UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended		December 31, 2005
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from				to
		Commission file number		001-32426

WRIGHT EXPRESS CORPORATION
(Exact name of Registrant as specified in its charter)

Delaware		01-0526993
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

97 Darling Avenue
South Portland, ME 04106

(Address of principal executive office)

(207) 773-8171

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):

Large accelerated filer ¨		Accelerated filer ¨		Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed using the closing price of the common stock on June 30, 2005 was $632,164,748 (for purposes of this calculation, directors, officers and 10% or greater stockholders are assumed to be affiliates).

There were 40,288,653 shares of common stock $0.01 par value outstanding as of March 10, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for the 2006 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

 

 

 

TABLE OF CONTENTS

				Page
				Number
Explanatory Note					4
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995					5
PART I
ITEM 1.		BUSINESS.			5
ITEM 1A.		RISK FACTORS.			14
ITEM 1B.		UNRESOLVED STAFF COMMENTS.			19
ITEM 2.		PROPERTIES.			19
ITEM 3.		LEGAL PROCEEDINGS.			19
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.			19
PART II
ITEM 5.		MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.			20
ITEM 6.		SELECTED FINANCIAL DATA.			21
ITEM 7.		MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.			22
ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.			35
ITEM 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.			36
ITEM 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.			70
ITEM 9A.		CONTROLS AND PROCEDURES.			70
ITEM 9B.		OTHER INFORMATION.			70
PART III
ITEM 10.		DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.			71
ITEM 11.		EXECUTIVE COMPENSATION.			71
ITEM 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.			71
ITEM 13.		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.			71
ITEM 14.		PRINCIPAL ACCOUNTING FEES AND SERVICES.			71
PART IV
ITEM 15.		EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.			72
		SIGNATURES			74
		EXHIBIT INDEX			75
Ex-10.20 Employment Agreement - David Maxsimic
Ex-10.21 Employment Agreement - Tod Demeter
Ex-10.22 Employment Agreement - Katherine Greenleaf
Ex-21.1 Subsidiaries of the Registrant
Ex-23.1 Consent of Deloitte & Touche LLP
Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32.1 Section 906 Certification of CEO
Ex-32.2 Section 906 Certification of CFO

					WEXOnline®, Wright Express®, WEX® and WEXIndex® are our registered trademarks. This report also includes trademarks, service marks and trade names of other companies.

Explanatory Note

          This Amendment No. 1 on Form 10-K/A is filed by Wright Express Corporation (the “Company”) to amend the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 originally filed with the Securities and Exchange Commission (“SEC”) on March 15, 2006 (“Original Filing”). The Company has concluded that Cendant Corporation (“Cendant”), the Company’s former corporate parent, incorrectly allocated the purchase price relating to Cendant’s 2001 acquisition of PHH and its subsidiaries (which at the time included Wright Express). Cendant's February 22, 2005 divesture of Wright Express through an initial public offering gave rise to a change in the tax basis of the goodwill of the Company. During the course of the review of the initial goodwill allocation, the Company also reevaluated the accounting that was required at the time of the initial public offering, including the establishment of deferred income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes. The Company concluded that such deferred income taxes had been recorded incorrectly and that such balances would be restated. As such, the Company has determined that it should restate (1) its previously issued financial statements for 2005 and prior years to reflect additional goodwill of $138 million (net of 2001 amortization of approximately $3 million); and (2) its previously issued financial statements for 2005 to lower deferred income taxes by approximately $110 million. Correcting these errors results in an increase in both goodwill and stockholders’ or member’s equity and a decrease in deferred income taxes. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company determined that the restated goodwill was not impaired and there was no impact to earnings for 2002 through 2005. For the period prior to the Company’s adoption of SFAS No. 142, approximately $3 million of additional goodwill amortization was charged to the Company’s 2001 earnings. The adjustment to deferred income taxes had no impact to earnings. The Company will also be filing amended quarterly reports on Form 10-Q/A for its quarterly periods ended March 31, 2006 and June 30, 2006, which include 2005 comparative financial information, to correct its previously reported balance sheets as of those dates for the same errors.

          This Amendment No. 1 on Form 10-K/A amends the following Items for the change in goodwill, stockholders’ or member’s equity, deferred income taxes and related earnings impacts:

	•		Item 6 (Selected Financial Data) to reflect changes to 2001 total operating expenses, 2001 net income, 2001 basic earnings per share, as well as, total assets (all years presented), total stockholders’ or member’s equity (all years presented), and total liabilities and stockholders’ or member’s equity (all years presented).
	•		Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) to reflect changes to Liquidity, Capital Resources and Cash Flows.
	•		Item 8 (Financial Statements and Supplementary Data) to reflect changes to the Company’s financial statements and notes thereto, including changes to the Consolidated Balance Sheets, Consolidated Statement of Changes in Stockholders’ or Member’s Equity, the addition of Note 1 to the Consolidated Financial Statements, “Restatement” as well as other Notes which present restated financial information, and the revised report of the Company’s independent registered public accounting firm.
	•		Item 9A (Controls and Procedures) to reflect management’s updated evaluation of disclosure controls and procedures and internal control over financial reporting.

          No other significant changes have been made to the Original Filing except:

	•		the items previously listed;
	•		the updating throughout this report of internal references to this report from references to Form 10-K to references to Form 10-K/A;
	•		the re-numbering throughout this report of references to the Notes to the Consolidated Financial Statements to reflect the addition of a new Note 1; and
	•		the renumbering of certain pages of this report.

          This amendment is not intended to update other information presented in the Original Filing. As a result of this amendment, the certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, filed as exhibits to the Original Filing, have been re-executed and re-filed as of the date of this Form 10-K/A. Included in this Form 10-K/A is quarterly information within Note 1 to the Consolidated Financial Statements which amends the quarterly reports on Form 10-Q, previously filed by the Company with respect to the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005. Previously issued financial statements should no longer be relied upon. The Company does not intend to amend these previously filed quarterly reports.

 

 

PART I

ITEM 1. BUSINESS.

Our Company

          Wright Express is a leading provider of payment processing and information management services to the commercial and government vehicle fleet industry. The Company provides these services for approximately 295,000 commercial and government fleets totaling 4.2 million vehicles in the United States and Canada. Wright Express markets these services directly, as well as through more than 95 strategic relationships, and offers a MasterCard-branded corporate card. The Company’s fleet cards are accepted at approximately 180,000 fuel and vehicle maintenance locations throughout the United States and Canada.

          The broad array of information we collect at the point of sale includes the amount of the expenditure, the identity of the driver and vehicle, the odometer reading, the identity of the fuel or vehicle maintenance provider and the items purchased. We use this information to provide fleets with purchase controls, comprehensive information, and analytical tools to effectively manage their vehicle fleets and control costs. Our network, which is deployed at fuel and maintenance locations that use our proprietary software, is referred to as “closed” because only Wright Express transactions can be processed in this network. We provide value to our customers by providing customized offerings with accepting merchants, processing payments and providing unique information management services to our fleets.

          Over the past 20 years we have built our network to have site acceptance at over 90% of the nation’s retail fuel locations and over 40,000 vehicle maintenance locations. We believe our network is one of the largest closed fuel and vehicle maintenance networks of its kind, which allows us to offer customers broad site acceptance. Our closed network also affords us access to a higher level of fleet-specific information and control than is widely available on the networks of MasterCard, Visa, American Express or Discover, which allows us to improve and refine the information reporting we provide to our fleet customers and strategic relationships.

          The vehicle maintenance portion of our proprietary closed network, which we refer to as the Wright Express Service Network, fulfills fleets’ vehicle maintenance needs, such as roadside service and assistance, replacement tires, glass, brakes and mufflers, oil changes and car washes.

          On February 16, 2005, Wright Express LLC, a Delaware limited liability company, converted into Wright Express Corporation, a Delaware corporation, and 100% of the ownership interests in Wright Express LLC were converted into 40 million shares of common stock and 100 shares of non-voting convertible, redeemable preferred stock. On the same day, our former corporate parent sold all 40 million shares of common stock in an initial public offering (“IPO”) and all 100 shares of non-voting convertible, redeemable preferred stock in a private placement.

          Our operations are organized into the following operating segments, which are discussed in greater detail in Note 21, “Segment Information,” in the accompanying consolidated financial statements:

	•		Fleet — The fleet operating segment provides customers with payment and transaction processing services specifically designed for the needs of the vehicle fleet industry. This segment also provides information management services to these fleet customers. The fleet segment derives its revenue primarily from three marketing channels — direct, co-branded and private label.
	•		MasterCard — The MasterCard operating segment provides customers with a payment processing solution for their corporate purchasing and transaction monitoring needs. Revenue in this segment is derived from two product lines — corporate charge cards and rotating accounts. The different MasterCard products are used by businesses to facilitate purchases of products and utilize the Company’s information management capabilities.

Fleet Products and Services

Payment processing

          In a payment processing transaction we pay the purchase price for the fleet customer’s transaction, less our payment processing fees, to the fuel or vehicle maintenance provider, and we collect the total purchase price from the fleet customer, typically within one month from the billing date. Payment processing fees are typically based on a percentage of the aggregate dollar amount of the customer’s purchase. We provide short-term funding of the expenditure for transactions made for fleet customers in our direct channel and certain fleet customers of our strategic relationships, which in 2005 accounted for approximately 166 million payment processing transactions.

