| Any of the risks discussed below, or elsewhere in this Annual Report on Form 10-K or our other SEC filings, could have a material impact on our business, financial condition or results of operations |
| 8 _________________________________________________________________ [79]Table of Contents RISK FACTORS If we lose key retail agents in our Global Funds Transfer segment, our business and results of operations could be adversely affected |
| We may not be able to retain all of our current retail agents |
| The competition for chain retail agents is intense, and larger agents are increasingly demanding financial concessions and more information technology customization |
| The development and equipment necessary to meet agent demands could require substantial capital expenditures |
| If we were unable to meet these demands, we could lose agents and our volume of money transfers would be substantially reduced and our revenues would decline |
| A substantial portion of our transaction volume is generated by a limited number of key agents |
| During 2005 and 2004, our ten largest agents accounted for 31 percent and 27 percent, respectively, of our total revenue and 46 percent and 41 percent, respectively, of the revenue of our Global Funds Transfer segment |
| Our largest agent, Wal-Mart Stores, Inc, accounted for 13 percent and 9 percent of our total revenue and 19 percent and 14 percent of the revenue of our Global Funds Transfer segment in 2005 and 2004, respectively |
| If any of these key agents were not to renew their contracts with us, or if such agents were to reduce the number of their locations, or cease doing business, we might not be able to replace the volume of business conducted through these agents, and our business and results of operations would be adversely affected |
| In addition, many of our high volume agents are in the check cashing industry |
| There are risks associated with the check cashing industry that could cause this portion of our agent base to decline |
| Any regulatory action that adversely affects check cashers could also cause this portion of our agent base to decline |
| If we lose large financial institution customers in our Payment Systems segment, our business and results of operation could be adversely affected |
| During 2005 and 2004, our ten largest financial institution customers accounted for 13 percent and 14 percent, respectively, of our total revenue and 39 percent and 39 percent, respectively, of the revenue of our Payment Systems segment |
| Our largest financial institution customer generated 4 percent of our total revenue in 2005 and 2004 and 11 percent and 10 percent of the revenue in our Payment Systems segment in 2005 and 2004, respectively |
| The loss of any of our top financial institution customers could adversely affect our business and results of operations |
| If we fail to successfully develop and timely introduce new and enhanced products and services, our business, prospects, financial condition and results of operations could be adversely affected |
| Our future growth will depend, in part, on our ability to continue to develop and successfully introduce new and enhanced methods of providing money transfer, money order, official check, bill payment and related services that keep pace with competitive introductions, technological changes and the demands and preferences of our agents, financial institution customers and consumers |
| Many of our competitors offer stored-value cards and other electronic payment mechanisms, including various internet-based payment services, which we have only recently introduced, that could be substituted for traditional forms of payment, such as the money orders, bill payment and money transfer services that we offer |
| If these alternative payment mechanisms become widely substituted for our products and services, and we do not develop and ramp up similar alternative payment mechanisms successfully and on a timely basis, our business and prospects could be adversely affected |
| If we are unable to protect the intellectual property rights related to our existing and any new or enhanced products and services, our business, prospects, financial condition and results of operations could be adversely affected |
| We rely on a combination of patent, trademark and copyright laws, trade secret protection and confidentiality and license agreements to protect the intellectual property rights related to our products and services |
| We also investigate the intellectual property rights of third parties to prevent infringement of those rights |
| We may be subject to claims of third parties that we infringe or have misappropriated their proprietary rights |
| We may be required to spend resources to defend any such claims and/or to protect and police our own rights |
| Some intellectual property rights may not be protected by intellectual property laws, particularly in foreign jurisdictions |
| The loss of intellectual property protection, the inability to secure or enforce intellectual property protection or to successfully defend against an intellectual property infringement action could harm our business and prospects |
| Litigation or investigations which could result in material settlements, fines or penalties may adversely 9 _________________________________________________________________ [80]Table of Contents affect our business, financial condition and results of operations |
| Our business has in the past been, and may in the future continue to be, the subject of class actions, regulatory actions, investigations or other litigation |
| The outcome of class action lawsuits, regulatory actions or investigations is difficult to assess or quantify |
| Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of lawsuits and actions may remain unknown for substantial periods of time |
| The cost to defend future lawsuits or investigations may be significant |
| There may also be adverse publicity associated with lawsuits and investigations that could decrease customer acceptance of our services |
| As a result, litigation or investigations may adversely affect our business, financial condition and results of operations |
| We face intense competition, and if we are unable to continue to compete effectively, our business, financial condition and results of operations would be adversely affected |
| The industries in which we compete are highly competitive, and we face a variety of competitors across our businesses |
| In addition, new competitors or alliances among established companies may emerge |
| Our primary competition comes from First Data Corporation and its subsidiaries, including Western Union, which has substantially greater transaction volume than we do |
