UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

 

 

 

Commission File No. 001-16427

 

 

 

 

Fidelity National Information Services, Inc.

(Exact name of registrant as specified in its charter)

 

 

(904) 854-8100

(Registrant’s telephone number, including area code)

 

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

 

 

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

(Title of Class)

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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, 2006, 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 $2,175,304,441 based on the closing sale price of $35.40 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 191,509,231 as of February 1, 2007.

 

 

FIDELITY NATIONAL INFORMATION SERVICES, INC.
2006 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

Unless stated otherwise or the context otherwise requires, all references in this Form 10-K to the registrant, “us,” “we,” “our”, the “Company” or “FIS” 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 Certegy merger described below; all references to “Former FIS” are to Fidelity National Information Services, Inc., a Delaware corporation, and its subsidiaries, prior to the merger; and all references to “Old FNF” are to Fidelity National Financial, Inc., a Delaware corporation that owned a majority of our shares through November 9, 2006: and all references to FNF are to Fidelity National Financial, Inc. (formerly known as Fidelity National Title Group, Inc.), formerly a subsidiary of Old FNF but now an independent company that remains a related entity from an accounting perspective.

 

General Development of the Business

 

FIS constitutes one of the largest global providers of processing services to financial institutions, with market-leading positions in core processing, card issuing services, check risk management, mortgage processing, and lender processing services in the U.S. We serve customers in over 60 countries throughout the world. We offer a diversified product mix, and we believe that we will continue to benefit from the opportunity to cross-sell products and services across our broad customer base, and from our expanded international presence and scale.

 

Our business operations and organizational structure result from the February 1, 2006, business combination of Certegy and Former FIS (the Certegy Merger), pursuant to which Former FIS was merged into a wholly-owned subsidiary of Certegy. Immediately after the Certegy Merger, the stockholders of Former FIS, including its then-majority stockholder Old FNF owned approximately 67.4% of our outstanding common stock. Accordingly, for accounting and financial reporting purposes, the Certegy Merger was treated as a reverse acquisition of Certegy by Former FIS under the purchase method of accounting pursuant to U.S. generally accepted accounting principles and a tax free merger under IRC§368(a). Also, as a result of the Certegy Merger, our name changed from “Certegy Inc.” to “Fidelity National Information Services, Inc.” and our New York Stock Exchange trading symbol from “CEY” to “FIS”. Our board of directors was reconstituted so that a majority of the board now consists of directors designated by the stockholders of Former FIS. On November 9, 2006, Old FNF (after other transactions in which it distributed all of its assets other than its ownership in FIS) merged with and into FIS (the FNF Merger). Upon completion of the FNF Merger, FIS became an independent publicly traded company, and Old FNF ceased to exist as an independent publicly traded company. The assets distributed by Old FNF prior to the FNF Merger included its ownership in Fidelity National Title Group, Inc., which following the FNF Merger renamed itself Fidelity National Financial, Inc.

 

Certegy was incorporated on March 2, 2001, under the laws of the State of Georgia as a wholly-owned subsidiary of Equifax Inc. (Equifax). 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. Certegy established itself as a leading provider of card issuer services to community financial institutions and as a leading provider of check risk management services to large national retailers. During the past decade, the company expanded its card and check operations internationally to serve customers in over 25 countries. Also during that time, the company broadened its domestic product lines to include eBanking services to financial institutions and cash access services to the gaming industry.

 

Former FIS was incorporated under the laws of the State of Delaware on May 20, 2004, as a wholly-owned subsidiary of Old FNF, our former parent company. From November 2004 through March 2005, Old FNF contributed a number of business entities to Former FIS, including certain real estate-related information services and loan default management businesses developed by Old FNF in the 1990s, and a series of over 25 acquisitions completed by Old FNF between 2001 and 2005. Although many of these acquisitions added important applications

and services to the offerings of Former FIS, the recent growth of Former FIS has been driven primarily by the acquisitions of companies that provide core processing services to financial institutions including:

 

 

Financial Information About Operating Segments and Geographic Areas

 

Shortly after the February 1, 2006 merger of Certegy and FIS, we implemented a new organizational structure and we began reporting under a new operating segment structure effective with first quarter 2006 results. The new reportable segments are Transaction Processing Services, or TPS, and Lender Processing Services, or LPS. This reporting structure is consistent with the management and the operating structure adopted following the Certegy Merger. The primary components of the TPS segment are Integrated Financial Solutions, Enterprise Banking Solutions, and International. The TPS segment includes Certegy’s former Card and Check Services segments and the financial institution processing component of the Financial Institution Software and Services segment of Former FIS. The primary components of the Lender Processing, or LPS segment, are Mortgage Processing Services, which includes the Mortgage Processing component of the Financial Institution Software and Services segment of Former FIS, and Information Services, which includes the Lender Services, Default Management, and Information Services segments of Former FIS.

