UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the fiscal year ended December 31, 2005 | ||
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission File
No. 001-16427
Fidelity National Information Services, Inc.
(Exact name of registrant as specified in its charter)
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Georgia (State or other jurisdiction of incorporation or organization) |
37-1490331 (I.R.S. Employer Identification No.) |
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601 Riverside Avenue
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Jacksonville, Florida
(Address of principal executive offices) |
32204 (Zip Code) |
(904) 854-8100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
| Title of each class: | Name of each exchange on which registered: | |
| Common Stock, par value $0.01 per share | New York Stock Exchange |
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, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2 of the
Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
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 30, 2005, 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 $2,359,841,844 based on the closing
sale price of $38.22 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 191,462,141 as of February 1, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Annual Meeting of Shareholders to be
held on June 21, 2006 is incorporated by reference to the
extent indicated under Items 10, 11, 12, 13, and 14, into
Part III of this
Form 10-K.
FIDELITY NATIONAL INFORMATION SERVICES, INC
2005 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Unless stated otherwise or the context otherwise requires,
all references in this
Form 10-K to the
registrant, “us,” “we,” “our” or
the “Company” are to Fidelity National Information
Services, Inc., a Georgia corporation formerly known as Certegy
Inc., and its subsidiaries; all references to
“Certegy” are to Certegy Inc., and its subsidiaries,
prior to the merger; all references to “Former FIS”
are to Fidelity National Information Services, Inc., a Delaware
corporation, and its subsidiaries, prior to the merger; all
references to “FNF” are to Fidelity National
Financial, Inc., a Delaware corporation that owns a majority of
our outstanding shares; and all references to the
“merger” are to the merger on February 1, 2006,
of Former FIS into a wholly-owned subsidiary of Certegy.
PART I
| Item 1. | Business. |
General Development of the Business
Our current business operations and organizational structure
result from the business combination on February 1, 2006,
of Certegy Inc., or Certegy, and Fidelity National Information
Services, Inc., a Delaware corporation, or Former FIS, pursuant
to which Former FIS was merged into a wholly-owned subsidiary of
Certegy. As a result of the merger:
| • | the stockholders of Former FIS, including its then-majority stockholder Fidelity National Financial, Inc., or FNF, owned approximately 67.4% of our outstanding common stock immediately after the merger, | |
| • | FNF itself now owns approximately 50.7% of our outstanding common stock, | |
| • | we changed our name from “Certegy Inc.” to “Fidelity National Information Services, Inc.” and our New York Stock Exchange trading symbol from “CEY” to “FIS”, and | |
| • | our board of directors was reconstituted so that a majority of the board now consists of directors designated by the stockholders of Former FIS. |
Although the combination with Former FIS was structured as a
merger of Former FIS into a wholly-owned subsidiary of Certegy,
the stockholders of Former FIS now hold a majority of our
outstanding shares of common stock. Accordingly, for accounting
and financial reporting purposes, the merger will be treated as
a reverse acquisition of Certegy by Former FIS under the
purchase method of accounting pursuant to U.S. generally
accepted accounting principles.
Certegy was incorporated on March 2, 2001, under the laws
of the State of Georgia as a wholly-owned subsidiary of Equifax
Inc. Equifax contributed its payment services division to
Certegy and “spun off” Certegy on July 7, 2001,
through a tax-free dividend of all of Certegy’s outstanding
shares of common stock to Equifax’s shareholders. As a
result of the spin-off, Certegy became an independent publicly
traded company.
Former FIS was incorporated under the laws of the State of
Delaware on May 20, 2004, as a wholly-owned subsidiary of
FNF, our new parent company. From November 2004 through March
2005, FNF made a series of contributions to Former FIS of the
businesses included in the Financial Institution Software and
Services, Lender Outsourcing Solutions, and Information Services
operating segments of FNF. During the 1990s, FNF acquired and
developed complementary real estate-related information services
and loan default management businesses as an adjunct to its
title insurance business. In 2001, the growth of these
complementary businesses accelerated, and since January 2001,
FNF has completed over 25 acquisitions in the business lines of
Former FIS. Although many of these acquisitions added important
applications and services to the offerings of Former FIS, the
most significant steps in the recent growth of Former FIS were
the acquisitions of:
| • | The financial services division of ALLTEL Information Services, Inc., which provides core banking and mortgage processing services and was renamed Fidelity Information Services, Inc., or FI. |
| • | VISTA Information Solutions, Inc., which was renamed Fidelity National Information Solutions, Inc., or FNIS, and which provides information applications and services, | |
| • | Aurum Technology, or Aurum, which provides software and outsourcing solutions to community banks and credit unions, | |
| • | Kordoba, which provides information technology solutions for the financial services industry with a focus on services and solutions for the German banking market, | |
| • | Sanchez Computer Associates, Inc., or Sanchez, which provides software and outsourcing solutions to banks and other financial institutions, and | |
| • | InterCept, Inc., or InterCept, which provides outsourced and in-house core banking solutions as well as item processing and check imaging services. |
As a result of the merger, we constitute one of the largest
providers of processing services to U.S. financial
institutions, with market-leading positions in core processing,
card issuing services, check risk management, mortgage
processing, and lending services. We are able to offer a
diversified product mix, and we believe that we will benefit
from the opportunity to cross-sell products and services across
our combined customer base and from our expanded international
presence and scale. We also expect to achieve cost synergies in,
among other things, corporate overhead, compensation and
benefits, technology, vendor management, and facilities.
Financial Information About Operating Segments and Geographic
Areas
Prior to the merger, Certegy reported financial information on
the basis of the following two segments:
| • | Card Services, and | |
| • | Check Services. |
Card Services included our card issuer services business in the
U.S., the U.K., Brazil, Chile, Australia, New Zealand, Ireland,
Thailand, the Caribbean, and Canada. Revenues of our domestic
card issuer services business are primarily derived from
independent community banks and credit unions, while revenues of
our international card issuer services business are generated
from large and small financial institutions. Additionally, Card
Services included our
e-banking service
business in the U.S. and our card issuer software, support, and
consulting service businesses in the U.S. and numerous other
countries. Check Services included the check risk management
services and related processing services businesses that we
provide in the U.S., the U.K., Canada, France, Ireland,
Australia, and New Zealand. A significant portion of our check
risk management services revenues are generated from several
large national and regional retail chains.
For financial information about Certegy’s segments and by
geographic area see “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Segment Results — Certegy”
in Item 7 of this report and Note 12 —
Segment Information to Certegy’s consolidated financial
statements in Item 8 of this report.
Former FIS reported financial information about its operations
on the basis of the following four segments:
| • | Financial Institution Software and Services, | |
| • | Lender Services, | |
| • | Default Management Services, and | |
| • | Information Services. |
The businesses that Former FIS conducted through the Financial
Institution Software and Services segment focused on two primary
markets: financial institution processing and mortgage loan
processing. The primary service offering of this segment was the
provision of software applications that function as the
underlying infrastructure of a financial institution’s
transaction processing environment. These software
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applications include core bank processing software, which banks
use to maintain the primary records of their customer accounts,
and core mortgage processing software, which banks use to
originate and service mortgage loans. A number of complementary
software applications and services that interact directly with
the core processing applications, including software
applications that facilitate interactions between the financial
institutions and their customers were also included in this
segment.
Former FIS offered customized outsourced business process and
information solutions to first mortgage, refinance, home equity
and sub-prime lenders and loan servicers through its Lender
Services segment. These solutions included loan facilitation
services, consisting of centralized, customized title agency,
and closing services, that allow financial institutions to
outsource their title and loan closing requirements in
accordance with pre-selected criteria, regardless of the
geographic location of the borrower or property.
The services that Former FIS offered through the Default
Management Services segment allow 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. Internal resources and networks established
with independent contractors are used to provide these
outsourcing solutions, which consist of foreclosure posting and
publishing services, nationwide recording services, field
services, and property management.
The various property data and real estate related information
services offered by Former FIS through its Information Services
segment span the entire home purchase and ownership life cycle,
from purchase through closing, refinancing, and resale. Included
among these information services are property appraisal and
valuation services, property records information, real estate
tax services, borrower credit and flood zone information and
certification, and multiple listing software and services. These
property data and real estate-related services are used by
mortgage lenders, investors, and real estate professionals to
complete residential real estate transactions throughout the U.S.
Shortly after consummating the merger, we implemented our new
organizational structure, and we will report under a new
operating segment structure beginning with the reporting of
first quarter 2006 results. Effective as of February 1,
2006, our reportable segments are Transaction Processing
Services, or TPS, and Lender Processing Services, or LPS. This
structure reflects how our businesses are now being managed
consistent with the new operating structure that we adopted
following the merger. The primary components of the TPS segment,
which includes Certegy’s former reportable segments of Card
and Check Services and the financial institution processing
component of the Financial Institution Software and Services
segment of Former FIS, are our Enterprise Solutions and
Integrated Financial Solutions businesses. The primary
components of the LPS segment are our Mortgage Processing and
Origination Services businesses, which include the mortgage
lender processing component of the Financial Institution
Software and Services segment of Former FIS, and the Lender
Services, Default Management, and Information Services segments
of Former FIS.
Narrative Description of the Business
| Overview |
As a result of combining the businesses of Certegy and Former
FIS, we now provide core processing services, check services,
card issuer and transaction processing services, risk management
services, mortgage loan processing, mortgage-related information
products, and outsourcing services to a wide variety of
financial institutions, retailers, mortgage lenders and mortgage
loan servicers, and real estate professionals. We have
processing and technology relationships with 35 of the top 50
global banks, including nine of the top ten. Nearly
50 percent of all U.S. residential mortgages are
processed using our software. We serve customers in more than 60
countries worldwide.
The customers that we cite by name in the following discussion
were selected as to provide a representative cross-section of
our customers based on size, geographic location, type of
institution and the services that they use.
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| Our Transaction Processing Services Operating Segment |
| Enterprise Banking and Retail Solutions |
Our Enterprise Banking and Retail Solutions division focuses on
filling the processing needs of large financial institutions in
North America, automotive financing companies, and commercial
lenders. It also provides check risk management and related
processing products and services to businesses accepting or
cashing checks at the
point-of-sale, and
provides comprehensive cash access services in the gaming
industry. Primary service offerings include:
| • | Core Processing Applications for Financial Institutions. Our core processing software applications are designed to run critical banking processes for our financial institution customers. These critical banking processes include deposit and lending systems, customer systems, and most other core banking systems that a bank must utilize to manage the products it provides to its customers. | |
| • | Retail Delivery Applications for Financial Institutions. Our retail delivery applications facilitate direct interactions between a bank and its customers through applications that allow for the delivery of services to these customers. Our retail delivery applications include TouchPoint, an application suite that supports call centers, branch and teller environments, and retail and commercial Internet channels. | |
| • | Integration Applications for Financial Institutions. Our integration applications access data across both our internal and third-party core processing systems and transport information to our customers’ retail delivery channels. Our integration applications provide transaction routing and settlement. These applications facilitate tightly integrated systems and efficient software delivery that reduces technology costs for our customers. | |
| • | Check Risk Management Services for Retailers. Our check risk management products utilize our proprietary risk management services and data sources to manage check acceptance risk for retailers at the point-of-sale. Our services, which can be tailored to meet the specific needs of our customers, include check guarantee, check verification and check collection services. | |
| • | Cash Access Services to Casinos. The acquisition of Game Financial on March 1, 2004 positioned us as a leading provider of comprehensive cash access services in the gaming industry. Our comprehensive product suite, which includes credit card cash advance services, ATM cash disbursements, and check cashing services, can be fully integrated into our customers’ cage operations or operated by us on an outsourced basis. | |
| • | Syndicated Loan Applications. Our syndicated loan applications are designed to support wholesale and commercial banking requirements necessary for all aspects of syndicated commercial loan origination and management. | |
| • | Automotive Finance Applications. Our primary applications include an application suite that assists automotive finance institutions in evaluating loan applications and credit risk, and allow automotive finance institutions to manage their loan and lease portfolios. |
Over 45,000 customers use our Enterprise Banking and Retail
Solutions applications and services, including banks, auto
finance companies and retailers. The processing needs of our
customers vary significantly across the size and type of
entities we serve. These entities include:
| • | Large Financial Institutions. We define the large financial institution market as banks and other financial institutions in North America with assets in excess of $5 billion. Of the 100 largest U.S. banks as of December 31, 2005, our customers included 15 banks that use our real-time, integrated loan and deposit applications, 41 banks that use our deposit-related core processing applications, 36 banks that use our lending-related core processing applications and 32 banks that use our various retail delivery applications. Our customers in this market include JP Morgan Chase, Bank of America, ING/ Direct, Charles Schwab Bank, and Citizens Bank of Rhode Island. Our solutions and services sold to banks in the large bank market accounted for approximately $447 million of revenues in 2005. |
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| • | Automotive Finance Institutions. Our automotive finance processing services include integrated loan and lease servicing solutions for the global automotive finance industry. As of December 2005, over 18 million automotive loans and leases in North America and Europe were processed on our automotive finance applications. We also offer origination, e-contract hosting, dealer wholesale finance, and other ancillary services, providing an end-to-end automotive finance solution. Three of the top five captive automotive finance companies in the U.S., as ranked at the end of 2005, utilize our applications and services. | |
| • | Commercial Lenders. We also provide business solutions that allow clients to automate and manage their entire commercial lending and loan trading businesses. Our customers include more than 91 financial institutions, including 9 of the top 10 and 27 of the top 50 as ranked by capital as of December 31, 2005. Our customers include Bank of America, JP Morgan Chase, Barclays Capital, Bank of Scotland, and Rabobank. | |
| • | Retailers. A significant portion of our revenues from check risk management services is generated from large national retail chains including Sears, Best Buy, Marmaxx and Albertson’s. Other customers of our check risk management products and services include regional merchants such as hotels, automotive dealers, telecommunication companies, supermarkets, gaming establishments, mail order houses and other businesses. |
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, described below, which allow us to combine our
services and best practices and leverage our expertise. We are
also able to deliver individual applications through a software
licensing arrangement. The examples below represent the typical
delivery models that we utilize in providing our applications:
| • | Software Licensing. In this traditional license and maintenance model, our customers purchase a license and maintenance contract for our software. We may also provide these customers with professional support services on either a time and materials or fixed-price basis to assist them with the implementation of, or conversion to, the licensed software, or with other IT projects. | |
| • | Application Management. In this service deployment model, we provide applications that are run by the customer at its processing facility, with a dedicated staff of our application programmers and business analysts assisting the customer in managing day-to-day technology-related activities. Our support staff may be located on-site at the customer’s facility, off-site at one of our facilities, or at a combination of both sites. In many cases, our staff supports the customer’s third-party applications, as well as our own software applications. | |
| • | Application Service Provider or ASP. In this service model, we use one of our off-site technology facilities to provide the users of ASP services with computing and application management facilities and support. Our support personnel are generally located off-site in one of our technology facilities, which communicate through online data transmission connections with remote devices on-site at the customer’s location. The ASP customer generally uses a suite of our applications and services in its business. Our customers may arrange to use our facilities infrastructure in a shared capacity with other customers, or they may contract with us to have dedicated computing capacity available solely for the operation of their applications, sometimes referred to as remote outsourcing. | |
| • | Facilities Management Processing or FM. In the FM service model, we provide our customers with a computing and application management function similar to that provided under ASP services. However, in the case of FM services, our personnel are located on-site at the location of the customer and act as the customer’s on-site IT staff in connection with FM services, generally also supporting the customer’s third-party software applications. When we enter into one of these arrangements, we generally hire the customer’s IT staff, which we supplement with our own employees. |
We also have developed an additional service referred to as
managed operations, in which we use our off-site technology and
processing infrastructure to offer computing facilities to
customers, without providing any
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of our software applications. Unlike our other service
customers, our managed operations customers often include
customers that are not financial institutions. We are able to
profitably leverage our computing capacity and technical
expertise to compete in this type of outsourcing business.
| Integrated Financial Solutions |
The primary focus of our Integrated Financial Solutions business
is on fulfilling the processing needs of independent community
banks, credit unions, and savings banks. Processing solutions
include core processing, branch automation, back office support
systems, compliance, credit and debit card issuing, image item
processing, print and mail, ATM/ EFT, retail internet banking,
commercial cash management, web design, web hosting, voice
response, and bill payment services. Over 8,000 commercial
banks, savings institutions and credit unions utilize one or
more of these solutions.
Customers of our core processing applications and services in
the U.S. banking market, which consist primarily of
community banks, credit unions, and savings banks, typically
seek a fully integrated and broad suite of applications. As a
result, our core processing applications sold to this market
have various add-on modules or applications that integrate into
our core processing applications, providing a broad processing
solution. Over 1,200 institutions utilize one of our core
processing solutions. Examples of our customers in this sector
include Hudson City Savings Bank, Sterling Bank, and VyStar
Credit Union.
Over 6,000 institutions utilize our 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. 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. More specifically, we process the card transactions on
the cards issued by our customers, including electronically
authorizing the transactions, capturing the transaction data and
settling the transactions as well as providing full service
back-office support functions for their programs. These support
functions include embossing and mailing our customers’
credit and debit cards to their cardholders; customer service on
behalf of the card issuers to their customers; card portfolio
management and analysis; invoicing cardholders; receiving and
processing cardholder payments; and delinquent account
management services. 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 the
“ICBA,” and Card Services for Credit Unions, or CSCU.
These organizations offer our products and 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 products and services to
individual credit unions and community banks.
Our item processing and imaging services are utilized by more
than 1,100 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 52
processing centers located throughout the U.S. or
on-site at a customer
location.
We provide a full range of eBanking 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 gift cards
and payroll cards. Our eBanking services are utilized by more
than 850 financial institutions and allow them to offer Internet
banking and bill payment services to consumers and businesses.
| International |
We offer core banking applications, card services, and check
risk management solutions to financial institutions, card
issuers, and retailers in approximately 60 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
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of full-service outsourced solutions, including core banking
applications and transaction processing and call center
services. We also provide application management, facilities
management processing, consulting services, and software
licensing and maintenance. Our international customers include
CitiBank, ING Group, Krung Thai Bank, China Construction Bank,
National Australia Bank, and a number of other mid-tier and
regional based financial institutions, card issuers, and
retailers.
| Our Lender Processing Services Operating Segment |
Our Lender Processing Services segment provides a comprehensive
range of products and services related to the mortgage life
cycle. Over 50% of all residential mortgages in the United
States are processed on our servicing platforms. We also offer a
wide range of mortgage life cycle products and services,
including origination, data gathering, risk management,
servicing, default management and property disposition services
to lenders and other real estate professionals. These additional
products and services can be interfaced with our internal lender
and servicing platforms as well as external lender and servicing
platforms.
| Mortgage Processing Services |
We sell the most widely used mortgage loan servicing system in
the U.S. The primary applications and services of this
business include:
| • | MSP. Our Mortgage Servicing Platform, or MSP, is an application that automates all areas of loan servicing, including loan setup and ongoing processing, customer service, accounting and reporting to the secondary mortgage market, and federal regulatory reporting. MSP processes a wide range of loan products, including fixed-rate mortgages, adjustable-rate mortgages, construction loans, equity lines of credit, and daily simple interest loans. | |
| • | Empower! Empower! is a mortgage loan origination software system used by banks, savings & loans, mortgage bankers, and sub-prime lenders. This application fully automates every phase of making loans, providing seamless credit bureau access and interfacing with automated underwriting systems used by Freddie Mac and Fannie Mae, as well as with vendors providing servicing, flood certifications, appraisals, and title insurance. |
Our mortgage loan processing customers include 20 of the top 25
loan servicers in the U.S. as of December 31, 2005, 6
of the top 10 loan subservicers and 9 of the top 20 sub-prime
loan servicers 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
generally provide relatively consistent annual revenues based on
the number of mortgages processed on our applications. Our
mortgage loan servicing platforms, including MSP, are used to
process over 50% of all residential mortgages by dollar volume
in the U.S. as of December 31, 2005, representing
balances exceeding $4.0 trillion.
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 loan volume choose to
use us as their processing partner and engage FIS 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 ASP arrangement in which
multiple clients share the same computing and personnel
resources or to have their own dedicated resources within our
facility.
| Mortgage Origination Services |
Mortgage origination services include customized outsourced
business process and information solutions that enable our
customers to outsource their title and closing requirements in
accordance with pre-selected criteria, regardless of the
geographic location of the borrower or property. As a result,
our customers are able to utilize our outsourcing services in a
manner that we believe provides a greater level of consistency
in service, pricing and quality than if these customers were to
contract separately for similar services.
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The primary service offerings are as follows:
| • | Title Agency Services. Our centralized financial institution title agency services include arranging for the issuance of a title insurance policy by a title insurer, by conducting title searches and preparing an abstract of title, reviewing the status of title in a title commitment, resolving any title exceptions, verifying the payment of existing loans secured by a subject property, and verifying the amount of prorated expenses. We perform these services on a national basis, both in the traditional manner and through our centralized production facilities that incorporate automated processes, which can help expedite the delivery of services. Additionally, we typically prepare checks, deeds, and affidavits and record appropriate documents in connection with the closing. In 2004 and 2005, all title insurance policies issued as a result of our agency services were issued by title insurance companies owned by FNF. Going forward, we will continue to act as an agent for these title insurers. | |
| • | Closing Services. Our closing management services are currently available nationwide. We maintain a network of independent closing agents who are trained to close loans in accordance with the lender’s instructions. Our closing management services cover a variety of types of closings, including purchases and refinancings, and provide a variety of types of services. | |
| • | Homebuilders’ Services. We offer mortgage loan fulfillment and processing services to U.S. homebuilders. We enter into partnership and management arrangements with homebuilders to establish and manage captive mortgage finance businesses that originate, underwrite, process, and place first mortgages with unaffiliated wholesale lenders that make loans on newly constructed homes. |
In addition, the title and closing services described above can
be combined and customized with many of the offerings of our
Mortgage Information Services business to meet the specific
requirements of our customers.
The customers of our title agency and closing services are
financial institutions involved in the first mortgage,
refinance, home equity, and sub-prime lending markets. Customers
of our title agency and closing services delivered under
traditional outsourcing arrangements are typically large,
national institutions, and include Wells Fargo, Washington
Mutual, and Bank of America. Our automated title process and
ancillary services are targeted at the top 50 U.S. mortgage
lenders, although we believe that the benefits provided by these
automated services may be attractive to other national lenders,
as well as regional lenders with significant lending operations.
Customers of our homebuilders’ services are
U.S. homebuilders, including Beazer Homes, Trend Homes, and
Cambridge Homes.
| Mortgage Information Services |
Our Mortgage Information Services are used by mortgage lenders,
investors, and real estate professionals to complete residential
real estate transactions throughout the U.S. We offer a
comprehensive suite of services spanning the entire home
purchase and ownership life cycle, from purchase through
closing, refinancing, and resale. A significant number of our
customers use a combination of our mortgage origination,
mortgage information and default management services.
| • | Flood Zone Certifications. We offer flood zone certifications through a proprietary automated system that accesses and interprets Federal Emergency Management Agency, or FEMA, flood maps and certifies whether a property is in a federally designated flood zone. Additionally, we offer lenders a life-of-loan flood zone determination service that monitors previously issued certificates for any changes, such as FEMA flood map revisions, for as long as that loan is outstanding. | |
| • | Real Estate Tax Services. We offer lenders a monitoring service that will notify them of any change in tax status during the life of a loan. We also provide complete outsourcing of tax escrow services, including the establishment of a tax escrow account that is integrated with the lender’s mortgage servicing system and the processing of tax payments to taxing authorities. | |
| • | Credit Reporting. We provide credit information reports and related services to meet the needs of the mortgage industry and help commercial banks, mortgage companies, and consumer lenders make loan |
8
| decisions. Our services include providing a merged credit report that contains credit history data on individual or joint credit applicants acquired from the combined databases of three credit bureaus (Experian, Trans Union and Equifax) for national coverage. We consolidate and organize information from these credit bureaus and deliver a concise report to our customers. | ||
| • | Valuation and Appraisal Services. We have developed a broad suite of valuation applications, which include automated valuation models, traditional appraisals, broker price opinions, collateral scores, and appraisal reviews utilized by participants in the secondary mortgage markets. We have developed innovative new hybrid valuation offerings such as collateral valuation insurance, which combine a traditional valuation with an insurance policy issued by an unaffiliated third party that guarantees the accuracy of a valuation within certain parameters. We also have developed processes and technologies that allow our lender customers to outsource their valuation management functions. When our customers outsource these functions to us, we use various technologies to allow our lenders to automatically select a valuation service from our suite of offerings that delivers the best service/cost solution for each individual situation. | |
| • | 1031 Exchange Intermediary Services. We act as a qualified exchange intermediary for those customers who seek to engage in qualified exchanges under Section 1031 of the Internal Revenue Code, which allows capital gains tax deferral on the sale of certain real estate investment assets. Through our nationwide network of regional offices, we provide our customers with direct access to a full-time staff of exchange professionals, one-third of whom are attorneys specializing in tax deferred exchange solutions. | |
| • | Multiple Listing Services. We provide services that are used to operate multiple listing services in the U.S. serving over 300,000 real estate brokers and agents. We have acquired and developed reliable data base management tools and provide central hosting of MLS systems in our data centers for local MLS organizations, enabling realtors to search for available homes using a potential buyer’s criteria. |
Customers of our mortgage information services include loan
servicers, banks, and consumers, as well as other participants
in the real estate, lending, and title insurance industries. Our
customers include ABN Amro, U.S. Bancorp, Bank of America,
Freddie Mac, New Century Mortgage, and Washington Mutual.
| Default Management Services |
Our Default Management Services enable mortgage lenders and loan
servicers to outsource the business processes necessary to take
a loan and the underlying real estate securing the loan through
the default and foreclosure process. Additionally, we work with
customers to identify specific parameters regarding the type and
quality of services they require and provide a single point of
contact for these services. As a result, our customers are able
to use our outsourcing services in a manner that we believe
provide a greater level of consistency in services, pricing, and
quality than if these customers were to contract separately for
similar services. For example, we offer default management
services as part of a package with MSP, which may lead to
additional cost savings for our customers. We use our own
resources and networks that we have established with independent
contractors to provide these default management outsourcing
solutions.
Based in part on the range and quality of our product offering
and our focus on customer service, the demand for our services
has grown significantly. We are now one of the largest default
management outsourced service providers in the U.S. We
offer a full spectrum of outsourcing services designed to assist
lenders throughout the foreclosure process, as described in more
detail below:
| • | At the onset of a loan default, our services are designed to assess and preserve the value of the property securing the loan. This includes both inspection and property preservation and maintenance services provided through national networks of contractors and inspectors. | |
| • | As the foreclosure process continues, we provide comprehensive posting and publication of foreclosure and auction notices and conduct mandatory title searches, in each case as necessary to meet state statutory requirements for foreclosure. We provide document preparation and recording services, |
9
| including mortgage assignment and release preparation, and due diligence and research services. We also provide various other title services in connection with the foreclosure process. | ||
| • | After a property has been foreclosed, we provide property preservation field services that aid our customers in managing their real estate owned, or REO, properties. We also offer a variety of title services relating to the lender’s ownership and eventual sale of REO properties, as well as nationwide advisory and management services to facilitate a lender’s REO sales. |
We primarily provide our default management services to national
mortgage lenders and loan servicers, many of which previously
performed this function in-house. We currently provide default
management services to 22 of the top 25 residential mortgage
servicers, 13 of the top 25 sub-prime servicers, and 24 of the
top 25 subservicers. Washington Mutual and Bank of America are
two of our largest customers.
Sales and Marketing
| Sales Force |
Our sales and marketing efforts are primarily organized around
our lines of business, and by customer market segment and
distribution channel. In our Transaction Processing Services
segment, we have a sales force that markets our core processing
services to our large national bank customers. A separate sales
group focuses on community based institutions. Specialized sales
items have been established to promote our products to national
and regional retailers and the automotive and gaming industries.
In addition, we have a sales force responsible for marketing our
services outside the United States. We also market other
products and services of our Transaction Processing Services
segment through indirect sales channels, such as ICBA and CSCU,
independent sales organizations, marketing alliances, and
financial institutions.
In our Lender Processing Services segment we utilize four
distinct sales teams. The first sales team is dedicated to the
sale and marketing of MSP and related services of the Mortgage
Processing Services business to large national banks, credit
unions, and thrifts, as well as to mortgage companies and
specialized servicing companies. Our mortgage origination,
default management, and mortgage information services businesses
each have a dedicated sales and marketing team responsible for
its respective products and services. Of the two teams assigned
to the mortgage origination and information services, one
targets the largest 125 U.S. lenders while the other
targets mid-tier lenders not among the largest 125.
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.
As many of our customers use a single product or service, or a
combination of products or 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 products and services.
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 or “OOE,” 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.
The broad range of services we offer provides us with the
opportunity to expand our sales to our existing customer base
through strategic account management efforts. The importance of
our core processing applications to our financial institution
customers gives us access to management at a more senior level
than we have with our individual business units alone. We
believe that this access, combined with our range of solutions,
increases sales of our mortgage and banking related services.
In addition to providing our customers with a broad range of
service offerings, through the Office of the Enterprise we are
able to assist customers in improving process efficiencies and
productivity and enhancing the
10
consumer’s experience. The Office of the Enterprise has
been instrumental in assisting our business units with
implementation of these solutions by working with its executive
level contacts, as well as other key industry players such as
Fannie Mae and Freddie Mac. These activities accelerate
implementation and allow lenders to reap the process efficiency
benefits of such solutions.
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
In the large bank sector, the markets for our core banking
products and services are highly competitive. The markets are
very mature and have a number of existing providers with a high
level of experience and significant market share. Additionally,
given the attractive market characteristics in financial
services, there are from time to time new market entrants which
seek to leverage shifts in technology or product innovation to
attract customers.
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 ability to offer multiple
applications and services to individual customers enhances our
competitiveness against competitors with more limited
application offerings.
In the small and mid-tier financial institution markets, we
compete with vendors that offer similar core processing
applications and services to financial institutions, including
The Bisys Group, Inc., Accenture, Fiserv, Inc., Jack Henry and
Associates, Inc., and Metavante Corporation. 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, eFunds, and Global Payments.
The principal competitors for our Mortgage Origination and
Default Management Services are title companies such as First
American and LandAmerica and in-house services provided directly
by our customers. We believe that customer service and timely
delivery are key factors in competing successfully.
The markets for our mortgage information services 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
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mortgage information services business. However, there are a
number of competitors in specific lines, some of which have
substantial resources. First American is a significant
competitor in a majority of our mortgage information services.
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 significant
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 products and services that are
compatible with new and emerging delivery channels.
Our strategy and development group maintains a dialogue with its
extensive and diverse customer base and is highly attuned to
ongoing shifts in industry requirements and preferences. This
active customer and market participation is translated into
multi-year, iterative development plans that map the primary
areas of investment in our application set. This group is
ultimately responsible for designing, developing and enhancing
applications targeted at the diverse requirements of the various
local, regional, national and international environments of our
numerous customers. We provide updated versions of our various
applications or application suites on an iterative basis as
dictated by market requirements. Our software applications
include many application features and functions and will
accommodate customized requirements specific to each institution.
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, 2005 and December 31, 2004, Former
FIS recorded expense of approximately $113.5 million and
$74.2 million on research and development efforts.
We are party to a master services agreement with Covansys
Corporation (NASDAQ: CVNS), or Covansys, a U.S.-based provider
of application management and offshore outsourcing services with
India-based operations, pursuant to which we have agreed,
subject to certain termination rights, to provide
$150 million of revenues to Covansys over the term of the
master services agreement from either our own utilization of
Covansys’s services or from the utilization of
Covansys’ services by our existing customers seeking to
outsource information technology services. The master services
agreement expires in 2009. We can terminate the master services
agreement on thirty days’ notice at any time after
December 31, 2006, subject to certain penalties. The
Company is subject to penalties up to $8.0 million in the
event that certain annual thresholds are not met and a final
penalty equal to 6.67% of the unmet commitment. The first
spending threshold is $50.0 million from the contract start
date through June 30, 2006. Failure to meet this threshold
amount will result in a penalty due of $1.0 million.
Through December 31, 2005, Former FIS had spent
approximately $20.8 million under the terms of this
agreement, substantially less than required to meet the
June 30, 2006 threshold. As a result the $1 million
penalty has been accrued and is included in selling, general and
administrative expenses in the year ended December 31, 2005
Consolidated and Combined Statement of Earnings of Former FIS.
12
With respect to our outsourcing of software development, we are
transferring costs from our U.S. and Western European-based
development centers to Covansys and other lower cost off-shore
facilities. We are using our relationship with Covansys and with
other facilities to lower our internal development costs over
time by outsourcing certain programming, development and
maintenance functions.
We are currently engaged in significant efforts to upgrade our
core bank processing software and our mortgage processing
software. These applications were included in the acquisition of
FI from ALLTEL by Former FIS in 2003. Former FIS spent the
period immediately following the FI acquisition discussing with
its key customers the changes that they would like to see made
in those applications. In 2004, Former FIS began the development
work to implement changes required to keep pace with the
marketplace and the requirements of its customers.
In addition to amounts already spent, we expect to spend an
incremental $40 million over the next few years on the
development of our mortgage servicing platform. With respect to
the core banking software, we expect to spend a total of
approximately $55 million on development, enhancements and
integration projects in 2006. Our ongoing efforts to upgrade our
mortgage processing and core bank processing software systems
have not materially affected our operations or materially
impaired our ability to provide customers with services.
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 products and 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
13
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 fee shares or
splits or 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 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 a underwritten title company, title agencies, and
individual escrow officers. The underwritten title company
operates only in California. The regulation of an underwritten
title company in California is generally limited to requirements
to maintain specified levels of net worth and working capital,
and to obtain and maintain a license in each of the counties in
California 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.
The California Department of Insurance has recently commenced a
review of levels of pricing and competition in the title
insurance industry in California, in part with a view to
determining whether prices are too high and if so, implementing
rate reductions. New York, Colorado, Florida, Nevada and Texas
insurance regulators have also announced similar inquiries (or
other review of title insurance rates) and other states could
follow. At this stage, we are unable to predict what the outcome
will be of this or any similar review.
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. The proposed regulations are scheduled to be
discussed at a public hearing on June 6, 2006. We currently
do not know what the effect of 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.
14
Employees
As of February 1, 2006, we had approximately 19,323
employees, including approximately 3,217 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.
| Item 1A. | Risk Factors. |
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.
Risks Resulting from Our Recently Completed Business
Combination
| We will be controlled by Fidelity National Financial, Inc., or FNF, as long as it owns a majority of our common stock, and our other shareholders generally will be unable to affect the outcome of shareholder voting during this time. |
As a result of our recently completed business combination, FNF
owns approximately 50.7% of the outstanding shares of our common
stock. Subject to limitations under a shareholders agreement
that we entered into with FNF, as long as FNF continues to hold
a majority of our outstanding common stock, FNF will be able to
elect all of our directors and determine the outcome of all
corporate actions requiring shareholder approval. Further, under
the shareholders agreement, until FNF no longer owns at least
30% of the total voting power of our outstanding stock, FNF will
have the right to approve the hiring and firing of our Chief
Executive Officer and Chief Financial Officer and our annual
operating and capital expenditure budgets.
FNF’s voting control will enable it to control decisions
with respect to:
| • | our business direction and policies; | |
| • | mergers or other business combinations involving us or our subsidiaries, except as described below; | |
| • | the acquisition or disposition of assets by us or our subsidiaries; | |
| • | our financing; and | |
| • | amendments to our articles of incorporation and bylaws. |
Although it will control whether we can merge or combine with a
third party, FNF has agreed, under the shareholders agreement,
to certain limitations on its ability to cause us to engage in
transactions which are commonly referred to as
“going-private transactions.”
In addition to these effects, FNF’s control could make it
more difficult for us to raise capital by selling stock or for
us to use our stock as currency in acquisitions. This
concentrated ownership also might delay or prevent a change in
control and may impede or prevent transactions in which our
other shareholders might otherwise receive a premium for their
shares.
15
| We could have conflicts with FNF, and the Chairman of our board of directors and other officers and directors will be subject to conflicts of interest due to their relationships with FNF and its other subsidiaries. |
Conflicts may arise between FNF, FNF’s majority owned
subsidiary Fidelity National Title Group, Inc., or FNT, or their
respective subsidiaries, on the one hand, and us, on the other,
as a result of the parties’ ongoing agreements and the
nature of their respective businesses. Among other things, we
and our subsidiaries are parties to a variety of service
agreements with FNF, FNT or FNT’s subsidiaries. Certain of
our executive officers and directors will be subject to
conflicts of interest with respect to these service agreements
and other matters due to their relationships with FNF, FNT or
their respective subsidiaries.
Some of our executive officers and directors own substantial
amounts of FNF and FNT stock and stock options because of their
relationships with FNF and FNT. Such ownership could create or
appear to create potential conflicts of interest when our
directors and officers are faced with decisions that involve
FNF, FNT, or any of their respective subsidiaries. Each of
William P. Foley, II, Daniel D. (Ron) Lane and Cary H. Thompson,
who are members of our board of directors, beneficially owns
shares of FNF common stock. Other of our senior officers hold
interests in FNF that were obtained through various employee
benefit and compensation plans while at FNF and Former FIS. In
addition, officers of FNF will provide services from time to
time to us, FNT, and FNF. These persons also hold equity
interests in FNF.
Mr. Foley, the Chairman of our board of directors, is also
the Chief Executive Officer and Chairman of the board of
directors of FNF and Chairman of the board of directors of FNT.
As an officer and director of these companies, he has
obligations to us as well as to FNF and FNT and will have
conflicts of interest with respect to matters potentially or
actually involving or affecting us and FNF or any of its
subsidiaries, including FNT.
Matters that could give rise to conflicts between us and FNF or
its other subsidiaries include, among other things:
| • | past and ongoing contractual relationships involving us or our subsidiaries, on the one hand, and FNF and its subsidiaries, on the other hand, including service agreements and other arrangements with respect to the administration of tax matters, employee benefits, indemnification, and other matters; | |
| • | the quality and pricing of services that we have agreed to provide to FNF subsidiaries or that those entities have agreed to provide to us; | |
| • | sales or distributions by FNF of all or part of its ownership interest in our common stock; and | |
| • | business opportunities arising for either us or FNF, FNT, or their respective subsidiaries that could be pursued by either us or by FNF, FNT, or one or more of their respective subsidiaries. |
We seek to manage these potential conflicts through dispute
resolution and other provisions of our agreements with FNF, FNT,
and their respective subsidiaries 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 it were dealing with an unaffiliated
third party.
| We may lack adequate oversight because the Chairman of our board of directors is also both the Chief Executive Officer and Chairman of the board of directors of FNF and the Chairman of the board of directors of FNT. |
Mr. Foley, the Chairman of our board of directors, is also
the Chairman of FNT’s board of directors and the Chief
Executive Officer and Chairman of the board of directors of FNF.
As an officer and director of multiple companies, he has
obligations to us as well as FNF and FNT and may have conflicts
of time with respect to matters potentially or actually
involving or affecting us. As a non-executive chairman, it is
expected that Mr. Foley will devote a minority of his time
to us. If his duties as our Chairman require more time than
Mr. Foley is able to allot, then his oversight of our
activities could be diminished.
16
| Our substantial leverage and debt service requirements may adversely affect our financial and operational flexibility. |
Following completion of the business combination, we had total
debt of approximately $3.1 billion. This high level of debt
could have important consequences to us, including the following:
| • | the debt level makes us more vulnerable to economic downturns and adverse developments in our business, may cause us to have difficulty borrowing money in the future for working capital, capital expenditures, acquisitions, or other purposes and will limit our ability to pursue other business opportunities and implement certain business strategies; | |
| • | we will need to use a large portion of the money we earn to pay principal and interest on our senior credit facilities, which will reduce the amount of money available to finance operations, acquisitions and other business activities, repay other indebtedness and pay shareholder dividends; | |
| • | some of the debt has a variable rate of interest, which exposes us to the risk of increased interest rates; and | |
| • | we will have a higher level of debt than certain of our competitors, which may cause a competitive disadvantage and may reduce flexibility in responding to changing business and economic conditions, including increased competition. |
In addition, the terms of our senior credit facilities may
restrict us from taking actions, such as making acquisitions or
dispositions or entering into certain agreements that we might
believe to be advantageous to us.
| The historical financial information of Former FIS for periods prior to March 9, 2005 may not be representative of its results as a consolidated, stand-alone company. |
The historical financial statements of Former FIS do not reflect
operations as a separate stand-alone entity for the historical
periods presented prior to March 9, 2005, the date on which
Former FIS engaged in a private placement of a minority interest
in its common stock and was no longer a wholly owned subsidiary
of FNF. Because prior to that date Former FIS’ businesses
were either wholly owned subsidiaries of FNF, or were operated
as divisions of wholly owned subsidiaries of FNF, Former
FIS’ historical financial statements prior to that date
were carved out from the consolidated financial statements of
FNF using assets, liabilities, revenues, and expenses directly
attributable to its operations and allocations to Former FIS of
certain corporate expenses of FNF. Further, Former FIS’
historical financial statements prior to that date do not
reflect the debt or interest expense Former FIS might have
incurred if it had been a stand-alone entity. As a result of
these and other factors, Former FIS’ historical financial
statements for periods prior to March 9, 2005 do not
necessarily reflect what its financial position and results of
operations would have been if it had been operated as a
stand-alone public entity during the periods covered, and may
not be indicative of future results of operations or financial
position as part of our combined company.
17
| We may not be able to successfully integrate the businesses of Certegy and Former FIS. |
The success of our recently completed business combination will
depend in large part upon our ability to integrate the
organizations, operations, systems and personnel of Former FIS
and Certegy. The integration of two previously independent
companies is a challenging, time-consuming, and costly process.
It is possible that the integration process could result in the
loss of key employees, the disruption of each company’s
ongoing businesses or inconsistencies in standards, controls,
procedures, and policies that adversely affect our ability to
maintain relationships with suppliers, customers, and employees
or to achieve the anticipated benefits of the business
combination. In addition, successful integration of the
companies will require the dedication of significant management
resources, which will temporarily detract attention from our
day-to-day businesses. If management is not able to integrate
the organizations, operations, systems, and personnel of Former
FIS and Certegy in a timely and efficient manner, the
anticipated benefits of the business combination may not be
realized fully or at all or may take longer to realize than
expected.
Failure
to achieve expected synergies could result in the benefits of
the business combination not being attained.
We expect that our recently completed business combination will
result in beneficial synergies for us and our subsidiaries.
Achieving these anticipated synergies, however, will depend on a
number of factors, some of which include:
| • | retention of key management, marketing, and technical personnel; | |
| • | correctly identifying areas where personnel and facilities can be consolidated without adverse effects on results of operations; | |
| • | customers not deferring purchasing decisions as a result of the business combination; | |
| • | our ability to increase sales of our products; and | |
| • | competitive conditions in the industries in which we operate. |
The failure to achieve anticipated synergies could result in a
failure to attain expected benefits to our combined business,
financial condition and operating results.
| Our failure to successfully cross-sell products and services to our existing customer bases could result in the full potential benefits of the business combination not being achieved. |
While we intend to take advantage of the business combination to
seek cross-selling opportunities, such cross-selling efforts may
face potential challenges for various reasons, such as
difficulties in coordinating and incentivizing employees within
one combined company and maintaining optimal quality control,
managing existing customers’ potential resistance to
outsourcing functions to a new vendor, and other matters. If the
cross-selling synergies for increased revenue do not occur, the
benefits of the business combination may not be achieved.
| If FNF engages in the same types of businesses we conduct, our ability to successfully operate and expand our business may be limited. |
Under the shareholders agreement entered into in connection with
our business combination, FNF agreed, and agreed to cause FNT
and certain of its other affiliates to agree, not to compete
with us in certain significant lines of business. However, these
restrictions do not cover certain other lines of business in
which we will operate, such as title agency services. Our
mortgage origination services business provides centralized
title agency services to large national lenders, and the
revenues of former FIS for 2005 from this business were
$80.9 million. Through its FNT operations, FNF provides
similar national title agency services. Further, although we
have agreed to place all title insurance business our title
agency services generate with FNT’s title insurers, the
latter are free to deal with other third party title agents.
18
As previously noted, certain of our officers and directors are
subject to conflicts of interest with respect to our business
activities which compete with FNF, FNT or any of their
respective subsidiaries. In addition, due to the significant
resources of FNF, including financial resources, FNF could have
a significant competitive advantage over us if and when we
compete with them, which could have an adverse effect on our
financial condition and results of operations.
| Sales of our shares by large, registered shareholders could adversely affect the trading price of our shares. |
In connection with the business combination, we entered into a
registration rights agreement with the former stockholders of
Former FIS requiring us to register the shares of our common
stock that are now beneficially owned by them. Consequently, we
have to date registered for resale from time to time shares
which collectively account for approximately 16.7% of our shares
outstanding after the merger. Sales of these shares, or the
possibility that sales of these shares or of other shares issued
in the business combination may occur in unlimited amounts and
without prior notice, could adversely affect the trading price
of our shares.
Risks Related to Our Business
| 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 products and 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
products and services, and develop and introduce new products
and services that address the increasingly sophisticated needs
of our customers and their clients. These initiatives carry the
risks associated with any new product or 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 products and
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
products and services, or that our new products and services and
their enhancements will adequately meet the demands of the
marketplace and achieve market acceptance.
For example, the specific products and services that we deliver
to the electronic payments market are designed to process
transactions and deliver reports and other information on those
transactions at very high volumes and processing speeds. Any
performance issue that arises with a new product or service
could result in significant processing or reporting errors. As a
result of these factors, our research and development efforts
could result in increased costs that could reduce our revenues
and operating income if new products are not delivered timely to
our customers, or a loss of revenue, or possible claims for
damages if new products and services do not perform as
anticipated.
Additionally, we currently are engaged in significant efforts to
upgrade two of our most important applications: our core bank
processing software and our mortgage processing software. These
applications were acquired upon our acquisition of Fidelity
Information Services, Inc., or FI, from Alltel Information
Services, Inc. in 2003. We spent the period immediately
following the acquisition discussing with key customers the
changes that they would like to see made in those products. In
2004, we began the development work to implement changes
required to keep pace with the marketplace and the requirements
of our customers. In addition to amounts already spent, we
expect to spend approximately $40.0 million on the
development of our mortgage servicing platform. With respect to
the core banking software, during 2005 we spent approximately
$56.0 million on enhancement and integration projects, and
during 2006 we expect to spend approximately $55.0 million
on such projects. If we are unsuccessful in completing or
gaining market acceptance of these and other upgrade efforts, it
would likely have a material adverse effect on our ability to
retain existing customers or attract new ones.
19
| 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.
| 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, products
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.
| Decreased lending and real estate activity may reduce demand for certain of our services and adversely affect our results of operations. |
Revenues from information services and lender services
operations are closely related to the general level of real
estate transactions, such as real estate sales and mortgage
refinancings. Real estate sales are affected by a number of
factors, including mortgage interest rates, the availability of
funds to finance purchases and general economic conditions.
Prevailing mortgage interest declined to record lows in recent
years, and the volume of real estate transactions experienced
record highs. However, these trends did not continue, and the
volume of refinancing transactions in particular and mortgage
originations in general declined in 2004 and again in 2005 from
2003 levels, resulting in reduction of revenues in some of our
businesses. Some of our services and related applications,
including our automated title agent process that accounted for
substantial revenues from our lender services operations in
2003, are currently used exclusively for refinancing
transactions. 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.
| Our revenues from the sale of services to 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
20
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 would have a material adverse
effect on our business.
| 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.
| 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 products and services must
comply. For example, our products 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.
| Demand for many of our products and 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 of our financial information software and services business 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 segment, 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.
21
| 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.
| To continue to grow our card issuer business profitably, we must expand our share of the credit and debit card transaction processing market and enter new markets, and the failure to do this could adversely affect our business. |
Our domestic card issuer business is concentrated in the
independent community bank and credit union segments of the
market, and we have achieved a significant degree of penetration
of these market segments. While we intend to continue our
vigorous pursuit of expansion within these segments, future
growth and profitability of this business will significantly
depend upon our ability to penetrate other markets, including
emerging markets for electronic transaction processing, such as
international transaction processing and Internet payment
systems. As part of our strategy to achieve this expansion, we
will continue to seek acquisition opportunities, investments,
and alliance relationships that will facilitate our expansion;
however, we may not be able to complete suitable acquisitions,
investments or alliances, and if we do, they may not provide us
with the benefits we anticipated. Also, we may not have adequate
financial and technological resources to develop products and
distribution channels that will satisfy the demands of new
markets.
| 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:
| • | interruption of business operations; | |
| • | delay in market acceptance; | |
| • | additional development and remediation costs; | |
| • | diversion of technical and other resources; | |
| • | loss of customers; | |
| • | negative publicity; or | |
| • | exposure to liability claims. |
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.
22
| 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.
| 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 products and 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:
| • | increase our operating expenses to correct problems caused by the interruption; | |
| • | harm our business and reputation; | |
| • | result in a loss of customers; or | |
| • | expose us to liability. |
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.
23
| Our outsourcing of key development functions overseas may lead to quality control issues that affect our business operations. |
By outsourcing development functions overseas, we may experience
quality control issues in our applications offered to our
markets. Overseas outsourcing operations are subject to risk of
quality control deficiencies due to the physical distance from
our headquarters, the increased potential for instructions and
guidance to be misunderstood, a lack of direct institutional
control and the time and expense it will take to provide on site
training. Any one of these factors make it more difficult for us
to maintain quality control, and the potential for quality
control issues may impact our ability to maintain and or
increase our customer base.
| 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:
| • | be expensive and time-consuming to defend; | |
| • | cause us to cease making, licensing or using applications that incorporate the challenged intellectual property; | |
| • | require us to redesign our applications, if feasible; | |
| • | divert management’s attention and resources; and | |
| • | require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies. |
There can be no assurance that third parties will not assert
infringement claims against us in the future with respect to our
current or future applications and services.
| 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 2005, sales outside of the U.S. represented
approximately 6.7% of the revenues of Former FIS. Additionally,
approximately 16.4% of the consolidated revenues of Certegy for
the year ended December 31, 2005 and 38.1% of
Certegy’s consolidated assets at December 31, 2005 are
associated with operations outside of the U.S.
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
24
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:
| • | political and economic instability; | |
| • | unexpected changes in regulatory requirements and policy, the adoption of laws detrimental to our operations such as legislation relating to the collection of personal data over the Internet or the adoption of laws, regulations, or treaties governing the export of encryption related software; | |
| • | the burdens of complying with a wide variety of other laws and regulations; | |
| • | failure to adequately manage currency exchange rate fluctuations; | |
| • | potentially adverse tax consequences, including restrictions on the repatriation of earnings; | |
| • | potential difficulty of enforcing agreements and collecting receivables in some foreign legal systems; and | |
| • | general economic conditions in international markets. |
There can be no assurance that we will be able to compete
successfully against current or future international competitors
or that our relative inexperience with international operations
will not limit or hinder our success.
Statement Regarding Forward-Looking Information
The information contained in this
Form 10-K contains
forward-looking statements that involve a number of risks and
uncertainties. Statements that are not historical facts,
including statements about our beliefs and expectations, are
forward-looking statements. Forward-looking statements are based
on management’s beliefs, as well as assumptions made by,
and information currently available to, management. Because such
statements are based on expectations as to future economic
performance and are not statements of fact, actual results may
differ materially from those projected. We undertake no
obligation to update any forward-looking statements, whether as
a result of new information, future events, or otherwise.
Important factors that may affect these projections or
expectations include, but are not limited to:
| • | general political, economic, and business conditions, including the possibility of intensified international hostilities, acts of terrorism, and general volatility in the capital markets; | |
| • | a decrease in the volume of real estate transactions such as real estate sales and mortgage refinancings, which can be caused by high or increasing interest rates, a shortage of mortgage funding, or a weak United States economy; | |
| • | consolidation in the mortgage lending or banking industry; | |
| • | security breaches of our systems and computer viruses affecting our software; | |
| • | the impact of competitive products and pricing; | |
| • | the ability to identify suitable acquisition candidates and the ability to finance such acquisitions, which depends upon the availability of adequate cash reserves from operations or of acceptable financing terms and the variability of our stock price; | |
| • | our ability to integrate any acquired business’ operations, products, clients, and personnel; | |
| • | changes in, or the failure to comply with, government regulations, including privacy regulations; and | |
| • | other risks detailed elsewhere in this Risk Factors section and in our other filings with the Securities and Exchange Commission. |
All of these factors are difficult to predict and many are
beyond our control. Accordingly, while we believe these
forward-looking statements to be reasonable, there can be no
assurance that they will approximate actual experience or that
expectations derived from them will be realized. When used in our
25
documents or oral presentations, the words
“anticipate,” “believe,”
“estimate,” “objective,”
“projection,” “forecast,” “goal,”
or similar words are intended to identify forward-looking
statements.
| Item 1B. | Unresolved Staff Comments. |
None.
| Item 2. | Properties. |
Our corporate headquarters are located in Jacksonville, Florida,
in an owned facility. Fidelity National Title Group, Inc.,
a majority owned subsidiary of FNF, occupies and pays us rent
for approximately 121,000 square feet in this facility. We
lease office space as follows:
| Number of | ||||
| State | Locations(1) | |||
|
California
|
51 | |||
|
Texas
|
24 | |||
|
Florida
|
22 | |||
|
New York, Illinois
|
11 | |||
|
Ohio
|
10 | |||
|
Georgia
|
7 | |||
|
New Jersey, Maryland, and Alabama
|
6 | |||
|
Other
|
72 | |||
| (1) | Represents the number of locations in each state or country listed. |
We also lease approximately 47 locations outside the United
States. We believe our properties are adequate for our business
as presently conducted.
| Item 3. | Legal Proceedings. |
In the ordinary course of business, we are involved in various
pending and threatened litigation matters related to our
operations, some of which include claims for punitive or
exemplary damages. We believe that no actions, other than those
listed below, depart from customary litigation incidental to our
business. As background to the disclosure below, please note the
following:
| • | These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including but not limited to the underlying facts of each matter, novel legal issues, variations between jurisdictions in which matters are being litigated, differences in applicable laws and judicial interpretations, the length of time before many of these matters might be resolved by settlement or through litigation and, in some cases, the timing of their resolutions relative to other similar cases brought against other companies and the current challenging legal environment faced by large corporations. | |
| • | In these matters, plaintiffs seek a variety of remedies including equitable relief in the form of injunctive and other remedies and monetary relief in the form of compensatory damages. In most cases, the monetary damages sought include punitive or treble damages. Often more specific information beyond the type of relief sought is not available because plaintiffs have not requested more specific relief in their court pleadings. In general, the dollar amount of damages sought is not specified. In those cases where plaintiffs have made a specific statement with regard to monetary damages, they often specify damages just below a jurisdictional limit regardless of the facts of the case. This represents the maximum they can seek without risking removal from state court to federal court. In our experience, monetary demands in plaintiffs’ court pleadings bear little relation to the ultimate loss, if any, we may experience. |
26
| • | We review these matters on an on-going basis and follow the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies” when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, we base our decision on our assessment of the ultimate outcome following all appeals. | |
| • | In the opinion of our management, while some of these matters may be material to our operating results for any particular period if an unfavorable outcome results, none will have a material adverse effect on our overall financial condition. |
Former FIS, together with certain of its employees and Fidelity
National Financial, Inc. (“FNF”), were named on
March 6, 2006 as defendants in a civil lawsuit brought by
Grace & Digital Information Technology Co., Ltd.