Transaction processing

          In a transaction processing transaction we earn a fixed fee per transaction and do not typically provide funding. Fleet customers of our strategic relationships conducted over 62 million transaction processing transactions in 2005.

Information management

          We provide customized information to customers through monthly vehicle analysis reports and our online website, WEXOnline^®. These reports contain information about each transaction by driver and vehicle. We also flag any unusual transactions or transactions that fall outside of pre-established parameters in these reports. Through our website, customers can access their account information, including their account history and recent transactions, and download details concerning current and past transactions. They can quickly access, use and download this information to manage and track the usage and efficiency of their fleets’ vehicles, to monitor driver behavior and spending, to track maintenance schedules and to more effectively manage fleet costs. The reports we provide to customers help them reduce the amount of administrative time they spend in recording and monitoring expenses.

 

 

Security and control

          We enable our customers and the customers of our strategic relationships to monitor and control their fleets’ expenditures. Through WEXOnline^®, fleet managers can set pre-determined limits on the amount of money their drivers can charge, the frequency with which their drivers can purchase fuel, the type of products and services that their drivers can purchase and the time of day or days when their drivers can make purchases. In addition, through WEXOnline^®, fleet managers can perform real-time modifications to any pre-determined limits or add or remove driver identification numbers in response to changes or to prevent theft. They also can elect to be notified by email when limits are exceeded in eight purchase categories, including limits on transactions within a time range, gallons per day and allowable fuel types. Our purchase controls allow fleet drivers to purchase essential items and services when needed, but deter them from making excessive or unauthorized purchases.

Account management

          We provide the following account management services:

	•		Customer service, account activation and account retention. We offer customer service, account activation and account retention services to fleets, strategic relationships and the fuel and vehicle maintenance providers on our network. We conduct regular surveys to ensure that these constituencies receive proper customer service, initiate calls to customers to promote adoption and use of our programs, and actively call “at risk” customers through our account retention programs.
	•		Authorization and billing inquiries and account maintenance. We handle authorization and billing questions, account changes and other issues for small and mid-sized fleets through our dedicated telephone call center, which is available 24 hours a day, seven days a week.
	•		Premium fleet services. We assign designated service representatives to businesses and government agencies with large fleets. These representatives have in-depth knowledge of both our programs and their fleets’ operations and objectives.
	•		Strategic relationship services. We assign a dedicated account representative to most of our strategic relationships. The representative prepares reports on key performance indicators, which gives each of our strategic relationships a periodic snapshot of its program’s performance in crucial areas. These are benchmarked against programs of similar size.
	•		Merchant services. Our representatives work with fuel and vehicle maintenance providers to enroll them in our network, install and test all network and terminal software and hardware and train them on the sale and transaction authorization process.
	•		Credit and collections services. We have developed proprietary account approval, credit management and fraud detection programs. We have developed an application underwriting model that produces a proprietary score, which we use to predict the likelihood of an account becoming delinquent within 12 months of activation. We also use a credit line maintenance model to manage ongoing accounts, which allows us to predict the likelihood of account delinquency over an on-going 18-month time horizon. We have developed a collections scoring model that we use to rank and prioritize past due accounts for collection activities. We also employ fraud specialists who educate, monitor, alert and provide case management expertise to minimize losses and reduce program abuse.

Fuel Price Derivatives

          We use derivative instruments to manage the impact of volatility in fuel prices. We enter into put and call option contracts (“Options”) based on the wholesale price of unleaded gasoline and retail price of diesel fuel, which expire on a monthly basis according to the schedule below. The Options are intended to lock in a range of prices during any given quarter on a portion of our forecasted earnings subject to fuel price variations. Our fuel-price risk management program is designed to purchase derivative instruments to manage the Company’s fuel-price-related earnings exposure going forward. We plan to continue locking in about 90 percent of our earnings exposure every quarter, on a rolling basis. The following table presents information about the Options as of December 31, 2005:

Industry

          According to Havill & Company, Inc.’s U.S. Commercial Fleet Market Forecast, there are approximately 41 million fleet vehicles in the United States. Fleet vehicles include automobiles and trucks used by businesses or government agencies.

          Vehicle fleets are categorized by vehicle type and fleet size. Vehicle types include heavy trucks (with a gross vehicle weight greater than 19,500 lbs.), medium trucks (with a gross vehicle weight between 10,000 and 19,500 lbs.), light trucks (with a gross vehicle weight below 10,000 lbs.) and automobiles. The fleets for which we provide services are predominantly comprised of medium trucks, light trucks and automobiles.

          The following table categorizes commercial and government trucks by fleet size and weight class:

 

 

          The following table categorizes commercial and government automobiles by fleet size:

          The majority of automobile and light truck fleets rely on retail filling stations to refuel their fleet vehicles. Medium and heavy trucks, which typically require diesel fuel, also refuel at on-site fueling locations, unattended, automated fueling stations and truck stops. Fleets also may purchase fuel in bulk in order to obtain lower prices, store the fuel in their storage tanks and refuel their fleet vehicles from this location. Certain of these fleets also may use mobile fueling, whereby fuel is delivered to a fleet’s location by a mobile fueler.

          The following table categorizes fuel consumption and expenditures by commercial and government fleet by vehicle type:

Growth Strategy

          Management estimates that approximately one-third of the 41 million commercial and government fleet vehicles are currently purchasing their fuel on a fleet card offering. Of the estimated two thirds of the market not using a fleet card, we believe more than half are still purchasing with cash. The market presents us with strong organic growth potential. Our strategy is to drive growth in this market by focusing on the development of products and services that meet the needs of fleets of all sizes.

          Our approach is to leverage our core competitive strengths – sales and marketing, portfolio management and product differentiation – to improve our performance in acquiring and retaining customers, and in creating products that add value by satisfying new and existing customer needs. Our fleet card solutions cut across the whole market and target fleets of all sizes and all vehicle types.

          In the large fleet market, there is strong awareness of fleet card offerings. In this market, we are focused on continuing to develop innovative products and services that meet the needs of this market, as well as providing customized information management to serve the complex needs of larger businesses. With the small fleet segment, which we consider to be fleets of less than 25 vehicles, there is much less awareness of fleet card products. We have developed sales and marketing capabilities that target this segment, and we have expertise in the data modeling and direct marketing techniques required to identify and connect with small fleets. Because of this expertise, we believe there is potential for continued long-term organic growth in our core fleet card solutions business through our direct, co-brand, and private label marketing channels.

          In addition, we are looking at the marketplace for potential acquisitions that can accelerate our growth or enhance our strategic position. We expect to focus on transactions in contiguous markets that complement our core

competencies. We are seeking out opportunities that are fleet, payment processing, or information-solutions related and which we believe will have the potential to drive growth.

Sales and Marketing

          We market our payment processing and information management services to fleets through three primary channels: the direct channel, the co-branded channel and the private label channel. Our experienced inside and outside sales forces and our marketing team, which has expertise in direct marketing, database analysis and marketing strategy and execution, drive our sales and marketing efforts. We also utilize industry tradeshows, advertising and other awareness campaigns to market our services.

          By collecting and analyzing customer data acquired for more than 20 years, we have created a detailed profile of representative fleet customers and have also developed a proprietary database that allows us to better market to the fleet industry. We provide market opportunity analyses, customer acquisition models and detailed marketing plans to our sales force and the sales forces of companies with which we have co-branded or private label relationships.

Direct

          In our direct channel we market our services, branded with the Wright Express name, directly to commercial and government vehicle fleets, which allows us to have a direct relationship with our fleet customers. As of December 31, 2005, we had approximately 66,000 fleet customers, in our direct channel, with approximately 1.7 million total vehicles.

          The fleet customers in our direct channel include fleets of all sizes and vehicle categories. We use our inside sales force to attract small fleets, such as contracting, landscaping or plumbing businesses. Our mid-size fleet customers are typically regional businesses, such as dairies, beverage companies and grocery chains. We use our outside sales force to market to these customers. Our large fleet customers consist of national and large regional fleets. In marketing our services to these customers, we emphasize our ability to offer national site acceptance, a high level of customer service, and on-line tools to monitor, control and customize their fleet management capabilities. To attract and retain large fleet customers we use both our outside sales force, which focuses on the acquisition of new business, and internal account managers, who focus on servicing and growing revenue from existing customers.

Co-branded

          In our co-branded channel we market our services for, and in collaboration with, approximately 75 fleet management companies and automotive manufacturers using their brand name and our Wright Express logo. These companies seek to offer our payment processing and information management services to their fleet customers as part of a larger package of fleet services that they provide. As of December 31, 2005, we had approximately 39,000 fleet customers, in our co-branded channel, with approximately 1.2 million total vehicles.

          We use this channel to reach the small, mid-size and large fleet customers of our co-branded relationships. We are able to expand the base of customers to whom we provide our services by combining the marketing and sales efforts of our own sales force, with the efforts of the sales forces of our co-branded relationships.

Private label

          In our private label channel we market our services for, and in collaboration with, over 20 fuel retailers, using only their brand names. The fuel retailers with which we have formed strategic relationships offer our payment processing and information management services to their fleet customers in order to establish and enhance customer loyalty. These fleets use these services exclusively at the fuel locations of the fuel retailer with whom we have the private label relationship. As of December 31, 2005, we had approximately 190,000 fleet customers, in our private label channel, with approximately 1.3 million total vehicles.

