedging contracts to reduce our exposure to adverse foreign currency ratechanges as of December 31, 2005, although we may do so in the future. Currently, we receivenon-U.S. dollar denominated revenues and incur non-U.S. dollar denominated operating expensesprimarily 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, Indianrupee and Canadian dollar. For the year ended December 31, 2005, approximately 7% of our netrevenues and 18% of our operating expenses were denominated in these three currencies.We have prepared sensitivity analyses to assess the impact of hypothetical changes in foreigncurrency rates on our income before tax for the year ended December 31, 2005. Based upon theseanalyses, we estimate that a 10% adverse change in the exchange rate between the U.S. dollar andthe British pound, Indian rupee and Canadian dollar would have reduced our reported income beforetaxes during 2005 by approximately $5 million. A 10% change in the exchange rate for the Britishpound, Indian rupee and Canadian dollar would also have an impact on the foreign net assetsreflected in our balance sheet, but we would not expect this change to be material to our totalassets.Changes in interest rates could impact our anticipated interest income on cash, cash equivalentsand short-term investments and the amount of interest we pay on borrowings under our RevolvingCredit Agreement. A 10% adverse change in interest rates from the interest rates in effect at theend of 2005 would not, however, have had a material adverse effect on our net income or financialcondition for 2005.
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**Report of Independent Registered Public Accounting Firm**The Board of Directors and Stockholders