UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

 

 

 

Commission File No. 001-16427

 

 

 

 

Fidelity National Information Services, Inc.

(Exact name of registrant as specified in its charter)

 

 

(904) 854-8100

(Registrant’s telephone number, including area code)

 

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

 

 

Securities registered pursuant to Section 12(g) of the Act: None

(Title of Class)

 

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

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 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 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

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

 

As of June 29, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by nonaffiliates was $9,511,456,783 based on the closing sale price of $54.28 on that date as reported by the New York Stock Exchange. For the purposes of the foregoing sentence only, all directors and executive officers of the registrant were assumed to be affiliates. The number of shares outstanding of the registrant’s common stock, $0.01 par value per share, was 194,479,421 as of February 1, 2008.

 

The information in Part III hereof is incorporated herein by reference to the registrant’s Proxy Statement on Schedule 14A for the fiscal year ended December 31, 2007, to be filed within 120 days after the close of the fiscal year that is the subject of this Report.

 

 

FIDELITY NATIONAL INFORMATION SERVICES, INC.
2007 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

Unless stated otherwise or the context otherwise requires, all references to “FIS,” “we,” the “Company” or the “registrant”: (a) with respect to periods after the Certegy Merger described below, are to Fidelity National Information Services, Inc., a Georgia corporation formerly known as Certegy Inc., which was the surviving legal entity in the Certegy Merger; and (b) with respect to periods up to and including the Certegy Merger, are to Fidelity National Information Services, Inc., a Delaware corporation that merged into Certegy in the Certegy Merger but was deemed the acquirer from an accounting perspective, as described below; all references to “Certegy” are to Certegy Inc., and its subsidiaries, with respect to periods prior to the Certegy merger described in; all references to “eFunds” are to eFunds Corporation, and its subsidiaries, as acquired by FIS; all references to “Old FNF” are to Fidelity National Financial, Inc., a Delaware corporation that owned a majority of the Company’s shares through November 9, 2006; and all references to “FNF” are to Fidelity National Financial, Inc. (formerly known as Fidelity National Title Group, Inc. (“FNT”)), formerly a subsidiary of Old FNF but now an independent company that remains a related entity from an accounting perspective.

 

 

General Development of the Business

 

FIS is a leading provider of core processing services, card issuer and transaction processing and mortgage-related services to financial institutions, mortgage lenders and servicers. FIS has processing and technology relationships with 35 of the top 50 global banks, including nine of the top 10. Over 50 percent of all U.S. residential mortgages are processed using FIS’ mortgage servicing platform. FIS is a member of Standard and Poor’s (S&P) 500^® Index.

 

Our business operations and organizational structure result from the February 1, 2006, business combination of FIS and Certegy (the “Certegy Merger”), pursuant to which FIS was merged into a wholly-owned subsidiary of Certegy. Immediately after the Certegy Merger, the stockholders of FIS, including its then-majority stockholder Old FNF, owned approximately 67.4% of our outstanding common stock. Accordingly, for accounting and financial reporting purposes, the Certegy Merger was treated as a reverse acquisition of Certegy by FIS using the purchase method of accounting pursuant to U.S. generally accepted accounting principles. Under this accounting treatment, although Certegy was the legal entity that survived the merger, FIS was viewed as the acquirer for accounting purposes, and our financial statements and other disclosures for periods prior to the Certegy Merger treat FIS as our predecessor company. Also, as a result of the Certegy Merger, the registrant’s name changed from “Certegy Inc.” to “Fidelity National Information Services, Inc.” and our New York Stock Exchange trading symbol from “CEY” to “FIS”. On November 9, 2006, Old FNF (after other transactions in which it distributed all of its assets other than its ownership in FIS) merged with and into FIS (the FNF Merger). Upon completion of the FNF Merger, FIS became an independent publicly traded company, and Old FNF ceased to exist as an independent publicly traded company. The assets distributed by Old FNF prior to the FNF Merger included its ownership in Fidelity National Title Group, Inc., which following the FNF Merger renamed itself Fidelity National Financial, Inc.

 

Prior to the Certegy Merger, FIS was incorporated under the laws of the State of Delaware on May 20, 2004, as a wholly-owned subsidiary of Old FNF, our former parent company. As a result of the Certegy Merger, we are now incorporated under the laws of the State of Georgia, where Certegy was initially incorporated on March 2, 2001. From November 2004 through March 2005, Old FNF contributed a number of business entities to FIS, including certain real estate-related information services and loan default management businesses developed by Old FNF in the 1990s, and a series of acquisitions completed by Old FNF between 2001 and 2005. Although many of these acquisitions added important applications and services to the offerings of FIS, our long-term growth has been driven primarily by internal growth of these businesses and acquisitions of companies that provide core processing services to financial institutions including:

 

 

 

Additionally, since 2006 we have broadened our service offerings through our acquisitions of:

 

 

Financial Information About Operating Segments and Geographic Areas

 

Our reportable segments are Transaction Processing Services, or TPS, and Lender Processing Services, or LPS. The primary components of the TPS segment are Integrated Financial Solutions, Enterprise Solutions, and International. The primary components of the Lender Processing, or LPS segment, are Mortgage Processing and Information Services, which includes loan facilitation services, default management, and other information and outsourcing based services.

 

Revenue from our TPS segment is generated from serving the processing needs of financial institutions. Our primary software applications function as the underlying infrastructure of a financial institution’s core processing environment which banks use to maintain the primary records of their customer accounts. We also provide a number of complementary applications, such as item processing and electronic funds transfer, and services that interact directly with the core processing applications, including applications that facilitate interactions between our financial institution customers and their clients such as online banking and bill payment services and fraud prevention and detection services. We offer our applications and services through a range of delivery and service models, including on-site outsourcing and remote processing arrangements, as well as on a licensed software basis for installation on customer-owned and operated systems. This segment also includes card issuer services, which enable banks, credit unions, and others to issue VISA and MasterCard credit and debit cards, private label cards, and other electronic payment cards for use by both consumer and business accounts. In addition, we provide point-of-sale check verification and guarantee services to retailers.

 

Revenue from our LPS segment is generated from outsourced business processes, core mortgage processing and information solutions primarily provided to national lenders and loan servicers. These processes include centralized title agency and closing services offered to first mortgage, refinance, home equity and sub-prime lenders. This segment’s information solutions include appraisal and valuation services, real estate tax services and flood zone information. In addition, this segment provides default management services to national lenders and loan servicers, allowing customers to outsource the business processes necessary to take a loan and the underlying real estate securing the loan through the default and foreclosure process.

 

Lender Processing Services Spin-off

 

On October 25, 2007, we announced that our Board of Directors had approved pursuing a plan to spin-off the businesses that currently make up our LPS segment into a stand alone publicly traded company which will be known as Lender Processing Services, Inc. (“LPS, Inc.”). As currently contemplated, we will contribute the majority of the assets and liabilities of this segment into LPS, Inc. in exchange for additional shares of the LPS, Inc. common stock and approximately $1.6 billion principal amount of LPS, Inc. debt securities. Following receipt of necessary approvals from the Securities and Exchange Commission (the “SEC”) and a ruling from the Internal Revenue Service (the “IRS”) and an opinion from our special tax advisor with respect to the tax-free nature of the spin-off, we will distribute 100% of the LPS, Inc. common stock to our shareholders in the spin-off and exchange the LPS, Inc. debt securities for a like amount of our existing debt. We expect that the spin-off will be tax-free to FIS and our

shareholders, and that the debt-for-debt exchange will be tax-free to FIS. We will then retire the debt that is exchanged for the LPS, Inc. debt securities. Completion of the spin-off is expected to occur in mid-2008. FIS’s current Chief Financial Officer, Jeff Carbiener, is expected to be the Chief Executive Officer of LPS, Inc.

 

In January 2008, we filed a ruling request with the IRS regarding the tax-free nature of the LPS, Inc. spin-off and intend to file a preliminary Form 10 Registration Statement with the SEC in the first quarter of 2008. Completion of the spin-off is contingent upon the satisfaction or waiver of a variety of conditions, including final approval of the spin-off and all related arrangements by our Board of Directors. The completion of the proposed spin-off is also subject to risks and uncertainties including but not limited to those associated with our ability to contribute the LPS segment assets and liabilities to LPS, Inc., with the ability of LPS, Inc. to complete the debt exchange in the manner and on the terms currently contemplated, the possibility that necessary governmental approvals or actions (from the IRS, the SEC or other authorities) will not be obtained, and market conditions for the spin-off.

 

Narrative Description of the Business

 

Overview

 

FIS is a leading provider of core processing services, card issuer and transaction processing and mortgage-related services to financial institutions, mortgage lenders and servicers. FIS has processing and technology relationships with 35 of the top 50 global banks, including nine of the top 10. Approximately 50 percent of all U.S. residential mortgages are processed using FIS’ mortgage servicing platform. FIS is a member of Standard and Poor’s (S&P) 500 Index.

 

The customers cited in the following discussion provide a representative cross-section of our customers based on size, geographic location, type of institution and the services that they use.

 

Our Transaction Processing Services Operating Segment

 

The table below summarizes the revenues by division for our TPS segment (in millions):

 

 

Integrated Financial Solutions

 

The primary focus of our Integrated Financial Solutions business is to serve the processing needs of independent community banks, credit unions, and savings banks in the United States. Processing solutions include core processing, branch automation, back office support systems, compliance, credit and debit card issuing, item processing and imaging, print and mail, ATM/EFT, retail Internet banking and bill payment services, commercial cash management and voice response services. Over 12,000 commercial banks, savings institutions and credit unions utilize one or more of these solutions.

 

Of these 12,000 institutions, over 1,350 institutions utilize one of our core processing solutions. Customers of this segment typically seek a fully integrated and broad suite of applications. As a result, our core processing services sold in this market have various add-on modules or applications that integrate into our core processing applications, providing a broad processing solution. Examples of our customers in this sector include Hudson City Savings Bank, Sterling Bank, and VyStar Credit Union.

 

Over 4,550 institutions utilize our card issuer services which enable banks, credit unions, and others to issue VISA and MasterCard credit and debit cards, and other electronic payment cards for use by both consumer and business accounts. The majority of our card issuer programs are full service, including most of the operations and support necessary for an issuer to operate a credit and debit card program. We do not make credit decisions for our

card issuing customers, nor do we fund their card receivables. We provide our card issuer services primarily through our longstanding contractual alliances with two associations representing independent community banks and credit unions in the U.S., the Independent Community Bankers of America, or ICBA, and Card Services for Credit Unions, or CSCU. These organizations offer our services to their respective members with our company as the provider. Our alliances with the ICBA and CSCU provide us with an efficient and effective means of marketing our services to individual credit unions and community banks.

 

Our item processing and imaging services are utilized by more than 1,450 institutions. The services provide our customers with a wide range of outsourcing services relating to the imaging and processing of checks, statements, remittances, and other transaction records, which are performed at one of our 40 item processing centers located throughout the U.S. or on-site at a customer location.

 

We provide a full range of ePayment capabilities, including electronic funds transfer, or EFT, processing solutions, ranging from automated teller machine, or ATM, and debit card services to card production and distribution to stored-value prepaid/gift cards and payroll cards. Our eBanking services are utilized by more than 1,660 financial institutions and enable them to offer Internet banking and bill payment services to consumers and businesses.

 

Enterprise Solutions

 

Our Enterprise Solutions division focuses on serving the processing needs of large U.S. financial institutions, automotive financing companies, and commercial lenders. We also provide check risk management and related processing services to businesses accepting or cashing checks at the point-of-sale, risk management services to financial institutions and comprehensive cash access services in the gaming industry. Primary service offerings include:

 

 

The processing needs of our customers vary significantly across the sizes and types of entities we serve. These entities include:

 

 

We have developed several models of providing our customers with applications and services. We typically deliver the highest value to our customers when we combine our software applications and deliver them in one of several types of outsourcing arrangements, such as an application service provider, facilities management processing or application management arrangement. We are also able to deliver individual applications through a software licensing arrangement. Finally, using our expertise gained in the foregoing types of arrangements, we also have clients for whom we manage their IT operations, without providing any of our proprietary software.

 

International

 

We provide core banking applications, item processing, card services, and check risk management solutions to financial institutions, card issuers, and retailers in approximately 80 countries outside the United States. Our international operation leverages existing domestic applications and provides services for the specific business needs of our customers in targeted international markets. Our service offering includes a comprehensive range of payment processing services and core banking solutions. Our payment processing services, which comprise approximately 56% of our international revenues, include fully outsourced card issuer services and customer support, item processing and retail point-of-sale check authorization services. Our core banking solutions include fully outsourced processing arrangements, application management, software licensing and maintenance, facilities management and consulting services. Our international customers include CitiBank, Bradesco, ABN AMRO/Banco Real, ING Group, Krung Thai Bank, China Construction Bank, National Australia Bank, and a number of other mid-tier and regional financial institutions, card issuers, and retailers.