 

Revenues in our Transaction Processing, or TPS, segment are generated predominantly from the development, implementation, management, support and maintenance of core processing software and systems used by financial institutions to maintain the primary records of their customer accounts. We also provide a comprehensive range of credit card processing and cardholder support services to our financial institution customers. Additionally, revenues in this segment are generated by providing check risk management services to large national and regional retail chains. Our Integrated Financial Solutions customers are comprised primarily of community banks, credit unions and savings banks based in the U.S., while our Enterprise Banking Solutions customers are comprised of large and mid-tier financial institutions and retailers in the U.S. Our International customer base consists primarily of large and mid-tier financial institutions and retailers outside of North America.

 

Revenues in our Lender Processing, or LPS, segment are generated from products and services that span the entire mortgage loan life cycle, from origination through closing, refinancing, default, foreclosure and resale. Included among these services are property appraisal and valuation services, property records information, real estate tax services, borrower credit and flood zone information and certification, and mortgage processing and default management services. Also included are 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. We provide these services to U.S. based mortgage lenders, mortgage servicers, investors and real estate professionals to assist them in the completion of real estate transactions.

 

Narrative Description of the Business

 

Overview

 

FIS provides a comprehensive range of 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 serve customers in more than 60 countries worldwide, and have processing and technology relationships with 35 of the top 50 global banks, including nine of the top ten. Approximately 50 percent of all U.S. residential mortgages are processed using our mortgage processing platform.

 

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

 

Our Transaction Processing Services Operating Segment

 

Integrated Financial Solutions

 

The primary focus of our Integrated Financial Solutions business is to serve the processing needs of independent community banks, credit unions, and savings banks in the United States. Processing solutions include core processing, branch automation, back office support systems, compliance, credit and debit card issuing, image item processing, print and mail, ATM/EFT, retail internet banking and bill payment services, commercial cash management and voice response services. Over 8,000 commercial banks, savings institutions and credit unions utilize one or more of these solutions.

 

Of these 8,000 institutions, over 1,200 institutions utilize one of our core processing solutions. Customers of this segment typically seek a fully integrated and broad suite of applications. As a result, our core processing services sold in this market have various add-on modules or applications that integrate into our core processing applications, providing a broad processing solution. Examples of our customers in this sector include Hudson City Savings Bank, Sterling Bank, and VyStar Credit Union.

 

Over 6,000 institutions utilize our card issuer services which enable banks, credit unions, and others to issue VISA and MasterCard credit and debit cards, and other electronic payment cards for use by both consumer and business accounts. The majority of our card issuer programs are full service, including most of the operations and support necessary for an issuer to operate a credit and debit card program. We do not make credit decisions for our card issuing customers, nor do we fund their card receivables. We provide our card issuer services primarily through our longstanding contractual alliances with two associations representing independent community banks and credit unions in the U.S., the Independent Community Bankers of America, or ICBA, and Card Services for Credit Unions, or CSCU. These organizations offer our 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 enable them to offer Internet banking and bill payment services to consumers and businesses.

 

Enterprise Banking Solutions

 

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

 

 

 

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

 

 

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

 

International

 

We offer core banking applications, item processing, 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 of full-service outsourced solutions, including core banking applications and transaction processing and call center services. We also provide application management, facilities management, consulting services, and software licensing and maintenance. Our international customers include CitiBank, Bradesco, ABN AMRO/Banco Real, ING Group, Krung Thai Bank, China Construction Bank, National Australia Bank, and a number of other mid-tier and regional financial institutions, card issuers, and retailers.

 

Our Lender Processing Services Operating Segment

 

Mortgage Processing Services

 

We offer the most widely used mortgage loan servicing system (known as MSP) in the U.S. As of December 31, 2006, our mortgage loan servicing platforms, including MSP, were used to process over 50% of all residential mortgages by dollar volume in the U.S. representing balances exceeding $4.0 trillion. 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 platform.