          The customers in this channel are typically small fleets. The fleet drivers often do not travel beyond a defined geographic area and are not unduly burdened by limiting their fuel purchases to the fuel locations of a particular fuel retailer within that area. We rely on the marketing efforts of our private label relationships to attract customers in this channel. However, many of these fuel retailers also rely on our sales and marketing expertise.

 

 

MasterCard Products and Services

          We offer the following MasterCard products:

	•		Corporate charge card. Our corporate MasterCard charge card product provides commercial travel and entertainment and purchase capabilities to businesses in industries that can utilize our information management capabilities.
	•		Rotating accounts. Our rotating account product allows businesses to centralize purchasing, simplify complex supply chain processes and eliminate the paper check writing associated with traditional purchase order programs. Our rotating account product is used exclusively for transactions that are not made in person, that is, transactions conducted over the telephone, by mail or facsimile or on the Internet. They also can be used for transactions that require pre-authorization, such as hotel reservations and vehicle maintenance. Under this program, each transaction is assigned a unique MasterCard account number, which makes limiting purchase amounts, tracking, settling and reconciling purchases easier and eliminates the risks associated with using multiple cards. After all of the account numbers assigned to a business have been used, the account numbers are rotated and used again by the business.

Competition

          The Company has a strong competitive position in its fleet segment. Our product features and extensive account management services are key factors behind our leadership position in the fleet industry. We face considerable competition in both business segments. Our competitors vie with us for prospective direct fleet customers as well as for companies with which we form strategic relationships. We compete with companies that perform payment and transaction processing or similar services. Financial institutions that can issue Visa, MasterCard and American Express credit and charge cards currently compete against us primarily in the small fleet category of our fleet segment and in the corporate charge card category of our MasterCard segment.

          In both of our operating segments the most significant competitive factors are breadth of features and functionality, price and servicing capability.

Regulation

          The Company’s wholly owned bank subsidiary, Wright Express Financial Services Corporation, or FSC, is a Utah industrial bank that began operations in June 1998. Through FSC, the Company is able to issue certificates of deposit that support its ability to fund transactions. FSC approves the customer applications for all of the Company’s funded programs and is the issuing bank for the Company’s MasterCard programs. FSC has an independent board of directors.

          The Company and FSC are subject to certain federal and state laws and regulations governing insured depository institutions and their affiliates. FSC is subject to supervision and examination by both the Utah Department of Financial Institutions, or the UTDFI, and the Federal Deposit Insurance Corporation, or the FDIC. The Company and FSC are also subject to certain restrictions on transactions with affiliates set forth in the Federal Reserve Act. The Company is subject to anti-tying provisions in the Bank Holding Company Act. Utah laws and regulations limit the loans FSC may make to one borrower and the types of investments FSC may make.

          Set forth below is a description of the material elements of the laws, regulations, policies and other regulatory matters affecting Wright Express.

Regulation of lending businesses in the United States

          FSC primarily makes commercial loans but it has the authority to extend credit to consumers as well. When making consumer loans, FSC is subject to extensive federal and state consumer protection laws. The Equal Credit Opportunity Act prohibits lenders from discriminating when extending credit on certain criteria such as an applicant’s sex, race and marital status. In order to protect borrowers from such discrimination, the Equal Credit Opportunity Act requires that lenders disclose the reasons they took adverse action against an applicant or a customer.

          The Fair Credit Reporting Act, or FCRA, imposes duties on lenders if they use consumer credit reports. For instance, it prohibits the use of a consumer credit report except in connection with a proposed business transaction

with the consumer. FCRA also requires lenders to notify consumers when taking adverse action based upon information obtained from credit reporting agencies.

          The Federal Deposit Insurance Act, or FDIA, authorizes federally insured state chartered banks to use various alternative interest rates when they make loans, including the highest interest rate authorized for state-chartered lenders located in the state where a national bank is located. This ability to “export” rates is relied upon by Wright Express to charge customers the interest rates and fees permitted by Utah law regardless of an inconsistent law of the state in which the customer is located, thereby facilitating the Company’s nationwide lending activities.

Restrictions on intercompany borrowings and transactions

          The Federal Reserve Act, or FRA, restricts the extent to which the Company may borrow or otherwise obtain credit from, sell assets to, or engage in certain other transactions with FSC. In general, these restrictions require that any such extensions of credit by FSC must be fully secured. There is no limit on such transactions to the extent they are secured by a cash deposit with FSC or pledged United States government securities. It is also possible to pledge designated amounts of other specified kinds of collateral if the aggregate of such transactions are limited to 10% of FSC’s capital stock and surplus with respect to any single affiliate, and to 20% of FSC’s capital stock and surplus with respect to all affiliates if FSC had more than one affiliate.

Restrictions on dividends

          The FRA also limits the dividends FSC may pay to the Company. In addition, FSC is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. A state or federal regulatory authority can determine, under certain circumstances relating to the financial condition of a bank, that the payment of dividends would be an unsafe or unsound practice and can prohibit payment thereof. Moreover, FSC may not pay a dividend to us if it is undercapitalized or would become undercapitalized as a result of paying the dividend. Utah law permits an industrial bank to pay dividends only from undivided earnings.

Capital requirements

          The FDIC has risk-based capital and leverage ratio requirements and guidelines for banking organizations. The requirements and guidelines are intended to ensure that banking organizations have adequate capital given the risk levels of their assets and off-balance sheet financial instruments. Under the risk-based capital requirements applicable to FSC, the minimum requirement for the ratio of total capital (as defined below) to risk-weighted assets (including certain off-balance sheet items, such as interest rate swaps) is 10%. At least 6% of the total capital must be comprised of common stockholders’ equity, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets, also collectively known as Tier 1 capital. The remainder may consist of mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock that does not qualify as Tier 1 capital and a limited amount of reserves for possible credit losses, collectively known as Tier 2 capital, and together with Tier 1 capital, total capital. Banks may be subject to higher risk-based and leverage capital ratios depending on other specific factors, such as interest rate risk, concentrations of credit risk, and the conduct of non-traditional activities.

Prompt corrective action

          The FDIA requires, among other things, federal banking agencies to take prompt corrective action in respect to depository institutions that do not meet minimum capital requirements. The FDIA sets forth the following five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. At December 31, 2005, FSC was considered well capitalized. FSC utilizes brokered deposits to fund many of its operations. Federal law requires a bank to be well capitalized or adequately capitalized with a waiver from the FDIC if it accepts new brokered deposits. Thus, FSC must always qualify as well capitalized or adequately capitalized with a waiver from the FDIC to continue to utilize brokered deposits.

          The FDIA generally prohibits a depository institution from making any capital distributions, including payment of a dividend, or paying any management fee to its parent holding company if the depository institution would thereafter be undercapitalized. Undercapitalized institutions are subject to a range of supervisory actions to restore adequate capital and address all other unsafe and unsound conditions at the bank. In Utah, the Commissioner

 

 

of Financial Institutions can take possession of an undercapitalized bank at any time and thereafter appoint a receiver, remove management, and order a sale of the bank or any of its assets. Federal law also gives the FDIC authority to assess civil money penalties against the parent and any institution affiliated parties deemed responsible for causing or permitting problems at the bank to continue without resolution.

Company obligations to FSC

          Any non-deposit obligation of FSC to the Company is subordinate, in right of payment, to deposits and other indebtedness of FSC. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of FSC will be assumed by the bankruptcy trustee and entitled to priority of payment.

FDICIA and FDIC insurance

          FSC is subject to FDIC deposit insurance assessments for the Bank Insurance Fund, or the BIF. Each financial institution is assigned to one of three capital groups: well capitalized, adequately capitalized or undercapitalized, and further assigned to one of three sub-groups within a capital group on the basis of supervisory evaluations by the institution’s primary federal and, if applicable, state supervisors and other information relevant to the institution’s financial condition and the risk posed to the applicable insurance fund. The assessment rate applicable to FSC in the future will depend in part upon the risk assessment classification assigned by the FDIC and in part on the BIF assessment schedule adopted by the FDIC. Because of favorable loss experience and a healthy reserve ratio in the BIF, FSC, which is considered well capitalized and well managed, has not paid any premiums in recent years. However, premium rates for FSC may change in the future.

Gramm-Leach-Bliley Act

          The financial privacy provisions of the Gramm-Leach-Bliley Act generally prohibit financial institutions, including FSC, to the extent it makes loans or provides other financial services to consumers, from disclosing non-public personal information it collects about consumers to third parties unless consumers have the opportunity to opt out of the disclosure. A financial institution is also required to provide an annual privacy notice to its customers. The Gramm-Leach-Bliley Act permits states to adopt more restrictive privacy laws, which could reduce the effectiveness and increase the cost of our marketing programs.

USA PATRIOT Act

          In 2001, comprehensive anti-terrorism legislation known as the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, or the USA Patriot Act, was enacted. The United States Treasury Department has issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements to financial institutions, including FSC. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. The USA Patriot Act’s requirement to obtain and verify certain customer information may hamper the ability of FSC to open some accounts where such information cannot be easily obtained or verified.

Restrictions on ownership of Wright Express common stock

          FSC, and therefore the Company, is subject to bank regulations that impose requirements on entities that control 5% or more of Wright Express common stock. These requirements are discussed in detail in ITEM 1A — RISK FACTORS under the heading “If any entity controls 5% or more of our common stock and such entity has caused a violation of applicable banking laws by its failure to obtain any required approvals prior to acquiring such common stock, we will have the power to restrict such entity’s ability to vote such shares.”

