EX-13 6 dex13.htm 2005 ANNUAL REPORT TO SHAREHOLDERS 2005 Annual Report to Shareholders

EXHIBIT 13

Fiserv, Inc and Subsidiaries

2005 Annual Report


CONSOLIDATED STATEMENTS OF INCOME

 

(In thousands, except per share data)

Years ended December 31,

   2005     2004     2003  

REVENUES:

      

Processing and services

   $ 2,891,552     $ 2,739,732     $ 2,420,728  

Product

     1,167,926       990,014       504,639  
                        

TOTAL REVENUES

     4,059,478       3,729,746       2,925,367  
                        

EXPENSES:

      

Cost of processing and services

     1,855,247       1,822,733       1,659,923  

Cost of product

     942,708       795,965       351,395  

Selling, general and administrative

     516,127       451,488       392,227  
                        

TOTAL EXPENSES

     3,314,082       3,070,186       2,403,545  
                        

OPERATING INCOME

     745,396       659,560       521,822  

Interest expense

     (27,828 )     (24,902 )     (22,895 )

Interest income

     13,561       6,708       7,340  

Realized gain from sale of investments

     86,822       —         —    
                        

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     817,951       641,366       506,267  

Income tax provision

     306,594       246,468       197,444  
                        

INCOME FROM CONTINUING OPERATIONS

     511,357       394,898       308,823  

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES

     5,081       (17,256 )     6,189  
                        

NET INCOME

   $ 516,438     $ 377,642     $ 315,012  
                        

BASIC NET INCOME (LOSS) PER SHARE:

      

Continuing operations

   $ 2.71     $ 2.03     $ 1.60  

Discontinued operations

     0.03       (0.09 )     0.03  
                        

Total

   $ 2.74     $ 1.94     $ 1.63  
                        

DILUTED NET INCOME (LOSS) PER SHARE:

      

Continuing operations

   $ 2.68     $ 2.00     $ 1.58  

Discontinued operations

     0.03       (0.09 )     0.03  
                        

Total

   $ 2.70     $ 1.91     $ 1.61  
                        

SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE:

      

Basic

     188,807       194,981       193,240  
                        

Diluted

     190,967       197,287       195,937  
                        

See notes to consolidated financial statements.


CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands)

December 31,

   2005     2004  

ASSETS

    

Cash and cash equivalents

   $ 184,471     $ 516,127  

Accounts receivable, less allowance for doubtful accounts

     553,402       437,764  

Prepaid expenses and other assets

     105,782       100,810  

Investments

     2,126,538       1,984,536  

Property and equipment, net

     226,013       200,709  

Intangible assets, net

     593,808       532,539  

Goodwill

     2,249,502       1,859,347  

Assets of discontinued operations held for sale

     —         2,751,517  
                

TOTAL

   $ 6,039,516     $ 8,383,349  
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Accounts payable

   $ 241,751     $ 202,616  

Short-term borrowings

     —         100,000  

Accrued expenses

     365,651       363,513  

Accrued income taxes

     4,266       44,955  

Deferred revenues

     240,105       226,080  

Customer funds held and retirement account deposits

     1,960,626       1,829,639  

Deferred income taxes

     165,992       134,330  

Long-term debt

     595,385       505,327  

Liabilities of discontinued operations held for sale

     —         2,412,467  
                

TOTAL LIABILITIES

     3,573,776       5,818,927  

COMMITMENTS AND CONTINGENCIES

    

SHAREHOLDERS’ EQUITY

    

Preferred stock, no par value: 25,000,000 shares authorized; none issued

     —         —    

Common stock, $0.01 par value: 450,000,000 shares authorized; 197,507,892 and 195,940,360 shares issued

     1,975       1,959  

Additional paid-in capital

     693,715       679,573  

Accumulated other comprehensive income

     1,321       26,695  

Accumulated earnings

     2,436,977       1,920,539  

Treasury stock, at cost, 15,753,675 and 1,691,500 shares

     (668,248 )     (64,344 )
                

TOTAL SHAREHOLDERS’ EQUITY

     2,465,740       2,564,422  
                

TOTAL

   $ 6,039,516     $ 8,383,349  
                

See notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

(In thousands)

   Common Stock    Additional
Paid-In
Capital
   Comprehensive
Income
    Accumulated
Other
Comprehensive
Income
    Accumulated
Earnings
   Treasury Stock  
   Shares    Amount              Shares     Amount  

Balance at December 31, 2002

   192,450    $ 1,924    $ 599,700      $ 23,882     $ 1,227,885    805     $ (25,722 )

Net income

            $ 315,012         315,012     

Foreign currency translation

              1,078       1,078         

Change in unrealized gains on available-for-sale investments - net of tax

              (927 )     (927 )       

Reclassification adjustment for realized investment gains included in net income - net of tax

              (10,264 )     (10,264 )       

Fair market value adjustment on cash flow hedges - net of tax

              3,576       3,576         
                          

Comprehensive income

            $ 308,475           
                          

Shares issued under stock plans including income tax benefits

   1,265      13      20,411           (362 )     11,761  

Shares issued for acquired companies

   545      6      17,512           (443 )     13,961  
                                                  

Balance at December 31, 2003

   194,260      1,943      637,623        17,345       1,542,897    —         —    

Net income

            $ 377,642         377,642     

Foreign currency translation

              634       634         

Change in unrealized gains on available-for-sale investments - net of tax

              3,253       3,253         

Fair market value adjustment on cash flow hedges - net of tax

              5,463       5,463         
                          

Comprehensive income

            $ 386,992           
                          

Shares issued under stock plans including income tax benefits

   1,680      16      41,950            

Purchase of treasury stock

                   1,692       (64,344 )
                                                  

Balance at December 31, 2004

   195,940      1,959      679,573        26,695       1,920,539    1,692       (64,344 )

Net income

            $ 516,438         516,438     

Foreign currency translation

              767       767         

Change in unrealized gains on available-for-sale investments - net of tax

              (228 )     (228 )       

Reclassification adjustment for realized investment gains included in net income - net of tax

              (31,902 )     (31,902 )       

Fair market value adjustment on cash flow hedges - net of tax

              5,989       5,989         
                          

Comprehensive income

            $ 491,064           
                          

Shares issued under stock plans including income tax benefits

   1,568      16      14,142           (1,171 )     48,671  

Purchase of treasury stock

                   15,233       (652,575 )
                                                  

Balance at December 31, 2005

   197,508    $ 1,975    $ 693,715      $ 1,321     $ 2,436,977    15,754     $ (668,248 )
                                                  

See notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands)

Years ended December 31,

   2005     2004     2003  

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

   $ 516,438     $ 377,642     $ 315,012  

Adjustment for discontinued operations

     (5,081 )     17,256       (6,189 )

Adjustments to reconcile income from continuing operations to net cash provided by operating activities from continuing operations:

      

Realized gain from sale of investments

     (86,822 )     —         —    

Deferred income taxes

     19,183       23,022       27,488  

Depreciation and amortization

     179,179       185,363       165,838  

Changes in assets and liabilities, net of effects from acquisitions and dispositions of businesses:

      

Accounts receivable

     (83,367 )     (19,177 )     17,268  

Prepaid expenses and other assets

     (7,085 )     (4,518 )     4,803  

Accounts payable and accrued expenses

     52,676       54,445       33,371  

Deferred revenues

     14,389       17,826       9,420  

Accrued income taxes

     (2,388 )     46,524       28,674  
                        

Net cash provided by operating activities from continuing operations

     597,122       698,383       595,685  
                        

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Capital expenditures, including capitalization of software costs for external customers

     (164,951 )     (161,093 )     (139,111 )

Payment for acquisitions of businesses, net of cash acquired

     (509,630 )     (64,896 )     (735,917 )

Proceeds from sale of businesses, net of expenses paid

     282,236       —         —    

Cash distribution received from discontinued operations prior to sale

     68,000       —         —    

Investments

     (104,810 )     (139,258 )     139,432  
                        

Net cash used in investing activities from continuing operations

     (429,155 )     (365,247 )     (735,596 )
                        

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Repayment of short-term borrowings

     (100,000 )     —         —    

Proceeds from long-term debt

     129,580       17,303       248,268  

Repayments of long-term debt

     (39,744 )     (210,243 )     (32,474 )

Issuance of common stock and treasury stock

     32,129       30,666       18,585  

Purchases of treasury stock

     (652,575 )     (64,344 )     —    

Customer funds held and retirement account deposits

     130,987       246,941       (124,760 )
                        

Net cash (used in) provided by financing activities from continuing operations

     (499,623 )     20,323       109,619  
                        

Change in cash and cash equivalents

     (331,656 )     353,459       (30,292 )

Beginning balance

     516,127       162,668       192,960  
                        

Ending balance

   $ 184,471     $ 516,127     $ 162,668  
                        

Discontinued Operations Cash Flow Information (Revised - See Note 1)

      

Net cash (used in) provided by operating activities - discontinued operations

   $ (6,306 )   $ 89,659     $ (77,584 )

Net cash (used in) provided by investing activities - discontinued operations

     (36,749 )     (64,910 )     44,405  

Net cash (used in) provided by financing activities - discontinued operations

     39,600       (29,000 )     39,000  
                        

Total net cash (used in) provided by discontinued operations

     (3,455 )     (4,251 )     5,821  
                        

Cash and cash equivalents - discontinued operations - beginning of year

     35,849       40,100       34,279  

Cash and cash equivalents - sold

     32,394       —         —    
                        

Cash and cash equivalents - discontinued operations - end of year

   $ —       $ 35,849     $ 40,100  
                        

See notes to consolidated financial statements.


Notes to Consolidated Financial Statements

For the years ended December 31, 2005, 2004 and 2003

1. Summary of Significant Accounting Policies

DESCRIPTION OF THE BUSINESS

Fiserv, Inc. and subsidiaries (the “Company”) provides information management systems and services to the financial and health benefits industries, including transaction processing outsourcing, business process outsourcing and software and systems solutions. The Company’s operations are primarily in the United States and consist of three business segments based on the services provided by each: Financial institution outsourcing, systems and services; Health plan management services; and Investment support services. The Financial institution outsourcing, systems and services segment provides account and transaction processing products and services to financial institutions and other financial intermediaries. The Health plan management services segment provides services primarily to employers who self-insure their health plans, including services such as handling payments to healthcare providers, assisting with cost controls, plan design services and prescription benefit management. The Investment support services segment provides retirement plan administration services to individual retirement plan and pension administrators, financial planners and financial institutions.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Fiserv, Inc. and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

FAIR VALUES

The fair values of cash equivalents, accounts receivable, accounts payable, short-term borrowings, accrued expenses and customer funds held and retirement account deposits approximate the carrying values due to the short period of time to maturity. The fair value of investments is determined based on quoted market prices. The fair value of long-term debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rates or dealer quotes and the fair value of derivative instruments is determined based on dealer quotes.