Our Lender Processing Services Operating Segment

 

The table below summarizes the revenues by division for our LPS segment (in millions):

 

 

Mortgage Processing

 

We offer the most widely used mortgage loan servicing system (known as MSP) in the U.S. As of December 31, 2007, our mortgage loan servicing platform, or MSP, was used to process over 50% of all residential mortgages, based on number of loans, in the U.S. Our mortgage loan processing customers include Bank of America, Wells Fargo, National City Mortgage, and U.S. Bank Home Mortgage. Our customer relationships are typically long-term relationships that provide consistent annual revenues based on the number of mortgages processed on our platform.

 

While our mortgage servicing applications can be purchased on a stand-alone, licensed basis, the substantial majority of our MSP customers by both number of customers and number of loans choose to use us as their processing partner and engage us to perform all data processing functions in our technology center located in Jacksonville, Florida. Customers determine whether to process their loan portfolio data under an application service provider arrangement in which multiple clients share the same computing and personnel resources or to have their own dedicated resources within our facility.

 

The primary applications and services of this business include:

 

 

Information Outsourcing

 

We offer a suite of services spanning the entire mortgage loan life cycle, from loan origination through closing, refinancing, foreclosure and resale. A significant number of our customers use a combination of our mortgage servicing, mortgage information, mortgage origination and default management services. Our client base includes mortgage lenders such as U.S. Bancorp, Bank of America, Freddie Mac and Washington Mutual, as well as investors and real estate professionals. Our primary service lines are described below:

 

 

 

Sales and Marketing

 

Sales Force

 

We have teams of experienced sales personnel with subject matter expertise in particular services or in the needs of particular types of customers. A significant portion of our potential customers in each of our business lines is targeted via direct and/or indirect field sales, as well as inbound and outbound telemarketing efforts. Marketing activities include direct marketing, print advertising, media relations, public relations, tradeshow and convention activities, seminars, and other targeted activities. Because many of our customers use a single service, or a combination of services, our direct sales force also targets existing customers to promote cross-selling opportunities. Our strategy is to use the most efficient delivery system available to successfully acquire customers and build awareness of our services.

 

In our Lender Processing Segment, in addition to our traditional sales force, we have established a core team of senior managers to lead strategic account management for the full range of our services to existing and potential top-

tier financial institution customers. The individuals who participate in this effort, which we coordinate through our Office of the Enterprise, spend a significant amount of their time on sales and marketing efforts as well as working with our business units to develop solutions based upon strategic issues impacting customers’ businesses.

 

Patents, Trademarks and Other Intellectual Property

 

We rely on a combination of contractual restrictions, internal security practices, and copyright and trade secret law to establish and protect our software, technology, and expertise. Further, we have developed a number of brands that have accumulated substantial goodwill in the marketplace, and we rely on trademark law to protect our rights in that area. We intend to continue our policy of taking all measures we deem necessary to protect our copyright, trade secret, and trademark rights. These legal protections and arrangements afford only limited protection of our proprietary rights, and there is no assurance that our competitors will not independently develop or license products, services, or capabilities that are substantially equivalent or superior to ours. In general, we believe that we own most proprietary rights necessary for the conduct of our business, although we do license certain items, none of which is material, under arms-length agreements for varying terms.

 

Competition

 

Our primary competitors include internal technology departments within banks, data processing or software development departments of large companies or large computer manufacturers, third-party payment processors, independent computer services firms, companies that develop and deploy software applications, companies that provide customized development, implementation and support services, and companies that market software for the electronic payment industry. Some of these competitors possess substantially greater financial, sales and marketing resources than we do. Competitive factors for applications and services include the quality of the technology-based application or service, application features and functions, ease of delivery and integration, ability of the provider to maintain, enhance, and support the applications or services, and price. We believe that we compete favorably in each of these categories. In addition, we believe that our financial institution industry expertise, combined with our ability to offer multiple applications, services and integrated solutions to individual customers, enhances our competitiveness against competitors with more limited application offerings.

 

We compete with vendors that offer similar core processing applications and services to financial institutions, including Fiserv, Inc., Jack Henry and Associates, Inc., Metavante Corporation, Open Solutions, IBM and Accenture. In certain non-U.S. markets, we compete with regional providers including Alnova, I-Flex, and Temenos.

 

Our competitors in the card issuer services market include third-party credit and debit card processors such as First Data Corporation, Total System Services, Electronic Data Systems Corporation, and Payment Systems for Credit Unions, and third-party software providers, which license their card processing systems to financial institutions and third-party processors. Competitors in the check risk management services market include First Data’s TeleCheck Services division, CrossCheck, and Global Payments.

 

The markets for our Information Outsourcing business lines are also highly competitive. Key competitive factors include quality of the service, convenience, speed of delivery, customer service, and price. We do not believe that there is a competitor currently offering the scope of services and market coverage that we provide in our Information Outsourcing business. However, there are a number of competitors in specific lines, some of which have substantial resources. First American and Land America are significant competitors in a majority of our Information Outsourcing business lines, including tax, flood, appraisal and default.

 

Research and Development

 

Our research and development activities have related primarily to the design and development of our processing systems and related software applications and risk management platforms. We expect to continue our practice of investing an appropriate level of resources to maintain, enhance and extend the functionality of our proprietary systems and existing software applications, to develop new and innovative software applications and systems in response to the needs of our customers, and to enhance the capabilities surrounding our outsourcing infrastructure. In addition, we intend to offer services that are compatible with new and emerging delivery channels.

As part of our research and development process, we evaluate current and emerging technology for applicability to our existing and future software platforms. To this end, we engage with various hardware and software vendors in evaluation of various infrastructure components. Where appropriate, we use third-party technology components in the development of our software applications and service offerings. Third-party software may be used for highly specialized business functions, which we may not be able to develop internally within time and budget constraints. Additionally, third-party software may be used for commodity type functions within a technology platform environment. In the case of nearly all of our third-party software, enterprise license agreements exist for the third-party component and either alternative suppliers exist or transfer rights exist to ensure the continuity of supply. As a result, we are not materially dependent upon any third-party technology components. We work with our customers to determine the appropriate timing and approach to introducing technology or infrastructure changes to our applications and services. In the years ended December 31, 2007, 2006 and 2005 we recorded expense of approximately $106.3 million, $105.6 million, and $113.5 million, respectively, on research and development efforts (excluding amounts capitalized).

 

Government Regulation

 

Various aspects of our businesses are subject to federal, state, and foreign regulation. Our failure to comply with any applicable laws and regulations could result in restrictions on our ability to provide our services, as well as the imposition of civil fines and criminal penalties.

 

As a provider of electronic data processing and back-office services to financial institutions such as banks, thrifts and credit unions we are subject to regulatory oversight and examination by the Federal Financial Institutions Examination Council, an interagency body of the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the National Credit Union Administration and various state regulatory authorities. In addition, independent auditors annually review several of our operations to provide reports on internal controls for our customers’ auditors and regulators. We also may be subject to possible review by state agencies that regulate banks in each state in which we conduct our electronic processing activities.

 

Beginning July 1, 2001, financial institutions were required to comply with privacy regulations imposed under the Gramm-Leach-Bliley Act. These regulations place restrictions on financial institutions’ use of non-public personal information. All financial institutions must disclose detailed privacy policies to their customers and offer them the opportunity to direct the financial institution not to share information with third parties. The new regulations, however, permit financial institutions to share information with non-affiliated parties who perform services for the financial institutions. As a provider of services to financial institutions, we are required to comply with the privacy regulations and are bound by the same limitations on disclosure of the information received from our customers as apply to the financial institutions themselves.

 

Given that one of the databases that we maintain in the U.S. contains certain data pertaining to the check-writing histories of consumers, and that data is used to provide certain check risk management services, our check risk management business is subject to the Federal Fair Credit Reporting Act and various similar state laws. Among other things, the Fair Credit Reporting Act imposes requirements on us concerning data accuracy, and provides that consumers have the right to know the contents of their check-writing histories, to dispute their accuracy, and to require verification or removal of disputed information. In furtherance of our objectives of data accuracy, fair treatment of consumers, protection of consumers’ personal information, and compliance with these laws, we maintain a high level of security for our computer systems in which consumer data resides, and we maintain consumer relations call centers to facilitate efficient handling of consumer requests for information and handling of disputes.

 

Our check collection services are subject to the Federal Fair Debt Collection Practices Act and various state collection laws and licensing requirements. The Federal Trade Commission, as well as state attorneys general and other agencies, have enforcement responsibility over the collection laws, as well as the various credit reporting laws.

 

Elements of our cash access business are registered as a Money Services Business and are subject to the USA Patriot Act and reporting requirements of the Bank Secrecy Act and U.S. Treasury Regulations. This business is also

subject to various state, local and tribal licensing requirements. The Financial Crimes Enforcement Network, state attorneys general, and other agencies have enforcement responsibility over laws relating to money laundering, currency transmission, and licensing.

 

The Real Estate Settlement Procedures Act, or RESPA, and related regulations generally prohibit the payment or receipt of fees or any other item of value for the referral of a real estate-secured loan to a loan broker or lender and prohibit fee shares or splits of unearned fees in connection with the provision of residential real estate settlement services, such as mortgage brokerage and real estate brokerage. Notwithstanding these prohibitions, RESPA permits payments for goods furnished or for services actually performed, so long as those payments bear a reasonable relationship to the market value of the goods or services provided. RESPA and related regulations may to some extent restrict our real estate-related businesses from entering into certain preferred alliance arrangements. The U.S. Department of Housing and Urban Development is responsible for enforcing RESPA.

 

Real estate appraisers are subject to regulation in most states, and some state appraisal boards have sought to prohibit certain valuation products including our automated valuation applications. Courts have limited such prohibitions, in part on the ground of preemption by the federal Financial Institutions Reform, Recovery, and Enforcement Act of 1989, but we cannot assure you that our valuation and appraisal services business will not be subject to regulation.

 

The title agency and related services we provide are conducted through an underwritten title company, title agencies, and individual title agents and escrow officers. The regulation of an underwritten title company is generally limited to requirements to maintain specified levels of net worth and working capital, and to obtain and maintain appropriate licenses for the jurisdictions in which it operates. The title agencies and individual escrow officers are also subject to regulation by the insurance or banking regulators in many jurisdictions. These regulators generally require, among other items, that agents and individuals obtain and maintain a license and be appointed by a title insurer. We also own a small title insurer which issues policies generated by our direct and agency operations in relatively limited circumstances. This insurer is domiciled in New York and is therefore subject to regulation by the insurance regulatory authorities of that state. Among other things, no person may acquire 10% or more of our common stock without the approval of the New York insurance regulators.

 

The California Department of Insurance has recently proposed implementing rate reductions in the title insurance industry in California. Florida, New Mexico, and Texas have also announced reviews of title insurance rates and other states could follow. At this stage, we are unable to predict what the outcome will be of these or any similar processes. Any such rate reductions could adversely affect our revenues from our title agency services.

 

Given that we conduct business in international markets as well as in the U.S., we are subject to laws and regulations in jurisdictions outside the U.S. that regulate many of the same activities that are described above, including electronic data processing and back-office services for financial institutions and use of consumer information.

 

The IRS has proposed regulations under Section 468B regarding the taxation of the income earned on escrow accounts, trusts and other funds used during deferred exchanges of like-kind property and under Section 7872 regarding below-market loans to facilitators of these exchanges. The proposed regulations affect taxpayers that engage in like-kind exchanges and escrow holders, trustees, qualified intermediaries, and others that hold funds during like-kind exchanges. We currently do not know what effect these changes will have on our 1031 exchange businesses.

 

Although we do not believe that compliance with future laws and regulations related to our businesses, including future consumer protection laws and regulations, will have a material adverse effect on our company, enactment of new laws and regulations may increasingly affect the operations of our business, directly or indirectly, which could result in substantial regulatory compliance costs, litigation expense, adverse publicity, and/or loss of revenue.

Employees

 

As of December 31, 2007, we had approximately 31,000 employees, including approximately 12,000 employees principally employed outside of the U.S. None of our U.S. workforce currently is unionized. We have not experienced any work stoppages, and we consider our relations with employees to be good.