| First Data Corporation and its subsidiaries have a larger agent base, a more established brand name and substantially greater financial and marketing resources than we do |
| First Data Corporation has announced that it will spin off Western Union |
| We cannot anticipate what, if any, effect the spin-off will have on our business or the money transfer industry |
| The Global Funds Transfer segment of our business competes in a concentrated industry, with a small number of large competitors and a large number small, niche competitors |
| Our large competitors are other providers of money orders and money transfer services, including Western Union, other subsidiaries of First Data Corporation and the US Postal Service with respect to money orders |
| We also compete with banks and niche person-to-person money transfer service providers that serve select send and receive corridors |
| The Payment Systems segment of our business competes in a concentrated industry with a small number of large competitors |
| Our competitors in this segment are Integrated Payment Systems, a subsidiary of First Data Corporation, and Federal Home Loan Banks |
| We also compete with financial institutions that have developed internal processing capabilities or services similar to ours and do not outsource these services |
| Recent levels of growth in consumer money transfer transactions and other payment products may not continue |
| In addition, consolidation among payment services companies has occurred and could continue |
| If we are unable to compete effectively in the changing marketplace, our business, financial condition and results of operations would be adversely affected |
| We are subject to a number of risks relating to US federal and state regulatory requirements which could result in material settlements, fines or penalties or changes in our business operations that may adversely affect our business, financial condition and results of operations |
| In the United States, the money transfer business is subject to a variety of state regulations |
| We are also subject to US federal anti-money laundering laws and the requirements of the Office of Foreign Assets Control, which prohibit us from transmitting money to specified countries or on behalf of prohibited individuals |
| If we were to inadvertently transmit money on behalf of, or unknowingly conduct business with, a prohibited individual, we could be required to pay significant damages, including fines and penalties |
| Any intentional or negligent violation of anti-money laundering laws by our employees could lead to significant fines and/or penalties, and could limit our ability to conduct business in some jurisdictions |
| The federal government or the states may elect to impose additional anti-money laundering requirements |
| Changes in laws, regulations or other industry practices and standards may occur which could increase our compliance and other costs of doing business, could require significant systems redevelopment, reduce the market for or value of our products or services or render our products or services less profitable or obsolete, and could have an adverse effect on our results of operations |
| If onerous regulatory requirements were imposed on our agents, they could lead to a loss of agents, which, in turn, could lead to a loss of retail business |
| Failure to comply with the laws and regulatory requirements of federal and state regulatory authorities could result in, among other things, revocation of required licenses or registrations, loss of approved status, termination of contracts with banks or retail representatives, administrative enforcement actions 10 _________________________________________________________________ [81]Table of Contents and fines, class action lawsuits, cease and desist orders and civil and criminal liability |
| The occurrence of one or more of these events could materially adversely affect our business, financial condition and results of operations |
| Imposition of additional regulatory requirements in any of the foreign countries in which we operate could adversely affect our business |
| International regulation of the money transfer business varies from country to country |
| Although most countries (other than Germany, Malaysia, the Netherlands, Switzerland, Ukraine and the United Kingdom) do not regulate this business to the same degree as the United States, this could change in the future |
| Various foreign governments could impose penalties or charges, or additional regulatory requirements on us or our agents, such as licensing requirements, government watch lists that prohibit the transfer of money on behalf of prohibited individuals, and anti-money laundering regulations |
| Any of these requirements, including anti-money laundering requirements and related scrutiny, could make it more difficult to originate money transfers overseas, increase our costs or decrease our revenues |
| Any inadvertent violation of a law or regulation by us or one of our agents could subject us to damages, including fines or penalties |
| Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse affect on our business and stock price |
| Due to our July 1, 2004 spin-off and new status as a public company, 2006 is the first year in which we are required to certify and report on our compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm addressing these assessments |
| If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 |
| In order to achieve effective internal controls we may need to enhance our accounting systems or processes which could increase our cost of doing business |
| Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business |
| We face credit and fraud risks from our retail agents |
| The vast majority of our Global Funds Transfer business is conducted through independent agents that provide our products and services to consumers at their business locations |
| Our agents receive the proceeds from the sale of our payment instruments and we must then collect these funds from the agents |
| As a result, we have credit exposure to our agents, which averages approximately dlra1dtta1 billion in the aggregate, representing a combination of money orders, money transfers and bill payment proceeds |
| We are not insured against credit losses, except in circumstances of agent theft or fraud |
| If an agent becomes insolvent, files for bankruptcy, commits fraud or otherwise fails to remit money order or money transfer proceeds to us, we must nonetheless pay the money order or complete the money transfer on behalf of the consumer |
| Moreover, we have made, and may in the future make, secured or unsecured loans to retail agents under limited circumstances or allow agents to retain our funds for a period of time before remitting them to us |