NEW ACCOUNTING PRONOUNCEMENT

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), that requires companies to expense the value of employee stock purchase plans, stock option grants and similar awards at the beginning of their next fiscal year that begins after June 15, 2005 and requires the use of either the modified prospective or the modified retrospective application method. The Company will adopt SFAS 123R on January 1, 2006 under the modified prospective method, which requires the application of SFAS 123R to new awards and to awards modified, repurchased, or cancelled after the effective date. Additionally, compensation cost for the portion of outstanding awards for which service has not been rendered (such as unvested options) that are outstanding as of the date of adoption shall be recognized as the remaining services are rendered. Had the Company adopted SFAS 123R in prior periods, the Company believes the impact of the standard would have approximated the impact of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) as described in the following “Stock-Based Compensation” disclosure. The incremental share-based compensation expense under SFAS 123R is estimated to be in the range of $0.09 to $0.11 per share in 2006. The ultimate impact of adopting SFAS 123R on 2006’s results of operations and financial position will depend upon many factors including the level of stock-based compensation granted in 2006, the fair value of those options which will be determined at the date of grant, the level of participation in the employee stock purchase plan, the related tax benefits recorded and the diluted shares outstanding.

DERIVATIVE INSTRUMENTS

The Company accounts for its derivative instruments in accordance with SFAS Nos. 133, 137 and 149 related to “Accounting for Derivative Instruments and Hedging Activities”. Derivative instruments are recorded on the balance sheet as either an asset or liability measured at their fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative are recognized in earnings. To the extent the hedge is effective, there is an offsetting adjustment to the basis of the item being hedged. If the derivative is designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are recorded as a component of accumulated other comprehensive income and recognized in the consolidated statements of income when the hedged item affects earnings. Ineffective portions of changes in the fair value of hedges are recognized in earnings.

The Company’s existing fair value and cash flow hedges are effective. As a result, there is no current impact on earnings due to hedge ineffectiveness. It is the policy of the Company to execute such instruments with credit-worthy banks and not to enter into derivative financial instruments for speculative purposes.

RECLASSIFICATIONS AND REVISIONS

Certain amounts reported in prior periods have been reclassified to conform to the 2005 presentation. During 2005, the Company revised the format of its consolidated statement of income. All prior periods have been revised to be consistent with the 2005 presentation. This revision did not impact the Company’s total revenue, total expenses, operating income, net income or net income per share.

In addition, in 2005, the Company revised the presentation of its consolidated statements of cash flows to present separate disclosure of, rather than as a single line item, the cash flows from operating, investing and financing activities of the discontinued operations and revised the consolidated statements of cash flows for the years ended December 31, 2004 and 2003.

REVENUE RECOGNITION

Processing and services revenues are primarily derived from account and transaction-based fees for data processing, related consulting services, software maintenance fees and from administration fees on investment accounts and are recognized as the related services are


provided. Revenues from investment support services include net investment income of $81.2 million, $74.1 million and $67.4 million in 2005, 2004 and 2003, respectively. Software maintenance fee revenues for on-going customer support are recognized ratably over the term of the related support period, generally 12 months. Deferred revenues consist primarily of advance billings for services and are recognized as revenues when the services are provided.

Product revenues are primarily derived from the Company’s pharmacy businesses, software license sales and integrated print and electronic communications. Product revenues from our pharmacy network contracts where we are the principal are recognized on a gross basis, at the prescription price (ingredient cost plus dispensing fee) negotiated with our clients, excluding the portion of the price to be settled directly by the member (co-payment), plus our administrative fees. Our responsibilities under our client contracts to adjudicate member claims properly, our separate contractual pricing relationships and responsibilities to the pharmacies in our networks, and our interaction with members, among other factors, qualify us as the principal under the indicators set forth in Emerging Issues Task Force No. 99-19, “Reporting Gross Revenues as a Principal vs. Net as an Agent” (“EITF 99-19”) in the majority of our transactions with clients. The Company also recognizes product revenues such as software license sales when written contracts are signed, delivery of the product has occurred, the fee is fixed or determinable and collection is probable.

The Company also includes customer reimbursements, such as postage and telecommunication costs, in both processing and services and product revenue and expense in accordance with Emerging Issues Task Force No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred” (“EITF 01-14”). These costs, which are pass-through expenses to clients included in both revenues and expenses were $351.0 million, $379.2 million and $333.3 million in 2005, 2004 and 2003, respectively.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses primarily consist of salaries, wages and related expenses paid to sales personnel, administrative employees and management; advertising and promotional costs; and other selling expenses.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and investments with original maturities of 90 days or less.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company specifically analyzes accounts receivable and historical bad debts, customer credit-worthiness, current economic trends, and changes in customer payment terms and collection trends when evaluating the adequacy of its allowance for doubtful accounts. Any change in the assumptions used in analyzing a specific account receivable may result in an additional allowance for doubtful accounts being recognized in the period in which the change occurs. The balance in the allowance for doubtful accounts was $33.5 million and $29.5 million at December 31, 2005 and 2004, respectively.

INVESTMENTS

The following summarizes the Company’s investments at December 31:

 

2005

(In thousands)

   Amortized/
Historical
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value
   Carrying
Value

Mortgage-backed obligations

   $ 1,845,019    $ 2,713    $ (50,614 )   $ 1,797,118    $ 1,845,019

Corporate debt obligations

     16,255      1,365      —         17,620      16,255

Other fixed income obligations

     492      1      —         493      492
                                   

Total held-to-maturity investments

     1,861,766      4,079      (50,614 )     1,815,231      1,861,766

Available-for-sale investments

     14,590      54      —         14,644      14,644

Money market mutual funds

     148,607      —        —         148,607      148,607

Repurchase agreements

     100,000      —        —         100,000      100,000

Other investments

     1,521      —        —         1,521      1,521
                                   

TOTAL

   $ 2,126,484    $ 4,133    $ (50,614 )   $ 2,080,003    $ 2,126,538
                                   

2004

(In thousands)

   Amortized/
Historical
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value
   Carrying
Value

Mortgage-backed obligations

   $ 1,496,969    $ 8,249    $ (33,647 )   $ 1,471,571    $ 1,496,969

Corporate debt obligations

     27,658      3,218      —         30,876      27,658

Other fixed income obligations

     990      4      —         994      990
                                   

Total held-to-maturity investments

     1,525,617      11,471      (33,647 )     1,503,441      1,525,617

Available-for-sale investments

     30,436      50,124      —         80,560      80,560

Money market mutual funds

     131,872      —        —         131,872      131,872

Repurchase agreements

     225,000      —        —         225,000      225,000

Other investments

     21,487      —        —         21,487      21,487
                                   

TOTAL

   $ 1,934,412    $ 61,595    $ (33,647 )   $ 1,962,360    $ 1,984,536
                                   


The Company’s Investment support services subsidiaries accept money market deposits from customers and invest the funds in securities. Such amounts due to customers represent the primary source of funds for the Company’s investment securities and amounted to $1.9 billion and $1.8 billion as of December 31, 2005 and 2004, respectively. The Company’s mortgage-backed obligations consist primarily of GNMA, FNMA and FHLMC mortgage-backed pass-through securities and collateralized mortgage obligations rated AAA by Standard and Poor’s. Mortgage-backed obligations may contain prepayment risk; however, the Company has never experienced a default on these types of securities. Substantially all of the Investment support services subsidiaries’ investments are rated AAA or equivalent, except for certain corporate debt obligations which are classified as investment grade. Investments in mortgage-backed obligations and certain fixed income obligations had an average duration of approximately three years and eight months at December 31, 2005. These investments are accounted for as held-to-maturity and are carried at amortized cost as the Company has the ability and intent to hold these investments to maturity.

Available-for-sale investments are carried at market value, based upon quoted market prices. Unrealized gains or losses on available-for-sale investments are accumulated in shareholders’ equity as accumulated other comprehensive income, net of related deferred income taxes. During 2005, the Company sold its remaining 3.2 million shares of Bisys Group, Inc. common stock (included in available-for-sale investments) realizing a pre-tax gain of $43.5 million and its investment in INTRIA Items, Inc. (included in other investments) realizing a pre-tax gain of $43.4 million. Realized gains or losses are computed based on specific identification of the investments sold, based on the trade date.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation and amortization are computed primarily using the straight-line method over the shorter of the estimated useful life of the asset or the leasehold period, if applicable. Property and equipment consist of the following at December 31:

 

(In thousands)   

Estimated
Useful Lives

   2005    2004

Data processing equipment

   3 to 5 years    $ 389,989    $ 354,780

Buildings and leasehold improvements

   5 to 40 years      126,269      125,179

Furniture and equipment

   3 to 10 years      131,424      122,056
                
        647,682      602,015

Less accumulated depreciation and amortization

        421,669      401,306
                

TOTAL

      $ 226,013    $ 200,709
                

INTANGIBLE ASSETS

 

Intangible assets consist of the following at December 31:

 

2005

(In thousands)

   Gross Carrying
Amount
   Accumulated
Amortization
   Net Book
Value

Software development costs for external customers

   $ 565,558    $ 394,340    $ 171,218

Purchased software

     254,244      163,901      90,343

Customer base

     374,830      104,490      270,340

Trade names

     57,744      —        57,744

Other

     8,486      4,323      4,163
                    

TOTAL

   $ 1,260,862    $ 667,054    $ 593,808
                    

2004

(In thousands)

   Gross Carrying
Amount
   Accumulated
Amortization
   Net Book
Value

Software development costs for external customers

   $ 507,122    $ 352,429    $ 154,693

Purchased software

     226,002      136,905      89,097

Customer base

     312,091      86,996      225,095

Trade names

     57,744      —        57,744

Other

     10,041      4,131      5,910
                    

TOTAL

   $ 1,113,000    $ 580,461    $ 532,539
                    

Software development costs for external customers include internally generated computer software for external customers and software acquired in conjunction with acquisitions of businesses. The Company capitalizes certain costs incurred to develop new software or enhance existing software which is marketed externally or utilized by the Company to process customer transactions in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” Costs are capitalized commencing when the technological feasibility of the software has been established. Routine maintenance of software products, design costs and development costs incurred prior to establishment of a product’s technological feasibility are expensed as incurred. Amortization of all software is computed on a straight-line basis over the expected useful life of the product, generally three to five years.