(“Grace”), a Chinese company that formerly acted as a
sales agent for Alltel Information Services (“AI”),
the predecessor to Fidelity Information Services, in China.
Grace originally filed a lawsuit in December 2004 in state court
in Monterey County, California, alleging that FIS breached the
sales agency agreement between Grace and AI by failing to pay
Grace commissions on certain contracts in 2001 and 2003.
However, the 2001 contracts were never completed and the 2003
contracts, as to which Grace provided no assistance were for a
different project and were executed one and one-half years after
FIS terminated the sales agency agreement with Grace. In
addition to its breach of contract claim, Grace also alleged
that FNF violated the Foreign Corrupt Practices Act
(FCPA) in its dealings with a bank customer in China. FNF
denied Grace’s allegations in this California lawsuit.
In December 2005, the Monterey County court dismissed the
lawsuit on the grounds of inconvenient forum. On March 6,
2006, Grace filed a new lawsuit in the United States District
Court for the Middle District of Florida arising from the same
transaction, and added an additional allegation to its complaint
that FNF violated the Racketeer Influenced and Corrupt
Organizations Act (RICO) in its dealings with the same bank
customer. FNF and its subsidiaries intend to defend this case
vigorously. On March 7, 2006, FNF filed its motion to
dismiss this lawsuit and denied Grace’s underlying
allegations.
FNF and its counsel have investigated these allegations and,
based on the results of the investigations, FNF does not believe
that there have been any violations of the FCPA or RICO, or that
the ultimate disposition of these allegations or the lawsuit
will have a material adverse impact on FNF’s or any of its
subsidiaries’ financial position, results of operations or
cash flows. FNF is fully cooperating with the Securities and
Exchange Commission and the U.S. Department of Justice in
connection with their inquiry into these allegations.
On October 22, 2004, a complaint for patent infringement
was filed in the matter of USA Payments, Inc. and Global Cash
Access, Inc. v. U.S. Bancorp dba U.S. Bank,
et al., Case No. CV-S-04-1470-JCM PAL,
U.S. District Court, District of Nevada. The complaint
named Certegy Inc. and three of its subsidiaries, Certegy Check
Services, Inc., Game Financial Corporation and GameCash, Inc. as
defendants. The plaintiffs were seeking injunctive relief, an
unspecified amount of damages (but no less than an unspecified
reasonable royalty), a trebling of damages, together with
pre-judgment interest, and attorneys’ fees. The parties
have reached an oral understanding on the material terms of a
settlement, which would not result in any payment by the
Company. Negotiation of a definitive agreement is in process.
On July 15, 2004, Sourceprose Corporation (“SP”)
filed a complaint in the U.S. District Court, Eastern
District of Texas, Marshall Division, against FNF and four of
our subsidiaries, Fidelity National Information Solutions, Inc.,
Fidelity Information Services, Inc., FNIS Flood Services, L.P.
(d/b/a LSI Flood Services) and Geotrac, Inc. (collectively, the
“Fidelity Defendants”). SP alleges that it is the
owner assignee of certain patents covering systems and methods
for performing manually assisted flood zone determinations,
which have been infringed by the Fidelity Defendants’ use
of certain practices within the scope of such patents, including
the performance of manually assisted flood zone determinations.
SP seeks a declaration that the patents are valid and
enforceable, a declaration that the patents were and are
infringed by the Fidelity Defendants, preliminary and permanent
injunctions against the alleged infringement and actual and
treble damages, interest, costs and attorneys’ fees. The
Fidelity Defendants have filed summary judgment motions
27
that SP opposed, but the court has not yet ruled on these
motions. The lawsuit is set for trial on April 3, 2006. The
Fidelity Defendants intend to vigorously defend this action.
| Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
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 of Certegy
for each quarter of 2005 and 2004.
| High | Low | Dividend | ||||||||||
|
2005
|
||||||||||||
|
First Quarter
|
$ | 37.00 | $ | 33.73 | $ | 0.05 | ||||||
|
Second Quarter
|
$ | 39.02 | $ | 32.35 | $ | 0.05 | ||||||
|
Third Quarter
|
$ | 41.01 | $ | 33.05 | $ | 0.05 | ||||||
|
Fourth Quarter
|
$ | 41.29 | $ | 36.42 | $ | 0.05 | ||||||
|
2004
|
||||||||||||
|
First Quarter
|
$ | 35.04 | $ | 31.32 | $ | 0.05 | ||||||
|
Second Quarter
|
$ | 39.61 | $ | 34.10 | $ | 0.05 | ||||||
|
Third Quarter
|
$ | 39.73 | $ | 36.20 | $ | 0.05 | ||||||
|
Fourth Quarter
|
$ | 38.35 | $ | 32.70 | $ | 0.05 | ||||||
As part of the merger transaction, Certegy declared a
$3.75 per share special cash dividend that was paid to its
pre-merger shareholders at the consummation of the merger. As of
January 31, 2006, there were approximately
6,327 shareholders of record of our common stock.
We began declaring cash dividends to common shareholders in the
third quarter of 2003. 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, including Former FIS’s credit facility, to
which we became a party in connection with the merger. A regular
quarterly dividend of $.05 per common share is payable
March 30, 2006 to shareholders on record as of the close of
business on March 20, 2006.
Item 12 of Part III contains information concerning
securities authorized for issuance under our equity compensation
plans.
During the three months ended December 31, 2005, none of
the registrant’s equity securities were purchased by the
registrant or any affiliated purchaser.
| Item 6. | Selected Financial Data. |
The selected financial data set forth below constitutes
historical financial data of Certegy 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.
28
On February 1, 2006, Fidelity National Information
Services, Inc., a Delaware corporation, or Former FIS, was
merged into a wholly owned subsidiary of Certegy in a tax-free
merger. For accounting and financial reporting purposes, the
merger will be treated as a reverse acquisition of Certegy by
Former 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 merger contained in future reports covering
post-merger periods will be historical financial information of
Former FIS.
In September 2004, Certegy’s Board of Directors approved a
plan to sell the merchant acquiring business, at which time, the
held for sale criteria in Statement of Financial Accounting
Standards (“SFAS”) No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets”
(“SFAS 144”), were met. Therefore, Certegy’s
financial statements reflect the merchant acquiring business as
a discontinued operation with the related assets and liabilities
classified under the captions “Assets held for sale”
and “Liabilities related to assets held for sale” in
the consolidated balance sheets. We plan to continue to operate
the institution processing business, which we believe is
complementary to our card issuing business. The merchant
acquiring operations were historically included in
Certegy’s Card Services segment. The sale of the merchant
acquiring business was completed during 2005. See Note 5 to
the consolidated financial statements for further information.
| Year Ended December 31, | ||||||||||||||||||||
| 2005(1) | 2004 | 2003(2) | 2002(2) | 2001 | ||||||||||||||||
| (Dollars in thousands, except for per share data) | ||||||||||||||||||||
|
Results of Operations:
|
||||||||||||||||||||
|
Revenues(3)
|
$ | 1,117,141 | $ | 1,039,506 | $ | 921,734 | $ | 906,791 | $ | 838,330 | ||||||||||
|
Operating expenses(3)(4)(5)(9)
|
932,186 | 871,010 | 783,550 | 773,845 | 698,186 | |||||||||||||||
|
Operating income
|
184,955 | 168,496 | 138,184 | 132,946 | 140,144 | |||||||||||||||
|
Other income, net
|
2,435 | 1,207 | 2,339 | 1,119 | 78 | |||||||||||||||
|
Interest expense(6)
|
(12,832 | ) | (12,914 | ) | (7,950 | ) | (7,120 | ) | (7,200 | ) | ||||||||||
|
Income from continuing operations before income taxes, equity in
earnings of unconsolidated entity, minority interests, and
cumulative effect of a change in accounting principle
|
174,558 | 156,789 | 132,573 | 126,945 | 133,022 | |||||||||||||||
|
Provision for income taxes
|
(68,927 | ) | (59,111 | ) | (50,429 | ) | (50,231 | ) | (52,791 | ) | ||||||||||
|
Equity in earnings of unconsolidated entity
|
(117 | ) | — | — | — | — | ||||||||||||||
|
Minority interests in earnings, net of tax
|
— | — | — | — | (945 | ) | ||||||||||||||
|
Income from continuing operations before cumulative effect of a
change in accounting principle
|
105,514 | 97,678 | 82,144 | 76,714 | 79,286 | |||||||||||||||
|
Income from discontinued operations, net of tax
|
24,805 | 5,934 | 3,897 | 2,926 | 3,879 | |||||||||||||||
|
Cumulative effect of a change in accounting principle, net of
tax(7)
|
— | — | (1,335 | ) | — | — | ||||||||||||||
|
Net income
|
$ | 130,319 | $ | 103,612 | $ | 84,706 | $ | 79,640 | $ | 83,165 | ||||||||||
29
| Year Ended December 31, | |||||||||||||||||||||
| 2005(1) | 2004 | 2003(2) | 2002(2) | 2001 | |||||||||||||||||
| (Dollars in thousands, except for per share data) | |||||||||||||||||||||
|
Basic earnings per share:
|
|||||||||||||||||||||
|
Income from continuing operations before cumulative effect of an
accounting change
|
$ | 1.70 | $ | 1.55 | $ | 1.26 | $ | 1.12 | $ | 1.16 | |||||||||||
|
Income from discontinued operations
|
0.40 | 0.09 | 0.06 | 0.04 | 0.06 | ||||||||||||||||
|
Cumulative effect of an accounting change
|
— | — | (0.02 | ) | — | — | |||||||||||||||
|
Net income
|
$ | 2.10 | $ | 1.65 | $ | 1.30 | $ | 1.17 | $ | 1.22 | |||||||||||
|
Diluted earnings per share:
|
|||||||||||||||||||||
|
Income from continuing operations before cumulative effect of an
accounting change
|
$ | 1.66 | $ | 1.53 | $ | 1.25 | $ | 1.11 | $ | 1.15 | |||||||||||
|
Income from discontinued operations
|
0.39 | 0.09 | 0.06 | 0.04 | 0.06 | ||||||||||||||||
|
Cumulative effect of an accounting change
|
— | — | (0.02 | ) | — | — | |||||||||||||||
|
Net income
|
$ | 2.06 | $ | 1.62 | $ | 1.29 | $ | 1.15 | $ | 1.20 | |||||||||||
|
Cash dividends declared per common share
|
$ | 0.20 | $ | 0.20 | $ | 0.10 | $ | — | $ | — | |||||||||||
|
Other Operating Data:
|
|||||||||||||||||||||
|
Depreciation & amortization
|
$ | 51,858 | $ | 47,449 | $ | 42,030 | $ | 39,050 | $ | 45,677 | |||||||||||
|
Capital expenditures
|
$ | 63,566 | $ | 40,908 | $ | 43,747 | $ | 48,961 | $ | 49,349 | |||||||||||
|
Ratio of earnings to fixed charges(8)
|
10.46x | 9.94x | 11.52x | 11.88x | 11.77x | ||||||||||||||||
|
Balance Sheet Data:
|
|||||||||||||||||||||
|
Total assets
|
$ | 972,435 | $ | 922,209 | $ | 785,356 | $ | 702,141 | $ | 736,203 | |||||||||||
|
Long-term debt
|
$ | 227,881 | $ | 273,968 | $ | 222,399 | $ | 214,200 | $ | 230,000 | |||||||||||
|
Total shareholders’ equity
|
$ | 459,270 | $ | 307,287 | $ | 266,751 | $ | 202,392 | $ | 212,935 | |||||||||||
| (1) | Certegy’s financial results for the year ended December 31, 2005 include merger and acquisition costs of $11.2 million. These costs include investment banking, legal, accounting, and other direct costs of $8.3 million related to the merger with Former FIS and $2.9 million related to the possible formation and acquisition of a majority ownership in a card and merchant processing joint venture in Brazil. See Notes 3 and 13 to the consolidated financial statements for further information. |
| (2) | Certegy’s financial results for the years ended December 31, 2003 and 2002 include other charges of $12.2 million ($7.7 million after-tax) in each year. The other charges in 2003 include $9.6 million of early termination costs associated with a U.S. data processing contract, $2.7 million of charges related to the downsizing of the Brazilian card operation, and $(0.1) million of market value recoveries on collateral assignment in life insurance policies, net of severance charges. The other charges in 2002 include an impairment write-off of $4.2 million for the remaining intangible asset value assigned to an acquired customer contract in the Brazilian card operation, due to the loss of the customer; a $4.0 million charge for the settlement of a class action lawsuit, net of insurance proceeds; and $4.0 million of severance charges and market value losses on collateral assignment in life insurance policies. See Note 3 to the consolidated financial statements for further information. |
| (3) | On January 1, 2002, Certegy adopted Emerging Issues Task Force Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket’ Expenses Incurred,” which required reimbursements received for out-of-pocket expenses to be reclassified from operating expenses to revenues. Amounts for years prior to 2002 were reclassified to conform to this presentation. |
30
| (4) | General corporate expense was $35.3 million, $26.6 million, $22.7 million, $25.3 million, and $14.0 million, respectively, for the years ended December 31, 2005, 2004, 2003, 2002, and 2001. |
| (5) | Certegy adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002, which ceased the amortization of goodwill. Adoption of the non-amortization provisions of SFAS No. 142 as of January 1, 2001 would have increased net income for the year ended December 31, 2001 by $7.3 million, which is net of $1.3 million of income taxes. |
| (6) | In conjunction with Certegy’s spin-off from Equifax in July 2001, it made a cash payment to Equifax of $275 million to reflect its share of Equifax’s pre-distribution debt used to establish Certegy’s initial capitalization. This was funded through $400 million of unsecured revolving credit facilities obtained in July 2001. Interest expense for periods prior to the spin-off principally consist of interest paid on a line of credit held by the Brazilian card business and interest charged by Equifax on overnight funds borrowed on Certegy’s behalf. |
| (7) | The cumulative effect of accounting change expense of $1.3 million in 2003 reflects the adoption of certain provisions of Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51,” on December 31, 2003 related to the synthetic lease on the St. Petersburg, Florida operations facility. See Note 2 to the consolidated financial statements for further information. |
| (8) | For purposes of calculating the ratio of earnings to fixed charges, “earnings” consist of income from continuing operations before income taxes, cumulative effect of a change in accounting principle, and fixed charges, but including equity in earnings of unconsolidated entity and minority interests in earnings. “Fixed charges” consist of interest on indebtedness, amortization of deferred financing costs, and an estimated amount of rental expense that is deemed to be representative of the interest factor. |
| (9) | Effective January 1, 2005, Certegy adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment,” using the modified retrospective method, restating all prior periods, and as a result recorded stock option compensation expense of $5.8 million, $11.2 million, $10.0 million, $14.2 million, and $5.1 million for the years ended December 31, 2005, 2004, 2003, 2002, and 2001, respectively. |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Our current business operations and organizational structure
result from the business combination on February 1, 2006,
of Certegy Inc., or Certegy, and Fidelity National Information
Services, Inc., a Delaware corporation, or Former FIS, pursuant
to which Former FIS was merged into a wholly-owned subsidiary of
Certegy.
Unless stated otherwise or the context otherwise requires, all
references in the following discussion and analysis to
“us,” “we,” “our” or the
“Company” are to Fidelity National Information
Services, Inc., a Georgia corporation formerly known as Certegy
Inc., and its subsidiaries; all references to
“Certegy” are to Certegy Inc., and its subsidiaries,
prior to the merger; all references to “Former FIS”
are to Fidelity National Information Services, Inc., a Delaware
corporation, and its subsidiaries, prior to the merger; all
references to “FNF” are to Fidelity National
Financial, Inc., a Delaware corporation that owns a majority of
our outstanding shares; and all references to the
“merger” are to the merger on February 1, 2006,
of Former FIS into a wholly-owned subsidiary of Certegy.
The following discussion and analysis focuses on the financial
condition and results of operations of Certegy for the
historical periods presented (which are prior to the merger) and
should be read in conjunction with Item 6: Selected
Financial Data and Item 8: Financial Statements and
Supplementary Data included elsewhere in this report. Because
the stockholders of Former FIS now hold a majority of our
outstanding shares of common stock, for accounting and financial
reporting purposes the merger will be treated as a reverse
acquisition of Certegy by Former FIS under the purchase method
of accounting pursuant to accounting principles generally
accepted in the U.S. (“GAAP”). Accordingly, our
historical financial information for periods prior to the merger
presented in future reports covering post-merger periods will be
the historical financial information of Former FIS rather than
Certegy.
31
Throughout this management’s discussion and analysis, we
refer to certain financial amounts both on a before-and
after-tax basis. Management believes it is helpful to include
the after-tax effect of certain financial charges to allow
investors and management to evaluate their impact on net income
and diluted earnings per share.
Overview
During fiscal year 2005, Certegy’s business consisted of
providing credit card, debit card, and other transaction
processing and check risk management services to financial
institutions and merchants in the U.S. and internationally
through two segments, Card Services and Check Services. Card
Services provided card issuer services in the U.S., the U.K.,
Brazil, Chile, Australia, New Zealand, Ireland, Thailand, the
Caribbean, and Canada. Additionally, Card Services provided
merchant processing and
e-banking services in
the U.S. and card issuer software, support, and consulting
services in numerous countries. Check Services provided check
risk management services and related processing services in the
U.S., the U.K., Canada, France, Ireland, Australia, and New
Zealand.
Shortly after consummating the merger, we implemented our new
organizational structure, and we will report under a new
operating segment structure beginning with the reporting of
first quarter 2006 results. Effective as of February 1,
2006, the reportable segments of the combined company are
Transaction Processing Services, or TPS, and Lender Processing
Services, or LPS. This structure reflects how our businesses are
now being managed consistent with the new operating structure
that we adopted following the merger. Certegy’s former
reportable segments of Card and Check Services are now included
in the TPS segment.
Card Services. The Card Services business provides a full
range of card issuer services that enable banks, credit unions,
retailers, 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.
Additionally, we process American Express cards in Australia,
the Caribbean, and Brazil. Our debit card services support both
off-line debit cards, which are processed similarly to credit
cards, and on-line debit cards, through which cardholders obtain
immediate access to funds in their bank accounts through ATMs or
merchant point-of-sale
terminals. In the U.S., our card processing business is
concentrated in the independent community bank and credit union
segments of the market. We have long-term contractual alliances
with two trade associations representing independent community
banks and credit unions in the U.S., the Independent Community
Bankers of America (“the ICBA”) and Card Services for
Credit Unions (“CSCU”), which expire in 2011 and 2009,
respectively. Internationally, we service both large and small
financial institutions and provide our card issuer services
through our operations in the U.S., Brazil, Chile, the U.K.,
Australia, and the Caribbean. Our merchant processing services
enable retailers and other businesses to accept credit, debit,
and other electronic payment cards from purchasers of their
goods and services, while our
e-banking services
enable financial institutions to offer Internet banking and
related products to consumers and businesses. Card issuing
software, support, and consulting services allow customers to
manage their credit card programs.
Card transactions continue to increase as a percentage of total
point-of-sale payments,
which fuels continuing demand for card-related products. We
continue to launch new products aimed at serving this demand. In
recent years, we have introduced a variety of stored-value card
types, Internet banking, and electronic bill presentment/payment
products, 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. Additionally,
in 2004, Certegy acquired Crittson Financial Services LLC
(“Crittson”), a full-service provider of card and
merchant processing services.
We continue to pursue growth in the international markets. In
2003, Certegy entered into an eight-year agreement with a
Thailand financial institution to process its VISA and
MasterCard credit cards and unsecured personal loans. In 2004,
Certegy acquired Caribbean CariCard Services, Inc.
(“CariCard”), a third party transaction processor in
the Caribbean. In 2005, Certegy announced that it finalized a
multi-year transaction processing agreement with a leading
European retail specialist service group to provide card and
loan transaction processing services to its subsidiaries in the
U.K., Spain, Portugal, Belgium and Holland.
32
Recently, we signed a seven-year extension of our card
processing agreement with a multi-national Australian-based
financial institution.
We believe that the increased use of credit, debit, and other
electronic payment cards around the globe will continue to
present the card processing industry with significant growth
opportunities. We intend to continue to expand our card
processing business in the independent community bank and credit
union segments of the market. Moreover, our future growth and
profitability will significantly depend upon our ability to
penetrate additional international markets, including emerging
markets for electronic transaction processing. Our certification
as an American Express processor also provides further growth
opportunities for us in the global card market.
Check Services. Check Services provides check risk
management and related processing products and services to
businesses accepting or cashing checks at the point-of-sale.
These services utilize our proprietary check authorization
systems and risk assessment decision platforms. A significant
portion of our revenues from check risk management services is
generated from several large national merchants, including the
nation’s leading retail chains. Other customers of our
Check Services segment include hotels, automotive dealers,
telecommunications companies, supermarkets, casinos, mail order
houses, and other small regional businesses. Our services allow
our clients to run their customers’ personal and business
checks through an automated decision-making process that
assesses the likelihood that a check will clear. We provide our
check risk management products and services internationally in
Canada, the U.K., Ireland, France, Australia, and New Zealand.
Our principal product in all those countries is check guarantee
services, although mass retailers are beginning to utilize our
check verification, collection services, and deferred debit
processing services.
In recent years, we have introduced several new products for
existing and new markets, such as third-party check collections;
electronic check risk management solutions for point-of-sale,
call center, and electronic commerce applications; and PayCheck
Accepttm,
which enables supermarkets and gaming establishments to reduce
the risk of check losses and fraud in connection with their
payroll check cashing services. Additionally, the acquisition of
Game Financial Corporation (“Game Financial”) on
March 1, 2004, helps position us as a leading provider of
comprehensive cash access services in the gaming industry and
broadens our check risk management product line and customer
base. On February 1, 2006, we acquired certain assets of
FastFunds Financial Corporation (“FastFunds”) and its
wholly-owned subsidiary Chex Services, Inc. (“Chex
Services”). FastFunds, through Chex Services, provides
comprehensive cash access services including check cashing,
automated teller machine access, and credit and debit card cash
advance services to approximately 50 casinos and gaming
establishments in the U.S., Canada, and the Caribbean. This
acquisition further strengthens our position in the gaming
industry and provides new growth opportunities in the Native
American and Caribbean markets.
We believe check writing has been declining as a total
percentage of point-of-sale payments due, in part, to the
growing use of other payment means, such as credit, debit, and
other electronic payment cards. At the same time, however,
demand for our services is strong due to factors that include
increasing sophistication of check fraud and higher
concentration of bad checks written at the point-of-sale due to
a trend of higher credit quality consumers writing fewer checks
and paying more with cards. These factors are contributing to a
growing reliance of retailers and other businesses on outside
vendors, such as Certegy, to provide check risk management
services.
Annually, we experience a decline in base volumes related to
factors that include customer attrition, which in recent years
has been largely isolated to our regional small customer base.
Our base volumes are also impacted by the migration of consumers
to other payment means and the retail sales activity of our
customers, which can be affected by general economic conditions
and other factors that may relate to certain retailers. We
believe that many consumers who rely on checks as a means of
retail payment may be more heavily impacted by certain economic
factors than the consuming population as a whole. We are unable
to accurately quantify the specific impact of each of these
individual factors on the annual decline in base volumes.
Typically, the addition of new customers offsets the decline in
base volumes. During 2005, total check volumes increased by
approximately $13 billion, or 31.5 percent.
Verification volumes grew by $11.8 billion, which is more
than double the prior year’s volumes, while guarantee
volumes grew $0.9 billion, or 2.8 percent, as the
33
recent mix of new customers has been more focused in our
verification products. Over time, we expect the trend of
customers using verification products to migrate over to
guarantee products to continue.
Key Performance Indicators. Management uses various key
indicators to manage its business, including revenue and
operating income growth, operating margin, earnings per share
growth, number of cards and accounts on file, and volumes
processed.
Comparability of Financial Results. Certegy’s
financial results for 2003 were adversely impacted by the loss
of a large customer in its Brazilian card operation, which
discontinued using its card processing services at the beginning
of March 2003. In the Check Services segment, Certegy’s
financial results in 2003 were adversely impacted by slow retail
volumes due to general economic conditions, and, in addition,
incremental start-up costs relating to the check cashing
services business. Additionally, certain of the business
developments described in the next section also affected the
comparability of Certegy’s financial results for the years
ended December 31, 2005, 2004, and 2003.
Business Developments
Merger and Acquisition Costs. Merger and acquisition
(“M&A”) costs consist of investment banking,
legal, accounting, and other direct costs related to the merger
with Former FIS and the possible formation and acquisition of a
majority ownership in a card processing joint venture in Brazil.
During 2005, Certegy was selected to exclusively negotiate with
two of the largest card issuing banks in Brazil to establish and
acquire a majority ownership interest in a new joint venture
company that will provide a wide range of card processing
services. Currently, it is anticipated that the card issuing
banks will contribute long-term exclusive processing contracts
to the joint venture, and we will contribute consideration of
cash and other capital, which may include part or all of our
existing Brazilian operations. We cannot, at this time, predict
the timing or ultimate outcome of this possible joint venture.
Certegy incurred $11.2 million of M&A costs related to
these transactions during 2005. Merger costs of
$8.3 million are included in Corporate expense while
$2.9 million in joint venture costs are included in Card
Services.
Adoption of SFAS 123(R). Effective January 1, 2005,
Certegy adopted the fair value recognition provisions of
Statement of Financial Accounting Standards (“SFAS”)
No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123(R)) using the modified retrospective
transition method. Under that transition method, compensation
cost recognized includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of
January 1, 2005, based on the grant-date fair value
estimated in accordance with the original provisions of SFAS
No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”), and
(b) compensation cost for all share-based payments granted
subsequent to January 1, 2005, based on the grant-date fair
value estimated in accordance with the provisions of
SFAS 123(R). Results for all prior periods presented have
been restated based on the amounts previously recognized under
SFAS 123 for purposes of pro forma disclosures. Refer to Notes 2
and 8 in the consolidated financial statements for further
information.
Compensation cost recognized in any period is impacted by the
number of stock options granted and the vesting period (which
generally varies between three and four years), as well as the
underlying assumptions used in estimating the fair value on the
date of grant.
Discontinued Operations. Certegy’s merchant
processing operations previously consisted of two businesses:
(1) merchant acquiring, which was sold in 2005, where
Certegy was a direct party to contracts with merchants regarding
the provision of card processing services for the merchant, and
Certegy was subject to the associated risk that a cardholder
billing dispute would be resolved in favor of the cardholder
(referred to as a cardholder “chargeback”), and
(2) institution processing, which provides authorization,
settlement, and customer service to community banks and others
that contract directly with merchant customers. Certegy viewed
merchant acquiring as a non-strategic business and over the past
few years, had operated this business conservatively to reduce
exposure to merchant risk, which in the short-term improved
overall profitability but limited growth. FIS plans to continue
to operate the institution processing business, which we believe
is complementary to our card issuing business.
34
During the second quarter of 2005, Certegy completed the sale of
a majority of its merchant acquiring business for
$57.0 million and recognized an after-tax gain of
$27.3 million ($0.43 per diluted share) on the sale. Also
during the second quarter of 2005, Certegy recorded a
$6.8 million after-tax write-down ($0.11 per diluted share)
of its remaining merchant acquiring portfolio to its estimated
net realizable value. In the third quarter of 2005, Certegy
completed the sale of its remaining discontinued merchant
acquiring portfolio for $3.0 million of cash, which
approximated net book value at the date of the sale.
Certegy’s financial statements reflect the merchant
acquiring business as a discontinued operation with the related
assets and liabilities classified under the captions
“Assets held for sale” and “Liabilities related
to assets held for sale” in the consolidated balance sheet
at December 31, 2004. The results of operations are treated
as income from discontinued operations, net of tax, and
separately stated in the consolidated statements of income,
below income from continuing operations. The merchant acquiring
operations were historically included in the Card Services
segment. Refer to Note 5 in the consolidated financial
statements for further information.
Acquisitions. On March 1, 2004, we completed the
purchases of Game Financial, a provider of debit and credit card
cash advances, ATM access, and check cashing services in gaming
institutions, and Crittson, a full service provider of card and
merchant processing services. The acquisition of Game Financial
helps position FIS as a leading provider of comprehensive cash
access services in the gaming industry and broadens our check
risk management product line and customer base, while the
acquisition of Crittson further strengthens our U.S. market
share as the leading third party credit card processor for
community banks and credit unions. On August 6, 2004,
Certegy completed the acquisition of CariCard, a third party
transaction processor in the Caribbean. CariCard provides a wide
range of products and services to financial institutions,
retailers, and the petroleum industry in 16 countries throughout
the Caribbean.
The above acquisitions were accounted for as purchases and their
results of operations have been included in Certegy’s
consolidated statements of income from the dates of acquisition.
The pro forma effects of these acquisitions on Certegy’s
consolidated financial statements were not material. Refer to
Note 4 in the consolidated financial statements for further
information.
On February 1, 2006, we acquired certain assets of
FastFunds and its wholly-owned subsidiary Chex Services.
FastFunds, through Chex Services, provides comprehensive cash
access services including check cashing, automated teller
machine access, and credit and debit card cash advance services
to approximately 50 casinos and gaming establishments in the
U.S., Canada, and the Caribbean.
$200 Million Note Offering. In September 2003, Certegy
completed an offering of $200 million aggregate principal
amount of 4.75 percent senior unsecured notes, which mature
in September 2008. The proceeds from this offering were used to
pay off the outstanding indebtedness under Certegy’s
$300 million revolving credit facility and for general
corporate purposes. Refer to Note 6 in the consolidated
financial statements for further information.
Adoption of FIN 46. On December 31, 2003, Certegy
adopted certain provisions of Financial Accounting Standards
Board Interpretation No. 46, “Consolidation of
Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51” (“FIN 46”) as
required for the synthetic lease on our St. Petersburg, Florida
operations facility. In conjunction with the adoption of FIN 46,
Certegy recognized a cumulative effect of accounting change
expense of $1.3 million after-tax, or $0.02 per diluted
share. Additionally, it recorded property and equipment of
$21.0 million, which is net of accumulated depreciation,
deferred income tax assets of $0.8 million, long-term notes
payable of $22.4 million, and a minority interest liability
of $0.8 million, which is included in other long-term
liabilities in the consolidated balance sheet. Refer to Notes 2
and 6 in the consolidated financial statements for further
information.
Share Repurchase Authority. In May 2004, the Certegy
Board of Directors approved a $100 million share repurchase
program, which replaced the prior authority. As of
December 31, 2005, there was approximately
$43.3 million remaining authority for share repurchases.
Other Charges. During 2003, Certegy recorded other
charges of $12.2 million ($7.7 million after-tax).
These charges include $9.6 million of early termination
costs associated with a U.S. data processing contract,
35
$2.7 million of charges related to the downsizing of the
Brazilian card operation, and $(0.1) million of market value
recoveries on the collateral assignment in life insurance
policies, net of severance charges. Refer to Note 3 in the
consolidated financial statements for further information.
Components of Income Statement
The Card Services business generates revenues from charges based
on transaction volumes, accounts or cards processed, and fees
for various services and products, while Check Services
generates revenues from charges based on transaction volumes,
face value of checks guaranteed, and fees for various check
services and products. Revenues depend upon a number of factors,
such as demand for and price of our services, the technological
competitiveness of our product line, our reputation for
providing timely and reliable service, competition within our
industry, and general economic conditions. Costs of services
consist primarily of the costs of transaction processing
systems; personnel costs to develop and maintain applications,
operate computer networks, and provide customer support; losses
from check guarantee services; interchange (processing fees paid
to credit card associations) and other fees related to merchant
processing; depreciation and occupancy costs associated with the
facilities where these functions are performed; and reimbursed
out-of-pocket expenses. Selling, general, and administrative
expenses consist primarily of salaries, wages, and related
expenses paid to sales, non-revenue customer support functions,
and administrative employees and management.
As mentioned previously, Certegy’s merchant processing
operations previously consisted of two businesses, merchant
acquiring and institution processing. In the merchant acquiring
business, which has now been sold, where Certegy was a direct
party to contracts with merchants, revenues collected for
services were based primarily on a discount rate, which
considered the cost of interchange fees. In the institution
processing business, where our relationship is with the
financial institution that contracts directly with the merchant,
we collect the interchange fees in addition to transaction fees.
In both instances, we are responsible for collecting the
interchange fees after settling with the credit card
associations and thus, interchange fees are recorded as a
component of revenues and costs of services in the consolidated
statements of income. Interchange fees reflected in the
consolidated statements of income for 2005, 2004, and 2003 from
continuing operations (institution processing) were
$87.1 million, $69.0 million, and $62.8 million,
respectively.
Highlights of Certegy’s 2005 Consolidated Financial
Results
Highlights of the 2005 consolidated financial results as
compared to 2004 are as follows:
| • | Revenues grew 7.5 percent to $1.1 billion. | |
| • | Operating income of $185.0 million, which includes $11.2 million of M&A costs, increased 9.8 percent. | |
| • | Interest expense totaled $12.8 million compared to $12.9 million in 2004. | |
| • | Income from continuing operations, which includes $11.2 million of M&A costs, increased 8.0 percent to $105.5 million. | |
| • | Diluted earnings per share from continuing operations, which includes $0.18 of M&A costs, increased 8.5 percent to $1.66 per share. |
In 2005, capital expenditures totaled $63.6 million.
36
Consolidated Results of Operations
The following table summarizes Certegy’s consolidated
financial results for the years ended December 31, 2005,
2004, and 2003:
| 2005(1) | 2004 | 2003(2) | |||||||||||
| (In millions, except per share | |||||||||||||
| amounts) | |||||||||||||
|
Revenues
|
$ | 1,117.1 | $ | 1,039.5 | $ | 921.7 | |||||||
|
Operating expenses
|
$ | 932.2 | $ | 871.0 | $ | 783.5 | |||||||
|
Operating income
|
$ | 185.0 | $ | 168.5 | $ | 138.2 | |||||||
|
Other income, net
|
$ | 2.4 | $ | 1.2 | $ | 2.3 | |||||||
|
Interest expense
|
$ | (12.8 | ) | $ | (12.9 | ) | $ | (8.0 | ) | ||||
|
Income from continuing operations before cumulative effect of
accounting change
|
$ | 105.5 | $ | 97.7 | $ | 82.1 | |||||||
|
Income from discontinued operations, net of tax(3)
|
$ | 24.8 | $ | 5.9 | $ | 3.9 | |||||||
|
Cumulative effect of accounting change, net of tax(4)
|
$ | — | $ | — | $ | (1.3 | ) | ||||||
|
Net income
|
$ | 130.3 | $ | 103.6 | $ | 84.7 | |||||||
|
Diluted EPS:
|
|||||||||||||
|
Income from continuing operations before cumulative effect of
accounting change
|
$ | 1.66 | $ | 1.53 | $ | 1.25 | |||||||
|
Income from discontinued operations
|
0.39 | 0.09 | 0.06 | ||||||||||
|
Cumulative effect of accounting change
|
— | — | (0.02 | ) | |||||||||
|
Net income
|
$ | 2.06 | $ | 1.62 | $ | 1.29 | |||||||
| (1) | The consolidated results for the year ended December 31, 2005 include $11.2 million, or $0.18 per diluted share, of M&A costs. |
| (2) | The consolidated results for the year ended December 31, 2003 include $12.2 million, or $0.12 per diluted share, of other charges. |
| (3) | In 2005, Certegy sold its merchant acquiring business. The consolidated results reflect this business as a discontinued operation for periods prior to the sale. |
| (4) | The cumulative effect of accounting change expense of $1.3 million after-tax reflects the adoption of certain provisions of FIN 46 on December 31, 2003 as required for the synthetic lease on the St. Petersburg, Florida operations facility. |
| Consolidated Revenues |
| Year 2005 compared with Year 2004 |
Certegy’s consolidated revenues in 2005 of
$1.1 billion increased $77.6 million, or
7.5 percent, over 2004. Card Services revenues grew
$61.6 million, or 10.4 percent, while Check Services
experienced revenue growth of $16.0 million, or
3.6 percent.
Overall, revenue growth was driven by strong growth in the North
American and international card issuing and cash access
operations, as well as favorable currency rates. The
strengthening of certain foreign currencies against the U.S.
dollar increased total U.S. dollar revenues by $6.4 million
in 2005.
| Year 2004 compared with Year 2003 |
Certegy’s consolidated revenues in 2004 of
$1.0 billion increased $117.8 million, or
12.8 percent, over 2003. Card Services revenues grew
$39.6 million, or 7.2 percent, while Check Services
experienced revenue growth of $78.1 million, or
21.1 percent.
37
Overall, revenue growth was driven by acquisitions, strong
growth in the North American card issuing and global check
operations, and favorable currency rates, which more than offset
the $5.6 million decline in software revenue and the
annualization of the loss of a large customer in the Brazilian
card operation in March 2003. The strengthening of certain
foreign currencies against the U.S. dollar increased total U.S.
dollar revenues by $15.9 million in 2004.
| Consolidated Operating Expenses |
| Year 2005 compared with Year 2004 |
Certegy’s consolidated operating expenses in 2005 of
$932.2 million increased $61.2 million, or
7.0 percent, over 2004. Operating expenses for Card
Services increased $53.7 million, or 11.8 percent,
while Check Services operating expenses decreased
$1.2 million, or 0.3 percent. Corporate expenses of
$35.3 million increased $8.7 million above 2004.
Consolidated operating expenses in 2005 include
$11.2 million of M&A costs. The strengthening of
certain foreign currencies against the U.S. dollar increased
total U.S. dollar operating expenses by $8.5 million in
2005.
Costs of services in 2005 of $791.6 million increased
$50.3 million, or 6.8 percent, over 2004. Card
Services experienced a $51.7 million, or 12.6 percent,
increase in costs of services primarily driven by a
$18.1 million increase in card merchant processing
interchange fees (costs of services included $87.1 million and
$69.0 million of interchange fees in 2005 and 2004,
respectively) and an $11.3 million increase in reimbursable
expenses, as well as increases in direct costs of revenue growth
in our domestic and international operations, and currency
exchange. Costs of services in Check Services decreased
$1.4 million, or 0.4 percent, driven primarily by a
reduction in check guarantee net losses attributable to enhanced
fraud modeling and increased collection rates, which more than
offset increased costs attributable to revenue growth in the
cash access business.
Selling, general, and administrative (“SG&A”)
expenses in 2005 of $129.4 million decreased
$0.2 million, or 0.2 percent, below 2004. Card
Services SG&A expense decreased $0.9 million, or
2.0 percent, while SG&A costs in Check Services
increased $0.2 million, or 0.3 percent. Corporate
SG&A expense increased $0.5 million. Overall, lower
share-based compensation expense drove a reduction in SG&A
expenses, which was partially offset by higher costs in the
international operations, audit fees, and other employee related
expenses.
During 2005, Certegy incurred $11.2 million of investment
banking, legal, accounting and other direct costs related to the
merger with Former FIS and the possible formation and
acquisition of a majority ownership in a card processing joint
venture in Brazil, which is currently under exclusive
negotiation with two leading Brazilian banks. Merger costs of
$8.3 million are included in Corporate expense, while
$2.9 million in joint venture costs are included in Card
Services. M&A costs in 2005 consist of the following (in
thousands):
| Merger | Joint Venture | |||||||
|
Investment banking fees
|
$ | 3,864 | $ | 406 | ||||
|
Legal fees
|
2,627 | 1,025 | ||||||
|
Accounting fees
|
715 | 440 | ||||||
|
Consulting and other costs
|
1,033 | 1,052 | ||||||
| $ | 8,239 | $ | 2,923 | |||||
| Year 2004 compared with Year 2003 |
Certegy’s consolidated operating expenses in 2004 of
$871.0 million increased $87.5 million, or
11.2 percent, over 2003. Operating expenses for Card
Services increased $21.7 million, or 5.0 percent,
while Check Services increased $61.9 million, or
18.8 percent. Corporate expenses of $26.6 million
increased $3.9 million over 2003. The 2003 consolidated
operating expenses include $12.2 million of other charges.
The strengthening of certain foreign currencies against the U.S.
dollar increased total U.S. dollar operating expenses by
$14.0 million in 2004.
38
Costs of services in 2004 of $741.3 million increased
$85.7 million, or 13.1 percent, over 2003. Card
Services experienced a $30.4 million, or 8.0 percent,
increase in costs of services primarily driven by a
$6.2 million increase in card merchant processing
interchange fees (costs of services included $69.0 million
and $62.8 million of interchange fees in 2004 and 2003,
respectively), a $5.6 million increase in reimbursable
expenses, the Crittson and CariCard acquisitions, and
unfavorable currency trends. Costs of services in Check Services
increased $55.3 million, or 19.9 percent, driven by
the Game Financial acquisition, growth in our cash access
operations, as well as unfavorable currency trends.
Selling, general, and administrative (“SG&A”)
expenses in 2004 of $129.7 million increased
$14.0 million, or 12.1 percent, over 2003. Card
Services experienced a $2.8 million, or 6.7 percent,
increase in SG&A costs driven primarily by higher
international business development costs and the growth in North
American card issuing operations, which more than offset the
reduction in SG&A costs for the downsizing of the Brazilian
card operations in March 2003. SG&A costs in Check Services
increased $7.6 million, or 15.2 percent, primarily as
a result of the acquisition of Game Financial and the growth in
our cash access operations. Corporate SG&A expense increased
$3.5 million, or 15.4 percent, primarily due to higher
audit fees related to Sarbanes-Oxley Section 404 compliance
and higher employee benefit and relocation costs.
During 2003, Certegy recorded other charges of
$12.2 million ($7.7 million after-tax). These charges
include $9.6 million of early termination costs associated
with a U.S. data processing contract, $2.7 million of
charges related to the downsizing of the Brazilian card
operation, and $(0.1) million of market value recoveries on the
collateral assignment in life insurance policies, net of
severance charges.
| Consolidated Operating Income |
| Year 2005 compared with Year 2004 |
Certegy’s consolidated operating income in 2005 of
$185.0 million increased $16.5 million, or
9.8 percent, over 2004. Card Services operating income
increased $7.9 million, or 5.8 percent, while Check
Services operating income increased $17.2 million, or
29.3 percent. General corporate expense increased
$8.7 million, or 32.9 percent, over 2004. The
consolidated operating margin was 16.6 percent in 2005
compared to 16.2 percent in 2004. Operating income in 2005
includes $11.2 million of M&A costs, of which
$8.3 million is included in Corporate expense and
$2.9 million is included in Card Services.
The operating income growth experienced in 2005 was driven by
improved profitability in the Check Services segment, primarily
attributable to lower check guarantee net losses and growth in
our cash access business, as well as growth in the North
American and international card issuing operations, which more
than offset the $11.2 million of M&A costs incurred in
2005 and the negative impact of foreign currency on operating
income. The impact of changes of certain foreign currencies
against the U.S. dollar decreased total U.S. dollar operating
income by approximately $2.1 million in 2005.
| Year 2004 compared with Year 2003 |
Certegy’s consolidated operating income in 2004 increased
$30.3 million, or 21.9 percent, over 2003. Card
Services operating income increased $17.9 million, or
15.1 percent, while Check Services operating income
increased $16.2 million, or 38.2 percent. General
corporate expense increased $3.9 million over 2003. The
consolidated operating margin grew from 15.0 percent in
2003 to 16.2 percent in 2004. The 2003 consolidated
operating income includes $12.2 million of other charges.
The operating income growth experienced in 2004 was primarily
driven by revenue growth in the North American card issuing and
global check operations, improvement in the Check Services
margin, and acquisitions. Front-end proprietary risk modeling
technology and improved collections, which reduced check
guarantee net losses, and increased margins in cash access drove
Check Services profitability. The strengthening of certain
foreign currencies against the U.S. dollar increased total U.S.
dollar operating income by approximately $1.9 million in
2004.
39
| Consolidated Other Income, Net |
Certegy’s consolidated other income, net, which principally
consists of interest income and net foreign currency exchange
gains, totaled $2.4 million, $1.2 million, and
$2.3 million during 2005, 2004, and 2003, respectively. The
other income, net, earned in 2005 was driven by higher cash
balances, due in part to the proceeds received in 2005 for the
sale of the merchant acquiring business, and higher interest
rates, while the other income, net, earned in 2003 was
attributable to income earned on temporary cash balances,
primarily outside the U.S. Certain of these funds were
transferred to the U.S. during 2004 to settle intercompany
balances and were used to repay short-term borrowings under
Certegy’s revolving credit facility.
| Consolidated Interest Expense |
Certegy’s interest expense in 2005, 2004, and 2003 totaled
$12.8 million, $12.9 million, and $8.0 million,
respectively. The increase in 2005 and 2004 was driven by the
issuance of the $200 million of five-year notes at 4.75
percent in September 2003, which resulted in a higher rate of
interest. During 2004, Certegy borrowed additional funds on the
revolving credit facility for acquisitions and share
repurchases, which were repaid in 2005. In addition, the new
lease accounting (FIN 46) on the St. Petersburg, Florida
operations facility, which became effective on December 31,
2003, resulted in higher interest expense in 2005 and 2004.
| Effective Tax Rate |
Certegy’s effective tax rates for continuing operations
were 39.5 percent, 37.7 percent, and 38.0 percent
in 2005, 2004, and 2003, respectively. The slightly lower
effective rates in the more recent years, when excluding the
impact of non-deductible M&A costs in 2005, were driven by
the implementation of certain international and state tax
planning strategies and the impact of expensing stock options in
accordance with SFAS 123(R), which is attributable to there
being more deductible stock compensation expense in conjunction
with higher operating income in each year as compared to the
prior year.
During 2005, Certegy incurred M&A costs of
$11.2 million associated with the merger with Former FIS
and the proposed Brazilian joint venture. A tax benefit for
these costs was not recorded because the ultimate tax treatment
of these costs cannot be determined with adequate certainty at
this time. This resulted in an increase in the 2005 effective
tax rate of approximately two percentage points.
| Consolidated Net Income and Earnings per Share |
| Year 2005 compared with Year 2004 |
Certegy’s income from continuing operations of
$105.5 million in 2005 increased $7.8 million, or
8.0 percent, above 2004, while diluted earnings per share
from continuing operations of $1.66 increased $0.13, or
8.5 percent. Income from continuing operations in 2005
includes $11.2 million of M&A costs. Income from
discontinued operations in 2005, which includes an after-tax
gain on sale of $27.3 million, or $0.43 per diluted share,
and an after-tax write-down of $6.8 million, or $0.11 per
diluted share, totaled $24.8 million in 2005 compared to
$5.9 million in 2004.
| Year 2004 compared with Year 2003 |
Certegy’s consolidated net income in 2004 of
$103.6 million increased $18.9 million, or
22.3 percent, compared to 2003, which includes the
cumulative effect of a change in accounting principle charge of
$1.3 million. Diluted earnings per share of $1.62 increased
$0.33, or 25.6 percent, compared to 2003, which includes
the cumulative effect of a change in accounting principle charge
of $0.02. Income from continuing operations of
$97.7 million in 2004 increased $15.5 million, or
18.9 percent, while income from discontinued operations of
$5.9 million increased $2.0 million, or
52.3 percent. The discontinued operating results in 2004
benefited from $0.5 million of reduced after-tax
amortization expense, in accordance with the requirements of
SFAS 144, which requires amortization of long-lived assets to
cease upon classification as held for sale.
40
The repurchase of 2.7 million shares of common stock in
2004 had a favorable impact on earnings per share compared to
the prior year by reducing the weighted average shares
outstanding in 2004 by approximately 1.4 million shares.
Segment Results
The following table summarizes Certegy’s segment results
for the years ended December 31, 2005, 2004, and 2003:
| 2005 | 2004 | 2003 | |||||||||||
| (in millions) | |||||||||||||
|
Revenues:
|
|||||||||||||
|
Card Services
|
$ | 652.0 | $ | 590.4 | $ | 550.7 | |||||||
|
Check Services
|
465.1 | 449.1 | 371.0 | ||||||||||
| $ | 1,117.1 | $ | 1,039.5 | $ | 921.7 | ||||||||
|
Operating Income:
|
|||||||||||||
|
Card Services
|
$ | 144.3 | $ | 136.3 | $ | 118.4 | |||||||
|
Check Services
|
76.0 | 58.8 | 42.5 | ||||||||||
| 220.3 | 195.1 | 160.9 | |||||||||||
|
General corporate expense
|
(35.3 | ) | (26.6 | ) | (22.7 | ) | |||||||
| $ | 185.0 | $ | 168.5 | $ | 138.2 | ||||||||
| Card Services |
| Year 2005 compared with Year 2004 |
Card Services revenues of $652.0 million in 2005 increased
$61.6 million, or 10.4 percent, above 2004,
attributable to growth in both the North American and
international businesses and favorable currency trends. The
strengthening of certain foreign currencies against the U.S.
dollar increased the U.S. dollar revenues by approximately
$7.2 million in 2005. At December 31, 2005, Certegy
was processing 54.0 million cards compared to
48.9 million cards at December 31, 2004.
The North American card business, which includes the continuing
merchant processing services, generated revenues of
$529.3 million, a $41.6 million, or 8.5 percent,
increase over the prior year, driven by growth in card
processing services, e-payments (Internet banking and electronic
bill payment), and institution merchant processing. North
American card transactions increased 3.5 percent, driven by
7.0 percent growth in the number of cards processed. Higher
adoption of loyalty programs resulted in growth in card
enhancement revenue, while Internet banking subscribers and
electronic bill payment users increased over the prior year.
Institution merchant processing volumes increased 19.3 percent,
driven by 14.1 percent growth in transactions. Merchant
interchange fees and reimbursable expenses, which are included
in revenues, increased $18.1 million and $9.2 million,
respectively, in 2005.
The international card business, which includes the software
maintenance and support services, generated revenues of
$122.7 million, a $20.0 million, or 19.5 percent,
increase over the prior year. Growth was driven by new
customers, expanding card programs of existing customers,
particularly in the Asia-Pacific and Brazilian operations, and
favorable currency trends. Over 3.4 million cards were
added during the year. Reimbursable expenses, which are included
in revenues, increased $2.1 million in 2005. The
strengthening of certain foreign currencies against the U.S.
dollar increased the U.S. dollar revenues by approximately
$7.2 million in 2005.
Card Services operating income of $144.3 million in 2005
increased $7.9 million, or 5.8 percent, above 2004.
Card Services operating margin of 22.1 percent in 2005 decreased
by 100 basis points compared to an operating margin of
23.1 percent in the prior year, primarily driven by
$2.9 million of M&A costs in connection with the
ongoing exclusive negotiation with two leading Brazilian banks
regarding the possible
41
formation and acquisition of a majority ownership in a card
processing joint venture and product mix shift driven by the
strongest revenue growth coming from products and services with
margins lower than the overall Card Services average margin. The
impact of changes of certain foreign currencies against the U.S.
dollar decreased the U.S. dollar operating income by
approximately $1.6 million in 2005.
| Year 2004 compared with Year 2003 |
Card Services revenues of $590.4 million in 2004 increased
$39.6 million, or 7.2 percent, over 2003, primarily
attributable to growth in North American card issuing, the
acquisitions of Crittson and CariCard, and favorable currency
trends, which more than offset the $5.6 million decline in
software revenue and the annualization of the loss of a large
customer in the Brazilian card operations in March 2003. The
strengthening of certain foreign currencies against the U.S.
dollar increased the U.S. dollar revenues by approximately
$7.9 million in 2004. At December 31, 2004, Certegy
was processing 48.9 million cards compared to
46.4 million at December 31, 2003.
North American card revenues, which include the continuing
merchant processing services, of $487.7 million in 2004
increased $41.3 million, or 9.3 percent, over 2003. This
increase was fueled by new customer signings, growth in
e-banking and card loyalty programs, institution merchant
processing, an account activation initiative, and the
acquisition of Crittson in March 2004. North American card
transactions increased 4.7 percent over the prior year,
with debit card transaction growth of 8.5 percent and
credit card transaction growth of 2.7 percent.
Approximately 0.5 million domestic cards were added during
2004, increasing the domestic card base to 23.8 million at
December 31, 2004. Merchant interchange fees and
reimbursable expenses, which are included in revenues, increased
$6.2 million and $6.6 million, respectively, in 2004.
International card revenues, which include the software
maintenance and support services, of $102.7 million in 2004
decreased $1.6 million, or 1.5 percent, below 2003, driven
by the comparative impact of the loss of a large customer in the
Brazilian card operations in March 2003 and a large software
implementation and consulting project that was substantially
completed in late 2003, which more than offset new account
growth, favorable currency trends, and the acquisition of
CariCard in August 2004. The strengthening of certain foreign
currencies against the U.S. dollar increased the U.S. dollar
revenues by approximately $7.9 million in 2004.
Reimbursable expenses, which are included in revenues, decreased
$0.9 million in 2004. International card growth totaled
1.9 million cards in 2004, an 8.4 percent increase
over 2003.