| The failure of agents owing us large amounts to remit funds to us or to repay such amounts could materially adversely affect our business, results of operations and our financial condition |
| We are subject to credit risk related to our investment portfolio and our use of derivatives |
| Our credit risk includes the potential risk that the Company may not collect on interest and/or principal associated with its investments, as well as counterparty risk associated with its derivative financial instruments |
| Approximately 83 percent of our investment portfolio at December 31, 2005 consisted of securities that are not issued or guaranteed by the US government |
| If the issuer of any of these securities were to default in its payment obligations to us or to otherwise experience credit problems, the value of the investments would decline and adversely impact our investment portfolio and our earnings |
| At December 31, 2005, we were party to derivative instruments, known as swaps, having a notional amount of dlra2dtta7 billion |
| These swap agreements are contracts in which we and a counterparty agree to exchange periodic payments based on a fixed or variable rate of interest on a given notional amount, without the exchange of the underlying notional amounts |
| The notional amount of a swap agreement is used to measure amounts to be paid or received and does not represent the amount of 11 _________________________________________________________________ [82]Table of Contents exposure to credit loss |
| At any point in time, depending upon many factors including the interest rate environment and the fixed and variable rates of the swap agreements, we may owe our counterparty or our counterparty may owe us |
| If any of our counterparties to these swap agreements were to default in its payment obligation to us or otherwise experience credit problems, we could be adversely affected |
| Our financial condition and results of operations could be adversely affected by fluctuations in interest rates |
| We derive a substantial portion of our revenue from the investment of funds we receive from the sale of payment instruments, such as official checks and money orders, until these instruments are settled |
| We generally invest these funds in long-term fixed-income securities |
| We pay the financial institutions to which we provide official check outsourcing services a commission based on the average balance of funds produced by their sale of official checks |
| This commission is generally calculated on the basis of a variable rate based on short-term financial indices, such as the federal funds rate |
| In addition, we have agreements to sell, on a periodic basis, undivided percentage interests in some of our receivables from agents at a price that is discounted based on short-term interest rates |
| To mitigate the effects of interest rate fluctuations on our commission expense and the net proceeds from our sales of agent receivables, we enter into variable-to-fixed rate swap agreements |
| These swap agreements require us to pay our counterparty a fixed interest rate on an agreed notional amount, while our counterparty pays us a variable interest rate on that same notional amount |
| Fluctuations in interest rates affect the value and amount of revenue produced by our investment portfolio, the amount of commissions that we pay, the net proceeds from our sale of receivables and the amount that we pay or receive under our swap agreements |
| As a result, our net investment revenue, which is the difference, or “spread,” between the amount we earn on our investment portfolio and the commissions we pay and the discount on the sale of receivables, net of the effect of the swap agreements, is subject to interest rate risk as the components of net investment revenue are not perfectly matched through time and across all possible interest rate scenarios |
| Certain investments in our portfolio, primarily fixed-rate mortgage-backed investments, are subject to prepayment with no penalty to the borrower |
| As interest rates decrease, borrowers are more likely to prepay fixed-rate debt, resulting in cash flows that are received earlier than expected |
| Replacing the higher-rate investments that prepay with lower rate investments could reduce our net investment revenue |
| Conversely, an increase in interest rates may result in slower than expected prepayments and, therefore, cash flows that are received later than expected |
| In this case, there is risk that the cost of our commission payments may reprice faster than our investments and at a higher cost, which could reduce our net investment revenue |
| Material changes in the market value of securities we hold may materially affect our results of operation and financial condition |
| We also bear market risk that arises from fluctuations in interest rates that may result in changes in the values of our investments and swap agreements |
| Rate movements can affect the repricing of assets and liabilities differently, as well as their market value |
| Stockholders’ equity can be adversely affected by changing interest rates, as after-tax changes in the fair value of securities classified as available-for-sale and after-tax changes in the fair value of our swaps are reflected as increases and decreases to a component of stockholders’ equity |
| The fair value of our swaps generally increases when the market value of fixed rate, long-term debt investments decline and vice versa |
| However, the changes in the fair value of swaps and investments may not fully offset, which could adversely affect stockholders’ equity |
| The market values of securities we hold may decline due to a variety of factors, including decline in credit rating of the issuer or credit issues related to underlying collateral of the security, general market conditions and increases in interest rates for comparable obligations |
| If we determine that an unrealized loss on a security is “other-than-temporary,” the loss becomes a realized loss through an impairment charge in the income statement |
| Our business may require cash in amounts greater than the amount of available credit facilities and liquid assets that we have on hand at a particular time, and if we were forced to ultimately liquidate assets or secure other financing as a result of unexpected liquidity needs, our earnings could be reduced |
| We are subject to risks relating to daily liquidity needs, as well as extraordinary events, such as the unexpected loss of a customer |
| On a daily basis, we receive remittances from our agents and financial institution customers and we must clear and pay the financial 12 _________________________________________________________________ [83]Table of Contents instruments that were previously sold and currently are presented for payment |