Gross software development costs for external customers capitalized for new products and enhancements to existing products totaled $50.0 million, $47.8 million and $51.9 million in 2005, 2004 and 2003, respectively. Amortization of previously capitalized development costs was $48.7 million, $60.2 million and $47.8 million in 2005, 2004 and 2003, respectively.


Customer base intangible assets represent customer contracts and relationships obtained as part of acquired businesses and are amortized using the straight-line method over their estimated useful lives, generally five to 20 years. Trade names have been determined to have indefinite lives and therefore are not amortized in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” Other intangible assets consist primarily of non-compete agreements, which are generally amortized over their estimated useful lives.

Amortization expense for intangible assets was $104.8 million, $110.5 million and $90.0 million for the years ended December 31, 2005, 2004 and 2003, respectively. Aggregate amortization expense with respect to existing intangible assets with finite lives resulting from acquisitions of businesses, excluding purchased software amortization, should approximate $25 million annually.

GOODWILL

The excess of the purchase price over the estimated fair value of tangible and identifiable intangible assets acquired is recorded as goodwill. The Company reviews, on an annual basis, or more frequently if circumstances indicate possible impairment, the carrying value of goodwill by comparing balances to fair values and has determined that no impairment exists. The changes in the carrying amount of goodwill by business segment during the years ended December 31, 2005 and 2004 are as follows:

 

(In thousands)   

Financial Institution
Outsourcing,
Systems

and Services

   Health Plan
Management
Services
   Investment
Support
Services
   Total

Balance, December 31, 2003

   $ 1,332,523    $ 387,206    $ 1,593    $ 1,721,322

Goodwill additions

     68,728      69,297      —        138,025
                           

Balance, December 31, 2004

     1,401,251      456,503      1,593      1,859,347

Goodwill additions

     375,937      14,218      —        390,155
                           

Balance, December 31, 2005

   $ 1,777,188    $ 470,721    $ 1,593    $ 2,249,502
                           

IMPAIRMENT OF LONG-LIVED ASSETS

The Company assesses the likelihood of recovering the cost of long-lived assets based on current and projected operating results and cash flows of the related business operations using undiscounted cash flow analyses. These factors, along with management’s plans with respect to the operations, are considered in assessing the recoverability of property and equipment and intangible assets subject to amortization. Measurement of any impairment loss is based on discounted operating cash flows.

DISCONTINUED OPERATIONS

On March 24, 2005, the Company completed the sale of its securities clearing businesses to Fidelity Global Brokerage Group, Inc. for $344.9 million paid in cash at closing, subject to certain post-closing adjustments. Prior to completion of the sale, the securities clearing businesses paid a $68.0 million cash distribution to the Company. The sales proceeds, net of related expenses, including taxes that became due upon the sale of the securities clearing businesses, approximated the Company’s carrying value of its investment. The stock purchase agreement also provides for a contingent payment of up to $15.0 million to be paid after the first anniversary of the closing date based on achievement of certain revenue targets. In addition, the stock purchase agreement provided that the Company retained the liability associated with the SEC investigation of the Company’s former subsidiary, Fiserv Securities, Inc. (“FSI”). In April 2005, FSI settled with the SEC on this matter for $15.0 million, which was fully accrued for in the Company’s 2004 financial statements. During 2005, the Company recorded $0.03 per share in diluted earnings in discontinued operations primarily as a result of favorable resolutions of income tax uncertainties.

Also, in the third quarter of 2005, the Company received an indemnification notice under the stock purchase agreement regarding FSI’s past maintenance of certain documentation related to FSI’s introducing broker dealers’ customers. The Company is currently investigating the merits of this matter and is unable to estimate or predict the ultimate outcome or determine whether this matter will have a material adverse impact on the Company’s discontinued operations’ results.

The Company’s securities clearing businesses are excluded from reported total revenues, total expenses and operating cash flows and have been reported as discontinued operations for all periods presented. Summarized financial information for discontinued operations included in the financial statements for the years ended December 31 is as follows:

 

(In thousands)    2005     2004     2003  

Total revenues

   $ 26,391     $ 115,457     $ 108,303  

Total expenses

     26,809       132,820       98,157  
                        

Operating (loss) income before income taxes

     (418 )     (17,363 )     10,146  

Income tax benefit (expense)

     5,862       107       (3,957 )

Loss on sale of businesses, net of income taxes of $48,670

     (363 )     —         —    
                        

Income (loss) from discontinued operations, net of tax

   $ 5,081     $ (17,256 )   $ 6,189  
                        


Assets and liabilities of the discontinued operations were sold on March 24, 2005. At the time of the sale, cash of $32.4 million was included on the balance sheet sold to the buyer. The Company reports its cash flows from continuing operations separate from cash flows from discontinued operations on its consolidated statements of cash flows. The discontinued operations cash flow disclosure includes a $68.0 million cash distribution that the securities clearing business made to the Company prior to completion of the sale.

At December 31, 2004, the assets and liabilities of the discontinued operations were presented separately under the captions “Assets of discontinued operations held for sale” and “Liabilities of discontinued operations held for sale,” respectively, in the accompanying Consolidated Balance Sheets and consisted of the following:

 

(In thousands)    2004

Assets of discontinued operations:

  

Cash and cash equivalents

   $ 35,849

Securities processing receivables

     2,404,215

Prepaid expenses and other assets

     27,632

Investments

     128,279

Property and equipment

     4,140

Intangible assets and goodwill

     151,402
      

TOTAL

   $ 2,751,517
      

Liabilities of discontinued operations:

  

Accounts payable and accruals

   $ 53,328

Securities processing payables

     2,349,139

Short-term borrowings

     10,000
      

TOTAL

   $ 2,412,467
      

SHORT-TERM BORROWINGS

The Company’s Investment support services subsidiaries had no short-term borrowings as of December 31, 2005 and $100.0 million of short-term borrowings as of December 31, 2004. The short-term borrowings outstanding at December 31, 2004 had an average interest rate of 2.6% and were collateralized by investments valued at $102.0 million at December 31, 2004.

INCOME TAXES

The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes.” Under these rules, certain assumptions are made which represent significant estimates. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis, net operating loss and tax credit carryforwards, and tax contingencies. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded against deferred tax assets for which utilization of the asset is not likely.

NET INCOME PER SHARE

Basic net income per share is computed using the weighted-average number of common shares outstanding during the periods. Diluted net income per share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist primarily of stock options and are computed using the treasury stock method. During the years ended December 31, 2005, 2004 and 2003, the Company excluded 0.1 million, 4.1 million and 3.4 million weighted-average shares under stock options, respectively, from the calculation of common equivalent shares as the impact was anti-dilutive.

The computation of the number of shares used in calculating basic and diluted net income per common share is as follows:

 

(In thousands)    2005    2004    2003

Weighted-average common shares outstanding used for calculation of net income per share - basic

   188,807    194,981    193,240

Common stock equivalents

   2,160    2,306    2,697
              

Total shares used for calculation of net income per share - diluted

   190,967    197,287    195,937
              


STOCK-BASED COMPENSATION

The Company has accounted for its stock-based awards and employee stock purchase plans in accordance with the intrinsic value provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, the Company did not record compensation expense in the consolidated financial statements for its stock options and employee stock purchase plans as all options granted under the stock option plans had an exercise price not less than 100% of the fair value of the underlying common stock on the date of grant, and the discount for the employee stock purchase plans did not exceed fifteen percent. The value of the Company’s restricted stock awards, based on market prices, is recognized as compensation expense over the restriction period on a straight-line basis.

The following table illustrates the effect on net income and net income per share had compensation expense been recognized consistent with the fair value provisions of SFAS 123. Stock options are typically granted in the first quarter of the year, generally vest 20% on the date of grant and 20% each year thereafter and expire 10 years from the date of the award.

 

(In thousands, except per share data)    2005     2004     2003  

Net income:

      

As reported

   $ 516,438     $ 377,642     $ 315,012  

Add: reported stock compensation expense - net of tax

     2,500       405       316  

Less: fair value stock compensation expense - net of tax

     (23,380 )     (18,405 )     (17,316 )
                        

Pro forma

   $ 495,558     $ 359,642     $ 298,012  
                        

Reported net income per share:

      

Basic

   $ 2.74     $ 1.94     $ 1.63  

Diluted

     2.70       1.91       1.61  

Pro forma net income per share:

      

Basic

   $ 2.62     $ 1.84     $ 1.54  

Diluted

     2.59       1.82       1.52  

The fair value of each stock option granted in 2005 and 2004 was estimated on the date of grant using a binomial option-pricing model; the fair value of each stock option granted in 2003 was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions:

 

     2005     2004     2003  

Expected life (in years)

   5.4     5.5     5.0  

Risk-free interest rate

   3.9 %   3.1 %   3.0 %

Volatility

   32.2 %   33.6 %   52.3 %

Dividend yield

   0.0 %   0.0 %   0.0 %

The weighted-average estimated fair value of stock options granted during the years ended December 31, 2005, 2004 and 2003 was $14.46, $13.56 and $15.14 per share, respectively.

SHAREHOLDER RIGHTS PLAN

The Company has a shareholder rights plan. Under this plan, each shareholder holds one preferred stock purchase right for each outstanding share of the Company’s common stock held. The stock purchase rights are not exercisable until certain events occur.

ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income consists of the following at December 31:

 

(In thousands)    2005     2004  

Unrealized (losses) gains on investments, net of tax

   $ (45 )   $ 32,085  

Unrealized gains (losses) on cash flow hedges, net of tax

     316       (5,673 )

Foreign currency translation adjustments

     1,050       283  
                

TOTAL

   $ 1,321     $ 26,695  
                

SUPPLEMENTAL CASH FLOW INFORMATION

 

(In thousands)    2005    2004    2003

Interest paid

   $ 26,696    $ 25,495    $ 22,164

Income taxes paid (including discontinued operations)

     335,601      177,017      144,130

Liabilities assumed in acquisitions of businesses

     39,478      10,507      85,072


2. Acquisitions

During 2005, 2004 and 2003, the Company completed the following acquisitions of businesses. The results of operations of these acquired businesses have been included in the accompanying consolidated statements of income from the dates of acquisition.