Card Services operating income of $136.3 million in 2004
increased $17.9 million, or 15.1 percent, compared to
operating income of $118.4 million in 2003, which includes
$11.5 million of other charges. Revenue growth in North
American card issuing and acquisitions drove this growth, which
more than offset the decline in software profits and the
annualization of the loss of a large customer in the Brazilian
card operations in March 2003. The impact of changes of certain
foreign currencies against the U.S. dollar had only a minimal
impact on our U.S. dollar operating income in 2004.
| Check Services |
| Year 2005 compared with Year 2004 |
Check Services revenues of $465.1 million in 2005 increased
$16.0 million, or 3.6 percent, over 2004, primarily
driven by growth in the cash access business, attributable to
increased volumes and new customer signings in the Game
Financial business, which was acquired in 2004, and the
continued roll-out of our payroll check-cashing services to
grocers and other retailers. The weakening of certain foreign
currencies against the U.S. dollar decreased the U.S. dollar
revenues by approximately $0.8 million in 2005. The face
amount of checks Certegy authorized totaled $53.0 billion
in 2005 as compared to $40.3 billion in the prior year,
with an $11.8 billion increase in verification volumes and
a $0.9 billion increase in guarantee volumes.
North American check revenues of $387.4 million increased
$12.5 million, or 3.3 percent, over 2004. Growth in
the cash access business, as well as growth from new customers
and third-party collections, was partially offset by reduced
revenue in the domestic point-of-sale business, as the increase
in check volumes
42
was offset by lower loss-sensitive revenues and a reduction in
the average billing rate attributable to lower-risk verticals
that are priced based on risk, such as the grocery industry. The
success of Certegy’s risk initiatives has reduced
loss-sensitive revenues, such as service fees and risk-sharing
contracts. Cash access transactions and check volumes were
negatively impacted by the Gulf Coast storms in 2005 and the
resulting impact of the rising energy prices on retail spending.
The face amount of checks Certegy authorized in the U.S. totaled
$49.5 billion in 2005 as compared to $36.5 billion in
the prior year, with a $11.8 billion increase in
verification volumes and a $1.1 billion increase in
guarantee volumes.
International check revenues of $77.7 million increased
$3.5 million, or 4.7 percent, compared to 2004. The
international growth is largely attributable to the deferred
debit program in Australia and new customer signings. This
growth rate was impacted by softer retail sales in the U.K. and
France, which drove lower check volumes in 2005 in both
countries. The face amount of checks Certegy authorized
internationally was $3.5 billion in 2005 as compared to
$3.8 billion in the prior year.
The weakening of certain foreign currencies against the U.S.
dollar decreased the U.S. dollar revenues by approximately
$0.8 million in 2005.
Check Services operating income of $76.0 million in 2005
increased $17.2 million, or 29.3 percent, compared to
2004. Check Services operating margin of 16.3 percent in
2005 increased by approximately 320 basis points compared to an
operating margin of 13.1 percent in the prior year.
Improvements in the accuracy of our risk management systems to
better identify fraudulent transactions and initiatives to
improve salvage collections drove a reduction in check guarantee
net losses that improved profitability in the Check Services
segment. Higher cash access profitability also contributed to
the margin expansion in the Check Services business.
Improvements in the accuracy of the risk management systems have
resulted in higher expected salvage rates on returned checks.
Also, initiatives to improve the salvage collection techniques
have benefited collection rates on both new and aged returned
checks. While we will continue to focus on driving higher
profitability in our check risk management business through
ongoing improvements in risk management systems and salvage
collection techniques, we expect margin growth to moderate in
the future. The weakening of foreign currencies against the U.S.
dollar decreased the U.S. dollar operating income by
approximately $0.5 million in 2005.
| Year 2004 compared with Year 2003 |
Check Services revenues of $449.1 million in 2004 increased
$78.1 million, or 21.1 percent, over 2003, driven by
the acquisition of Game Financial, increased retail check
volumes, new customer signings, growth in the cash access
operations, and increased third-party collections. In addition,
the strengthening of foreign currencies against the U.S. dollar
increased the U.S. dollar revenues by approximately
$8.0 million in 2004. The face amount of checks Certegy
authorized totaled $40.3 billion in 2004 as compared to
$35.2 billion in 2003. Guarantee volumes grew from
$28.0 billion in 2003 to $30.1 billion in 2004, a
7.2 percent increase over the prior year.
North American check revenues of $374.9 million increased
$67.1 million, or 21.8 percent, compared with revenues
of $307.8 million in 2003, driven by the acquisition of
Game Financial, a stronger economy, an improving job market, and
new domestic customers. Also, the continued rollout of new check
cashing locations contributed to North American revenue growth.
The face amount of checks Certegy authorized in the U.S. totaled
$36.5 billion in 2004 as compared to $31.8 billion in
2003.
International check revenues of $74.2 million in 2004
increased $11.0 million, or 17.5 percent, over 2003
revenues of $63.2 million due primarily to favorable
currency trends and higher volumes. The strengthening of the
British pound against the U.S. dollar increased the U.S. dollar
revenues by approximately $8.0 million in 2004. The face
amount of checks Certegy authorized internationally increased to
$3.8 billion in 2004 as compared to $3.4 billion in
2003.
Check Services operating income of $58.8 million in 2004
increased $16.2 million, or 38.2 percent, compared to
operating income of $42.5 million in 2003, which includes
$1.0 million of other charges. The growth in Check Services
operating income is primarily attributable to revenue growth and
improvement in
43
the domestic margin, as well as the acquisition of Game
Financial in March 2004. Front-end proprietary risk modeling
technology and improved collections, which reduced check
guarantee net losses, and increased margins in cash access drove
higher profitability. The strengthening of foreign currencies
against the U.S. dollar increased the U.S. dollar operating
income by approximately $2.0 million in 2004.
| General Corporate Expense |
| Year 2005 compared with Year 2004 |
Certegy’s general corporate expense of $35.3 million
in 2005 increased $8.7 million over 2004 due to
$8.3 million of M&A costs related to the merger, higher
audit fees, and certain employee-related expenses, which more
than offset reduced share-based compensation costs.
| Year 2004 compared with Year 2003 |
Certegy’s general corporate expense of $26.6 million
in 2004 increased $3.9 million, or 17.0 percent,
compared to $22.7 million in 2003, which includes $(0.3)
million of market value recoveries on the collateral assignment
in life insurance policies. The increase in general corporate
expense is due in large part to higher audit fees related to
Sarbanes-Oxley Section 404 compliance and higher
employee-related costs including benefits and relocation.
Liquidity and Capital Resources
Certegy has historically generated strong cash flows from
operating activities that are used to further invest in the
business through expenditures for capital and strategic
acquisitions. Additionally, Certegy has engaged in periodic
repurchases of its common shares, when deemed appropriate, and
began to pay cash dividends to shareholders in 2003. Additional
cash flows have been generated from stock option exercises,
which vary each year due to changes in the stock price, and the
sale of the merchant acquiring business in 2005.
On March 1, 2004, Certegy completed the purchases of Game
Financial and Crittson and on August 6, 2004, it completed
the purchase of CariCard. A majority of the cash acquired with
these acquisitions relates to Game Financial, which provides
check cashing and cash advance and ATM services to the gaming
industry. In certain casino locations, Game Financial maintains
cash access booths, where consumers can cash personal checks,
and various “point-of-sale” devices, where cash
advance services are facilitated. These point-of-sale devices
include PC’s, kiosks, and ATM’s. In other casino
locations, these transactions are conducted in the casino’s
own cage operation by casino employees using Game
Financial’s system.
In September 2003, Certegy used the net proceeds from the
offering of 4.75 percent fixed rate five-year notes with a face
value of $200 million to repay the outstanding indebtedness
under its $300 million revolving credit facility. At the
same time, Certegy cancelled the $300 million facility and
replaced it with a $200 million revolving credit facility,
which was used to meet working capital needs and to fund
strategic acquisitions and periodic repurchases of shares when
deemed appropriate. There were no amounts outstanding on this
facility at December 31, 2005.
On January 31, 2006, the $200 million revolving credit
facility was cancelled in connection with the merger, and
Certegy entered into a $250 million unsecured interim term
loan. Proceeds from this loan were used to provide the cash
necessary to fund a $3.75 per share special cash dividend that
was paid to Certegy’s pre-merger shareholders and
merger-related expenses. The loan was repaid and cancelled on
February 1, 2006 using available cash and borrowings under
the Former FIS credit facility, which is described below.
As of December 31, 2005, Certegy’s consolidated cash
balance was $138.0 million, which includes the proceeds
from the sale of the merchant acquiring business in 2005, net of
amounts used to pay certain taxes due on the gain on the sale.
Cash flows from operating activities of the combined company are
expected to be strong in 2006, and we expect capital
expenditures for 2006 to approximate $225 million to
$275 million.
44
We regularly evaluate cash requirements for current operations,
development activities, and acquisitions. We may elect to raise
additional funds for these purposes, either through further bank
financing or the public capital markets, as appropriate. Based
on our recent financial results and current financial position,
we believe that additional funding will be available if required
to meet our capital requirements.
| Year 2005 compared with Year 2004 |
Operating Activities. During 2005, Certegy generated
$128.8 million in cash from operating activities compared
to $144.4 million in 2004. The decrease in net cash
provided by operating activities is attributable to changes in
assets and liabilities and income taxes paid in connection with
the sale of the merchant acquiring business in 2005, which more
than offset the increase in income from continuing operations,
adjusted for depreciation and amortization, amortization of
deferred compensation, and other non-cash charges.
Changes in assets and liabilities between years are driven by
the timing of collections compared to billings (trade accounts
receivable) and payments for vendor invoices, income taxes,
interest, and other third-party liabilities (other current
liabilities). Additional changes are attributable to the level
of other receivables and other payables in our deferred debit
processing services and cash access operations (other
receivables and other payables) and the volume and timing of
claims paid to merchant customers and claims recovered from
check writers in our check guarantee business (net claims
accounts).
Net cash provided by operating activities includes a cash
outflow of approximately $20.0 million for income taxes on
the gain on the sale of the merchant acquiring business in 2005.
Proceeds from the sale of $60.0 million are presented in
investing activities, while income taxes paid on the gain on the
sale are required to be presented in operating activities. Cash
flows from discontinued operations, excluding the cash flows
related to the sale, are shown separately in the statement of
cash flows as cash provided by discontinued operations.
Other non-cash items, which are adjustments to reconcile net
income to net cash provided by operating activities, include
amortization of certain capitalized contract acquisition costs
and deferred financing costs, as well as net periodic benefit
costs of retirement and postretirement benefit plans.
Outflows for other long-term assets primarily consist of the
funding of employee life insurance premiums and deferred
compensation plans, incentive payments to customers related to
signing or renewing long-term contracts, and payments related to
deferred data processing costs.
Certegy used cash flows from operating activities in 2005
primarily to repay revolving credit borrowings, reinvest in
existing businesses through expenditures for equipment and
systems development, and make dividend payments.
Investing Activities. Capital expenditures in 2005
totaled $63.6 million, which represents an increase of
$22.7 million compared to the prior year. Expenditures for
systems development and conversion of a large customer in the
international card issuing operations, incremental expenditures
for systems development for operations acquired in the prior
year, and additional expenditures for domestic processing
equipment and systems development for new products and services
drove the increase in capital expenditures over the prior year.
Proceeds from the sale of the merchant acquiring business
totaled $60.0 million in 2005, while the acquisitions of
Game Financial, Crittson, and CariCard in the prior year totaled
$39.7 million, which is net of cash acquired. In 2005,
Certegy paid an additional $1.0 million related to the
Crittson acquisition as a result of the acquired business
achieving specified levels of revenue growth during designated
periods subsequent to the acquisition.
Financing Activities. Net repayments of borrowings on the
revolving credit facility in 2005 totaled $48.6 million,
compared to net additions to borrowings of $48.6 million in
2004, which were used to fund acquisitions and share
repurchases. Cash expended for share repurchases totaled
$96.5 million in 2004. Dividend payments to shareholders
totaled $12.5 million and $12.6 million in 2005 and
2004, respectively. Proceeds from the exercise of stock options
totaled $24.9 million in 2005 compared to
$11.3 million in the prior year.
45
Discontinued Operations. Cash provided by discontinued
operations, excluding the cash flows from the sale, was
$8.9 million in 2005 compared to $6.1 million in 2004,
consisting of operating cash flows of $8.9 million in 2005
compared to $12.1 million in 2004. The decrease in
operating cash flows is primarily driven by deferred income
taxes for acquired merchant portfolios, due to a change in the
tax method of amortization in 2004, and the sale of the business
in 2005. Investing cash outflows in 2004 consisted of
$0.2 million of capital expenditures and $5.8 million
for the acquisition of the merchant acquiring portfolio of
Crittson. There were no investing cash flows in 2005.
| Year 2004 compared with Year 2003 |
Operating Activities. During 2004, Certegy generated
$144.4 million in cash from operating activities compared
to $131.8 million in 2003. The increase in net cash
provided by operating activities is primarily attributable to
the increase in income from continuing operations, adjusted for
depreciation and amortization, amortization of deferred
compensation, and other non-cash charges. Cash flows from
discontinued operations are shown separately in the statement of
cash flows as cash provided by discontinued operations.
Certegy used cash flows from operating activities primarily to
reinvest in its existing businesses through expenditures for
equipment and systems development, as well as to repurchase
shares, make dividend payments, and partially fund its
acquisitions of Game Financial, Crittson, and CariCard.
Investing Activities. Capital expenditures in 2004
totaled $40.9 million, which represents a decrease of
$2.8 million compared to the prior year. Capital
expenditures in 2004 were primarily for processing equipment and
software in the global card issuing operations and systems
development for new products and services. The acquisitions of
Game Financial, Crittson, and CariCard totaled
$39.7 million, which is net of cash acquired.
Financing Activities. Net borrowings on the revolving
credit facility in 2004 totaled $48.6 million, which were
primarily related to the acquisitions and share repurchases.
Certegy repurchased approximately 2.7 million shares of
common stock in 2004 at a total cost of $96.5 million.
Proceeds from the exercise of stock options in 2004 totaled
$11.3 million, compared with $5.5 million in the prior
year. Dividend payments to shareholders, which Certegy began to
pay in the fourth quarter of 2003, totaled $12.6 million in
2004.
Discontinued Operations. Cash provided by discontinued
operations was $6.1 million in 2004, compared to
$1.5 million in 2003, consisting of operating cash flows of
$12.1 million in 2004 compared to $6.3 million in the
prior year, and investing cash outflows of $6.0 million in
2004 compared to $4.7 million in 2003. The increase in
operating cash flows is primarily driven by deferred income
taxes on acquired merchant portfolios due to a change in the tax
method of amortization, which resulted in a tax deduction in
2004. Investing cash outflows in 2004 consist of
$0.2 million of capital expenditures and $5.8 million
for the acquisition of the merchant acquiring portfolio of
Crittson. Investing cash outflows in 2003 consist of
$0.2 million for capital expenditures and $4.5 million
for the acquisition of a merchant portfolio.
| General |
Certegy Revolving Credit Facility. As discussed above,
Certegy’s $200 million revolving credit facility was
cancelled in connection with the merger, and Certegy entered
into a $250 million unsecured interim term loan on
January 31, 2006. Proceeds from this loan were used to
provide the cash necessary to fund a $3.75 per share special
cash dividend that was paid to Certegy’s pre-merger
shareholders and merger-related expenses. The loan was repaid
and cancelled on February 1, 2006 using available cash and
borrowings under the Former FIS credit facility, which is
described below.
Certegy also has a $100 million unsecured revolving credit
facility that provides advances to finance its customers’
shortfalls in the daily funding requirements associated with its
credit and debit card settlement operations. Outstanding
borrowings on this credit facility are classified as part of the
settlement payables in the consolidated balance sheets. There
were no amounts outstanding under this facility at
December 31, 2005 or December 31, 2004.
46
Former FIS Credit Facility. On March 9, 2005, Former
FIS completed a recapitalization plan. Former FIS entered into
$3.2 billion in senior credit facilities consisting of a
$800.0 million Term Loan A facility, a
$2.0 billion Term Loan B facility (collectively, the
“Term Loan Facilities”) and a $400.0 million
revolving credit facility (“Revolver”) with a
consortium of lenders led by Bank of America. Former FIS fully
drew upon the entire $2.8 billion in Term Loan Facilities
to consummate the recapitalization. Former FIS used proceeds
from the loans to repay the outstanding principal and interest
on a $2.7 billion note it previously paid as a dividend to
its parent, FNF. Revolving credit borrowings and Term A Loans
bear interest at a floating rate, which will be, at the
borrowers’ option, either the British Bankers Association
LIBOR or base rate plus, in both cases, an applicable margin,
which is subject to adjustment based on the senior secured
leverage ratio of the borrowers. The Term B Loans bear interest
at either the British Bankers Association LIBOR plus 1.75% per
annum or, at the borrowers’ option, a base rate plus 0.75%
per annum. The borrowers may choose one month, two month, three
month, six month, and to the extent available, nine month or one
year LIBOR, which then applies for a period of that duration.
Interest is due at the end of each interest period, provided
that for LIBOR loans that exceed three months, the interest is
due three months after the beginning of such interest period.
The Term Loan A matures in March 2011, the Term Loan B in March
2013, and the Revolver in March 2011. The Term Loan Facilities
are subject to quarterly amortization of principal in equal
installments of 0.25% of the original principal amount with the
remaining balance payable at maturity. As a result of these
scheduled repayments and additional voluntary prepayments, the
aggregate principal balance of the Term Loan Facilities was
$2.5 billion at December 31, 2005. In addition to the
scheduled amortization, and with certain exceptions, the Term
Loan Facilities are subject to mandatory prepayment from excess
cash flow, which is reduced based on senior-secured leverage,
issuance of additional equity and debt and sales of certain
assets. Voluntary prepayments of both the Term Loan Facilities
and revolving loans and commitment reductions of the revolving
credit facility are permitted at any time without fee upon
proper notice and subject to minimum dollar requirements.
The Former FIS credit facilities contain 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, limitations on dividends and other
restricted payments and capital expenditures, a minimum interest
coverage ratio, and a maximum secured leverage ratio.
On March 9, 2005, Former FIS also completed its minority
interest sale, in which it issued common shares representing a
25% interest in Former FIS to an investor group for
$500 million. Former FIS used the proceeds of that issuance
and the remaining Term Loan proceeds to retire its former
revolving credit facility and pay expenses relating to the
recapitalization and the minority interest sale. These expenses
totaled $79.2 million, and included certain fees and
expenses of the investor group totaling approximately
$45.7 million. The remaining proceeds from the Term Loans
and minority interest sale were retained to use for general
corporate purposes.
Following the recapitalization, Former FIS is highly leveraged.
As of December 31, 2005, it is paying interest on the Term
Loan Facilities at a rate of one month LIBOR plus 1.50% to 1.75%
(5.86 — 6.11%). At that rate, the annual interest on the
remaining $1,854.0 million of debt not swapped into a fixed
rate obligation as described below would be $112.8 million.
A one percent increase in the LIBOR rate would increase its
annual debt service on this portion of the Term Loan Facilities
by $18.8 million. The credit rating assigned to the Term
Loan Facilities and Revolver by Standard & Poor’s is
currently BB.
On April 11, 2005, Former FIS entered into interest rate
swap agreements, which have effectively fixed the interest rate
at approximately 6.1% through April 2008 on $350 million of
the Term Loan B Facility and at approximately 5.9% through April
2007 on an additional $350.0 million of the Term Loan B
Facility. The estimated fair value of the cash flow hedges
results in an asset of Former FIS of $5.2 million as of
December 31, 2005, which is included in other noncurrent
assets and as a component of accumulated other comprehensive
earnings, net of deferred taxes, in Former FIS’s balance
sheet.
Upon completion of the merger, Certegy became a co-borrower
under Former FIS’s senior credit facilities. The facilities
were amended to limit the amount of dividends the combined
company can pay on its common stock to $60 million per
year, plus certain other amounts, except that dividends on the
common stock
47
may not be paid if any event of default under the facilities
shall have occurred or be continuing or would result from such
payment.
Contractual Obligations. The following table summarizes
Certegy’s significant contractual obligations and
commitments as of December 31, 2005:
| Payments due by | |||||||||||||||||||||
| Less than 1 | 1 to 3 | 4 to 5 | |||||||||||||||||||
| Total | year | years | years | Thereafter | |||||||||||||||||
| (in millions) | |||||||||||||||||||||
|
Long-term debt, excluding discount and capital leases
(Note 6)
|
$ | 222.4 | $ | — | $ | 200.0 | $ | 22.4 | $ | — | |||||||||||
|
Operating leases (Note 10)
|
48.8 | 13.9 | 20.7 | 8.3 | 5.9 | ||||||||||||||||
|
Capital leases (Note 6)
|
9.6 | 3.4 | 5.8 | 0.4 | — | ||||||||||||||||
|
Data processing agreement obligations (Note 10)
|
247.2 | 37.1 | 65.0 | 56.2 | 88.9 | ||||||||||||||||
|
Total
|
$ | 528.0 | $ | 54.4 | $ | 291.5 | $ | 87.3 | $ | 94.8 | |||||||||||
Note: This table excludes other obligations that we may have,
such as employee benefit obligations (discussed in Note 9
to the consolidated financial statements), guarantees under our
synthetic leases (see Note 10 to the consolidated financial
statements), and other current and long-term liabilities
reflected in our consolidated balance sheets.
The following table summarizes Former FIS’s significant
contractual obligations and commitments as of December 31,
2005:
| Payments due by | |||||||||||||||||||||
| Less than 1 | 1 to 3 | 4 to 5 | |||||||||||||||||||
| Total | year | years | years | Thereafter | |||||||||||||||||
| (in millions) | |||||||||||||||||||||
|
Long-term debt
|
$ | 2,564.1 | $ | 33.7 | $ | 60.1 | $ | 56.3 | $ | 2,414.0 | |||||||||||
|
Operating leases
|
143.6 | 38.8 | 58.8 | 33.4 | 12.6 | ||||||||||||||||
|
Purchase commitment (Covansys)
|
129.2 | 44.2 | 60.0 | 25.0 | — | ||||||||||||||||
|
Total
|
$ | 2,836.9 | $ | 116.7 | $ | 178.9 | $ | 114.7 | $ | 2,426.6 | |||||||||||
Off-Balance Sheet Arrangements. Note 10 to the
consolidated financial statements also describes certain
off-balance sheet arrangements in the form of synthetic leases
and the change in accounting for one of the leases that was
adopted on December 31, 2003 in accordance with certain
provisions of FIN 46. Other than facility leasing
arrangements, Certegy has not engaged in off-balance sheet
financing activities. See Former FIS’s financial statements
included as Exhibit 99.2 to this filing for a description
of its off-balance sheet arrangements.
Related Parties. Prior to the merger transaction, Certegy
did not have any material related party transactions. See Former
FIS’s financial statements included as Exhibit 99.2 to
this filing for a description of its related party transactions.
Critical Accounting Policies
The preparation of Certegy’s financial statements in
accordance with GAAP requires management to make estimates and
assumptions that affect reported amounts and related
disclosures. Management considers an accounting estimate to be
critical if:
| • | it requires assumptions to be made that were uncertain at the time the estimate was made; and | |
| • | changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations or financial condition. |
48
Our significant accounting policies are described in Note 2
to the consolidated financial statements. We believe that the
following accounting policies involve a higher degree of
complexity and warrant specific description.
Reserves for Card Processing and Check Guarantee Losses.
We recognize a reserve for estimated losses related to our
card issuing and merchant acquiring businesses based on
historical experience and other relevant factors. In our card
issuing business, we record estimates to accrue for losses
resulting from transaction processing errors. We utilize a
number of systems and procedures within our card issuing
business in order to minimize such transaction processing
errors. In our recently sold merchant acquiring business, we
were a direct party to contracts with merchants regarding our
provision of card processing services for the merchant. If, due
to the insolvency or bankruptcy of the merchant or other
reasons, we were not able to collect amounts from our merchant
customers for billing disputes resolved in favor of the
cardholder (referred to as a cardholder “chargeback”),
we had to bear the credit risk for the full amount of the
cardholder transaction. We required cash deposits and other
types of collateral from certain customers to minimize any such
risk. In addition, we utilized a number of systems and
procedures to manage merchant risk and believe that the
diversification of our merchant portfolio among industries and
geographic regions minimized our risk of loss. Card processing
loss reserves are primarily determined by performing a
historical analysis of our loss experience and considering other
factors that could affect that experience in the future. Such
factors include the general economy and the credit quality of
customers. Once these factors are considered, we assess the
reserve adequacy by comparing the recorded reserve to the
estimated amount based on an analysis of the current trend
changes or specific anticipated future events. Any adjustments
are charged to costs of services. These card processing loss
reserve amounts are subject to risk that actual losses may be
greater than our estimates. We remain at risk for cardholder
transactions in the merchant acquiring business conducted prior
to the sale of the business. At December 31, 2005 and 2004,
we had aggregate card processing loss reserves of
$0.7 million and $0.9 million, respectively, which are
included in other current liabilities in the consolidated
balance sheets.
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 services. 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 $29.5 million and
$36.7 million at December 31, 2005 and
$36.2 million and $39.3 million at December 31,
2004, respectively.
Historically, such estimation processes have proven to be
materially accurate; however, our projections of probable card
processing losses, 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 card processing losses and check
guarantee losses, net of anticipated recoveries excluding
service fees, of $147.1 million, $170.0 million, and
$174.6 million, respectively, for the years ended
December 31, 2005, 2004, and 2003. A one percent increase
in our card processing losses and check guarantee losses, net of
anticipated recoveries excluding service fees, in 2005 would
have reduced 2005 net income by approximately $0.9 million
after-tax.
Valuation of Goodwill and Other Long-Lived Assets.
Goodwill and certain other intangible assets are tested for
impairment at least annually in accordance with
SFAS No. 142 “Goodwill and Other Intangible
Assets” (“SFAS 142”), and all other
long-lived assets are tested for impairment in accordance with
49
SFAS 144. We regularly evaluate whether events and
circumstances have occurred which indicate that the carrying
amounts of goodwill and other long-lived assets (property and
equipment, other intangible assets, systems development and
capitalized contract costs, and other assets) may be impaired or
not recoverable. Significant factors that are considered that
could trigger an impairment review include: changes in business
strategy, market conditions, or the manner of use of an asset,
underperformance relative to historical or expected future
operating results, and negative industry or economic trends. In
evaluating our long-lived assets other than goodwill for
possible impairment, management estimates the asset’s
future undiscounted cash flows to measure whether the asset is
recoverable. If it is determined that the asset is not
recoverable, we measure the impairment based on the projected
discounted cash flows of the asset over its remaining life. In
the opinion of management, goodwill and other long-lived assets
are appropriately valued at December 31, 2005 and 2004.
We make certain estimates, assumptions, and projections about
our financial performance and our industry that affect the
determination of the expected future cash flows used in our
impairment tests. While we believe that our estimates of future
cash flows are reasonable, these estimates are not guarantees of
future performance and are subject to risks and uncertainties
that may cause actual results to differ from what is assumed in
these impairment tests. Should we be unable to achieve certain
of our business plans, this could have a future impact on
management’s opinion regarding the valuation of assets,
which could result in an impairment.
Income Taxes. We record income taxes in accordance with
the provisions of SFAS No. 109, “Accounting for
Income Taxes,” using the asset and liability method. The
asset and liability method requires the recognition of deferred
tax assets and liabilities for expected future tax consequences
of temporary differences that exist between the tax bases and
financial reporting bases of our assets and liabilities, based
on enacted tax rates expected to apply in the years in which the
temporary differences are expected to be recovered or settled. A
valuation allowance is provided against deferred tax assets when
it is more likely than not that some or all of a deferred tax
asset will not be realized. At present, all Brazilian deferred
tax assets are fully reserved in our valuation allowance. Brazil
currently has approximately $44.6 million of net operating
losses that are subject to restrictions on utilization. No
provision is made for U.S. income taxes on undistributed
earnings of certain foreign subsidiaries because those earnings
are considered permanently reinvested in the operations of those
subsidiaries.
In addition to estimating the future tax rates applicable to the
reversal of tax differences, management must also make certain
assumptions regarding whether tax differences are permanent or
temporary. If the differences are temporary, management must
estimate the timing of their reversal and whether taxable
operating income in future periods will be sufficient to fully
recognize any gross deferred tax assets.
For the years ended December 31, 2005, 2004, and 2003,
management made no material changes in its assumptions regarding
the determination of the provision for income taxes. During
2002, we determined that our investments in certain foreign
subsidiaries are permanently invested and will not be
repatriated to the U.S. in the foreseeable future. U.S. tax
consequences on the undistributed earnings of these subsidiaries
are no longer considered in the tax provision calculation in
accordance with APB Opinion No. 23. At December 31,
2005, there are approximately $57.1 million of
undistributed net earnings for which no additional U.S. tax has
been provided. In 2004, the U.S. enacted a one-time tax
reduction on cash distributions of these undistributed foreign
earnings, which by election could apply in 2004. We did not make
this election for 2004, but did distribute $0.4 million
from foreign subsidiaries in 2005, which had a minimal impact on
2005 tax expense. Any future change in management’s plans
regarding reinvestment of these earnings will require us to
accrue for the additional tax impact of any amounts no longer
permanently reinvested. This accrual would be recorded at the
time management determines that these earnings are no longer
permanently reinvested.
During 2005, we incurred M&A costs of $11.2 million
associated with the merger with Former FIS and the proposed
Brazilian joint venture. A tax benefit for these costs was not
recorded because the ultimate tax treatment of these costs
cannot be determined with adequate certainty at this time. This
resulted in an increase in our 2005 effective tax rate of
approximately two percentage points.
Certain events could occur that would materially affect our
estimates and assumptions regarding deferred taxes. Changes in
current tax laws and applicable enacted tax rates could affect
the valuation of deferred tax
50
assets and liabilities, thereby impacting our income tax
provision. Additionally, significant declines in taxable
operating income could materially impact the realizable value of
deferred tax assets.
For the year ended December 31, 2005, our provision for
income taxes from continuing operations was $68.9 million,
consisting of $60.6 million for current tax expense and
$8.3 million for deferred tax expense. Our pre-tax earnings
from continuing operations for financial reporting purposes have
historically been higher than taxable income due primarily to
tax deductions for amortization of goodwill, amortization of
software development, and the special bonus depreciation
allowance. Our pre-tax earnings for financial reporting were
less than taxable income in 2004 due primarily to accelerated
collection of accrued check guarantee claims and an increase in
net employee benefit accruals. Changes in management’s
estimates and assumptions regarding the enacted tax rate applied
to deferred tax assets and liabilities, the ability to realize
the value of deferred tax assets, or the timing of the reversal
of tax basis differences could potentially impact the provision
for income taxes. A one percent change in the effective tax rate
from 39.5 percent in 2005 to 40.5 percent would have
increased the 2005 income tax provision by $1.8 million.
Employee Benefit Obligations. The plan obligations and
related assets of our defined benefit retirement and
postretirement plans are presented in Note 9 to the
consolidated financial statements. Plan assets, which consist
primarily of marketable equity and debt instruments, are valued
using market quotations. Plan obligations and the annual net
periodic benefit cost are determined by independent actuaries
and through the use of a number of assumptions. Key assumptions
in measuring the plan obligations include the discount rate, the
rate of salary increases, and the estimated future return on
plan assets. In determining the discount rate, we utilize the
yield on high-quality, fixed-income investments currently
available with maturities corresponding to the anticipated
timing of benefit payments. Salary increase assumptions are
based upon historical experience and anticipated future
management actions. The expected long-term rate of return on
plan assets was made considering the plan asset mix, historical
returns on equity securities, and expected yields to maturity
for debt securities.
For calculating retirement plan expense, a market-related value
of assets is used. The market-related value of assets recognizes
the difference between actual returns and expected returns over
five years at a rate of 20% per year. While the asset return and
interest rate environment have impacted the funded status of our
U.S. retirement plan, we do not currently have minimum funding
requirements, as set forth in ERISA and federal tax laws. We did
not contribute to the plan in 2005 and do not anticipate
contributing to the plan in 2006. Information about the expected
future employer contributions and benefit payments for our
employee benefit plans are detailed in Note 9 to the
consolidated financial statements.
Net periodic benefit cost for our employee retirement and
postretirement plans for the years ended December 31, 2005,
2004, and 2003 were $6.2 million, $3.9 million, and
$1.4 million, respectively, which includes
$4.5 million, $4.4 million, and $4.3 million of
expected return on plan assets.
We have made certain other estimates that, while not involving
the same degree of judgment, are important to understanding our
financial statements. On an ongoing basis, management evaluates
its estimates and judgments in these areas based on its
historical experience and other relevant factors.
Management’s estimates as of the date of the financial
statements reflect its best judgment giving consideration to all
currently available facts and circumstances. As such, these
estimates may require adjustment in the future, as additional
facts become known or as circumstances change.
Seasonality and Inflation
We are subject to certain seasonal fluctuations, such as peak
activity during the holiday buying season. We do not believe
that inflation has had a material effect on our operating
results; however, inflation could adversely affect our financial
results were it to result in a substantial weakening in economic
conditions that adversely affects the level of consumer spending.
51
Economic and Other Factors
In FIS’s financial institution processing business,
increases in deposit and lending transactions can positively
affect our business and thus the condition of the overall
economy can have an effect on growth. While this business
generally is not significantly affected by the cyclicality of
real estate transactions, our ability to expand our mortgage
loan processing business is correlated to the total number of
mortgage loans outstanding.
FIS competes for both licensing and outsourcing business, and
thus is affected by the decisions of financial institutions to
outsource the services FIS provides instead of simply licensing
its applications. As a provider of outsourcing solutions, FIS
benefits from the greater revenues that result from a financial
institution’s decision to outsource its processing to FIS.
Generally, financial institutions of all sizes will consider
outsourcing information technology and business process services
to varying degrees, although smaller financial institutions are
more likely to outsource all information technology functions to
companies such as FIS since they generally do not have the
staff, budget or competencies to implement and operate highly
complex technical environments. Larger financial institutions
have historically chosen to limit outsourcing to specific
application functions or services in connection with a
particular product or operation such as mortgage processing.
Generally, demand for outsourcing solutions has increased over
time as providers such as FIS realize economies of scale and
improve their ability to provide services that improve customer
efficiencies and reduce costs.
FIS may be affected by the consolidation trend in the banking
industry. This trend may be beneficial or detrimental to the
financial institution processing and mortgage loan processing
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 client is involved in a
consolidation, FIS may benefit by expanding the use of its
services if they are chosen to survive the consolidation and
support the newly combined entity. Conversely, FIS may lose
market share if a customer of FIS is involved in a consolidation
and its services are not chosen to survive the consolidation and
support the newly combined entity.
The level of residential real estate activity, which depends in
part on the level of interest rates, affects the level of
revenues from our loan origination services business. Revenues
from loan origination services increase as the amount of
mortgage originations, from both home purchases and mortgage
refinancings, increases. During the second half of 2000,
mortgage interest rates began to decline, causing an increase in
refinance activity. This trend continued through the first six
months of 2003. The increasing refinance activity, coupled with
record levels of residential resale and new home sales, resulted
in an exceptionally strong business climate for Former
FIS’s mortgage origination services in 2003. Declines in
refinancings since 2003 have adversely affected our revenues in
2004 and 2005 from mortgage origination services.
In contrast to the mortgage origination business, FIS believes
that a higher interest rate environment may increase the volume
of consumer defaults and thus favorably affect FIS’s
default management services business, which provides services
relating to residential mortgage loans in default. The overall
strength of the economy also affects default revenues.
The level of residential real estate activity, such as the
number of residential resales, new home sales and mortgage
originations, also affects revenues derived from many of the
services provided by our information services businesses. Former
FIS experienced increased residential loan refinancing activity
coupled with record levels of residential resale and new home
sales during 2000 through 2003. While refinancing activity
declined, residential sales remained strong in 2004 and
throughout 2005.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Interest rates. Certegy has a synthetic lease obligation
that has a variable interest rate and, through the consummation
of the merger, an unsecured revolving credit facility that had a
variable interest rate; therefore, we have exposure to the
impact of interest rate fluctuations. The risk was somewhat
mitigated by our ability to fix the base LIBOR rate for periods
of up to six months on our revolving credit facility and by
using interest
52
rate swap arrangements in relation to our synthetic lease
obligation. There were no amounts outstanding under
Certegy’s revolving credit facility at December 31,
2005, while the balance on our synthetic lease obligation at
December 31, 2005 was $22.4 million. We have performed
an interest rate sensitivity analysis assuming a 100 basis point
increase in LIBOR for our outstanding synthetic lease obligation
and the increase in interest expense would not be material.
Former FIS is highly leveraged. As of December 31, 2005, it
is paying interest on the Term Loan Facilities at a rate of one
month LIBOR plus 1.50% to 1.75% (5.86 — 6.11%). At that
rate, the annual interest on the remaining $1,854.0 million
of debt not swapped into a fixed rate obligation, as described
in Item 7: Management’s Discussion and Analysis of
Financial Condition and Results of Operations, would be
$112.8 million. A one percent increase in the LIBOR rate
would increase its annual debt service on this portion of the
Term Loan Facilities by $18.8 million.
Foreign currency exchange rates. Approximately
16.4 percent of Certegy’s consolidated revenues for
the year ended December 31, 2005 and 38.1 percent of
its consolidated assets at December 31, 2005 are associated
with operations outside of the U.S. The U.S. dollar balance
sheets and statements of income for these businesses are subject
to currency fluctuations. We are most vulnerable to fluctuations
in the Brazilian real and the British pound against the U.S.
dollar. Historically, we have not entered into derivative
financial instruments to mitigate this risk, as it has not been
cost-effective. The impact of currency fluctuations on
profitability has not been significant since both revenues and
operating costs of these businesses are denominated in local
currency. If the U.S. dollar had a 10 percent higher
appreciation against Certegy’s non-U.S. dollar denominated
businesses, consolidated revenues and operating income would
have been reduced by $16.6 million and $1.2 million,
respectively, in 2005, and $14.9 million and
$1.3 million, respectively, in 2004. The cumulative
translation adjustment, largely related to Certegy’s
investment in its Brazilian card processing operation, was a
$54.5 million and $58.6 million reduction of
shareholders’ equity at December 31, 2005 and 2004,
respectively.
53
| Item 8. | Financial Statements and Supplementary Data |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENTS
The Board of Directors and Shareholders
Certegy Inc. (now known as Fidelity National Information
Services, Inc.)
We have audited the accompanying consolidated balance sheets of
Certegy Inc. (now known as Fidelity National Information
Services, Inc.) as of December 31, 2005 and 2004, and the
related consolidated statements of income, shareholders’
equity, and cash flows for each of the three years in the period
ended December 31, 2005. These consolidated financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated 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 financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Certegy Inc. (now known as
Fidelity National Information Services, Inc.) at
December 31, 2005 and 2004, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2005, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for a variable interest entity upon adoption of certain
provisions of Financial Accounting Standards Board Financial
Interpretation No. 46, “Consolidation of Variable
Interest Entities” on December 31, 2003.
As discussed in Note 2 to the consolidated financial
statements, effective January 1, 2005, the Company adopted
the provisions of Statement of Financial Accounting Standard
(SFAS) No. 123 (revised 2004) applying the modified
retrospective method, which resulted in the restatement of all
prior periods presented in the consolidated financial statements.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Certegy Inc.’s (now known as Fidelity
National Information Services, Inc.) internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 10, 2006
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 10, 2006
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Shareholders
Certegy Inc. (now known as Fidelity National Information
Services, Inc.)
We have audited management’s assessment, included in the
accompanying Management’s Annual Report on Internal Control
over Financial Reporting, that Certegy Inc. (now known as
Fidelity National Information Services, Inc.) maintained
effective internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Certegy Inc.’s (now known as Fidelity
National Information Services, Inc.) management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is
to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our 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, management’s assessment that Certegy Inc.
(now known as Fidelity National Information Services, Inc.)
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion,
Certegy Inc. (now known as Fidelity National Information
Services, Inc.) maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Certegy Inc. (now known as
Fidelity National Information Services, Inc.) as of
December 31, 2005 and 2004, and the related consolidated
statements of income, shareholders’ equity, and cash flows
for each of the three years in the period ended
December 31, 2005 and our report dated March 10, 2006
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 10, 2006
55
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
The management of Certegy Inc. (now known as Fidelity National
Information Services, Inc.) is responsible for establishing and
maintaining adequate internal control over financial reporting,
as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934. Under those rules,
internal control over financial reporting is defined as a
process designed by, or under the supervision of, Certegy’s
principal executive and principal financial officers, and
effected by its board of directors, management and other
personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles and includes those
policies and procedures that:
| • | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of Certegy’s assets; | |
| • | 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 are being made only in accordance with authorizations of Certegy’s management and directors; and | |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Certegy’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. In
addition, 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.
Management assessed the effectiveness of Certegy’s internal
control over financial reporting as of December 31, 2005.
In making this assessment, management used the criteria set
forth in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Based on that assessment, management believes that
Certegy’s internal control over financial reporting was
effective as of December 31, 2005.
Management’s assessment of the effectiveness of
Certegy’s internal control over financial reporting has
been audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their report, which is
included herein.
March 10, 2006
56
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||||
| 2005 | 2004 | |||||||||
| (in thousands, except par | ||||||||||
| values) | ||||||||||
| ASSETS | ||||||||||
|
Current assets:
|
||||||||||
|
Cash and cash equivalents
|
$ | 137,979 | $ | 41,801 | ||||||
|
Settlement deposits
|
31,327 | 44,855 | ||||||||
|
Trade accounts receivable, net of allowance for doubtful
accounts of $2,533 and $2,175, respectively
|
115,825 | 120,767 | ||||||||
|
Settlement receivables
|
26,773 | 49,861 | ||||||||
|
Claims recoverable (Note 2)
|
36,660 | 39,316 | ||||||||
|
Other receivables
|
78,491 | 48,053 | ||||||||
|
Other current assets (Note 2)
|
17,847 | 22,236 | ||||||||
|
Assets held for sale (Note 5)
|
— | 41,828 | ||||||||
|
Total current assets
|
444,902 | 408,717 | ||||||||
|
Property and equipment, net (Note 2)
|
70,346 | 61,490 | ||||||||
|
Goodwill, net (Note 2)
|
244,796 | 232,941 | ||||||||
|
Other intangible assets, net (Note 2)
|
15,546 | 25,506 | ||||||||
|
Systems development and capitalized contract costs, net
|
137,439 | 123,135 | ||||||||
|
Other assets, net (Note 2)
|
59,406 | 70,420 | ||||||||
|
Total Assets
|
$ | 972,435 | $ | 922,209 | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
|
Current liabilities:
|
||||||||||
|
Accounts payable and other accrued expenses
|
$ | 63,083 | $ | 56,764 | ||||||
|
Settlement payables
|
58,100 | 94,716 | ||||||||
|
Claims payable (Note 2)
|
29,497 | 36,204 | ||||||||
|
Compensation and benefit liabilities
|
18,090 | 19,384 | ||||||||
|
Income taxes payable
|
19,310 | 14,398 | ||||||||
|
Other payables
|
18,629 | 22,882 | ||||||||
|
Other current liabilities (Note 2)
|
26,853 | 28,271 | ||||||||
|
Liabilities related to assets held for sale (Note 5)
|
— | 17,719 | ||||||||
|
Total current liabilities
|
233,562 | 290,338 | ||||||||
|
Long-term debt (Note 6)
|
227,881 | 273,968 | ||||||||
|
Deferred income taxes (Note 7)
|
29,112 | 33,071 | ||||||||
|
Other long-term liabilities
|
22,610 | 17,545 | ||||||||
|
Total liabilities
|
513,165 | 614,922 | ||||||||
|
Commitments and contingencies (Note 10)
|
||||||||||
|
Shareholders’ equity:
|
||||||||||
|
Preferred stock, $0.01 par value; 100,000 shares authorized;
none issued and outstanding
|
— | — | ||||||||
|
Common stock, $0.01 par value; 300,000 shares authorized; 69,272
shares issued and 62,815 and 61,784 shares outstanding in 2005
and 2004, respectively
|
693 | 693 | ||||||||
|
Paid-in capital
|
307,000 | 290,865 | ||||||||
|
Retained earnings
|
413,268 | 295,532 | ||||||||
|
Accumulated other comprehensive loss (Note 2)
|
(64,177 | ) | (59,194 | ) | ||||||
|
Treasury stock, at cost; 6,457 and 7,488 shares in 2005 and
2004, respectively
|
(197,514 | ) | (220,609 | ) | ||||||
|
Total shareholders’ equity
|
459,270 | 307,287 | ||||||||
|
Total Liabilities and Shareholders’ Equity
|
$ | 972,435 | $ | 922,209 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
57
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
CONSOLIDATED STATEMENTS OF INCOME
| Year ended December 31, | ||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||
|
Revenues
|
$ | 1,117,141 | $ | 1,039,506 | $ | 921,734 | ||||||||
|
Operating expenses:
|
||||||||||||||
|
Costs of services
|
791,581 | 741,331 | 655,654 | |||||||||||
|
Selling, general and administrative
|
129,443 | 129,679 | 115,693 | |||||||||||
|
Merger and acquisition costs (Note 3)
|
11,162 | — | — | |||||||||||
|
Other charges (Note 3)
|
— | — | 12,203 | |||||||||||
| 932,186 | 871,010 | 783,550 | ||||||||||||
|
Operating income
|
184,955 | 168,496 | 138,184 | |||||||||||
|
Other income, net
|
2,435 | 1,207 | 2,339 | |||||||||||
|
Interest expense
|
(12,832 | ) | (12,914 | ) | (7,950 | ) | ||||||||
|
Income from continuing operations before income taxes, equity in
earnings of unconsolidated entity and cumulative effect of a
change in accounting principle
|
174,558 | 156,789 | 132,573 | |||||||||||
|
Provision for income taxes
|
(68,927 | ) | (59,111 | ) | (50,429 | ) | ||||||||
|
Equity in earnings of unconsolidated entity
|
(117 | ) | — | — | ||||||||||
|
Income from continuing operations before cumulative effect of a
change in accounting principle
|
105,514 | 97,678 | 82,144 | |||||||||||
|
Income from discontinued operations, net of taxes of $16,419,
$3,595, and $2,288, respectively (Note 5)
|
24,805 | 5,934 | 3,897 | |||||||||||
|
Cumulative effect of a change in accounting principle, net of
$832 income tax benefit (Note 2)
|
— | — | (1,335 | ) | ||||||||||
|
Net income
|
$ | 130,319 | $ | 103,612 | $ | 84,706 | ||||||||
|
Basic earnings per share (Note 2):
|
||||||||||||||
|
Income from continuing operations before cumulative effect of a
change in accounting principle
|
$ | 1.70 | $ | 1.55 | $ | 1.26 | ||||||||
|
Income from discontinued operations
|
0.40 | 0.09 | 0.06 | |||||||||||
|
Cumulative effect of a change in accounting principle
|
— | — | (0.02 | ) | ||||||||||
|
Net income
|
$ | 2.10 | $ | 1.65 | $ | 1.30 | ||||||||
|
Average shares outstanding
|
62,011 | 62,818 | 65,094 | |||||||||||
|
Diluted earnings per share (Note 2):
|
||||||||||||||
|
Income from continuing operations before cumulative effect of a
change in accounting principle
|
$ | 1.66 | $ | 1.53 | $ | 1.25 | ||||||||
|
Income from discontinued operations
|
0.39 | 0.09 | 0.06 | |||||||||||
|
Cumulative effect of a change in accounting principle
|
— | — | (0.02 | ) | ||||||||||
|
Net income
|
$ | 2.06 | $ | 1.62 | $ | 1.29 | ||||||||
|
Average shares outstanding
|
63,391 | 63,966 | 65,870 | |||||||||||
|
Dividends declared per share of common stock
|
$ | 0.20 | $ | 0.20 | $ | 0.10 | ||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
58
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year ended December 31, | |||||||||||||||
| 2005 | 2004 | 2003 | |||||||||||||
| (In thousands) | |||||||||||||||
|
Cash Flows From Operating Activities:
|
|||||||||||||||
|
Net income
|
$ | 130,319 | $ | 103,612 | $ | 84,706 | |||||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities of continuing operations:
|
|||||||||||||||
|
Income from discontinued operations (Note 5)
|
(4,352 | ) | (5,934 | ) | (3,897 | ) | |||||||||
|
Gain on sale of discontinued operations (Note 5)
|
(45,433 | ) | — | — | |||||||||||
|
Charge for write-down of portfolio of discontinued operations
(Note 5)
|
11,167 | — | — | ||||||||||||
|
Depreciation and amortization
|
51,858 | 47,449 | 42,030 | ||||||||||||
|
Amortization of deferred compensation
|
12,206 | 16,241 | 14,589 | ||||||||||||
|
Income tax benefit from exercise of stock options
|
2,109 | 1,430 | 626 | ||||||||||||
|
Other non-cash items
|
12,299 | 10,628 | 5,925 | ||||||||||||
|
Deferred income taxes
|
1,981 | (5,318 | ) | 12,096 | |||||||||||
|
Cumulative effect of a change in accounting principle
|
— | — | 1,335 | ||||||||||||
|
Changes in assets and liabilities , excluding effects of
acquisitions:
|
|||||||||||||||
|
Accounts receivable, net
|
(27,766 | ) | (22,516 | ) | (1,891 | ) | |||||||||
|
Current liabilities , excluding settlement and claims payable
|
2,967 | (967 | ) | (4,725 | ) | ||||||||||
|
Claims accounts, net
|
(4,050 | ) | 5,225 | (5,092 | ) | ||||||||||
|
Other current assets
|
(2,191 | ) | 4,861 | (2,077 | ) | ||||||||||
|
Other long-term liabilities
|
1,367 | 3,032 | (141 | ) | |||||||||||
|
Other long-term assets
|
(13,666 | ) | (13,354 | ) | (11,665 | ) | |||||||||
|
Net cash provided by operating activities
|
128,815 | 144,389 | 131,819 | ||||||||||||
|
Cash Flows From Investing Activities:
|
|||||||||||||||
|
Capital expenditures
|
(63,566 | ) | (40,908 | ) | (43,747 | ) | |||||||||
|
Proceeds from sale of business (Note 5)
|
60,000 | — | — | ||||||||||||
|
Acquisitions, net of cash acquired (Note 4)
|
(1,000 | ) | (39,721 | ) | — | ||||||||||
|
Net cash used in investing activities
|
(4,566 | ) | (80,629 | ) | (43,747 | ) | |||||||||
|
Cash Flows From Financing Activities:
|
|||||||||||||||
|
Net (repayments of) additions to revolving credit facilities
|
(48,600 | ) | 48,600 | (214,200 | ) | ||||||||||
|
Proceeds from exercise of stock options
|
24,911 | 11,291 | 5,502 | ||||||||||||
|
Dividends paid
|
(12,509 | ) | (12,633 | ) | (3,242 | ) | |||||||||
|
Treasury stock purchases
|
— | (96,502 | ) | (73,550 | ) | ||||||||||
|
Proceeds from note issuance, net of discount and payment of debt
issuance costs
|
— | — | 196,130 | ||||||||||||
|
Other
|
289 | (723 | ) | (32 | ) | ||||||||||
|
Net cash used in financing activities
|
(35,909 | ) | (49,967 | ) | (89,392 | ) | |||||||||
|
Effect of foreign currency exchange rates on cash
|
(1,089 | ) | (390 | ) | 7,886 | ||||||||||
|
Cash provided by discontinued operations (Note 5)
|
8,927 | 6,118 | 1,548 | ||||||||||||
|
Net cash provided
|
96,178 | 19,521 | 8,114 | ||||||||||||
|
Cash and cash equivalents, beg inning of year
|
41,801 | 22,280 | 14,166 | ||||||||||||
|
Cash and cash equivalents, end of year
|
$ | 137,979 | $ | 41,801 | $ | 22,280 | |||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
59
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY
| Accumulated Other | Total | ||||||||||||||||||||||||||||||||
| Shares | Common | Paid-in | Retained | Comprehensive | Treasury | Shareholders’ | Comprehensive | ||||||||||||||||||||||||||
| Outstanding | Stock | Capital | Earnings | Loss | Stock | Equity | Income | ||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||
|
Balance, December 31, 2002
|
65,999 | $ | 692 | $ | 259,784 | $ | 126,297 | $ | (114,799 | ) | $ | (69,582 | ) | $ | 202,392 | $ | 32,680 | ||||||||||||||||
|
2003 changes:
|
|||||||||||||||||||||||||||||||||
|
Net income
|
84,706 | 84,706 | $ | 84,706 | |||||||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
38,291 | 38,291 | 38,291 | ||||||||||||||||||||||||||||||
|
Treasury stock purchased
|
(2,552 | ) | (73,550 | ) | (73,550 | ) | |||||||||||||||||||||||||||
|
Dividends declared
|
(6,459 | ) | (6,459 | ) | |||||||||||||||||||||||||||||
|
Stock options exercised
|
298 | (1,288 | ) | 6,790 | 5,502 | ||||||||||||||||||||||||||||
|
Income tax benefit from stock options
|
626 | 626 | |||||||||||||||||||||||||||||||
|
Amortization of deferred compensation
|
14,589 | 14,589 | |||||||||||||||||||||||||||||||
|
Cash flow hedging activities, net of taxes of $417
|
654 | 654 | 654 | ||||||||||||||||||||||||||||||
|
Balance, December 31, 2003
|
63,745 | 692 | 273,711 | 204,544 | (75,854 | ) | (136,342 | ) | 266,751 | $ | 123,651 | ||||||||||||||||||||||
|
2004 changes:
|
|||||||||||||||||||||||||||||||||
|
Net income
|
103,612 | 103,612 | $ | 103,612 | |||||||||||||||||||||||||||||
|
Foreign currency translation adjustment, net of taxes of $992
|
16,462 | 16,462 | 16,462 | ||||||||||||||||||||||||||||||
|
Treasury stock purchased
|
(2,657 | ) | (96,502 | ) | (96,502 | ) | |||||||||||||||||||||||||||
|
Dividends declared
|
(12,624 | ) | (12,624 | ) | |||||||||||||||||||||||||||||
|
Stock options exercised
|
559 | (553 | ) | 11,844 | 11,291 | ||||||||||||||||||||||||||||
|
Issuance of restricted stock
|
137 | 1 | (392 | ) | 391 | — | |||||||||||||||||||||||||||
|
Income tax benefit from stock options
|
1,858 | 1,858 | |||||||||||||||||||||||||||||||
|
Amortization of deferred compensation
|
16,241 | 16,241 | |||||||||||||||||||||||||||||||
|
Cash flow hedging activities, net of taxes of $126
|
198 | 198 | 198 | ||||||||||||||||||||||||||||||
|
Balance, December 31, 2004
|
61,784 | 693 | 290,865 | 295,532 | (59,194 | ) | (220,609 | ) | 307,287 | $ | 120,272 | ||||||||||||||||||||||
|
2005 changes:
|
|||||||||||||||||||||||||||||||||
|
Net income
|
130,319 | 130,319 | $ | 130,319 | |||||||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
4,133 | 4,133 | 4,133 | ||||||||||||||||||||||||||||||
|
Dividends declared
|
4 | (12,583 | ) | (12,579 | ) | ||||||||||||||||||||||||||||
|
Stock options exercised
|
936 | 4,414 | 20,497 | 24,911 | |||||||||||||||||||||||||||||
|
Issuance of restricted stock and restricted stock units
|
95 | (2,598 | ) | 2,598 | — | ||||||||||||||||||||||||||||
|
Income tax benefit from stock options
|
2,109 | 2,109 | |||||||||||||||||||||||||||||||
|
Amortization of deferred compensation
|
12,206 | 12,206 | |||||||||||||||||||||||||||||||
|
Minimum pension liability, net of tax benefit of $6,017
|
(9,451 | ) | (9,451 | ) | (9,451 | ) | |||||||||||||||||||||||||||
|
Cash flow hedging activities, net of taxes of $214
|
335 | 335 | 335 | ||||||||||||||||||||||||||||||
|
Balance, December 31, 2005
|
62,815 | $ | 693 | $ | 307,000 | $ | 413,268 | $ | (64,177 | ) | $ | (197,514 | ) | $ | 459,270 | $ | 125,336 | ||||||||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
60
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Basis of Presentation
On July 7, 2001, Equifax Inc. spun-off its Payment Services
division by consolidating all of the assets and liabilities of
the businesses that comprised the Payment Services division into
Certegy Inc. and distributing all of the outstanding shares of
Certegy common stock to Equifax shareholders.