| We monitor and maintain a liquidity portfolio along with credit lines and repurchase agreements in order to cover payment service obligations as they are presented |
| If we were forced to liquidate portfolio assets or secure other financing as a result of unexpected liquidity needs, our earnings could be reduced |
| In addition, if we were to lose any of our significant customers, in addition to losing the related revenues, we may have to liquidate investments or seek to borrow for a period of time to fund our obligation to clear the outstanding instruments issued on behalf of that customer at the termination of its contract |
| We may not be able to plan effectively for every customer contract termination, which could result in sale of investments at a loss of or lower profits than we would otherwise realize due to prevailing market conditions |
| Our business is highly dependent on the efficient and uninterrupted operation of our computer network systems and data centers, and any disruption or material breach of security of our systems could harm our business |
| Our ability to provide reliable service largely depends on the efficient and uninterrupted operation of our computer network systems and data centers |
| Any significant interruptions or security or privacy breaches in our facilities, computer networks and databases could harm our business and reputation, result in a loss of customers or cause inquiries and fines or penalties from regulatory or governmental authorities |
| Our systems and operations could be exposed to damage or interruption from fire, natural disaster, power loss, telecommunications failure, unauthorized entry or physical break-ins, computer viruses and hackers |
| The measures we have enacted, such as the implementation of disaster recovery plans and redundant computer systems, may not be successful and we may experience problems other than system failures |
| We may also experience software defects, development delays and installation difficulties, which would harm our business and reputation and expose us to potential liability and increased operating expenses |
| Third-party contractors also may experience security breaches involving the storage and transmission of proprietary information |
| If users gain improper access to our systems or databases, they may be able to steal, publish, delete or modify confidential third-party information that is stored or transmitted on the networks |
| Our data applications may not be sufficient to address technological advances, changing market conditions or other developments |
| If we face system interruptions and system failures due to defects in our software, development delays, installation difficulties or for any other reason, our business interruption insurance may not be adequate to compensate us for all losses or damages that we may incur |
| Our business involves the movement of large sums of money, and, as a result, our business is particularly dependent on our ability to process and settle transactions accurately and efficiently |
| Our revenues consist primarily of transaction fees that we charge for the movement of this money and investment revenues |
| These transaction fees represent only a small fraction of the total amount of money that we move |
| Because we are responsible for large sums of money that are substantially greater than our revenues, the success of our business particularly depends upon the efficient and error-free handling of the money that is remitted to us and that is used to clear payment instruments or complete money transfers |
| We rely on the ability of our employees and our internal systems and processes to process these transactions in an efficient, uninterrupted and error-free manner |
| In addition, we rely on third-party vendors in our business, including clearing banks which clear our money orders and official checks and certain of our telecommunications providers |
| In the event of a breakdown, catastrophic event, security breach, improper operation or any other event impacting our systems or processes or our vendors’ systems or processes, or improper action by our employees, agents, customer financial institutions or third party vendors, we could suffer financial loss, loss of customers, regulatory sanctions and damage to our reputation |
| There are a number of risks associated with our international sales and operations that could harm our business |
| We provided money transfer services between and among approximately 170 countries and territories at December 31, 2005, and our strategy is to expand our international business |
| Our ability to grow in international markets and our future results could be harmed by a number of factors, including: • changes in political and economic conditions and potential instability in certain regions; • changes in regulatory requirements or in foreign policy and the adoption of foreign laws detrimental to our business; 13 _________________________________________________________________ [84]Table of Contents • burdens of complying with a wide variety of laws and regulations; • possible fraud or theft losses, and lack of compliance by international representatives in remote locations and foreign legal systems where collection and enforcement may be difficult or costly; • reduced protection for our intellectual property rights; • unfavorable tax rules or trade barriers; • inability to secure, train or monitor international agents; and • failure to successfully manage our exposure to foreign currency exchange rates |
| Our charter documents, our rights plan and Delaware law contain provisions that could delay or prevent an acquisition of our Company, which could inhibit your ability to receive a premium on your investment from a possible sale of our Company |
| Our charter documents contain provisions that may discourage third parties from seeking to acquire our Company |
| In addition, we have adopted a rights plan which enables our Board of Directors to issue preferred share purchase rights that would be triggered by certain prescribed events |
| These provisions and specific provisions of Delaware law relating to business combinations with interested stockholders may have the effect of delaying, deterring or preventing a merger or change in control of our Company |
| Some of these provisions may discourage a future acquisition of our Company even if stockholders would receive an attractive value for their shares or if a significant number of our stockholders believed such a proposed transaction to be in their best interests |
| As a result, stockholders who desire to participate in such a transaction may not have the opportunity to do so |