 

Company

 

Month

Acquired

  

Service

 

Consideration

2005:

      

Del Mar Datatrac, Inc.

  Mar.    Lending services   Cash for stock

Emergis, Inc.’s eLending U.S. business

  May    Lending services   Cash for assets

Interactive Technologies, Inc.

  June    Software and services   Cash for stock

Administrative Services Group, Inc.

  June    Health plan management   Cash for stock

J.W. Hutton, Inc.

  Aug.    Health plan management   Cash for stock

BillMatrix Corporation

  Aug.    Data processing   Cash for stock

VerticalPoint, Inc.

  Aug.    Insurance software systems   Cash for stock

Xcipio, Inc.

  Nov.    Insurance software systems   Cash for assets

2004:

      

RegEd, Inc.

  Jan.   

Insurance/securities training

 

Cash for stock

Pharmacy Fulfillment, Inc.

  Aug.   

Health plan management

 

Cash for stock

Results International Systems, Inc.

  Aug.   

Insurance data processing

 

Cash for stock

CheckAGAIN, LLC

  Oct.   

Item processing

 

Cash for assets

2003:

      

AVIDYN, Inc.

  Jan.   

Health plan management

 

Stock for stock

Precision Computer Systems, Inc.

  Mar.   

Software and services

 

Cash for stock

ReliaQuote, Inc.

  Apr.   

Insurance services

 

Cash for stock

WBI Holdings Corporation

  May   

Health plan management

 

Cash for stock

Electronic Data Systems Corporation’s Credit Union Industry Group business

  July   

Credit union data processing

 

Cash for assets

Chase Credit Systems, Inc. & Chase Credit Research, Inc.

  July   

Lending services

 

Cash for stock

Unisure, Inc.

  Sept.   

Insurance data processing

 

Cash for assets

Insurance Management Solutions Group, Inc.

  Sept.   

Insurance data processing

 

Cash for stock

GAC Holdings Corporation

  Sept.   

Lending services

 

Cash for stock

Federal Home Loan Bank of Indianapolis IP services

  Oct.   

Item processing

 

Cash for assets

MI-Assistant Software, Inc.

  Nov.   

Insurance software systems

 

Cash for assets

MedPay Corporation

  Dec.   

Health plan management

 

Cash for stock

During 2005, 2004 and 2003, the Company completed eight, four and twelve acquisitions, respectively. Net cash paid for these acquisitions was $440.3 million, $35.7 million and $702.8 million, respectively, subject to certain adjustments. At December 31, 2005, the preliminary purchase price allocation for the 2005 acquisitions resulted in goodwill of approximately $374 million and other intangible assets of $83 million, primarily related to customer base and software. The amounts allocated to goodwill and intangible assets are based on preliminary estimates and are subject to final adjustment. Pro forma information for 2005 is not being provided as the 2005 acquisitions did not have a material effect on the Company’s results of operations.

The Company may be required to pay additional cash consideration for acquisitions up to maximum estimated payments of $54.5 million through 2008, if certain of the acquired entities achieve specific escalating operating income targets. The Company has recorded a liability of $34.7 million at December 31, 2005 as an estimate of the additional cash consideration to be paid. During 2005, as a result of previously acquired entities achieving their operating income targets, the Company paid additional cash consideration of $69.3 million. The additional consideration was treated as additional purchase price.


3. Long-term debt

The Company has available $700.0 million of unsecured credit and commercial paper facilities with a syndicate of banks. The Company had $308.2 million of outstanding indebtedness under the credit and commercial paper facilities at December 31, 2005, with a weighted-average variable interest rate of 4.8% and 2.8% at December 31, 2005 and 2004, respectively. The credit facilities consist of a $465.3 million five-year revolving credit facility, which expires in March 2009, and a $234.7 million 364-day revolving credit facility, which is subject to renewal annually through 2009. There were no significant commitment fees or compensating balance requirements under these facilities. The Company must, among other requirements under the facilities, maintain a minimum net worth of $2.0 billion as of December 31, 2005 and limit its total debt to no more than three and one-half times the Company’s earnings before interest, taxes, depreciation and amortization. The Company was in compliance with all debt covenants throughout 2005.

At December 31, 2005, the Company had cash flow interest rate swap agreements to fix the interest rates on certain floating-rate debt at a rate of approximately 5.0% (based on current bank fees and spreads) for a notional amount of $150.0 million until December 2008. At December 31, 2004, the Company had cash flow interest rate swap agreements to fix the interest rates on certain floating-rate debt at a rate approximating 6.8% (based on then current bank fees and spreads) for a notional amount of $200.0 million until December 2005. The estimated fair values of the Company’s cash flow hedges are $0.5 million and ($9.1) million as of December 31, 2005 and 2004, respectively, and are included in the accompanying consolidated balance sheets in prepaid expenses and other assets in 2005 and accrued expenses in 2004 and as a component of accumulated other comprehensive income, net of deferred taxes in both years.

In addition, the Company had fixed-to-floating interest rate swap agreements on the $150.0 million 4% senior notes due April 2008, with a variable interest rate of approximately 5.1% at December 31, 2005. The estimated fair values of the fair value hedges are ($5.5) million and ($2.0) million as of December 31, 2005 and 2004, respectively, and are included in the accompanying consolidated balance sheets in accrued expenses and long-term debt.

The carrying value and estimated fair values of the Company’s long-term debt are as follows at December 31:

 

     2005    2004
(In thousands)    Carrying
Value
   Estimated
Fair Value
   Carrying
Value
   Estimated
Fair Value

Bank notes and commercial paper, at short-term rates

   $ 308,182    $ 308,182    $ 194,993    $ 194,993

3.0% senior notes payable, due 2008

     99,945      94,375      99,922      95,877

4.0% senior notes payable, due 2008

     144,400      144,000      147,957      148,875

Other

     42,858      42,516      62,455      62,837
                           

Total long-term debt

   $ 595,385    $ 589,073    $ 505,327    $ 502,582
                           

Annual principal payments required under the terms of the long-term debt agreements are as follows at December 31, 2005:

 

(In thousands)

Years ending December 31,

    

2006

   $ 14,186

2007

     5,466

2008

     264,092

2009

     311,638

2010

     3
      

TOTAL

   $ 595,385
      

4. Income taxes

A reconciliation of recorded income tax expense from continuing operations with income tax computed at the statutory federal tax rates is as follows for the three years ended December 31:

 

(In thousands)    2005     2004     2003  

Statutory federal tax rate

     35 %     35 %     35 %

Tax computed at statutory rate

   $ 286,283     $ 224,478     $ 177,193  

State income taxes, net of federal effect

     25,863       22,983       19,047  

Foreign tax credit carryover

     —         (2,431 )     —    

Other - net

     (5,552 )     1,438       1,204  
                        

TOTAL

   $ 306,594     $ 246,468     $ 197,444  
                        


The provision for income taxes from continuing operations consist of the following at December 31:

 

(In thousands)    2005     2004     2003  

Current:

      

Federal

   $ 235,966     $ 181,981     $ 138,010  

State

     36,093       34,148       27,506  

Foreign

     15,352       7,317       4,440  
                        
     287,411       223,446       169,956  
                        

Deferred:

      

Federal

     20,994       22,894       28,890  

State

     409       1,134       1,431  

Foreign

     (2,220 )     (1,006 )     (2,833 )
                        
     19,183       23,022       27,488  
                        

TOTAL

   $ 306,594     $ 246,468     $ 197,444  
                        

Significant components of the Company’s deferred tax assets and liabilities consist of the following at December 31:

 

(In thousands)    2005     2004  

Reserve for bad debts

   $ 11,675     $ 10,137  

Purchased incomplete software technology

     17,990       22,461  

Accrued expenses not currently deductible

     30,976       26,667  

Net operating loss carryforwards

     5,437       2,932  

Other

     9,133       16,913  
                

Total deferred tax assets

     75,211       79,110  
                

Prepaid expenses

     (8,059 )     (4,940 )

Software development costs for external customers

     (44,812 )     (40,384 )

Excess of tax over book depreciation

     (20,101 )     (25,463 )

Excess of tax over book amortization

     (148,876 )     (105,912 )

Unrealized gains on investments

     —         (18,081 )

Other

     (19,355 )     (18,660 )
                

Total deferred tax liabilities

     (241,203 )     (213,440 )
                

TOTAL

   $ (165,992 )   $ (134,330 )
                

Tax benefits associated with the exercise of non-qualified employee stock options were credited directly to additional paid-in capital and amounted to $30.7 million, $11.3 million and $13.2 million in 2005, 2004 and 2003, respectively.

At December 31, 2005, the Company has state net operating loss carryforwards of $46.2 million, with expiration dates ranging from 2006 through 2025, and foreign net operating loss carryforwards of $8.0 million, with no expiration dates.

5. Employee Benefit Plans

STOCK OPTION AND RESTRICTED STOCK PLAN

The Company’s Stock Option and Restricted Stock Plan (the “Plan”) provides for grants to the Company’s employees and directors of restricted stock and either incentive or non-qualified options to purchase shares of the Company’s common stock. The options are granted at a price not less than 100% of the fair value of the shares at the date of grant. For restricted stock, during the period of restriction, the holder has voting rights and is entitled to receive all distributions including dividends paid with respect to the stock. At December 31, 2005, options to purchase 4.4 million shares were available for grant under the Plan.