 

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

 

The primary applications and services of this business include:

 

 

Mortgage Information Services

 

We offer a comprehensive suite of services spanning the entire mortgage loan life cycle, from loan origination through closing, refinancing, foreclosure and resale. A significant number of our customers use a combination of our mortgage information, mortgage origination and default management services. Our client base includes mortgage lenders such as ABN Amro, U.S. Bancorp, Bank of America, Freddie Mac, New Century Mortgage and

Washington Mutual, as well as investors and real estate professionals. Our primary product lines are described below:

 

 

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 teams 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 certain 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 Segment, sales teams are assigned to national banks, credit unions, thrifts, and mortgage companies based on institution size. Other teams focus on more highly specialized lending and servicing companies. We endeavor to increase market share by attracting new customers as well as further penetrating our customer base by selling additional mortgage related product services including origination, default management, tax and appraisal services, to existing mortgage processing clients and vice versa.

 

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, spend a significant amount of their time on sales and marketing efforts as well as working with our business units to develop solutions based upon strategic issues impacting customers’ businesses.

 

Patents, Trademarks and Other Intellectual Property

 

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

 

Competition

 

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 financial institution industry expertise, combined with our ability to offer multiple applications and services to individual customers, enhances our competitiveness against competitors with more limited application offerings.

 

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

 

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

 

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 mortgage information services business. However, there are a number of competitors in specific lines, some of which have substantial resources. First American and Land America are significant competitors in a majority of our Mortgage Information Services, including tax, flood, appraisal and default.

 

Research and Development

 

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

 

As part of our research and development process, we evaluate current and emerging technology for applicability to our existing and future software platforms. To this end, we engage with various hardware and software vendors in evaluation of various infrastructure components. Where appropriate, we use third-party technology components in the development of our software applications and service offerings. Third-party software may be used for highly specialized business functions, which we may not be able to develop internally within time and budget constraints. Additionally, third-party software may be used for commodity type functions within a technology platform environment. In the case of nearly all of our third-party software, enterprise license agreements exist for the third-party component and either alternative suppliers exist or transfer rights exist to ensure the continuity of supply. As a result, we are not materially dependent upon any third-party technology components. We work with our customers to determine the appropriate timing and approach to introducing technology or infrastructure changes to our applications and services. In the years ended December 31, 2006, 2005 and 2004 we recorded expense of approximately $105.6 million, $113.5 million and $74.2 million, respectively on research and development efforts.

 

With respect to our outsourcing of software development, we are transferring costs from our U.S. and Western European-based development centers to Covansys Corporation (Covansys), in which FIS holds an equity investment, 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.

 

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 general and other agencies, have enforcement responsibility over the collection laws, as well as the various credit reporting laws.

 

Elements of our cash access business are registered as a Money Services Business and are subject to the USA Patriot Act and reporting requirements of the Bank Secrecy Act and U.S. Treasury Regulations. This business is also subject to various state, local and tribal licensing requirements. The Financial Crimes Enforcement Network, state attorneys general, and other agencies have enforcement responsibility over laws relating to money laundering, currency transmission, and licensing.

 

The Real Estate Settlement Procedures Act, or RESPA, and related regulations generally prohibit the payment or receipt of fees or any other item of value for the referral of a real estate-secured loan to a loan broker or lender and prohibit fee shares or splits 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 an underwritten title company, title agencies, and individual escrow officers. 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. We also own a small title insurer which issues policies generated by our agency operations in relatively limited circumstances. This insurer is domiciled in New York and is therefore subject to regulation by the insurance regulatory authorities of that state. Among other things, no person may acquire 10% or more of our common stock without the approval of the New York insurance regulators.

 

The California Department of Insurance has recently proposed implementing rate reductions in the title insurance industry in California. New York, Colorado, Florida, Nevada, Texas and other insurance regulators have also announced reviews of title insurance rates and other states could follow. At this stage, we are unable to predict what the outcome will be of these or any similar processes.

 

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

 

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

 

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

 

Employees

 

As of December 31, 2006, we had approximately 24,871 employees, including approximately 7,706 employees principally employed outside of the U.S. None of our U.S. workforce currently is unionized. We have not experienced any work stoppages, and we consider our relations with employees to be good.

 

Available Information

 

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

 

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

 

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

 

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

 

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

 

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

 

As of December 31, 2006, we had total debt of approximately $3.0 billion. This high level of debt could have important consequences to us, including the following:

 

 

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

 

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

 

As part of our growth strategy, we have made numerous acquisitions in recent years. We anticipate that we will continue to seek to acquire complementary businesses, 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.

 

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

 

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

 

Demand for many of our 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.