On February 1, 2006, Fidelity National Information
Services, Inc. (“Former FIS”) was merged into a wholly
owned subsidiary of Certegy in a tax-free merger, and as a
result, the Company changed its name from Certegy to Fidelity
National Information Services, Inc. (“FIS”). Although
the combination with Former FIS was structured as a merger of
Former FIS into a wholly owned subsidiary of Certegy, the
stockholders of Former FIS now hold a majority of our
outstanding shares of common stock. Accordingly, for accounting
and financial reporting purposes, the merger will be treated as
a reverse acquisition of Certegy by Former FIS under the
purchase method of accounting pursuant to accounting principles
generally accepted in the U.S. (“GAAP”). The
financial statements of the combined company after the merger
will reflect the financial results of Former FIS on a historical
basis and will include the results of operations of Certegy from
February 1, 2006.
The accompanying consolidated financial statements include the
accounts of Certegy and its majority-owned subsidiaries as of
December 31, 2005 and 2004, and for each of the three years
in the period ended December 31, 2005. The consolidated
financial statements have been prepared on the historical cost
basis in accordance with GAAP and present the Company’s
consolidated financial position, results of operations, changes
in shareholders’ equity and cash flows. All significant
intercompany transactions and balances have been eliminated.
Certain prior period amounts have been reclassified to conform
to the current period presentation.
Unless stated otherwise or the context otherwise requires, all
references in these consolidated financial statements and
related notes to “Certegy” are to Certegy Inc., and
its subsidiaries, prior to the merger; all references to
“Former FIS” are to Fidelity National Information
Services, Inc., a Delaware corporation, and its subsidiaries,
prior to the merger; all references to “FIS” or the
“Company” are to Fidelity National Information
Services, Inc., a Georgia corporation formerly known as Certegy
Inc., and its subsidiaries; and all references to the
“merger” are to the merger on February 1, 2006,
of Former FIS into a wholly owned subsidiary of Certegy.
Historically, Certegy’s business consisted of providing
credit card, debit card, and other transaction processing and
check risk management services to financial institutions and
merchants in the U.S. and internationally through two segments,
Card Services and Check Services (see Note 12 for segment
information). Card Services provided card issuer services in the
U.S., the U.K., Brazil, Chile, Australia, New Zealand, Ireland,
Thailand, the Caribbean, and Canada. Additionally, Card Services
provided merchant processing and
e-banking services in
the U.S. and card issuer software, support, and consulting
services in numerous countries. Check Services provided check
risk management services and related processing services in the
U.S., the U.K., Canada, France, Ireland, Australia, and New
Zealand.
Note 2 — Significant Accounting Policies
Use of Estimates. The preparation of financial statements
in conformity with GAAP requires management to make estimates
and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, as well as reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from
these estimates.
Revenue Recognition. Revenues from credit and debit card
processing and related services are recognized based on a
specified amount per account, per card, or per transaction when
processed or as services are rendered.
61
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Revenues for card merchant processing services are recognized in
the period the transactions are processed or when the services
are performed, based on a percentage of the gross amount
charged. Certegy’s merchant processing operations
previously consisted of two businesses: (1) merchant
acquiring, which has now been sold, where Certegy was a direct
party to contracts with merchants regarding its provision of
card processing services for the merchant, and Certegy was
subject to the associated risk that a cardholder billing dispute
would be resolved in favor of the cardholder (referred to as a
cardholder “chargeback”), and (2) institution
processing, where Certegy provided authorization, settlement,
and customer service to community banks and others that contract
directly with merchant customers. When Certegy was a direct
party to contracts with merchants, revenues collected for
services were based primarily on a discount rate, which
considered the cost of interchange fees, which are processing
fees paid to credit card associations. When the relationship was
with the financial institution that contracts directly with the
merchant, Certegy collected the interchange fees in addition to
transaction fees. In both instances, Certegy was responsible for
collecting the interchange fees after settling with the credit
card associations and thus, interchange fees are recorded as a
component of revenues and costs of services in the consolidated
statements of income. As further discussed in Note 5, in
September 2004, the Board of Directors approved a plan to sell
the merchant acquiring business; therefore, Certegy’s
financial statements reflect the results of operations of the
merchant acquiring business as discontinued operations. In 2005,
Certegy completed the sale of this business. Interchange fees
reflected in the consolidated statements of income for 2005,
2004, and 2003 from continuing operations were
$87.1 million, $69.0 million, and $62.8 million,
respectively.
Check guarantee is the process of electronically authorizing a
check being presented to the merchant customer, through an
extensive database, and guaranteeing the face value of the check
to the merchant customer. Revenues for check guarantee services
are based on a percentage of the face value of each guaranteed
check and are recognized when the obligations to the merchant
customer are fulfilled. Check verification services are similar
to check guarantee services, except Certegy does not guarantee
the verified checks, and the risk of loss is retained by the
merchant customer. Revenues for check verification services are
based on a fixed amount per check and are recognized when the
checks are verified.
The Company licenses card issuer software products that allow
customers to manage their credit card programs. These products
include a complete suite of UNIX and mainframe credit card
issuing and acquiring software. Software license revenues are
recognized in accordance with Statement of Position 97-2,
“Software Revenue Recognition.” In certain software
arrangements, the Company provides consulting services, which
include implementation and upgrades to the existing base
software. For license sales that do not include consulting
services, and where the license fee is fixed and determinable,
collectibility is probable, and evidence of an arrangement
exists, revenue is recognized when delivery has occurred. For
professional services related to card issuer software and for
licenses that include consulting or processing services, revenue
is recognized over the period the services are performed. Card
issuer software maintenance and support revenues are recognized
over the term of the contract or as services are performed.
The collection of fees for services or products prior to the
period such services or products are provided to customers are
deferred and recognized over the period such services are
provided or as products are delivered.
Reserves for Card Processing and Check Guarantee Losses.
Certegy recognizes a reserve for estimated losses related to its
card issuing and merchant acquiring businesses based on
historical experience and other relevant factors. In the card
issuing business, estimates are recorded to accrue for losses
resulting from transaction processing errors. A number of
systems and procedures are utilized within the card issuing
business in order to minimize such transaction processing
errors. In the recently sold merchant acquiring business,
Certegy was a direct party to contracts with merchants regarding
its provision of card processing services for the merchant. If,
due to the insolvency or bankruptcy of the merchant or other
reasons, Certegy was not able to collect amounts from its
merchant customers for billing disputes resolved in favor of the
cardholder (referred to as a cardholder “chargeback”),
Certegy had to bear the credit risk for the full amount
62
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of the cardholder transaction. Certegy required cash deposits
and other types of collateral from certain merchants to minimize
any such risk. In addition, Certegy utilized a number of systems
and procedures to manage merchant risk and believed that the
diversification of its merchant portfolio among industries and
geographic regions minimized its risk of loss. These card
processing loss reserve amounts are subject to risk that actual
losses may be greater than the estimates. The Company remains at
risk for cardholder transactions in the merchant acquiring
business conducted prior to the sale of the business. At
December 31, 2005 and 2004, Certegy had aggregate card
processing loss reserves of $0.7 million and
$0.9 million, respectively, which are included in other
current liabilities in the consolidated balance sheets.
Effective January 1, 2003, Certegy adopted Financial
Accounting Standards Board (“FASB”) Interpretation
No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” (“FIN 45”), which
requires the recognition of a liability for the amount of the
fair value of a guarantee. A liability is required to be
maintained until the settlement or expiration of the guarantee
for transactions occurring after December 31, 2002. The
adoption of FIN 45 did not have a material impact on the
card processing business, as based on historical experience,
ongoing credit risk assessments, and the collateral held, the
fair value of Certegy’s guarantee for merchant chargebacks
approximates the credit loss reserves.
In the check guarantee business, if a guaranteed check presented
to a merchant customer is dishonored by the check writer’s
bank, the Company reimburses its merchant customer for the
check’s face value and pursues collection of the amount
from the delinquent check writer. Merchant customers have
approximately 60 days from the check date to present claims
for dishonored checks to the Company. The Company has a maximum
potential liability equal to the value of all checks presented
to its merchant customers; however, through historical
experience and analysis, the Company is able to reasonably
estimate its liability for check returns. The Company recognizes
a liability to its merchant customers for estimated check
returns (claims payable) and a receivable for amounts the
Company estimates it will recover from the check writers (claims
recoverable), based on historical experience and other relevant
factors. The estimated check returns and recovery amounts are
subject to risk that actual amounts returned and recovered may
be different than the Company’s estimates. Certegy had
accrued claims payable and accrued claims recoverable balances
of $29.5 million and $36.7 million at
December 31, 2005 and $36.2 million and
$39.3 million at December 31, 2004, respectively.
As a result of FIN 45, with regards to check guarantee
transactions occurring after December 31, 2002, the Company
is required to maintain a liability for each guaranteed check
equal to the fair value of the guarantee, until the settlement
or expiration of the guarantee. As Certegy was already applying
similar accounting policies for the recognition of its guarantee
obligations and related revenue, the adoption of FIN 45 did
not have a material impact on its check guarantee business.
The Company settles its claim obligations with merchants on
average within 14 days. Recoverability of claims from the
check writers extends beyond this timeframe, but generally
occurs within a one-year timeframe.
Certegy recorded card processing losses and check guarantee
losses, net of anticipated recoveries excluding service fees, of
$147.1 million, $170.0 million, and
$174.6 million, respectively, for the years ended
December 31, 2005, 2004, and 2003. Amounts written-off, or
in the case of check guarantee losses, the amounts paid to
merchant customers, net of amounts recovered from check writers
excluding service fees, were $151.3 million,
$165.1 million, and $180.7 million, respectively, for
the years ended December 31, 2005, 2004, and 2003.
Other Charges. It is the Company’s policy to present
other charges, such as severance, impairment, or restructuring,
if significant for a given reporting period, on a separate line
item within operating expenses in the consolidated statements of
income. In the normal course of business, it is not unusual for
the Company to
63
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
have ongoing severance charges that are not significant and
therefore, not presented separately in the consolidated
statements of income.
Share-Based Compensation. On December 16, 2004, the
FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123(R)”),
which is a revision of SFAS No. 123, “Accounting
for Stock-Based Compensation” (“SFAS 123”).
SFAS 123(R) supersedes Accounting Principles Board
(“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees” (“APB 25”), and
amends SFAS No. 95, “Statement of Cash
Flows.” Generally, the approach in SFAS 123(R) is
similar to the approach described in SFAS 123. However,
SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.
SFAS 123(R) permits public companies to adopt its
requirements using one of two methods:
| • | A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. | |
| • | A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all periods presented or (b) prior interim periods of the year of adoption. |
Certegy adopted SFAS 123(R) on January 1, 2005, using
the Black-Scholes-Merton option valuation model and the modified
retrospective method, restating all prior periods. Prior to
January 1, 2005, Certegy accounted for stock option awards
using APB 25’s intrinsic value method as permitted by
SFAS 123. As such, no compensation cost was recognized in
the income statement, as the exercise price equaled the market
value of the underlying common stock on the date of grant.
Additionally, prior to January 1, 2005, Certegy presented
all tax benefits of deductions resulting from the exercise of
stock options as operating cash flows in the consolidated
statement of cash flows. SFAS 123(R) requires that the cash
retained as a result of excess tax benefits relating to
share-based compensation be presented as financing cash flows,
with the remaining tax benefits presented as operating cash
flows. Prior to the adoption of SFAS 123(R), restricted
stock awards were recorded as deferred compensation, a reduction
of shareholders’ equity, based on the quoted fair market
value of Certegy’s stock on the date of grant. The common
or treasury stock balances were adjusted on the date of grant to
reflect the issuance of the restricted stock awards. Under the
provisions of SFAS 123(R), restricted stock awards are not
deemed to be issued until the end of the vesting period.
Accordingly, SFAS 123(R) requires that compensation cost be
recognized over the requisite service period with an offsetting
credit to paid-in capital. Refer to Note 8 for additional
information regarding Certegy’s share-based compensation
awards.
Equity in Earnings of Unconsolidated Entity. The Company
is a minority owner in a financial institution holding company
whose objective is to engage in the acquisition and issuing of
agent bank Visa and MasterCard credit cards for credit unions
and to develop and provide other credit card-related products
and services designed specifically for credit unions and their
members. The holding company is currently in a
start-up phase and is
awaiting regulatory approval from the Federal Deposit Insurance
Corporation (“FDIC”). As of December 31, 2005,
Certegy had invested approximately $0.5 million of its
total anticipated investment of $2.5 million for a 24.99%
ownership interest in the entity. Certegy accounts for this
investment using the equity method of accounting.
Earnings Per Share. Basic earnings per share
(“EPS”) is calculated by dividing net income by the
weighted average number of common shares outstanding during the
period.
64
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Diluted EPS reflects the potential dilution that would occur if
stock options or other contracts to issue common stock were
exercised and resulted in additional common shares outstanding
during the period. Diluted weighted average shares outstanding
in 2005, 2004 and 2003 excludes 960 thousand, 37 thousand and
2.0 million weighted average shares, respectively, since
these shares were antidilutive.
A reconciliation of the average outstanding shares used in the
basic and diluted EPS calculations for the years ended
December 31, 2005, 2004, and 2003 is as follows (in
thousands):
| 2005 | 2004 | 2003 | ||||||||||
|
Weighted average shares outstanding — basic
|
62,011 | 62,818 | 65,094 | |||||||||
|
Effect of dilutive securities:
|
||||||||||||
|
Stock options
|
931 | 815 | 479 | |||||||||
|
Restricted stock and restricted stock units
|
449 | 333 | 297 | |||||||||
|
Weighted average shares outstanding — diluted
|
63,391 | 63,966 | 65,870 | |||||||||
Cash and Cash Equivalents. Cash and cash equivalents
include cash on hand and all liquid investments with an initial
maturity of three months or less when purchased.
Settlement Deposits, Receivables, and Payables.
Settlement receivables and payables result from timing
differences in Certegy’s settlement process with merchants,
financial institutions, and credit card associations related to
merchant and card transaction processing and third-party check
collections. Cash held by Certegy associated with this
settlement process is classified as settlement deposits in the
consolidated balance sheets.
The Company has a $100 million unsecured revolving credit
facility that it uses to finance its customers’ shortfalls
in the daily funding requirements associated with the
Company’s credit and debit card settlement operations.
Amounts borrowed are typically repaid within one to two business
days, as customers fund the shortfalls. This facility has a term
of 364 days and is renewed annually. There were no amounts
outstanding under this facility at December 31, 2005 or
2004.
Trade Accounts Receivable. Provisions for losses on trade
accounts receivable were $2.0 million, $1.1 million,
and $2.0 million, respectively, and write-offs, net of
recoveries, were $1.7 million, $0.8 million, and
$2.8 million, respectively, for the years ended
December 31, 2005, 2004, and 2003.
Other Receivables and Other Payables. Other receivables
and other payables represent amounts due from consumers and
amounts due to merchant customers, respectively, related to the
deferred debit processing services offered in Australia and the
U.K. Additionally, other receivables include amounts due from
various financial institutions for the settlement of credit
card, debit card, or ATM transactions generated by consumers to
access cash or written payment instruments in the cash access
business. Other payables also include amounts due to casinos for
written payment instruments issued by Certegy in its cash access
business.
Other Current Assets. Certegy’s other current assets
at December 31, 2005 and 2004 consist of the following (in
thousands):
| 2005 | 2004 | |||||||
|
Prepaid expenses
|
$ | 10,429 | $ | 13,395 | ||||
|
Current deferred income taxes (Note 7)
|
1,413 | 3,768 | ||||||
|
Inventories and supplies
|
2,195 | 2,417 | ||||||
|
Other
|
3,810 | 2,656 | ||||||
| $ | 17,847 | $ | 22,236 | |||||
65
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Property and Equipment. The cost of property and
equipment is depreciated on a straight-line basis over estimated
useful lives as follows: building — 40 years;
leasehold improvements — not to exceed lease terms;
data processing equipment — 3 to 5 years; and
furniture and other equipment — 3 to 8 years.
Maintenance and repairs are charged to expense as incurred.
Property and equipment at December 31, 2005 and 2004
consist of the following (in thousands):
| 2005 | 2004 | |||||||
|
Land
|
$ | 1,500 | $ | 1,500 | ||||
|
Building and improvements
|
41,051 | 38,852 | ||||||
|
Data processing equipment
|
85,507 | 72,014 | ||||||
|
Furniture and other equipment
|
70,660 | 60,283 | ||||||
| $ | 198,718 | $ | 172,649 | |||||
|
Less accumulated depreciation
|
(128,372 | ) | (111,159 | ) | ||||
| $ | 70,346 | $ | 61,490 | |||||
Depreciation and amortization expense for property and
equipment, including equipment under capital lease, was
$20.4 million in 2005, $19.0 million in 2004, and
$16.8 million in 2003.
Equipment under capital lease, which is included in data
processing equipment, was $8.1 million and
$6.2 million at December 31, 2005 and 2004,
respectively. Accumulated depreciation related to these assets
totaled $3.0 million and $1.3 million at
December 31, 2005 and 2004, respectively.
In December 2003, the FASB issued Interpretation No. 46
(revised 2003), “Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research
Bulletin No. 51” (“FIN 46”).
FIN 46 requires the consolidation of variable interest
entities in which an enterprise absorbs a majority of the
entity’s expected losses, receives a majority of the
entity’s expected residual returns, or both, as a result of
ownership, contractual or other financial interests in the
entity.
The Company is the tenant of certain real property located in
St. Petersburg, Florida (the “Florida Leased
Property”) pursuant to the terms of a synthetic lease
agreement entered into on December 30, 1999 (the
“Florida Lease”) with an unconsolidated variable
interest entity (the “VIE”), as landlord. The term of
the Florida Lease expires on September 17, 2009, but can be
renewed through September 17, 2014. In order to acquire the
Florida Leased Property, third parties have invested capital at
risk equal to 3.5% of the assets of the VIE with the remainder
being financed through a debt obligation of the VIE. This, and
certain other criteria, allowed Certegy to not consolidate the
VIE in its financial statements prior to adopting FIN 46.
Rather, Certegy accounted for the arrangement as an operating
lease. Accordingly, neither the leased facility nor the related
debt was recorded in its consolidated balance sheet.
Upon adoption of certain provisions of FIN 46 on
December 31, 2003, Certegy consolidated the VIE and
recorded a cumulative effect of accounting change expense of
$1.3 million after-tax, or $0.02 per diluted share.
Upon consolidation of the VIE, property and equipment increased
by $21.0 million, which is net of accumulated depreciation
of $2.2 million, long-term notes payable increased by
$22.4 million, deferred income tax assets increased by
$0.8 million, and a minority interest liability of
$0.8 million was recorded, which is included in other
long-term liabilities in the consolidated balance sheet.
The effect on diluted EPS would have been less than $0.01 in
2003 if FIN 46 had been adopted as of the beginning of 2003.
At December 31, 2005, the value of the property and
equipment related to the VIE included in Certegy’s
consolidated balance sheet was $19.9 million, which is net
of accumulated depreciation of $3.3 million.
66
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Goodwill. SFAS No. 142, “Goodwill and
Other Intangible Assets” (“SFAS 142”)
prescribes the method for determining goodwill impairment.
First, a determination of the fair value of the reporting unit
is made using expected future discounted cash flows. If the net
book value of the reporting unit exceeds the fair value, an
allocation of the reporting unit’s fair value to all of its
assets and liabilities in a manner similar to purchase price
allocation is made, with any residual fair value being allocated
to goodwill. The fair value of the goodwill is then compared to
its carrying amount to determine impairment. SFAS 142
further requires that reporting unit goodwill be re-evaluated
and tested for impairment at least on an annual basis.
Accordingly, during 2005, 2004, and 2003, Certegy updated its
impairment evaluation and determined that reporting unit
goodwill remained unimpaired.
The Company makes certain estimates, assumptions, and
projections about its financial performance and its industry
that affect the determination of the expected future cash flows
used in the Company’s impairment tests. While the Company
believes that its estimates of future cash flows are reasonable,
these estimates are not guarantees of future performance and are
subject to risks and uncertainties that may cause actual results
to differ from what is assumed in these impairment tests. Should
the Company be unable to achieve certain of its business plans,
this could have a future impact on management’s opinion
regarding the valuation of assets, which could result in an
impairment.
A summary of the changes in the net carrying amount of goodwill
by reporting segment for the years ended December 31, 2005
and 2004 is as follows (in thousands):
| Card Svcs | Check Svcs | Total | ||||||||||
|
Balance as of January 1, 2004
|
$ | 157,968 | $ | 29,659 | $ | 187,627 | ||||||
|
Acquisitions
|
21,916 | 17,408 | 39,324 | |||||||||
|
Discontinued operations
|
(4,005 | ) | — | (4,005 | ) | |||||||
|
Foreign currency translation
|
9,020 | 975 | 9,995 | |||||||||
|
Balance as of December 31, 2004
|
184,899 | 48,042 | 232,941 | |||||||||
|
Prior acquisitions
|
2,366 | — | 2,366 | |||||||||
|
Foreign currency translation
|
11,063 | (1,574 | ) | 9,489 | ||||||||
|
Balance as of December 31, 2005
|
$ | 198,328 | $ | 46,468 | $ | 244,796 | ||||||
During 2004, Certegy completed acquisitions of Game Financial
Corporation (“Game Financial”), Crittson Financial
Services LLC (“Crittson”), and Caribbean CariCard
Services, Inc. (“CariCard”) (Note 4). The
goodwill allocated to the merchant acquiring portion of the
Crittson acquisition was reclassified to discontinued operations
(Note 5).
During 2005, Certegy recorded certain adjustments to the
purchase price allocation of these acquisitions as further
discussed in Note 4.
Other Intangible Assets. Certegy’s acquired
intangible assets subject to amortization at December 31,
2005 and 2004 are as follows (in thousands):
| 2005 | 2004 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
| Amount | Amortization | Amount | Amortization | |||||||||||||
|
Acquired customer contracts
|
$ | 21,908 | $ | (9,659 | ) | $ | 27,328 | $ | (5,431 | ) | ||||||
|
Other
|
4,853 | (1,556 | ) | 4,853 | (1,244 | ) | ||||||||||
| 26,761 | (11,215 | ) | 32,181 | (6,675 | ) | |||||||||||
|
Net book value
|
$ | 15,546 | $ | 25,506 | ||||||||||||
67
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Certegy’s acquired intangible assets are amortized on a
straight-line basis over their estimated useful lives. The
weighted-average amortization period for acquired customer
contracts is six years, while the weighted-average amortization
period for other acquired intangible assets, which primarily
consist of data files and customer lists, is 13 years.
During 2004, Certegy completed the acquisitions of Game
Financial, Crittson, and CariCard, resulting in identifiable
intangible assets as further discussed in Note 5. These
intangible assets represent the values assigned to acquired
customer contracts and are being amortized on a straight-line
basis primarily over seven years.
The change in the carrying amount of other intangible assets
from December 31, 2004 to December 31, 2005 was the
result of certain adjustments to the purchase price allocation
of the Game Financial and CariCard acquisitions
(Note 4) and currency translation adjustments.
Amortization expense associated with Certegy’s acquired
intangible assets totaled $4.5 million, $4.0 million,
and $2.0 million for the years ended December 31,
2005, 2004 and 2003, respectively. Estimated amortization
expense for acquired intangible assets for each of the five
succeeding fiscal years is as follows: 2006-$4.1 million;
2007-$4.1 million; 2008-$2.1 million;
2009-$1.5 million; and 2010-$1.5 million. However,
future amortization amounts will change as a result of purchase
accounting that will be applied to Certegy’s net assets in
connection with the merger. See Note 13 for further
information.
Certegy had no other intangible assets with indefinite useful
lives.
Systems Development and Capitalized Contract Costs. The
Company develops and purchases computer software that is used
internally to provide processing services to customers or for
internal administrative use, and to a lesser extent, software to
be sold or licensed to customers. These systems development
costs have been capitalized based on Statement of Position 98-1,
“Accounting for Costs of Computer Software Developed or
Obtained for Internal Use,” which requires the
capitalization of qualifying internal and external costs
incurred in connection with the design, coding, installation,
and testing of internal use software. Certegy ceased
capitalization at the point at which the project was
substantially complete and ready for its intended use. Systems
development costs were amortized on a straight-line basis
generally over five to eight years, as determined by their
estimated useful lives.
Additionally, Certegy capitalized contract acquisition costs
related to signing or renewing long-term customer contracts to
the extent recoverable through future operations, contractual
minimums, and/or penalties in the case of early termination.
These costs, primarily consisting of internal conversion costs
and cash payments for rights to provide processing services,
were amortized on a straight-line basis generally over the terms
of the customer contracts.
Amortization expense for systems development and capitalized
contract costs was $27.1 million, $24.4 million, and
$23.2 million in 2005, 2004, and 2003, respectively. As of
December 31, 2005 and 2004, accumulated amortization was
$142.9 million and $110.9 million, respectively.
68
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Other Assets. Other assets, net at December 31, 2005
and 2004 consist of the following (in thousands):
| 2005 | 2004 | |||||||
|
Cash surrender value of life insurance policies
|
$ | 15,745 | $ | 13,998 | ||||
|
Intangible assets related to retirement plans (Note 9)
|
4,080 | 4,742 | ||||||
|
Deferred income taxes (Note 7)
|
1,535 | 4,873 | ||||||
|
Deferred financing costs, net
|
1,511 | 2,596 | ||||||
|
Prepaid pension cost (Note 9)
|
— | 16,656 | ||||||
|
Other
|
36,535 | 27,555 | ||||||
| $ | 59,406 | $ | 70,420 | |||||
Impairment of Long-Lived Assets. Long-lived assets other
than goodwill include property and equipment, other intangible
assets, systems development and capitalized contract costs, and
other assets. In accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets” (“SFAS 144”), the Company regularly
evaluates whether events and circumstances have occurred which
indicate that the carrying amount of long-lived assets may
warrant revision or may not be recoverable. When factors
indicate that long-lived assets should be evaluated for possible
impairment, the Company uses an estimate of the future
undiscounted net cash flows of the related business over the
remaining life of the asset in measuring whether the carrying
amount of the related asset is recoverable. To the extent these
projections indicate that future undiscounted net cash flows are
not sufficient to recover the carrying amounts of the related
assets, the underlying assets are written down by charges to
expense so that the carrying amount is equal to fair value,
primarily determined based on future discounted cash flows. In
the opinion of management, Certegy’s long-lived assets are
appropriately valued at December 31, 2005 and 2004.
The Company makes certain estimates, assumptions, and
projections about its financial performance and its industry
that affect the determination of the expected future cash flows
used in the Company’s impairment tests. While the Company
believes that its estimates of future cash flows are reasonable,
these estimates are not guarantees of future performance and are
subject to risks and uncertainties that may cause actual results
to differ from what is assumed in these impairment tests. Should
the Company be unable to achieve certain of its business plans,
this could have a future impact on management’s opinion
regarding the valuation of assets, which could result in an
impairment.
Other Current Liabilities. Certegy’s other current
liabilities at December 31, 2005 and 2004 consist of the
following (in thousands):
| 2005 | 2004 | |||||||
|
Deferred revenue
|
$ | 9,363 | $ | 8,414 | ||||
|
Accrued interest
|
2,799 | 2,810 | ||||||
|
Other
|
14,691 | 17,047 | ||||||
| $ | 26,853 | $ | 28,271 | |||||
69
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Accumulated Other Comprehensive Loss. Accumulated other
comprehensive loss at December 31, 2005, 2004, and 2003
consists of the following components (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
|
Cumulative foreign currency translation adjustment
|
$ | (54,512 | ) | $ | (58,645 | ) | $ | (75,107 | ) | |||
|
Minimum pension liability, net of tax benefit (Note 9)
|
(9,451 | ) | — | — | ||||||||
|
Cumulative loss from cash flow hedging activities
|
(214 | ) | (549 | ) | (747 | ) | ||||||
|
Accumulated other comprehensive loss
|
$ | (64,177 | ) | $ | (59,194 | ) | $ | (75,854 | ) | |||
Foreign Currency Translation. The Company has foreign
subsidiaries whose functional currency is their local currency.
Gains and losses on transactions denominated in currencies other
than the functional currencies are included in determining net
income for the period in which exchange rates change. The assets
and liabilities of foreign subsidiaries, including long-term
intercompany balances, are translated at the year-end rate of
exchange, and income statement items are translated at the
average rates prevailing during the year. The resulting
translation adjustment is recorded as a component of
shareholders’ equity. The effects of foreign currency gains
and losses arising from these translations of assets and
liabilities are included as a component of other comprehensive
income.
Supplemental Cash Flow Information. Supplemental cash
flow disclosures for the years ended December 31, 2005,
2004, and 2003 are as follows (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
|
Income taxes paid, net of amounts refunded
|
$ | 78,329 | $ | 55,534 | $ | 39,163 | ||||||
|
Interest paid
|
$ | 11,550 | $ | 11,958 | $ | 4,536 | ||||||
Income taxes paid in 2005 increased in large part due to an
increase in estimated income tax payments of approximately
$20.0 million related to the gain on the sale of the
merchant acquiring business during 2005 (Note 5). Under
SFAS No. 95, “Statement of Cash Flows,” all
income tax payments are included in determining net cash flow
from operating activities, but the cash received from the sale
of a business, including that portion related to the gain on the
sale, must be reported as an investing cash flow.
Financial Instruments. The Company considers the carrying
amounts of its financial instruments, including cash and cash
equivalents, receivables, accounts payable, and accrued
liabilities to approximate their fair market values due to their
short maturity. The fair value of Certegy’s long-term
unsecured notes was $197.7 million at December 31,
2005, compared to the carrying amount of $199.7 million.
The fair value was derived using the discounted value of future
cash flows at rates currently available for notes with similar
terms. All other debt instruments at December 31, 2005,
approximated their fair values given the debt arrangements have
variable interest rates that reflect current terms and
conditions for similar debt. The fair value of long-term
unsecured notes was $204.4 million at December 31,
2004, compared to the carrying amount of $199.5 million.
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”
(“SFAS 133”) requires that a company recognize
derivatives as assets or liabilities on its balance sheet, and
also requires that the gain or loss related to the effective
portion of derivatives designated as cash flow hedges be
recorded as a component of other comprehensive income. At
December 31, 2005, Certegy had an interest rate swap
arrangement that, in effect, fixed the interest rate for a
related variable rate lease obligation (Note 10). This
derivative was designated as a cash flow hedge, was documented
as fully effective, and at December 31, 2005 and 2004, was
valued as a liability totaling $0.6 million and
$1.2 million, respectively. The notional amount of the debt
underlying the swap arrangement at the date of the transaction
was $10.1 million.
70
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The value of this swap arrangement is included in other current
liabilities in the consolidated balance sheets, and the related
gains or losses are recorded, net of income tax effects, as a
component of other comprehensive income.
Note 3 — Merger and Acquisition Costs and
Other Charges
Merger and Acquisition Costs. On February 1, 2006,
Former FIS was merged into a wholly owned subsidiary of Certegy
in a tax-free merger. See Note 13 for further information
on the merger.
During 2005, Certegy was selected to exclusively negotiate with
two of the largest card issuing banks in Brazil to establish and
acquire a majority-ownership interest in a new joint venture
company that will provide a wide range of card processing
services. Currently, it is anticipated that the card issuing
banks will contribute long-term exclusive processing contracts
to the joint venture, and the Company will contribute
consideration of cash and other capital, which may include part
or all of its existing Brazilian operations. The Company cannot,
at this time, predict the timing or ultimate outcome of this
possible joint venture.
During 2005, Certegy incurred $11.2 million of investment
banking, legal, accounting, and other direct costs
(“M&A”) related to these transactions. Merger
costs of $8.3 million are included in Corporate expense
while $2.9 million in joint venture costs are included in
Card Services.
M&A costs for the year ended December 31, 2005 consist
of the following (in thousands):
| 2005 | ||||||||||||
| Merger | Joint Venture | Total | ||||||||||
|
Investment banking fees
|
$ | 3,864 | $ | 406 | $ | 4,270 | ||||||
|
Legal fees
|
2,627 | 1,025 | 3,652 | |||||||||
|
Accounting fees
|
715 | 440 | 1,155 | |||||||||
|
Consulting and other costs
|
1,033 | 1,052 | 2,085 | |||||||||
| $ | 8,239 | $ | 2,923 | $ | 11,162 | |||||||
Other Charges. During 2003, Certegy recorded other
charges of $12.2 million ($7.7 million after-tax).
These charges included $9.6 million of early termination
costs associated with a U.S. data processing contract,
$2.7 million of charges related to the downsizing of the
Brazilian card operation, and ($0.1) million of market
value recoveries on collateral assignment in life insurance
policies (the carrying value of the collateral assignment is the
lesser of the policies’ cash surrender value or the
premiums paid), net of severance charges. These charges were
recorded in accordance with SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal
Activities,” and SFAS 144.
Early Termination Costs. In March 2003, Certegy entered
into a ten-year agreement with IBM to provide data processing
services for its U.S. operations. The Company anticipates
that this agreement, which replaces an existing arrangement
Certegy had with EDS, will provide cost savings and future
operational flexibility to the Company. Certegy recorded a
charge of $9.6 million in March 2003 for early contract
termination costs under the terms of the existing EDS contract,
which included a $6.7 million termination charge and
$2.9 million for “wind-down” costs payable to EDS
related to the disposal or redeployment of EDS equipment, the
placement of EDS personnel, and the termination of third-party
agreements. Approximately $8.8 million of this charge was
recorded in Card Services, while the remaining $0.8 million
was recorded in Check Services. The conversion to IBM was
completed during the third quarter of 2003 and all charges were
paid as of December 31, 2004.
Downsizing of Brazilian Card Operation. Due to the loss
of a large customer in the Brazilian card operation, which
discontinued using Certegy’s card processing services at
the beginning of March 2003, and the continued focus on
attaining cost efficiencies, Certegy downsized its Brazilian
card operation during the
71
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
first quarter of 2003. In conjunction with this downsizing,
Certegy recorded charges of $2.7 million, which included
severance charges of approximately $0.7 million, a
$0.2 million charge for third-party contract termination
costs, and $1.8 million of asset impairment charges related
to equipment and capitalized software development costs. The
impairment resulted from the downsizing of the operation and
management’s strategic focus away from certain development
models in order to attain on-going cost efficiencies in its
operations. All of the 2003 contract termination costs and
severance charges were paid as of December 31, 2004.
Note 4 — Acquisitions
On March 1, 2004, Certegy completed the purchases of Game
Financial, a provider of debit and credit card cash advances,
ATM access, and check cashing services in gaming institutions,
and Crittson, a full service provider of card and merchant
processing services. The acquisition of Game Financial helps
position the Company as a leading provider of comprehensive cash
access services in the gaming industry and broadens its check
risk management product line and customer base, while the
acquisition of Crittson further strengthens the Company’s
U.S. market share as the leading third party credit card
processor for community banks and credit unions. On
August 6, 2004, Certegy completed the acquisition of
CariCard, a third-party transaction processor in the Caribbean.
CariCard provides a wide range of products and services to
financial institutions, retailers, and the petroleum industry
that service markets in 16 countries throughout the Caribbean.
These acquisitions had a combined cash purchase price of
$45.5 million, net of $24.6 million of cash acquired.
During 2005, Certegy paid an additional $1.0 million
related to Crittson as a result of the acquired business
achieving specified levels of revenue growth during designated
periods subsequent to the acquisition. This payment resulted in
an increase in goodwill.
During 2005, Certegy recorded certain purchase price allocation
adjustments in connection with the Crittson and CariCard
acquisitions. These adjustments included a net decrease in
goodwill of $0.6 million to record a reduction in
acquisition liabilities. Additional adjustments resulted in a
net increase in goodwill of $1.9 million and a net decrease
in acquired customer contracts of $0.7 million to adjust
deferred tax liabilities on assets acquired.
During 2005, a customer contract acquired as part of the Game
Financial acquisition was terminated by the customer. The
purchase agreement for Game Financial provides for a purchase
price reduction in the event of the termination of this customer
contract. Upon notice of the termination of this customer
contract, Certegy recorded a receivable for $4.8 million
and a reduction in the value previously assigned to this
acquired customer contract (included in other intangible
assets). The receivable is included in other receivables in the
consolidated balance sheet at December 31, 2005.
The purchase price allocation, including the purchase price
allocation adjustments discussed above, resulted in identifiable
intangible assets of $14.9 million at December 31,
2005, which are being amortized primarily over seven years. This
intangible asset value was assigned to acquired customer
contracts. Goodwill recognized in these acquisitions amounted to
$41.7 million at December 31, 2005, which is expected
to be fully deductible for tax purposes. Goodwill was assigned
to the Card Services and Check Services segments in the amounts
of $24.3 million and $17.4 million, respectively.
In connection with these acquisitions, Certegy recorded
acquisition liabilities, net of the $0.6 million discussed
above, totaling $7.2 million for early termination costs
associated with a data processing contract of one of the
acquired businesses, severance and relocation costs for
employees of the acquired businesses, and professional fees.
These costs were reflected as assumed liabilities in the
allocation of the purchase price to net assets acquired. There
are no outstanding liabilities related to these acquisitions as
of December 31, 2005.
72
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The above acquisitions were accounted for as purchases and their
results of operations have been included in the consolidated
statements of income from the dates of acquisition. The pro
forma effects of these acquisitions on Certegy’s
consolidated financial statements were not material.
Approximately $5.8 million of the Crittson purchase price,
which represents merchant acquiring operations, was reclassified
to discontinued operations (Note 5), including
$4.0 million of goodwill and $1.2 million of
identifiable intangible assets. Additionally, during 2003,
Certegy acquired a merchant portfolio for $4.5 million in
cash, which was being amortized on a straight-line basis over
seven years. This acquisition was also reclassified to
discontinued operations (Note 5).
Note 5 — Discontinued Operations
Certegy’s merchant processing operations consisted of two
businesses: (1) merchant acquiring, which has now been
sold, where Certegy was a direct party to contracts with
merchants regarding its provision of card processing services
for the merchant, and was subject to the associated risk that a
cardholder billing dispute would be resolved in favor of the
cardholder (referred to as a cardholder “chargeback”),
and (2) institution processing, where Certegy provided
authorization, settlement, and customer service to community
banks and others that contract directly with merchant customers.
Certegy viewed merchant acquiring as a non-strategic business
and over the past few years, had operated this business
conservatively to reduce exposure to merchant risk, which in the
short-term improved overall profitability but limited growth. In
September 2004, the Board of Directors approved a plan to sell
the merchant acquiring business, at which time, the held for
sale criteria in SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” were met.
During the second quarter of 2005, Certegy sold a majority of
the merchant acquiring business for $57.0 million, which
resulted in a gain of $45.4 million, or $27.3 million
after-tax ($0.43 per diluted share). Also during the
quarter, Certegy recorded an $11.2 million, or
$6.8 million after-tax ($0.11 per diluted share)
write-down of its remaining merchant acquiring portfolio to its
estimated net realizable value. In September 2005, Certegy
completed the sale of its remaining merchant acquiring portfolio
for $3.0 million of cash, which approximated net book value
at the date of sale.
Certegy’s financial statements reflect the merchant
acquiring business as a discontinued operation with the related
assets and liabilities classified under the captions
“Assets held for sale” and “Liabilities related
to assets held for sale” in the consolidated balance sheet
at of December 31, 2004. The results of operations are
treated as income from discontinued operations, net of tax, and
separately stated in the consolidated statements of income,
below income from continuing operations. The merchant acquiring
operations were historically included in the Card Services
segment.
The Company plans to continue to operate the institution
processing business, which it believes is complementary to its
card issuing business.
73
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Summarized financial information for discontinued operations for
the years ended December 31, 2005, 2004 and 2003 is as
follows (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
|
Revenues
|
$ | 57,398 | $ | 107,194 | $ | 93,730 | ||||||
|
Operating expenses
|
50,441 | 97,665 | 87,545 | |||||||||
|
Income before income taxes
|
6,957 | 9,529 | 6,185 | |||||||||
|
Provision for income taxes
|
(2,605 | ) | (3,595 | ) | (2,288 | ) | ||||||
|
Income from operations
|
4,352 | 5,934 | 3,897 | |||||||||
|
Gain on sale of business, net of tax
|
27,276 | — | — | |||||||||
|
Write-down of portfolio, net of tax
|
(6,823 | ) | — | — | ||||||||
|
Income from discontinued operations, net of tax
|
$ | 24,805 | $ | 5,934 | $ | 3,897 | ||||||
The assets held for sale and liabilities related to assets held
for sale as of December 31, 2004 were as follows (in
thousands):
| December 31, | ||||||
| 2004 | ||||||
|
Assets:
|
||||||
|
Settlement deposits
|
$ | 1,716 | ||||
|
Trade accounts receivable, net
|
6,424 | |||||
|
Settlement receivables
|
8,774 | |||||
|
Other current assets
|
372 | |||||
|
Goodwill, net
|
4,005 | |||||
|
Other intangible assets, net
|
20,537 | |||||
|
Assets held for sale
|
$ | 41,828 | ||||
|
Liabilities:
|
||||||
|
Accounts payable and other accrued expenses
|
$ | 1,271 | ||||
|
Settlement payables
|
10,490 | |||||
|
Deferred income taxes
|
5,958 | |||||
|
Liabilities related to assets held for sale
|
$ | 17,719 | ||||
74
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Summarized cash flow information associated with discontinued
operations for the years ended December 31, 2005, 2004 and
2003 is as follows (in thousands):
| 2005 | 2004 | 2003 | |||||||||||
|
Income from discontinued operations
|
$ | 4,352 | $ | 5,934 | $ | 3,897 | |||||||
|
Deferred income taxes
|
(165 | ) | 4,994 | 718 | |||||||||
|
Changes in assets and liabilities:
|
|||||||||||||
|
Accounts receivable, net
|
5,389 | (968 | ) | (1,063 | ) | ||||||||
|
Current liabilities, excluding settlement and claims payable
|
(670 | ) | (200 | ) | 296 | ||||||||
|
Other current assets
|
21 | (8 | ) | — | |||||||||
|
Other long-term assets
|
— | 2,327 | 2,429 | ||||||||||
| 8,927 | 12,079 | 6,277 | |||||||||||
|
Capital expenditures
|
— | (161 | ) | (208 | ) | ||||||||
|
Acquisitions (Note 4)
|
— | (5,800 | ) | (4,521 | ) | ||||||||
| — | (5,961 | ) | (4,729 | ) | |||||||||
|
Net cash provided by discontinued ope rations
|
$ | 8,927 | $ | 6,118 | $ | 1,548 | |||||||
The sale of Certegy’s merchant acquiring business in 2005
resulted in proceeds of $60.0 million, which are presented
in investing activities in the statement of cash flows. Income
taxes paid in 2005 on the gain on the sale were approximately
$20.0 million, which are included in operating activities
in the statement of cash flows. Cash flows from our discontinued
operations, excluding the cash flows related to the sale, are
shown separately in the statement of cash flows as cash provided
by discontinued operations.
Note 6 — Long-Term Debt
Long-term debt at December 31, 2005 and 2004 consists of
the following (in thousands):
| 2005 | 2004 | |||||||
|
Unsecured notes, 4.75%, due 2008, net of unamortized discount of
$0.3 million and $0.5 million in 2005 and 2004,
respectively
|
$ | 199,667 | $ | 199,543 | ||||
|
Borrowings under revolving credit facility
|
— | 48,600 | ||||||
|
Notes payable, 4.27% in 2005 and 2.25% in 2004, due 2009
|
22,364 | 22,364 | ||||||
|
Capital lease obligations, less current portion
|
5,850 | 3,461 | ||||||
| $ | 227,881 | $ | 273,968 | |||||
Unsecured Notes. In September 2003, Certegy completed its
offering of $200 million (aggregate principal amount) of
unsecured 4.75% fixed-rate notes due in 2008. The notes rank
equally with all of the Company’s existing and future
unsecured, unsubordinated indebtedness from time to time
outstanding. The notes were sold at a discount of
$0.6 million, which along with the related note issuance
costs, are amortized on a straight-line basis over the term of
the notes. Certegy used the net proceeds from the offering to
repay the outstanding indebtedness under its $300 million
revolving credit facility and for general corporate purposes.
The notes accrue interest at a rate of 4.75% per year,
payable semi-annually in arrears on each March 15 and September
15.
Revolving Credit Facilities. In September 2003, Certegy
cancelled its $300 million revolving credit facility and
replaced it with a new three-year $200 million revolving
credit facility. This facility bore interest at an annual rate
of LIBOR plus 100 basis points and contained certain
financial covenants related to interest
75
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
coverage and funded debt to cash flow. Borrowings on this
facility were available to meet working capital needs and to
fund strategic acquisitions and periodic repurchases of shares
when deemed appropriate. This facility was amended in August
2004 to reduce certain restrictions on intercompany loans and
cash transfers among subsidiaries. At December 31, 2004,
Certegy had outstanding borrowings of $48.6 million, which
were repaid in June 2005 with available cash and net proceeds
from the sale of the merchant acquiring business (Note 5).
This facility had a weighted average interest rate of 3.42% in
2005 and 2.57% in 2004.
On January 31, 2006 this facility was cancelled in
connection with the merger with Former FIS (Note 13), and
Certegy entered into a $250 million unsecured interim term
loan with a financial institution bearing interest at a rate
equal to the higher of the institution’s announced prime
lending rate or the federal funds rate plus one-half of one
percent. The interim term loan contained customary
representations and warranties, and affirmative and negative
covenants, which were substantially similar to those contained
in the $200 million revolving credit facility. Proceeds
from the loan were used to provide the cash necessary to fund
the special dividend in connection with the merger
(Note 13) and merger-related expenses. The loan was repaid
and cancelled on February 1, 2006 using available cash and
borrowings under the Former FIS credit facility. Refer to Former
FIS’s financial statements included as Exhibit 99.2 to
this filing for a description of its credit facility.
The Company also has an unsecured revolving credit facility that
it uses to finance its customers’ shortfalls in the daily
funding requirements associated with its credit and debit card
settlement operations (Note 2). In June 2003, Certegy
lowered the borrowing amount from $130 million to
$100 million. This facility has a term of 364 days and
is renewed annually. Outstanding borrowings on this credit
facility are classified as part of Certegy’s settlement
payables in the consolidated balance sheets. There were no
amounts outstanding under this facility at December 31,
2005 or 2004.
The Company amended this credit agreement on February 1,
2006 to make certain of its terms consistent with the provisions
of the Former FIS credit facility, which amendment also revised
the pricing applicable to the obligations under the credit
agreement so that loans made thereunder will be made utilizing a
variable rate of interest dependent on the senior secured
leverage ratio (as it exists from time to time) of the Company
and its consolidated subsidiaries with (i) prime rate based
borrowings to include an applicable margin above the prime rate
ranging from 0.25% to 0.75% per annum, (ii) LIBOR
based borrowings to include an applicable margin above LIBOR
ranging from 1.25% to 1.75% per annum and
(iii) federal funds rate borrowings to include an
applicable margin above the federal funds rate ranging from
1.50% to 2.0% per annum. The credit agreement contains
various covenants and restrictions, including, among other
things, limitations on the ability to incur indebtedness, to
grant liens, to undertake certain mergers, to liquidate, to make
certain investments and acquisitions, to make certain capital
expenditures, to pay dividends and redeem shares, and to dispose
of certain assets. The terms of the credit agreement also
require the Company to maintain certain senior secured leverage
and interest coverage ratios. The borrowings under this
facility, which have not been guaranteed by any of the
Company’s subsidiaries, are unsecured and rank on parity in
right of payment with all other unsecured and unsubordinated
indebtedness from time to time outstanding.
Notes Payable. As described in Note 2, Certegy
consolidated its Florida Lease on December 31, 2003, in
accordance with certain provisions of FIN 46. As a
component of this consolidation, Certegy recorded long-term
notes payable of $22.4 million, which are due at the
expiration of the lease in September 2009. These notes had a
weighted average interest rate of 4.27% in 2005 and 2.25% in
2004.
The Company amended the Florida Lease on February 1, 2006
to make certain of its terms consistent with the provisions of
the Former FIS credit facility, which amendment also:
(i) revised the pricing applicable to the Florida Lease to
LIBOR plus an applicable margin as existing from time to time
under the Former FIS credit facility, plus 0.125% per
annum; and (ii) added certain of the Company’s
subsidiaries as guarantors.
76
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Capital Lease Obligations. The Company is party to
several capital lease agreements for network, data processing,
and computer equipment with terms ranging from three to five
years. Assets leased under these agreements totaled
$8.1 million and $6.2 million at December 31,
2005 and 2004, respectively.
Future maturities of capital lease obligations, including
current portion, as of December 31, 2005 are as follows (in
thousands):
|
2006
|
$ | 3,366 | ||
|
2007
|
3,320 | |||
|
2008
|
2,483 | |||
|
2009
|
380 | |||
|
2010
|
29 | |||
| 9,578 | ||||
|
Less amounts representing interest
|
(692 | ) | ||
|
Present value of minimum lease payments
|
$ | 8,886 | ||
Note 7 — Income Taxes
The Company files a consolidated U.S. federal income tax
return with its domestic subsidiaries. Foreign subsidiaries file
separate income tax returns based on each subsidiary’s
operations. Where available, the Company does use foreign group
relief provisions to reduce taxes payable within the same
country tax group.
The provision for income taxes from continuing operations before
cumulative effect of a change in accounting principle and
including the effects of adopting SFAS 123(R) consists of
the following (in thousands):
| 2005 | 2004 | 2003 | |||||||||||
|
Current:
|
|||||||||||||
|
Federal
|
$ | 48,999 | $ | 51,940 | $ | 29,153 | |||||||
|
State
|
5,697 | 6,141 | 3,755 | ||||||||||
|
Foreign
|
5,877 | 7,492 | 5,513 | ||||||||||
| 60,573 | 65,573 | 38,421 | |||||||||||
|
Deferred:
|
|||||||||||||
|
Federal
|
3,280 | (6,883 | ) | 13,378 | |||||||||
|
State
|
631 | (1,015 | ) | 815 | |||||||||
|
Foreign
|
4,443 | 1,436 | (2,185 | ) | |||||||||
| 8,354 | (6,462 | ) | 12,008 | ||||||||||
| $ | 68,927 | $ | 59,111 | $ | 50,429 | ||||||||
The provision for income taxes is based on pre-tax income from
continuing operations, which includes the effects of adopting
SFAS 123(R) as follows (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
|
United States
|
$ | 156,557 | $ | 142,766 | $ | 135,382 | ||||||
|
Foreign
|
18,001 | 14,023 | (2,809 | ) | ||||||||
| $ | 174,558 | $ | 156,789 | $ | 132,573 | |||||||
77
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The provision for income taxes from continuing operations before
cumulative effect of a change in accounting principle and
including the effects of adopting SFAS 123(R) is reconciled
with the U.S. federal statutory rate as follows (in
thousands):
| 2005 | ||||||||||||||||||||||||
| 2004 | ||||||||||||||||||||||||
| 2003 | ||||||||||||||||||||||||
|
Provision calculated at federal statutory rate
|
$ | 61,095 | 35.0 | % | $ | 54,876 | 35.0 | % | $ | 46,401 | 35.0 | % | ||||||||||||
|
State and local taxes, net of federal benefit
|
4,113 | 2.4 | 3,332 | 2.2 | 3,629 | 2.7 | ||||||||||||||||||
|
Foreign tax on U.S. income
|
431 | 0.3 | 982 | 0.6 | 367 | 0.3 | ||||||||||||||||||
|
Unremitted earnings of foreign subsidiaries
|
(1,379 | ) | -0.8 | (1,096 | ) | -0.7 | (528 | ) | -0.4 | |||||||||||||||
|
Incentive stock options
|
— | — | 1,106 | 0.7 | 1,302 | 0.9 | ||||||||||||||||||
|
M&A costs
|
3,732 | 2.1 | — | — | — | — | ||||||||||||||||||
|
Other
|
935 | 0.5 | (89 | ) | -0.1 | (742 | ) | -0.5 | ||||||||||||||||
| $ | 68,927 | 39.5 | % | $ | 59,111 | 37.7 | % | $ | 50,429 | 38.0 | % | |||||||||||||
The effective tax rate of 39.5% for the year ended
December 31, 2005 reflects the impact of not recognizing a
tax benefit associated with the M&A costs of
$11.2 million incurred during 2005. A tax benefit for these
costs was not recorded because the ultimate tax treatment of
these costs cannot be determined with adequate certainty at this
time.
During 2002, Certegy determined that its investments in certain
foreign subsidiaries are permanently invested and will not be
repatriated to the U.S. in the foreseeable future. Future
U.S. tax consequences on the undistributed earnings of
these subsidiaries are no longer considered in the tax provision
calculation in accordance with APB Opinion No. 23,
“Accounting for Income Taxes — Special
Areas”. At December 31, 2005, there are approximately
$57.1 million of undistributed net earnings for which no
additional U.S. tax has been provided.