Intellectual Property

          We pursue the protection of our trademarks and patents by applying to register them in the United States. We have obtained federal trademark registration of a number of marks, including Wright Express^®, WEX^®, WEXOnline^® and WEXIndex^®. In addition, we seek to protect our proprietary rights through the use of confidentiality agreements with employees, consultants, advisors and others.

Employees

          As of December 31, 2005, we employed over 650 full-time employees. None of our employees are subject to a collective bargaining agreement.

Available Information

          The Company’s principal executive offices are located at 97 Darling Avenue, South Portland, ME 04106, telephone (207) 773-8171, and Internet address www.wrightexpress.com. The Company’s annual, quarterly and current reports, proxy statements and certain other information filed with the SEC, as well as amendments thereto, may be obtained free of charge from our web site. These documents are posted to our web site as soon as reasonably practicable after we have filed or furnished these documents with the SEC. The Company’s Audit Committee Charter, Compensation Committee Charter, Governance Committee Charter, Corporate Governance Guidelines and codes of conduct are available without charge through the “Corporate Governance” portion of the Investor Relations page of the Company’s web site, as well.

          Copies will also be provided to any shareholder upon written request to Investor Relations at the address above or by telephone at (866) 230-1633.

          The Company’s Internet site and the information contained therein are not incorporated by reference into this Form 10-K/A.

ITEM 1A. RISK FACTORS.

Risks Relating to Our Company

     The majority of our revenues are related to the dollar amount of fuel purchased by our customers, and, as a result, volatility in fuel prices could have an adverse effect on our payment processing revenues.

          In 2005, approximately 67% of our total revenues were attributable to fees paid to us by fuel and vehicle maintenance providers based on a negotiated percentage of the purchase price paid by our customers. Our customers primarily purchase fuel. Accordingly, our revenues are largely dependent on fuel prices, which are prone to significant volatility. For example, we estimate that during 2005, a 10 cent decline in average fuel prices below average actual prices would have resulted in approximately a $6.7 million decline in 2005 revenue. We have benefited from historically high fuel prices during 2005 and 2004, and a significant decline in the price of fuel in future periods could have a material adverse effect on our total revenues.

          We have implemented a derivative program to normalize our cash flows related to fuel price volatility. This program is designed to reduce volatility in cash flows but may increase the volatility of our operating results. See an explanation of our program in our “Fuel Price Derivatives” discussion in ITEM 1 — BUSINESS.

          Fuel prices are dependent on several factors, all of which are beyond our control. These factors include, among others:

	•		supply and demand for oil and gas, and expectations regarding supply and demand;
	•		actions by the Organization of Petroleum Exporting Countries (OPEC), Russia, Mexico or other major oil producing nations;
	•		political conditions in other oil-producing and gas-producing countries, including insurgency, terrorism or war;
	•		refinery capacity;
	•		weather;
	•		the prices of foreign exports and the availability of alternate fuel sources;
	•		general worldwide economic conditions; and
	•		governmental regulations and tariffs.

 

 

     Derivatives transactions may not adequately manage our cash flows and may cause volatility in our net income.

          Because the majority of our revenues are subject to fuel price volatility, we utilize fuel price sensitive derivative instruments to manage our exposure to this volatility. For a more detailed discussion of these derivative instruments see our “Fuel Price Derivatives” discussion in ITEM 1 — BUSINESS. These instruments may expose us to the risk of financial loss if, for example, the counterparties fail to perform under the contracts governing those arrangements, we unwind our position before the expiration of the contract or there is a sudden material change in fuel prices. The success of our fuel price derivatives strategy depends upon, among other things, our ability to forecast the amount of fuel purchased by fleets using our services. To the extent our forecasts are inaccurate these derivative contracts may be inadequate to protect us against significant changes in fuel prices or over-expose us to fuel price volatility. Realized and unrealized gains and losses on these contracts will be recorded each quarter to reflect changes in the market value of the underlying contracts. As a result, our quarterly net income may be prone to significant volatility.

     Our industry has become increasingly competitive, which makes it more difficult for us to maintain profit margins at historical levels.

          We face and may continue to face increased levels of competition in each category of the overall industry from several companies that seek to offer competing capabilities and services. Historically, we have primarily been able to provide customers with a unique spectrum of services and capabilities and, therefore, we have not considered price to be the exclusive or even the primary basis on which we compete. As our competitors have continued to develop their service offerings, it has become increasingly more difficult for us to compete solely on the basis of superior capabilities or service. In some areas of our business, we have been forced to respond to competitive pressures by reducing our fees. We have seen erosion of our historical profit margins as we use our pricing strategies to encourage existing strategic relationships to sign long-term contracts. If these trends continue and if competition intensifies, our profitability may be adversely impacted.

          While we have traditionally offered our services to all categories of the fleet industry, some of our competitors have successfully garnered significant share in particular categories of the overall industry. For example, we believe U.S. Bank Voyager Fleet Systems, Inc. has the largest share among the government fleet category of the industry and Comdata Corporation has a significant share of the heavy truck category. To the extent that our competitors are regarded as leaders in specific categories, they may have an advantage over us as we attempt to further penetrate these categories.

          We also face increased competition in our efforts to enter into new strategic relationships and renew existing strategic relationships on the same terms.

     Our business and operating results are dependent on several key strategic relationships, the loss of which could adversely affect our results of operations.

          Revenue we received from services we provided to our top five strategic relationships accounted for approximately 21% of our total revenues in 2005. Accordingly, we are dependent on maintaining our strategic relationships and our results of operations would be lower in the event that these relationships were terminated.

          Likewise, we have agreements with the major oil companies and fuel retailers whose locations accept our payment processing services. The termination of any of these agreements would reduce the number of locations where our payment processing services are accepted; therefore, we could lose our competitive advantage and our operating results could be adversely affected.

     Decreased demand for fuel and other vehicle products and services could harm our business and results of operations.

          Our results of operations are dependent on the number of transactions we process and the dollar value of those transactions. We believe that our transaction volume is correlated with general economic conditions in the United States. A downturn in the United States economy is generally characterized by reduced commercial activity and, consequently, reduced purchasing of fuel and other vehicle products and services.

          In addition, demand for fuel and other vehicle products and services may be reduced by other factors that are beyond our control, such as the development by vehicle manufacturers and adoption by our fleet customers of vehicles with greater fuel efficiency or alternative non-liquefied fuel sources.

     Our failure to effectively implement new technology could jeopardize our position as a leader in our industry.

          As a provider of information management and payment processing services, we must constantly adapt and respond to the technological advances offered by our competitors and the informational requirements of our customers, including those related to the Internet, in order to maintain and improve upon our competitive position. We may not be able to expand our technological capabilities and service offerings as rapidly as our competitors, which could jeopardize our position as a leader in our industry.

     We are dependent on technology systems and electronic communications networks managed by third parties, which could result in our inability to prevent service disruptions.

          Our ability to process and authorize transactions electronically depends on our ability to electronically communicate with our fuel and vehicle maintenance providers through point-of-sale devices and electronic networks that are owned and operated by third parties. The electronic communications networks upon which we depend are often subject to disruptions of various magnitudes and durations. Any severe disruption of one or all of these networks could impair our ability to authorize transactions or collect information about such transactions, which, in turn, could harm our reputation for dependable service and adversely affect our results of operations. In addition, our ability to collect enhanced data relating to our customers’ purchases may be limited by the use of older point-of-sale devices by fuel and vehicle maintenance providers. To the extent that fuel and vehicle maintenance providers within our network are slow to adopt advanced point-of-sale devices, we may not be able to offer the services and capabilities our customers demand.

     If we fail to adequately assess and monitor credit risks of our customers, we could experience an increase in bad debt expense.

          We are subject to the credit risk of a majority of our customers, many of which are small to mid-sized businesses. We use various formulae and models to screen potential customers and establish appropriate credit limits, but these formulae and models cannot eliminate all potential bad credit risks and may not prevent us from approving applications that are fraudulently completed. Increases in average fuel prices can require us to periodically increase credit limits for a significant number of our customers. Moreover, businesses that are good credit risks at the time of application may become bad credit risks over time and we may fail to detect such change. In times of economic recession, the number of our customers who default on payments owed to us tends to increase. If we fail to adequately manage our credit risks, our bad debt expense could be significantly higher than it has been in the past.

     The loss or suspension of the charter for our Utah industrial bank or changes in regulatory requirements could be disruptive to operations and increase costs.

          FSC’s bank regulatory status enables FSC to issue certificates of deposit, accept money market deposits and borrow federal funds. These funds are used to support our payment processing operations, which require the Company to make payments to fuel and maintenance providers on behalf of fleets. FSC operates under a uniform set of state lending laws, and its operations are subject to extensive state and federal regulation. The Utah Department of Financial Institutions licenses FSC on the state level, and the Federal Deposit Insurance Corporation licenses FSC on the federal level. Continued licensing and federal deposit insurance are subject to ongoing satisfaction of compliance and safety and soundness requirements. FSC must be well capitalized and satisfy a range of additional capital requirements. If FSC were to lose its bank charter, Wright Express would either outsource its credit support activities or perform these activities itself, which would subject the Company to the credit laws of each individual state in which Wright Express conducts business. Any such change would be disruptive to Wright Express’ operations and could result in significant incremental costs. In addition, changes in the bank regulatory environment, including the implementation of new or varying measures or interpretations by the state of Utah or the U.S. federal government, may significantly affect or restrict the manner in which the Company conducts business in the future.