Changes in stock options outstanding are as follows:

 

    

Number of
Shares

(In thousands)

    Weighted
Average
Exercise Price

Outstanding, December 31, 2002

   11,610     $ 21.77

Granted

   1,719       30.96

Forfeited

   (326 )     36.90

Exercised

   (1,414 )     9.37
            

Outstanding, December 31, 2003

   11,589     $ 24.21

Granted

   1,282       38.19

Forfeited

   (188 )     36.19

Exercised

   (1,123 )     12.42
            

Outstanding, December 31, 2004

   11,560     $ 26.71

Granted

   1,789       39.45

Forfeited

   (192 )     36.82

Exercised

   (3,043 )     17.08
            

Outstanding, December 31, 2005

   10,114     $ 31.67
            


The number of shares under option that were exercisable at December 31, 2005, 2004 and 2003 was 7.0 million, 8.5 million and 8.2 million, at weighted-average exercise prices of $28.89, $23.44 and $20.19, respectively. The following summarizes information about the Company’s stock options outstanding and exercisable at December 31, 2005:

 

Range of Exercise Prices

   Options Outstanding   

Options Outstanding

and Exercisable

  

Number of
Shares

(In thousands)

  

Weighted-

Average
Exercise Price

   Weighted-Average
Remaining
Contractual Life
(in years)
  

Number of
Shares

(In thousands)

  

Weighted -

Average
Exercise Price

$  7.85 - $16.00

   1,114    $ 13.86    1.7    1,114    $ 13.86

  16.01 -   30.95

   1,990      21.16    3.7    1,948      21.01

  30.96 -   37.00

   1,619      31.55    7.2    851      31.27

  37.01 -   38.15

   1,527      37.05    5.1    1,506      37.04

  38.16 -   39.40

   2,308      38.40    8.7    643      38.50

  39.41 -   46.09

   1,556      42.69    7.0    912      41.63
                            

$  7.85 - $46.09

   10,114    $ 31.67    5.9    6,974    $ 28.89
                            

EMPLOYEE STOCK PURCHASE PLAN

The Company’s employee stock purchase plan provides that eligible employees may purchase a limited number of shares of common stock each quarter through payroll deductions, at a purchase price equal to 85% of the closing price of the Company’s common stock on the last business day of each calendar quarter. During each of the years ended December 31, 2005 and 2004, 0.6 million shares were issued under the employee stock purchase plan. As of January 1, 2006, there were 1.0 million shares available for grant under this plan.

EMPLOYEE SAVINGS PLAN

The Company and its subsidiaries have defined contribution savings plans covering substantially all employees, under which eligible participants may elect to contribute a specified percentage of their salaries, subject to certain limitations. The Company makes matching contributions, subject to certain limitations, and makes discretionary contributions based upon the attainment of certain profit goals. Company contributions vest ratably at 20% for the first five years of each employee’s service. Company contributions charged to operations under these plans approximated $53.8 million, $45.6 million and $44.3 million in 2005, 2004 and 2003, respectively.

6. Leases, other commitments and contingencies

LEASES

The Company leases certain office facilities and equipment under operating leases. Most leases contain renewal options for varying periods. Future minimum rental payments on operating leases with initial noncancellable lease terms in excess of one year were due as follows as of December 31, 2005:

 

(In thousands)

Years Ending December 31,

    

2006

   $ 93,673

2007

     78,633

2008

     66,216

2009

     53,768

2010

     39,763

Thereafter

     92,458
      

TOTAL

   $ 424,511
      

Rent expense applicable to all operating leases was approximately $113.8 million, $115.6 million and $111.2 million during the years ended December 31, 2005, 2004 and 2003, respectively.


OTHER COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits in which claims are asserted against the Company. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits are not expected to have a material adverse effect on the consolidated financial statements of the Company.

The Company’s Investment support services subsidiaries had fiduciary responsibility for the administration of approximately $39 billion in trust funds as of December 31, 2005. The Company is also the custodian of cash deposited by customers with specific instructions as to its disbursement from active escrow and account servicing files. The balances in these custodial accounts were $420 million and $90 million at December 31, 2005 and 2004, respectively, and have not been included in the consolidated financial statements. The increase in 2005 primarily relates to government funds which will be paid out by the Company’s flood insurance claim processing business. The Company has purchase obligations primarily related to agreements to purchase or license data processing equipment and software for approximately $60.2 million at December 31, 2005.


7. Business Segment Information

The Company provides information management systems and services to the financial and health benefits industries, including transaction processing outsourcing, business processing outsourcing and software and systems solutions. The Company’s continuing operations are classified into three business segments: Financial institution outsourcing, systems and services (“Financial”); Health plan management services (“Health”); and Investment support services (“Investment”). The securities clearing businesses are reported under discontinued operations and are not included in the segment information below. Summarized financial information by business segment is as follows for each of the three years ended December 31:

 

(In thousands)    Financial    Health    Investment    Total

2005

           

Processing and services

   $ 2,383,963    $ 373,181    $ 134,408    $ 2,891,552

Product

     524,116      643,810      —        1,167,926
                           

Total revenues

     2,908,079      1,016,991      134,408      4,059,478

Operating income

     639,927      80,434      25,035      745,396

Identifiable assets

     3,056,896      749,548      2,196,997      6,003,441

Capital expenditures, including capitalization of software development costs for external customers

     140,999      13,764      10,188      164,951

Depreciation and amortization expense

     150,016      17,414      11,749      179,179

2004

           

Processing and services

   $ 2,226,137    $ 388,059    $ 125,536    $ 2,739,732

Product

     476,599      513,415      —        990,014
                           

Total revenues

     2,702,736      901,474      125,536      3,729,746

Operating income

     563,645      75,365      20,550      659,560

Identifiable assets

     2,501,855      696,543      2,142,773      5,341,171

Capital expenditures, including capitalization of software development costs for external customers

     143,958      11,829      5,306      161,093

Depreciation and amortization expense

     154,558      16,700      14,105      185,363

2003

           

Processing and services

   $ 1,967,051    $ 337,063    $ 116,614    $ 2,420,728

Product

     441,966      62,673      —        504,639
                           

Total revenues

     2,409,017      399,736      116,614      2,925,367

Operating income

     457,783      47,472      16,567      521,822

Identifiable assets

     2,467,727      598,163      1,889,080      4,954,970

Capital expenditures, including capitalization of software development costs for external customers

     124,889      10,141      4,081      139,111

Depreciation and amortization expense

     138,146      11,852      15,840      165,838

A reconciliation of reportable segment identifiable asset amounts to the Company’s consolidated balance sheets is as follows:

 

(In thousands)    2005    2004

Assets:

     

Reportable segments

   $ 6,003,441    $ 5,341,171

Corporate

     36,075      290,661

Discontinued operations

     —        2,751,517
             

TOTAL

   $ 6,039,516    $ 8,383,349
             

The Company’s domestic operations comprised approximately 96%, 97% and 96% of total revenues for the years ended December 31, 2005, 2004 and 2003, respectively. No single customer accounted for more than 3%, 2% and 3% of total revenues during the years ended December 31, 2005, 2004 and 2003, respectively.


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain matters discussed herein are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as “believes,” “anticipates,” or “expects,” or words of similar import. Similarly, statements that describe future plans, objectives or goals of the Company are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those currently anticipated. Factors that could affect results include, among others, economic, competitive, governmental, regulatory and technological factors affecting the Company’s operations, markets, services and related products, prices and other factors under “Risk Factors” discussed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The Company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company’s management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The Company continually evaluates the accounting policies and estimates it uses to prepare the consolidated financial statements. The Company bases its estimates on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management.

The majority of the Company’s revenues are generated from monthly account and transaction-based fees in which revenue is recognized when the related services have been rendered. Revenues are primarily recognized under service agreements having stipulated terms and conditions which are long-term in nature, generally three to five years, and do not require management to make significant judgments or assumptions. Given the nature of the Company’s business and the applicable rules guiding revenue recognition, the Company’s revenue recognition practices do not contain significant estimates that materially affect its results of operations.

The Company has reviewed the carrying value of goodwill and other intangible assets by comparing such amounts to their fair values and has determined that the carrying amounts of goodwill and other intangible assets do not exceed their respective fair values. The Company is required to perform this comparison, which uses various assumptions, at least annually or more frequently if circumstances indicate possible impairment. Given the significance of goodwill and other intangible asset balances, an adverse change to the fair value could result in an impairment charge, which could be material to the Company’s financial statements.

The Company does not participate in, nor has it created, any off-balance sheet variable interest entities or other off-balance sheet financing, other than operating leases. In addition, the Company does not enter into any derivative financial instruments for speculative purposes and uses derivative financial instruments primarily for managing its exposure to changes in interest rates and managing its ratio of fixed to floating-rate long-term debt.

NEW ACCOUNTING PRONOUNCEMENT

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), that requires companies to expense the value of employee stock purchase plans, stock option grants and similar awards at the beginning of their next fiscal year that begins after June 15, 2005 and requires the use of either the modified prospective or the modified retrospective application method. The Company will adopt SFAS 123R on January 1, 2006 under the modified prospective method, which requires the application of SFAS 123R to new awards and to awards modified, repurchased, or cancelled after the effective date. Additionally, compensation cost for the portion of outstanding awards for which service has not been rendered (such as unvested options) that are outstanding as of the date of adoption shall be recognized as the remaining services are rendered. Had the Company adopted SFAS 123R in prior periods, the Company believes the impact of the standard would have approximated the impact of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) as described in the “Stock-Based Compensation” disclosure in Note 1 to the consolidated financial statements. The incremental share-based compensation expense under SFAS 123R is estimated to be in the range of $0.09 to $0.11 per share in 2006. The ultimate impact of adopting SFAS 123R on 2006’s results of operations and financial position will depend upon many factors including the level of stock-based compensation granted in 2006, the fair value of those options which will be determined at the date of grant, the level of participation in the employee stock purchase plan, the related tax benefits recorded and the diluted shares outstanding.

MARKET RISK

Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, correlations or other market factors, such as liquidity, will result in losses for a certain financial instrument or group of financial instruments. The Company is exposed primarily to interest rate risk and market price risk on investments and borrowings. The Company actively monitors these risks through a variety of control procedures involving senior management.


The Company’s Investment support services subsidiaries accept money market account deposits from customers and invest those funds in marketable securities. Substantially all of the investments are rated within the highest investment grade categories for securities. The Company’s Investment support services subsidiaries utilize simulation models for measuring and monitoring interest rate risk and market value of portfolio equities. A formal Asset Liability Committee of the Company meets quarterly to review interest rate risks, capital ratios, liquidity levels, portfolio diversification, credit risk ratings and adherence to investment policies and guidelines. At December 31, 2005 mortgage-backed obligations have an average duration of approximately three years and eight months with most of the remaining investments having a maturity of one year or less. The Company does not believe any significant changes in interest rates would have a material impact on the consolidated financial statements.

The Company manages its debt structure and interest rate risk through the use of fixed and floating-rate debt and through the use of interest rate swaps. The Company uses interest rate swaps to partially hedge its exposure to interest rate changes and to control its financing costs. Generally, under these swaps, the Company agrees with a counter party to exchange the difference between fixed-rate and floating-rate interest amounts based on an agreed notional amount. While changes in interest rates could decrease the Company’s interest income or increase its interest expense, the Company does not believe that it has a material exposure to changes in interest rates, primarily due to approximately 45% of the Company’s long-term debt having fixed interest rates as of December 31, 2005. Based on the Company’s long-term debt with variable interest rates as of December 31, 2005, a 1% increase in the Company’s borrowing rate would increase annual interest expense by approximately $3.3 million. Based on the controls in place, management believes the risks associated with financial instruments at December 31, 2005, will not have a material effect on the Company’s consolidated financial position or results of operations.