 

Available Information

 

Our Internet website address is www.fidelityinfoservices.com. We make available, free of charge, through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission. Our Corporate Governance Policy and Code of Business Conduct and Ethics are also available on our website and are available in print, free of charge, to any shareholder who mails a request to the Corporate Secretary, Fidelity National Information Services, Inc., 601 Riverside Avenue, Jacksonville, FL 32204 USA. Other corporate governance-related documents can be found at our website as well. However, the information found on our website is not part of this or any other report.

 

 

In addition to the normal risks of business, we are subject to significant risks and uncertainties, including those listed below and others described elsewhere in this Annual Report on Form 10-K. Any of the risks described herein could result in a significant adverse effect on our results of operation and financial condition.

 

If we fail to adapt our services to changes in technology or in the marketplace, or if our ongoing efforts to upgrade our technology are not successful, we could lose customers and have difficulty attracting new customers for our services.

 

The markets for our services are characterized by constant technological changes, frequent introductions of new services and evolving industry standards. Our future success will be significantly affected by our ability to enhance our current services, and develop and introduce new services that address the increasingly sophisticated needs of our customers and their clients. These initiatives carry the risks associated with any new service development effort, including cost overruns, delays in delivery, and performance issues. There can be no assurance that we will be successful in developing, marketing and selling new services that meet these changing demands, that we will not experience difficulties that could delay or prevent the successful development, introduction, and marketing of these services, or that our new services and their enhancements will adequately meet the demands of the marketplace and achieve market acceptance.

 

We operate in a competitive business environment, and if we are unable to compete effectively our results of operations and financial condition may be adversely affected.

 

The market for our services is intensely competitive. Our competitors vary in size and in the scope and breadth of the services they offer. Some of our competitors have substantial resources. We face direct competition from third parties, and since many of our larger potential customers have historically developed their key applications in-house and therefore view their system requirements from a make-versus-buy perspective, we often compete against our potential customers’ in-house capacities. In addition, we expect that the markets in which we compete will continue to attract new competitors and new technologies. There can be no assurance that we will be able to compete successfully against current or future competitors or that competitive pressures we face in the markets in which we operate will not materially adversely affect our business, financial condition, and results of operations.

Our substantial leverage and debt service requirements may adversely affect our financial and operational flexibility.

 

As of December 31, 2007, we had total debt of approximately $4.3 billion. This high level of debt could have important consequences to us, including the following:

 

 

In addition, the terms of our senior credit facilities may restrict us from taking actions, such as making significant acquisitions or dispositions or entering into certain agreements, which we might believe to be advantageous to us.

 

If we are unable to successfully consummate and integrate acquisitions, our results of operations may be adversely affected.

 

As part of our growth strategy, we have made numerous acquisitions in recent years. We anticipate that we will continue to seek to acquire complementary businesses and services. This strategy will depend on the ability to find suitable acquisitions and finance them on acceptable terms. We may require additional debt or equity financing for future acquisitions, and doing so will be made more difficult by our substantial debt. If we are unable to acquire suitable acquisition candidates, we may experience slower growth.

 

Further, even if we successfully complete acquisitions, we will face challenges in integrating any acquired business. These challenges include eliminating redundant operations, facilities and systems, coordinating management and personnel, retaining key employees, managing different corporate cultures, and achieving cost reductions and cross-selling opportunities. There can be no assurance that we will be able to fully integrate all aspects of acquired businesses successfully or fully realize the potential benefits of bringing them together, and the process of integrating these acquisitions may disrupt our business and divert our resources.

 

Consolidation in the banking and financial services industry could adversely affect our revenues by eliminating some of our existing and potential customers and could make us more dependent on a more limited number of customers.

 

There has been and continues to be substantial merger, acquisition and consolidation activity in the banking and financial services industry. Mergers or consolidations of banks and financial institutions in the future could reduce the number of our customers and potential customers, which could adversely affect our revenues even if these events do not reduce the aggregate number of customers or the banking and other activities of the consolidated entities. If our customers merge with or are acquired by other entities that are not our customers, or that use fewer of our services, they may discontinue or reduce their use of our services. In addition, it is possible that the larger banks or financial institutions resulting from mergers or consolidations could decide to perform in-house some or all of the services which we currently provide or could provide. Any of these developments could have a material adverse effect on our business and results of operations.

Demand for many of our services is sensitive to the level of consumer transactions generated by our customers, and accordingly, our revenues could be impacted negatively by a general economic slowdown or any other event causing a material slowing of consumer spending.

 

A significant portion of our revenue is derived from transaction processing fees. Any changes in economic factors that adversely affect consumer spending and related consumer debt, or a reduction in check writing or credit and debit card usage, could reduce the volume of transactions that we process, and have an adverse effect on our business, financial condition and results of operations.

 

Potential customers may be reluctant to switch to a new vendor, which may adversely affect our growth, both in the U.S. and internationally.

 

For banks and other potential customers of our financial information software and services, switching from one vendor of bank core processing or related software and services (or from an internally-developed system) to a new vendor is a significant undertaking. Many potential customers worry about potential disadvantages such as loss of accustomed functionality, increased costs and business disruption. As a result, potential customers, both in the U.S. and internationally, often resist change. We seek to overcome this resistance through strategies such as making investments to enhance the functionality of our software. However, there can be no assurance that our strategies for overcoming potential customers’ reluctance to change vendors will be successful, and this resistance may adversely affect our growth, both in the U.S. and internationally.

 

Decreased lending and real estate activity may reduce demand for certain of our services and adversely affect our results of operations.

 

Real estate sales are affected by a number of factors, including mortgage interest rates, the availability of funds to finance purchases, the level of home prices and general economic conditions. The volume of refinancing transactions in particular and mortgage originations in general declined in 2005, 2006 and 2007 from 2004 levels, resulting in reduction of revenues in some of our businesses. The current MBA forecast is for $2.0 trillion of mortgage originations in 2008 compared to $2.3 trillion in 2007. Our revenues in future periods will continue to be subject to these and other factors which are beyond our control and, as a result, are likely to fluctuate.

 

Further, in the event that levels of home ownership were to decline or other factors were to reduce the aggregate number of U.S. mortgage loans, our revenues from mortgage processing and related services could be adversely affected.

 

We could have conflicts with FNF, and the executive chairman of our board of directors and other officers and directors could have conflicts of interest due to their relationships with FNF.

 

Conflicts may arise between FNF and us as a result of our ongoing agreements and the nature of our respective businesses. Among other things, we and certain of our subsidiaries are parties to a variety of related party agreements with FNF. Certain of our executive officers and directors will be subject to conflicts of interest with respect to such related party agreements and other matters due to their relationships with FNF.

 

Some of the FNF executive officers and directors who became executive officers and directors of our company in connection with the FNF Merger, including William P. Foley, II and Brent B. Bickett, own substantial amounts of FNF stock and stock options because of their relationships with FNF and Old FNF prior to the FNF Merger. Such ownership could create or appear to create potential conflicts of interest when our directors and officers are faced with decisions that involve FNF or any of its respective subsidiaries.

 

Mr. Foley, who became our Executive Chairman in connection with the FNF Merger, is currently the Chairman of the board of directors of FNF. Mr. Bickett also became an officer of our company and FNF. As a result, each of these individuals has obligations to us as well as to FNF and will have conflicts of interest with respect to matters potentially or actually involving or affecting us and FNF.

Matters that could give rise to conflicts between us and FNF include, among other things.

 

 

We will seek to manage these potential conflicts through dispute resolution and other provisions of our agreements with FNF and through oversight by independent members of our board of directors. However, there can be no assurance that such measures will be effective or that we will be able to resolve all potential conflicts with FNF, or that the resolution of any such conflicts will be no less favorable to us than if we were dealing with an unaffiliated third party.

 

We may lack adequate oversight since the chairman of the board of directors of FNF is also our executive chairman.

 

Mr. Foley is executive chairman of our board of directors. Mr. Foley is also the chairman of the board of directors of FNF. As a result of his roles, he has obligations to us as well as FNF and may have conflicts of time with respect to matters potentially or actually involving or affecting us. As executive chairman, it is expected that Mr. Foley will devote no more than one-half of his time to matters relating to us. If Mr. Foley’s duties as executive chairman of our board of directors require more time than he is able to allot, then his oversight of the activities of our company could be diminished and the effective management of our company could be adversely affected.

 

Our revenues from the sale of services to the VISA and MasterCard organizations are dependent upon our continued VISA and MasterCard certification and financial institution sponsorship, and the loss or suspension of this certification or sponsorship could adversely affect our business.

 

In order to provide our card services, we must be designated a certified processor by, and be a member service provider of, MasterCard and be designated as an independent sales organization of VISA. These designations are dependent upon our continuing adherence to the standards of the VISA and MasterCard associations. The member financial institutions of VISA and MasterCard, some of which are our competitors, set the standards with which we must comply. If we fail to comply with these standards, our designation as a certified processor, as a member service provider, or as an independent sales organization could be suspended or terminated. The termination of our member service provider status or our status as a certified processor, or any changes in the VISA and MasterCard rules that prevent our registration or otherwise limit our ability to provide transaction processing and marketing services for the VISA or MasterCard organizations, would result in the loss of business from VISA or MasterCard issuing customers, and lead to a reduction in our revenues, which in turn could have a material adverse effect on our business.

 

We have a long sales cycle for many of our applications and if we fail to close sales after expending significant time and resources to do so, our business, financial condition, and results of operations may be adversely affected.

 

The implementation of many of our applications often involves significant capital commitments by our customers, particularly those with smaller operational scale. Potential customers generally commit significant resources to an evaluation of available software and require us to expend substantial time, effort, and money educating them as to the value of our software and services. We incur substantial costs in order to obtain each new customer. We may expend significant funds and management resources during the sales cycle and ultimately fail to close the sale. Our sales cycle may be extended due to our customers’ budgetary constraints or for other reasons. If we are unsuccessful in closing sales after expending significant funds and management resources or we experience delays, it could have a material adverse effect on our business, financial condition, and results of operations.

In the wake of the current mortgage crisis, there could be adverse regulatory consequences or litigation that could affect us.

 

Various aspects of our businesses are subject to federal, state and foreign regulation. The sharp rise in home foreclosures that started in the United States during the fall of 2006 and has accelerated in 2007 and 2008 has begun to result in investigations and lawsuits against various parties commenced by various governmental authorities and third parties. It has also resulted in governmental review of aspects of the mortgage lending business, which may lead to greater regulation in areas such as appraisals, default management, loan closings and regulatory reporting. Such actions and proceedings could have consequences that could adversely affect our business.

 

Completion of the spin-off is subject to various risks.

 

On October 25, 2007, we announced our intention to pursue the spin-off of the businesses that primarily comprise our LPS operations. There is no guarantee the proposed spin-off will be finalized. Completion of the spin-off is subject to a number of specific factors and conditions, as well as to the discretion of our board of directors which may be influenced by market conditions or other factors. For example, it is a condition to completing the spin-off that we receive a private letter ruling from the IRS and an opinion of our special tax adviser, together to the effect that, for United States Federal income tax purposes, the following transactions will qualify as tax-free transactions to us, the spun-off entity, and our stockholders: (i) the contribution of all of our interest in the assets, liabilities, businesses and employees related to our LPS operations in exchange for the receipt by us of LPS, Inc. common stock and LPS, Inc. debt obligations (the “contribution”); (ii) the expected exchange by us of the LPS, Inc. debt obligations for certain of our outstanding debt (the “debt exchange”); and (iii) the distribution of LPS, Inc. common stock to our stockholders, except that any gain that our stockholders realize on cash received in lieu of any fractional shares of LPS, Inc. common stock to which such stockholders may be entitled in the distribution generally will be taxable to the stockholders. The proposed spin-off is also subject to the SEC having declared effective the registration statement for the new shares and the listing of LPS, Inc. common stock on the NYSE having been approved, among other conditions.

 

If the spin-off is not completed, we will have incurred costs without any corresponding benefit. Further, our management will have spent time executing the plan which may be a distraction from its day to day activities.

 

We and/or LPS may be unable to achieve some or all of the benefits that we expect will be achieved from the spin-off.

 

We and LPS, Inc. may not be able to achieve the full strategic and financial benefits we expect will result from the spin-off or such benefits may be delayed or not occur at all. These outcomes may occur due to, among other things, the leverage to be incurred by LPS, Inc. in connection with the spin-off, the loss of synergies, excess costs the two companies will incur as stand-alone entities, or the obligations imposed on LPS, Inc. and us to avoid certain transactions in respect of our capital stock in order to preserve the planned tax-free nature of the transactions.