 

 

     We may not be able to adequately protect the data we collect about our customers, which could subject us to liability and damage our reputation.

          We collect and store data about our customers and their fleets, including bank account information and spending data. Our customers expect us to keep this information in our confidence. We may experience attempts by experienced programmers or “hackers” to penetrate our network security. A party who is able to penetrate our network security could misappropriate our proprietary information or cause interruptions in our WEXOnline^® web site. We may be required to expend significant capital and other resources to protect against the threat of such security breaches or to alleviate problems caused by such breaches. Moreover, any security breach or inadvertent transmission of information about our customers could expose us to liability and/or litigation and cause damage to our reputation.

     We may incur substantial losses due to fraudulent use of our charge cards.

          When we fund customer transactions, we typically assume the risk of losses due to fraudulent use of our charge cards, which could be substantial. We do not maintain any insurance to protect us against any such losses.

     In an increasing interest rate environment, interest expense on the unhedged portion of our borrowings on our credit facility will increase and we may not be able to replace our maturing certificates of deposit with new certificates of deposit that carry the same interest rates.

          We had $222.5 million of indebtedness outstanding at December 31, 2005 under our new credit agreement, of which $102.5 million bears interest at rates that vary with changes in overall market interest rates. Rising interest rates will result in reduced net income.

          The certificates of deposit that our industrial bank subsidiary uses to finance payments to major oil companies carry fixed rates from issuance to maturity. Upon maturity, the certificates of deposit will be replaced by issuing new certificates of deposit to the extent that they are needed to finance payments to major oil companies. In a rising interest rate environment, FSC will not be able to replace maturing certificates of deposit with new certificates of deposit that carry the same interest rates. Rising interest rates will result in reduced net income to the extent that certificates of deposit mature and need to be replaced. At December 31, 2005, FSC had outstanding $294.2 million in certificates of deposit maturing within one year and $39.3 million in certificates of deposit maturing within one to five years.

     The debt covenants on our credit facility may restrict our operating flexibility.

          At December 31, 2005, we had outstanding a total of $222.5 million on our credit facility. The credit agreement contains restrictions on our ability to, among other things:

	•		pay dividends to our stockholders;
	•		sell or transfer all or substantially all of our property or assets;
	•		incur more indebtedness or make guarantees;
	•		grant or incur liens on our assets;
	•		make investments, loans, advances or acquisitions;
	•		engage in mergers, consolidations, liquidations or dissolutions;
	•		engage in transactions with our affiliates;
	•		enter into sales or leasebacks; and
	•		change our accounting policies or reporting practices.

          The restrictions contained in the credit agreement could hurt our ability to finance our future operations or capital needs or make acquisitions that may be in our best interest. In addition, our credit agreement requires that we comply with several financial maintenance covenants. Specifically, our credit agreement contains financial

covenants requiring us to maintain a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio at the end of each fiscal quarter. The credit agreement requires us to maintain a maximum consolidated leverage ratio of 3.00 to 1.00 at the end of each fiscal quarter until September 30, 2006, 2.50 to 1.00 at the end of each fiscal quarter until September 30, 2007, 2.00 to 1.00 at the end of each fiscal quarter until September 30, 2008 and 1.50 to 1.00 at the end of each fiscal quarter until the maturity date. The credit agreement also requires us to maintain a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00 at the end of each fiscal quarter until December 31, 2006 and 1.50 to 1.00 at the end of each fiscal quarter until the maturity date. Our ability to comply with these financial requirements and other restrictions may be affected by events beyond our control, and our inability to comply with them could result in a default under our credit agreement. If a default occurs under our credit agreement, the lenders under the revolving credit facility or term loan could elect to declare all of the outstanding borrowings, as well as accrued interest and fees, to be due and payable and require us to apply all of our available cash to repay those borrowings. In addition, a default may result in higher rates of interest and the inability to obtain additional capital.

     We have benefited from being a subsidiary of much larger entities, and we may not be able to maintain our historical growth rate as an independent public company.

          Our growth prior to February 16, 2005 occurred while we were a subsidiary of much larger entities, and these entities helped facilitate the establishment of new business relationships and the renewal of existing relationships. As an independent company, we will no longer have a parent company to help with facilitating new relationships, and may not be able to sustain the same level of growth in our business.

     We depend on key management and if we are unable to retain those employees, we could lose valuable strategic and customer relationships.

          We believe that our future depends, in part, on the continued services of our senior management team, including Michael Dubyak, our president and chief executive officer, who has been with Wright Express since 1986. Losing the services of Mr. Dubyak or other members of our senior management team could adversely affect our strategic and customer relationships and impede our ability to execute our growth strategies. We do not currently maintain key person life insurance policies with respect to our executive officers.

Risks Relating to Our Common Stock

     If any entity controls 5% or more of our common stock and such entity has caused a violation of applicable banking laws by its failure to obtain any required approvals prior to acquiring such common stock, we will have the power to restrict such entity’s ability to vote such shares.

          As owners of a Utah industrial bank, we are subject to banking regulations that require any entity that controls 5% or more of our common stock to obtain the prior approval of Utah banking authorities, and any person or entity who controls 10% or more of our common stock must obtain the prior approval of federal banking regulators. A failure to comply with these requirements could result in sanctions, including the loss of our Utah industrial bank charter. Our certificate of incorporation requires that if any stockholder fails to provide us with satisfactory evidence that any required approvals have been obtained, we may, or will if required by state or federal regulators, restrict such stockholder’s ability to vote such shares with respect to any matter subject to a vote of our stockholders.

     Provisions in our charter documents, Delaware law and applicable banking law may delay or prevent our acquisition by a third party.

          Our certificate of incorporation, by-laws and our rights plan contain several provisions that may make it more difficult for a third party to acquire control of us without the approval of our board of directors. These provisions include, among other things, a classified board of directors, the elimination of stockholder action by written consent, advance notice for raising business or making nominations at meetings of stockholders and “blank check” preferred stock. Blank check preferred stock enables our board of directors, without stockholder approval, to designate and issue additional series of preferred stock with such special dividend, liquidation, conversion, voting or other rights, including the right to issue convertible securities with no limitations on conversion, as our board of directors may determine, including rights to dividends and proceeds in a liquidation that are senior to the common stock. These provisions may make it more difficult or expensive for a third party to acquire a majority of our outstanding voting common stock. We also are subject to certain provisions of Delaware law, which could delay, deter or prevent us from entering into an acquisition, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in a business combination with an interested stockholder unless specific

 

 

conditions are met. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock.

          In addition, because we own a Utah industrial bank, any purchaser of our common stock who would own 5% or more of our common stock after such purchase would be required to obtain the prior consent of Utah banking authorities and any purchaser of our common stock who would own 10% or more of our common stock would be required to obtain the consent of federal banking authorities prior to consummating any such acquisition. These regulatory requirements may preclude or delay the purchase of a relatively large ownership stake by certain potential investors.

     Our stockholder rights plan could prevent you from receiving a premium over the market price for your shares of common stock from a potential acquirer.

          Our board of directors approved a stockholder rights plan, which entitles our stockholders to acquire shares of our common stock at a price equal to 50% of the then current market value in limited circumstances when a third party acquires 15% or more of our outstanding common stock or announces its intent to commence a tender offer for at least 15% of our common stock, in each case, in a transaction that our board of directors does not approve. The existence of these rights would significantly increase the cost of acquiring control of our company without the support of our board of directors because, under these limited circumstances, all of our stockholders, other than the person or group who caused the rights to become exercisable, would become entitled to purchase shares of our common stock at a discount. The existence of the rights plan could therefore deter potential acquirers and thereby reduce the likelihood that you will receive a premium for your common stock in an acquisition.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

          Not applicable.

ITEM 2. PROPERTIES.

          All of our facilities are leased, including our 67,000 square foot corporate headquarters in South Portland, Maine, which is under a lease that will expire in 2012. We also lease five smaller buildings in the South Portland area. Three of these buildings, totaling 72,000 square feet, are used for technical and customer service employees. The other two buildings include a 7,500 square foot warehouse, and a 29,000 square foot space that we sublease to a third party. We lease 11,500 square feet of office space in Salt Lake City, Utah to support our bank operations. These facilities are adequate for our current uses.

ITEM 3. LEGAL PROCEEDINGS.

          On October 14, 2003, Enron Corporation filed a preference and fraudulent transfer claim in the United States Bankruptcy Court for the Southern District of New York against us seeking the return of $2.8 million paid to us prior to the Enron bankruptcy. Enron added additional claims for allegedly preferential transfers and sought an additional $526,000 by way of an amended complaint on December 1, 2003. We filed an answer on July 30, 2004 asserting various defenses, including the defense that the payments in question came from Enron’s non-debtor subsidiaries, not Enron, the debtor, in the ordinary course of business. We believe that we have meritorious defenses to these claims and intend to vigorously defend this lawsuit.

          In addition, we are, from time to time, subject to other legal proceedings and claims in the ordinary course of business, none of which we believe are likely to have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

          No matters were submitted to a vote of security holders during the three months ended December 31, 2005.