RESULTS OF OPERATIONS

Components of Revenue and Expenses

The following briefly describes the components of revenues and expenses as presented in the consolidated statements of income. A description of the Company’s revenue recognition policies is included in Note 1 to the consolidated financial statements.

Processing and Services

Processing and services revenues are primarily generated from account and transaction-based fees under long term contracts, generally three to five years. Revenue is recognized when the related transactions are processed and services have been rendered. Processing and services revenues are most reflective of the Company’s core business performance as a significant amount of the Company’s total operating profit is generated from these services. Cost of processing and services includes costs directly associated with providing services to clients and includes the following: personnel, equipment and data communication, infrastructure costs including costs to maintain applications, customer support, depreciation and other operating expenses.

Product

Product revenue is primarily derived from the pharmacy businesses, software license fees and integrated print and electronic communications. A significant amount of product revenue is derived from the Company’s pharmacy businesses within the Health segment as the Company includes in both revenues and expenses the prescription product costs associated with these businesses. The Company does not manufacture or generally distribute prescription product, but the Company is considered a principal under EITF 99-19, as more fully described in Note 1 to the consolidated financial statements and therefore, records these revenues and expenses on a gross basis. Prescription product costs included in both product revenues and cost of product were $540.0 million, $439.6 million and $55.9 million in 2005, 2004 and 2003, respectively. Cost of products, in addition to pharmacy product costs, include personnel and other costs directly associated with product revenue.

The Company also includes customer reimbursements, such as postage and telecommunication costs, in both processing and services and product revenue and expense captions in the table below in accordance with EITF 01-14 . These costs, which are pass-through expenses to clients included in both revenues and expenses were $351.0 million, $379.2 million and $333.3 million in 2005, 2004 and 2003, respectively.

Selling, General and Administrative

Selling, general and administrative expenses primarily consist of salaries, wages and related expenses paid to sales personnel, administrative employees and management; advertising and promotional costs; and other selling expenses.


The following table presents, for the periods indicated, certain amounts included in the Company’s consolidated statements of income, the relative percentage that those amounts represent to revenues and the percentage change in those amounts from year to year. This information should be read along with the consolidated financial statements and notes thereto.

 

    

Years ended December 31,

(In millions)

  

Percentage (1) (2)

Years ended December 31,

   

Percentage

Increase

 
     2005    2004    2003    2005     2004     2003     2005 vs.
2004
    2004 vs.
2003
 

Revenues:

                   

Processing and services

   $ 2,891.6    $ 2,739.7    $ 2,420.7    71 %   73 %   83 %   6 %   13 %

Product

     1,167.9      990.0      504.6    29 %   27 %   17 %   18 %   96 %
                                                   

Total revenues

   $ 4,059.5    $ 3,729.7    $ 2,925.4    100 %   100 %   100 %   9 %   27 %
                                                   

Expenses:

                   

Cost of processing and services (1)

     1,855.2      1,822.7      1,659.9    64 %   67 %   69 %   2 %   10 %

Cost of product (1)

     942.7      796.0      351.4    81 %   80 %   70 %   18 %   127 %
                               

Sub-total (2)

     2,798.0      2,618.7      2,011.3    69 %   70 %   69 %   7 %   30 %

Selling, general and administrative (2)

     516.1      451.5      392.2    13 %   12 %   13 %   14 %   15 %
                                                   

Total expenses (2)

   $ 3,314.1    $ 3,070.2    $ 2,403.5    82 %   82 %   82 %   8 %   28 %
                                                   

Operating Income (2)

   $ 745.4    $ 659.6    $ 521.8    18 %   18 %   18 %   13 %   26 %
                                                   

(1) Each percentage equals the relevant expense amount divided by the related component of total revenues.
(2) Each percentage equals the relevant expense or operating income amount divided by total revenues.

Total Revenues

Total revenues increased $329.7 million, or 9%, in 2005 compared to 2004 and $804.4 million, or 27%, in 2004 compared to 2003. The internal revenue growth rate was 7% in 2005 and 10% in 2004 with the remaining growth resulting from acquisitions, which had a much greater impact on 2004 revenue growth than 2005. Overall internal revenue growth is primarily derived from sales to new clients, cross-sales to existing clients and increases in transaction volumes from existing clients. The decrease in the total revenue growth rate for the Company in 2005 compared to 2004 was primarily due to slower revenue growth in the Company’s Health segment.

Processing and services revenues increased 6% in 2005 compared to 13% in 2004 and product revenues increased 18% in 2005 compared to 96% in 2004. Revenue increases in both of these captions were greater in 2004 than 2005 primarily driven by a more significant impact of acquisitions in 2004. Product revenues are impacted significantly on a year over year basis by the inclusion of prescription product costs in the Health segment’s revenues and expenses of $540.0 million, $439.6 million and $55.9 million in 2005, 2004 and 2003, respectively.

Processing and services revenues were positively impacted by early contract termination and assignment fees of $57.9 million, $36.4 million and $9.8 million in 2005, 2004 and 2003, respectively. The financial segment businesses generally enter into three to five year contracts with clients that contain early contract termination fees. These fees are generated when an existing client is acquired by another financial institution and can vary significantly from period to period based on the number and size of clients that are acquired and how early in the contract term a client is acquired.

Total Expenses

Total expenses increased $243.9 million, or 8%, in 2005 compared to 2004 and $666.6 million, or 28%, in 2004 compared to 2003. The significant increase in 2004 expenses was driven by the significant increase in prescription product costs. Total expenses as a percentage of total revenues were 82% in 2005, 2004 and 2003. Cost of processing and services as a percentage of processing and services revenues declined over the last 3 years from 69% of processing and services revenues in 2003 to 64% in 2005 due to a number of factors including: changes in the mix of the Company’s businesses due to acquisitions, the impact of operating efficiencies generated from the consolidation of bank and EFT processing platforms within the Company’s Financial segment and revenue associated with a higher amount of contract termination fees that do not result in any significant incremental cost. Cost of product has increased as a percentage of product revenue from 70% in 2003 to 81% in 2005, primarily driven by the significant increase in prescription product costs. Selling, general and administrative expenses have remained relatively consistent as a percentage of total revenues in 2005, 2004 and 2003.

Operating Income and Operating Margin

Operating income increased $85.8 million, or 13%, in 2005 compared to 2004 and $137.7 million, or 26%, in 2004 compared to 2003. Operating income increases in 2004 were greater than 2005 primarily due to a greater impact of acquisitions in 2004 than 2005. The operating income increases were primarily derived from the Financial segment, which increased operating income $76.3 million in 2005 and $105.9 million in 2004 compared to prior years. Operating margins were relatively consistent on a year over year basis and were positively impacted by a higher operating margin on processing and services revenue and negatively impacted by reduced product margin due to the increase of prescription product costs over the last 3 years. The negative impact on operating margins due to the inclusion of prescription product costs in revenue and expense was 3 percentage points in 2005 and 2 percentage points in 2004. In addition, the inclusion of customer reimbursements of $351.0 million, $379.2 million and $333.3 million in 2005, 2004 and 2003, respectively, in both revenue and expense, had a negative impact on operating margins of 2 percentage points in 2005, 2004 and 2003.


SEGMENT RESULTS

The Company provides information management systems and services to the financial and health benefits industries, including transaction processing outsourcing, business process outsourcing and software and systems solutions. The Company’s continuing operations are classified into three business segments: Financial institution outsourcing, systems and services (“Financial”); Health plan management services (“Health”); and Investment support services (“Investment”). Adjusted revenues presented in this table exclude the revenues associated with customer reimbursements and the pass-through portion of the prescription product costs since both of these items offset in revenues and expenses. Adjusted revenue is a non-GAAP financial measure that the Company believes is useful to investors because it provides a measurement of growth excluding pass-through revenue and expense as management does not believe these items are necessarily an indicator of the Company’s current or future performance. Adjusted revenues as calculated by the Company is not necessarily comparable to similarly titled measures presented by other companies.

 

     Revenue (In millions)  

Years ended December 31,

   Financial     Health     Investment     Total  

2005

        

Total revenues

   $ 2,908.1     $ 1,017.0     $ 134.4     $ 4,059.5  

Less:

        

Customer reimbursements

     345.3       5.8       —         351.0  

Prescription product costs

     —         540.0       —         540.0  
                                

Adjusted revenues

   $ 2,562.8     $ 471.2     $ 134.4     $ 3,168.4  
                                

2004

        

Total revenues

   $ 2,702.7     $ 901.5     $ 125.5     $ 3,729.7  

Less:

        

Customer reimbursements

     363.6       15.6       —         379.2  

Prescription product costs

     —         439.6       —         439.6  
                                

Adjusted revenues

   $ 2,339.1     $ 446.3     $ 125.5     $ 2,911.0  
                                

2003

        

Total revenues

   $ 2,409.0     $ 399.7     $ 116.6     $ 2,925.4  

Less:

        

Customer reimbursements

     332.6       0.7       —         333.3  

Prescription product costs

     —         55.9       —         55.9  
                                

Adjusted revenues

   $ 2,076.4     $ 343.2     $ 116.6     $ 2,536.2  
                                

Total Revenue growth: (1)

        

2005

     8 %     13 %     7 %     9 %

2004

     12 %     126 %     8 %     27 %

Adjusted Revenue growth: (1)

        

2005

     10 %     6 %     7 %     9 %

2004

     13 %     30 %     8 %     15 %

(1) Represents total and adjusted revenue growth over the prior year period.

 

     Operating Income (In millions)  

Years ended December 31,

   Financial     Health     Investment     Total  

Operating Income:

        

2005

   $ 639.9     $ 80.4     $ 25.0     $ 745.4  

2004

     563.6       75.4       20.6       659.6  

2003

     457.8       47.5       16.6       521.8  

Operating Income Growth: (1)

        

2005

     14 %     7 %     22 %     13 %

2004

     23 %     59 %     24 %     26 %

Operating Margin:

        

2005

     22 %     8 %     19 %     18 %

2004

     21 %     8 %     16 %     18 %

2003

     19 %     12 %     14 %     18 %

(1) Represents operating income growth over the prior year period.