During 2004, the U.S. enacted legislation that would permit
companies with undistributed foreign earnings to repatriate
those earnings in either 2004 or 2005 at a preferential rate of
approximately 5.25%. To qualify for the preferential rate, the
cash dividend must be extraordinary (i.e. greater than the
average foreign dividends paid over a test period), cannot be
used to fund loans back to controlled foreign subsidiaries, and
must be invested in the U.S. pursuant to a domestic
reinvestment plan that is approved by the taxpayer’s chief
executive officer and its Board of Directors, management
committee or similar body.
Management has determined that the level of cash held by its
controlled foreign subsidiaries is required for operations
outside of the U.S. As such, Certegy did not make
qualifying distributions during 2004, but did approve limited
distributions from foreign subsidiaries in 2005. Certegy’s
Barbados subsidiary distributed approximately $0.4 million
in December 2005.
The Company records deferred income taxes using enacted tax laws
and rates for the years in which the Company expects to pay the
taxes. Deferred income tax assets and liabilities are recorded
based on the differences between the financial reporting and
income tax bases of assets and liabilities. Management evaluates
the ultimate recoverability of deferred tax assets and records a
valuation allowance for any portion of an asset for which
ultimate realization is not probable.
78
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Components of Certegy’s deferred income tax assets and
liabilities related to continuing operations and including the
effects of adopting SFAS 123(R) at December 31, 2005
and 2004 are as follows (in thousands):
| 2005 | 2004 | |||||||
|
Deferred income tax assets:
|
||||||||
|
Employee compensation and benefit plans
|
$ | 19,782 | $ | 7,788 | ||||
|
Net operating loss and foreign tax credit carryovers
|
18,314 | 15,458 | ||||||
|
Reserves and accrued expenses
|
5,457 | 5,477 | ||||||
|
Deferred income
|
17 | 1,171 | ||||||
|
Depreciation
|
— | 9 | ||||||
|
Other
|
3,978 | 3,715 | ||||||
| 47,548 | 33,618 | |||||||
|
Deferred income tax liabilities:
|
||||||||
|
Intangibles and other assets
|
(49,452 | ) | (40,646 | ) | ||||
|
Claims recoverable and payable, net
|
(4,742 | ) | (2,284 | ) | ||||
|
Depreciation
|
(85 | ) | — | |||||
|
Other
|
(3,534 | ) | (4,142 | ) | ||||
| (57,813 | ) | (47,072 | ) | |||||
|
Valuation allowances
|
(15,899 | ) | (10,976 | ) | ||||
|
Net deferred income tax liability
|
$ | (26,164 | ) | $ | (24,430 | ) | ||
|
Current deferred tax asset (included in other current assets)
|
$ | 1,413 | $ | 3,768 | ||||
|
Long-term deferred tax asset (included in other assets)
|
1,535 | 4,873 | ||||||
|
Long-term deferred tax liability
|
(29,112 | ) | (33,071 | ) | ||||
| $ | (26,164 | ) | $ | (24,430 | ) | |||
A significant portion of Certegy’s deferred tax assets
relate to net operating loss carryovers in countries outside the
U.S. The Company considers the need for a valuation
allowance on a country-by-country basis taking into account the
effects of local tax law. Management believes that there is
sufficient evidence to support its conclusion not to record a
valuation allowance for deferred tax assets, other than for the
U.S. foreign tax credit carryover and all Brazilian
deferred tax assets. Many factors are considered in the
determination, including whether the losses were generated
primarily by accelerated tax deductions for software, whether
the operations with significant net operating losses have
current year taxable income before net operating loss
utilization, and whether the significant net operating losses
have an indefinite life.
Brazilian deferred tax assets are fully reserved, as those
operations are not currently projected to generate a level of
taxable income that makes realization of these assets probable.
The Company is currently able to utilize Brazilian losses in its
U.S. income tax return so an increase in the valuation
reserve for Brazilian deferred tax does not increase overall
income tax expense. However, utilization of the losses in the
U.S. return makes realization of the U.S. foreign tax
credit carryover highly unlikely, requiring that it also be
fully reserved.
79
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The deferred tax assets for net operating loss and foreign tax
credit carryovers, net of valuation allowances, as of
December 31, 2005 and 2004 consist of the following (in
thousands):
| 2005 | 2004 | |||||||
|
Net operating loss for Card Services Brazil (no expiration date)
|
$ | 15,169 | $ | 10,438 | ||||
|
Net operating loss for Card Services Australia (no expiration
date)
|
2,555 | 4,743 | ||||||
|
Net operating loss for Card Services U.S. — State
|
340 | — | ||||||
|
U.S. foreign tax credit carryover at Certegy Inc. (expires
2006)
|
179 | 179 | ||||||
|
Net operating loss for Card Services U.K. (no expiration date)
|
56 | 67 | ||||||
|
Net operating loss for Card Services Chile (no expiration date)
|
15 | 10 | ||||||
|
Net operating loss for Card Services Thailand (expires 2009)
|
— | 21 | ||||||
|
Net operating loss and foreign tax credit carryovers
|
18,314 | 15,458 | ||||||
|
Valuation allowance for Card Services Brazil
|
(15,169 | ) | (10,438 | ) | ||||
|
Valuation allowance for Certegy Inc.
|
(179 | ) | (179 | ) | ||||
| $ | 2,966 | $ | 4,841 | |||||
In addition to the valuation allowances related to net operating
loss and foreign tax credit carryovers, Certegy had valuation
allowances of $0.5 million and $0.4 million at
December 31, 2005 and 2004, respectively, related to
reserves and accrued expenses. The change in valuation
allowances during 2005 is summarized as follows (in thousands):
|
Valuation allowances at December 31, 2004
|
$ | 10,976 | ||
|
Current year change in valuation allowance for Brazil net
operating loss
|
3,256 | |||
|
Current year change in valuation allowance for other Brazil
deferred tax assets
|
141 | |||
|
Foreign currency translation on Brazil valuation allowance
|
1,526 | |||
|
Valuation allowances at December 31, 2005
|
$ | 15,899 | ||
As discussed in Notes 3 and 13, on February 1,
2006, Former FIS was merged into a wholly owned subsidiary of
Certegy in a tax-free merger.
Note 8 — Shareholders’ Equity
As discussed in Note 2, Certegy adopted SFAS 123(R) on
January 1, 2005, using the Black-Scholes-Merton option
valuation model and the modified retrospective method, restating
all prior periods. The Company currently awards stock options,
restricted stock, and restricted stock units to its employees
and members of the Board of Directors, the terms of which are
described in further detail below.
Certain changes were made to Certegy’s share-based
compensation plans as a result of the merger. Additionally,
vesting of all outstanding Certegy equity incentive awards was
accelerated upon closing of the merger. See Note 13 for
further information.
Stock Options. In June 2001, Certegy’s Board of
Directors adopted the Certegy Inc. Stock Incentive Plan (the
“Employee Stock Plan”), pursuant to which
6.6 million shares of authorized but unissued common stock
were reserved. The Employee Stock Plan provides that qualified
and nonqualified stock options may be granted to officers and
other key employees at exercise prices not less than market
value on the date of grant. Options generally vest over a three
or four-year period subject to the employee’s continued
service and are exercisable for seven to ten years from the date
of grant. Options generally provide for accelerated vesting in
the event of a change in control. Options generally continue to
vest in accordance with the original vesting schedule upon
retirement, or upon permanent disability if the optionee is then
eligible to retire, subject to the
80
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
individual being available to perform reasonable services for
the Company as a consultant through the vesting date of the
grant, and subject to the conditions that the individual does
not commence employment with a competitor of the Company, does
not engage in solicitation of the Company’s employees,
customers or suppliers, and does not disclose the Company’s
confidential information or trade secrets.
Additionally, Certegy adopted the Certegy Inc. Non-Employee
Director Stock Option Plan, pursuant to which
200,000 shares of stock were reserved for grant to
non-employee directors in the form of stock options.
At December 31, 2005, there were approximately
0.7 million and 0.2 million shares available for
future grants and restricted stock awards under the Employee
Stock Plan and the Director Stock Plan, respectively.
The following is a summary of the stock option activity during
2005, 2004, and 2003 (options in thousands):
| Weighted-Average | |||||||||||||||||
| Remaining | Aggregate | ||||||||||||||||
| Weighted-Average | Contractual Term | Intrinsic | |||||||||||||||
| Options | Exercise Price | (years) | Value | ||||||||||||||
|
Balance, January 1, 2003
|
4,369 | $ | 26.26 | ||||||||||||||
|
Granted (at market price)
|
639 | 25.58 | |||||||||||||||
|
Exercised
|
(196 | ) | 29.99 | ||||||||||||||
|
Cancelled
|
(304 | ) | 18.89 | ||||||||||||||
|
Balance, December 31, 2003
|
4,508 | $ | 26.49 | ||||||||||||||
|
Granted (at market price)
|
767 | 33.77 | |||||||||||||||
|
Exercised
|
(87 | ) | 30.81 | ||||||||||||||
|
Cancelled
|
(580 | ) | 20.75 | ||||||||||||||
|
Balance, December 31, 2004
|
4,608 | $ | 28.34 | ||||||||||||||
|
Granted (at market price)
|
742 | 35.44 | |||||||||||||||
|
Exercised
|
(936 | ) | 26.63 | ||||||||||||||
|
Cancelled
|
(92 | ) | 31.76 | ||||||||||||||
|
Balance, December 31, 2005
|
4,322 | $ | 29.86 | 5.41 | $ | 46,251 | |||||||||||
|
Exercisable, December 31, 2005
|
3,022 | $ | 28.46 | 5.09 | $ | 36,578 | |||||||||||
81
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information about stock options
outstanding at December 31, 2005 (options in thousands):
| Options Outstanding | ||||||||||||||||||||
| Weighted Average | Options Exercisable | |||||||||||||||||||
| Remaining | ||||||||||||||||||||
| Contractual Life | Weighted Average | Weighted Average | ||||||||||||||||||
| Range of Exercise Price | Options | in Years | Exercise Price | Options | Exercise Price | |||||||||||||||
|
$13.27 – $18.97
|
450 | 4.49 | $ | 18.19 | 423 | $ | 18.14 | |||||||||||||
|
$19.94 – $23.72
|
489 | 4.18 | $ | 22.04 | 489 | $ | 22.04 | |||||||||||||
|
$24.54 – $26.68
|
468 | 5.99 | $ | 25.28 | 281 | $ | 25.51 | |||||||||||||
|
$26.92 – $30.09
|
537 | 5.09 | $ | 29.03 | 499 | $ | 29.04 | |||||||||||||
|
$30.40 – $33.84
|
426 | 4.98 | $ | 32.47 | 312 | $ | 32.44 | |||||||||||||
|
$34.96
|
921 | 6.12 | $ | 34.96 | 870 | $ | 34.96 | |||||||||||||
|
$35.09 – $35.24
|
663 | 5.78 | $ | 35.18 | 119 | $ | 35.09 | |||||||||||||
|
$35.35 – $38.58
|
328 | 6.15 | $ | 35.58 | 12 | $ | 36.72 | |||||||||||||
|
$38.59
|
20 | 6.47 | $ | 38.59 | — | $ | — | |||||||||||||
|
$43.50
|
20 | 1.38 | $ | 43.50 | 17 | $ | 43.50 | |||||||||||||
| 4,322 | 5.41 | $ | 29.86 | 3,022 | $ | 28.46 | ||||||||||||||
The fair value of options granted in 2005, 2004, and 2003 is
estimated on the date of grant using the Black-Scholes-Merton
option pricing model based on the assumptions summarized in the
following table.
| 2005 | 2004 | 2003 | ||||||||||
|
Dividend yield
|
0.5 | % | 0.6 | % | 0.6 | % | ||||||
|
Expected volatility
|
25.0 | % | 39.8 | % | 40.0 | % | ||||||
|
Risk-free interest rate
|
3.70 – 4.37 | % | 3.6 | % | 3.1 | % | ||||||
|
Expected term (in years )
|
4.62 – 6.97 | 4.8 | 4.8 | |||||||||
Expected volatility and expected term are primarily based on
Certegy’s historical data. In computing historical
volatility, the Company disregards any identifiable period of
time in which its share price is extraordinarily volatile
because of events that are not expected to recur during the
expected term. In 2005, Certegy began evaluating the expected
term based on separate employee groups with similar historical
exercise behavior. The range provided in the table above results
from certain groups of employees exhibiting different exercise
behavior. The risk-free interest rate is based on the
U.S. Treasury zero-coupon issues with a remaining term
approximating the expected term. The dividend yield is
calculated based on the anticipated dividends over the expected
term.
The weighted-average grant-date fair value per share of options
granted in 2005, 2004, and 2003 under the Employee Stock Plan
and the Director Stock Plan is as follows:
| 2005 | 2004 | 2003 | ||||||||||
|
Employee Stock Plan
|
$ | 12.19 | $ | 13.31 | $ | 9.07 | ||||||
|
Director Stock Plan
|
N/A | N/A | $ | 8.90 | ||||||||
The Company recognizes compensation cost for awards with graded
vesting using the straight-line attribution method, with the
amount of compensation cost recognized at any date at least
equal to the portion of the grant-date value of the award that
is vested at that date. At December 31, 2005, the
unamortized compensation cost related to stock option awards
totaled $11.8 million, which was recognized upon the
consummation of the merger.
82
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The compensation cost and related tax benefit associated with
stock options is summarized below (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
|
Stock option expense
|
$ | 5,849 | $ | 11,158 | $ | 10,031 | ||||||
|
Income tax benefit
|
(2,066 | ) | (2,960 | ) | (2,335 | ) | ||||||
| $ | 3,783 | $ | 8,198 | $ | 7,696 | |||||||
Restricted Stock. In June 2001, Certegy’s Board of
Directors adopted the Certegy Inc. Key Management Long-Term
Incentive Plan for officers and other key employees. This plan,
in conjunction with the Employee Stock Plan, provides for the
issuance of restricted stock awards. Restricted stock generally
vests over a specified period subject to the employee’s
continued service. Certain restricted stock awards contain
performance-accelerated provisions; accordingly, compensation
expense associated with these awards can fluctuate each year
based on the likelihood that the performance criteria will be
met. Restricted stock generally provides for accelerated vesting
in the event of a change in control or death. Restricted stock
generally continues to vest in accordance with the original
vesting schedule upon retirement, or upon permanent disability
if the optionee is then eligible to retire, subject to the
individual being available to perform reasonable services for
the Company as a consultant through the vesting date of the
grant, and subject to the conditions that the individual does
not commence employment with a competitor of the Company, does
not engage in solicitation of the Company’s employees,
customers or suppliers, and does not disclose the Company’s
confidential information or trade secrets. Employees receive
dividends on restricted stock awards and are entitled to vote
during the vesting period. Certegy generally recognized
compensation cost for restricted stock on a straight-line basis
over the vesting period based on the quoted fair market value of
the stock on the date of grant.
The following is a summary of the restricted stock activity
during 2005, 2004, and 2003 (shares in thousands):
| Weighted-Average | |||||||||
| Grant-Date | |||||||||
| Shares | Fair Value | ||||||||
|
Balance, January 1, 2003
|
397 | $ | 33.18 | ||||||
|
Granted (at market price)
|
210 | 26.82 | |||||||
|
Balance, December 31, 2003
|
607 | $ | 30.99 | ||||||
|
Granted (at market price)
|
147 | 32.88 | |||||||
|
Vested
|
(18 | ) | 30.30 | ||||||
|
Cancelled
|
(137 | ) | 31.69 | ||||||
|
Balance, December 31, 2004
|
599 | $ | 31.31 | ||||||
|
Granted (at market price)
|
166 | 35.50 | |||||||
|
Vested
|
(90 | ) | 26.10 | ||||||
|
Cancelled
|
(7 | ) | 31.64 | ||||||
|
Balance, December 31, 2005
|
668 | $ | 33.05 | ||||||
|
Weighted average remaining contractual term (years )
|
1.78 | ||||||||
The restricted stock awards granted in 2005, 2004, and 2003
become fully vested at the end of vesting periods, which range
from 12 to 72 months. At December 31, 2005, the
unamortized compensation cost related to restricted stock awards
totaled $9.6 million, which was recognized upon the
consummation of the merger.
83
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The compensation cost and related tax benefit associated with
restricted stock awards is summarized below (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
|
Compensation expense
|
$ | 5,769 | $ | 4,828 | $ | 4,558 | ||||||
|
Income tax benefit
|
(2,242 | ) | (1,877 | ) | (1,595 | ) | ||||||
| $ | 3,527 | $ | 2,951 | $ | 2,963 | |||||||
Restricted Stock Units. Restricted stock units are
awarded to the Company’s Board of Directors. The restricted
stock units vest one year from the grant date at which time one
share of common stock will be issued for each stock unit unless
the Board member elects to defer delivery of the stock.
Compensation expense is recognized on a straight-line basis over
the vesting period based on the quoted fair market value of the
Company’s stock on the date of grant.
In July 2004, 13,475 units were awarded with a
weighted-average grant-date fair value of $37.80 per unit.
The units were fully amortized in the second quarter of 2005, at
which time 1,935 shares were issued and the remaining
vested units were deferred. In May 2005, 12,997 units were
awarded with a weighted-average grant-date fair value of
$37.70 per unit. During 2005, a member of Certegy’s
Board of Directors resigned. As a result, vesting of his awards
was accelerated and 3,801 shares were issued. As of
December 31, 2005, the unamortized compensation cost
related to restricted stock units totaled $158 thousand, which
was recognized upon the consummation of the merger.
The compensation cost and related tax benefit associated with
restricted stock units awards is summarized below (in thousands):
| 2005 | 2004 | |||||||
|
Compensation expense
|
$ | 587 | $ | 255 | ||||
|
Income tax benefit
|
(228 | ) | (99 | ) | ||||
| $ | 359 | $ | 156 | |||||
Treasury Stock. In May 2004, Certegy’s Board of
Directors approved a $100 million share repurchase program,
which replaced the prior program. As of December 31, 2005,
Certegy had $43.3 million remaining under this program for
future share repurchases. When available, the Company uses
treasury shares for employee stock option exercises and
restricted stock awards. During 2005, Certegy made no share
repurchases. During 2004 and 2003, Certegy repurchased
2.7 million and 1.7 million shares of its common stock
through open market transactions at an aggregate cost of
$96.5 million and $49.6 million, respectively.
Additionally, during 2003, Certegy repurchased 0.9 million
shares through a private transaction at an aggregate cost of
$24.0 million. During 2005, 2004, and 2003, Certegy
reissued approximately 1.0 million, 0.7 million, and
0.3 million treasury shares, respectively, in connection
with employee stock option exercises and the vesting of
restricted stock and restricted stock units.
84
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Dividends. Certegy began declaring cash dividends to
common shareholders in the third quarter of 2003. Dividends
declared during 2005, 2004, and 2003 are as follows:
| Dividend | Total Dividend | |||||||
| Per Share | (in millions) | |||||||
|
2005
|
||||||||
|
First Quarter
|
$ | 0.05 | $ | 3.1 | ||||
|
Second Quarter
|
$ | 0.05 | $ | 3.1 | ||||
|
Third Quarter
|
$ | 0.05 | $ | 3.2 | ||||
|
Fourth Quarter
|
$ | 0.05 | $ | 3.2 | ||||
|
2004
|
||||||||
|
First Quarter
|
$ | 0.05 | $ | 3.2 | ||||
|
Second Quarter
|
$ | 0.05 | $ | 3.2 | ||||
|
Third Quarter
|
$ | 0.05 | $ | 3.1 | ||||
|
Fourth Quarter
|
$ | 0.05 | $ | 3.1 | ||||
|
2003
|
||||||||
|
First Quarter
|
$ | — | $ | — | ||||
|
Second Quarter
|
$ | — | $ | — | ||||
|
Third Quarter
|
$ | 0.05 | $ | 3.2 | ||||
|
Fourth Quarter
|
$ | 0.05 | $ | 3.2 | ||||
As part of the merger transaction, Certegy declared a
$3.75 per share special cash dividend that was paid to
Certegy’s pre-merger shareholders. This dividend, totaling
$239.1 million, was paid at the consummation of the merger.
Effect of Adoption of SFAS 123(R) Adoption. The
effect of the adoption of SFAS 123(R) on the consolidated
statements of income is as follows (in thousands, except for per
share data):
| 2005 | 2004 | 2003 | ||||||||||||||||||||||||||||||||||
| Without | SFAS 123(R) | With | Without | SFAS 123(R) | With | Without | SFAS 123(R) | With | ||||||||||||||||||||||||||||
| SFAS 123(R) | impact | SFAS 123(R) | SFAS 123(R) | impact | SFAS 123(R) | SFAS 123(R) | impact | SFAS 123(R) | ||||||||||||||||||||||||||||
|
Income from continuing operations before income taxes, equity in
earnings of unconsolidated entity and cumulative effect of a
change in accounting principle
|
$ | 180,407 | $ | (5,849 | ) | $ | 174,558 | $ | 167,947 | $ | (11,158 | ) | $ | 156,789 | $ | 142,604 | $ | (10,031 | ) | $ | 132,573 | |||||||||||||||
|
Provision for income taxes
|
(70,993 | ) | 2,066 | (68,927 | ) | (62,071 | ) | 2,960 | (59,111 | ) | (52,764 | ) | 2,335 | (50,429 | ) | |||||||||||||||||||||
|
Income from continuing operations
|
109,297 | (3,783 | ) | 105,514 | 105,876 | (8,198 | ) | 97,678 | 89,840 | (7,696 | ) | 82,144 | ||||||||||||||||||||||||
|
Net income
|
134,102 | (3,783 | ) | 130,319 | 111,810 | (8,198 | ) | 103,612 | 92,402 | (7,696 | ) | 84,706 | ||||||||||||||||||||||||
|
Basic earnings per share
|
$ | 2.16 | $ | (0.06 | ) | $ | 2.10 | $ | 1.78 | $ | (0.13 | ) | $ | 1.65 | $ | 1.42 | $ | (0.12 | ) | $ | 1.30 | |||||||||||||||
|
Diluted earnings per share
|
$ | 2.12 | $ | (0.06 | ) | $ | 2.06 | $ | 1.75 | $ | (0.13 | ) | $ | 1.62 | $ | 1.40 | $ | (0.12 | ) | $ | 1.29 | |||||||||||||||
|
Net cash provided by operating activities
|
$ | 130,712 | $ | (1,897 | ) | $ | 128,815 | $ | 144,817 | $ | (428 | ) | $ | 144,389 | $ | 131,819 | $ | — | $ | 131,819 | ||||||||||||||||
|
Net cash used in financing activities
|
(37,806 | ) | 1,897 | (35,909 | ) | (50,395 | ) | 428 | (49,967 | ) | (89,392 | ) | — | (89,392 | ) | |||||||||||||||||||||
85
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 9 — Employee Benefits
In December 2003, Certegy adopted SFAS No. 132
(revised 2003), “Employers’ Disclosures about Pensions
and Other Postretirement Benefits.” This statement revised
employers’ disclosures about pension and other
postretirement benefit plans. It did not change the measurement
or recognition of these plans.
The Company uses a measurement date of December 31 for the
majority of its retirement and postretirement benefit plans.
See Note 13 for a further discussion of the impact of the
merger on the Company’s accounting for its employee benefit
plans.
Retirement Plan. The Company maintains a non-contributory
qualified retirement plan covering most U.S. salaried
employees (the U.S. Retirement Income Plan, or
“USRIP”). Benefits are primarily a function of salary
and years of service.
A reconciliation of the changes in the fair value of plan assets
of the USRIP for the years ended December 31, 2005 and 2004
is as follows (in thousands):
| 2005 | 2004 | |||||||
|
Fair value of plan assets at beginning of year
|
$ | 52,650 | $ | 48,495 | ||||
|
Actual return on plan assets
|
3,383 | 4,730 | ||||||
|
Benefits paid
|
(588 | ) | (575 | ) | ||||
|
Fair value of plan assets at end of year
|
$ | 55,445 | $ | 52,650 | ||||
Benefits paid in the above table include only those amounts paid
directly from plan assets.
The asset allocation for the USRIP at the end of 2005 and 2004
and the target allocation for 2006, by asset category, are as
follows:
| Percentage of | |||||||||||||
| Plan Assets at | |||||||||||||
| Target | Measurement | ||||||||||||
| Allocation | Date | ||||||||||||
| 2006 | 2005 | 2004 | |||||||||||
|
Asset Category:
|
|||||||||||||
|
Equity securities
|
70% | 71 | % | 72 | % | ||||||||
|
Debt securities
|
30% | 29 | % | 28 | % | ||||||||
|
Total
|
100% | 100 | % | 100 | % | ||||||||
The Company’s pension plan assets are invested in a manner
consistent with the fiduciary standards of the “Employment
Retirement Income Security Act” (“ERISA”). Plan
investments are made with the safeguards and diversity to which
a prudent investor would adhere and all transactions undertaken
are for the sole benefit of plan participants and their
beneficiaries.
The Company’s investment objective is to obtain the highest
possible return commensurate with the level of assumed risk.
Fund performances are compared to benchmarks including the
S&P 500 Stock Index, S&P 400 Stock Index, Russell Midcap
Value Index, Russell 2000 Index, MSCI EAFE, Lehman Brothers
Aggregate Bond Index, and ML 3 Month T-Bill Index. The
Company’s Investment Committee meets on a quarterly basis
to review plan investments.
At December 31, 2005, Certegy’s accumulated benefit
obligation exceeded the fair value of plan assets, resulting in
an additional minimum pension liability of $15.6 million.
This additional minimum pension liability exceeded
Certegy’s unrecognized prior service cost by
$15.5 million and was, therefore, recorded as a
86
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
reduction of equity in accordance with SFAS No. 87,
“Employers’ Accounting for Pensions.” This item
of $9.5 million, net of tax benefits of $6.0 million,
is included in accumulated other comprehensive loss in the
consolidated balance sheet at December 31, 2005.
Supplemental Executive Retirement Plan. In November 2003,
Certegy established a supplemental executive retirement plan
(“SERP”) for certain key officers. The plan, which is
unfunded, provides supplemental retirement payments based on
salary and years of service. In connection with the
establishment of this plan, the Company recorded a
$4.4 million intangible asset and additional minimum
liability, representing the unfunded accumulated benefit
obligation at inception of the plan. The intangible asset and
additional minimum liability was $3.9 million and
$4.7 million at December 31, 2005 and 2004,
respectively. The aggregate projected benefit obligation and
accumulated benefit obligation are $7.3 million and
$6.1 million, respectively, as of December 31, 2005
and $7.4 million and $5.9 million, respectively, as of
December 31, 2004. The plan is unfunded and therefore, has
no plan assets.
Postretirement Benefit Plan. The Company maintains
certain healthcare and life insurance benefit plans for eligible
retired employees. Substantially all of the Company’s
U.S. employees may become eligible for these benefits if
they reach retirement age while working for the Company and
satisfy certain years of service requirements. Employees hired
or rehired after December 31, 1998 have access to the
plan’s healthcare benefits but are required to pay 100% of
the age-adjusted premiums. The cost of providing these benefits
is recognized over the active service period of the employees.
On December 8, 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (“the Act”)
was enacted. The Act introduced both a Medicare prescription
drug benefit and a federal subsidy to sponsors of retiree
healthcare plans. In January 2004, the FASB issued FASB Staff
Position No. 106-1 (“FSP 106-1”),
“Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of
2003.” This statement permitted a sponsor of a
postretirement benefit plan that provides a prescription drug
benefit to make a one-time election to defer recognizing the
effects of the Act until authoritative guidance on accounting
for the federal subsidy was issued or until certain other events
occurred. In May 2004, the FASB issued FASB Staff Position
No. 106-2 (“FSP 106-2”), “Accounting and
Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003,” which
superseded FSP 106-1. FSP 106-2, which became effective in the
third quarter of 2004, provides guidance on accounting for the
effects of the Act and requires certain disclosures regarding
the effect of the federal subsidy provided by the Act. To
qualify for the subsidy, plan sponsors of Medicare-eligible
retirees must provide prescription drug benefits, which are at
least as valuable as the benefits that those retirees would be
entitled to under Medicare Part D. The Company’s
postretirement benefit plan provides a prescription drug
benefit. For 2006 (the first year for which the subsidy is
available), the Company has decided not to apply for, and will
not receive, the subsidy. Although an official actuarial
determination has not been made, the Company’s
post-retirement prescription drug benefits are not expected to
qualify for the subsidy in future years. Thus, the accumulated
postretirement benefit obligation and net periodic
postretirement benefit cost amounts do not reflect any amount
associated with the potential subsidy.
87
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A reconciliation of the changes in the benefit obligations for
the years ended December 31, 2005 and 2004 is as follows
(in thousands):
| Postretirement | ||||||||||||||||
| Retirement Plans | Benefit Plan | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
|
Benefit obligations at beginning of year
|
$ | 59,556 | $ | 47,022 | $ | 2,630 | $ | 1,640 | ||||||||
|
Service cost
|
4,547 | 3,753 | 249 | 214 | ||||||||||||
|
Interest cost
|
3,687 | 3,257 | 151 | 122 | ||||||||||||
|
Actuarial loss
|
8,444 | 6,099 | 23 | 666 | ||||||||||||
|
Benefits paid
|
(588 | ) | (575 | ) | (13 | ) | (12 | ) | ||||||||
|
Benefit obligations at end of year
|
$ | 75,646 | $ | 59,556 | $ | 3,040 | $ | 2,630 | ||||||||
|
Accumulated benefit obligations at end of year
|
$ | 65,360 | $ | 51,128 | $ | 3,040 | $ | 2,630 | ||||||||
The weighted-average assumptions used to determine benefit
obligations at December 31, 2005 and 2004 are as follows:
| Retirement Plans | ||||||||||||||||||||||||
| Postretirement | ||||||||||||||||||||||||
| USRIP | SERP | Benefit Plan | ||||||||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||
|
Discount rate
|
5.87 | % | 6.30 | % | 5.26 | % | 5.26 | % | 5.65 | % | 5.85 | % | ||||||||||||
|
Rate of compensation increase
|
4.00 | % | 4.00 | % | 5.00 | % | 5.00 | % | N/A | N/A | ||||||||||||||
A reconciliation of the changes in the funded status for the
years ended December 31, 2005 and 2004 is as follows (in
thousands):
| Postretirement | ||||||||||||||||
| Retirement Plans | Benefit Plan | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
|
Funded status
|
$ | (20,201 | ) | $ | (6,906 | ) | $ | (3,040 | ) | $ | (2,630 | ) | ||||
|
Unrecognized actuarial loss (gain)
|
24,908 | 16,966 | (286 | ) | (317 | ) | ||||||||||
|
Unrecognized prior service cost (benefit)
|
4,926 | 5,439 | (109 | ) | (194 | ) | ||||||||||
|
Net amount recognized
|
$ | 9,633 | $ | 15,499 | $ | (3,435 | ) | $ | (3,141 | ) | ||||||
Amounts recognized in the consolidated balance sheets at
December 31, 2005 and 2004 are as follows (in thousands):
| Postretirement | ||||||||||||||||
| Retirement Plans | Benefit Plan | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
|
Prepaid pension cost (Note 2)
|
$ | — | $ | 16,656 | $ | — | $ | — | ||||||||
|
Accrued benefit cost
|
(9,915 | ) | (5,899 | ) | (3,435 | ) | (3,141 | ) | ||||||||
|
Intangible assets (Note 2)
|
4,080 | 4,742 | — | — | ||||||||||||
|
Minimum pension liability (Note 2)
|
15,468 | — | — | — | ||||||||||||
|
Net amount recognized
|
$ | 9,633 | $ | 15,499 | $ | (3,435 | ) | $ | (3,141 | ) | ||||||
Accrued benefit costs for the plans are included in other
long-term liabilities in the consolidated balance sheets. The
minimum pension liability is included in accumulated other
comprehensive loss in the consolidated statement of
shareholders’ equity.
88
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Net periodic benefit cost for the plans includes the following
components for the years ended December 31, 2005, 2004, and
2003 (in thousands):
| Postretirement | ||||||||||||||||||||||||
| Retirement Plans | Benefit Plan | |||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
|
Service cost
|
$ | 4,547 | $ | 3,753 | $ | 3,191 | $ | 249 | $ | 214 | $ | 184 | ||||||||||||
|
Interest cost
|
3,687 | 3,257 | 2,431 | 151 | 122 | 92 | ||||||||||||||||||
|
Expected return on plan assets
|
(4,539 | ) | (4,424 | ) | (4,316 | ) | — | — | — | |||||||||||||||
|
Recognized actuarial loss
|
1,657 | 665 | — | — | — | — | ||||||||||||||||||
|
Amortization of net gain
|
— | — | — | (7 | ) | (56 | ) | (80 | ) | |||||||||||||||
|
Amortization of prior service cost (benefit)
|
514 | 514 | 108 | (85 | ) | (128 | ) | (170 | ) | |||||||||||||||
|
Net periodic benefit cost
|
$ | 5,866 | $ | 3,765 | $ | 1,414 | $ | 308 | $ | 152 | $ | 26 | ||||||||||||
The weighted-average assumptions used to determine periodic
benefit cost for the years ended December 31, 2005, 2004,
and 2003 are as follows:
| Postretirement | ||||||||||||||||||||||||||||||||||||
| USRIP | SERP | Benefit Plan | ||||||||||||||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | ||||||||||||||||||||||||||||
|
Discount rate
|
6.30 | % | 6.75 | % | 7.00 | % | 5.26 | % | 6.75 | % | 6.75 | % | 5.85 | % | 6.75 | % | 7.00 | % | ||||||||||||||||||
|
Expected long-term return on plan assets
|
8.50 | % | 8.50 | % | 8.50 | % | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||
|
Rate of compensation increase
|
4.00 | % | 4.25 | % | 4.25 | % | 5.00 | % | 5.00 | % | 5.00 | % | N/A | N/A | N/A | |||||||||||||||||||||
For measurement purposes, a 13 percent annual rate of
increase in the per capita cost of covered health care benefits
was assumed for 2006. The rate was assumed to decrease gradually
to 5 percent for 2014 and remain at that level thereafter.
A one-percentage-point change in assumed health care cost trend
rates would have had an immaterial effect on the amounts
reported for the postretirement benefit plan.
The expected long-term rate of return on plan assets was made
considering the USRIP’s asset mix, historical returns on
equity securities, and expected yields to maturity for debt
securities.
For calculating retirement plan expense, a market-related value
of assets is used. The market-related value of assets recognizes
the difference between actual returns and expected returns over
five years at a rate of 20% per year.
While the asset return and interest rate environment have
negatively impacted the funded status of the USRIP, the Company
does not currently have minimum funding requirements, as set
forth in ERISA and federal tax laws. Certegy did not contribute
to the USRIP in 2005 and the Company does not anticipate
contributing to the USRIP in 2006.
89
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information about the expected future employer contributions and
benefit payments for the USRIP, the SERP, and the Postretirement
Benefit Plan is as follows (in thousands):
| Retirement | Postretirement | ||||||||
| Plans | Benefit Plan | ||||||||
|
Employer Contributions:
|
|||||||||
|
2006 (expected)
|
$ | — | $ | 47 | |||||
|
Expected Benefit Payments
|
|||||||||
|
2006
|
$ | 807 | 47 | ||||||
|
2007
|
1,098 | 75 | |||||||
|
2008
|
1,399 | 113 | |||||||
|
2009
|
1,715 | 167 | |||||||
|
2010
|
2,060 | 231 | |||||||
|
2011 – 2015
|
27,763 | 2,075 | |||||||
Foreign Retirement Plans. The Company also maintains
various defined contribution plans for certain employees in its
international locations. Expenses for these plans for the years
ended December 31, 2005, 2004, and 2003 were not material.
Employee Retirement Savings Plan. The Company’s
retirement savings plan provides for annual contributions,
within specified ranges, determined at the discretion of the
Board of Directors for the benefit of eligible employees in the
form of the Company’s common stock. Employees may sell
their stock, including shares contributed as the Company match,
at any time. Certegy’s expense for this plan was
$1.8 million in 2005, $1.7 million in 2004, and
$1.5 million in 2003.
Note 10 — Commitments and Contingencies
The Company is currently reviewing Certegy’s lease
agreements and vendor arrangements as part of the merger
integration, which may result in changes to the following
arrangements.
Operating Leases. The Company’s operating leases
principally involve office space and office equipment. Rental
expense relating to these leases was $15.0 million in 2005,
$11.3 million in 2004, and $11.1 million in 2003.
Future minimum payment obligations for noncancelable operating
leases exceeding one year are as follows as of December 31,
2005 (in thousands):
|
2006
|
$ | 13,901 | ||
|
2007
|
11,819 | |||
|
2008
|
8,899 | |||
|
2009
|
5,208 | |||
|
2010
|
3,099 | |||
|
Thereafter
|
5,916 | |||
| $ | 48,842 | |||
Data Processing Services Agreements. The Company has
agreements with IBM and Proceda, which expire between 2007 and
2014, for portions of its computer data processing operations
and related functions. The Company’s estimated aggregate
contractual obligation remaining under these agreements is
approximately $247.2 million as of December 31, 2005.
However, this amount could be more or less depending on various
factors such as the inflation rate, the introduction of
significant new technologies, or changes in the
90
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company’s data processing needs as a result of the merger,
acquisitions, or divestitures. Under certain circumstances, such
as a change in control of the Company or for the Company’s
convenience, the Company may terminate these agreements.
However, the agreements provide that the Company must pay a
termination charge in the event of such a termination.
Synthetic Leases. As discussed in Notes 2
and 6, the Company is the tenant of the Florida Leased
Property. The original cost to the lessor of the Florida Leased
Property when Certegy entered into the Florida Lease was
approximately $23.2 million. Subject to the satisfaction of
certain conditions, upon the expiration (or any earlier
termination) of the Florida Lease, the Company will be obligated
to acquire the Florida Leased Property at its original cost.
Additionally, the February 1, 2006 amendment to the Florida
Lease also includes a provision that would require the Company
to purchase the Florida Leased Property at its original cost if,
by May 1, 2006, the lender financing the Florida Lease has
concluded either that: (i) the current value of the Florida
Leased Property (as reflected on an appraisal being performed at
the direction of the lender) is not sufficient for the original
cost of the Florida Leased Property to constitute no more than
70% of the current value (but, instead of being required to
purchase the Florida Leased Property, the Company will have the
right to repay a sufficient portion of the lessor’s
original cost to maintain such 70% limit); or
(ii) environmental conditions exist in connection with the
Florida Leased Property (other than to the extent previously
disclosed by the Company to the lender) that could adversely
affect the Florida Leased Property.
Effective December 31, 2003, Certegy began consolidating
this lease arrangement into its consolidated financial
statements in accordance with certain provisions of FIN 46.
The Company also has a synthetic lease arrangement (the
“Wisconsin Lease”) with respect to its facilities in
Madison, Wisconsin (the “Wisconsin Leased Property”).
The Company amended the Wisconsin Lease on February 1, 2006
to make certain of its terms consistent with the provisions of
the Former FIS credit facility, which amendment also:
(i) revised the pricing applicable to the Wisconsin Lease
to LIBOR plus an applicable margin as existing from time to time
under the Former FIS credit facility, plus 0.125% per
annum; (ii) added certain of the Company’s
subsidiaries as guarantors; and (iii) shortened the term of
the Wisconsin Lease so that it is scheduled to expire on
December 31, 2006 rather than in 2009. The original cost to
the lessor of the Wisconsin Leased Property when the Company
entered into the Wisconsin Lease was approximately
$10.1 million. Subject to the satisfaction of certain
conditions, the Company has the option to acquire the Wisconsin
Leased Property at its original cost, or to direct the sale of
the Wisconsin Leased Property to a third party.
At the expiration of the term of the Wisconsin Lease, if the
Wisconsin Leased Property has not been purchased by the Company
or sold to a third party at the direction of the Company, the
lessor may elect to sell the Wisconsin Leased Property. If the
proceeds of such a sale do not cover a specified percentage of
the original cost of the Wisconsin Leased Property, then
pursuant to the provisions of a residual value guarantee made by
the Company to the lessor and its lender, the Company is
obligated to pay any resulting shortfall (but not more than
approximately $8.1 million). Based on the current fair
market value of the Wisconsin Leased Property, the Company does
not expect to be required to make payments under this residual
value guarantee.
At December 31, 2005, Certegy had an interest rate swap
arrangement to fix the variable interest rate on the Wisconsin
Lease (Note 2).
Litigation. A number of lawsuits seeking damages are
brought against the Company each year in the ordinary course of
business. In the opinion of management, the ultimate resolution
of these matters, individually or in the aggregate, will not
have a materially adverse effect on the Company’s financial
position, liquidity, or results of operations.
91
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On October 22, 2004, a complaint for patent infringement
was filed in the matter of USA Payments, Inc. and Global Cash
Access, Inc. v. U.S. Bancorp dba U.S. Bank,
et al., Case No. CV-S-04-1470-JCM PAL,
U.S. District Court, District of Nevada. The complaint
named Certegy Inc. and three of its subsidiaries, Certegy Check
Services, Inc., Game Financial Corporation, and Game Cash, Inc.
as defendants. The plaintiffs were seeking injunctive relief, an
unspecified amount of damages (but no less than an unspecified
reasonable royalty), a trebling of damages, together with
pre-judgment interest, and attorneys’ fees. The parties
have reached an oral understanding on the material terms of a
settlement, which would not result in any payment by the
Company. Negotiations of a definitive agreement are in process.
Note 11 — Quarterly Consolidated Financial
Information (Unaudited)
Quarterly revenues and operating income by reportable segment
(Note 12) and other summarized quarterly financial data for
2005 and 2004 are as follows (in thousands, except per share
amounts):
| First(1) | Second(1) | Third(1) | Fourth(1) | |||||||||||||||
|
2005
|
||||||||||||||||||
|
Revenues:
|
||||||||||||||||||
|
Card Services
|
$ | 153,956 | $ | 164,100 | $ | 166,536 | $ | 167,428 | ||||||||||
|
Check Services
|
108,502 | 111,923 | 116,238 | 128,458 | ||||||||||||||
| $ | 262,458 | $ | 276,023 | $ | 282,774 | $ | 295,886 | |||||||||||
|
Operating income:
|
||||||||||||||||||
|
Card Services
|
$ | 31,046 | $ | 35,253 | $ | 36,688 | $ | 41,249 | ||||||||||
|
Check Services
|
14,202 | 16,246 | 18,378 | 27,203 | ||||||||||||||
| 45,248 | 51,499 | 55,066 | 68,452 | |||||||||||||||
|
General corporate expense
|
(8,196 | ) | (8,122 | ) | (12,048 | ) | (6,944 | ) | ||||||||||
| $ | 37,052 | $ | 43,377 | $ | 43,018 | $ | 61,508 | |||||||||||
|
Income from continuing operations
|
$ | 21,155 | $ | 25,391 | $ | 22,667 | $ | 36,301 | ||||||||||
|
Income from discontinued operations, net of tax (Note 5)
|
2,041 | 22,153 | 602 | 9 | ||||||||||||||
|
Net income
|
$ | 23,196 | $ | 47,544 | $ | 23,269 | $ | 36,310 | ||||||||||
|
Basic earnings per share:
|
||||||||||||||||||
|
Income from continuing operations
|
$ | 0.34 | $ | 0.41 | $ | 0.37 | $ | 0.58 | ||||||||||
|
Income from discontinued operations
|
0.03 | 0.36 | 0.01 | — | ||||||||||||||
|
Net income
|
$ | 0.38 | $ | 0.77 | $ | 0.38 | $ | 0.58 | ||||||||||
|
Diluted earnings per share:
|
||||||||||||||||||
|
Income from continuing operations
|
$ | 0.34 | $ | 0.40 | $ | 0.36 | $ | 0.57 | ||||||||||
|
Income from discontinued operations
|
0.03 | 0.35 | 0.01 | — | ||||||||||||||
|
Net income
|
$ | 0.37 | $ | 0.75 | $ | 0.37 | $ | 0.57 | ||||||||||
|
Dividends declared per common share
|
$ | 0.05 | $ | 0.05 | $ | 0.05 | $ | 0.05 | ||||||||||
| (1) | The first , second, third , and fourth quarters of 2005 include M&A costs of $0.3 million , $1.0 million, $7.0 million, and $2.9 million, respectively. See Note 3 for further information on these costs. |
92
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| First | Second | Third | Fourth | ||||||||||||||
|
2004
|
|||||||||||||||||
|
Revenues:
|
|||||||||||||||||
|
Card Services
|
$ | 138,654 | $ | 144,928 | $ | 149,542 | $ | 157,258 | |||||||||
|
Check Services
|
100,686 | 110,736 | 113,118 | 124,584 | |||||||||||||
| $ | 239,340 | $ | 255,664 | $ | 262,660 | $ | 281,842 | ||||||||||
|
Operating income:
|
|||||||||||||||||
|
Card Services
|
$ | 29,013 | $ | 32,568 | $ | 35,767 | $ | 38,939 | |||||||||
|
Check Services
|
8,050 | 11,633 | 14,987 | 24,117 | |||||||||||||
| 37,063 | 44,201 | 50,754 | 63,056 | ||||||||||||||
|
General corporate expense
|
(7,093 | ) | (6,758 | ) | (6,115 | ) | (6,612 | ) | |||||||||
| $ | 29,970 | $ | 37,443 | $ | 44,639 | $ | 56,444 | ||||||||||
|
Income from continuing operations
|
$ | 16,851 | $ | 21,283 | $ | 25,941 | $ | 33,603 | |||||||||
|
Income from discontinued operations, net of tax (Note 5)
|
1,272 | 1,536 | 1,325 | 1,801 | |||||||||||||
|
Net income
|
$ | 18,123 | $ | 22,819 | $ | 27,266 | $ | 35,404 | |||||||||
|
Basic earnings per share:
|
|||||||||||||||||
|
Income from continuing operations
|
$ | 0.26 | $ | 0.34 | $ | 0.41 | $ | 0.54 | |||||||||
|
Income from discontinued operations
|
0.02 | 0.02 | 0.02 | 0.03 | |||||||||||||
|
Net income
|
$ | 0.28 | $ | 0.36 | $ | 0.44 | $ | 0.57 | |||||||||
|
Diluted earnings per share:
|
|||||||||||||||||
|
Income from continuing operations
|
$ | 0.26 | $ | 0.33 | $ | 0.41 | $ | 0.53 | |||||||||
|
Income from discontinued operations
|
0.02 | 0.02 | 0.02 | 0.03 | |||||||||||||
|
Net income
|
$ | 0.28 | $ | 0.36 | $ | 0.43 | $ | 0.56 | |||||||||
|
Dividends declared per common share
|
$ | 0.05 | $ | 0.05 | $ | 0.05 | $ | 0.05 | |||||||||
Note 12 — Segment Information
Segment information has been prepared in accordance with
SFAS No. 131, “Disclosures About Segments of an
Enterprise and Related Information”
(“SFAS 131”). Prior to the merger, Certegy had
two segments: credit and debit card processing (Card Services)
and check risk management services (Check Services). Segments
were determined based on products and services provided by each
segment (Note 1) and represented components about which
separate internal financial information was maintained and
evaluated by senior management in deciding how to allocate
resources and in assessing performance. The accounting policies
of the segments were the same as those described in
Certegy’s summary of significant accounting policies
(Note 2). Certegy evaluated the segment performance based
on its operating income. Intersegment sales and transfers, which
are not material, have been eliminated.
93
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Segment information for 2005, 2004, and 2003 is as follows
(dollars in thousands):
| 2005 | 2004 | 2003 | |||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | ||||||||||||||||||||
|
Revenues:
|
|||||||||||||||||||||||||
|
Card Services
|
$ | 652,020 | 58 | % | $ | 590,382 | 57 | % | $ | 550,733 | 60 | % | |||||||||||||
|
Check Services
|
465,121 | 42 | 449,124 | 43 | 371,001 | 40 | |||||||||||||||||||
| $ | 1,117,141 | 100 | % | $ | 1,039,506 | 100 | % | $ | 921,734 | 100 | % | ||||||||||||||
|
Operating income:
|
|||||||||||||||||||||||||
|
Card Services
|
$ | 144,236 | 65 | % | $ | 136,287 | 70 | % | $ | 118,363 | 74 | % | |||||||||||||
|
Check Services
|
76,029 | 35 | 58,787 | 30 | 42,540 | 26 | |||||||||||||||||||
| 220,265 | 100 | % | 195,074 | 100 | % | 160,903 | 100 | % | |||||||||||||||||
|
General corporate expense
|
(35,310 | ) | (26,578 | ) | (22,719 | ) | |||||||||||||||||||
| $ | 184,955 | $ | 168,496 | $ | 138,184 | ||||||||||||||||||||
|
Total assets at December 31:
|
|||||||||||||||||||||||||
|
Card Services
|
$ | 537,251 | 55 | % | $ | 533,304 | 58 | % | |||||||||||||||||
|
Check Services
|
319,421 | 33 | 292,936 | 32 | |||||||||||||||||||||
|
Corporate
|
115,763 | 12 | 54,141 | 6 | |||||||||||||||||||||
|
Discontinued operations (Note 5)
|
— | — | 41,828 | 4 | |||||||||||||||||||||
| $ | 972,435 | 100 | % | $ | 922,209 | 100 | % | ||||||||||||||||||
|
Depreciation and amortization:
|
|||||||||||||||||||||||||
|
Card Services
|
$ | 37,549 | 73 | % | $ | 34,054 | 72 | % | $ | 32,220 | 77 | % | |||||||||||||
|
Check Services
|
13,115 | 25 | 12,114 | 25 | 8,688 | 21 | |||||||||||||||||||
|
Corporate
|
1,194 | 2 | 1,281 | 3 | 1,122 | 2 | |||||||||||||||||||
| $ | 51,858 | 100 | % | $ | 47,449 | 100 | % | $ | 42,030 | 100 | % | ||||||||||||||
|
Capital expenditures:
|
|||||||||||||||||||||||||
|
Card Services
|
$ | 47,611 | 75 | % | $ | 31,660 | 77 | % | $ | 29,309 | 67 | % | |||||||||||||
|
Check Services
|
15,931 | 25 | 8,826 | 22 | 13,849 | 32 | |||||||||||||||||||
|
Corporate
|
24 | — | 422 | 1 | 589 | 1 | |||||||||||||||||||
| $ | 63,566 | 100 | % | $ | 40,908 | 100 | % | $ | 43,747 | 100 | % | ||||||||||||||
The increase in Corporate assets from December 31, 2004 to
December 31, 2005 is primarily attributable to the increase
in cash for the proceeds from the sale of Certegy’s
merchant acquiring business in 2005.
94
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Financial information by geographic area is as follows (dollars
in thousands):
| 2005 | 2004 | 2003 | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
|
Revenues (based on location of customer):
|
||||||||||||||||||||||||
|
United States
|
$ | 916,446 | 82 | % | $ | 861,903 | 83 | % | $ | 754,123 | 82 | % | ||||||||||||
|
United Kingdom
|
125,339 | 11 | 92,703 | 9 | 89,477 | 10 | ||||||||||||||||||
|
Brazil
|
35,631 | 3 | 20,718 | 2 | 24,889 | 3 | ||||||||||||||||||
|
Other
|
39,725 | 4 | 64,182 | 6 | 53,245 | 5 | ||||||||||||||||||
| $ | 1,117,141 | 100 | % | $ | 1,039,506 | 100 | % | $ | 921,734 | 100 | % | |||||||||||||
|
Long-lived assets at December 31:
|
||||||||||||||||||||||||
|
United States
|
$ | 289,776 | 55 | % | $ | 299,938 | 59 | % | ||||||||||||||||
|
Brazil
|
126,463 | 24 | 112,784 | 22 | ||||||||||||||||||||
|
United Kingdom
|
70,391 | 13 | 59,813 | 12 | ||||||||||||||||||||
|
Other
|
39,368 | 8 | 36,084 | 7 | ||||||||||||||||||||
| $ | 525,998 | 100 | % | $ | 508,619 | 100 | % | |||||||||||||||||
Revenues from external customers by product and service offering
are as follows (dollars in thousands):
| 2005 | 2004 | 2003 | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
|
Card Issuer Services
|
$ | 542,721 | 48 | % | $ | 502,596 | 48 | % | $ | 462,522 | 50 | % | ||||||||||||
|
Check Services
|
465,121 | 42 | 449,124 | 43 | 371,001 | 40 | ||||||||||||||||||
|
Merchant Processing Services
|
100,345 | 9 | 81,774 | 8 | 76,618 | 9 | ||||||||||||||||||
|
Card Issuer Software and Support
|
8,954 | 1 | 6,012 | 1 | 11,593 | 1 | ||||||||||||||||||
| $ | 1,117,141 | 100 | % | $ | 1,039,506 | 100 | % | $ | 921,734 | 100 | % | |||||||||||||
Note 13 — Subsequent Events (Unaudited)
Acquisition. On February 1, 2006, the Company
acquired certain assets of FastFunds Financial Corporation
(“FastFunds”) and its wholly owned subsidiary Chex
Services, Inc. (“Chex Services”) for approximately
$14 million, which is net of cash acquired. FastFunds,
through Chex Services, provides comprehensive cash access
services including check cashing, automated teller machine
access, and credit and debit card cash advance services to
approximately 50 casinos and gaming establishments in the U.S.,
Canada, and the Caribbean. Management believes this acquisition
further strengthens the Company’s position in the gaming
industry and provides new growth opportunities in the Native
American and Caribbean markets.
Merger. On September 14, 2005, Certegy entered into
a definitive merger agreement with Fidelity National Financial,
Inc. (“FNF”) under which Fidelity National Information
Services, Inc. (“Former FIS”), a majority-owned
subsidiary of FNF, and Certegy would combine operations to form
a single publicly traded company. Former FIS is a leading
provider of core financial institution processing, mortgage loan
processing, and related information products and outsourcing
services to financial institutions, mortgage lenders, and real
estate professionals.
On January 26, 2006, Certegy’s shareholders approved
the combination of Certegy with Former FIS, pursuant to a
stock-for-stock merger, which was consummated on
February 1, 2006. At the time of the merger, the Company
changed its name from Certegy to Fidelity National Information
Services, Inc.
95
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(“FIS”). As a result of the merger, approximately
127.9 million additional shares of Certegy common stock
were issued to the shareholders of Former FIS. Additionally,
outstanding stock options of Former FIS were converted into
approximately 8.9 million stock options of FIS.