 

Finally, notwithstanding our receipt of the IRS private letter ruling and opinion of our special tax adviser, the IRS could determine that the contribution, debt exchange and/or spin-off should be treated as taxable transactions if it determines that there was a misstatement or omission of any of the facts, representations, or undertakings that were included in the request for the private letter ruling, or if it disagrees with the conclusions in the opinion that are not covered by the IRS ruling. In such case, we and our shareholders could be subject to significant tax liabilities.

 

If Old FNF’s 2006 spin-off of FNF does not constitute a tax free distribution under Section 355(e) of the Internal Revenue Code or if our merger with Old FNF does not constitute a tax free reorganization under Section 368(a), then we may suffer losses resulting from payment of taxes and tax-related losses.

 

Under a tax disaffiliation agreement, which we were required to enter into with Old FNF and FNF as a condition to the closing under our merger agreement with Old FNF, FNF is required to indemnify us for taxes and tax-related losses (including stockholder suits) if Old FNF’s 2006 spin-off of FNF (the “2006 Distribution”) were determined to be taxable either to Old FNF (and us as its successor) or the FNF stockholders or both, unless such adverse determination were the result of a breach by us of our agreement not to take any action within our control that would cause the 2006 Distribution to be taxable or the result of an acquisition of FIS stock within the control of

us or a subsidiary. In such an event, Old FNF estimated that the amount of tax on the transfer of FNF’s stock in the distribution could be in the range of $150 million and possibly greater depending on, among other things, the value of FNF’s stock at the time of the 2006 Distribution. In addition, FNF is required under the tax disaffiliation agreement to indemnify Old FNF (and us as its successor) for taxes and tax-related losses (including stockholder suits) in the event the Old FNF-FIS merger were determined to be taxable. Old FNF estimated that the amount of tax on Old FNF’s transfer and retirement of its FIS stock in the merger could be in the range of $1 billion and possibly greater depending on, among other things, the value of our stock at the time of the merger.

 

Even if the 2006 Distribution otherwise qualifies as a spin-off under Section 355 of the Code, the distribution of FNF common stock to the Old FNF stockholders in connection with the 2006 Distribution would not qualify as tax-free to Old FNF (or us as its successor) under Section 355(e) of the Code if 50% or more of the stock of Old FNF (including us as successor to Old FNF) or FNF is acquired as part of a plan or series of related transactions that includes the 2006 Distribution. As a result of our merger with Old FNF, approximately 49% of our stock would be treated as having been acquired pursuant to a plan that includes the 2006 Distribution for purposes of Section 355(e) of the Code.

 

There is no guaranty that FNF will have financial resources to satisfy any such indemnification obligation described above. If the tax-free status is lost because of any action taken by us or any of our subsidiaries after the time of the 2006 Distribution (except for certain actions specifically identified in the tax disaffiliation agreement), we would be required to pay the taxes described above ourself and would be required to indemnify FNF for all tax-related losses.

 

We may be affected by significant restrictions following the FNF Merger with respect to certain actions that could jeopardize the tax-free status of the spin-off by Old FNF of Fidelity National Title Group or the FNF Merger.

 

In order to preserve the tax-free treatment of the spin-off by Old FNF of Fidelity National Title Group, a tax disaffiliation agreement entered into by FNF and us prior to the closing under the FNF Merger agreement restricts us, for two years after the spin-off, from taking certain actions within our control that could cause the spin-off to be taxable without first obtaining a consent of certain officers of FNF or obtaining an opinion from a nationally recognized law firm or accounting firm that such action will not cause the spin-off to be taxable to FNF under Section 355(e) of the Code. In general, such actions would include engaging in certain transactions involving (i) the acquisition of our stock or (ii) the issuance of shares of our stock.

 

Because of these restrictions, we may be limited in the amount of stock that we can issue to make acquisitions or raise additional capital in the two years subsequent to the spin-off and the FNF Merger and in our ability to repurchase shares of our common stock.

 

We may experience software defects, development delays, and installation difficulties, which would harm our business and reputation and expose us to potential liability.

 

Many of our services are based on sophisticated software and computing systems, and we may encounter delays when developing new applications and services. Further, the software underlying our services has occasionally contained and may in the future contain undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technologies on platforms used by our customers. Defects in our software, errors, or delays in the processing of electronic transactions, or other difficulties could result in:

 

 

 

Although we attempt to limit our potential liability through disclaimers and limitation-of-liability provisions in our license and customer agreements, we cannot be certain that these measures will be successful in limiting our liability.

 

Security breaches or computer viruses could harm our business by disrupting our delivery of services and damaging our reputation.

 

As part of our business, we electronically receive, process, store, and transmit sensitive business information of our customers. In addition, we collect personal consumer data, such as names and addresses, social security numbers, driver’s license numbers, checking and savings account numbers, and payment history records. Unauthorized access to our computer systems or databases could result in the theft or publication of confidential information or the deletion or modification of records or could otherwise cause interruptions in our operations. These concerns about security are increased when we transmit information over the Internet. Computer viruses have also been distributed and have rapidly spread over the Internet. Computer viruses could infiltrate our systems, disrupting our delivery of services and making our applications unavailable. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in our systems and terminate their agreements with us, and could inhibit our ability to attract new customers.

 

Many of our customers are subject to a regulatory environment and to industry standards that may change in a manner that reduces the number of transactions in which our customers engage and therefore reduces our revenues.

 

Our customers are subject to a number of government regulations and industry standards with which our services must comply. For example, our services are affected by VISA and MasterCard electronic payment standards that are generally updated twice annually. In addition, action by regulatory authorities relating to credit availability, data usage, privacy, or other related regulatory developments could have an adverse effect on our customers and therefore could have a material adverse effect on our business, financial condition, and results of operations.

 

If we fail to comply with privacy regulations imposed on providers of services to financial institutions, our business could be harmed.

 

As a provider of services to financial institutions, we are bound by the same limitations on disclosure of the information we receive from our customers as apply to the financial institutions themselves. If we fail to comply with these regulations, we could be exposed to suits for breach of contract or to governmental proceedings, our customer relationships and reputation could be harmed, and we could be inhibited in our ability to obtain new customers. In addition, if more restrictive privacy laws or rules are adopted in the future on the federal or state level, or, with respect to our international operations, by authorities in foreign jurisdictions on the national, provincial, state, or other level, that could have an adverse impact on us.

 

If we experience system failures, the services we provide to our customers could be delayed or interrupted, which could harm our business and reputation and result in the loss of customers.

 

Our ability to provide reliable service in a number of our businesses depends on the efficient and uninterrupted operations of our computer network systems and data centers. Our systems and operations could be exposed to damage or interruption from fire, natural disaster, power loss, telecommunications failure, unauthorized entry, and computer viruses. Although we have taken steps to prevent system failures, we cannot be certain that our measures

will be successful. Further, our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur. Any significant interruptions could:

 

 

Any one or more of the foregoing occurrences could have a material adverse effect on our business, financial condition, and results of operations.

 

We face liability to our merchant customers if checks that we have guaranteed are dishonored by the check writer’s bank.

 

If a check that we have guaranteed is dishonored by the check writer’s bank, we must reimburse our merchant customer for the check’s face value and pursue collection of the amount from the delinquent check writer. In some cases, we recognize a liability to our merchant customers for estimated check returns and a receivable for amounts we estimate we will recover from the check writers, based on historical experience and other relevant factors. The estimated check returns and recovery amounts are subject to the risk that actual amounts returned may exceed our estimates and actual amounts recovered may be less than our estimates.

 

Misappropriation of our intellectual property and proprietary rights could impair our competitive position.

 

Our ability to compete depends upon proprietary systems and technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our services or to obtain and use information that we regard as proprietary. Policing unauthorized use of our proprietary rights is difficult. We cannot make any assurances that the steps we have taken will prevent misappropriation of technology or that the agreements entered into for that purpose will be enforceable. Effective trademark, service mark, copyright, and trade secret protection may not be available in every country in which our applications and services are made available online. Misappropriation of our intellectual property or potential litigation concerning such matters could have a material adverse effect on our results of operations or financial condition.

 

If our applications or services are found to infringe the proprietary rights of others, we may be required to change our business practices and may also become subject to significant costs and monetary penalties.

 

As our information technology applications and services develop, we may become increasingly subject to infringement claims. Any claims, whether with or without merit, could:

 

 

We may not succeed with our current and future expansion of our international operations and such failure may adversely affect our growth and results of operations.

 

In 2007, sales outside of the U.S. represented approximately 11.2% of our revenues. We believe there are additional opportunities to expand our international operations, and we expect to commit significant resources to

expand our international sales and marketing activities. However, overall we are less well-known internationally than in the United States and have less experience with local business conditions. In addition, we will face challenges in successfully managing small operations located far from our headquarters, because of the greater difficulty in overseeing and guiding operations from a distance, and we will be increasingly subject to a number of other risks and potential costs, including:

 

 

There can be no assurance that we will be able to compete successfully against current or future international competitors.

 

Misappropriation of consumer data by a former employee could materially adversely affect our relationship with governing organizations, customers or regulators.

 

On July 3, 2007, we announced that a database administrator had misappropriated consumer information. To date, we have seen no evidence of the stolen information being used for anything other than marketing purposes. Nevertheless, multiple putative class action lawsuits were filed against us seeking monetary damages. Those class actions were settled in January of 2008, and the settlement received preliminary approval from the court in February of 2008. Although we do not believe that we face any material liability, there can be no assurance that this matter will not result in fines or other charges or adversely impact our relationships with the VISA and MasterCard issuing organizations, customers or regulators.

 

Statement Regarding Forward-Looking Information

 

The statements contained in this Form 10-K or in our other documents or in oral presentations or other statements made by our management that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, hopes, intentions, or strategies regarding the future. These statements relate to, among other things, our future financial and operating results. In many cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these terms and other comparable terminology. Actual results could differ materially from those anticipated in these statements as a result of a number of factors, including, but not limited to:

 

 

 

We are not under any obligation (and expressly disclaim any such obligation) to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise. You should carefully consider the possibility that actual results may differ materially from our forward-looking statements.

 

 

None.

 

 

Our corporate headquarters are located in Jacksonville, Florida, in an owned facility. FNF occupies and pays us rent for approximately 86,000 square feet in this facility. We lease office space as follows:

 

 

 

 

We also lease approximately 72 locations outside the United States. We believe our properties are adequate for our business as presently conducted.

 

 

In the ordinary course of business, the Company is involved in various pending and threatened litigation matters related to operations, some of which include claims for punitive or exemplary damages. The Company believes that no actions, other than the matters listed below, depart from customary litigation incidental to its business. As background to the disclosure below, please note the following:

 

 

Grace & Digital Information Technology Co., Ltd.

 

We and certain of our employees were named as defendants in a civil lawsuit brought by Grace & Digital Information Technology Co., Ltd. (“Grace”). Grace was a sales agent engaged by Alltel Information Services, Inc. (“AIS”) in June of 2001. In March of 2002 (before AIS was acquired by us) Grace’s contract was terminated because it was no longer providing sales agent services. In May of 2004, Grace asserted a claim against us for unpaid sales commissions, and filed suit later that same year. The case was subsequently dismissed and re-filed in March of 2006. In the second filing, Grace alleged damages caused by breach of contract, violation of the Racketeer Influenced and Corrupt Organizations (“RICO”) Act and violation of the Foreign Corrupt Practices Act (“FCPA”). Grace’s FCPA and RICO allegations prompted inquiries by both the SEC and the U.S. Department of Justice. We vigorously defended Grace’s civil lawsuit, and in March of 2007 the court dismissed the RICO claims with prejudice and struck Grace’s FCPA allegations. The parties subsequently settled the remaining breach of contract claim at court-ordered mediation in April of 2007. The U.S. Department of Justice closed its investigation with no action being taken against the Company. The Company is awaiting a final determination from the SEC.

 

Driver’s Privacy Protection Act

 

A putative class action lawsuit styled Richard Fresco, et al. v. Automotive Directions, Inc. et al., was filed against eFunds and seven other non-related parties in the U.S. District Court for the Southern District of Florida. The complaint alleged that eFunds purchased motor vehicle records that were used for marketing and other purposes that are not permitted under the Federal Driver’s Privacy Protection Act (“DPPA”). The plaintiffs sought statutory damages, plus costs, attorney’s fees and injunctive relief. eFunds and five of the other seven defendants settled the case with the plaintiffs. That settlement was preliminarily approved by the court over the objection of a group of Texas drivers and motor vehicle record holders and is awaiting final approval. The objectors filed two class action complaints styled Sharon Taylor, et al. v. Biometric Access Company et al. and Sharon Taylor, et al. v. Acxiom et al. in the U.S. District Court for the Eastern District of Texas alleging similar violations of the DPPA. The Acxiom action is filed against eFunds subsidiary ChexSystems, Inc., while the Biometric suit is filed against Certegy Check Services, Inc. ChexSystems filed a motion to dismiss or stay the action based upon the earlier settlement which was granted. The action against Certegy Check Services, Inc. was voluntarily dismissed in February of 2008.