INTERNAL REVENUE GROWTH

Internal revenue growth percentages are measured as the increase or decrease in total revenues for the current period less “acquired revenue from acquisitions” divided by total revenues from the prior year period plus “acquired revenue from acquisitions.” “Acquired revenue from acquisitions” represents pre-acquisition revenue of acquired companies, less dispositions, for the comparable prior year period. Internal revenue growth percentage is a non-GAAP financial measure that the Company believes is useful to investors because it provides a breakdown of internal and acquisition-related revenue growth. The following table sets forth the calculation of internal revenue growth percentages:

 

    

Years ended December 31,

(In millions)

   

Years ended December 31,

(In millions)

 
     2005     2004    Increase
(Decrease)
    2004     2003    Increase
(Decrease)
 

Total Company

              

Total revenues

   $ 4,059.5     $ 3,729.7    $ 329.7     $ 3,729.7     $ 2,925.4    $ 804.4  

Acquired revenue from acquisitions

       67.5      (67.5 )       456.0      (456.0 )
                                              

Total

   $ 4,059.5     $ 3,797.2    $ 262.2     $ 3,729.7     $ 3,381.4    $ 348.4  
                                              

Internal revenue growth percentages:

              

Total revenues

     7 %          10 %     

Adjusted revenues (1)

     7 %          4 %     

By Segment:

              

Financial

              

Total revenues

   $ 2,908.1     $ 2,702.7    $ 205.3     $ 2,702.7     $ 2,409.0    $ 293.7  

Acquired revenue from acquisitions

       45.7      (45.7 )       206.1      (206.1 )
                                              

Total

   $ 2,908.1     $ 2,748.5    $ 159.6     $ 2,702.7     $ 2,615.1    $ 87.6  
                                              

Internal revenue growth percentages:

              

Total revenues

     6 %          3 %     

Adjusted revenues (1)

     7 %          2 %     

Health

              

Total revenues

   $ 1,017.0     $ 901.5    $ 115.5     $ 901.5     $ 399.7    $ 501.7  

Acquired revenue from acquisitions

       21.7      (21.7 )       249.9      (249.9 )
                                              

Total

   $ 1,017.0     $ 923.2    $ 93.8     $ 901.5     $ 649.6    $ 251.9  
                                              

Internal revenue growth percentages:

              

Total revenues

     10 %          39 %     

Adjusted revenues (1)

     3 %          10 %     

Investment

              
                                              

Total revenues

   $ 134.4     $ 125.5    $ 8.9     $ 125.5     $ 116.6    $ 8.9  
                                              

Internal revenue growth percentages

              

Total revenues

     7 %          8 %     

(1) Adjusted revenue growth is calculated based on adjusted revenues excluding customer reimbursements and prescription product pass-through costs. Acquired revenues in the Health segment include prescription product costs of $11.1 million and $186.8 million in 2004 and 2003, respectively.

Financial

The Financial segment increased total revenues by $205.3 million, or 8%, in 2005 and $293.7 million, or 12%, in 2004. The internal revenue growth rate in the Financial segment was 6% in 2005 and 3% in 2004 with the remaining growth resulting from acquisitions. Adjusted internal revenue growth, excluding the impact of customer reimbursements, was 7% in 2005 and 2% in 2004. The largest contributors to the 2005 internal revenue growth rate in this segment were increased volumes and new clients in the lending division’s loan settlement and loan servicing businesses, increased revenue associated with new client growth and cross sales in the bank and credit union operations, incremental revenue associated with the Australian check processing business that began operations in mid-April 2005, higher than normal revenues associated with flood insurance claims processing and an increase in contract termination fees over those received in 2004.

Operating margins in the Financial segment were 22% in 2005, 21% in 2004 and 19% in 2003. Operating margins in 2005 were positively impacted by 60 basis points over 2004 due to an increase in contract termination fees of $21.5 million compared to 2004. The increase in operating margins in 2004 compared to 2003 in the Financial segment was primarily due to continued operating efficiencies and the impact of increased contract termination and assignment fees of $26.6 million or 80 basis points. Customer reimbursements negatively impacted operating margins in the Financial segment by approximately 3 percentage points in 2005, 2004 and 2003.

Health

The Health segment had revenue growth of $115.5 million, or 13%, in 2005 compared to 2004 and $501.7 million, or 126%, in 2004 compared to 2003. The internal revenue growth rate in this segment for 2005 was 10% in 2005 and 39% in 2004 with the remaining growth from acquisitions. Adjusted internal revenue growth, excluding the impact of prescription product and other customer reimbursement costs, was 3% in 2005 and 10% in 2004. The decrease in the 2005 internal revenue growth rate compared to 2004 was primarily due to significant growth of the Company’s pharmacy businesses in early 2004 based on the signing of some large clients. In addition, growth of the health plan administration businesses in 2005 was negatively impacted by increased competition in the large commercial employer market.

Operating margins in the Health segment were 8% in 2005 and 2004 and 12% in 2003. The decrease in operating margins in the Health segment in 2005 and 2004 compared to 2003 was due to the Company’s entrance into the pharmacy business in mid-2003 and significant revenue growth in this business, which generates operating margins in the mid-single digits due to the inclusion of prescription product costs in revenues and expenses. Prescription product costs negatively impacted operating margins in the Health segment by approximately 9 percentage points in 2005 and 8 percentage points in 2004.


Investment

The Investment segment had revenue growth of $8.9 million in 2005 and 2004, representing revenue growth of 7% and 8%, respectively. Revenue growth was primarily derived from continued new client growth. Operating margins in the Investment segment were 19% in 2005, 16% in 2004 and 14% in 2003. The increase in operating margin in 2005 compared to the prior periods was primarily due to a temporary increase in cash investment balances in 2005 that improved net investment income. The 2004 increase in operating margins over 2003 was primarily due to increased trust administration fees and investment income and the completion of the Investment segment’s operations consolidation to one technology platform and into a single location.

DISCONTINUED OPERATIONS

On March 24, 2005, the Company completed the sale of its securities clearing businesses to Fidelity Global Brokerage Group, Inc. for $344.9 million paid in cash at closing, subject to certain post-closing adjustments. Prior to completion of the sale, the securities clearing businesses paid a $68.0 million cash distribution to the Company. The sales proceeds, net of related expenses, including taxes that became due upon the sale of the securities clearing businesses, approximated the Company’s carrying value of its investment. In 2005, the Company recorded a net loss on the sale of discontinued operations of $0.4 million, net of related income taxes of $48.7 million. The higher income tax expense on the sale of the securities clearing operations was primarily due to a significantly lower tax basis than book basis in the discontinued operations due primarily to a tax free exchange in the Company’s initial purchase of one of the companies included in discontinued operations. The stock purchase agreement also provides for a contingent payment of up to $15.0 million to be paid after the first anniversary of the closing date based on achievement of certain revenue targets. In addition, the stock purchase agreement provided that the Company retained the liability associated with the SEC investigation of the Company’s former subsidiary, Fiserv Securities, Inc. (“FSI”). In April 2005, FSI settled with the SEC on this matter for $15.0 million, which was fully accrued for in the Company’s 2004 financial statements. During 2005, the Company recorded $0.03 per share in diluted earnings in discontinued operations primarily as a result of favorable resolutions of income tax uncertainties.

In the third quarter of 2005, the Company received an indemnification notice under the stock purchase agreement regarding FSI’s past maintenance of certain documentation related to FSI’s introducing broker dealers’ customers. The Company is currently investigating the merits of this matter and is unable to estimate or predict the ultimate outcome or determine whether this matter will have a material adverse impact on the Company’s discontinued operations’ results.

INTEREST INCOME

In 2005, interest income was $13.6 million compared to $6.7 million in 2004 and $7.3 million in 2003. The increase in 2005 was primarily due to interest income earned on increased cash balances in 2005 resulting from the proceeds received on the sale of the securities clearing businesses.

REALIZED GAIN FROM SALE OF INVESTMENTS

In 2005, the Company recorded a pre-tax realized gain of $43.5 million, or $0.14 per share after tax, from the sale of its remaining ownership of 3.2 million shares of Bisys Group, Inc. common stock. In addition, the Company sold its investment in INTRIA Items, Inc. to its partner, Canadian Imperial Bank of Commerce (CIBC), recognizing a pre-tax gain of $43.4 million, or $0.15 per share after tax, subject to post-closing adjustments. CIBC decided to purchase the Company’s share as a part of its ongoing reorganization of the bank’s Canadian retail network and supporting back-office operations.

INCOME TAX PROVISION

The effective income tax rate on continuing operations was 37.5% in 2005, 38.4% in 2004 and 39.0% in 2003. The decrease in the 2005 tax rate was primarily due to a lower tax rate on the sale of its investments mentioned previously and certain one-time tax benefits associated with a number of factors including tax law changes, tax audits closing and finalization of various tax returns. The income tax rate on continuing operations for 2006 is expected to be 38.7%.

NET INCOME PER SHARE - DILUTED

Net income per share-diluted for 2005 was $2.70 compared to $1.91 in 2004 and $1.61 in 2003. Net income per share-diluted from continuing operations for 2005 was $2.68 compared to $2.00 in 2004 and $1.58 in 2003. The $2.68 in net income from continuing operations per share for 2005 was positively impacted by $0.29 per share due to the realized gain on sale of investments and $0.07 per share from an increase in contract termination fees in 2005 compared to 2004.

Historically, the Company’s growth has been accomplished, to a significant degree, through the acquisition of businesses that are complementary to its operations. Management believes that a number of acquisition candidates are available that would further enhance the Company’s competitive position and plans to pursue them vigorously. Management is engaged in an ongoing program to reduce expenses related to acquisitions and existing operations by eliminating operating redundancies. The Company’s approach has been to move slowly in achieving this goal in order to minimize the amount of disruption experienced by its clients and the potential loss of clients due to this program.