 

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

 

Revenues from our 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. The volume of refinancing transactions in particular and mortgage originations in general declined in 2004, 2005 and 2006 from 2003 levels, resulting in reduction of revenues in some of our businesses. In addition, rising mortgage delinquency and default rates have negatively impacted some of our mortgage lending customers, particularly within the subprime lending market. These trends appear likely to continue. 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.

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Under a tax disaffiliation agreement, which we were required to enter into with Old FNF and FNF as a condition to the closing under our merger agreement with Old FNF, FNF is required to indemnify us for taxes and tax-related losses (including stockholder suits) if Old FNF’s 2006 spin-off of FNF (the “2006 Distribution”) were determined to be taxable either to Old FNF (and us as its successor) or the FNF stockholders or both, unless such adverse determination were the result of a breach by us of our agreement not to take any action within our control that would cause the 2006 Distribution to be taxable or the result of an acquisition of FIS stock within the control of us or a subsidiary. In such an event, Old FNF estimated that the amount of tax on the transfer of FNF’s stock in the distribution could be in the range of $150 million and possibly greater depending on, among other things, the value of FNF’s stock at the time of the 2006 Distribution. In addition, FNF is required under the tax disaffiliation agreement to indemnify Old FNF (and us as its successor) for taxes and tax-related losses (including stockholder suits) in the event the Old FNF-FIS merger were determined to be taxable. Old FNF estimated that the amount of tax on Old FNF’s transfer and retirement of its FIS stock in the merger could be in the range of $1 billion and possibly greater depending on, among other things, the value of our stock at the time of the merger.

 

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

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

As part of our business, we electronically receive, process, store, and transmit sensitive business information of our customers. In addition, we collect personal consumer data, such as names and addresses, social security numbers, driver’s license numbers, checking and savings account numbers, and payment history records. Unauthorized access to our computer systems or databases could result in the theft or publication of confidential information or the deletion or modification of records or could otherwise cause interruptions in our operations. These concerns about security are increased when we transmit information over the Internet. Computer viruses have

also been distributed and have rapidly spread over the Internet. Computer viruses could infiltrate our systems, disrupting our delivery of services and making our applications unavailable. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in our systems and terminate their agreements with us, and could inhibit our ability to attract new customers.

 

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

 

Our customers are subject to a number of government regulations and industry standards with which our 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.

 

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:

 

 

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.

 

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:

 

 

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 2006, sales outside of the U.S. represented approximately 10.9% of our revenues. We believe there are additional opportunities to expand our international operations, and we expect to commit significant resources to expand our international sales and marketing activities. However, overall we are less well-known internationally than in the United States and have less experience with local business conditions. In addition, we will face challenges in successfully managing small operations located far from our headquarters, because of the greater difficulty in overseeing and guiding operations from a distance, and we will be increasingly subject to a number of other risks and potential costs, including:

 

 

 

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

 

Sales of our shares by large shareholders could adversely affect the trading price of our shares.

 

In connection with the 2005 minority interest sale in Former FIS, we entered into a registration rights agreement with certain of our stockholders requiring us to register the shares of our common stock that are beneficially owned by them. Consequently, we have to date registered for resale from time to time shares which collectively account for approximately 12.8% of our shares outstanding. Sales of these shares, or the possibility that sales of these shares may occur in unlimited amounts and without prior notice, could adversely affect the trading price of our shares.

 

Statement Regarding Forward-Looking Information

 

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

 

 

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

 

None.

 

Our corporate headquarters are located in Jacksonville, Florida, in an owned facility. FNF occupies and pays us rent for approximately 121,000 square feet in this facility. We lease office space as follows:

 

 

 

 

We also lease approximately 81 locations outside the United States. We believe our properties are adequate for our business as presently conducted.

 

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 the matters listed below, depart from customary litigation incidental to our business. As background to the disclosure below, please note the following:

 

 

The Company 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 suit in December 2004 in state court in Monterey County, California, alleging that the Company breached a sales agency agreement by failing to pay commissions associated with sales contracts signed in 2001 and 2003. The 2001 contracts were never completed. The 2003 contracts, as to which Grace provided no assistance, were for a different project and were executed one and one-half years after Grace’s sales agency agreement was terminated. In addition to its breach of contract claim, Grace also alleged that the Company violated the Foreign Corrupt Practices Act (FCPA) in its dealings with a bank customer in China. The Company denied Grace’s allegations in this California lawsuit.