 

Employee Data Theft

 

On July 3, 2007, we announced that a database administrator had misappropriated consumer information. To date, we have seen no evidence of the stolen information being used for anything other than marketing purposes. Nevertheless, multiple putative class action lawsuits were filed against us seeking monetary damages. Those class actions were settled in January of 2008. In February of 2008, the court indicated that preliminary approval of the settlement would be granted, but a formal written order has not yet been entered.

 

 

None

 

 

Our common stock trades on the New York Stock Exchange under the ticker symbol “FIS.” The table set forth below provides the high and low sales prices of the common stock and the cash dividends declared per share of common stock for each quarter of 2007 and 2006.

 

 

 

 

We currently pay a $0.05 dividend on a quarterly basis, and expect to continue to do so in the future. The declaration and payment of future dividends is at the discretion of the Board of Directors, and depends on, among other things, our investment policy and opportunities, results of operations, financial condition, cash requirements, future prospects, and other factors that may be considered relevant by our Board of Directors, including legal and contractual restrictions. Additionally, the payment of cash dividends may be limited by covenants in certain debt agreements. A regular quarterly dividend of $.05 per common share is payable March 27, 2008 to shareholders on record as of the close of business on March 13, 2008.

 

Item 12 of Part III contains information concerning securities authorized for issuance under our equity compensation plans.

 

On October 25, 2006, our Board of Directors approved a plan, effective for three years, authorizing repurchases of up to $200 million worth of our common stock. During the fourth quarter of 2007, we did not repurchase any of our common stock under this plan. We currently have $126.5 million of authorized repurchases available as of December 31, 2007.

 

The selected financial data set forth below constitutes historical financial data of Fidelity National Information Services, Inc. and should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, included elsewhere in this report.

 

On February 1, 2006, FIS was merged into a wholly owned subsidiary of Certegy in a tax-free merger. For accounting and financial reporting purposes, the merger was treated as a reverse acquisition of Certegy by FIS under the purchase method of accounting pursuant to accounting principles generally accepted in the U.S. Accordingly, our historical financial information for periods prior to the Certegy Merger is the historical financial information of FIS.

 

 

 

 

 

 

Selected Quarterly Financial Data

 

Selected quarterly financial data is as follows:

 

 

 

 

 

Overview

 

We are one of the largest global providers of processing services to financial institutions, serving customers in over 80 countries throughout the world. We are among the market leaders in core processing, card issuing services, check point-of-sale verification and guarantee, mortgage processing, and certain other lender processing services in the U.S. We offer a diversified service mix, and benefit from the opportunity to cross-sell multiple services across our broad customer base. We have two reporting segments, TPS and LPS, which produced approximately 63% and 37%, respectively, of our revenues for the year ended December 31, 2007.

 

of complementary applications and services, such as item processing and electronic funds transfer, that interact directly with the core processing applications, including applications that facilitate interactions between our financial institution customers and their clients such as online banking and bill payment services and fraud prevention and detection services. We offer our applications and services through a range of delivery and service models, including on-site outsourcing and remote processing arrangements, as well as on a licensed software basis for installation on customer-owned and operated systems. This segment also includes card issuer services, which enable banks, credit unions, and others to issue VISA and MasterCard credit and debit cards, private label cards, and other electronic payment cards for use by both consumer and business accounts. In addition, we provide point-of-sale check verification and guarantee services to retailers.

 

 

The Corporate and Other segment consists of the corporate overhead costs and other operations that are not included in the other segments.

 

On September 12, 2007, we completed the eFunds acquisition. The eFunds businesses have been integrated into our operations within our TPS segment.

 

Business Trends and Conditions

 

Transaction Processing Services

 

In the TPS business, increases in deposit and card transactions can positively affect our business and thus the condition of the overall economy can have an effect on growth.

 

In this segment, we compete for both licensing and outsourcing business, and thus are affected by the decisions of financial institutions to utilize our services under an outsourced arrangement or to process in-house under a software license and maintenance agreement. As a provider of outsourcing solutions, we benefit from multi-year recurring revenue streams. Generally, demand for outsourcing solutions has increased over time as providers such as us realize economies of scale and improve their ability to provide services that improve customer efficiencies and reduce costs.

 

Card transactions continue to increase as a percentage of total point-of-sale payments, which fuels continuing demand for card-related services. We continue to launch new services aimed at accommodating this demand. In recent years, we have introduced a variety of stored-value card types, Internet banking, and electronic bill presentment/payment services, as well as a number of card enhancement and loyalty/reward programs. The common theme among these offerings continues to be convenience and security for the consumer coupled with value to the financial institution.

 

Consolidation within the banking industry may be beneficial or detrimental to the TPS businesses. When consolidations occur, merger partners often operate disparate systems licensed from competing service providers. The newly formed entity generally makes a determination to migrate its core systems to a single platform. When a financial institution processing client is involved in a consolidation, we may benefit by expanding the use of our services if such services are chosen to survive the consolidation and support the newly combined entity. Conversely, we may lose market share if a customer of ours is involved in a consolidation and our services are not chosen to survive the consolidation and support the newly combined entity.

Lender Processing Services

 

Our mortgage processing services business, driven by MSP, is largely subject to the number of residential mortgage loans outstanding which is influenced by overall home ownership. The level of residential real estate activity, which depends in part on the level of interest rates, affects the level of revenues from many of the other businesses in the LPS segment.

 

The slow down of real estate activity and the tightening of available credit in 2007 has resulted in a reduction in new loan origination and refinancing activity. The current MBA forecast is for $2.0 trillion of mortgage originations in 2008 as compared to $2.3 trillion in 2007. These factors are also likely to result in seasonal effects having more influence on real estate activity. Traditionally, the greatest volume of real estate activity, particularly residential resale transactions, has occurred in the spring and summer months.

 

In contrast, current market conditions have increased the volume of residential mortgage defaults and thus favorably affected our default management services, which provide services relating to residential mortgage loans in default. The overall strength of the economy also affects default revenues.

 

Critical Accounting Policies

 

The accounting policies described below are those we consider critical in preparing our Consolidated and Combined Financial Statements. These policies require management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosures with respect to contingent liabilities and assets at the date of the Consolidated and Combined Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts could differ from those estimates. See Note 3 of Notes to the Consolidated and Combined Financial Statements for a more detailed description of the significant accounting policies that have been followed in preparing our Consolidated and Combined Financial Statements.

 

Revenue Recognition

 

We recognize revenues in accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 104 (“SAB No. 104”), Revenue Recognition and related interpretations, Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force No. 00-21 (“EITF 00-21”), Revenue Arrangements with Multiple Deliverables, American Institute of Certified Public Accountant’s SOP No. 97-2 “Software Revenue Recognition” (“SOP 97-2”), SOP No. 98-9 Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to Certain Transactions (“SOP 98-9”), and SOP No. 81-1, Accounting for Performance of Construction Type and Certain Production-Type Contracts (“SOP 81-1”). Recording revenues under the provisions of these pronouncements requires judgment, including determining whether or not an arrangement includes multiple elements, whether any of the elements are essential to the functionality of any other elements, and whether evidence of fair value exists for those elements. Customers receive certain contract elements over time and changes to the elements in an arrangement, or in our ability to identify fair value for these elements, could materially impact the amount of earned and unearned revenue reflected in our financial statements.

 

The primary judgments relating to our revenue recognition are determining when all of the following criteria are met under SAB 104: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectibility is reasonably assured. Under EITF 00-21, judgment is also required to determine whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting.

 

If the deliverables under a contract are software related as determined under SOP 97-2 or SOP 98-9, we apply these pronouncements and related interpretations to determine the appropriate units of accounting and how the arrangement consideration should be measured and allocated to the separate units. This determination, as well as management’s ability to establish vendor specific objective evidence (“VSOE”) for the individual deliverables, can impact both the amount and timing of revenue recognition under these agreements. The inability to establish VSOE for each contract deliverable results in having to record deferred revenues and/or applying the residual method as defined in SOP 98-9. For arrangements where we determine VSOE for software maintenance using a stated renewal

rate within the contract, we use judgment to determine whether the renewal rate represents fair value for that element as if it had been sold on a stand-alone basis. For a small percentage of revenues, we use contract accounting, as required by SOP No. 97-2, when the arrangement with the customer includes significant customization, modification, or production of software. For elements accounted for under contract accounting, revenue is recognized in accordance with SOP 81-1, Accounting for Performance of Construction Type and Certain Production-Type Contracts, using the percentage-of-completion method since reasonably dependable estimates of revenues and contract hours applicable to various elements of a contract can be made.

 

Occasionally, we are party to multiple concurrent contracts with the same customer. These situations require judgment to determine whether the individual contracts should be aggregated or evaluated separately for purposes of revenue recognition. In making this determination we consider the timing of negotiating and executing the contracts, whether the different elements of the contracts are interdependent and whether any of the payment terms of the contracts are interrelated.

 

Due to the large number, broad nature and average size of individual contracts we are a party to, the impact of judgments and assumptions that we apply in recognizing revenue for any single contract is not likely to have a material effect on our consolidated operations. However the broader accounting policy assumptions that we apply across similar arrangements or classes of customers could significantly influence the timing and amount of revenue recognized in our historical and future results of operations or financial position.

 

Reserves for Check Guarantee Losses

 

In our check guarantee business, if a guaranteed check presented to a merchant customer is dishonored by the check writer’s bank, we reimburse our merchant customer for the check’s face value and pursue collection of the amount from the delinquent check writer. Loss reserves and anticipated recoveries are primarily determined by performing a historical analysis of our check loss and recovery experience and considering other factors that could affect that experience in the future. Such factors include the general economy, the overall industry mix of our customer volumes, statistical analysis of check fraud trends within our customer volumes, and the quality of returned checks. Once these factors are considered, we establish a rate for check losses that is calculated by dividing the expected check losses by dollar volume processed and a rate for anticipated recoveries that is calculated by dividing the anticipated recoveries by the total amount of related check losses. These rates are then applied against the dollar volume processed and check losses, respectively, each month and charged to costs of revenues. The estimated check returns and recovery amounts are subject to risk that actual amounts returned and recovered may be different than our estimates. We had accrued claims payable and accrued claims recoverable balances of $27.4 million and $39.4 million at December 31, 2007 and $30.0 million and $39.4 million at December 31, 2006, respectively.

 

Historically, such estimation processes have proven to be materially accurate; however, our projections of probable check guarantee losses and anticipated recoveries are inherently uncertain, and as a result, we cannot predict with certainty the amount of such items. Changes in economic conditions, the risk characteristics and composition of our customers, and other factors could impact our actual and projected amounts. We recorded check guarantee losses, net of anticipated recoveries excluding service fees, of $113.8 million and $102.9 million, respectively, for the years ended December 31, 2007 and 2006. A ten percent difference in our estimated gross check guarantee losses and our estimated recoveries as of December 31, 2007 could impact 2007 net earnings by approximately $4.5 million after-tax.

 

Computer Software

 

Computer software includes the fair value of software acquired in business combinations, purchased software and capitalized software development costs. As of December 31, 2007 and 2006, computer software, net of accumulated amortization was $780.7 million and $640.8 million, respectively. Purchased software is recorded at cost and amortized using the straight line method over its estimated useful life and software acquired in business combinations is recorded at its fair value and amortized using straight line and accelerated methods over their estimated useful lives, ranging from 3 to 10 years. In determining useful lives, management considers historical results and technological trends which may influence the estimate. Amortization expense for computer software

was $177.8 million, $130.2 million and $91.7 million in 2007, 2006 and 2005, respectively. We also assess the recorded value of computer software for impairment on a regular basis by comparing the carrying value to the estimated future cash flows to be generated by the underlying software asset. There are inherent uncertainties in determining the expected useful life or cash flows to be generated from computer software; however, we have not historically experienced significant changes in these estimates but could be subject such changes in the future.

 

Goodwill and Other Intangible Assets

 

We have significant intangible assets that were acquired through business acquisitions. These assets consist of purchased customer relationships, contracts, and the excess of purchase price over the fair value of identifiable net assets acquired (goodwill).