PART II

ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

          The principal market for the Company’s common stock is the New York Stock Exchange (“NYSE”), ticker symbol WXS. The following table sets forth, for the indicated calendar periods, the reported intraday high and low sales prices of the common stock on the NYSE Composite Tape.

Holders

          As of March 10, 2006, the closing price of our common stock was $24.74 per share, there were 40,288,653 shares of our common stock outstanding, and there were four holders of record of our common stock.

Dividends

          The Company has not declared any dividends on its common stock since it commenced trading on the NYSE on February 16, 2005. The timing and amount of future dividends will be (i) dependent upon the Company’s results of operations, financial condition, cash requirements and other relevant factors, (ii) subject to the discretion of the Board of Directors of the Company, and (iii) payable only out of the Company’s surplus or current net profits in accordance with the General Corporation Law of the State of Delaware.

          The Company has certain restrictions on the dividends it may pay. These restrictions have been discussed in Note 11, “Financing Debt” in the accompanying consolidated financial statements. In addition, the Company’s wholly-owned industrial bank subsidiary has certain restrictions with regard to the dividends it may pay to the Company. These restrictions have been discussed in this Form 10-K/A in ITEM 1 — BUSINESS under the caption, “Restrictions on dividends.”

          The Company does not currently intend to pay cash dividends on its common stock in the foreseeable future.

          The information related to equity compensation plans required by Regulation S-K Item 201(d) will be included in the Proxy Statement for the Company’s 2006 Annual Meeting of Stockholders, which is incorporated herein by reference.

 

 

ITEM 6. SELECTED FINANCIAL DATA.

          The following table sets forth our summary historical financial information for the periods ended and as of the dates indicated. You should read the following historical financial information along with ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in this Form 10-K/A and the Consolidated Financial Statements and related notes thereto. The 2003 through 2005 fiscal year financial information included in the table below is derived from audited financial statements:

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

          The Company has restated its previously issued Consolidated Balance Sheets as of December 31, 2005 and 2004 as detailed in Note 1 to the accompanying Consolidated Financial Statements. All affected amounts and period-to-period comparisons described herein have been restated.

          This discussion should be read in conjunction with our audited financial statements as of December 31, 2005, and for the two years then ended and the notes accompanying those financial statements. In addition, this discussion contains forward-looking statements which are covered by the Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 as discussed on page 5 of this Annual Report on Form 10-K/A.

Overview

          Wright Express is a leading provider of payment processing and information management services to the vehicle fleet industry. The Company utilizes its wholly-owned bank subsidiary, Wright Express Financial Services Corporation, a Utah-chartered industrial bank that is regulated, supervised and regularly examined by the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation, to facilitate and manage transactions for vehicle fleets through its proprietary closed network of major oil companies, fuel retailers and vehicle maintenance providers. Wright Express provides fleets with detailed transaction data, analytical tools and purchase control capabilities. Our operations are organized as follows:

	•		Fleet — The fleet operating segment provides customers with payment and transaction processing services specifically designed for the needs of the vehicle fleet industry. This segment also provides information management services to these fleet customers. The fleet segment derives its revenue primarily from three marketing channels — direct, co-branded and private label.
	•		MasterCard — The MasterCard operating segment provides customers with a payment processing solution for their corporate purchasing and transaction monitoring needs. Revenue in this segment is derived from two product lines — corporate charge cards and rotating accounts. The different MasterCard products are used by businesses to facilitate purchases of products and utilize the Company’s information management capabilities.

Highlights for 2005

	•		On February 22, 2005, Cendant Corporation (“Cendant”) divested 100% of its ownership interest in Wright Express Corporation through an initial public offering (“IPO”). We did not receive any proceeds from the sale of the Company’s common stock by Cendant. The Company issued 40 million shares of common stock with a $0.01 par value per share, and 100 shares of Series A non-voting convertible, redeemable preferred stock in connection with the IPO.
	•		Credit losses in the fleet operating segment were $8.3 million for the year ended December 31, 2005 and $7.8 million a year ago. We measure our credit loss performance by calculating credit losses as a percentage of total fuel expenditures on payment processing transactions (“Fuel Expenditures”). This metric improved in 2005, as losses were 11 basis points of Fuel Expenditures for the year ended December 31, 2005 compared to 15 basis points for 2004. This year was an historic low for the company. Management collection practices coupled with favorable economic conditions were key drivers behind these results.
	•		Total payment processing fuel transactions during the year ended December 31, 2005 increased 14% from the same period last year to 165.9 million. The increase was driven by the growth in vehicles serviced and increased usage by vehicles serviced already under management.
	•		Gallons per payment processing transaction increased 1.5% for the year ended December 31, 2005 compared to a year ago. This increase was driven by our initiatives to develop additional product offerings that attract vehicles with larger fuel tanks.
	•		Average number of vehicles serviced increased 9% for the year ended December 31, 2005 over the same period a year ago to 4.1 million. New customers in 2005 drove nearly all of the growth.

 

 

•

Total MasterCard purchase volume grew to $962.3 million for the year ended December 31, 2005, an increase of 34% over last year. Growth was primarily driven by spend on the corporate charge card product which helps companies manage operational spending.

Results of Operations

Use of Non-GAAP financial measures

          Adjusted net income is a non-GAAP financial measure equal to net income, the most directly comparable GAAP financial measure, adjusted for fair value changes of derivative instruments, the loss related to the termination of the derivative contracts that extended past March 2005 and stock-based compensation costs related to the conversion and vesting of equity instruments in conjunction with our IPO.

          Although adjusted net income is not calculated in accordance with GAAP, this measure is integral to the Company’s reporting and planning processes. The Company considers this measure integral because it eliminates the non-cash volatility associated with the derivative instruments. Wright Express believes that adjusted net income may also be useful to investors as one means of evaluating the Company’s performance. However, because adjusted net income is a non-GAAP measure, it should not be considered as a substitute for, or superior to, net income, operating income or cash flows from operating activities as determined in accordance with GAAP. In addition, adjusted net income as used by Wright Express may not be comparable to similarly titled measures employed by other companies.

Year ended December 31, 2005 as compared to the year ended December 31, 2004

Fleet

          The following table reflects comparative operating results and key operating statistics within our fleet operating segment:

          Payment processing transaction growth was predominantly driven by the increase in vehicles serviced. Increases in average expenditure per payment processing transaction were primarily a result of higher fuel prices over 2004. The positive impact of these key statistics on payment processing revenue was partially offset by 9%, compared to a year ago, primarily due to the renegotiation of pricing on long-term contracts with existing strategic relationships.

          Transaction processing revenue grew 4% in 2005 versus 10% in 2004. This slower growth rate was predominantly due to the fact that two strategic relationships converted 1.1 million transactions from transaction processing to payment processing transactions in 2005.

          Finance fees increased in proportion with higher daily accounts receivable balances subject to late fees. Average daily accounts receivable balances subject to late fees are predominantly higher due to elevated retail fuel prices and an increase in the number of payment processing transactions.

 

 

          Total operating expenses increased over 2004 primarily because of the following:

	•		$11.6 million in net operating interest expense as a result of an increase in interest rates and larger average operating debt balances to accommodate the higher fuel prices. Average interest rates were 3.4% for the year ended December 31, 2005 compared to 1.6% for the year ended December 31, 2004. Average debt for the year ended December 31, 2005 totaled $312 million, compared to $183 million for the same period a year ago. Another factor contributing to the increase in net operating interest expense was the loss of intercompany interest income from Cendant. We received $3.2 million for the year ended December 31, 2004. No interest income was earned from Cendant during the current year.
	•		$5.7 million of expense associated with the issuance of common stock in exchange for Cendant restricted stock units and options to purchase shares of our common stock in exchange for Cendant stock options held by our employees. These exchanges were part of the IPO transaction in February 2005. (This expense has been excluded in calculating adjusted net income.)
	•		$2.7 million for additional employees needed for our finance, legal and human resources departments as part of operating as a stand-alone publicly traded company.
	•		$2.7 million in depreciation primarily as a result of placing $20 million of internally-developed software into service in March 2005 related to our updated technology platform.
	•		$2.4 million for additional employees in our sales and customer service organizations to support our growing number of vehicles serviced.
	•		$1.9 million of costs for third-party services in connection with board of director fees and insurance, investor relations, legal costs, employee benefit plan administration, stock exchange fees, internal audit and Sarbanes-Oxley Act compliance.

          Finance interest expense is related to the new corporate credit facility that we entered into in February 2005 and the preferred stock that we issued as part of our IPO. The details of these new obligations are discussed in Note 11, “Financing Debt” and Note 14, “Preferred Stock” in the accompanying consolidated financial statements. Finance interest expense also includes the gain or loss we incur related to our interest rate swap agreements discussed in Note 10, “Derivative Instruments” in the accompanying consolidated financial statements.

          Also discussed in detail in Note 10 are our fuel price sensitive derivative instruments. These instruments generated the realized and unrealized losses on derivatives in the table above. Of the total losses, approximately $29.1 million were net realized losses (of which $8.5 million have been excluded in calculating adjusted net income) and approximately $36.7 million represent the unrealized loss (all of which has been excluded in calculating adjusted net income) at December 31, 2005.

          The Company’s effective income tax rate for 2005 was 33.1%. See Note 15, “Income Taxes” in the accompanying consolidated financial statements for a more detailed discussion of the Company’s income taxes.