As a result of the merger, the Company constitutes one of the
largest providers of processing services to U.S. financial
institutions, with market-leading positions in core processing,
card issuing services, check risk management, mortgage
processing, and lending services. It is able to offer a
diversified product mix, and management believes that it will
benefit from the opportunity to cross-sell products and services
across the combined customer base and from the expanded
international presence and scale. Management also expects to
achieve cost synergies in, among other things, corporate
overhead, compensation and benefits, technology, vendor
management, and facilities.
Under the terms of the merger agreement, Former FIS was merged
into a wholly owned subsidiary of Certegy in a tax-free merger,
and all the outstanding stock of Former FIS was converted into
common stock of the Company. As a result of the merger:
| • | the shareholders of Former FIS, including its then-majority stockholder, FNF, owned approximately 67.4% of the combined company’s outstanding common stock immediately after the merger, while Certegy’s pre-merger shareholders owned approximately 32.6%, | |
| • | FNF itself now owns approximately 50.7% of the combined company’s outstanding common stock, and | |
| • | the combined company’s board of directors was reconstituted so that a majority of the board now consists of directors designated by the stockholders of Former FIS. |
In connection with the merger, Certegy amended its articles of
incorporation to increase the number of authorized shares of
capital stock from 400 million shares to 800 million
shares, with 600 million shares being designated as common
stock and 200 million shares being designated as preferred
stock. Additionally, Certegy amended its Employee Stock Plan to
increase the total number of shares of common stock available
for issuance under the current stock incentive plan by an
additional 6 million shares, and to increase the limits on
the number of options, restricted shares, and other awards that
may be granted to any individual in any calendar year. These
changes were approved by the shareholders on January 26,
2006.
As part of the merger transaction, Certegy declared a
$3.75 per share special cash dividend that was paid to
Certegy’s pre-merger shareholders. This dividend, totaling
$239.1 million, was paid subsequent to the consummation of
the merger.
GAAP requires that one of the two companies in the transaction
be designated as the acquirer for accounting purposes. Former
FIS has been designated as the accounting acquirer because
immediately after the merger, its shareholders hold more than
50% of the common stock of the combined company. As a result,
the merger of Certegy and Former FIS will be accounted for as a
reverse acquisition under the purchase method of accounting.
Under this accounting treatment, Former FIS will be considered
the acquiring entity and Certegy will be considered the acquired
entity for financial reporting purposes. The financial
statements of the combined company after the merger will reflect
the financial results of Former FIS on a historical basis and
will include the results of operations of Certegy from
February 1, 2006.
The purchase price was based on the outstanding common stock of
Certegy on February 1, 2006, the date of consummation of
the merger. The common stock was valued as of February 1,
2006 at a value of $33.38 per share (which is the average
of the trading price of Certegy common stock two days before and
two days after the announcement of the merger on
September 15, 2005 of $37.13, less the $3.75 per share
special dividend declared prior to closing). The purchase price
also includes an estimated fair value of Certegy’s stock
options and restricted stock units outstanding at the
transaction date.
96
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The estimated total purchase price is as follows (in millions):
|
Value of Certegy’s common stock
|
$ | 2,121.0 | ||
|
Value of Certegy’s stock options and restricted stock units
|
47.2 | |||
|
Former FIS’ estimated transaction costs
|
6.7 | |||
|
Total purchase price
|
$ | 2,174.9 | ||
The purchase price will be allocated to Certegy’s tangible
and identifiable intangible assets acquired and liabilities
assumed based on their estimated fair values as of
February 1, 2006. Management expects that the fair value of
the net assets acquired will be lower than the purchase price,
and as a result, goodwill will be recorded for the amount that
the purchase price exceeds the fair value of the net assets
acquired. The preliminary allocation is as follows (in millions):
|
Tangible assets
|
$ | 574.7 | ||
|
Computer software
|
138.8 | |||
|
Intangible assets
|
657.5 | |||
|
Goodwill
|
1,883.4 | |||
|
Liabilities assumed at fair value
|
(1,079.5 | ) | ||
|
Total purchase price
|
$ | 2,174.9 | ||
The completion of the merger of Certegy and Former FIS also
triggered the following related transactions:
Change in Control Agreements. Certegy maintained change
in control agreements with each of its executive officers and
certain other employees pursuant to which they are eligible to
receive severance and other benefits if, during the three-year
period following a change in control, such as the merger, the
employee’s employment with the combined company is
terminated by FIS (other than for “cause” or by reason
of the employee’s disability), or by the employee for
“good reason.” The closing of the merger and the
related transactions under the merger agreement are considered a
change in control under these agreements. Consequently, FIS
determined that certain of the employees are no longer needed as
part of the combined company following the merger, and
accordingly terminated such employees without cause, while
certain other employees elected to terminate their employment,
which entitles them to the change in control benefits. These
benefits include severance payments, certain retirement
benefits, maintenance of three years of medical coverages, and
certain other benefits. Additionally, for benefits that are
subject to the excise taxes imposed under Section 4999 of
the Internal Revenue Code, the participant is entitled to an
additional payment such that he or she was placed in the same
after-tax position as if no excise tax had been imposed. Amounts
paid for such benefits totaled $27.4 million, which were
recorded upon completion of the merger.
New Employment Agreements. Certain other officers and
employees entered into new employment agreements with Certegy,
which became effective upon completion of the merger and which
cancelled and replaced their previous change in control
agreements. In consideration of the cancellation of the prior
change in control agreements, these employees were provided cash
payments upon completion of the merger. Additionally, for
benefits that are subject to the excise taxes imposed under
Section 4999 of the Internal Revenue Code, the participant
is entitled to an additional payment such that he or she was
placed in the same after-tax position as if no excise tax had
been imposed. Amounts paid for such benefits totaled
$11.6 million, which were recorded upon completion of the
merger. Additionally, on February 1, 2006, approximately
1.8 million stock options were awarded to such employees as
compensation for their future service with FIS, with vesting
periods of three to four years. The estimated value of these
stock option grants is $20.7 million.
97
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Accelerated Vesting of Share-Based Compensation Awards.
Upon closing of the merger, each outstanding stock option, share
of restricted stock, and restricted stock unit vested in full in
accordance with the terms of the original grants under the
Employee Stock Plan and the Director Stock Plan; therefore, upon
completion of the merger, the Company recognized all unamortized
compensation cost related to these awards, totaling
$20.5 million.
Upon payment of the $3.75 per share special dividend,
Certegy’s outstanding stock options and restricted stock
units were equitably adjusted to take into account the payment
of the $3.75 per share special dividend in respect of each
share of Certegy common stock. The purpose of the adjustment was
to keep the intrinsic value of the options after the dividend
the same as the intrinsic value of the options before the
dividend, which was accomplished by dividing the exercise price
of each option, and multiplying the number of shares subject to
each option, by a ratio obtained by dividing the market price of
a share of Certegy common stock before giving effect to the
dividend by the market price after giving effect to the
dividend. Outstanding restricted stock units were adjusted by
issuing whole or fractional restricted stock units to the
holders therefore equal to the value of the special dividend
that would have been received by a holder if such holder’s
units had been actual whole or fractional shares of Certegy
common stock.
SERP. Under this plan, if following a change in control
such as the merger, a participant’s employment is
terminated by FIS (other than for “cause” or by reason
of the participant’s disability) or by the participant for
“good reason,” the participant becomes fully vested in
his benefit under the plan and is paid his supplemental pension
benefit in a lump sum. Amounts paid to terminated participants
totaled $1.7 million, which were recorded upon completion
of the merger.
Deferred Compensation Plan. Certegy maintained a deferred
compensation plan for certain employees. Upon a change in
control such as the merger, employees who previously elected to
have their accounts under the plan distributed in a lump sum
upon a change in control are entitled to a distribution of their
account balance. In addition, Certegy maintained a “rabbi
trust” related to this plan. Upon a change in control, the
trust became irrevocable and FIS is required to contribute an
amount that is sufficient to fund the trust in an amount equal
to no less than 100% of the amount necessary to pay each
participant whose account is not to be distributed. The trust is
currently funded by life insurance policies whose cash value is
estimated to be sufficient to fully satisfy all plan obligations.
Life Insurance Coverages. Certegy provided special life
insurance coverages for certain officers and other employees and
has established a “rabbi trust” in connection with
this plan. Upon a change in control, the Company is required to
fully fund the trust in an amount necessary to pay all future
required insurance premiums under the split-dollar life
insurance programs and to pay all of the “participant
interests” as defined in the plan. These amounts were
funded into the rabbi trust as of December 31, 2005 in the
amount of $3.0 million.
Other Costs. From December 31, 2005 through the date
the merger was consummated, Certegy incurred additional M&A
costs totaling $3.0 million for continued legal,
accounting, consulting, and other costs (Note 3).
Additionally, upon completion of the merger, the Company became
obligated to Certegy’s financial advisors for transaction
fees of approximately $13.6 million and for a six-year
“tail” directors’ and officers’ run-off
insurance policy totaling $2.5 million, which were recorded
upon completion of the merger.
Severance. As a result of the merger, the Company
determined that certain of the Certegy employees are no longer
needed as part of the Company following the merger, and
accordingly, has or will be terminating such employees.
Severance costs for these employee terminations are expected to
approximate $10.0 million.
Debt Arrangements. As discussed in Notes 6
and 10, Certegy’s $200 million revolving credit
facility was cancelled on January 31, 2006 in connection
with the merger, and certain terms and conditions of
Certegy’s other debt arrangements, including the synthetic
leases, were amended.
98
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Employee Benefit Plans. Management of FIS is currently
reviewing Certegy’s employee benefit plans in connection
with the Former FIS plans, which may result in changes to the
existing plans.
Lease Agreements and Vendor Arrangements. The Company is
still evaluating certain lease agreements and vendor
arrangements of Certegy. The results of this evaluation may
impact those arrangements and the purchase price allocation.
Decisions regarding the closure of duplicate facilities,
employee relocation, or vendor contract terminations could
result in an increase in the assumed liabilities and an increase
in goodwill.
99
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
| Item 9A. | Controls and Procedures. |
| Disclosure Controls and Procedures |
An evaluation of our disclosure controls and procedures, as
defined in Securities Exchange Act
Rule 13a-15(f),
was carried out by management, with the participation of the
chief executive and chief financial officers, as of the end of
the period covered by this Annual Report on
Form 10-K. No
system of controls, no matter how well designed and operated,
can provide absolute assurance that the objectives of the system
of controls are met, and no evaluation of controls can provide
absolute assurance that the system of controls has operated
effectively in all cases. Our disclosure controls and procedures
however are designed to provide reasonable assurance that the
objectives of disclosure controls and procedures are met.
Based on the evaluation discussed above, our chief executive and
chief financial officers have concluded that our disclosure
controls and procedures were effective as of the date of that
evaluation to provide reasonable assurance that the objectives
of disclosure controls and procedures are met.
| Management’s Annual Report on Internal Control Over Financial Reporting |
Our management’s assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2005, is included in Part II, Item 8
of this Annual Report on
Form 10-K. That
assessment has been audited by Ernst & Young LLP, our
independent registered public accounting firm, as stated in
their report, which is also included in Part II,
Item 8.
| Changes in Internal Control Over Financial Reporting |
There were no changes in our internal control over financial
reporting that occurred during the most recent fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
| Item 9B. | Other Information. |
None.
PART III
| Item 10. | Directors and Executive Officers of the Registrant. |
Our Proxy Statement for the Annual Meeting of Shareholders to be
held on June 21, 2006 to be filed with the Securities and
Exchange Commission, will contain information required by this
item relating to our directors and nominees, compliance with
Section 16(a) of the Securities Exchange Act of 1934, our
audit committee and our audit committee financial experts, and
our code of business conduct and ethics applicable to our chief
executive, financial and accounting officers, which is
incorporated by reference into this report. We intend to satisfy
the disclosure requirement under Item 5.05 of
Form 8-K regarding
an amendment to, or waiver from, a provision of our code of
business conduct and ethics by posting such information on our
website, at www.fidelityinfoservices.com.
100
| Item 11. | Executive Compensation. |
Our Proxy Statement for the Annual Meeting of Shareholders to be
held on June 21, 2006 to be filed with the Securities and
Exchange Commission, will contain information required by this
item relating to director and executive officer compensation,
which is incorporated by reference into this report.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Our Proxy Statement for the Annual Meeting of Shareholders to be
held on June 21, 2006 to be filed with the Securities and
Exchange Commission, will contain information required by this
item relating to security ownership of certain beneficial owners
and management, which is incorporated by reference into this
report.
Our Proxy Statement will also contain information required by
this item relating to our equity compensation plans, which is
incorporated by reference into this report.
| Item 13. | Certain Relationships and Related Transactions. |
Our Proxy Statement for the Annual Meeting of Shareholders to be
held on June 21, 2006 to be filed with the Securities and
Exchange Commission, will contain information required by this
item relating to certain relationships and related transactions
between us and certain of our directors and executive officers,
as well as with FNF and its other subsidiaries, which is
incorporated by reference into this report.
| Item 14. | Principal Accounting Fees and Services. |
Our Proxy Statement for the Annual Meeting of Shareholders to be
held on June 21, 2006 to be filed with the Securities and
Exchange Commission, will contain information required by this
item relating to the fees charged and services provided by our
principal accountant during the last two fiscal years and our
pre-approval policy and procedures for audit and non-audit
services, which is incorporated by reference into this report.
PART IV
| Item 15. | Exhibits, Financial Statement Schedules. |
(a) The following documents are filed as part of this
report:
(1) Financial Statements:
See Financial Statements starting on page 54.
(2) Financial Statement Schedules:
| All schedules have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes to the statements. |
(3) Exhibits:
| The following is a complete list of exhibits included as part of this report, including those incorporated by reference. A list of those documents filed with this report is set forth on the Exhibit Index appearing elsewhere in this report and is incorporated by reference. |
101
| Exhibit | ||||
| No. | Description | |||
| 2 | .1 | Agreement and Plan of Merger among Certegy Inc., C Co. Merger Sub, LLC and Fidelity National Information Services, Inc. dated as of September 14, 2005, previously filed as Exhibit 2.1 on Form 8-K filed September 15, 2005 (SEC File No. 001-16427) and incorporated by reference. | ||
| 3 | .1 | Amended and Restated Articles of Incorporation of Fidelity National Information Services, Inc., previously filed as Exhibit 3.1 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 3 | .2 | Amended and Restated Bylaws of Fidelity National Information Services, Inc., previously filed as Exhibit 3.2 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 4 | .1 | Indenture, dated September 10, 2003, between Certegy Inc. and SunTrust Bank, as Trustee, previously filed as Exhibit 4.1 on Form S-4 filed September 26, 2003 (SEC File No. 333-109156) and incorporated by reference. | ||
| 4 | .2 | Registration Rights Agreement, dated February 1, 2006, among Fidelity National Information Services, Inc. and the securityholders named therein, previously filed as Exhibit 99.1 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 4 | .3 | Form of 4.75% Note due in 2008 included in Exhibit 4.1 on Form S-4 filed September 26, 2003 (SEC File No. 333-109156) and incorporated by reference. | ||
| 4 | .4 | Form of certificate representing Fidelity National Information Services, Inc. Common Stock, previously filed as Exhibit 4.3 on Form S-3 filed February 6, 2006 (SEC File No. 333-131593) and incorporated by reference. | ||
| 4 | .5 | Shareholder Agreement dated September 14, 2005 among Certegy Inc. and the other parties thereto previously filed as Exhibit 4.4 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 4 | .6 | Commitment Agreement dated as of September 14, 2005 among Certegy Inc. and the other parties thereto previously filed as Exhibit 10.1 on Form 8-K filed September 16, 2005 (SEC File No. 001-16427) and incorporated by reference. | ||
| 4 | .7 | Lock-Up Agreement dated September 14, 2005 between Certegy Inc. and Bank of America Capital Investors, L.P. previously filed as Exhibit 4.5 to Form S-3 filed February 6, 2006 (SEC File No. 333-131593) and incorporated by reference. | ||
| 10 | .1 | Assignment and Assumption of Lease and Other Operative Documents, dated June 25, 2001, among Equifax Inc., Certegy Inc., Prefco VI Limited Partnership, Atlantic Financial Group, Ltd. and SunTrust Bank, previously filed as Exhibit 10.3 on Form 10-Q filed August 14, 2001 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .1(a) | Omnibus Amendment to Master Agreement, Lease, Loan Agreement and Definitions Appendix A (Florida) dated as of September 17, 2004, entered into among Certegy Inc., Prefco VI Limited Partnership, and SunTrust Bank, previously filed as Exhibit 10.3(a) on Form 10-Q filed November 9, 2004 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .2 | Tax Sharing and Indemnification Agreement, dated as of June 30, 2001, between Equifax Inc. and Certegy Inc., previously filed as Exhibit 99.1 on Form 8-K filed July 20, 2001 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .3 | Certegy Inc. Executive Life and Supplemental Retirement Benefit Plan, previously filed as Exhibit 10.13 on Form 10-K filed March 25, 2002 (SEC File No. 001-16427) and incorporated by reference. (1) | ||
| 10 | .4 | Grantor Trust Agreement, dated July 8, 2001, between Certegy Inc. and Wachovia Bank, N.A., previously filed as Exhibit 10.15 on Form 10-K filed March 25, 2002 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .4(a) | Grantor Trust Agreement, as originally effective July 8, 2001, and amended and restated effective December 5, 2003, between Certegy Inc. and Wachovia Bank, N.A., previously filed as Exhibit 10.15(a) on Form 10-K filed February 17, 2004 (SEC File No. 001-16427) and incorporated by reference. | ||
102
| Exhibit | ||||
| No. | Description | |||
| 10 | .5 | Intellectual Property Agreement, dated as of June 30, 2001, between Equifax Inc. and Certegy Inc., previously filed as Exhibit 99.5 on Form 8-K filed July 20, 2001 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .6 | Agreement Regarding Leases, dated as of June 30, 2001, between Equifax Inc. and Certegy Inc., previously filed as Exhibit 99.6 on Form 8-K filed July 20, 2001 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .7 | Certegy Inc. Non-Employee Director Stock Option Plan, previously filed as Exhibit 10.24 on Form 10-K filed March 25, 2002 (SEC File No. 001-16427) and incorporated by reference. (1) | ||
| 10 | .8 | Certegy Inc. Deferred Compensation Plan, previously filed as Exhibit 10.25 on Form 10-K filed March 25, 2002 (SEC File No. 001-16427) and incorporated by reference. (1) | ||
| 10 | .9 | Certegy 2002 Bonus Deferral Program Terms and Conditions, previously filed as Exhibit 10.29 on Form 10-K filed March 25, 2002 (SEC File No. 001-16427) and incorporated by reference. (1) | ||
| 10 | .10 | Certegy Excess Liability Insurance Plan for the Registrant’s executive Officers, previously filed as Exhibit 10.30 on Form 10-K filed March 25, 2002 (SEC File No. 001-16427) and incorporated by reference. (1) | ||
| 10 | .11 | Certegy Inc. Deferred Compensation Plan, previously filed as Exhibit 10.32 on Form 10-K filed February 14, 2003 (SEC File No. 001-16427) and incorporated by reference. (1) | ||
| 10 | .12 | ICBA Bankcard, Inc. and Certegy Card Services, Inc. 2003 Renewal Service Agreement, previously filed as Exhibit 10.36 on Form 10-K filed February 17, 2004 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .13 | 2004 Restated CSCU Card Processing Service Agreement, previously filed as Exhibit 10.37 on Form 10-K filed February 17, 2004 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .14 | Certegy Inc. Special Supplemental Executive Retirement Plan, effective as of November 7, 2003, previously filed as Exhibit 10.38 on Form 10-K filed February 17, 2004 (SEC File No. 001-16427) and incorporated by reference. (1) | ||
| 10 | .15 | Certegy Inc. Supplemental Executive Retirement Plan, effective as of November 5, 2003, previously filed as Exhibit 10.39 on Form 10-K filed February 17, 2004 (SEC File No. 001-16427) and incorporated by reference. (1) | ||
| 10 | .16 | Certegy Inc. Executive Life and Supplemental Retirement Benefit Plan Split Dollar Life Insurance Agreement, effective as of November 7, 2003, previously filed as Exhibit 10.40 on Form 10-K filed February 17, 2004 (SEC File No. 001-16427) and incorporated by reference. (1) | ||
| 10 | .17 | Trust Agreement for the Certegy Inc. Deferred Compensation Plan between Certegy Inc. and SunTrust Bank dated March 4, 2003, previously filed as Exhibit 10.41 on Form 10-K filed February 17, 2004 (SEC File No. 001-16427) and incorporated by reference. (1) | ||
| 10 | .18 | Master Agreement for Operations Support Services between Certegy Inc. and International Business Machines Corporation dated June 29, 2001, previously filed as Exhibit 10.42 on Form 10-K filed February 17, 2004 (SEC File No. 001-16427) and incorporated by reference. (Document omits information pursuant to a Request for Confidential Treatment granted under Rule 24b-2 of the Securities Exchange Act of 1934.) | ||
| 10 | .19 | Master Agreement for Operations Support Services Transaction Document #03-01 (United States) between Certegy Inc. and International Business Machines Corporation dated March 5, 2003, previously filed as Exhibit 10.43 on Form 10-K filed February 17, 2004 (SEC File No. 001-16427) and incorporated by reference. (Document omits information pursuant to a Request for Confidential Treatment granted under Rule 24b-2 of the Securities Exchange Act of 1934.) | ||
| 10 | .20 | Certegy Inc. Stock Incentive Plan Restricted Stock Unit Award Agreement dated June 18, 2004, previously filed as Exhibit 10.44 on Form 10-Q filed August 6, 2004 (SEC File No. 001-16427) and incorporated by reference. (1) | ||
| 10 | .21 | Certegy Inc. Restricted Stock Units Deferral Election Agreement for 2004, previously filed as Exhibit 10.45 on Form 10-Q filed August 6, 2004 (SEC File No. 001-16427) and incorporated by reference. (1) | ||
103
| Exhibit | ||||
| No. | Description | |||
| 10 | .22 | Form of Certegy Inc. Annual Incentive Plan, previously filed as Exhibit 10.46 on Form 8-K filed February 10, 2005 (SEC File No. 001-16427) and incorporated by reference. (1) | ||
| 10 | .23 | Form of Certegy Inc. Stock Incentive Plan Non-Qualified Stock Option Award Agreement. (1) | ||
| 10 | .24 | Form of Certegy Inc. Stock Incentive Plan Restricted Stock Unit Award Agreement. (1) | ||
| 10 | .25 | Form of Certegy Inc. Stock Incentive Plan Restricted Stock Award Agreement. (1) | ||
| 10 | .26 | Credit Agreement, dated as of March 9, 2005, among Fidelity National Information Solutions, Inc., Fidelity National Tax Service, Inc., Fidelity National Information Services, Inc., and various financial institutions (the ‘FIS Credit Agreement‘) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Fidelity National Financial, Inc., filed March 15, 2005) | ||
| 10 | .27 | Amendment No. 1 and Addendum, dated as of September 26, 2005 and effective as of February 1, 2006, to the FIS Credit Agreement | ||
| 10 | .28 | Amended and Restated License and Services Agreement, dated February 1, 2006 filed as Exhibit 99.16 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .29 | Issuing Agency contract dated as of July 22, 2004 between Chicago Title Insurance Company and LSI Title Company filed as Exhibit 10.25 to Fidelity National Title Group’s Form S-1 (File No. 333-126402) and incorporated by reference. | ||
| 10 | .30 | Issuing Agency contract dated as of July 22, 2004 between Chicago Title Insurance Company and LSI Title Agency, Inc. filed as Exhibit 10.26 to Fidelity National Title Group’s Form S-1 (File No. 333-126402) and incorporated by reference. | ||
| 10 | .31 | Issuing Agency contract dated as of July 22, 2004 between Chicago Title Insurance Company and Lender’s Service Title Agency, Inc. filed as Exhibit 10.27 to Fidelity National Title Group’s Form S-1 (File No. 333-126402) and incorporated by reference. | ||
| 10 | .32 | Issuing Agency contract dated as of August 9, 2004 between Chicago Title Insurance Company and LSI Alabama, LLC filed as Exhibit 10.28 to Fidelity National Title Group’s Form S-1 (File No. 333-126402) and incorporated by reference. | ||
| 10 | .33 | Issuing Agency contract dated as of February 8, 2005 between Chicago Title Insurance Company and LSI Title Company of Oregon, LLC filed as Exhibit 10.29 to Fidelity National Title Group’s Form S-1 (File No. 333-126402) and incorporated by reference. | ||
| 10 | .34 | Issuing Agency contract dated as of September 28, 2004 between Fidelity National Title Insurance Company and LSI Title Company filed as Exhibit 10.30 to Fidelity National Title Group’s Form S-1 (File No. 333-126402) and incorporated by reference. | ||
| 10 | .35 | Issuing Agency contract dated as of September 28, 2004 between Fidelity National Title Insurance Company and LSI Title Agency, Inc. filed as Exhibit 10.31 to Fidelity National Title Group’s Form S-1 (File No. 333-126402) and incorporated by reference. | ||
| 10 | .36 | Issuing Agency contract dated as of September 28, 2004 between Fidelity National Title Insurance Company and Lender’s Service Title Agency, Inc. filed as Exhibit 10.32 to Fidelity National Title Group’s Form S-1 (File No. 333-126402) and incorporated by reference. | ||
| 10 | .37 | Issuing Agency contract dated as of September 28, 2004 between Fidelity National Title Insurance Company and LSI Alabama, LLC filed as Exhibit 10.33 to Fidelity National Title Group’s Form S-1 (File No. 333-126402) and incorporated by reference. | ||
| 10 | .38 | Issuing Agency contract dated as of February 24, 2005 between Fidelity National Title Insurance Company and LSI Title Company of Oregon, LLC filed as Exhibit 10.34 to Fidelity National Title Group’s Form S-1 (File No. 333-126402) and incorporated by reference. | ||
| 10 | .39 | Agreement for Sale of Title Plants dated January 4, 2005 between Ticor Title Company of Oregon and LSI Title Company of Oregon, LLC filed as Exhibit 10.36 to Fidelity National Title Group’s Form S-1 (File No. 333-126402) and incorporated by reference. | ||
104
| Exhibit | ||||
| No. | Description | |||
| 10 | .40 | Agreement for Sale of Plant Index and For Use of Computerized Title Plant Services dated as of December 20, 2004 between Chicago Title Insurance Company and LSI Title Agency, Inc filed as Exhibit 10.37 to Fidelity National Title Group’s Form S-1 (File No. 333-126402) and incorporated by reference. | ||
| 10 | .41 | Title Plant Maintenance Agreement dated as of March 4, 2005, among Property Insight, LLC, Security Union Title Insurance Company, Chicago Title Insurance Company and Ticor Title Insurance Company filed as Exhibit 10.38 to Fidelity National Title Group’s Form S-1 (File No. 333-126402) and incorporated by reference. | ||
| 10 | .42 | Title Plant Management Agreement dated as of May 17, 2005, between Property Insight, LLC and Ticor Title Insurance Company of Florida filed as Exhibit 10.40 to Fidelity National Title Group’s Form S-1 (File No. 333-126402) and incorporated by reference. | ||
| 10 | .43 | Amended and Restated Master Title Plant Access Agreement, dated as of February 1, 2006, between Rocky Mountain Support Services, Inc. and Property Insight, LLC filed as Exhibit 99.26 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .44 | Amended and Restated Title Plant Master Services Agreement, dated as of February 1, 2006, between Rocky Mountain Support Services, Inc. and Property Insight, LLC filed as Exhibit 99.27 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .45 | Joinder Agreement, dated as of February 1, 2006, by and between Fidelity National Information Services, Inc. and Bank of America, N.A., under the FIS Credit Agreement filed as Exhibit 99.6 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .46 | Fidelity National Information Services, Inc. 2005 Stock Incentive Plan filed as Exhibit 10.84 to the Annual Report on Form 10-K of Fidelity National Financial, Inc. filed March 16, 2005. | ||
| 10 | .47 | Form of Option Agreement between Fidelity National Information Services, Inc. and Lee Kennedy filed as Exhibit 99.10 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .48 | Form of Option Agreement between Fidelity National Information Services, Inc. and Jeffrey S. Carbiener filed as Exhibit 99.11 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .49 | FNF Corporate Services Agreement dated as of February 1, 2006 between Fidelity National Financial, Inc. and Fidelity National Information Services, Inc. filed as Exhibit 99.29 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .50 | Amended and Restated Corporate Services Agreement dated as of February 1, 2006, between Fidelity National Title Group, Inc. and Fidelity National Information Services, Inc. filed as Exhibit 99.12 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .51 | Amended and Restated Employee Matters Agreement dated as of February 1, 2006 among Fidelity National Financial, Inc., Fidelity National Information Services, Inc. and Fidelity National Information Services, LLC filed as Exhibit 99.30 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .52 | Amended and Restated Certegy Inc. Stock Incentive Plan, filed as Exhibit 99.8 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 10 | .53 | Form of Amendment to Change in Control Letter Agreements filed as Exhibit 99.36 on Form 8-K filed February 6, 2006 (SEC File No. 001-16427) and incorporated by reference. | ||
| 12 | .1 | Statements re Computation of Ratios. | ||
| 21 | .1 | Subsidiaries of the Registrant. | ||
| 23 | .1 | Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP). | ||
| 23 | .2 | Consent of Independent Registered Public Accounting Firm (KPMG LLP). | ||
105
| Exhibit | ||||
| No. | Description | |||
| 31 | .1 | Certification of Lee A. Kennedy, Chief Executive Officer of Fidelity National Information Services, Inc., pursuant to rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31 | .2 | Certification of Jeffrey S. Carbiener, Chief Financial Officer of Fidelity National Information Services, Inc., pursuant to rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .1 | Certification of Lee A. Kennedy, Chief Executive Officer of Fidelity National Information Services, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .2 | Certification of Jeffrey S. Carbiener, Chief Financial Officer of Fidelity National Information Services, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 99 | .1 | Selected Financial Data of Fidelity National Information Services, Inc., a Delaware Corporation. | ||
| 99 | .2 | Financial Statements of Fidelity National Information Services, Inc., a Delaware Corporation. | ||
| (1) | Management Contract or Compensatory Plan. |
106
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: March 15, 2006
| Fidelity National Information Services, Inc. |
| By: | /s/ Lee A. Kennedy |
|
|
|
| Lee A. Kennedy | |
| President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Date: March 15, 2006
| By: | /s/ William P. Foley, II |
|
|
|
| William P. Foley, II, Chairman of the Board |
Date: March 15, 2006
| By: | /s/ Lee A. Kennedy |
|
|
|
| Lee A. Kennedy President and Chief Executive Officer; Director (Principal Executive Officer) |
Date: March 15, 2006
| By: | /s/ Jeffrey S. Carbiener |
|
|
|
| Jeffrey S. Carbiener | |
| Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
Date: March 15, 2006
| By: | /s/ Thomas M. Hagerty |
|
|
|
| Thomas M. Hagerty, Director |
Date: March 15, 2006
| By: | /s/ Marshall Haines |
|
|
|
| Marshall Haines, Director |
Date: March 15, 2006
| By: | /s/ Keith W. Hughes |
|
|
|
| Keith W. Hughes, Director |
Date: March 15, 2006
| By: | /s/ David K. Hunt |
|
|
|
| David K. Hunt, Director |
107
Date: March 15, 2006
| By: | /s/ Daniel D. Lane |
|
|
|
| Daniel D. Lane, Director |
Date: March 15, 2006
| By: | /s/ Phillip B. Lassiter |
|
|
|
| Phillip B. Lassiter, Director |
Date: March 15, 2006
| By: | /s/ Cary H. Thompson |
|
|
|
| Cary H. Thompson, Director |
108
FIDELITY NATIONAL INFORMATION SERVICES, INC.
FORM 10-K
INDEX TO EXHIBITS
The following documents are being filed with this Report:
| Exhibit | ||||
| No. | Description | |||
| 12 | .1 | Statements re Computation of Ratios. | ||
| 21 | .1 | Subsidiaries of the Registrant. | ||
| 23 | .1 | Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP). | ||
| 23 | .2 | Consent of Independent Registered Public Accounting Firm (KPMG LLP). | ||
| 31 | .1 | Certification of Lee A. Kennedy, Chief Executive Officer of Fidelity National Information Services, Inc., pursuant to rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31 | .2 | Certification of Jeffrey S. Carbiener, Chief Financial Officer of Fidelity National Information Services, Inc., pursuant to rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .1 | Certification of Lee A. Kennedy, Chief Executive Officer of Fidelity National Information Services, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .2 | Certification of Jeffrey S. Carbiener, Chief Financial Officer of Fidelity National Information Services, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 99 | .1 | Selected Financial Data of Fidelity National Information Services, Inc., a Delaware corporation | ||
| 99 | .2 | Financial Statements of Fidelity National Information Services, Inc., a Delaware corporation | ||
| (1) | Management Contract or Compensatory Plan. |
109
Exhibit 12.1
CERTEGY INC. (NOW KNOWN AS FIDELITY NATIONAL INFORMATION
SERVICES, INC.)
RATIO OF EARNINGS TO FIXED CHARGES
| For the year ended December 31, | ||||||||||||||||||||||
| 2001(2) | 2002(2) | 2003(2) | 2004(2) | 2005 | ||||||||||||||||||
| ($ in thousands, except ratio data) | ||||||||||||||||||||||
|
Earnings:
|
||||||||||||||||||||||
|
Income before income taxes(1)
|
$ | 132,077 | $ | 126,945 | $ | 132,573 | $ | 156,789 | $ | 174,441 | ||||||||||||
|
Add:
|
||||||||||||||||||||||
|
Interest expense
|
7,200 | 7,120 | 7,950 | 12,914 | 12,832 | |||||||||||||||||
|
Other adjustments
|
5,069 | 4,549 | 4,653 | 4,632 | 5,610 | |||||||||||||||||
|
Total earnings
|
$ | 144,346 | $ | 138,614 | $ | 145,176 | $ | 174,335 | $ | 192,883 | ||||||||||||
|
Fixed charges:
|
||||||||||||||||||||||
|
Interest expense
|
$ | 7,200 | $ | 7,120 | $ | 7,950 | $ | 12,914 | $ | 12,832 | ||||||||||||
|
Other adjustments
|
5,069 | 4,549 | 4,653 | 4,632 | 5,610 | |||||||||||||||||
|
Total fixed charges
|
$ | 12,269 | $ | 11,669 | $ | 12,603 | $ | 17,546 | $ | 18,442 | ||||||||||||
|
Ratio of earnings to fixed charges
|
11.77x | 11.88x | 11.52x | 9.94x | 10.46x | |||||||||||||||||
| (1) | Income from continuing operations before income taxes and cumulative effect of a change in accounting principle, but including minority interests and equity in earnings of unconsolidated subsidiary. |
| (2) | On January 1, 2005, Certegy adopted SFAS 123(R), as further described in Notes 2 and 8 to the consolidated financial statements, which requires all share-based payments to employees to be recognized in the income statement based on their fair values. Periods from Certegy’s spin-off from Equifax Inc. on July 7, 2001 to December 31, 2004 were restated to conform to this presentation. |
For the purposes of calculating the ratio of earnings to fixed
charges, fixed charges consist of interest on indebtedness,
amortization of deferred financing costs, and an estimated
amount of rental expense that is deemed to be representative of
the interest factor.
EXHIBIT 21.1 FIDELITY NATIONAL INFORMATION SERVICES, INC. (A GEORGIA CORPORATION) LIST OF SUBSIDIARIES COMPANY INCORPORATION - ------- ------------- AGES Participacoes Ltda Brazil Aircrown Ltd. United Kingdom ALLTEL Servicios de Informacion (Costa Rica) S.A. Costa Rica APTItude Solutions, Inc. Florida Arizona Sales and Posting, Inc. Arizona A.S.A.P. Legal Publication Services, Inc. California Aurum Technology Inc. Delaware BenchMark Consulting International N.A., Inc. Georgia BenchMark Consulting International Europe GmbH Germany Card Brazil Holdings, Inc. Georgia Card Brazil LLC Georgia Central Credit Services, Ltd. United Kingdom Certegy Asia Pacific Holdings, LLC Georgia Certegy Asset Management, Inc. Georgia Certegy Australia Limited United Kingdom Certegy Canada Company Canada Certegy Canada Holdings LLC Georgia Certegy Capital, Inc. Georgia Certegy Card Services Australia Pty. Ltd. Australia Certegy Card Services B.V The Netherlands Certegy Card Services Caribbean, Ltd. Barbados Certegy Card Services, Inc. Florida Certegy Card Services Ltd. United Kingdom Certegy Card Services (Thailand) Co., Ltd. Thailand Certegy (Cayman Islands) Limited Cayman Islands Certegy Check Services, Inc. Delaware Certegy Dutch Holdings B.V The Netherlands Certegy E-Banking Services, Inc. Georgia Certegy Europe LLC Georgia Certegy Ezi-Pay Pty Ltd. Australia Certegy First Bankcard Systems, Inc. Georgia Certegy France Ltd. United Kingdom Certegy Global Card Services, Inc. Florida Certegy International Investments C.V The Netherlands Certegy Ireland Limited Ireland Certegy Licensing Services, Inc. Georgia Certegy New Zealand Ltd. New Zealand Certegy Payment Recovery Services, Inc. Georgia Certegy Payment Services, Inc. Delaware
Certegy Ltd. United Kingdom Certegy Ltda Brazil Certegy Pty Ltd. Australia Certegy S.A Chile Certegy SNC France Certegy Transaction Services, Inc. Georgia Certegy UK Holdings B.V The Netherlands Chase Vehicle Exchange, Inc. Delaware Clear Par, LLC New York Comstock Net Services, Inc. Delaware Covansys Corporation (29%) Michigan Crittson Financial Corporation Indiana Crittson Financial LLC Indiana DOCX, LLC Georgia DPN, Incorporated Nevada DPSC Acquisition Corporation Georgia Ecosearch Environmental Resources, Inc. Indiana Ensite Corporation of Denver Colorado (d/b/a ENFO Corporation; and ENTRAC Corporation) Fidelity Information Services Brasil Participacoes Ltda. Brazil Fidelity Information Services Canada Limited Canada Fidelity Information Services (France) SARL France Fidelity Information Services (Germany) GmbH Germany Fidelity Information Services German Holdings C.V. The Netherlands Fidelity Information Services Holdings B.V The Netherlands Fidelity Information Services Holding GmbH Germany Fidelity Information Services (Hong Kong) Hong Kong Limited (99.9%) Fidelity Information Services, Inc. Arkansas Fidelity Information Services International Holdings C.V. The Netherlands Fidelity Information Services International Holdings, Inc. Delaware Fidelity Information Services International, Ltd. Delaware Fidelity Information Services Limited United Kingdom Fidelity Information Services (Netherlands) B.V The Netherlands Fidelity Information Services (New Zealand) Limited New Zealand Fidelity Information Services Pakistan Pakistan (Private) Limited Fidelity Information Services Sp. Z.o.o Poland Fidelity Information Services Taiwan Company Limited Taiwan Fidelity Information Services (Thailand) Limited Thailand Fidelity International Resource Management, Inc. Delaware Fidelity National Agency Sales and Posting California Fidelity National Asset Management Solutions, Inc. Colorado Fidelity National Credit Services, Inc. New York Fidelity National Field Services, Inc. Delaware Fidelity National Foreclosure Solutions, Inc. Delaware
Fidelity National Information Services, Inc. Georgia Fidelity National Information Services, LLC Delaware Fidelity National Information Solutions, Inc. Delaware Fidelity National Information Solutions Canada, Inc. Canada Fidelity National Loan Portfolio Services, Inc. California Fidelity National Tax Service, Inc. California Fidelity Output Solutions, LP Texas Fidelity Outsourcing Services, Inc. Delaware Fidelity Servicos de Informatica Brasil Ltda Brazil Fidelity Supply, LP Texas Financial Insurance Marketing Group, Inc. District of Columbia FIS Holding, LLC Delaware FIS Management Services, LLC Delaware FNIS Flood Group, LLC Delaware FNIS Flood of California, LLC Delaware FNIS Flood Services, L.P. Delaware FNIS Holding, LLC Delaware FNIS Intellectual Property Holdings, Inc. Delaware FNIS MLS Services, Inc. Delaware FNIS Services, Inc. Delaware GameCash, Inc. Minnesota Game Financial Corporation Minnesota Game Financial Corporation of Wisconsin Wisconsin GeoSure, Inc. Delaware GeoSure, L.P. New York Geotrac, Inc. Delaware Hansen Quality, LLC California HomeBuilders Financial Network, LLC (75%) Delaware HomeBuilders Investment, LLC Delaware HomeBuyers Mortgage Network, LLC Florida HQ Holding Corporation Delaware Indiana Residential Nominee Services, LLC Indiana I-Net Reinsurance Limited Turks and Caicos Island InterCept Data Services, Inc. Alabama InterCept, Inc. Georgia InterCept Services, LLC Georgia InterCept TX I, LLC Georgia International Data Management Corporation California Investment Property Exchange Services, Inc. California KORDOBA GmbH & Co. KG Germany KORDOBA Verwaltungs GmbH Germany Lender's Service Title Agency, Inc. Ohio LRT Record Services, Inc. Texas (d/b/a Land Records of Texas) LSI Alabama, LLC Alabama LSI Appraisal, LLC Delaware
LSI Maryland, Inc. Maryland LSI Title Agency, Inc. Illinois LSI Title Company California LSI Title Company of Oregon, LLC Oregon LSI Title Insurance Agency of Utah, Inc. Utah Maine Residential Nominee Services, LLC Maine Massachusetts Residential Nominee Services, LLC Massachusetts National Residential Nominee Services, Inc. Delaware National Safe Harbor Exchanges California National Underwriting Services, LLC Delaware NCLSI, L.P. Pennsylvania NCLSIGP, LLC Pennsylvania NewInvoice, L.L.C. (80%) Delaware NRC Insurance Services, Inc. North Carolina OnePointCity, L.L.C Ohio Partech Ltda Brazil Payment Brazil Holdings Ltda Brazil Payment Chile S.A Chile Payment South America Holdings, Inc. Georgia Payment South America, LLC Georgia Profile Partners GP, L.P. Delaware Profile Venture Partners Capital Fund I L.P. Delaware Property Insight, LLC California PVP Advisors, LLC (62%) Delaware PVP Management, LLC (34%) Delaware RealEC Technologies, Inc. (56%) Delaware RealInfo, L.L.C. (50%) Illinois Retail Credit Management Limited United Kingdom Risco, Inc. Kansas Sanchez Advisors, LLC Delaware Sanchez Capital Services Private Limited (20%) India Sanchez Computer Associates, Inc. Canada Sanchez Computer Associates International, Inc. Delaware Sanchez Computer Associates, LLC Delaware Sanchez Computer Associates Pty Limited Australia Sanchez Software, Ltd. Delaware Strategic Property Investments, Inc. Delaware The Ezi-Travel Club Pty Ltd. Australia Title-Tax, Inc. California Transax Limited United Kingdom Vermont Residential Nominee Services, LLC Vermont Vista Environmental Information, Inc. Delaware Viv Plc United Kingdom
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements of our
reports dated March 10, 2006 with respect to the consolidated financial statements of Certegy Inc.
(now known as Fidelity National Information Services, Inc.), Certegy Inc. management’s assessment
of the effectiveness of internal control over financial reporting, and the effectiveness of
internal control over financial reporting of Certegy Inc., included in this Annual Report on Form
10-K for the year ended December 31, 2005:
(1) Registration Statement (Form S-8 No. 333-103266) pertaining to the Certegy Inc. Deferred
Compensation Plan;
(2) Registration Statement (Form S-8 No. 333-64462) pertaining to the Certegy Inc. 401(k) Plan;
(3) Registration Statement (Form S-8 No. 333-63342) pertaining to the Certegy Inc. 2001 Stock
Incentive Plan and 2001 Non-Employee Director Stock Option Plan;
(4) Registration Statement (Form S-8 No. 333-131602) pertaining to the Fidelity National
Information Services, Inc. 2005 Stock Incentive Plan;
(5) Registration Statement (Form S-8 No. 333-131601) pertaining to the Amended and Restated Certegy
Inc. Stock Incentive Plan; and
(6) Registration Statement (Form S-3 No. 333-131593) of Fidelity National Information Services,
Inc.
| /s/ Ernst & Young LLP | ||||
Atlanta, Georgia
March 10, 2006
March 10, 2006
EXHIBIT
23.2
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Fidelity National Information Services, Inc.:
Fidelity National Information Services, Inc.:
We consent to the incorporation by reference in the registration statements on Form S-8 (No.
333-63342, 333-64462, 333-103266, 333-131601, 333-131602) and on Form S-3 (No. 333-131593) of
Fidelity National Information Services, Inc. (formerly known as Certegy Inc.) of our report dated
March 13, 2006, with respect to the consolidated and combined balance sheets of Fidelity National
Information Services, Inc. as of December 31, 2005 and 2004, 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, 2005, which report appears in the December 31, 2005 annual report on Form 10-K of
Fidelity National Information Services, Inc.
Our report refers to the completion of the merger between Fidelity National Information Services,
Inc. and Certegy Inc. effective February 1, 2006.
/s/ KPMG LLP
March 13, 2006
Jacksonville, Florida
Certified Public Accountants
March 13, 2006
Jacksonville, Florida
Certified Public Accountants
Exhibit 31.1
CERTIFICATIONS
I, Lee A. Kennedy, certify that:
1. I have reviewed this annual report on
Form 10-K of
Fidelity National Information Services, Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act
Rules 13a-15(e)
and 15d-15(e)) and
internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and 15d-15(f)) for the
registrant and have:
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; | |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s
auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 15, 2006
| By: | /s/ Lee A. Kennedy |
|
|
|
| Lee A. Kennedy | |
| President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, Jeffrey S. Carbiener, certify that:
1. I have reviewed this annual report on
Form 10-K of
Fidelity National Information Services, Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act
Rules 13a-15(e)
and 15d-15(e)) and
internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and 15d-15(f)) for the
registrant and have:
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; | |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s
auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 15, 2006
| By: | /s/ Jeffrey S. Carbiener |
|
|
|
| Jeffrey S. Carbiener | |
| Executive Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION OF PERIODIC FINANCIAL REPORTS PURSUANT TO 18
U.S.C. § 1350
The undersigned hereby certifies that he is the duly appointed
and acting Chief Executive Officer of Fidelity National
Information Services, Inc., a Georgia corporation (the
“Company”), and hereby further certifies as follows.
| 1. | The periodic report containing financial statements to which this certificate is an exhibit fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934. | |
| 2. | The information contained in the periodic report to which this certificate is an exhibit fairly presents, in all material respects, the financial condition and results of operations of Certegy Inc. |
In witness whereof, the undersigned has executed and delivered
this certificate as of the date set forth opposite his signature
below.
Date: March 15, 2006
| /s/ Lee A. Kennedy | |
|
|
|
| Lee A. Kennedy | |
| Chief Executive Officer |
Exhibit 32.2
CERTIFICATION OF PERIODIC FINANCIAL REPORTS PURSUANT TO 18
U.S.C. § 1350
The undersigned hereby certifies that he is the duly appointed
and acting Chief Financial Officer of Fidelity National
Information Services, Inc., a Georgia corporation (the
“Company”), and hereby further certifies as follows.
| 1. | The periodic report containing financial statements to which this certificate is an exhibit fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934. | |
| 2. | The information contained in the periodic report to which this certificate is an exhibit fairly presents, in all material respects, the financial condition and results of operations of Certegy Inc. |
In witness whereof, the undersigned has executed and delivered
this certificate as of the date set forth opposite his signature
below.
Date: March 15, 2006
| By: | /s/ Jeffrey S. Carbiener |
|
|
|
| Jeffrey S. Carbiener | |
| Chief Financial Officer |
EXHIBIT 99.1
Selected Financial Data of Fidelity National Information
Services, Inc.,
a Delaware corporation
SELECTED HISTORICAL FINANCIAL DATA OF FIS
The selected historical financial data of FIS as of
December 31, 2005 and 2004 and for each of the years in the
three-year period ended December 31, 2005, are derived from
FIS’s audited consolidated and combined financial
statements and related notes included elsewhere in this
document, which have been audited by KPMG LLP, an independent
registered public accounting firm. The selected historical
financial data of FIS as of December 31, 2002 and 2001, and
for the years ended December 31, 2002 and 2001, are derived
from FIS’s combined financial statements and related notes
not appearing herein. This financial information should be read
in conjunction with FIS’s audited consolidated and combined
financial statements and the notes thereto included elsewhere in
this Form 10-K.
FIS’s selected historical financial data have been prepared
from the historical results of operations and bases of the
assets and liabilities of the operations transferred to FIS by
FNF and gives effect to allocations of certain corporate
expenses from FNF. FIS’s selected historical financial data
may not be indicative of FIS’s future performance and does
not necessarily reflect what its financial position and results
of operations would have been had it operated as a separate,
stand-alone entity during the periods presented. Further, as a
result of FIS’s acquisitions, the results in the periods
shown below may not be directly comparable.
| Year Ended December 31, | ||||||||||||||||||||
| 2005(2) | 2004(2) | 2003(2) | 2002 | 2001(1) | ||||||||||||||||
|
Statement of Earnings Data:
|
||||||||||||||||||||
|
Processing and services revenues
|
$ | 2,766,085 | $ | 2,331,527 | $ | 1,830,924 | $ | 619,723 | $ | 402,224 | ||||||||||
|
Cost of revenues
|
1,793,285 | 1,525,174 | 1,101,569 | 379,508 | 255,349 | |||||||||||||||
|
Gross profit
|
972,800 | 806,353 | 729,355 | 240,215 | 146,875 | |||||||||||||||
|
Selling, general and administrative expenses
|
422,623 | 432,310 | 331,751 | 144,761 | 92,486 | |||||||||||||||
|
Research and development costs
|
113,498 | 74,214 | 38,345 | — | — | |||||||||||||||
|
Operating income
|
436,679 | 299,829 | 359,259 | 95,454 | 54,389 | |||||||||||||||
|
Other income (expense)
|
(124,623 | ) | 14,911 | (3,654 | ) | 10,149 | 96 | |||||||||||||
|
Earnings before income taxes, equity in earnings (loss) of
unconsolidated entities and minority interest
|
312,056 | 314,740 | 355,605 | 105,603 | 54,485 | |||||||||||||||
|
Income tax expense
|
116,085 | 118,343 | 137,975 | 39,390 | 20,097 | |||||||||||||||
|
Equity in earnings (loss) of unconsolidated entities
|
5,029 | (3,308 | ) | (55 | ) | — | — | |||||||||||||
|
Minority interest
|
(4,450 | ) | (3,673 | ) | (14,518 | ) | (8,359 | ) | (778 | ) | ||||||||||
|
Net earnings
|
$ | 196,550 | $ | 189,416 | $ | 203,057 | $ | 57,854 | $ | 33,610 | ||||||||||
|
Pro forma net earnings per share — basic(3)
|
$ | 1.54 | $ | 1.48 | $ | 1.59 | $ | .45 | $ | .26 | ||||||||||
|
Pro forma weighted average shares — basic
|
127,920 | 127,920 | 127,920 | 127,920 | 127,920 | |||||||||||||||
|
Pro forma net earnings per share — diluted(3)
|
$ | 1.53 | $ | 1.48 | $ | 1.59 | $ | .45 | $ | .26 | ||||||||||
|
Pro forma weighted average shares—diluted
|
128,354 | 127,920 | 127,920 | 127,920 | 127,920 | |||||||||||||||
| (1) | Effective January 1, 2002, FIS adopted SFAS No. 142 “Goodwill and Other Intangible Assets” and as a result, has ceased to amortize goodwill. Goodwill amortization in 2001 was $6.0 million. |
| (2) | Effective January 1, 2003, FIS adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” using the prospective method of adoption in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” and as a result recorded stock compensation expense of $20.4 million, $15.4 million and $3.8 million for the years ended December 31, 2005, 2004 and 2003, respectively. |
| (3) | Pro forma net earnings per share are calculated, for all periods presented, using the shares outstanding following FIS’s formation in its current structure as a holding company, and the minority interest sale on March 9, 2005, adjusted as converted by the exchange ratio (.6396) in the merger with Certegy. |
| As of December 31, | ||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
|
Balance Sheet Data (at end of period):
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 133,152 | $ | 190,888 | $ | 92,049 | $ | 55,674 | $ | 20,411 | ||||||||||
|
Total assets
|
4,189,021 | 4,002,856 | 2,327,085 | 530,647 | 404,566 | |||||||||||||||
|
Total long-term debt
|
2,564,128 | 431,205 | 13,789 | 17,129 | 24,980 | |||||||||||||||
|
Minority interest
|
13,060 | 13,615 | 12,130 | 63,272 | 34,385 | |||||||||||||||
|
Total equity
|
694,570 | 2,754,844 | 1,890,797 | 286,487 | 175,250 | |||||||||||||||
2
Selected Quarterly Financial Data
Selected quarterly financial data is as follows:
| Quarter Ended | ||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||
|
2005
|
||||||||||||||||
|
Processing and services revenues
|
$ | 651,580 | $ | 708,713 | $ | 698,109 | $ | 707,683 | ||||||||
|
Earnings before income taxes, equity in earnings (loss) of
unconsolidated entities and minority interest
|
75,066 | 79,550 | 88,786 | 68,654 | ||||||||||||
|
Net earnings
|
44,596 | 48,576 | 57,892 | 45,486 | ||||||||||||
|
Basic earnings per share
|
$ | .35 | $ | .38 | $ | .45 | $ | .36 | ||||||||
|
Diluted earnings per share
|
$ | .35 | $ | .38 | $ | .45 | $ | .35 | ||||||||
|
2004
|
||||||||||||||||
|
Processing and services revenues
|
$ | 510,717 | $ | 582,782 | $ | 563,032 | $ | 674,996 | ||||||||
|
Earnings before income taxes, equity in earnings (loss) of
unconsolidated entities and minority interest
|
72,680 | 85,689 | 93,825 | 62,546 | ||||||||||||
|
Net earnings
|
44,200 | 51,693 | 59,113 | 34,410 | ||||||||||||
|
Basic earnings per share
|
$ | .35 | $ | .40 | $ | .46 | $ | .27 | ||||||||
|
Diluted earnings per share
|
$ | .35 | $ | .40 | $ | .46 | $ | .27 | ||||||||
3
EXHIBIT 99.2
Financial Statements of Fidelity National Information
Services, Inc.,
a Delaware corporation
Report of Independent Registered Public Accounting Firm
The Board of Directors
Fidelity National Information Services, Inc.:
Fidelity National Information Services, Inc.:
We have audited the accompanying consolidated and combined
balance sheets of Fidelity National Information Services, Inc.
and subsidiaries and affiliates as of December 31, 2005 and
2004, 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, 2005. 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 auditing
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, 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, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles.