 

As of December 31, 2007 and 2006, goodwill was $5.3 billion and $3.7 billion, respectively. The process of determining whether or not an asset, such as goodwill, is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Such projections are inherently uncertain and, accordingly, actual future cash flows may differ materially from projected cash flows. In evaluating the recoverability of goodwill, we perform an annual goodwill impairment test on our reporting units based on an analysis of the discounted future net cash flows generated by the reporting units’ underlying assets. Such analyses are particularly sensitive to changes in future business trends and economic conditions which can significantly influence our estimates of future net cash flows and discount rates. Changes to these estimates might result in material changes in the fair value of the reporting units and determination of the recoverability of goodwill potentially leading to charges against earnings and a reduction in the carrying value of our goodwill.

 

As of December 31, 2007 and 2006, intangible assets, net of accumulated amortization, were $1.0 billion, and consisted primarily of purchased customer relationships and trademarks. The valuation of these assets involves significant estimates and assumptions concerning matters such as customer retention, future cash flows and discount rates. If any of these assumptions change, it could affect the recoverability of the carrying value of these assets. Purchased customer relationships are amortized over their estimated useful lives using an accelerated method which takes into consideration expected customer attrition rates over a ten-year period. All intangible assets that have been determined to have indefinite lives are not amortized, but are reviewed for impairment at least annually in accordance with SFAS No. 142. During 2005, we recorded a pre-tax impairment charge of $9.3 million to write-off the carrying value of customer relationships which were terminated at one subsidiary in the LPS segment. The determination of estimated useful lives and the allocation of the purchase price to the fair values of the intangible assets require significant judgment and may affect the amount of future amortization on the intangible assets other than goodwill. Amortization expense for intangible assets other than goodwill was $168.7 million, $175.6 million and $125.4 million in 2007, 2006 and 2005, respectively. There is an inherent uncertainty in determining the expected useful life or cash flows to be generated from intangible assets. We have not historically experienced significant changes in these estimates but could be subject to them in the future.

 

Accounting for Income Taxes

 

As part of the process of preparing the consolidated financial statements, we are required to determine income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax expense together with assessing temporary differences resulting from differing recognition of items for income tax and accounting purposes. These differences result in deferred income tax assets and liabilities, which are included within the consolidated balance sheets. We must then assess the likelihood that deferred income tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must reflect this increase as an expense within income tax expense in the statement of earnings. Determination of the income tax expense requires estimates and can involve complex issues that may require an extended period to resolve. Further, changes in the geographic mix of revenues or in the estimated level of annual pre-tax income can cause the overall effective income tax rate to vary from period to period. We believe that our tax positions comply with applicable tax law and that we adequately provide for any known tax contingencies. We believe the estimates and assumptions used to support our evaluation of tax benefit realization are reasonable. However, final determination of prior-year tax liabilities, either by settlement with tax authorities or expiration of statutes of limitations, could be materially

different than estimates reflected in assets and liabilities and historical income tax provisions. The outcome of these final determinations could have a material effect on our income tax provision, net income or cash flows in the period that determination is made.

 

Related Party Transactions

 

We are party to certain historical related party agreements with FNF and other related parties.

 

A detail of FNF related party items included in revenues is as follows (in millions):

 

 

A detail of FNF related party items included in operating expenses (net of expense reimbursements) is as follows (in millions):

 

 

In addition to the items shown above, we received revenue from unaffiliated third parties of $132.2 million, $83.9 million and $80.9 million in each of 2007, 2006 and 2005, respectively, representing commissions on title insurance policies placed by us on behalf of FNF.

 

Descriptions of these related party agreements and other related party relationships is included in Note 4 of the Notes to Consolidated and Combined Financial Statements.

 

Recent Developments

 

Lender Processing Services Spin Off

 

On October 25, 2007, we announced that our Board of Directors had approved pursuing a plan to spin-off the businesses that currently make up our LPS segment into a stand alone publicly traded company which will be known as Lender Processing Services, Inc. (“LPS, Inc.”). As currently contemplated, we will contribute the majority of the assets and liabilities of this segment into LPS, Inc. in exchange for additional shares of the LPS, Inc. common stock and approximately $1.6 billion principal amount of LPS, Inc. debt securities. Following receipt of necessary approvals from the Securities and Exchange Commission (the “SEC”) and a ruling from the Internal Revenue Service (the “IRS”) and an opinion from our special tax advisor with respect to the tax-free nature of the spin-off, we will distribute 100% of the LPS, Inc. common stock to our shareholders in the spin-off and exchange the LPS, Inc. debt securities for a like amount of our existing debt. We expect that the spin-off will be tax-free to FIS and our shareholders, and that the debt-for-debt exchange will be tax-free to FIS. We will then retire the debt that is exchanged for the LPS, Inc. debt securities. Completion of the spin-off is expected to occur in mid-2008. FIS’s current Chief Financial Officer, Jeff Carbiener, is expected to be the Chief Executive Officer of LPS, Inc.

 

In January 2008, we filed a ruling request with the IRS regarding the tax-free nature of the LPS, Inc. spin-off and intend to file a preliminary Form 10 Registration Statement with the SEC in the first quarter of 2008. Completion of the spin-off is contingent upon the satisfaction or waiver of a variety of conditions, including final approval of the spin-off and all related arrangements by our Board of Directors. The completion of the proposed

spin-off is also subject to risks and uncertainties including but not limited to those associated with our ability to contribute the LPS segment assets and liabilities to LPS, Inc., with the ability of LPS, Inc. to complete the debt exchange in the manner and on the terms currently contemplated, the possibility that necessary governmental approvals or actions (from the IRS, the SEC or other authorities) will not be obtained, and market conditions for the spin-off.

 

Evaluation of Check Services Business

 

On August 2, 2007, we announced that our management is evaluating strategic alternatives for our U.S. and Australian check services businesses. Our Board of Directors authorized the plan, allowing management to investigate strategic alternatives. Check Services is a leading provider of retail point-of-sale check risk management solutions, as well as of cash access services to the gaming industry. Subsequent to year end, on February 28, 2008, we announced that we entered into an agreement to sell Certegy Gaming Services, Inc. to Global Cash Access Holdings, Inc. for approximately $100.0 million in cash, which includes cash used to fund its ATM operations. The sale is expected to close in late March or early April of 2008.

 

Factors Affecting Comparability

 

Our Consolidated and Combined Financial Statements included in this report that present our financial condition and operating results reflect the following significant transactions:

 

 

Although the legal entity that survived the Certegy Merger was Certegy (which has since been renamed Fidelity National Information Services, Inc.), for accounting purposes, our historical financial statements are those of FIS. Our Consolidated and Combined Financial Statements include the results of operations of Certegy from the date of the acquisition. As a result of this transaction, the results of operations in the periods covered by the Consolidated and Combined Financial Statements may not be directly comparable.

Consolidated and Combined Results of Operations

(in thousands, except per share amounts)

 

 

Processing and Services Revenues

 

Processing and services revenues totaled $4,758.0 million, $4,042.2 million and $2,688.2 million in 2007, 2006 and 2005, respectively. The increase in revenue in 2007 of $715.8 million, or 17.7% as compared to 2006 is primarily attributable to organic growth across both segments, as well as increases attributable to acquisitions and newly formed operations. The eFunds acquisition contributed $166.6 million in the TPS segment from its September 12, 2007 completion date through December 31, 2007 and the Certegy Merger contributed one

additional month of revenue in the current year, or approximately $96.4 million as compared to the full year 2006. The additional growth in the TPS segment was attributable to increased sales to new customers, particularly in our international operations. Our new Brazilian outsourcing operation added $40.5 million to the increase in the current year. The growth in the LPS segment was primarily the result of increased demand for services, due to market share gains and the current real estate market conditions, within our default management and appraisal businesses, partially offset by decreased demand for other real estate related businesses, decreased related party activity with FNF, and by the deconsolidation of Fidelity National Real Estate Solutions, Inc. (“FNRES”) in the current year. The increase in revenue in 2006 of $1,353.9 million as compared to 2005 is primarily due to incremental revenues from the February 1, 2006 Certegy Merger, which contributed $1,067.2 million to the overall increase. The remaining 2006 increase is attributable to growth across both segments, including 15.2% growth in TPS, excluding the impact of Certegy, and 6.7% growth in LPS. The growth in TPS was driven by strong new sales within Integrated Financial Solutions and International, while the growth in LPS was driven by market share gains in default and appraisal services.

 

Cost of Revenues

 

Cost of revenues totaled $3,401.9 million, $2,875.3 million and $1,750.2 million in 2007, 2006 and 2005, respectively. The increase in cost of revenues of $526.6 million in 2007 as compared to 2006 is primarily attributable to increased costs associated with increased revenues across both segments and the inclusion of expenses relating to eFunds since its acquisition date, which totaled $120.3 million. The impact of the one additional month of Certegy in the current year was approximately $76.0 million. The increases were slightly offset by the deconsolidation of FNRES in the current year. The increase in cost of revenues in 2006 as compared to 2005 of $1,125.1 million was primarily due to incremental cost of revenues from the February 1, 2006 Certegy Merger which contributed $848.2 million to the overall increase. An increase in depreciation and amortization expense to $383.0 million in 2006 from $252.5 million in 2005 resulting from additional intangible amortization related to the Certegy Merger also contributed to the year-over-year increase.

 

Gross Profit

 

Gross profit as a percentage of revenues (“gross margin”) was 28.5%, 28.9% and 34.9% in 2007, 2006 and 2005, respectively. The slight decrease in gross margin in 2007 as compared to 2006 is primarily due to the LPS segment, which has had significant growth in slightly lower margin service lines, particularly our appraisal services. We have also experienced declining margins in our tax and property exchange services due to overall slowing of the real estate market. The decrease in gross margin in 2006 as compared to 2005 is primarily due to the February 1, 2006 Certegy Merger, because the historical Certegy businesses typically have lower margins than those of the historically owned FIS businesses. Incremental intangible amortization expense relating to the Certegy Merger also contributed to the decrease in gross margin in 2006.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses totaled $504.1 million, $498.2 million and $411.9 million for 2007, 2006 and 2005, respectively. The increase of $5.9 million in 2007 as compared to 2006 primarily resulted from the inclusion of $15.2 million of expenses relating to eFunds since its acquisition date, as well as one additional month of Certegy in the current year. These 2007 increases were partially offset by a decrease in stock-based compensation expense, and the deconsolidation of FNRES in the current year. Stock-based compensation decreased from $50.1 million in 2006 to $39.0 million in 2007. The decrease in stock-based compensation is attributable to the $24.5 million in expense recorded for the vesting of the FIS performance-based options granted in March 2005 for which the performance criteria was met during the first quarter of 2006 and an acceleration charge of $6.1 million recorded in the fourth quarter relating to the FNF Merger. Other cost reduction targets, related to the integration of Certegy, during the current year have been achieved, helping to further offset the additional expense related to eFunds and Certegy. The increase of $86.3 million in selling, general and administrative expenses for 2006 as compared to 2005 primarily relates to incremental selling, general and administrative expenses from the February 1, 2006 Certegy Merger which contributed $73.7 million to the overall increase. Additionally, the increase was partly due to an increase in stock based compensation expense which increased from $20.4 million during 2005

to $50.1 million for 2006. This increase in stock-based compensation is primarily attributable to the $24.5 million and $6.1 million in transaction-related expense described above.

 

Research and Development Costs

 

Research and development costs totaled $106.3 million, $105.6 million and $113.5 million for 2007, 2006 and 2005, respectively.

 

Operating Income

 

Operating income totaled $745.6 million, $563.1 million and $412.6 million for 2007, 2006 and 2005, respectively. Operating income as a percentage of revenue (“operating margin”) was 15.7%, 13.9% and 15.3% for 2007, 2006 and 2005, respectively. The increase in operating margin for 2007 as compared to 2006 is primarily attributable to the increased revenues and achievement of expense synergies relating to the Certegy Merger. The year-over-year decrease in operating margin for 2006 is primarily due to incremental intangible asset amortization relating to the Certegy Merger, increased stock based compensation costs and other merger related costs, as well as relatively lower gross profit percentage associated with the Certegy service lines, as noted above.