 

In December 2005, the Monterey County court dismissed the lawsuit on the grounds of inconvenient forum, which decision Grace appealed on February 10, 2006. That appeal was subsequently dismissed voluntarily by Grace. On March 6, 2006, Grace filed a new lawsuit in the United States District Court for the Middle District of Florida seeking the recovery of over $50 million in damages arising from the same transaction, and added an additional allegation to its complaint that the Company violated the Racketeer Influenced and Corrupt Organizations Act (RICO) in its dealings with the same bank customer. We intend to defend this case vigorously. On March 7, 2006, the Company filed its motion to dismiss this lawsuit, and on March 27, 2006, we filed an answer denying Grace’s underlying allegations and counterclaiming against Grace for tortious interference and abuse of process. These motions have all been fully briefed and are pending before the Court. A pretrial management order was entered providing for discovery, pretrial motion deadlines, and, if necessary, a trial in the later part of 2007.

 

We and our counsel have investigated these allegations and, based on the results of the investigations, we do 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 our financial position, results of operations or cash flows. We are fully cooperating with the Securities and Exchange Commission and the U.S. Department of Justice in connection with their inquiry into these allegations.

 

Our Annual Meeting of Stockholders was held on October 23, 2006. The results of matters submitted to a vote were as follows:

 

The proposal to approve the issuance of FIS common stock to the stockholders of Old FNF in connection with the agreement and plan of merger, dated as of June 25, 2006, as amended and restated as of September 18, 2006, between FIS and Old FNF, which agreement provides for the merger of Old FNF with and into FIS with FIS being the surviving corporation received the following votes:

 

 

The proposal to approve the adoption of an amendment to the Certegy Inc. Stock Incentive Plan, which among other things, increased the total number of shares of common stock available for issuance under the plan by an additional 4,000,000 shares and increased the limits on the number of individual awards that may be granted under the plan, received the following votes:

 

 

The proposal to approve the FIS Employee Stock Purchase Plan received the following votes:

 

 

The proposal to approve the adoption of the FIS Annual Incentive Plan received the following votes:

 

Nominees for Class 1 directors to serve until the 2009 FIS Annual Meeting of Shareholders were elected by the following vote:

 

 

Directors whose term of office as a director continued after the meeting are as follows: Lee A. Kennedy, David K. Hunt, Cary H. Thompson, Keith W. Hughes, Marshall Haines and James K. Hunt. Additionally, upon the closing of the securities exchange and distribution agreement between FNF and FNT, Richard N. Massey became a director of the Company.

 

The proposal to approve the ratification of the appointment of KPMG LLP as the independent registered public accounting firm for FIS for 2006 received the following votes:

 

 

Our common stock trades on the New York Stock Exchange under the ticker symbol “FIS.” The table set forth below provides the high and low sales prices of the common stock and the cash dividends declared per share of common stock for each quarter of 2006 and 2005.

 

 

 

 

Certegy, as the predecessor registrant, 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. A regular quarterly dividend of $.05 per common share is payable March 28, 2007 to shareholders on record as of the close of business on March 14, 2007.

 

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

 

The Company intends to limit dilution caused by option exercises (including anticipated exercises) by repurchasing shares in the open market or in privately negotiated transactions.

 

The following table summarizes purchases of equity securities by the issuer during the quarter ended December 31, 2006:

 

 

 

 

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

 

On February 1, 2006, Former FIS was merged into a wholly owned subsidiary of Certegy in a tax-free merger. For accounting and financial reporting purposes, the merger was treated as a reverse acquisition of Certegy by 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 Certegy Merger are the historical financial information of Former FIS.

 

 

 

 

 

Selected Quarterly Financial Data

 

Selected quarterly financial data is as follows:

 

 

Overview

 

We are one of the largest global providers of processing services to financial institutions, with market-leading positions in core processing, card issuing services, check risk management, mortgage processing, and certain other lender processing services in the U.S., serving customers in over 60 countries throughout the world. We offer a diversified product mix, and we believe that we will continue to benefit from the opportunity to cross-sell products and services across our broad customer base, and from our expanded international presence and scale. We have two reporting segments, Transaction Processing Services and Lender Processing Services, which produced approximately 59% and 41%, respectively, of our revenues for the year ended December 31, 2006.

 

 

 

We also have a corporate segment that consists primarily of costs relating to corporate overhead.