As discussed in notes (1) and (18) to the consolidated
and combined financial statements, the Company completed a
merger with Certegy Inc. on February 1, 2006.
/s/ KPMG LLP
March 13, 2006
Jacksonville, FL
Certified Public Accountants
F-2
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATES
Consolidated and Combined Balance Sheets
December 31, 2005 and 2004
(In thousands)
| 2005 | 2004 | |||||||||
|
Assets
|
||||||||||
|
Current assets:
|
||||||||||
|
Cash and cash equivalents
|
$ | 133,152 | $ | 190,888 | ||||||
|
Trade receivables, net of allowance for doubtful accounts of
$17.9 million and $20.3 million, respectively, at
December 31, 2005 and 2004
|
446,674 | 399,797 | ||||||||
|
Receivable from related party
|
9,146 | — | ||||||||
|
Prepaid expenses and other current assets
|
111,004 | 85,989 | ||||||||
|
Deferred income taxes
|
105,845 | 99,136 | ||||||||
|
Total current assets
|
805,821 | 775,810 | ||||||||
|
Property and equipment, net of accumulated depreciation of
$186.8 million and $123.2 million, respectively, at
December 31, 2005 and 2004
|
220,425 | 216,978 | ||||||||
|
Goodwill
|
1,787,713 | 1,757,757 | ||||||||
|
Intangible assets, net of accumulated amortization of
$292.7 million and $167.9 million, respectively, at
December 31, 2005 and 2004
|
508,780 | 629,154 | ||||||||
|
Computer software, net of accumulated amortization of
$208.9 million and $116.1 million, respectively, at
December 31, 2005 and 2004
|
451,993 | 372,610 | ||||||||
|
Deferred contract costs
|
183,263 | 82,970 | ||||||||
|
Investment in common stock and warrants of Covansys
|
136,024 | 138,691 | ||||||||
|
Other noncurrent assets
|
95,002 | 28,886 | ||||||||
|
Total assets
|
$ | 4,189,021 | $ | 4,002,856 | ||||||
|
Liabilities and Stockholders’ Equity
|
||||||||||
|
Current liabilities:
|
||||||||||
|
Accounts payable and accrued liabilities
|
$ | 309,591 | $ | 248,268 | ||||||
|
Payable to related party
|
— | 43,740 | ||||||||
|
Current portion of long-term debt
|
33,673 | 13,891 | ||||||||
|
Deferred revenues
|
254,534 | 237,126 | ||||||||
|
Total current liabilities
|
597,798 | 543,025 | ||||||||
|
Deferred revenues
|
111,536 | 86,626 | ||||||||
|
Deferred income taxes
|
153,193 | 135,334 | ||||||||
|
Long-term debt, excluding current portion
|
2,530,455 | 417,314 | ||||||||
|
Other long-term liabilities
|
88,409 | 52,098 | ||||||||
|
Total liabilities
|
3,481,391 | 1,234,397 | ||||||||
|
Minority interest
|
13,060 | 13,615 | ||||||||
|
Stockholders’ equity:
|
||||||||||
|
Preferred stock $0.01 par value; 200 million shares
authorized, none issued and outstanding at December 31, 2005
|
— | — | ||||||||
|
Common stock $0.01 par value; 600 million shares
authorized, 127.9 million shares issued and outstanding at
December 31, 2005
|
1,279 | — | ||||||||
|
Additional paid in capital
|
545,639 | — | ||||||||
|
Retained earnings
|
156,127 | — | ||||||||
|
Accumulated other comprehensive (loss) earnings
|
(8,475 | ) | 16,333 | |||||||
|
Net investment by FNF
|
— | 2,738,511 | ||||||||
|
Total stockholders’ equity
|
694,570 | 2,754,844 | ||||||||
|
Total liabilities and stockholders’ equity
|
$ | 4,189,021 | $ | 4,002,856 | ||||||
See accompanying notes to the consolidated and combined
financial statements.
F-3
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATES
Consolidated and Combined Statements of Earnings
Years ended December 31, 2005 and 2004 and 2003
(In thousands, except per share amounts)
| 2005 | 2004 | 2003 | ||||||||||||
|
Processing and services revenues, including $117.8 million,
$101.2 million and $54.6 million of revenues from
related parties for the years ended December 31, 2005, 2004
and 2003, respectively
|
$ | 2,766,085 | $ | 2,331,527 | $ | 1,830,924 | ||||||||
|
Cost of revenues, including depreciation and amortization of
$252.5 million, $197.9 million and $120.4 million
for the years ended December 31, 2005, 2004 and 2003,
respectively, and $3.0 million and $2.8 million of
expenses to related parties in 2005 and 2004, respectively
|
1,793,285 | 1,525,174 | 1,101,569 | |||||||||||
|
Gross profit
|
972,800 | 806,353 | 729,355 | |||||||||||
|
Selling, general, and administrative expenses, including
depreciation and amortization of $47.1 million,
$40.5 million, and $23.6 million and expenses to
related parties of $18.3 million, $67.9 million and
$33.8 million for the years ended December 31, 2005,
2004 and 2003, respectively
|
422,623 | 432,310 | 331,751 | |||||||||||
|
Research and development costs
|
113,498 | 74,214 | 38,345 | |||||||||||
|
Operating income
|
436,679 | 299,829 | 359,259 | |||||||||||
|
Other income (expense):
|
||||||||||||||
|
Interest income
|
6,392 | 1,232 | 577 | |||||||||||
|
Interest expense
|
(126,778 | ) | (4,496 | ) | (1,569 | ) | ||||||||
|
Loss on sale or issuance of subsidiary stock, net
|
— | — | (3,625 | ) | ||||||||||
|
Other income (expense)
|
(4,237 | ) | 18,175 | 963 | ||||||||||
|
Total other income (expense)
|
(124,623 | ) | 14,911 | (3,654 | ) | |||||||||
|
Earnings before income taxes, equity in earnings (loss) of
unconsolidated entities and minority interest
|
312,056 | 314,740 | 355,605 | |||||||||||
|
Provision for income taxes
|
116,085 | 118,343 | 137,975 | |||||||||||
|
Earnings before equity in earnings (loss) of unconsolidated
entities and minority interest
|
195,971 | 196,397 | 217,630 | |||||||||||
|
Equity in earnings (loss) of unconsolidated entities
|
5,029 | (3,308 | ) | (55 | ) | |||||||||
|
Minority interest
|
(4,450 | ) | (3,673 | ) | (14,518 | ) | ||||||||
|
Net earnings
|
$ | 196,550 | $ | 189,416 | $ | 203,057 | ||||||||
|
Pro forma net earnings per share—basic
|
$ | 1.54 | $ | 1.48 | $ | 1.59 | ||||||||
|
Pro forma weighted average shares outstanding—basic
|
127,920 | 127,920 | 127,920 | |||||||||||
|
Pro forma net earnings per share—diluted
|
$ | 1.53 | $ | 1.48 | $ | 1.59 | ||||||||
|
Pro forma weighted average shares outstanding—diluted
|
128,354 | 127,920 | 127,920 | |||||||||||
See accompanying notes to the consolidated and combined
financial statements.
F-4
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATES
Consolidated and Combined Statements of Comprehensive
Earnings
Years ended December 31, 2005 and 2004 and 2003
(In thousands)
| 2005 | 2004 | 2003 | ||||||||||||
|
Net earnings
|
$ | 196,550 | $ | 189,416 | $ | 203,057 | ||||||||
|
Other comprehensive (loss) earnings:
|
||||||||||||||
|
Unrealized loss on Covansys warrants(1)
|
(3,704 | ) | — | — | ||||||||||
|
Unrealized gain on interest rate swaps(2)
|
3,192 | — | — | |||||||||||
|
Unrealized (loss) gain on other investments(3)
|
(4 | ) | 265 | 2,279 | ||||||||||
|
Unrealized (loss) gain on foreign currency translation
|
(19,488 | ) | 14,534 | 1,230 | ||||||||||
|
Minimum pension liability adjustment
|
(4,804 | ) | — | — | ||||||||||
|
Other comprehensive (loss) earnings
|
(24,808 | ) | 14,799 | 3,509 | ||||||||||
|
Comprehensive earnings
|
$ | 171,742 | $ | 204,215 | $ | 206,566 | ||||||||
| (1) | Net of income tax benefit of $2.2 million in 2005. |
| (2) | Net of income tax expense of $2.0 million in 2005 |
| (3) | Net of income tax expense of $0.1 million and $1.2 million in 2004 and 2003, respectively. |
See accompanying notes to the consolidated and combined
financial statements.
F-5
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATES
Consolidated and Combined Statements of Stockholders’
Equity
Years ended December 31, 2005, 2004 and 2003
(In thousands)
| Accumulated | ||||||||||||||||||||||||||||
| other | ||||||||||||||||||||||||||||
| Additional | comprehensive | Total | ||||||||||||||||||||||||||
| Common | Common | Net investment | Paid in | Retained | (loss) | Stockholders’ | ||||||||||||||||||||||
| Shares | Stock | by FNF | Capital | Earnings | earnings | Equity | ||||||||||||||||||||||
|
Balances, December 31, 2002
|
$ | — | $ | — | $ | 288,462 | $ | — | $ | — | $ | (1,975 | ) | $ | 286,487 | |||||||||||||
|
Unrealized gain on other investments, net
|
— | — | — | — | — | 2,279 | 2,279 | |||||||||||||||||||||
|
Unrealized gain on foreign currency translation
|
— | — | — | — | — | 1,230 | 1,230 | |||||||||||||||||||||
|
Contribution of capital, net
|
— | — | 1,397,744 | — | — | — | 1,397,744 | |||||||||||||||||||||
|
Net earnings
|
— | — | 203,057 | — | — | — | 203,057 | |||||||||||||||||||||
|
Balances, December 31, 2003
|
— | — | 1,889,263 | — | — | 1,534 | 1,890,797 | |||||||||||||||||||||
|
Unrealized gain on other investments, net
|
— | — | — | — | — | 265 | 265 | |||||||||||||||||||||
|
Unrealized gain on foreign currency translation
|
— | — | — | — | — | 14,534 | 14,534 | |||||||||||||||||||||
|
Contribution of capital, net
|
— | — | 659,832 | — | — | — | 659,832 | |||||||||||||||||||||
|
Net earnings
|
— | — | 189,416 | — | — | — | 189,416 | |||||||||||||||||||||
|
Balances, December 31, 2004
|
— | — | 2,738,511 | — | — | 16,333 | 2,754,844 | |||||||||||||||||||||
|
Net earnings from January 1, 2005 through March 8, 2005.
|
— | — | 40,423 | — | — | — | 40,423 | |||||||||||||||||||||
|
Dividends paid
|
— | — | (2,700,000 | ) | — | — | — | (2,700,000 | ) | |||||||||||||||||||
|
Net distribution to parent
|
— | — | (6,719 | ) | — | — | — | (6,719 | ) | |||||||||||||||||||
|
Capitalization of holding company
|
95,940 | 959 | (72,215 | ) | 71,256 | — | — | — | ||||||||||||||||||||
|
Sale of minority interest, net of offering costs
|
31,980 | 320 | — | 454,016 | — | — | 454,336 | |||||||||||||||||||||
|
Stock-based compensation
|
— | — | — | 20,367 | — | — | 20,367 | |||||||||||||||||||||
|
Net earnings from March 9, 2005 to December 31, 2005
|
— | — | — | — | 156,127 | — | 156,127 | |||||||||||||||||||||
|
Unrealized loss on investments and derivatives, net
|
— | — | — | — | — | (516 | ) | (516 | ) | |||||||||||||||||||
|
Unrealized loss on foreign currency translation
|
— | — | — | — | — | (19,488 | ) | (19,488 | ) | |||||||||||||||||||
|
Minimum pension liability adjustment
|
— | — | — | — | — | (4,804 | ) | (4,804 | ) | |||||||||||||||||||
|
Balances, December 31, 2005
|
127,920 | $ | 1,279 | $ | — | $ | 545,639 | $ | 156,127 | $ | (8,475 | ) | $ | 694,570 | ||||||||||||||
See accompanying notes to the consolidated and combined
financial statements.
F-6
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATES
Consolidated and Combined Statements of Cash Flows
Years ended December 31, 2005 and 2004 and 2003
(In thousands)
| 2005 | 2004 | 2003 | |||||||||||||
|
Cash flows from operating activities:
|
|||||||||||||||
|
Net earnings
|
$ | 196,550 | $ | 189,416 | $ | 203,057 | |||||||||
|
Adjustment to reconcile net earnings to net cash provided by
operating activities:
|
|||||||||||||||
|
Depreciation and amortization
|
299,637 | 238,400 | 143,958 | ||||||||||||
|
Loss (gain) on Covansys warrants
|
4,400 | (15,800 | ) | — | |||||||||||
|
Stock-based compensation
|
20,367 | 15,436 | 3,804 | ||||||||||||
|
Deferred income taxes
|
41,557 | (11,003 | ) | 8,227 | |||||||||||
|
Equity in (earnings) loss of unconsolidated entities
|
(5,029 | ) | 3,308 | 55 | |||||||||||
|
Minority interest
|
4,450 | 3,673 | 14,518 | ||||||||||||
|
Changes in assets and liabilities, net of effects from
acquisitions:
|
|||||||||||||||
|
Net increase in trade receivables
|
(39,011 | ) | (27,795 | ) | (50,168 | ) | |||||||||
|
Net (increase) decrease in prepaid expenses and other assets
|
(91,831 | ) | 120,553 | (1,414 | ) | ||||||||||
|
Net increase in deferred contract costs
|
(100,293 | ) | (48,311 | ) | (34,659 | ) | |||||||||
|
Net increase in accounts payable, accrued liabilities, deferred
revenue, and other liabilities
|
95,775 | 36,480 | 72,134 | ||||||||||||
|
Net cash provided by operating activities
|
426,572 | 504,357 | 359,512 | ||||||||||||
|
Cash flows from investing activities:
|
|||||||||||||||
|
Additions to property and equipment
|
(79,567 | ) | (72,947 | ) | (57,049 | ) | |||||||||
|
Additions to capitalized software
|
(159,098 | ) | (104,555 | ) | (48,212 | ) | |||||||||
|
Acquisitions, net of cash acquired
|
(48,389 | ) | (423,170 | ) | (105,971 | ) | |||||||||
|
Net cash used in investing activities
|
(287,054 | ) | (600,672 | ) | (211,232 | ) | |||||||||
|
Cash flows from financing activities:
|
|||||||||||||||
|
Borrowings
|
2,800,000 | 410,000 | 1,998 | ||||||||||||
|
Debt service payments
|
(711,037 | ) | (19,839 | ) | (16,920 | ) | |||||||||
|
Capitalized debt issuance costs
|
(33,540 | ) | — | — | |||||||||||
|
Sale of stock, net of transactions costs
|
454,336 | — | — | ||||||||||||
|
Dividends paid
|
(2,700,000 | ) | — | — | |||||||||||
|
Net distribution to FNF
|
(7,013 | ) | (195,007 | ) | (96,983 | ) | |||||||||
|
Net cash (used in) provided by financing activities
|
(197,254 | ) | 195,154 | (111,905 | ) | ||||||||||
|
Net (decrease) increase in cash and cash equivalents
|
(57,736 | ) | 98,839 | 36,375 | |||||||||||
|
Cash and cash equivalents, beginning of year
|
190,888 | 92,049 | 55,674 | ||||||||||||
|
Cash and cash equivalents, end of year
|
$ | 133,152 | $ | 190,888 | $ | 92,049 | |||||||||
|
Noncash contributions by FNF
|
$ | 294 | $ | 854,839 | $ | 1,494,727 | |||||||||
|
Cash paid for interest
|
$ | 112,935 | $ | 3,615 | $ | 2,422 | |||||||||
|
Cash paid for taxes
|
$ | 83,829 | $ | 13,782 | $ | 10,018 | |||||||||
See accompanying notes to the consolidated and combined
financial statements.
F-7
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
| (1) | Summary of Significant Accounting Policies |
The following describes the significant accounting policies of
Fidelity National Information Services, Inc. and subsidiaries
and affiliates (collectively referred to as the
“Company” or “FIS”) which have been followed
in preparing the accompanying Consolidated and Combined
Financial Statements. FIS comprises the former wholly and
majority owned technology solutions, processing services and
information based services businesses of Fidelity National
Financial, Inc. and subsidiaries (collectively referred to as
“FNF”). During 2005, the Company underwent a
recapitalization and a 25% equity interest in the Company was
sold to a group of private investors (see note 2). After the
recapitalization transactions, the Company had 200 million
shares of common stock outstanding at a par value of $0.0001 per
share.
On February 1, 2006, the Company completed a merger with
Certegy Inc. (“Certegy”) (the “Merger”) (see
note 18). As a result of the Merger, each outstanding share of
FIS common stock was exchanged for 0.6396 shares of common stock
of Certegy. All share and per share amounts disclosed in these
financial statements and footnotes are presented as converted by
the exchange ratio used in the merger.
| (a) | Description of Business |
The Company is a leading provider of technology solutions,
processing services, and information-based services to the
financial services industry. The Company’s formation began
in early 2004 and was substantially completed in March 2005,
when all the entities, assets and liabilities that are included
in these Consolidated and Combined Financial Statements were
organized under one legal entity. The formation was accomplished
through the contribution of entities and operating assets and
liabilities to a newly formed subsidiary of FNF. The
Consolidated and Combined Financial Statements included herein
reflect the historical financial position, results of operations
and cash flows of the businesses included in this formation.
The Company offers technology services focused on two primary
markets, financial institution processing and mortgage loan
processing. The primary services provided are the provision of
software applications that function as the underlying
infrastructure of a financial institution’s transaction
processing environment. These software applications include core
bank processing software, which banks use to maintain the
primary records of their customer accounts, and core mortgage
processing software, which banks use to originate and service
mortgage loans. The Company also provides a number of
complementary software applications and services that interact
directly with the core processing applications, including
software applications that facilitate interactions between the
financial institutions and their customers.
The Company also offers customized outsourced business process
and information solutions to lenders and loan services. This
business provides loan facilitation services, which allow
financial institutions to outsource their title and loan closing
requirements in accordance with pre-selected criteria,
regardless of the geographic location of the borrower or
property. The Company also allows 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. The Company utilizes its own resources and
networks established with independent contractors to provide
these outsourcing solutions. The Company also operates various
property data and real estate-related services businesses. The
Company’s property data and real estate-related services
are utilized by mortgage lenders, investors and real estate
professionals to complete residential real estate transactions
throughout the U.S. The Company offers a comprehensive suite of
services spanning the entire home purchase and ownership life
cycle, from purchase through closing, refinancing, and resale.
| (b) | Principles of Consolidation and Combination and Basis of Presentation |
The accompanying Consolidated and Combined Financial Statements
include those assets, liabilities, revenues, and expenses
directly attributable to FIS’s operations and allocations
of certain FNF corporate assets, liabilities and expenses to
FIS. These amounts have been allocated to FIS on a basis that is
considered by management to reflect most fairly the utilization
of the services provided to or the benefit obtained by the
Company. Management believes the methods used to allocate these
amounts are reasonable.
F-8
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
All significant intercompany profits, transactions and balances
have been eliminated in consolidation or combination. The
financial information included herein does not necessarily
reflect what the financial position and results of operations of
the Company would have been had it operated as a stand-alone
entity during the periods covered.
The Company’s investments in less than 50% owned
partnerships and affiliates are accounted for using the equity
method of accounting.
All dollars presented in the accompanying Consolidated and
Combined Financial Statements (except per share amounts) are in
thousands unless indicated otherwise.
| (c) | Transactions with Related Parties |
The Company has historically conducted business with FNF and
Fidelity National Title Group, Inc. (“FNT”). In March
2005, in connection with the recapitalization and sale of equity
interest (see note 2), the Company entered into various
agreements with FNF and FNT under which the Company will
continue to provide title agency services, title plant
management, and IT services. Further, the Company also entered
into service agreements with FNF under which FNF and FNT will
continue to provide corporate services to the Company. On
February 1, 2006, in connection with the closing of the
Certegy merger (see note 18), many of these agreements were
amended and restated. The amended and restated agreements are
based substantially on the same versions of the agreements that
were originally executed in March 2005. A summary of these
agreements is as follows:
| • | Agreements to provide title agency services. These agreements allow the Company to provide services to existing customers through loan facilitation transactions, primarily with large national lenders. This arrangement involves the Company providing title agency services which result in the issuance of title policies by the Company on behalf of title insurance underwriters owned by FNT and subsidiaries. Subject to certain early termination provisions for cause, each of these agreements may be terminated upon five years’ prior written notice, which notice may not be given until after the fifth anniversary of the effective date of the agreement (thus effectively resulting in a minimum ten year term and a rolling one-year term thereafter). | |
| • | Agreements to provide title plant maintenance and management. These agreements govern the fee structure by which the Company will be paid for maintaining, managing and updating title plants owned by FNT’s title underwriters in certain parts of the country. In the case of the maintenance agreement, the Company will be responsible for the costs of keeping the title plant assets current and functioning and in return will receive the revenue generated by those assets. The Company will pay FNF a royalty fee of 2.5% to 3.75% of the revenues received. Subject to certain early termination provisions for cause, each of these agreements may be terminated upon five years’ prior written notice, which notice may not be given until after the fifth anniversary of the effective date of the agreement (thus effectively resulting in a minimum ten year term and a rolling one-year term thereafter). | |
| • | Agreement to provide information technology (“IT”) services. This arrangement governs the revenues to be earned by the Company for providing IT support services and software, primarily infrastructure support and data center management, to FNF and FNT. Subject to certain early termination provisions (including the payment of minimum monthly service and termination fees), this agreement has an initial term of five years with an option to renew for one or two additional years. | |
| • | Agreements by FNF and FNT to provide corporate services to the Company. These agreements provide for FNF and FNT to continue to provide general management, accounting, treasury, tax, finance, legal, payroll, human resources, employee benefits, internal audit, mergers and acquisitions, and other corporate support to the Company. The pricing of these services will be at cost for services which are either directly attributable to the Company, or in certain circumstances, an allocation of the Company’s share of the total costs incurred by FNF or FNT in providing such services based on estimates that FNF, FNT and the Company believe to be reasonable. |
F-9
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
A detail of related party items included in revenues and
expenses is as follows (in millions):
| 2005 | 2004 | 2003 | ||||||||||
|
Data processing and services revenue
|
$ | 56.9 | $ | 56.6 | $ | 12.4 | ||||||
|
Title plant information revenue
|
31.1 | 28.9 | 28.2 | |||||||||
|
Software revenue
|
18.9 | 5.8 | 2.6 | |||||||||
|
Other real-estate related services
|
10.9 | 9.9 | 11.4 | |||||||||
|
Total revenue
|
117.8 | 101.2 | 54.6 | |||||||||
|
Royalty expense
|
3.0 | 2.8 | — | |||||||||
|
Rent expense
|
5.0 | 8.4 | 7.3 | |||||||||
|
Data processing costs
|
— | — | 5.4 | |||||||||
|
Corporate services allocated
|
29.0 | 75.1 | 39.5 | |||||||||
|
Licensing, leasing and cost share agreement
|
(15.7 | ) | (15.6 | ) | (18.4 | ) | ||||||
|
Total expenses
|
21.3 | 70.7 | 33.8 | |||||||||
|
Total net impact of related party transactions
|
$ | 96.5 | $ | 30.5 | $ | 20.8 | ||||||
The Lender Services segment of FIS includes revenues generated
from loan facilitation transactions with lenders. A significant
part of those transactions involves title agency functions
resulting in the issuance of title insurance policies by a title
insurance underwriter owned by FNT. The Company also performs
similar functions in connection with trustee sale guarantees, a
form of title insurance that subsidiaries of FNT issue as part
of the foreclosure process on a defaulted loan. The Lender
Services segment includes revenues from unaffiliated third
parties of $80.9 million, $92.2 million and
$224.7 million for the years ended December 31, 2005,
2004 and 2003, respectively, representing commissions on title
insurance policies written by the Company on behalf of title
insurance subsidiaries of FNT. These commissions are equal to
88% of the total title premium from title policies that the
Company places with subsidiaries of FNT.
The Company’s property information division within the
Information Services segment manages FNT’s title plant
assets in certain areas of the United States. The underlying
title plant information is owned by FNT title underwriters; the
Company manages and updates the information in return for the
right to sell it to title insurers, including FNT underwriters
and other customers. As part of that management agreement, the
Company earns all revenue generated by those assets, both from
third party customers and from FNT and subsidiaries, and is also
responsible for the costs related to keeping the title plant
assets current and functioning on a daily basis and also pays
FNT a royalty fee ranging from 2.5% to 3.75% of those revenues
based on volume in 2005 and 2004. Had this agreement been in
place for the year ended December 31, 2003, the Company
would have recorded approximately $2.9 million in royalty
expense during that period. This business requires, among other
things, that the Company gather updated property information,
organize it, input it into one of several systems, maintain or
obtain the use of necessary software and hardware to store,
access and deliver the data, sell and deliver the data to
customers and provide various forms of customer support. The
Company’s costs include personnel costs, charges of third
parties such as government offices for title information,
technology costs and other operating expenses. FNT benefits from
having its title plant assets continually updated and
accessible. Revenues related to the sale of property information
were included in the Information Services segment for the years
ended December 31, 2005, 2004 and 2003. The Information
Services segment also has a subsidiary that provides software to
FNT and earned revenues in 2005, 2004 and 2003. Also included in
this segment are property data sales received from FNF and FNT
for certain real estate related services for the years ended
December 31, 2005, 2004 and 2003, respectively.
Included in the Financial Institution Software and Services
segment for the years ended December 31, 2005, 2004 and
2003, are data processing and services revenues from FNF and FNT
relating to the provision of IT infrastructure support and data
center management services. FIS began providing these services
to FNF
F-10
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
and its subsidiaries in September 2003 and thus there were no
revenues relating to these services in the first eight months of
2003. Prior to September 2003, a subsidiary of FNF provided
these services to FIS.
The Company has been reimbursed amounts from FNF or its
subsidiaries related to various miscellaneous licensing,
leasing, and cost sharing agreements during the years ended
December 31, 2005, 2004 and 2003, respectively.
FNF provides certain corporate services to the Company relating
to general management, accounting, tax, finance, legal, payroll,
human resources, internal audit and mergers and acquisitions.
The cost of these services has been allocated or passed through
to the Company from FNF based upon allocation bases including
revenues, head count, specific identification and others. Also
included in selling, general and administrative expenses are
payments to a subsidiary of FNF for equipment leases during the
years ended December 31, 2005, 2004 and 2003, respectively.
The equipment covered by those leases was purchased by the
Company during 2005 for $19.4 million.
The Company believes the amounts earned from or charged by FNF
to the Company under each of the foregoing service arrangements
are fair and reasonable. Although the 88% commission rate earned
by the Company’s Lender Services segment was set without
negotiation, the Company believes it is consistent with the
blended rate that would be available to a third party title
agent given the amount and the geographic distribution of the
business produced and the low risk of loss profile of the
business placed. In connection with title plant management, the
Company charges FNF title insurers for title information at
approximately the same rates it and other similar vendors charge
unaffiliated title insurers. The Company’s IT
infrastructure support and data center management services to
FNF and FNT is priced within the range of prices the Company
offers to third parties for similar services.
The Company owed FNF $43.7 million at December 31,
2004 relating to the various service agreements between the two
companies and the Company’s share of income taxes payable
by FNF. This amount represents only the net amount due under
various service agreements and income taxes payable for November
and December of 2004. Prior to November 2004, all amounts
related to these items were considered capital contributions or
dividends and included in the change in FNF’s net
investment in the Company. Effective with the execution of the
agreements described in note 2, amounts due to or from FNF are
settled monthly.
| (d) | Cash and Cash Equivalents |
For purposes of reporting cash flows, highly liquid instruments
purchased with original maturities of three months or less are
considered cash equivalents. The carrying amounts reported in
the Consolidated and Combined Balance Sheets for these
instruments approximate their fair value.
| (e) | Fair Value of Financial Instruments |
The fair values of financial instruments, which include trade
receivables and long-term debt, approximate their carrying
values. These estimates are subjective in nature and involve
uncertainties and significant judgment in the interpretation of
current market data. Therefore, the values presented are not
necessarily indicative of amounts the Company could realize or
settle currently. The Company intends to hold such instruments
to maturity. The Company holds, or has held, certain derivative
instruments, specifically interest rate swaps, warrants and
several put and call options relating to certain majority-owned
subsidiaries (see note 1(f)).
| (f) | Derivative Financial Instruments |
The Company accounts for derivative financial instruments in
accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 133, Accounting for Derivative
Instruments and Hedging Activities, (“SFAS No.
133”) as amended. During 2005, the Company engaged in
hedging activities relating to its variable rate debt through
the use of interest rate swaps. The Company designates these
interest rate swaps as cash flow hedges. The estimated fair
value of the cash flow hedges are recorded as an asset or
liability of the Company and are included in the accompanying
Consolidated and Combined Balance Sheet in other
F-11
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
noncurrent assets and or other long term liabilities, as
appropriate, and as a component of accumulated other
comprehensive earnings, net of deferred taxes. The amount
included in accumulated other comprehensive earnings will be
reclassified into interest expense as a yield adjustment as
future interest payments are made on the Term Loan B facility.
The Company’s existing cash flow hedges are highly
effective and there is no current impact on earnings due to
hedge ineffectiveness. It is the policy of the Company to
execute such instruments with credit-worthy banks and not to
enter into derivative financial instruments for speculative
purposes.
The Company also owns warrants to purchase additional shares of
common stock of Covansys Corporation. From September 2004 (the
date of initial purchase of Covansys stock and warrants) until
March 25, 2005, the Company accounted for the warrants
under SFAS No. 133. Under the provisions of SFAS
No. 133, the warrants were considered derivative
instruments and were recorded at a fair value of approximately
$23.5 million on the date of acquisition. During the first
quarter of 2005, the Company recorded a loss of
$4.4 million on the decrease in fair value of the warrants
through March 25, 2005 which is reflected in the Consolidated
and Combined Statement of Earnings in other income and expense.
On March 25, 2005, the terms of the warrants were amended
such that the accounting for the investment in the warrants is
now governed by the provisions of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, and changes in the fair value of the warrants
are recorded in other comprehensive earnings.
During 2004, the Company did not engage in any hedging
activities and thus recorded all derivative financial
instruments at fair value in the Combined Balance Sheet and all
changes in fair value were recognized in other income and
expense in the Combined Statement of Earnings.
| (g) | Trade Receivables, net |
A summary of trade receivables, net, at December 31, 2005
and 2004 is as follows (in thousands):
| 2005 | 2004 | ||||||||
|
Trade receivables—billed
|
$ | 367,225 | $ | 330,447 | |||||
|
Trade receivables—unbilled
|
97,392 | 89,616 | |||||||
|
Total trade receivables
|
464,617 | 420,063 | |||||||
|
Allowance for doubtful accounts
|
(17,943 | ) | (20,266 | ) | |||||
|
Total trade receivables, net
|
$ | 446,674 | $ | 399,797 | |||||
| (h) | Goodwill |
Goodwill represents the excess of cost over fair value of
identifiable net assets acquired and liabilities assumed in
business combinations. SFAS No. 142, Goodwill and
Intangible Assets (“SFAS No. 142”) requires
that intangible assets with estimable lives be amortized over
their respective estimated useful lives to their estimated
residual values and reviewed for impairment in accordance with
SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets (“SFAS No. 144”). SFAS
No 142 and SFAS No. 144 also provide that goodwill and
other intangible assets with indefinite useful lives should not
be amortized, but shall be tested for impairment annually, or
more frequently if circumstances indicate potential impairment,
through a comparison of fair value to its carrying amount. The
Company measures for impairment on an annual basis during the
fourth quarter using a September 30th measurement unless
circumstances require a more frequent measurement.
As required by SFAS No. 142, the Company completed its
annual goodwill impairment test in the fourth quarter of 2005 on
its reporting units, using a September 30, 2005 measurement
date, and has determined that each of its reporting units has a
fair value in excess of its carrying value. Accordingly, no
goodwill impairment has been recorded.
F-12
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
| (i) | Long-lived Assets |
SFAS No. 144 requires that long-lived assets and intangible
assets with definite useful lives be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the assets exceeds the
fair value of the asset.
| (j) | Intangible Assets |
The Company has intangible assets which consist primarily of
customer relationships and are recorded in connection with
acquisitions at their fair value based on the results of
valuations by third parties. Customer relationships are
amortized over their estimated useful lives using an accelerated
method which takes into consideration expected customer
attrition rates up to a ten-year period. Intangible assets with
estimated useful lives are reviewed for impairment in accordance
with SFAS No. 144 while intangible assets that are
determined to have indefinite lives are reviewed for impairment
at least annually in accordance with SFAS No. 142.
During 2005 and 2004, in accordance with SFAS No. 144,
the Company determined that the carrying value of certain of its
intangible assets, software and license fees was not recoverable
and recorded an expense of $9.3 million and
$6.3 million, respectively, relating to the impairment of
these assets. Such expenses are included in other operating
expenses in the Consolidated Statements of Earnings for the
years ended December 31, 2005 and 2004.
| (k) | Computer Software |
Computer software includes the fair value of software acquired
in business combinations, purchased software and capitalized
software development costs. Purchased software is recorded at
cost and amortized using the straight-line method over a 3-year
period 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 five to ten years.
Capitalized software development costs are accounted for in
accordance with either SFAS No. 86, Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed (“SFAS No. 86”), or with the
American Institute of Certified Public Accountants
(“AICPA”) Statement of Position (“SOP”)
No. 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use
(“SOP 98-1”).
After the technological feasibility of the software has been
established (for SFAS No. 86 software), or at the beginning
of application development (for SOP
No. 98-1
software), software development costs, which include salaries
and related payroll costs and costs of independent contractors
incurred during development, are capitalized. Research and
development costs incurred prior to the establishment of
technological feasibility (for SFAS No. 86 software), or
prior to application development (for SOP
No. 98-1
software), are expensed as incurred. Software development costs
are amortized on a product-by-product basis commencing on the
date of general release of the products (for SFAS No. 86
software) and the date placed in service for purchased software
(for SOP No. 98-1
software). Software development costs (for SFAS No. 86
software) are amortized using the greater of (1) the
straight-line method over its estimated useful life, which
ranges from three to ten years or (2) the ratio of current
revenues to total anticipated revenue over its useful life.
| (l) | Deferred Contract Costs |
Costs on software sales and outsourced data processing and
application management arrangements, including costs incurred
for bid and proposal activities, are generally expensed as
incurred. However, certain costs incurred upon initiation of a
contract are deferred and expensed over the contract life. These
costs represent incremental external costs or certain specific
internal costs that are directly related to the contract
acquisition or transition activities and are primarily
associated with installation of systems/processes and data
conversion.
F-13
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
In the event indications exist that a deferred contract cost
balance related to a particular contract may be impaired,
undiscounted estimated cash flows of the contract are projected
over its remaining term and compared to the unamortized deferred
contract cost balance. If the projected cash flows are not
adequate to recover the unamortized cost balance, the balance
would be adjusted to equal the contract’s net realizable
value, including any termination fees provided for under the
contract, in the period such a determination is made.
| (m) | Property and Equipment |
Property and equipment is recorded at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed primarily using the straight-line method based on the
estimated useful lives of the related assets: thirty years for
buildings and three to seven years for furniture, fixtures and
computer equipment. Leasehold improvements are amortized using
the straight-line method over the lesser of the initial term of
the applicable lease or the estimated useful lives of such
assets.
| (n) | Income Taxes |
Through March 8, 2005, the Company’s operating results
were included in FNF’s Consolidated U.S. Federal and State
income tax returns. The provision for income taxes in the
Consolidated and Combined Statements of Earnings is made at
rates consistent with what the Company would have paid as a
stand-alone taxable entity in those periods. Beginning on
March 8, 2005, The Company became its own tax paying
entity. The Company recognizes deferred income tax assets and
liabilities for temporary differences between the financial
reporting basis and the tax basis of the Company’s assets
and liabilities and expected benefits of utilizing net operating
loss and credit carryforwards. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The impact
on deferred income taxes of changes in tax rates and laws, if
any, are reflected in the consolidated and combined financial
statements in the period enacted.
| (o) | Revenue Recognition |
The following describes the Company’s primary types of
revenues and its revenue recognition policies as they pertain to
the types of transactions the Company enters into with its
customers. The Company enters into arrangements with customers
to provide services, software and software related services such
as post-contract customer support and implementation and
training either individually or as part of an integrated
offering of multiple products and services. These products and
services occasionally include offerings from more than one
segment to the same customer. The revenues for services provided
under these multiple element arrangements are recognized in
accordance with the applicable revenue recognition accounting
principles as further described below.
In its financial institution processing and mortgage loan
processing businesses, the Company recognizes revenues relating
to bank processing services and mortgage processing services
along with software licensing and software related services.
Several of the Company’s contracts include a software
license and one or more of the following services: data
processing, development, implementation, conversion, training,
programming, post-contract customer support and application
management. In some cases, these services are offered in
combination with one another and in other cases the Company
offers them individually. Revenues from bank and mortgage
processing services are typically volume-based depending on
factors such as the number of accounts processed, transactions
processed and computer resources utilized.
The substantial majority of the revenues in the financial
institution processing and mortgage loan processing businesses
are from outsourced data processing and application management
arrangements. Revenues from these arrangements are recognized as
services are performed in accordance with Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin
No. 104 (“SAB No. 104”), Revenue
Recognition and related interpretations. SAB No. 104 sets
forth guidance as to when revenue is realized or realizable and
earned when all of the following criteria are met:
(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 and
F-14
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
determinable; and (4) collectability is reasonably assured.
Revenues and costs related to implementation, conversion and
programming services associated with the Company’s data
processing and application management agreements during the
implementation phase are deferred and subsequently recognized
using the straight-line method over the term of the related
services agreement. The Company evaluates these deferred
contract costs for impairment in the event any indications of
impairment exist.
In the event that the Company’s arrangements with its
customers include more than one product or service, the Company
determines whether the individual revenue elements can be
recognized separately in accordance with Financial Accounting
Standards Board (“FASB”) Emerging Issues Task Force
No. 00-21 (“EITF 00-21”), Revenue Arrangements with
Multiple Deliverables. EITF 00-21 addresses the
determination of 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 all of the products and services are software related
products and services as determined under AICPA’s SOP 97-2
Software Revenue Recognition (“SOP 97-2”), and
SOP 98-9 Modification of SOP
No. 97-2, Software
Revenue Recognition, with Respect to Certain Transactions
(“SOP 98-9”) the Company applies 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.
The Company recognizes software license and post-contract
customer support fees as well as associated development,
implementation, training, conversion and programming fees in
accordance with SOP
No. 97-2 and SOP
No. 98-9. Initial license fees are recognized when a contract
exists, the fee is fixed or determinable, software delivery has
occurred and collection of the receivable is deemed probable,
provided that vendor-specific objective evidence
(“VSOE”) has been established for each element or for
any undelivered elements. The Company determines the fair value
of each element or the undelivered elements in multi-element
software arrangements based on VSOE. If the arrangement is
subject to accounting under SOP
No. 97-2, VSOE for
each element is based on the price charged when the same element
is sold separately, or in the case of post-contract customer
support, when a stated renewal rate is provided to the customer.
If evidence of fair value of all undelivered elements exists but
evidence does not exist for one or more delivered elements, then
revenue is recognized using the residual method. Under the
residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is
recognized as revenue. If evidence of fair value does not exist
for one or more undelivered elements of a contract, then all
revenue is deferred until all elements are delivered or fair
value is determined for all remaining undelivered elements.
Revenue from post-contract customer support is recognized
ratably over the term of the agreement. The Company records
deferred revenue for all billings invoiced prior to revenue
recognition.
With respect to a small percentage of revenues, the Company uses
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.
Revenues in excess of billings on these agreements are recorded
as unbilled receivables and are included in trade receivables.
Billings in excess of revenue recognized on these agreements are
recorded as deferred revenue until revenue recognition criteria
are met. Changes in estimates for revenues, costs and profits
are recognized in the period in which they are determinable.
When the Company’s estimates indicate that the entire
contract will be performed at a loss, a provision for the entire
loss is recorded in that accounting period.
The Company recognizes revenues from loan facilitation services
which primarily consist of centralized title agency and closing
services for various types of lenders. Revenues relating to
centralized title agency and closing services are recognized at
the time of closing of the related real estate transaction.
Ancillary service fees are recognized when the service is
provided. Revenue derived from these services is recognized as
the services are performed in accordance with SAB No. 104
as described above.
F-15
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
The Company recognizes revenues on default management services
provided to assist customers through the default and foreclosure
process, including property preservation and maintenance
services (such as lock changes, window replacement, debris
removal and lawn service), posting and publication of
foreclosure and auction notices, title searches, document
preparation and recording services, and referrals for legal and
property brokerage services. Revenue derived from these services
is recognized as the services are performed in accordance with
SAB No. 104 as described above.
The Company records revenue from providing property data or
data-related services. These services principally include
appraisal and valuation services, property records information,
real estate tax services, borrower credit and flood zone
information and multiple listing software and services. Revenue
derived from these services is recognized as the services are
performed in accordance with SAB No. 104 as described above.
The Company’s flood and tax units provide various services
including life-of-loan-monitoring services. Revenue for
life-of-loan services is deferred and recognized ratably over
the estimated average life of the loan service period, which is
determined based on the Company’s historical experience and
industry data. The Company evaluates its historical experience
on a periodic basis, and adjusts the estimated life of the loan
service period prospectively. Revenue derived from software and
service arrangements included in this segment is recognized in
accordance with SOP
No. 97-2 as
discussed above. Revenues from other services in this segment
are recognized as the services are performed in accordance with
SAB No. 104 as described above.
| (p) | Stock-Based Compensation Plans |
Certain FIS employees are participants in the Fidelity National
Information Services, Inc. 2005 Stock Incentive Plans, which
provide for the granting of incentive and nonqualified stock
options, restricted stock and other stock-based incentive awards
for officers and key employees. Also, certain FIS employees are
participants in FNF’s stock-based compensation plans.
The Company accounts for stock-based compensation using the fair
value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation (“SFAS No. 123”)
effective as of the beginning of 2003. Under the fair value
method of accounting, compensation cost is measured based on the
fair value of the award at the grant date and recognized over
the service period. The Company has elected to use the
prospective method of transition, as permitted by Statement of
Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation — Transition and
Disclosure (“SFAS No. 148”). Under this
method, stock-based employee compensation cost is recognized
from the beginning of 2003 as if the fair value method of
accounting had been used to account for all employee awards
granted, modified, or settled in years beginning after
December 31, 2002. The Company has provided for stock
compensation expense of $20.4 million, $15.4 million
and $3.8 million for the years ended December 31,
2005, 2004 and 2003, respectively, which is included in selling,
general, and administrative expense in the Consolidated and
Combined Statements of Earnings, as a result of the adoption of
SFAS No. 123.
F-16
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
The following table illustrates the effect on net earnings for
the years ended December 31, 2005, 2004 and 2003 as if the
Company had applied the fair value recognition provisions of
SFAS No. 123 to all awards held by FIS employees who are
plan participants (in thousands):
| 2005 | 2004 | 2003 | |||||||||||
|
Net earnings, as reported
|
$ | 196,550 | $ | 189,416 | $ | 203,057 | |||||||
|
Add: Stock-based compensation expense included in reported net
earnings, net of related income tax effects
|
12,589 | 9,569 | 2,358 | ||||||||||
|
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards, net of
related income tax effects
|
(12,995 | ) | (10,206 | ) | (4,926 | ) | |||||||
|
Pro forma net earnings
|
$ | 196,144 | $ | 188,779 | $ | 200,489 | |||||||
|
Earnings per share:
|
|||||||||||||
|
Basic — as reported
|
$ | 1.54 | $ | 1.48 | $ | 1.59 | |||||||
|
Basic — pro forma
|
$ | 1.53 | $ | 1.48 | $ | 1.57 | |||||||
|
Diluted — as reported
|
$ | 1.53 | $ | 1.48 | $ | 1.59 | |||||||
|
Diluted — pro forma
|
$ | 1.53 | $ | 1.48 | $ | 1.57 | |||||||
| (q) | Foreign Currency Translation |
The functional currency for the foreign operations of the
Company is either the U.S. Dollar or the local currency. For
foreign operations where the local currency is the functional
currency, the translation of foreign currencies into U.S.
dollars is performed for balance sheet accounts using exchange
rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during
the period. The gains and losses resulting from the translation
are included in accumulated other comprehensive earnings
(loss) in the Consolidated and Combined Statements of
Equity and are excluded from net earnings. Realized gains or
losses resulting from other foreign currency transactions are
included in other income (expense) and are insignificant in
the years ended December 31, 2005, 2004 and 2003.
| (r) | Management Estimates |
The preparation of these Consolidated and Combined Financial
Statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the Consolidated and Combined Financial Statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
| (s) | Unaudited Proforma Net Earnings per Share |
Unaudited pro forma net earnings per share is calculated for all
periods presented using the 200 million shares of FIS
outstanding following its recapitalization on March 9,
2005, as adjusted by the exchange ratio of 0.6396
(127.9 million shares) for the merger with Certegy Inc. on
February 1, 2006 (see note 18).
F-17
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
| 2005 | 2004 | 2003 | ||||||||||
|
Basic and diluted earnings
|
$ | 196,550 | $ | 189,416 | $ | 203,057 | ||||||
|
Weighted average shares outstanding — basic
|
127,920 | 127,920 | 127,920 | |||||||||
|
Plus: Common stock equivalent shares assumed from conversion of
options
|
434 | — | — | |||||||||
|
Weighted average shares outstanding — diluted
|
128,354 | 127,920 | 127,920 | |||||||||
|
Basic earnings per share
|
$ | 1.54 | $ | 1.48 | $ | 1.59 | ||||||
|
Diluted earnings per share
|
$ | 1.53 | $ | 1.48 | $ | 1.59 | ||||||
(2) Recapitalization
of FIS and Sale of Equity Interest
On March 9, 2005, the recapitalization of FIS was completed
through $2.8 billion in borrowings under new senior credit
facilities consisting of an $800 million Term Loan A
facility, a $2.0 billion Term Loan B facility
(collectively, the Term Loan Facilities) and a $400 million
revolving credit facility (the Revolver). The Company fully drew
upon the entire $2.8 billion in Term Loan Facilities to
complete the recapitalization while the Revolver remained
undrawn at the closing. The current interest rate on the Term
Loan A Facility and the Term Loan B Facility is LIBOR plus 1.50%
(5.86% at December 31, 2005) and LIBOR plus 1.75% (6.11% at
December 31, 2005), respectively. Bank of America, JP
Morgan Chase, Wachovia Bank, Deutsche Bank and Bear Stearns lead
a consortium of lenders providing the new senior credit
facilities.
The sale of the equity interest was accomplished through FIS
selling a 25 percent equity interest to an investment group led
by Thomas H. Lee Partners (THL) and Texas Pacific Group
(TPG). The Company issued a total of 32 million shares of
common stock of FIS to the investment group for a total purchase
price of $500 million. A new Board of Directors was created
at FIS, with William P. Foley, II, current Chairman and Chief
Executive Officer of FNF, serving as Chairman and Chief
Executive Officer of FIS. FNF appointed four additional members
to the FIS Board of Directors, while each of THL and TPG has
appointed two new directors. Subsequent to December 31,
2005 the Company closed its merger with Certegy and further
changes were made to the Board of Directors. (See note 18) The
following steps were undertaken to consummate the
recapitalization plan and equity interest sale. On March 8,
2005, the Company declared and paid a $2.7 billion dividend
to FNF in the form of a note. On March 9, 2005, the Company
borrowed $2.8 billion under its new senior credit
facilities and then paid FNF $2.7 billion, plus interest in
repayment of the note. The equity interest sale was then closed
through the payment of $500 million from the investment
group led by THL and TPG to the Company. The Company then repaid
approximately $410 million outstanding under its
November 8, 2004 credit facility. Finally, the Company paid
all expenses related to the transactions. These expenses totaled
$79.2 million, consisting of $33.5 million in
financing fees and $45.7 million in fees relating to the
equity interest sale, including placement fees payable to the
investors.
(3) Acquisitions
The results of operations and financial position of the entities
acquired during the years ended December 31, 2005, 2004 and
2003 are included in the Consolidated and Combined Financial
Statements from and after the date of acquisition. These
acquisitions were made by the Company or FNF and then
contributed to FIS by FNF. The acquisitions made by FNF and
contributed to FIS are included in the related Consolidated and
Combined Financial Statements as capital contributions. The
purchase price of each acquisition was allocated to the assets
acquired and liabilities assumed based on third party valuations
with any excess cost over fair value being allocated to
goodwill. There were no significant acquisitions completed
during 2005.
F-18
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
Significant 2004 acquisitions:
Aurum Technology,
Inc.
On March 11, 2004, FNF acquired Aurum Technology, Inc.
(Aurum) for $306.4 million, comprised of
$185.0 million in cash and FNF common stock valued at
$121.4 million. Aurum is a provider of outsourced and
in-house information technology solutions for the community bank
and credit union markets.
The assets acquired and liabilities assumed in the Aurum
acquisition were as follows (in thousands):
|
Tangible assets
|
$ | 39,373 | ||
|
Computer software
|
24,928 | |||
|
Intangible assets
|
44,803 | |||
|
Goodwill
|
255,399 | |||
|
Liabilities assumed
|
(58,134 | ) | ||
|
Total purchase price
|
$ | 306,369 | ||
Sanchez Computer Associates,
Inc.
On April 14, 2004, FNF acquired Sanchez Computer
Associates, Inc. (Sanchez) for $183.7 million, comprised of
$88.1 million in cash and FNF common stock valued
$88.1 million with the remaining purchase price of
$7.5 million relating to the issuance of FNF stock options
for vested Sanchez stock options. Sanchez develops and markets
scalable and integrated software and services that provide
banking, customer integration, outsourcing and wealth management
solutions to financial institutions in several countries.
Sanchez’ primary application offering is Sanchez
Profiletm,
a real-time, multi-currency, strategic core banking deposit and
loan processing system that can be utilized on both an
outsourced and in-house basis.
The assets acquired and liabilities assumed in the Sanchez
acquisition were as follows (in thousands):
|
Tangible assets
|
$ | 28,662 | ||
|
Computer software
|
29,331 | |||
|
Intangible assets
|
19,638 | |||
|
Goodwill
|
127,630 | |||
|
Liabilities assumed
|
(21,591 | ) | ||
|
Total purchase price
|
$ | 183,670 | ||
Kordoba
On September 30, 2004, FNF acquired a 74.9% interest in
KORDOBA Gesellschaft fur Bankensoftware mbH & Co. KG,
Munich, or Kordoba, a provider of core processing software and
outsourcing solutions to the German banking market, from Siemens
Business Services GmbH & Co. OHG (Siemens). The acquisition
price was $123.6 million in cash. The Company recorded the
Kordoba acquisition based on its proportional share of the fair
value of the assets acquired and liabilities assumed on the
purchase date. On September 30, 2005, the Company completed the
step acquisition by purchasing the remaining 25.1% of Kordoba
for $39.7 million.
F-19
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
The assets acquired and liabilities assumed in the Kordoba
acquisition (including the 25.1% minority interest acquisition)
were as follows (in thousands):
|
Tangible assets
|
$ | 122,938 | ||
|
Computer software
|
34,039 | |||
|
Intangible assets
|
35,372 | |||
|
Goodwill
|
105,664 | |||
|
Liabilities assumed
|
(134,767 | ) | ||
|
Total purchase price
|
$ | 163,246 | ||
InterCept, Inc.
On November 8, 2004, the Company acquired all of the
outstanding stock of InterCept, Inc. (InterCept) for $18.90 per
share. The total purchase price was approximately
$419.4 million which included $407.3 million of cash
with the remaining purchase price relating to the issuance of
FNF options for vested InterCept options. InterCept provides
both outsourced and in-house, fully integrated core-banking
solutions for community banks, including loan and deposit
processing and general ledger and financial accounting
operations. InterCept also operates significant item processing
and check imaging operations, providing imaging for customer
statements, clearing and settlement, reconciliation and
automated exception processing in both outsourced and in-house
relationships for customers.
The assets acquired and liabilities assumed in the InterCept
acquisition were as follows (in thousands):
|
Tangible assets
|
$ | 70,833 | ||
|
Computer software
|
12,700 | |||
|
Intangible assets
|
125,795 | |||
|
Goodwill
|
267,079 | |||
|
Liabilities assumed
|
(57,048 | ) | ||
|
Total purchase price
|
$ | 419,359 | ||
Selected unaudited pro forma combined results of operations for
the years ended December 31, 2005 and 2004, assuming the
above acquisitions and the recapitalization and sale of equity
interest (see note 2) had occurred as of January 1, 2004,
and using actual general and administrative expenses prior to
the acquisition, are set forth below (in thousands):
| Year Ended December 31, | ||||||||
| 2005 | 2004 | |||||||
|
Total revenue
|
$ | 2,766,085 | $ | 2,649,953 | ||||
|
Net earnings
|
$ | 184,650 | $ | 124,983 | ||||
|
Pro forma earnings per share — basic
|
$ | 1.44 | $ | .98 | ||||
|
Pro forma earnings per share — diluted
|
$ | 1.44 | $ | .98 | ||||
Significant 2003 acquisitions
Alltel Information Services,
Inc.
On January 28, 2003, FNF entered into a stock purchase
agreement with ALLTEL Corporation, Inc., a Delaware corporation
(ALLTEL), to acquire from ALLTEL its financial services
division, ALLTEL Information Services, Inc. (AIS). On
April 1, 2003, FNF closed the acquisition and subsequently
renamed the division Fidelity Information Services (FI). FI is
one of the largest providers of information-based technology
solutions and processing services to the mortgage and financial
services industries.