LIQUIDITY AND CAPITAL RESOURCES

Free cash flow is measured as net cash provided by operating activities from continuing operations less capital expenditures including capitalization of software costs for external customers, as reported in the Company’s consolidated statements of cash flows. Free cash flow is a non-GAAP financial measure that the Company believes is useful to investors because it provides another measure of available cash flow after the Company has satisfied the capital requirements of its operations. The following table summarizes free cash flow for the Company during the years ended December 31:

 

(In millions)    2005     2004     2003  

Net cash provided by operating activities from continuing operations

   $ 597.1     $ 698.4     $ 595.7  

Capital expenditures, including capitalization of software costs for external customers

     (165.0 )     (161.1 )     (139.1 )
                        

Free cash flow

   $ 432.2     $ 537.3     $ 456.6  
                        

Free cash flow decreased by $105.1 million in 2005 compared to 2004 primarily due to higher estimated tax payments made in 2005 compared to 2004 resulting in a negative impact of $48.9 million on free cash flow and an increase in accounts receivable resulting in a negative impact on free cash flow of $64.2 million compared to 2004. The increase in accounts receivable was primarily due to increased internal revenue growth in the Financial segment and no further improvements to the significant improvements made in prior years in receivable collections and days sales outstanding. In 2005, the Company primarily used its free cash flow of $432.2 million, cash of $282.2 million received from the sale of the securities businesses and the $68.0 million cash distribution received from the discontinued operations prior to its sale to fund acquisitions of $509.6 million and to repurchase $652.6 million of stock.

Long-term debt includes $308.2 million borrowed under the Company’s $700.0 million credit and commercial paper facilities, which are comprised of a $465.3 million five-year revolving credit facility due in 2009 and a $234.7 million 364-day revolving credit facility, which is renewable annually through 2009. The Company must, among other requirements under the facilities, maintain a minimum net worth of $2.0 billion as of December 31, 2005 and limit its total debt to no more than three and one-half times the Company’s earnings before interest, taxes, depreciation and amortization. At December 31, 2005, the Company had $595.4 million of long-term debt, while shareholders’ equity was $2.5 billion. The Company was in compliance with all debt covenants throughout 2005.

At December 31, 2005, the Company had operating lease commitments for office facilities and equipment aggregating $424.5 million, of which $93.7 million will be incurred in 2006. The Company believes that its cash flow from operations together with other available sources of funds will be adequate to meet its operating requirements, debt repayments, contingent payments in connection with business acquisitions and ordinary capital spending needs in 2006. At December 31, 2005, the Company had $398.8 million available for borrowing and $184.5 million in cash and cash equivalents. In the event that the Company makes significant future acquisitions, however, it may raise funds through additional borrowings or the issuance of securities.

The Company’s current policy is to retain earnings to support future business opportunities, rather than to pay dividends. In 2004, the Company’s Board of Directors authorized the repurchase of 8.3 million shares of the Company’s common stock which the Company fully utilized by December 31, 2005. In July 2005, the Company’s Board of Directors authorized the repurchase of an additional 10.0 million shares of the Company’s common stock. During 2005, the Company repurchased 15.2 million shares for $652.6 million and as of December 31, 2005, 3.1 million shares remained authorized for repurchase under the current stock buy back plan. On February 21, 2006, the Board of Directors authorized the repurchase of up to 10.0 million additional shares of the Company’s common stock. Shares repurchased under the existing authorizations are made through open market transactions as market conditions warrant. Shares acquired have historically been held for issuance in connection with acquisitions and employee stock option and purchase plans.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

The Company does not have any material off-balance sheet arrangements. Purchase obligations primarily relate to agreements to purchase or license data processing equipment and software. The following table details the Company’s contractual cash obligations at December 31, 2005:

 

(In millions)    Total    Less than
1 year
   1-3 years    3-5 years    More than
5 years

Long-term debt

   $ 595.4    $ 14.2    $ 269.6    $ 311.6      —  

Minimum operating lease payments

     424.5      93.7      144.8      93.5    $ 92.5

Purchase obligations

     60.2      20.1      39.2      0.9      —  
                                  

Total

   $ 1,080.0    $ 128.0    $ 453.6    $ 406.1    $ 92.5
                                  


SELECTED FINANCIAL DATA

The following data, which has been affected by acquisitions, should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report.

 

(In thousands, except per share data)

Years ended December 31,

   2005    2004     2003    2002    2001

Total revenues

   $ 4,059,478    $ 3,729,746     $ 2,925,367    $ 2,389,392    $ 2,023,776

Income from continuing operations

     511,357      394,898       308,823      259,331      198,676

Income (loss) from discontinued operations

     5,081      (17,256 )     6,189      6,806      9,541

Net income

     516,438      377,642       315,012      266,137      208,217

Basic net income (loss) per share:

             

Continuing operations

   $ 2.71    $ 2.03     $ 1.60    $ 1.36    $ 1.06

Discontinued operations

     0.03      (0.09 )     0.03      0.04      0.05
                                   

TOTAL

   $ 2.74    $ 1.94     $ 1.63    $ 1.39    $ 1.11

Diluted net income (loss) per share:

             

Continuing operations

   $ 2.68    $ 2.00     $ 1.58    $ 1.33    $ 1.04

Discontinued operations

     0.03      (0.09 )     0.03      0.03      0.05
                                   

TOTAL

   $ 2.70    $ 1.91     $ 1.61    $ 1.37    $ 1.09

Total assets

   $ 6,039,516    $ 8,383,349     $ 7,214,175    $ 6,438,705    $ 5,322,242

Long-term debt

     595,385      505,327       699,116      482,824      343,093

Shareholders’ equity

     2,465,740      2,564,422       2,199,808      1,827,669      1,604,826

MARKET PRICE INFORMATION

The following information relates to the high and low sales price of the Company’s common stock, which is traded on the Nasdaq Stock Market under the symbol FISV.

 

     2005    2004

Quarter Ended

   High    Low    High    Low

March 31

   $ 40.58    $ 36.33    $ 40.61    $ 35.02

June 30

     44.25      38.94      41.00      34.10

September 30

     46.85      42.06      39.05      32.20

December 31

     46.89      41.05      41.01      33.28

At December 31, 2005, the Company’s common stock was held by 10,353 shareholders of record. It is estimated that an additional 69,000 shareholders own the Company’s stock through nominee or street name accounts with brokers. The closing sale price for the Company’s stock on February 28, 2006, was $41.50 per share.


QUARTERLY FINANCIAL INFORMATION (Unaudited)

 

(In thousands, except per share data)    Quarters        
     First     Second     Third     Fourth     Total  

2005

          

Total revenues

   $ 973,114     $ 996,426     $ 1,011,645     $ 1,078,293     $ 4,059,478  

Total expenses

     785,098       809,181       840,126       879,677       3,314,082  
                                        

Operating income

     188,016       187,245       171,519       198,616       745,396  

Interest expense - net

     (3,662 )     (1,280 )     (3,429 )     (5,896 )     (14,267 )

Realized gain from sale of investments

     43,452       —         —         43,370       86,822  
                                        

Income from continuing operations before income taxes

     227,806       185,965       168,090       236,090       817,951  

Income tax provision

     88,161       71,968       58,751       87,714       306,594  
                                        

Income from continuing operations

     139,645       113,997       109,339       148,376       511,357  

Income (loss) from discontinued operations, net of tax

     (619 )     —         3,600       2,100       5,081  
                                        

Net income

   $ 139,026     $ 113,997     $ 112,939     $ 150,476     $ 516,438  
                                        

Basic net income per share:

          

Continuing operations

   $ 0.72     $ 0.60     $ 0.58     $ 0.81     $ 2.71  

Discontinued operations

     —         —         0.02       0.01       0.03  
                                        

TOTAL

   $ 0.72     $ 0.60     $ 0.60     $ 0.82     $ 2.74  
                                        

Diluted net income per share:

          

Continuing operations

   $ 0.71     $ 0.59     $ 0.58     $ 0.80     $ 2.68  

Discontinued operations

     —         —         0.02       0.01       0.03  
                                        

TOTAL

   $ 0.71     $ 0.59     $ 0.60     $ 0.81     $ 2.70  
                                        
(In thousands, except per share data)    Quarters        
     First     Second     Third     Fourth     Total  

2004

          

Total revenues

   $ 908,877     $ 919,773     $ 934,692     $ 966,404     $ 3,729,746  

Total expenses

     747,539       757,861       760,994       803,792       3,070,186  
                                        

Operating income

     161,338       161,912       173,698       162,612       659,560  

Interest expense - net

     (4,732 )     (4,486 )     (4,395 )     (4,581 )     (18,194 )
                                        

Income from continuing operations before income taxes

     156,606       157,426       169,303       158,031       641,366  

Income tax provision

     60,897       61,331       65,008       59,232       246,468  
                                        

Income from continuing operations

     95,709       96,095       104,295       98,799       394,898  

Loss from discontinued operations, net of tax

     (2,911 )     (1,061 )     (11,938 )     (1,346 )     (17,256 )
                                        

Net income

   $ 92,798     $ 95,034     $ 92,357     $ 97,453     $ 377,642  
                                        

Basic net income (loss) per share:

          

Continuing operations

   $ 0.49     $ 0.49     $ 0.53     $ 0.51     $ 2.03  

Discontinued operations

     (0.01 )     (0.01 )     (0.06 )     (0.01 )     (0.09 )
                                        

TOTAL

   $ 0.48     $ 0.49     $ 0.47     $ 0.50     $ 1.94  
                                        

Diluted net income (loss) per share:

          

Continuing operations

   $ 0.49     $ 0.49     $ 0.53     $ 0.50     $ 2.00  

Discontinued operations

     (0.01 )     (0.01 )     (0.06 )     (0.01 )     (0.09 )
                                        

TOTAL

   $ 0.47     $ 0.48     $ 0.47     $ 0.49     $ 1.91  
                                        


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Fiserv, Inc.

We have audited the accompanying consolidated balance sheets of Fiserv, Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fiserv, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1, during 2005 the Company revised the format of its statement of income. All prior periods have been revised to be consistent with the 2005 presentation. This revision to the income statement presentation did not impact previously reported total revenues, total expenses, operating income, net income or net income per share. In addition, as also discussed in Note 1, in 2005, the Company revised its presentation of the statements of cash flows to present separate disclosure of the cash flows from operating, investing and financing activities of the discontinued operations and has revised the statements of cash flows for the years ended December 31, 2004 and 2003.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2006 expressed an unqualified opinion on management’s assessment of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Milwaukee, Wisconsin
March 13, 2006


MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on our management’s assessment, our management believes that, as of December 31, 2005, our internal control over financial reporting was effective based on those criteria.

Our independent registered public accounting firm has issued their attestation report on our assessment of our internal control over financial reporting.


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Fiserv, Inc.

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, that Fiserv, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control - Integrated Framework issued by the COSO. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control - Integrated Framework issued by the COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2005 of the Company and our report dated March 13, 2006 expressed an unqualified opinion on those financial statements (which report includes an explanatory paragraph relating to revisions to the income statement and statement of cash flows presentation as described in Note 1).

 

/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Milwaukee, Wisconsin
March 13, 2006