 

Business Trends and Conditions

 

Transaction Processing Services

 

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

 

In this segment, we compete for both licensing and outsourcing business, and thus are affected by the decisions of financial institutions to utilize our services under an outsourced arrangement or to process in-house under a software license and maintenance agreement. As a provider of outsourcing solutions, we benefit from multi-year recurring revenue streams. Generally, 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 us since they generally do not have the staff, budget or expertise 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. Generally, demand for outsourcing solutions has increased over time as providers such as us realize economies of scale and improve their ability to provide services that improve customer efficiencies and reduce costs.

 

Card transactions continue to increase as a percentage of total point-of-sale payments, which fuels continuing demand for card-related 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.

 

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

 

Lender Processing Services

 

Our mortgage processing services business, driven by MSP, is largely subject to the same types of factors as affect our financial institutions core processing business, described above. The level of residential real estate activity, which depends in part on the level of interest rates, affects the level of revenues from many of the other businesses in the Lender Processing Services segment.

 

The increase in interest rates in 2006 has resulted in a reduction in new loan origination and refinancing activity. The current MBA forecast is for $2.4 trillion of mortgage originations in 2007 as compared to $2.5 trillion in 2006. Relatively higher interest rates are also likely to result in seasonal effects having more influence on real estate activity. Traditionally, the greatest volume of real estate activity, particularly residential resale transactions, has occurred in the spring and summer months.

 

In contrast, we believe that a rising interest rate environment may increase the volume of consumer mortgage defaults and thus favorably affect our default management services, which provide services relating to residential mortgage loans in default. The overall strength of the economy also affects default revenues.

 

Critical Accounting Policies

 

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

 

Revenue Recognition

 

The following describes our primary types of revenues and our revenue recognition policies as they pertain to the types of transactions we enter into with our customers. We enter 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 our TPS business, we recognize revenues relating to bank processing and credit and debit card processing services along with software licensing and software related services. Several of our 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 we offer them individually. Revenues from 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 transaction processing services business are from outsourced data processing, credit and debit card 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 determinable; and (4) collectability is reasonably assured. Revenues and costs related to implementation, conversion and programming services associated with our 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. We evaluate these deferred contract costs for impairment in the event any indications of impairment exist. A portion of credit card processing revenue is generated from our merchant institution processing business, where our relationship is with the financial institution that contracts directly with the merchant. In this business, we are responsible for collecting and settling interchange fees with the credit card associations, thus interchange fees are included as a component of revenue and costs of revenue.

 

In the event that arrangements with our customers include more than one product or service, we determine 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 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”) we apply these pronouncements and related interpretations to determine the appropriate units of accounting and how the arrangement consideration should be measured and allocated to the separate units.

 

We recognize 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. We determine 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. We record deferred revenue for all billings invoiced prior to revenue recognition.

 

With respect to a small percentage of revenues, we use contract accounting, as required by SOP No. 97-2, when the arrangement with the customer includes significant customization, modification, or production of software. For elements accounted for under contract accounting, revenue is recognized in accordance with SOP 81-1, “Accounting for Performance of Construction Type and Certain Production-Type Contracts”, using the percentage-of-completion method since reasonably dependable estimates of revenues and contract hours applicable to various elements of a contract can be made. 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 our estimates indicate that the entire contract will be performed at a loss, a provision for the entire loss is recorded in that accounting period.

 

In our LPS business, we recognize revenues relating to mortgage processing services, loan facilitation services, default management services, and property data-related services. Mortgage processing arrangements are typically volume-based depending on factors such as the number of accounts processed, transactions processed and computer resources utilized. Revenue derived from software and service arrangements included in the lender processing services segment is recognized in accordance with SOP No. 97-2 as discussed above. Loan facilitation services primarily consist of centralized title agency and closing services for various types of lenders. Revenues relating to loan facilitation services are typically recognized at the time of closing of the related real estate transaction. Ancillary service fees are recognized when the service is provided. Default management services 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. Property data or data-related 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. Revenues derived from these services are recognized as the services are performed in accordance with SAB No. 104 as described above.

 

In addition, our 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 our historical experience and industry data. We evaluate our historical experience on a periodic basis, and adjust the estimated life of the loan service period prospectively.

 

Reserves for Card Processing and Check Guarantee Losses

 

We recognize a reserve for estimated losses related to our card issuing business 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. 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 different than our estimates.

 

In the 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 the 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, a rate is established 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 cost of revenue. The estimated check returns and recovery amounts are subject to risk that actual amounts returned and recovered may be different from our estimates.

 

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 its estimated useful life and software acquired in business combinations is recorded at its fair value and amortized using straight line and accelerated methods over their estimated useful lives, ranging from 3 to 10 years.