F-20
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
FNF acquired FI for approximately $1.1 billion (including
the payment for certain working capital adjustments and
estimated transaction costs), consisting of $794.6 million
in cash and $275.0 million of FNF’s common stock.
The assets acquired and liabilities assumed in the FI
acquisition were as follows (in thousands):
|
Tangible assets
|
$ | 298,960 | ||
|
Computer software
|
95,000 | |||
|
Intangible assets
|
348,000 | |||
|
Goodwill
|
450,743 | |||
|
Liabilities assumed
|
(123,082 | ) | ||
|
Total purchase price
|
$ | 1,069,621 | ||
The Company is amortizing the intangible assets using an
accelerated method which takes into consideration expected
customer attrition rates over a 10-year period. The acquired
software is amortized over a ten-year period using an
accelerated method that contemplates the period of expected
economic benefit and future enhancements to the underlying
software. Under the terms of the stock purchase agreement, the
Company made a joint election with ALLTEL to treat the
acquisition as a sale of assets in accordance with
Section 338 (h) (10) of the Internal Revenue Code,
which resulted in the revaluation of the assets acquired to fair
value for income tax purposes. As such, the fair value
assignable to the historical assets, as well as intangible
assets and goodwill, is deductible for federal and state income
tax purposes.
Fidelity National
Information Solutions, Inc.
On September 30, 2003, FNF acquired the outstanding
minority interest of Fidelity National Information Solutions,
Inc. (FNIS), its publicly traded majority-owned real estate
information services subsidiary that provides property data and
real estate related services. In the acquisition, each share of
FNIS common stock (other than FNIS common stock the Company
already owned) was exchanged for 0.83 shares of FNF’s
common stock for a total purchase price of $243.7 million.
The Company recorded its proportional share of the fair value of
the assets acquired and liabilities assumed in the FNIS minority
interest acquisition as follows (in thousands):
|
Computer software
|
$ | 13,069 | ||
|
Intangible assets
|
75,827 | |||
|
Goodwill
|
154,831 | |||
|
Total purchase price
|
$ | 243,727 | ||
Other acquisitions
Additionally, the following transactions with acquisition prices
between $10 million and $100 million each were entered
into by FNF and subsequently contributed to the Company during
the period from January 1, 2003 through December 31,
2005:
| Name of Company Acquired | Date Acquired | Purchase Price | ||||||
|
Lender’s Service, Inc
|
February 10, 2003 | $ | 75.0 million | |||||
|
Webtone Technologies, Inc
|
September 2, 2003 | $ | 90.0 million | |||||
|
Hansen Quality Loan Services, LLC(i)
|
February 27, 2004 | $ | 34.0 million | |||||
|
Bankware
|
April 7, 2004 | $ | 55.7 million | |||||
|
Geotrac, Inc
|
July 2, 2004 | $ | 40.0 million | |||||
|
ClearPar LLC
|
December 13, 2004 | $ | 33.1 million | |||||
| (i) | Represents purchase by FNF of the remaining 45% interest not already owned by the Company. |
F-21
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
(4) Investment in Covansys Corporation
On September 15, 2004, FNF acquired 11 million shares
of common stock and warrants to purchase 4 million
additional shares of Covansys Corporation (Covansys), a publicly
traded U.S. based provider of application management and
offshore outsourcing services with India based operations for
$121.0 million in cash. FNF subsequently contributed the
common stock and warrants to the Company which resulted in the
Company owning approximately 29% of the common stock of
Covansys. The Company accounts for the investment in common
stock using the equity method of accounting and, until
March 24, 2005, accounted for the warrants under SFAS
No. 133. Under SFAS No. 133, the warrants were
considered derivative instruments and were recorded at a fair
value of approximately $23.5 million on the date of
acquisition. On March 25, 2005, the terms of the warrants
were amended to add a mandatory holding period subsequent to
exercise of the warrants and eliminate a cashless exercise
option available to the Company. Following these amendments, the
accounting for the warrants is now governed by the provisions of
SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, and changes in the fair value of the
warrants are recorded through equity in other comprehensive
earnings (loss).
The Company also entered into a master service provider
agreement with Covansys which requires the Company to purchase a
minimum of $150 million in services over a five year period
expiring June 30, 2009 or be subject to certain penalties
if defined spending thresholds are not met. The Company is
subject to penalties up to $8.0 million in the event that
certain annual thresholds are not met and a final penalty equal
to 6.67% of the unmet commitment. The first annual spending
threshold is $50.0 million from the contract begin date
through June 30, 2006. Failure to meet this threshold
amount will result in a penalty due of $1.0 million.
Through December 31, 2005, the Company had spent
approximately $20.8 million under the terms of this
agreement, substantially less than required to meet the
June 30, 2006 threshold. As a result the $1 million
penalty has been accrued and is included in selling, general and
administrative expenses in the year ended December 31, 2005
Consolidated and Combined Statement of Earnings.
An unaudited summary consolidated balance sheet of Covansys for
December 31, 2005 and December 31, 2004 is as follows
(in thousands):
| December 31, 2005 | December 31, 2004 | ||||||||
|
Current assets
|
$ | 204,637 | $ | 183,582 | |||||
|
Property and equipment
|
36,656 | 29,762 | |||||||
|
Goodwill
|
21,893 | 19,148 | |||||||
|
Other assets
|
8,075 | 16,310 | |||||||
|
Total assets
|
$ | 271,261 | $ | 248,802 | |||||
|
Current liabilities
|
$ | 59,727 | $ | 71,149 | |||||
|
Other liabilities
|
3,674 | 3,462 | |||||||
|
Shareholders’ equity
|
207,860 | 174,191 | |||||||
|
Total liabilities and shareholders’ equity
|
$ | 271,261 | $ | 248,802 | |||||
An unaudited summary income statement for Covansys for the year
ended December 31, 2005 and for the three months from the
acquisition date to December 31, 2004 is as follows (in
thousands):
| Three months | ||||||||
| Year Ended | ending | |||||||
| December 31, 2005 | December 31, 2004 | |||||||
|
Revenue
|
$ | 434,120 | $ | 99,171 | ||||
|
Net income
|
$ | 37,538 | $ | 9,224 | ||||
F-22
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
| (5) | Property and Equipment |
Property and equipment as of December 31, 2005 and 2004
consists of the following (in thousands):
| 2005 | 2004 | |||||||
|
Land
|
$ | 9,235 | $ | 9,493 | ||||
|
Buildings
|
90,031 | 91,438 | ||||||
|
Leasehold improvements
|
33,779 | 24,780 | ||||||
|
Computer equipment
|
212,790 | 188,371 | ||||||
|
Furniture, fixtures, and other equipment
|
61,435 | 26,057 | ||||||
| 407,270 | 340,139 | |||||||
|
Accumulated depreciation and amortization
|
(186,845 | ) | (123,161 | ) | ||||
| $ | 220,425 | $ | 216,978 | |||||
Depreciation and amortization expense on property and equipment
amounted to $68.4 million, $58.2 million and
$36.0 million for the years ended December 31, 2005,
2004 and 2003, respectively.
| (6) | Goodwill |
Changes in goodwill, net of purchase accounting adjustments,
during the years ended December 31, 2005 and 2004 are
summarized as follows (in thousands):
| Financial | ||||||||||||||||||||
| Institution | Default | |||||||||||||||||||
| Software and | Management | Lender | Information | |||||||||||||||||
| Services | Services | Services | Services | Total | ||||||||||||||||
|
Balance, December 31, 2003
|
$ | 562,660 | $ | 20,590 | $ | 64,989 | $ | 317,774 | $ | 966,013 | ||||||||||
|
Goodwill acquired during 2004
|
744,466 | 228 | (3,537 | ) | 50,587 | 791,744 | ||||||||||||||
|
Balance, December 31, 2004
|
1,307,126 | 20,818 | 61,452 | 368,361 | 1,757,757 | |||||||||||||||
|
Goodwill acquired during 2005
|
26,220 | 3,401 | 176 | 159 | 29,956 | |||||||||||||||
|
Balance, December 31, 2005
|
$ | 1,333,346 | $ | 24,219 | $ | 61,628 | $ | 368,520 | $ | 1,787,713 | ||||||||||
| (7) | Intangible Assets |
Intangible assets, as of December 31, 2005 and 2004,
consist of the following (in thousands):
| Accumulated | |||||||||||||
| Cost | Amortization | Net | |||||||||||
|
2005:
|
|||||||||||||
|
Customer relationships
|
$ | 756,403 | $ | 292,731 | $ | 463,672 | |||||||
|
Trademarks
|
45,108 | — | 45,108 | ||||||||||
| $ | 801,511 | $ | 292,731 | $ | 508,780 | ||||||||
|
2004:
|
|||||||||||||
|
Customer relationships
|
$ | 752,041 | $ | 167,898 | $ | 584,143 | |||||||
|
Trademarks
|
45,011 | — | 45,011 | ||||||||||
| $ | 797,052 | $ | 167,898 | $ | 629,154 | ||||||||
Amortization expense for intangible assets with definite lives
was $125.4 million, $104.9 million and
$49.4 million for the years ended December 31, 2005,
2004 and 2003, respectively. Intangible assets, other
F-23
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
than those with indefinite lives, are amortized over their
estimated useful lives ranging from 5 to 10 years using
accelerated methods. Estimated amortization expense for the next
five years is $104.1 million for 2006, $89.2 million
for 2007, $75.2 million for 2008, $61.6 million for
2009, and $47.6 million for 2010.
| (8) | Computer Software |
Computer software as of December 31, 2005 and 2004 consists
of the following (in thousands):
| 2005 | 2004 | |||||||
|
Software from business acquisitions
|
$ | 327,346 | $ | 299,047 | ||||
|
Capitalized software development costs
|
264,537 | 133,864 | ||||||
|
Purchased software
|
69,040 | 55,767 | ||||||
|
Computer software
|
660,923 | 488,678 | ||||||
|
Accumulated amortization
|
(208,930 | ) | (116,068 | ) | ||||
|
Computer software, net of accumulated amortization
|
$ | 451,993 | $ | 372,610 | ||||
Amortization expense for computer software was
$91.7 million, $69.9 million and $56.6 million
for 2005, 2004 and 2003, respectively.
| (9) | Deferred Contract Costs |
A summary of deferred contract costs as of December 31,
2005 and 2004 is as follows (in thousands):
| 2005 | 2004 | |||||||
|
Installations and conversions in progress
|
$ | 48,574 | $ | 16,905 | ||||
|
Installations and conversions completed, net
|
116,381 | 60,118 | ||||||
|
Other, net
|
18,308 | 5,947 | ||||||
|
Total deferred contract costs
|
$ | 183,263 | $ | 82,970 | ||||
Amortization of deferred contract costs was $14.2 million,
$5.4 million and $2.0 million for the years ended
December 31, 2005, 2004, and 2003, respectively.
| (10) | Accounts Payable and Accrued Liabilities |
Accounts payable and accrued liabilities as of December 31,
2005 and 2004 consists of the following (in thousands):
| 2005 | 2004 | |||||||
|
Salaries and incentives
|
$ | 96,492 | $ | 73,292 | ||||
|
Accrued benefits
|
24,346 | 11,675 | ||||||
|
Trade accounts payable
|
43,648 | 44,034 | ||||||
|
Accrued foreign trade and sales tax
|
25,868 | 2,062 | ||||||
|
Other accrued taxes (other than income)
|
10,068 | 3,592 | ||||||
|
Other accrued liabilities
|
109,169 | 113,613 | ||||||
| $ | 309,591 | $ | 248,268 | |||||
F-24
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
| (11) | Long-Term Debt |
Long-term debt as of December 31, 2005 and 2004 consists of
the following (in thousands):
| 2005 | 2004 | |||||||
|
Term Loan B Facility, secured, interest payable at LIBOR
plus 1.75% (6.11% at December 31, 2005), 0.25% quarterly
principal amortization, due March 2013
|
$ | 1,760,000 | $ | — | ||||
|
Term Loan A Facility, secured, interest payable at LIBOR
plus 1.50% (5.86% at December 31, 2005), 0.25% quarterly
principal amortization, due March 2011
|
794,000 | — | ||||||
|
Syndicated credit agreement, secured, interest due quarterly at
LIBOR plus 1.50%, unused portion of $400 million at
December 31, 2005
|
— | — | ||||||
|
Revolving credit facility, paid in full and terminated on
March 9, 2005
|
— | 410,000 | ||||||
|
Other promissory notes with various interest rates and maturities
|
10,128 | 21,205 | ||||||
| 2,564,128 | 431,205 | |||||||
|
Less current portion
|
(33,673 | ) | (13,891 | ) | ||||
|
Long-term debt, excluding current portion
|
$ | 2,530,455 | $ | 417,314 | ||||
On March 9, 2005, the Company entered into a Credit
Agreement, dated as of March 9, 2005, with Bank of America,
as Administrative Agent and other financial institutions (the
“Credit Agreement”).
The Credit Agreement replaces a $500 million Revolving
Credit Agreement, dated as of November 8, 2004, among the
Company, as borrower, and Wachovia Bank, National Association,
as Administrative Agent and Swing Line Lender, (the
“Wachovia Credit Agreement”), which was repaid and
terminated on March 9, 2005. On the date of its
termination, approximately $410 million was outstanding
under the Wachovia Credit Agreement and no early termination
penalties were incurred.
The Credit Agreement provides for an $800 million six-year
term facility (“Term A Loans”), a $2.0 billion
eight-year term facility (“Term B Loans”) and a
$400 million revolving credit facility maturing on the
sixth anniversary of the closing date. The term facilities were
fully drawn on the closing date while the revolving credit
facility was undrawn on the closing date. The Company has
provided an unconditional guarantee of the full and punctual
payment of the obligations under the Credit Agreement and
related loan documents.
Under the terms of the Credit Agreement, the Company has granted
a first priority (subject to certain exceptions) security
interest in substantially all of its personal property,
including shares of stock and other ownership interests.
Amounts under the revolving credit facility may be borrowed,
repaid and re-borrowed from time to time until the maturity of
the revolving credit facility. The term facilities are subject
to quarterly amortization of principal in equal installments of
0.25% of the principal amount with the remaining balance payable
at maturity. In addition to the scheduled amortization, and with
certain exceptions, the term loans are subject to mandatory
prepayment from excess cash flow, issuance of additional equity
and debt and certain sales of assets. Voluntary prepayments of
both the term loans and revolving loans and commitment
reductions of the revolving credit facility under the Credit
Agreement are permitted at any time without fee upon proper
notice and subject to a minimum dollar requirement. Revolving
credit borrowings and Term A Loans bear interest at a floating
rate, which will be, at the Company’s option, either the
British Bankers Association LIBOR or a base rate plus, in both
cases, an applicable margin, which is subject to adjustment
based on the performance of the Company. The Term B Loans bear
interest at either the British Bankers Association LIBOR plus
1.75% per annum or, at the Company’s option, a base
rate plus 0.75% per annum.
F-25
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
The credit facilities contain 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, limitations on dividends and other
restricted payments and capital expenditures, a minimum interest
coverage ratio, and a maximum secured leverage ratio. The
Company’s management believes that the Company is in
compliance with all covenants related to credit agreements at
December 31, 2005.
On April 11, 2005, the Company entered into interest rate
swap agreements which have effectively fixed the interest rate
at approximately 6.1% through April 2008 on $350 million of
the Term Loan B Facility and at approximately 5.9% through
April 2007 on an additional $350 million of the Term
Loan B Facility. The Company has designated these interest
rate swaps as cash flow hedges in accordance with
SFAS No. 133. The estimated fair value of the cash
flow hedges results in an asset to the Company of
$5.2 million, as of December 31, 2005 which is
included in the accompanying Consolidated Balance Sheet in other
noncurrent assets and as a component of accumulated other
comprehensive earnings, net of deferred taxes. The amount
included in accumulated other comprehensive earnings will be
reclassified into interest expense as a yield adjustment as
future interest payments are made on the Term Loan B
Facility. The Company’s existing cash flow hedges are
highly effective and there is no current impact on earnings due
to hedge ineffectiveness. It is the policy of the Company to
execute such instruments with credit-worthy banks and not to
enter into derivative financial instruments for speculative
purposes.
Principal maturities for the next five years ending
December 31 are as follows (in thousands):
|
2006
|
$ | 33,673 | ||
|
2007
|
31,607 | |||
|
2008
|
28,538 | |||
|
2009
|
28,310 | |||
|
2010
|
28,000 | |||
|
Thereafter
|
2,414,000 | |||
| $ | 2,564,128 | |||
| (12) | Income Taxes |
Income tax expense (benefit) for the years ended
December 31, 2005, 2004 and 2003 consists of the following
(in thousands):
| 2005 | 2004 | 2003 | |||||||||||
|
Current provision (benefit):
|
|||||||||||||
|
Federal
|
$ | 70,669 | $ | 105,682 | $ | 106,945 | |||||||
|
State
|
12,973 | 17,656 | 17,107 | ||||||||||
|
Foreign
|
(9,114 | ) | 6,008 | 5,696 | |||||||||
|
Total current provision
|
$ | 74,528 | $ | 129,346 | $ | 129,748 | |||||||
|
Deferred provision (benefit):
|
|||||||||||||
|
Federal
|
$ | 22,827 | $ | (11,242 | ) | $ | 7,142 | ||||||
|
State
|
3,172 | 239 | 1,085 | ||||||||||
|
Foreign
|
15,558 | — | — | ||||||||||
|
Total deferred provision
|
41,557 | (11,003 | ) | 8,227 | |||||||||
|
Total provision for income taxes
|
$ | 116,085 | $ | 118,343 | $ | 137,975 | |||||||
F-26
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
A reconciliation of the federal statutory income tax rate to the
Company’s effective income tax rate for the years ended
December 31, 2005, 2004 and 2003 is as follows (in
thousands):
| 2005 | 2004 | 2003 | |||||||||||
|
Federal statutory income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | |||||||
|
State income taxes
|
5.6 | 5.9 | 5.2 | ||||||||||
|
Federal benefit of state taxes
|
(2.1 | ) | (2.1 | ) | (1.8 | ) | |||||||
|
Change in valuation allowance
|
0.0 | (0.9 | ) | 0.8 | |||||||||
|
Other
|
(1.3 | ) | (0.3 | ) | (0.4 | ) | |||||||
|
Effective income tax rate
|
37.2 | % | 37.6 | % | 38.8 | % | |||||||
The significant components of deferred income tax assets and
liabilities at December 31, 2005 and 2004 consist of the
following (in thousands):
| 2005 | 2004 | |||||||||
|
Deferred income tax assets:
|
||||||||||
|
Deferred revenue
|
$ | 88,272 | $ | 55,439 | ||||||
|
Net operating loss carryforwards
|
44,083 | 56,247 | ||||||||
|
Allowance for doubtful accounts
|
5,637 | 5,387 | ||||||||
|
Employee benefit accruals
|
24,346 | 19,102 | ||||||||
|
Foreign tax credit carryforwards
|
11,052 | 2,152 | ||||||||
|
Other
|
16,278 | 13,428 | ||||||||
|
Total gross deferred income tax assets
|
189,668 | 151,755 | ||||||||
|
Less valuation allowance
|
(9,203 | ) | (3,047 | ) | ||||||
|
Total deferred income tax assets
|
180,465 | 148,708 | ||||||||
|
Deferred income tax liabilities:
|
||||||||||
|
Deferred contract costs
|
55,538 | 27,597 | ||||||||
|
Amortization of goodwill, intangible assets, and computer
software
|
162,599 | 151,327 | ||||||||
|
Other
|
9,676 | 5,982 | ||||||||
|
Total deferred income tax liabilities
|
227,813 | 184,906 | ||||||||
|
Net deferred income tax liability
|
$ | 47,348 | $ | 36,198 | ||||||
Deferred income taxes have been classified in the Consolidated
and Combined Balance Sheets as of December 31, 2005 and
2004 as follows (in thousands):
| 2005 | 2004 | ||||||||
|
Current assets
|
$ | 105,845 | $ | 99,136 | |||||
|
Noncurrent liabilities
|
153,193 | 135,334 | |||||||
|
Net deferred income tax liability
|
$ | 47,348 | $ | 36,198 | |||||
Management believes that based on its historical pattern of
taxable income, the Company will produce sufficient income in
the future to realize its net deferred income tax assets. A
valuation allowance is established for any portion of a deferred
income tax asset that management believes it is more likely than
not that the Company will not be able to realize the benefits of
such deferred income tax assets. Adjustments to the valuation
allowance will be made if there is a change in management’s
assessment of the amount of deferred income tax asset that is
realizable.
F-27
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
At December 31, 2005 and 2004, the Company has federal net
operating loss carryforwards of $91.8 million and
$146.1 million, respectively, which expire between 2019 and
2024. The Company also has Canadian net operating loss
carryforwards of $20.5 million as of December 31, 2005
which will begin to expire in 2006. As of December 31,
2005, the Company has a valuation allowance against
$15.5 million of the Canadian net operating losses for
which management believes it is likely that it will not realize
any benefits. At December 31, 2005 and 2004, the Company
had foreign tax credit carryovers of $11.1 million and
$2.2 million, respectively, which expire between 2010 and
2015. As of December 31, 2005, the Company has a valuation
allowance against $2.2 million of foreign tax credits for
which management believes it is likely that it will not realize
the benefit.
As of January 1, 2005, the Internal Revenue Service has
selected the Company to participate in a new pilot program
(Compliance Audit Program or CAP) that is a real-time audit for
2005 and future years. The Internal Revenue Service is also
currently examining FNF’s tax returns for years 2002, 2003,
and 2004. Management believes the ultimate resolution of these
examinations will not result in material adverse effect to the
Company’s financial position or results of operations and
has provided for taxes and related interest for any adjustments
that are expected to result from the audits.
The Company provides for United States income taxes on earnings
of foreign subsidiaries unless they are considered permanently
reinvested outside the United States. At December 31, 2005,
the cumulative earnings on which United States taxes have not
been provided for were $7.7 million. If these earnings were
repatriated to the United States, they would generate foreign
tax credits that could reduce the federal tax liability
associated with the foreign dividend.
| (13) | Commitments and Contingencies |
| Litigation |
In the ordinary course of business, we are involved in various
pending and threatened litigation matters related to our
operations, some of which include claims for punitive or
exemplary damages. We believe that no actions, other than those
listed below, depart from customary litigation incidental to our
business. As background to the disclosure below, please note the
following:
| • | These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including but not limited to the underlying facts of each matter, novel legal issues, variations between jurisdictions in which matters are being litigated, differences in applicable laws and judicial interpretations, the length of time before many of these matters might be resolved by settlement or through litigation and, in some cases, the timing of their resolutions relative to other similar cases brought against other companies and the current challenging legal environment faced by large corporations. | |
| • | In these matters, plaintiffs seek a variety of remedies including equitable relief in the form of injunctive and other remedies and monetary relief in the form of compensatory damages. In most cases, the monetary damages sought include punitive or treble damages. Often more specific information beyond the type of relief sought is not available because plaintiffs have not requested more specific relief in their court pleadings. In general, the dollar amount of damages sought is not specified. In those cases where plaintiffs have made a specific statement with regard to monetary damages, they often specify damages just below a jurisdictional limit regardless of the facts of the case. This represents the maximum they can seek without risking removal from state court to federal court. In our experience, monetary demands in plaintiffs’ court pleadings bear little relation to the ultimate loss, if any, we may experience. | |
| • | We review these matters on an on-going basis and follow the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies” when making accrual and |
F-28
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
| disclosure decisions. When assessing reasonably possible and probable outcomes, we base our decision on our assessment of the ultimate outcome following all appeals. | ||
| • | In the opinion of our management, while some of these matters may be material to our operating results for any particular period if an unfavorable outcome results, none will have a material adverse effect on our overall financial condition. |
The Company, together with FNF and certain of its employees,
were named on March 6, 2006 as defendants in a civil
lawsuit brought by Grace & Digital Information
Technology Co., Ltd. (“Grace”), a Chinese company that
formerly acted as a sales agent for Alltel Information Services
(“AIS”).
Grace originally filed a lawsuit in December 2004 in state court
in Monterey County, California, alleging that FIS breached the
sales agency agreement between Grace and AIS by failing to pay
Grace commissions on certain contracts in 2001 and 2003.
However, the 2001 contracts were never completed and the 2003
contracts, as to which Grace provided no assistance, were for a
different project and were executed one and one-half years after
FIS terminated the sales agency agreement with Grace. In
addition to its breach of contract claim, Grace also alleged
that FNF violated the Foreign Corrupt Practices Act (FCPA) in
its dealings with a bank customer in China. FNF denied
Grace’s allegations in this California lawsuit.
In December 2005, the Monterey County court dismissed the
lawsuit on the grounds of inconvenient forum. On March 6,
2006, Grace filed a new lawsuit in the United States District
Court for the Middle District of Florida arising from the same
transaction, and added an additional allegation to its complaint
that FNF violated the Racketeer Influenced and Corrupt
Organizations Act (RICO) in its dealings with the same bank
customer. FNF and its subsidiaries intend to defend this case
vigorously. On March 7, 2006, FNF filed its motion to
dismiss this lawsuit and denied Grace’s underlying
allegations.
FNF and its counsel have investigated these allegations and,
based on the results of the investigations, FNF does not believe
that there have been any violations of the FCPA or RICO, or that
the ultimate disposition of these allegations or the lawsuit
will have a material adverse impact on FNF’s or any of its
subsidiaries’ financial position, results of operations or
cash flows. FNF is fully cooperating with the Securities and
Exchange Commission and the U.S. Department of Justice in
connection with their inquiry into these allegations.
On July 15, 2004, Sourceprose Corporation (“SP”)
filed a complaint in the U.S. District Court, Eastern
District of Texas, Marshall Division, against Fidelity National
Financial, Inc., (“FNF”) and four of its subsidiaries,
Fidelity National Information Solutions, Inc., Fidelity
Information Services, Inc., FNIS Flood Services, L.P. (d/b/a LSI
Flood Services) and Geotrac, Inc. (collectively, the
“Fidelity Defendants”). SP alleges that it is the
owner assignee of certain patents covering systems and methods
for performing manually assisted flood zone determinations,
which have been infringed by the Fidelity Defendants’ use
of certain practices within the scope of such patents, including
the performance of manually assisted flood zone determinations.
SP seeks a declaration that the patents are valid and
enforceable, a declaration that the patents were and are
infringed by the Fidelity Defendants, preliminary and permanent
injunctions against the alleged infringement and actual and
treble damages, interest, costs and attorneys’ fees. The
Fidelity Defendants have filed summary judgment motions that SP
opposed, but the court has not yet ruled on these motions. The
lawsuit is set for trial on April 3, 2006. The Fidelity
Defendants intend to vigorously defend this action.
| Indemnifications and Warranties |
The Company often indemnifies its customers against damages and
costs resulting from claims of patent, copyright, or trademark
infringement associated with use of its software through
software licensing agreements. Historically, the Company has not
made any payments under such indemnifications, but continues to
monitor the conditions that are subject to the indemnifications
to identify whether it is probable that a loss has occurred, and
would recognize any such losses when they are estimable. In
addition, the Company warrants to
F-29
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
customers that its software operates substantially in accordance
with the software specifications. Historically, no costs have
been incurred related to software warranties and none are
expected in the future, and as such no accruals for warranty
costs have been made.
| Escrow Arrangements |
In conducting its operations, the Company routinely holds
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 and Combined Balance Sheets. The
Company has a contingent liability relating to proper
disposition of these balances, which amounted to
$3.3 billion at December 31, 2005. As a result of
holding these customers’ assets in escrow, the Company has
ongoing programs for realizing economic benefits during the year
through favorable borrowing and vendor arrangements with various
banks. There were no investments or loans outstanding as of
December 31, 2005 related to these arrangements.
| Leases |
The Company leases certain of its property under leases which
expire at various dates. Several of these agreements include
escalation clauses and provide for purchases and renewal options
for periods ranging from one to five years.
Future minimum operating lease payments for leases with
remaining terms greater than one year for each of the years in
the five years ending December 31, 2010, and thereafter in
the aggregate, are as follows (in thousands):
|
2006
|
$ | 38,750 | ||
|
2007
|
32,518 | |||
|
2008
|
26,278 | |||
|
2009
|
21,010 | |||
|
2010
|
12,395 | |||
|
Thereafter
|
12,638 | |||
|
Total
|
$ | 143,589 | ||
In addition, the Company has operating lease commitments
relating to office equipment and computer hardware with annual
lease payments approximately $15 million per year which
renew on a short-term basis.
Rent expense incurred under all operating leases during the
years ended December 31, 2005, 2004 and 2003, was
$61.1 million, $52.6 million, and $32.7 million,
respectively.
| (14) | Employee Benefit Plans |
| Stock Purchase Plan |
FIS employees participate in the Fidelity National Financial,
Inc. Employee Stock Purchase Plan (ESPP). Under the terms of the
ESPP and subsequent amendments, eligible employees may
voluntarily purchase, at current market prices, shares of
FNF’s common stock through payroll deductions. Pursuant to
the ESPP, employees may contribute an amount between 3% and 15%
of their base salary and certain commissions. Shares purchased
are allocated to employees, based upon their contributions. The
Company contributes varying matching amounts as specified in the
ESPP. The Company recorded $11.1 million,
$8.1 million, and $4.3 million, respectively, for the
years ended December 31, 2005, 2004 and 2003 relating to
the participation of FIS employees in the ESPP.
F-30
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
| 401(k) Profit Savings Plan |
The Company’s employees are covered by a qualified 401(k)
plan sponsored by FNF. Eligible employees may contribute up to
40% of their pretax annual compensation, up to the amount
allowed pursuant to the Internal Revenue Code. FNF generally
matches 50% of each dollar of employee contribution up to 6% of
the employee’s total eligible compensation. The Company
recorded $15.7 million, $12.7 million, and
$8.5 million, respectively, for the years ended
December 31, 2005, 2004 and 2003 relating to the
participation of FIS employees in the 401(k) plan.
| Stock Option Plans |
Certain FIS employees are participants in FNF’s stock-based
compensation plans, which provide for the granting of incentive
and nonqualified stock options, restricted stock and other
stock-based incentive awards for officers and key employees.
Grants of incentive and nonqualified stock options under these
plans have generally provided that options shall vest equally
over three years and generally expire ten years after their
original date of grant. All options granted under these plans
have an exercise price equal to the market value of the
underlying common stock on the date of grant. However, certain
of these plans allow for the option exercise price for each
share granted pursuant to a nonqualified stock option to be less
than the fair market value of the common stock on the date of
grant to reflect the application of the optionee’s deferred
bonus, if applicable.
In 2003, FNF issued to certain FIS employees rights to purchase
shares of restricted common stock (Restricted Shares). A portion
of the Restricted Shares vest over a five-year period and a
portion of the Restricted Shares vest over a four-year period,
of which one-fifth vested immediately on the date of grant. The
Company recorded stock-based compensation expense of
$2.1,million, $2.4 million and $1.5 million in
connection with the issuance of Restricted Shares to FIS
employees for the years ended December 31, 2005, 2004 and
2003, respectively, which was based on an allocation of
compensation expense to the Company for employees and directors
who provided services to the Company.
The Company follows the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123), for stock-based employee
compensation. Under the fair value method of accounting,
compensation cost is measured based on the fair value of the
award at the grant date and recognized over the service period.
The Company has elected to use the prospective method of
transition, as permitted by Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure
(SFAS No. 148). Under this method, stock-based
employee compensation cost is recognized from the beginning of
2003 as if the fair value method of accounting had been used to
account for all employee awards granted, modified, or settled in
years beginning after December 31, 2002. The Company has
provided for stock-based compensation expense of
$20.4 million, $15.4 million and $3.8 million for
the years ended December 31, 2005, 2004 and 2003,
respectively, which is included in selling, general, and
administrative expenses in the Consolidated and Combined
Statements of Earnings, as a result of the adoption of
SFAS No. 123.
For purposes of recording compensation expense allocated to the
Company relating to FNF options, the fair value for these FNF
options was estimated at the date of grant using a Black-Scholes
option-pricing model with the following weighted average
assumptions. The risk free interest rates used in the
calculation are the rates that correspond to the weighted
average expected life of an option. The risk free interest rate
used for options granted during the years ended
December 31, 2005, 2004 and 2003 was 4.2%, 3.2% and 2.0%,
respectively. A volatility factor for the expected market price
of FNF common stock of 27%, 34% and 43% was used for options
granted for the years ended December 31, 2005, 2004 and
2003, respectively. The expected dividend yield used for 2005,
2004, and 2003 was 2.4%, 2.5% and 1.4%, respectively. A weighted
average expected life of 4.0 years, 3.8 years and
3.5 years was used for 2005, 2004 and 2003 respectively.
In 2005, the Company adopted the Fidelity National Information
Services, Inc. 2005 Stock Incentive Plan (the “Plan”).
As of December 31, 2005, there were 8,985,421 options
outstanding under this plan at a
F-31
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
strike price of $15.63 per share (as adjusted for the .6396
exchange ratio in the Certegy transaction). These stock options
were granted at the estimated fair value of the Company’s
stock on the grant date based on the price for which the Company
sold 32 million shares (a 25% interest) to the financial
sponsors in the recapitalization transaction on March 9,
2005. The Plan provides for the grant of stock options and
restricted stock, representing up to 10,371,892 shares. The
options granted thus far under this plan have a term of
10 years and vest over either a 4 or 5 year period
(the “time-based options”) on a quarterly basis or
based on specific performance criteria (the
“performance-based options”). The time-based options
will vest with respect to 1/16 or 1/20 of the total number of
shares subject to such time-based options on the last day of
each fiscal quarter. The performance based options vest for
certain key employees in the event of a change in control or
after an initial public offering solely if one of the following
targets shall be met: (a) 50% of the total number of shares
subject to such performance based options will vest if the
public trading value of a share of common stock equals at least
$27.36 and (b) 100% of the total number of shares subject
to such performance based options will vest if the public
trading value of a share of common stock equals at least $31.27,
provided the optionee’s service has not terminated prior to
the applicable vesting date. For the remaining employees vesting
occurs in the event of a change in control or an initial public
offering and if the public trading value of common stock equals
at least $31.27 provided the optionee’s service with FIS
has not terminated prior to the applicable vesting date.
The following schedule summarizes the stock option activity for
year ending December 31, 2005:
| Weighted Average | ||||||||
| Shares | Exercise Price | |||||||
|
Balance, December 31, 2004
|
— | $ | — | |||||
|
Time-based options granted
|
4,798,747 | 15.63 | ||||||
|
Performance-based options granted
|
4,199,466 | 15.63 | ||||||
|
Exercised
|
— | — | ||||||
|
Cancelled
|
(12,792 | ) | 15.63 | |||||
|
Balance, December 31, 2005
|
8,985,421 | $ | 15.63 | |||||
The following table summarizes information related to stock
options outstanding and exercisable as of December 31, 2005:
| December 31, 2005 | ||||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted Average | ||||||||||||||||||||
| Number of | Remaining | Weighted Average | Number of | Weighted Average | ||||||||||||||||
| Range of Exercise Price | Options | Contractual Life | Exercise Price | Shares | Exercise Price | |||||||||||||||
|
$15.63
|
8,985,421 | 9.32 | $ | 15.63 | 1,070,156 | $ | 15.63 | |||||||||||||
The fair value relating to the time-based options granted by the
Company in 2005 was estimated using a Black-Scholes
option-pricing model, while the fair value relating to the
performance-based options was estimated using a Monte-Carlo
option pricing model due to the vesting characteristics of those
options, as discussed above. The following assumptions were used
for the 4,798,747 time-based options granted in 2005; the risk
free interest rate was 4.2%, the volatility factor for the
expected market price of the common stock was 44%, the expected
dividend yield was zero and weighted average expected life was
5 years. The fair value of each time-based option was
$6.79. Since the Company is not publicly traded, the Company
relied on industry peer data to determine the volatility
assumption and for the expected life assumption, the Company
used an average of several methods, including its parent
company’s historical exercise history, peer firm data,
publicly available industry data and the Safe Harbor approach as
stated in the SEC Staff Accounting Bulletin 107. The
following assumptions were used for the valuation of the
4,199,466 performance-based options granted in 2005: the risk
free interest rate was 4.2%, the volatility factor for the
expected market price of the common stock was 44%, the expected
dividend yield was zero and the objective time to exercise was
4.7 years with an objective in the money assumption of
2.95 years. It was also expected that the initial public
offering
F-32
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
assumption would occur within a 9 month period from grant
date. The fair value of the performance-based options was
calculated to be $5.85.
| Kordoba Defined Benefit Plans |
In connection with the Kordoba acquisition, the Company assumed
Kordoba’s unfunded, defined benefit plan obligations. These
obligations relate to retirement benefits to be paid to
Kordoba’s employees upon retirement. On December 31,
2005 and 2004, the benefit obligation is as follows (in
thousands):
|
Benefit obligation as of September 30, 2004
|
$ | 15,171 | ||
|
Service costs
|
243 | |||
|
Interest costs
|
199 | |||
|
Actuarial adjustment and foreign currency loss, net
|
2,343 | |||
|
Benefit obligation as of December 31, 2004
|
17,956 | |||
|
Service costs
|
1,196 | |||
|
Interest costs
|
853 | |||
|
Benefit payments
|
(148 | ) | ||
|
Actuarial adjustment and foreign currency loss, net
|
3,805 | |||
|
Benefit obligation as of December 31, 2005
|
$ | 23,662 | ||
The accumulated benefit obligation at December 31, 2005 and
2004 was $22.6 million and $17.1 million, respectively.
The benefit costs for the year ended December 31, 2005 and
the three months from September 30, 2004 (acquisition date)
through December 31, 2004 were as follows:
| 2005 | 2004 | |||||||
|
Service cost
|
$ | 1,196 | $ | 243 | ||||
|
Interest cost
|
853 | 199 | ||||||
|
Total benefit costs
|
$ | 2,049 | $ | 442 | ||||
The assumptions used to determine benefit obligations at
December 31, 2005 and 2004 and the periodic benefit cost
for the year ended December 31, 2005 and the three-month
period ended December 31, 2004 were as follows (in
thousands):
| 2005 | 2004 | |||||||
|
Discount rate
|
4.25 | % | 5.25 | % | ||||
|
Salary projection rate
|
2.25 | % | 2.25 | % | ||||
Projected payments relating to these liabilities for the next
five years ending December 31, 2010 and the period from
2011 to 2015 are as follows (in thousands):
|
2006
|
$ | 381 | ||
|
2007
|
530 | |||
|
2008
|
553 | |||
|
2009
|
681 | |||
|
2010
|
742 | |||
|
2011 – 2015
|
6,152 |
F-33
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
| (15) | Concentration of Risk |
The Company generates a significant amount of revenue from large
customers, but only one customer accounted for more than 10% of
revenues in any year. That customer accounted for approximately
17.6% of total revenues for the year ended December 31,
2003.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash
equivalents, and trade receivables.
The Company places its cash equivalents with high credit quality
financial institutions and, by policy, limits the amount of
credit exposure with any one financial institution. Investments
in commercial paper of industrial firms and financial
institutions are rated investment grade by nationally recognized
rating agencies.
Concentrations of credit risk with respect to trade receivables
are limited because a large number of geographically diverse
customers make up the Company’s customer base, thus
spreading the trade receivables credit risk. The Company
controls credit risk through monitoring procedures.
| (16) | Segment Information |
Summarized financial information concerning the Company’s
reportable segments is shown in the following tables.
As of and for the year ended December 31, 2005 (in
thousands):
| Financial | ||||||||||||||||||||||||
| Institution | Default | |||||||||||||||||||||||
| Software and | Management | Lender | Information | Corporate | ||||||||||||||||||||
| Services | Services | Services | Services | and Other | Total | |||||||||||||||||||
|
Processing and services revenues
|
$ | 1,624,317 | $ | 231,730 | $ | 163,972 | $ | 771,122 | $ | (25,056 | ) | $ | 2,766,085 | |||||||||||
|
Cost of revenues
|
1,129,902 | 170,676 | 107,988 | 384,719 | — | 1,793,285 | ||||||||||||||||||
|
Gross profit
|
494,415 | 61,054 | 55,984 | 386,403 | (25,056 | ) | 972,800 | |||||||||||||||||
|
Selling, general and administrative costs
|
156,050 | 33,063 | 20,638 | 168,789 | 44,083 | 422,623 | ||||||||||||||||||
|
Research development costs
|
113,498 | — | — | — | — | 113,498 | ||||||||||||||||||
|
Operating income
|
224,867 | 27,991 | 35,346 | 217,614 | (69,139 | ) | 436,679 | |||||||||||||||||
|
Total assets
|
$ | 3,157,448 | $ | 89,768 | $ | 184,384 | $ | 701,329 | $ | 56,092 | $ | 4,189,021 | ||||||||||||
|
Goodwill
|
$ | 1,333,346 | $ | 24,219 | $ | 61,628 | $ | 368,520 | $ | — | $ | 1,787,713 | ||||||||||||
|
Depreciation and amortization
|
$ | 236,154 | $ | 3,849 | $ | 16,718 | $ | 42,858 | $ | 58 | $ | 299,637 | ||||||||||||
F-34
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
As of and for the year ended December 31, 2004 (in
thousands):
| Financial | ||||||||||||||||||||||||
| Institution | Default | |||||||||||||||||||||||
| Software and | Management | Lender | Information | Corporate | ||||||||||||||||||||
| Services | Services | Services | Services | and Other | Total | |||||||||||||||||||
|
Processing and services revenues
|
$ | 1,269,068 | $ | 232,132 | $ | 187,836 | $ | 648,317 | $ | (5,826 | ) | $ | 2,331,527 | |||||||||||
|
Cost of revenues
|
886,641 | 182,571 | 91,510 | 364,452 | — | 1,525,174 | ||||||||||||||||||
|
Gross profit
|
382,427 | 49,561 | 96,326 | 283,865 | (5,826 | ) | 806,353 | |||||||||||||||||
|
Selling, general and administrative costs
|
142,855 | 33,631 | 20,458 | 166,121 | 69,245 | 432,310 | ||||||||||||||||||
|
Research and development costs
|
74,214 | — | — | — | — | 74,214 | ||||||||||||||||||
|
Operating income
|
165,358 | 15,930 | 75,868 | 117,744 | (75,071 | ) | 299,829 | |||||||||||||||||
|
Total assets
|
$ | 2,951,157 | $ | 99,986 | $ | 166,817 | $ | 695,308 | $ | 89,588 | $ | 4,002,856 | ||||||||||||
|
Goodwill
|
$ | 1,307,126 | $ | 20,818 | $ | 61,452 | $ | 368,361 | $ | — | $ | 1,757,757 | ||||||||||||
|
Depreciation and amortization
|
$ | 175,388 | $ | 2,256 | $ | 6,681 | $ | 54,075 | $ | — | $ | 238,400 | ||||||||||||
As of and for the year ended December 31, 2003 (in
thousands):
| Financial | ||||||||||||||||||||||||
| Institution | Default | |||||||||||||||||||||||
| Software and | Management | Lender | Information | Corporate | ||||||||||||||||||||
| Services | Services | Services | Services | and Other | Total | |||||||||||||||||||
|
Processing and services revenues
|
$ | 701,246 | $ | 190,107 | $ | 368,699 | $ | 573,272 | $ | (2,400 | ) | $ | 1,830,924 | |||||||||||
|
Cost of revenues
|
473,760 | 137,634 | 145,455 | 347,120 | (2,400 | ) | 1,101,569 | |||||||||||||||||
|
Gross profit
|
227,486 | 52,473 | 223,244 | 226,152 | — | 729,355 | ||||||||||||||||||
|
Selling, general and administrative costs
|
78,083 | 28,585 | 42,448 | 142,948 | 39,687 | 331,751 | ||||||||||||||||||
|
Research and development costs
|
38,345 | — | — | — | — | 38,345 | ||||||||||||||||||
|
Operating income
|
111,058 | 23,888 | 180,796 | 83,204 | (39,687 | ) | 359,259 | |||||||||||||||||
|
Total assets
|
$ | 1,434,035 | $ | 95,437 | $ | 225,891 | $ | 568,482 | $ | 3,240 | $ | 2,327,085 | ||||||||||||
|
Goodwill
|
$ | 562,660 | $ | 20,590 | $ | 64,989 | $ | 317,774 | $ | — | $ | 966,013 | ||||||||||||
|
Depreciation and amortization
|
$ | 100,880 | $ | 5,094 | $ | 8,360 | $ | 29,624 | $ | — | $ | 143,958 | ||||||||||||
| Financial Institution Software and Services |
The Financial Institution Software and Services segment focuses
on two primary markets, financial institution processing and
mortgage loan processing. Revenue from financial institution
processing was $1,283.1 million, $952.3 million and
$467.0 million, and revenue from mortgage loan processing
was $341.2 million, $316.8 million and
$234.2 million in 2005, 2004 and 2003, respectively. The
primary applications are software applications that function as
the underlying infrastructure of a financial institution’s
processing environment. These applications include core bank
processing software, which banks use to maintain the primary
records of their customer accounts, and core mortgage processing
software, which banks use to process and service mortgage loans.
This segment also provides a number of complementary
applications and services that interact directly with the core
processing applications, including applications that facilitate
interactions between the segment’s financial institution
customers and their clients. Included in this segment were
$184.3 million, $132.8 million and $62.3 million
in sales to
non-U.S. based
customers in 2005, 2004 and 2003, respectively.
F-35
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
| Default Management Services |
The Default Management Services segment also provides services
to national lenders and loan servicers. These services allow
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 Services |
The Lender Services segment offers customized outsourced
business process and information solutions to national lenders
and loan servicers. This business provides loan facilitation
services, which allow customers to outsource their title and
closing requirements in accordance with pre-selected criteria,
regardless of the geographic location of the borrower or
property. Depending on customer requirements, the Company
performs these services both in the traditional manner involving
many manual steps, and through more automated processes, which
significantly reduce the time required to complete the task.
During 2005 and 2004, in accordance with SFAS No. 144,
the Company determined that the carrying value of certain of its
intangible assets, software and license fees may not be
recoverable and recorded an expense of $9.3 million and
$6.3 million, respectively, relating to the impairment of
these assets. Such expenses are included in other operating
expenses in the Consolidated Statements of Earnings for the
years ended December 31, 2005 and 2004.
| Information Services |
In the Information Services segment, the Company operates a
property data business and a real estate-related services
business. Revenues from property data products were
$212.2 million, $197.4 million and $187.7 million
in 2005, 2004 and 2003, respectively. Revenues from real estate
related services were $558.9 million, $450.9 million
and $385.6 million in 2005, 2004 and 2003, respectively.
The Company’s property data and real estate-related
information services are utilized by mortgage lenders, investors
and real estate professionals to complete residential real
estate transactions throughout the U.S. The Company offers
a comprehensive suite of applications and services spanning the
entire home purchase and ownership life cycle, from purchase
through closing, refinancing, and resale.
| Corporate and Other |
The Corporate and Other segment consists of the corporate
overhead costs, including interest costs that are not allocated
to any operating segments.
(17) Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment (“SFAS No. 123R”), which
requires that compensation cost relating to share-based payments
be recognized in the Company’s financial statements. The
Company will adopt this standard effective January 1, 2006.
The Company adopted the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation
(“SFAS No. 123”), for stock-based employee
compensation, effective as of the beginning of 2003. The Company
elected to use the prospective method of transition, as
permitted by SFAS No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure
(“SFAS No. 148”). Under this method,
stock-based employee compensation cost is recognized from the
beginning of 2003 as if the fair value method of accounting had
been used to account for all employee awards granted, modified,
or settled in years beginning after December 31, 2002.
SFAS No. 123R does not allow for the prospective
method, but requires the recording of expense relating to the
vesting of all unvested options beginning January 1, 2006.
Since the Company adopted SFAS No. 123 in 2003, the
impact of recording additional expense in 2006 under
SFAS No. 123R relating to options granted prior to
January 1, 2003 is insignificant.
F-36
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
| (18) | Subsequent Events |
| Merger with Certegy Inc. |
On September 14, 2005, the Company entered into a
definitive merger agreement with Certegy under which the Company
and Certegy would combine operations to form a single publicly
traded company which will be called Fidelity National
Information Services, Inc. (NYSE:FIS). Certegy is a payment
processing company headquartered in St. Petersburg, Florida.
On January 26, 2006, Certegy’s shareholders approved
the Merger which was consummated on February 1, 2006.
As a result of the merger, the Company is one of the largest
providers of processing services to U.S. financial
institutions, with market-leading positions in core processing,
card issuing services, check risk management, mortgage
processing, and lending services. It is able to offer a
diversified product mix, and management believes that it will
benefit from the opportunity to cross-sell products and services
across the combined customer base and from the expanded
international presence and scale. Management also expects to
achieve cost synergies in, among other things, corporate
overhead, compensation and benefits, technology, vendor
management and facilities.
Under the terms of the merger agreement, the Company was merged
into a wholly owned subsidiary of Certegy in a tax-free merger,
and all of the Company’s outstanding stock was converted
into Certegy common stock. As a result of the merger:
| • | The Company’s shareholders owned approximately 67.4% of the combined company’s outstanding common stock immediately after the merger, while Certegy’s pre-merger shareholders owned approximately 32.6%, | |
| • | FNF itself now owns approximately 50.7% of the combined company’s outstanding common stock, and | |
| • | the combined company’s board of directors was reconstituted so that a majority of the board now consists of directors designated by the Company’s stockholders. |
In connection with the merger, Certegy amended its articles of
incorporation to increase the number of authorized shares of
capital stock from 400 million shares to 800 million
shares, with 600 million shares being designated as common
stock and 200 million shares being designated as preferred
stock. Additionally, Certegy amended its Employee Stock Plan to
increase the total number of shares of common stock available
for issuance under the current stock incentive plan by an
additional 6 million shares, and to increase the limits on
the number of options, restricted shares, and other awards that
may be granted to any individual in any calendar year. These
changes were approved by Certegy’s shareholders on
January 26, 2006.
As part of the merger transaction, Certegy declared a
$3.75 per share special cash dividend that was paid to
Certegy’s pre-merger shareholders. This dividend, totaling
$239.1 million, was paid by Certegy at the consummation of
the merger.
Generally accepted accounting principles in the
U.S. require that one of the two companies in the
transaction be designated as the acquirer for accounting
purposes. The Company has been designated as the accounting
acquirer because immediately after the merger, its shareholders
held more than 50% of the common stock of the combined company.
As a result, the merger will be accounted for as a reverse
acquisition under the purchase method of accounting. Under this
accounting treatment, the Company will be considered the
acquiring entity and Certegy will be considered the acquired
entity for financial reporting purposes. The financial
statements of the combined company after the merger will reflect
the Company’s financial results on a historical basis and
will include the results of operations of Certegy from
February 1, 2006.
The purchase price was based on the number of outstanding shares
of common stock of Certegy on February 1, 2006, the date of
consummation of the merger, valued at $33.38 per share (which is
the average of the trading price of Certegy common stock two
days before and two days after the announcement of the
F-37
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
merger on September 15, 2005 of $37.13, less the
$3.75 per share special dividend declared prior to
closing). The purchase price also includes an estimated fair
value of Certegy’s stock options and restricted stock units
outstanding at the transaction date.
The estimated total purchase price is as follows (in millions):
|
Value of Certegy’s common stock
|
$ | 2,121.0 | ||
|
Value of Certegy’s stock options and restricted stock units
|
47.2 | |||
|
Former FIS’ estimated transaction costs
|
6.7 | |||
| $ | 2,174.9 | |||
The purchase price will be allocated to Certegy’s tangible
and identifiable intangible assets acquired and liabilities
assumed based on their estimated fair values as of
February 1, 2006. Management expects that the fair value of
the net assets acquired will be lower than the purchase price,
and as a result, goodwill will be recorded for the amount that
the purchase price exceeds the fair value of the net assets
acquired. The preliminary allocation is as follows (in millions):
|
Tangible assets
|
$ | 574.7 | ||
|
Computer software
|
138.8 | |||
|
Intangible assets
|
657.5 | |||
|
Goodwill
|
1,883.4 | |||
|
Liabilities assumed
|
(1,079.5 | ) | ||
|
Total purchase price
|
$ | 2,174.9 | ||
The following summarizes transactions triggered by the
completion of the merger that impact the purchase price
allocation as they became liabilities assumed by the Company (in
millions):
|
Change of control payments to certain executive officers of
Certegy
|
$ | 27.4 | ||
|
Consideration for cancellation of certain other change of
control agreements
|
11.6 | |||
|
Certegy supplemental retirement plan payments to terminated
participants
|
1.7 | |||
|
Funding for life insurance coverage for certain officers and
employees of Certegy
|
3.0 | |||
|
Estimated severance payments to certain Certegy employees
|
10.0 | |||
|
Assumption of liability for Certegy transaction fees to its
financial advisors
|
13.6 | |||
|
Purchase of six-year “tail” directors’ and
officers’ run-off insurance policy
|
2.5 | |||
| $ | 69.8 | |||
The Company is still evaluating certain lease agreements and
vendor arrangements of Certegy. The results of this evaluation
may impact those arrangements and the purchase price allocation.
Decisions regarding the closure of duplicate facilities,
employee relocation, or vendor contract terminations could
result in an increase in the assumed liabilities and an increase
in goodwill.
Also, the Merger triggered the performance criteria relating to
FIS’s stock option grant made in March 2005 and these
awards will vest if the trading value of the Company’s
stock remains above $31.27 for 45 days following the
Merger. Based on the current trading value of the Company’s
stock, the Company expects to record a charge of approximately
$24.5 million in the first quarter of 2006.
Selected unaudited pro forma combined results of operations for
the year ended December 31, 2005, assuming the above
merger, the acquisitions (see note 3) and the
recapitalization and sale of equity interest
F-38
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS — (Continued)
(see note 2) had occurred as of January 1, 2005, and
using actual general and administrative expenses prior to the
acquisition, are set forth below (in thousands):
| Year Ended | ||||
| December 31, | ||||
| 2005 | ||||
|
Total revenue
|
$ | 3,883,226 | ||
|
Net earnings
|
$ | 249,448 | ||
|
Pro forma earnings per share — basic
|
$ | 1.31 | ||
|
Pro forma earnings per share — diluted
|
$ | 1.30 | ||
Selected unaudited proforma balance sheet information as of
December 31, 2005 is as follows (in thousands):
| December 31, | ||||
| 2005 | ||||
|
Total assets
|
$ | 7,443,386 | ||
|
Long term debt
|
$ | 2,758,336 | ||
|
Shareholders’ equity
|
$ | 2,862,836 | ||
F-39