MasterCard

          The following table reflects comparative operating results and key operating statistics within our MasterCard operating segment:

          Payment processing revenue increased primarily due to the increase in MasterCard purchase volume, year over year along with an 8% increase in the net interchange rate. The increase in the rate is due to larger growth within the corporate charge card product at higher net interchange rates.

          Transaction processing revenue decreased for the year ended December 31, 2005 while other revenue increased. In 2005, fees were charged at card issuance and recorded as other income. During 2004, fees were charged for transactions processed instead.

          The significant increase in our operating expense is the result of higher MasterCard purchase volume and an increase in interest rates. Average interest rates were 3.4% for the year ended December 31, 2005 compared to 1.6% for the year ended December 31, 2004.

Looking Forward

Fleet

          Revenues in our fleet operating segment are impacted by fuel prices. The forward-looking statements below are based on an assumed average retail fuel price of $2.57 per gallon. Although we expect the number of fuel transactions we process and the average number of gallons per transaction to continue to increase over time, we cannot predict changes in retail fuel prices.

          In our fleet operating segment, we anticipate continuing payment processing revenue growth. We also anticipate renegotiated contracts will have less impact on revenue in 2006 compared to 2005. We expect revenue growth to outpace the impact of pricing on renegotiated contracts in 2006. We do not expect finance income to grow in 2006 at the same rate as in 2005.

          We expect an increase in our provision for credit loss expense in 2006. We anticipate the increase to be led by higher Fuel Expenditures and higher loss rates (measured as credit loss as a percentage of Fuel Expenditures). We also project an increase in depreciation next year based upon the $20 million of assets placed in service in 2005 and our expected capital spending in 2006.

 

 

          We expect costs related to Sarbanes-Oxley Act compliance to increase in 2006. We will be required to issue our first internal control report under these new rules and anticipate the costs of documentation and testing to be higher than amounts spent during 2005.

          We anticipate average interest rates in 2006 at levels higher than in 2005. Management cannot predict what rates will be but expects to continue to have access to relatively low cost funds through its wholly-owned bank subsidiary. Average debt is expected to grow in proportion to our growth in vehicles serviced and transactions processed; however, changes in the price of fuel will impact these balances.

MasterCard

          In our MasterCard operating segment, we anticipate significant purchase volume growth in 2006. We also expect other revenue to decline based on the loss of Jackson Hewitt Tax Service Inc. Even with the loss of this customer, we expect our total revenue and net profitability growth rates for 2006 to approximate 2005 for the MasterCard segment due to projected growth in the corporate charge card product.

          In addition, we expect salary and other personnel expenses to increase in 2006 as we grow our MasterCard sales team. We also expect service fees to decline as a result of volume incentives and renegotiated contracts despite increasing volumes.

Year ended December 31, 2004 as compared to the year ended December 31, 2003

Fleet

          The following table reflects comparative operating results and key operating statistics within our fleet operating segment:

          We experienced an increase in the number of transactions we processed, primarily due to an increase in the average number of vehicles for which we provided services. The increase in vehicles resulted from a net increase in the average number of fleets for which we provided services to 274,000 in 2004 from 236,000 in 2003. Of these increases, approximately 2.0 million transactions and 155,000 vehicles were due to the addition of new accounts from one of our existing private label strategic relationships and one new private label strategic relationship.

          The payment processing revenue increase was driven by the increases in the number of payment processing transactions and average expenditure per payment processing transaction over the same period in 2003. Average expenditure per payment processing transaction was primarily driven by the increase in the average price per gallon of fuel, with the remainder resulting from growth in the average number of gallons purchased per transaction.

          The number of transaction processing transactions in 2004 drove the transaction processing revenue increase. Transaction processing volume growth was largely due to the addition of a new strategic relationship, which began in August 2003, and the expansion of existing relationships to encompass additional vehicles, resulting in a 155,000 increase in the average number of vehicles for which we provided service in 2004 as compared to 2003.

          Finance fees increased as a result of a change in the way they were assessed. Effective July 2003, we began to assess finance fees on the average daily balances for the month once an account became past due. Prior to July 2003, we assessed finance fees only on past-due balances.

          Total salaries and other personnel expenses remained relatively constant for the comparable periods. We capitalize salary and related costs associated with the development of proprietary software and the increase in salary and other personnel expenses in the 2004 period primarily reflected a decrease in the amount of these costs that were capitalized. Capitalized payroll was $2.2 million in 2004, a decrease of $2.7 million from $4.9 million in 2003. The decrease in capitalized payroll reflected a reduction in software development-related salaries as our upgraded technology platform neared completion. In addition, commissions increased $0.4 million for 2004, offset by a reduction in amounts paid to outside contractors of $1.1 million.

 

 

          All other operating expenses increased due to the following items:

	•		A $2.1 million increase in technology leasing and support expenses, primarily associated with our updated technology platform.
	•		A $0.8 million increase in occupancy and equipment costs, also primarily associated with our updated technology platform.
	•		A $0.4 million increase in postage and shipping costs.

MasterCard

          The following table reflects comparative operating results and key operating statistics within our MasterCard operating segment:

          We received $0.5 million from MasterCard for attaining targeted purchase volume levels in 2004 and received no such revenue in 2003. This amount was included in other revenues in the table above.

          Operating expenses related to service fees would have increased at the same level as the increased MasterCard purchase volume; however, $1.1 million in fees paid to a broker in 2003 were not paid in 2004. A contract amendment effectively terminated these fees in May 2003.

          We realized a decrease in credit losses, which are included in operating expenses, of $1.1 million in 2004. The decrease in losses was primarily the result of improved operational efficiency in our second year offering Jackson Hewitt stored value cards.

Liquidity, Capital Resources and Cash Flows

          The following table summarizes our financial position at December 31, 2005 compared to December 31, 2004:

          The Company’s results for 2005 generated an approximate $13 million increase in cash. This amount is consistent with the 2004 increase of approximately $10 million. Cash used for operations remained consistent year over year; however, cash provided by financing activities increased approximately $8 million offset by additional cash used for investing activities of $4 million.

          In 2005, approximately $11 million was used for capital expenditures primarily to continue to build our new software platform and to acquire information systems and personal computer office equipment. This amount was consistent with 2004 expenditures.

          As part of the IPO, the Company entered into a new credit facility. The credit facility is comprised of two major components:

	•		A revolving line-of-credit facility agreement that provides a total available line-of-credit of $130 million. Borrowings on the line-of-credit with at least three days notice carry interest based on the one-month, three-month, or six-month LIBOR, at the Company’s option. Draws on the line-of-credit with less than three days notice carry interest based on the prime rate. There is an $8 million letter of credit associated with the revolving line-of-credit facility. The letter of credit reduces the amount available for borrowings and collateralizes the Company’s derivative instruments. The revolving line-of-credit facility expires in February 2010.
	•		A term loan totaling approximately $168 million, net of loan origination fees. The term loan bears a variable interest rate that is based on LIBOR. The term loan requires repayment in quarterly principal amounts over five years. The loan allows for prepayment of principal.

 

 

          In April 2005, we entered into two interest rate swaps (the “Swaps”) for the purpose of hedging the variability in a portion of the future interest payments on our variable rate credit facility. The following table presents information about the Swaps:

          Our credit agreement contains various financial covenants requiring us to maintain certain financial ratios. Specifically, our credit agreement contains financial covenants requiring us to maintain a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio at the end of each fiscal quarter. The credit agreement requires us to maintain a maximum consolidated leverage ratio of 3.00 to 1.00 at the end of each fiscal quarter until September 30, 2006, 2.50 to 1.00 at the end of each fiscal quarter until September 30, 2007, 2.00 to 1.00 at the end of each fiscal quarter until September 30, 2008 and, thereafter, 1.50 to 1.00 at the end of each fiscal quarter until the maturity date. The credit agreement also requires us to maintain a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00 at the end of each fiscal quarter until December 31, 2006 and 1.50 to 1.00 at the end of each fiscal quarter until the maturity date.

          In addition to the financial covenants, the credit agreement contains various customary restrictive covenants that limit the Company’s ability to pay dividends, sell or transfer all or substantially all of its property or assets, incur more indebtedness or make guarantees, grant or incur liens on its assets, make investments, loans, advances or acquisitions, engage in mergers, consolidations, liquidations or dissolutions, enter into sales or leasebacks and change its accounting policies or reporting practices. FSC is not subject to certain of these restrictions. The Company was in compliance with all material covenants and restrictions at December 31, 2005.

          The new credit facility was used to finance $270 million of the $306 million dividend paid to Cendant.

Liquidity

          Management believes that we can adequately fund our cash needs for the foreseeable future.

          Short-term liquidity. Our short-term cash requirements consist primarily of payments to major oil companies for purchases made by our fleet customers, principal and interest payments on our credit facility, cash payments for realized losses on our fuel-price derivative instruments and other operating expenses. Our industrial bank subsidiary is responsible for substantially all payments to major oil companies and can fund its short-term cash requirements through the issuance of certificates of deposit and borrowed federal funds. Any remaining cash needs are primarily funded through operations. Our new credit facility had an available balance of $69 million at December 31, 2005 that could be used to cover any operating cash shortfalls.