 

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 SOP No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”. 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 five to ten years or (2) the ratio of current revenues to total anticipated revenue over its useful life.

 

Goodwill and Other Intangible Assets

 

We have significant intangible assets that were acquired through business acquisitions. These assets consist of purchased customer relationships, contracts, and the excess of purchase price over the fair value of identifiable net assets acquired (goodwill). The determination of estimated useful lives and the allocation of the purchase price to the fair values of the intangible assets require significant judgment and may affect the amount of future amortization on the intangible assets other than goodwill.

 

As of December 31, 2006 and December 31, 2005, goodwill was $3.7 billion and $1.8 billion, respectively. The process of determining whether or not an asset, such as goodwill, is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Such projections are inherently uncertain and, accordingly, actual future cash flows may differ materially from projected cash flows. In evaluating the recoverability of goodwill, we perform an annual goodwill impairment test on our reporting units based on an analysis of the discounted future net cash flows generated by the reporting units’ underlying assets. We completed our annual goodwill impairment test on our reporting units as of December 31, 2006 and determined that each of our reporting units has a fair value in excess of its carrying value. Accordingly, no goodwill impairment has been recorded. Such analyses are particularly sensitive to changes in estimates of future net cash flows and discount rates. Changes to these estimates might result in material changes in the fair value of the reporting units and determination of the recoverability of goodwill which may result in charges against earnings and a reduction in the carrying value of our goodwill.

 

As of December 31, 2006 and December 31, 2005, intangible assets were $1.0 billion and $0.5 billion respectively, which consist primarily of purchased customer relationships and trademarks. The valuation of these assets involves significant estimates and assumptions concerning matters such as customer retention, future cash flows and discount rates. If any of these assumptions change, it could affect the carrying value of these assets. Purchased customer relationships are amortized over their estimated useful lives using an accelerated method which takes into consideration expected customer attrition rates over a ten-year period. All trademarks have been determined to have indefinite lives and are not amortized, but are reviewed for impairment at least annually in accordance with SFAS No. 142. During 2005, we recorded an impairment of $9.3 million to write off the carrying value of customer relationships at one subsidiary in the Lender Processing Services segment which were terminated.

 

Long-Lived Assets

 

We review long-lived assets, primarily computer software, property and equipment and other intangibles, such as customer relationships and contracts, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If indicators of impairment are present, we estimate the future net cash flows expected to be generated from the use of those assets and their eventual disposal. We would recognize an impairment loss if the aggregate future net cash flows were less than the carrying amount. As a result, the carrying values of these assets could be significantly affected by the accuracy of the estimates of future net cash flows, which are not capable of being made with certainty.

 

Accounting for Income Taxes

 

Through March 9, 2005, our operating results have been included in Old FNF’s consolidated U.S. Federal and certain consolidated and/or combined State income tax returns. The provision for income taxes in the Consolidated and Combined statements of earnings is made at rates consistent with what we would have provided for as a stand-alone taxable entity. Subsequent to the recapitalization transaction and sale of minority interest, we became a stand-alone taxpayer. As part of the process of preparing the Consolidated and Combined financial statements, we were required to determine income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax expense together with assessing temporary differences resulting from differing recognition of items for income tax and accounting purposes. These differences result in deferred income tax assets and liabilities, which are included within the Consolidated Balance Sheets. We must then assess the likelihood that deferred income tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, establish a valuation allowance. To the extent we established a valuation allowance or increased this

allowance in a period, we must reflect this increase as an expense within income tax expense in the statement of earnings. Determination of the income tax expense requires estimates and can involve complex issues that may require an extended period to resolve. Further, changes in the geographic mix of revenues or in the estimated level of annual pre-tax income can cause the overall effective income tax rate to vary from period to period.

 

Derivatives and Hedging

 

We utilize interest rate swaps to hedge our exposure on our variable rate debt obligations. We have designated these interest rate swaps as cash flow hedges in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended. All relationships between the hedging instruments and hedged items are documented at the inception of the hedge transaction, as well as the risk-management objective and strategy for undertaking each hedge transaction. We carry the fair value of the interest rate swaps as an asset or a liability on the balance sheet at each reporting date, with a corresponding amount recorded in other comprehensive earnings within stockholders’ equity. Amounts are reclassified from other comprehensive earnings to the income statement in the periods that the hedged transaction affects earnings. A formal assessment is performed at the hedge’s inception and on a regular basis thereafter to determine whether the hedge has been highly effective in offsetting changes in the cash flows of the hedged transaction and whether it is expected to be highly effective in the future.