 

Interest Expense

 

Interest expense totaled $228.3 million, $192.8 million and $126.8 million for 2007, 2006 and 2005, respectively. The increase in interest expense in 2007 as compared to 2006 is a result of our new debt related to the acquisition of eFunds, as well as the inclusion of $27.2 million in write-offs of capitalized debt issuance costs relating to our prior credit facility. The increases are partially offset by the impact of lower interest rates and the lower long-term debt balance through the date of the eFunds acquisition. The increase in interest expense in 2006 as compared to 2005 primarily relates to an increase in interest rates and higher average borrowings. The recapitalization that occurred late in the first quarter of 2005 resulted in a full year of interest in 2006 as compared to approximately ten months in 2005.

 

Income Tax Expense

 

Income tax expense totaled $300.5 million, $139.2 million and $107.1 million for 2007, 2006 and 2005, respectively. This resulted in an effective tax rate on continuing operations of 37.0%, 37.2% and 37.2% for 2007, 2006 and 2005, respectively. The increase in tax expense for 2007 as compared to 2006 is attributable to increased operating income and the gain on sale of Covansys common stock and warrants. The decrease in the overall effective tax rate for 2007 is due to the increase in foreign pre-tax income, which is taxed at overall lower rates.

 

Net Earnings

 

Net earnings from continuing operations totaled $510.5 million, $240.9 million and $181.3 for 2007, 2006 and 2005, respectively, or $2.60, $1.27 and $1.41 per diluted share, respectively. Included in net earnings in 2007 is an after tax gain of $172.9 million, or $0.88 per diluted share, from the sale of Covansys common stock and warrants. Net earnings from discontinued operations (including the gain on disposition of Property Insight) were $50.8 million, $18.1 million and $15.2 million for the years ended December 31, 2007, 2006 and 2005, respectively, and diluted earnings per share from discontinued operations totaled $0.26, $0.10 and $0.12 for the years ended December 31, 2007, 2006 and 2005, respectively.

Segment Results of Operations

 

Transaction Processing Services

(in thousands)

 

 

Revenues for the TPS segment are derived from three main revenue channels: Enterprise Solutions, Integrated Financial Solutions and International. Revenues from TPS totaled $2,985.1 million, $2,458.8 million and $1,208.4 million for 2007, 2006 and 2005, respectively. The overall segment increase of $526.3 million in 2007 as compared to 2006 resulted from the previously mentioned organic growth in our International and Integrated Financial Solutions business lines and in core processing revenues for large banks, combined with the impact of the acquisition of eFunds, which added incremental revenues of $166.6 million, and one additional month of Certegy revenues, which totaled $96.4 million. The launch of our Brazilian item processing operation during the third quarter of 2006 contributed $40.5 million to the increase. The increases were partially offset by a reduction in revenues in our retail point-of-sale authorization business. The overall segment increase of $1,250.4 million during 2006, as compared to 2005, was primarily attributable to the Certegy Merger which contributed $1,067.2 million to the overall increase. Like 2007, the majority of the remaining 2006 growth is attributable to organic growth within Integrated Financial Solutions and International revenue channels, with International including $31.9 million related to the newly formed business process outsourcing operation in Brazil.

 

Cost of revenues for the TPS segment totaled $2,308.7 million, $1,914.1 million and $904.1 million for 2007, 2006 and 2005, respectively. The overall segment increase of $394.6 million in 2007 as compared to 2006 resulted from increased labor and other variable costs associated with increased revenues, the impact of the acquisition of eFunds, and one additional month of Certegy. The overall segment increase of $1,010.0 million during 2006 as compared to 2005 was primarily attributable to the Certegy Merger which contributed $848.2 million to the increase. Gross margin was 22.7%, 22.2% and 25.2% for 2007, 2006 and 2005, respectively. The increase in gross margin in 2007 as compared to 2006 is primarily due to lower intangible amortization expense. The decrease in gross margin in 2006 as compared to 2005 is primarily due to the February 1, 2006 Certegy Merger, which businesses typically have lower margins than those of the historically owned FIS businesses. Incremental intangible asset amortization relating to the Certegy Merger also contributed to the decrease in gross margin.

 

Selling, general and administrative expenses for the TPS segment totaled $191.4 million, $171.1 million and $94.9 million for 2007, 2006 and 2005, respectively. The increase of $20.3 million in 2007 as compared to 2006 is primarily attributable to increased labor costs, the impact of the acquisition of eFunds, and one additional month of Certegy, offset by achieving cost reduction targets related to the integration of Certegy during the current year. The increase in 2006 compared to 2005 is primarily attributable to the Certegy Merger which contributed $73.7 million to the overall increase of $76.2 million.

 

Research and development costs for the TPS segment totaled $70.4 million, $70.9 million and $85.7 million for 2007, 2006 and 2005, respectively.

 

Operating income for the TPS segment totaled $414.5 million, $302.6 million and $123.7 million for 2007, 2006 and 2005, respectively. Operating margin was approximately 13.9%, 12.3% and 10.2% for 2007, 2006 and 2005, respectively. The increase in 2007, as compared to 2006, primarily resulted from the increased gross margin, as well as a decrease, as a percentage of revenue, of 0.6% in selling, general, and administrative expenses and 0.5% in research and development costs. The increase in operating margin for 2006 as compared to 2005 resulted from a decrease, as a percentage of revenue, of 0.9% in selling, general and administrative expenses and 4.2% in research and development costs, partially offset by a decrease in gross margin as discussed above.

Lender Processing Services

(in thousands)

 

 

Revenues for the LPS segment totaled $1,761.1 million, $1,584.2 million and $1,484.3 million for 2007, 2006 and 2005, respectively. The overall segment increase of $176.9 million in 2007 as compared to 2006 resulted from accelerating demand for services within our default management businesses, which contributed an increase of $206.7 million, and in our appraisal services, which contributed $75.3 million. These increases are partially offset by decreased demand for other real estate related businesses, decreased related party activity with FNF, and by the deconsolidation of FNRES in the current year. The overall segment increase of $99.9 million during 2006 as compared to 2005 was the result of growth across most of the business lines, but primarily due to increased demand for our appraisal services along with growth in our default management businesses.

 

Cost of revenues for the LPS segment totaled $1,093.2 million, $961.1 million and $846.1 million for 2007, 2006 and 2005, respectively. The overall segment increase of $132.1 million in 2007 as compared to 2006, as well as the increase of $115.0 million in 2006 as compared to 2005, resulted from increased personnel, data processing, and other variable costs associated with increased business. The deconsolidation of FNRES slightly offset the increase in 2007. Gross margin was 37.9%, 39.3% and 43.0% for 2007, 2006 and 2005, respectively. The decrease in gross margin in 2007 as compared to 2006, as well as 2006 as compared to 2005 was primarily due to significant growth in lower margin service lines, particularly our appraisal services and other certain default services, along with declining margins in our tax services due to lower volumes and the lengthening of the service period.

 

Selling, general and administrative expenses for the LPS segment totaled $188.9 million, $197.4 million and $224.0 million for 2007, 2006 and 2005, respectively. The decrease of $8.5 million in 2007 as compared to 2006, as well as the decrease of $26.5 million in 2006 as compared to 2005 was primarily the result of cost control measures and the increased revenue base in the TPS segment for allocating certain combined selling and administrative expenses. The decrease in 2007 as compared to 2006 is also related to the deconsolidation of FNRES, partially offset by increased headcount in the default management businesses, and increased overhead costs.

 

Research and development costs for the LPS segment totaled $35.9 million, $34.7 million and $27.8 million for 2007, 2006 and 2005, respectively.

 

Operating income for the LPS segment totaled $443.1 million, $390.9 million and $386.5 million for 2007, 2006 and 2005, respectively. Operating margin was 25.2%, 24.7% and 26.0% for 2007, 2006 and 2005, respectively. The increase in operating income in 2007, as compared to 2006, as well as 2006 as compared to 2005, primarily results from our increased revenue, partially offset by our decreasing gross margin.

 

Corporate and Other

 

The Corporate and Other segment consists of the corporate overhead costs that are not included in the other segments. Corporate costs are primarily incurred directly by us; however, the 2006 period includes some amounts that were allocated from FNF prior to our merger with Old FNF, including stock based compensation. Selling, general and administrative expenses were $123.8 million, $129.7 million and $93.1 million in 2007, 2006 and 2005, respectively. The decrease in 2007 as compared to 2006 of $5.9 million primarily relates to a decrease in stock-based compensation expense, partially offset by additional costs associated with the eFunds acquisition and an increase in salaries and other labor costs. The increase in 2006 as compared to 2005 of $36.6 million primarily relates to an increase in stock-based compensation expense which increased from $20.4 million in 2005 to $50.1 million in 2006, as well as an increase in merger and merger related integration costs. The increase in stock

based compensation primarily related to the $24.5 million in expense recorded in the first quarter of 2006 for the vesting of the FIS performance based options granted in March of 2005 for which the performance criteria were met during 2006 and a $6.1 million charge related to the acceleration of vesting of stock options recorded in the fourth quarter relating to the FNF Merger.

 

Liquidity and Capital Resources

 

Cash Requirements

 

Our cash requirements include cost of revenues, selling, general and administrative expenses, income taxes, debt service payments, capital expenditures, systems development expenditures, stockholder dividends, and business acquisitions. Our principal sources of funds are cash generated by operations and borrowings.

 

At December 31, 2007, we had cash on hand of $355.3 million and debt of approximately $4,275.4 million, including the current portion. We expect cash flows from operations over the next twelve months will be sufficient to fund our operating cash requirements and pay principal and interest on our outstanding debt absent any unusual circumstances such as acquisitions or adverse changes in the business environment.

 

We currently pay a $0.05 dividend on a quarterly basis, and expect to continue to do so in the future. The declaration and payment of future dividends is at the discretion of the Board of Directors, and depends on, among other things, our investment policy and opportunities, results of operations, financial condition, cash requirements, future prospects, and other factors that may be considered relevant by our Board of Directors, including legal and contractual restrictions. Additionally, the payment of cash dividends may be limited by covenants in certain debt agreements. A regular quarterly dividend of $.05 per common share is payable March 27, 2008 to shareholders of record as of the close of business on March 13, 2008.

 

We intend to limit dilution caused by option exercises, including anticipated exercises, by repurchasing shares on the open market or in privately negotiated transactions. On October 25, 2006, our Board of Directors approved a plan authorizing repurchases of up to an additional $200.0 million worth of our common stock. During 2007, we repurchased 1.6 million shares of our stock for $80.3 million, at an average price of $49.15 under this program.

 

Cash Flows from Operations

 

Cash flows from operations were $463.6 million, $494.7 million and $426.0 million in 2007, 2006 and 2005 respectively. Included in 2007 cash flow from operations were payments of $106.6 million of tax liability relating to the gain on Covansys and a $47.5 million reduction in taxes payable due to stock option exercises. Included in 2006 cash flow from operations was a $26.9 million reduction in taxes payable due to stock option exercises.

 

Capital Expenditures

 

Our principal capital expenditures are for computer software (purchased and internally developed) and additions to property and equipment. In 2007, we spent approximately $343.3 million on capital expenditures, and in 2008 we expect to spend approximately $280.0 million to $300.0 million, primarily on equipment, purchased software and internally developed software.

 

Financing

 

On January 18, 2007, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender, and Letter of Credit Issuer, Bank of America, N.A., as Swing Line Lender, and other financial institutions party thereto (the “Credit Agreement”). The Credit Agreement replaced our prior term loans and revolver as well as a $100 million settlement facility. As a result of the new credit agreement, we repaid the old credit agreement and recorded a charge of $27.2 million to write-off unamortized capitalized debt issuance costs. The Credit Agreement, which became secured as of September 12, 2007, provides for a committed $2.1 billion five-year term facility denominated in U.S. Dollars (the “Term Loan A”) and a committed $900 million revolving credit

facility (the “Revolving Loan”) with a sublimit of $250 million for letters of credit and a sublimit of $250 million for swing line loans, maturing on the fifth anniversary of the closing date (the “Maturity Date”). The Revolving Loan is bifurcated into a $735 million multicurrency revolving credit loan (the “Multicurrency Tranche”) that can be denominated in any combination of U.S. Dollars, Euro, British Pounds Sterling and Australian Dollars, and any other foreign currency in which the relevant lenders agree to make advances and a $165 million U.S. Dollar revolving credit loan that can be denominated only in U.S. Dollars. The swingline loans and letters of credit are available as a sublimit under the Multicurrency Tranche. In addition, the Credit Agreement originally provided for an uncommitted incremental loan facility in the maximum principal amount of $600 million, which would be made available only upon receipt of further commitments from lenders under the Credit Agreement sufficient to fund the amount requested by us. On July 30, 2007, we, along with the requisite lenders, executed an amendment to the existing Credit Agreement to facilitate our acquisition of eFunds. The amendment permitted the issuance of up to $2.1 billion in additional loans, an increase from the foregoing $600 million. The amendment became effective September 12, 2007. On September 12, 2007, we entered into a joinder agreement to obtain a secured $1.6 billion tranche of term loans denominated in U.S. Dollars (the “Term Loan B”) under the Credit Agreement, utilizing $1.6 billion of the $2.1 billion uncommitted incremental loan amount. The Term Loan B proceeds were used to finance the eFunds acquisition, and pay related fees and expenses. The Term Loan B will mature on January 18, 2014. Debt issuance costs of $25.9 million are capitalized at December 31, 2007 and will be amortized over the life of the agreement.