          Long-term liquidity. Our long-term cash requirements consist primarily of principal and interest payments on our credit facility, which expires in 2010, and the amounts due to Cendant as part of our tax receivable agreement. As a consequence of our separation of Cendant, we increased our tax basis of intangible assets. This increase in tax basis allows us the ability to reduce the amount of future tax payments to the extent that we have future taxable income. We are obligated, pursuant to our tax receivable agreement with Cendant, to pay to Cendant, on an after-tax basis, 85% of the amount of tax we save for each tax period as a result of these increased tax benefits. We expect to fund these long-term requirements with cash generated from our operating activities. We plan to assess our financing alternatives periodically and may access the capital markets. If our future resources are insufficient to satisfy our long-term liquidity requirements, or if we enter into an acquisition or strategic arrangement with another company, we may need to sell additional equity or debt securities. There can be no assurances that the Company will be able to obtain financing from external sources on favorable terms.

Off-balance sheet arrangements

          Operating leases. We lease office space, office equipment and computer equipment under long-term operating leases, which are recorded in occupancy and equipment or technology leasing and support.

          Extension of credit to customers. We have entered into commitments to extend credit in the normal course of business. We had approximately $1.9 billion of commitments to extend credit at December 31, 2005 as part of established lending product agreements. Many of these commitments are not expected to be utilized; therefore, management does not believe total unused credit available to customers and customers of strategic relationships represents future cash requirements. Management believes that we can adequately fund actual cash requirements related to these credit commitments through the issuance of certificates of deposit and borrowed federal funds.

          Letters of credit. We are required to post collateral to secure our fuel-price sensitive derivative instruments based on the unrealized loss, less any unsecured credit granted by our counter party. At December 31, 2005 this unsecured credit totaled $30 million. We had posted collateral in the form of letters of credit of $8 million at December 31, 2005. In addition, we have posted a $2.1 million letter of credit as collateral under the terms of our lease agreement for our corporate offices.

          Preferred stock. 100 shares of Series A non-voting convertible, redeemable preferred stock was issued as part of the conversion of Wright Express LLC from a Delaware Limited Liability Company to a Delaware Corporation called Wright Express Corporation. The Series A preferred stock is mandatorily redeemable at the option of the holder after the fifth anniversary of its issuance.

Contractual obligations

          The table below summarizes the estimated dollar amounts of payments under contractual obligations as of December 31, 2005, for the periods specified:

 

 

Application of Critical Accounting Policies and Estimates

          Many accounting estimates and assumptions involved in the application of accounting principles generally accepted in the United States of America have a material impact on reported financial condition and operating performance and on the comparability of such reported information over different reporting periods. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. On an ongoing basis, we evaluate our estimates and judgments that we believe are most important to the portrayal of our financial condition and results of operations. We regard an accounting estimate or assumption underlying our financial statements to be most important to the portrayal of our financial condition and results of operations and therefore a “critical accounting estimate” where:

	•		The nature of the estimates or assumptions is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and
	•		The impact of the estimates and assumptions on financial condition or operating performance is material.

Reserve for Credit Losses

          Our reserve for credit losses is an estimate of the amounts currently recorded in gross accounts receivable that will ultimately not be collected. The reserve reduces the accounts receivable balances as reported in the financial statements to their net realizable value. Management estimates these reserves based on assumptions and other considerations, including a review of accounts receivable balances which become past due, past loss experience, customer payment patterns, current economic conditions, known fraud activity in the portfolio and industry averages.

          Management utilizes a model to calculate the level of the reserve for credit losses which includes such factors as:

	•		a six-month rolling average of actual charge-off experience;
	•		amounts currently due;
	•		the age of the balances, and;
	•		estimated bankruptcy rates.

          In addition to the model, management uses their judgment to ensure that the reserve for credit losses that is established is reasonable and appropriate.

          Management believes the current assumptions and other considerations used to estimate the reserve for credit losses are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating the reserves, the resulting change could have a material adverse effect on our consolidated results of operations, and in certain situations could have a material adverse effect on our financial condition. Management assessed the difference between the actual charge-off activity of amounts in gross accounts receivable at December 31, 2004 and the estimated reserve and determined that the reserve required no material adjustment.

          The following table summarizes the impact that differences in estimated loss rates would have on the reserve for credit losses at December 31, 2005:

Valuation Allowances for Deferred Income Taxes

          Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes, requires management to exercise judgment about its future results in assessing the realizability of its deferred tax assets. At December 31, 2005, Wright Express had gross deferred tax assets of approximately $406 million. Management determined that the likelihood of realization of certain deferred tax assets related to goodwill deductible for income taxes purposes and unrealized losses on fuel price sensitive derivatives is more than 50% and no valuation allowance was recorded. Management also determined that the realization of a deferred tax asset related to losses in tax jurisdictions which require non-consolidated tax returns is more than 50% and no valuation allowance was recorded. In determining that a reserve was not necessary, management considered earnings forecasts, expected fuel price volatility and potential tax planning opportunities. If future taxable income differs from management’s estimate, allowances may be required and may impact future net income.

Changes to Accounting Policies

          On July 1, 2005, the Company adopted SFAS No. 123(R), Share-Based Payment, and chose to transition using the modified prospective transition method. The Company did not recognize any additional compensation cost associated with unvested share-based awards as a result of this adoption. Prior to July 1, 2005, the Company had accounted for stock-based compensation using the fair value method under provisions of SFAS No. 123, Accounting for Stock-Based Compensation. As discussed in Note 2, “Summary of Significant Accounting Policies” in the accompanying consolidated financial statements, in connection with the IPO, the Company converted Cendant stock options to Wright Express stock options prior to its adoption of SFAS No. 123(R) and recorded a one-time charge of approximately $1.5 million for the year ended December 31, 2005. No options were issued subsequent to this conversion that would have required valuation under SFAS 123(R). Instead, the Company has used restricted stock units in its share-based payment programs. The restricted stock units issued by the Company during the year ended December 31, 2005 have no performance conditions and vest over a four-year period. At December 31, 2005 total compensation cost related to nonvested awards not yet recognized is expected to be approximately $8.9 million. The weighted average period over which this cost is expected to be recognized is approximately 3.5 years.

          During the 12 months ended December 31, 2005, there were no other significant changes to accounting policies.

Recent Accounting Pronouncements

          In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Correction — a replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. This statement requires, among other things, that a voluntary change in accounting principles be accounted for using retrospective application. This statement is effective for fiscal years beginning after December 15, 2005. The Company does not expect adoption of this statement to have a material impact on its financial position or results of operations.

          In November 2005, the FASB issued FASB Staff Position FAS115-1/124-1: The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP FAS 115-1/124-1”). This position amends FASB Statements No. 115, Accounting for Certain Investments in Debt and Equity Securities, and No. 124, The Equity Method of Accounting for Investments in Common Stock. This position specifies guidance to be used in determining whether an investment is other than temporarily impaired. This position is effective for reporting periods beginning after December 15, 2005. The Company does not expect adoption of this statement to have a material impact on its financial position or results of operations.

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk

          At December 31, 2005, the Company had borrowings of $169.5 million and $40 million on our term loan and credit facility, respectively, that bore interest at a floating rate equal to the one-month LIBOR plus 150 basis points. During 2005 we entered into two interest rate swap contracts that fix the interest rate on a portion of the variable rate term loan and the variable rate revolving credit facility.

          The following table presents the impact of changes in LIBOR on projected financing interest expense for 2006 on the unhedged portion of the principal outstanding under the credit facility (see the discussion of our interest rate swaps in ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS in the “Liquidity, Capital Resources and Cash Flows” section):

Commodity Price Risk

          The following table reflects the estimated effect of changes in the price of gas, without the effect of our fuel price derivative instruments:

          As discussed in “Fuel Price Derivatives” section of ITEM 1 — BUSINESS, we use derivative instruments to manage the impact of volatility in fuel prices to our cash flows. The table above does not reflect the impact of these derivatives on our pre-tax income, as management cannot predict the changes in market value of these instruments. These market value changes are unrealized and have no cash impact but must be reported as unrealized gains and losses in our operating results.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

WRIGHT EXPRESS CORPORATION

INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

		Page
		Number
Wright Express Corporation and Subsidiaries:
Consolidated Financial Statements:
Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm			37
Consolidated Balance Sheets at December 31, 2005 (restated) and 2004 (restated)			38
Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003			39
Consolidated Statements of Changes in Stockholders’ or Member’s Equity for the Years Ended December 31, 2005 (restated), 2004 (restated) and 2003 (restated)			40
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003			41
Notes to Consolidated Financial Statements			42

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Wright Express Corporation
South Portland, Maine

We have audited the accompanying consolidated balance sheets of Wright Express Corporation (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ or member’s 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 the Company as of December 31, 2005 and 2004, and the results of its operations and its 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 to the consolidated financial statements, the Company has restated, to correct for certain errors related to goodwill and deferred income taxes.

As discussed in Note 2 to the consolidated financial statements, on January 1, 2003, the Company prospectively adopted Statement of Financial Accounting Standards No. 123, “Accounting for Stock-based Compensation.” Also, as discussed in Note 2, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” on July 1, 2005 and chose to transition using the “modified prospective” method.

As discussed in Note 2 to the consolidated financial statements, the Company was an indirect wholly owned subsidiary of Cendant. Cendant divested 100% of its ownership interest in the Company through an Initial Public Offering on February 22, 2005. Included in Note 12 to the Consolidated Financial Statements are transactions with related parties of the Company.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts

March 2, 2006, except for Note 1,
as to which the date is November 20, 2006