 

As of December 31, 2007, the Term Loan A balance was $2,047.5 million, the Term Loan B balance was $1,596.0 million and a total of $308.0 million was outstanding under the Revolving Loan. The obligations under the Credit Agreement have been jointly and severally, unconditionally guaranteed by certain of our domestic subsidiaries. Additionally, we and certain subsidiary guarantors other than eFunds pledged certain equity interests we and they held in other entities (including certain of our direct and indirect subsidiaries) as collateral security for the obligations under the credit facility and the guarantee. The pledge also serves to equally and ratably secure our obligations under our outstanding 4.75% notes due 2008, discussed below.

 

We may borrow, repay and re-borrow amounts under the Revolving Loan from time to time until the maturity of the Revolving Loan. We must make quarterly principal payments under the Term Loan A in scheduled installments of: (a) $13.1 million per quarter from June 30, 2007 through December 31, 2008; (b) $26.3 million per quarter from March 31, 2009 through December 31, 2009; and (c) $52.5 million per quarter from March 31, 2010 through September 30, 2011, with the remaining balance of approximately $1.5 billion payable on the Maturity Date. We must make quarterly principal payments under the Term Loan B in scheduled installments of $4.0 million per quarter from December 31, 2007 through September 30, 2013 with the remaining balance of approximately $1.5 billion payable on January 18, 2014. As discussed above, we expect to exchange LPS, Inc. debt securities we will receive in connection with the LPS, Inc. spin-off for our outstanding Term Loan B, which will immediately thereafter be retired.

 

In addition to the scheduled principal payments, the Term Loans are (with certain exceptions) subject to mandatory prepayment upon issuances of debt, casualty and condemnation events, and sales of assets, as well as from a percentage of excess cash flow (as defined in the Credit Agreement) between zero and fifty percent commencing with the cash flow for the year ended December 31, 2008. Voluntary prepayments of the Loans are generally permitted at any time without fee upon proper notice and subject to a minimum dollar requirement. Commitment reductions of the Revolving Loan are also permitted at any time without fee upon proper notice. The Revolving Loan has no scheduled principal payments, but it will be due and payable in full on the Maturity Date.

 

The outstanding balance of the Loans bears interest at a floating rate, which is an applicable margin plus, at our option, either (a) the Eurocurrency (LIBOR) rate or (b) either (i) the federal funds rate or (ii) the prime rate. The applicable margin is subject to adjustment based on a leverage ratio (our total indebtedness to our EBITDA in our consolidated subsidiaries, as further defined in the Credit Agreement). Alternatively, we have the ability to request the lenders to submit competitive bids for one or more advances under the Revolving Loan.

 

The Credit Agreement contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, limits on the creation of liens, limits on the incurrence of indebtedness, restrictions on investments and dispositions, a prohibition on the payment of dividends and other restricted

payments if an event of default has occurred and is continuing or would result therefrom, a minimum interest coverage ratio and a maximum leverage ratio. Upon an event of default, the Administrative Agent can accelerate the maturity of the loan. Events of default include conditions customary for such an agreement, including failure to pay principal and interest in a timely manner and breach of certain covenants. These events of default include a cross-default provision that permits the lenders to declare the Credit Agreement in default if (i) we fail to make any payment after the applicable grace period under any indebtedness with a principal amount in excess of $150 million or (ii) we fail to perform any other term under any such indebtedness, as a result of which the holders thereof may cause it to become due and payable prior to its maturity. We were in compliance with all covenants related to the Credit Agreement at December 31, 2007.

 

Both the Credit Agreement and the 4.75% notes referred to below are equally and ratably secured by a pledge of equity interests in our subsidiaries, subject to certain exceptions for subsidiaries not required to be pledged. As of December 31, 2007, the shares of subsidiaries representing less than 10% of our net assets were subject to such pledge.

 

Through the Certegy Merger, we have an obligation to service $200.0 million (aggregate principal amount) of secured 4.75% fixed-rate notes due in 2008. The notes were recorded in purchase accounting at a discount of $5.7 million, which is being amortized over the term of the notes. The notes accrue interest at a rate of 4.75% per year, payable semi-annually in arrears on each March 15 and September 15. The notes include customary events of default, including a cross-default provision that permits the trustee or the holders of at least 25% of the Notes to declare the Notes in default if (i) we fail to make any payment after the applicable grace period under any indebtedness with a principal amount in excess of $10 million or (ii) we fail to perform any other term under any such indebtedness, as a result of which the holders thereof have caused it to become due and payable prior to its maturity.

 

Through the eFunds acquisition on September 12, 2007, we assumed $100.0 million in long-term notes payable previously issued to eFunds (the “eFunds Notes”). Subsequent to year-end, we redeemed the eFunds Notes for a total of $109.3 million, which includes a make-whole premium of $9.3 million. We completed the redemption on February 26, 2008.

 

We have entered into the following interest rate swap transactions converting a portion of the interest rate exposure on our Term Loans from variable to fixed (in millions):

 

 

 

 

We have designated these interest rate swaps as cash flow hedges in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The estimated fair value of these cash flow hedges results in a liability of $41.2 million and an asset of $4.9 million, as of December 31, 2007 and 2006, respectively, which is included in the accompanying consolidated balance sheets in other noncurrent assets or liabilities and as a component of accumulated other comprehensive earnings, net of deferred taxes. A portion of the amount included in accumulated other comprehensive earnings is reclassified into interest expense as a yield adjustment as interest payments are made on the Term Loans.

Our existing cash flow hedges are highly effective and there is no current impact on earnings due to hedge ineffectiveness. It is our policy to execute such instruments with credit-worthy banks and not to enter into derivative financial instruments for speculative purposes.

 

Contractual Obligations

 

FIS’s long-term contractual obligations generally include its long-term debt and operating lease payments on certain of its property and equipment. The following table summarizes FIS’s significant contractual obligations and commitments as of December 31, 2007 (in thousands):

 

 

Off-Balance Sheet Arrangements

 

FIS does not have any material off-balance sheet arrangements other than operating leases.

 

Escrow Arrangements

 

In conducting our title agency, closing and 1031 exchange services operations, we routinely hold customers’ assets in escrow, pending completion of real estate transactions. Certain of these amounts are maintained in segregated bank accounts and have not been included in the accompanying consolidated balance sheets. We have a contingent liability relating to proper disposition of these balances, which amounted to $1,926.8 million at December 31, 2007. As a result of holding these customers’ assets in escrow, we have ongoing programs for realizing economic benefits during the year through favorable borrowing and vendor arrangements with various banks. There were no loans outstanding as of December 31, 2007 and these balances were invested in short term, high grade investments that minimize the risk to principal.

 

Recent Accounting Pronouncements

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”), requiring an acquirer in a business combination to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values at the acquisition date, with limited exceptions. The costs of the acquisition and any related restructuring costs will be recognized separately. Assets and liabilities arising from contingencies in a business combination are to be recognized at their fair value at the acquisition date and adjusted prospectively as new information becomes available. When the fair value of assets acquired exceeds the fair value of consideration transferred plus any noncontrolling interest in the acquiree, the excess will be recognized as a gain. Under SFAS 141(R), all business combinations will be accounted for by applying the acquisition method, including combinations among mutual entities and combinations by contract alone. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008, is effective for periods beginning on or after December 15, 2008, and will apply to business combinations occurring after the effective date. Management is currently evaluating the impact of this statement on our statements of financial position and operations.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”), requiring noncontrolling interests (sometimes called minority interests) to be presented as a component of equity on the balance sheet. SFAS 160 also requires that the amount of net income attributable to the parent and to the noncontrolling interests be clearly identified and presented on the face of the consolidated statement of income. This statement eliminates the need to apply purchase

accounting when a parent company acquires a noncontrolling ownership interest in a subsidiary and requires that, upon deconsolidation of a subsidiary, a parent company recognize a gain or loss in net income after which any retained noncontrolling interest will be reported at fair value. SFAS 160 requires expanded disclosures in the consolidated financial statements that identify and distinguish between the interests of the parent’s owners and the interest of the noncontrolling owners of subsidiaries. SFAS 160 is effective for periods beginning on or after December 15, 2008 and will be applied prospectively except for the presentation and disclosure requirements, which will be applied retrospectively for all periods presented. Management is currently evaluating the impact of this statement on our statements of financial position and operations.

 

In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 mandates certain financial statement presentation and disclosure requirements when a company elects to report assets and liabilities at fair value under SFAS 159. SFAS 159 is effective as of the beginning of January 1, 2008 for calendar year entities. Management is currently evaluating the impact of adopting SFAS 159 on our statements of financial position and operations.

 

 

As of December 31, 2007, we are paying interest on the Credit Agreement at LIBOR plus 1.25% and LIBOR plus 1.75% on our Term Loan A and Term Loan B, respectively. A one percent increase in the LIBOR rate would increase our annual debt service on the Credit Agreement by $10.2 million (based on principal amounts outstanding at December 31, 2007, net of interest rate swaps). The credit rating assigned to FIS by Standard & Poor’s was BB at December 31, 2007.

 

We have entered into the following interest rate swap transactions converting a portion of the interest rate exposure on our Term Loans from variable to fixed (in millions):

 

 

 

 

We have designated these interest rate swaps as cash flow hedges in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The estimated fair value of these cash flow hedges results in a liability of $41.2 million and an asset of $4.9 million, as of December 31, 2007 and 2006, respectively, which is included in the accompanying consolidated balance sheets in other noncurrent assets or liabilities and as a component of accumulated other comprehensive earnings, net of deferred taxes. A portion of the amount included in accumulated other comprehensive earnings is reclassified into interest expense as a yield adjustment as interest payments are made on the Term Loans.

 

Our existing cash flow hedges are highly effective and there is no current impact on earnings due to hedge ineffectiveness. It is our policy to execute such instruments with credit-worthy banks and not to enter into derivative financial instruments for speculative purposes.

 

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATES

INDEX TO FINANCIAL INFORMATION

 

 

The Board of Directors and Stockholders

Fidelity National Information Services, Inc.:

 

We have audited Fidelity National Information Services, Inc.’s and subsidiaries’ and affiliates’ (the “Company”) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

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

 

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

 

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

 

In our opinion, Fidelity National Information Services, Inc. and subsidiaries and affiliates maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by COSO.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Fidelity National Information Services, Inc. and subsidiaries and affiliates as of December 31, 2007 and 2006, and the related consolidated and combined statements of earnings, comprehensive earnings, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007, and our report dated February 29, 2008 expressed an unqualified opinion on those consolidated and combined financial statements.

 

/s/ KPMG LLP

 

February 29, 2008

Jacksonville, Florida

Certified Public Accountants

 

The Board of Directors and Stockholders

Fidelity National Information Services, Inc.:

 

We have audited the accompanying consolidated balance sheets of Fidelity National Information Services, Inc. and subsidiaries and affiliates (the “Company”) as of December 31, 2007 and 2006, and the related consolidated and combined statements of earnings, comprehensive earnings, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits.

 

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

 

In our opinion, the consolidated and combined financial statements referred to above present fairly, in all material respects, the financial position of Fidelity National Information Services, Inc. and subsidiaries and affiliates as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Accounting Oversight Board (United States), Fidelity National Information Services, Inc.’s and subsidiaries’ and affiliates’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 29, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

As discussed in Note 6 to the consolidated and combined financial statements, the Company completed an acquisition of eFunds Corporation on September 12, 2007 and as discussed in Note 15, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, effective January 1, 2007.

 

/s/ KPMG LLP

 

February 29, 2008

Jacksonville, Florida

Certified Public Accountants

FIDELITY NATIONAL INFORMATION SERVICES, INC.

AND SUBSIDIARIES AND AFFILIATES

 

Consolidated Balance Sheets

 

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

FIDELITY NATIONAL INFORMATION SERVICES, INC.

AND SUBSIDIARIES AND AFFILIATES

 

Consolidated and Combined Statements of Earnings