 

Our existing cash flow hedges have been highly effective and there has been no impact on earnings due to hedge ineffectiveness. As of December 31, 2006 and 2005, the estimated fair value of cash flow hedges results in an asset of $4.9 million and $5.2 million, which is included in the accompanying Consolidated Balance Sheets in other assets with a corresponding amount recorded as a component of accumulated other comprehensive earnings, net of deferred taxes.

 

Related Party Transactions

 

Transactions with FNF

 

We have historically conducted business with Old FNF and its subsidiaries. In March 2005, in connection with the recapitalization and sale of equity interest, we entered into various agreements with Old FNF under which we continued to provide title agency services, title plant management, and IT services. Further, we also entered into service agreements with Old FNF under which Old FNF continued to provide us with corporate services. In September 2005, when Fidelity National Title Group, Inc. (“FNT”) was formed and the title insurance business was consolidated under FNT, many of these agreements were amended and restated to take into account the services that would be performed for and by FNT rather than Old FNF. On February 1, 2006, in connection with the closing of the Certegy Merger, many of these agreements were further amended and restated to reflect certain changes in the parties’ relationships. Certain of these agreements were amended or terminated in connection with the FNF merger and related transactions, as described in our current report on Form 8-K filed with the SEC on October 27, 2006. A summary of these agreements as in effect through December 31, 2006 is as follows:

 

 

 

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

 

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

 

 

We believe the amounts earned from or charged by FNF to us under each of the foregoing service arrangements are fair and reasonable. Although the 88% commission rate on title insurance policies was set without negotiation, we believe 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, we charge FNF title insurers for title information at approximately the same rates we and other similar vendors charge unaffiliated title insurers. Our IT infrastructure support and data center management services to FNF are priced within the range of prices we offer to third parties.

 

We also provide data processing services to Sedgwick CMS, a company in which FNF has held an approximately 40% equity interest since February 1, 2006. We recorded $17.3 million in revenue relating to this arrangement with Sedgwick in 2006.

 

Other transactions with FNF:

 

Contribution of National New York

 

During the second quarter of 2006, Old FNF contributed the stock of National Title Insurance of New York, Inc. (“National New York”), a title insurance company, to us, in connection with the recapitalization transaction in March 2005. This transaction was reflected as a contribution of capital from Old FNF in the amount of Old FNF’s historical basis in National New York of approximately $10.7 million.

 

Merger with FNF Capital

 

On October 26, 2006, we completed a merger with FNF Capital, Inc. (“FNF Capital”) a leasing subsidiary of Old FNF. We issued 279,000 shares of our common stock to Old FNF in exchange for a majority ownership in FNF Capital. The transaction was recorded at Old FNF’s historical basis in FNF Capital of approximately $2.3 million and we purchased the minority ownership shortly thereafter for $3.8 million in cash.

 

The contribution of National New York and the merger with FNF Capital were completed between entities under common control and their results of operations and account balances have been included in our results of operations and statement of financial position since the date of the relevant transactions. Had we included the results of operations and balance sheets for all periods presented in our Combined and Consolidated Financial Statements, net earnings would have been adjusted by $0.5 million, ($0.2) million and ($0.7) million for 2006, 2005 and 2004, respectively, and total assets would have increased $82.2 million as of December 31, 2005.

 

Investment by FNF in Fidelity National Real Estate Solutions, Inc.

 

On December 31, 2006, FNF contributed $52.5 million to Fidelity National Real Estate Solutions, Inc.(“FNRES”), our subsidiary, for approximately 61% of the outstanding shares of FNRES. As a result, as of December 31, 2006, we no longer consolidate FNRES, but record our remaining 39% interest as an equity investment in the amount of $33.5 million. The results of FNRES are included in the Consolidated and Combined Statements of Earnings for all periods presented.

 

Transactions with Covansys

 

In 2004, we entered into a master service provider agreement with Covansys, an entity in which we hold a 29% equity interest, which requires that we 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. We do not believe any future penalties will be incurred under the agreement. During 2006, 2005, and 2004, we spent $35.7 million, $17.6 million and $5.0 million purchasing professional services from Covansys and its subsidiaries.

 

Transactions with Banco Bradesco S.A. and ABN AMRO Real

 

In 2006, we recorded revenues of $22.8 million from ABN AMRO Real and $20.4 million from Banco Bradesco S.A., which are venture partners in our Brazilian Card business.

 

Recent Developments

 

Combination with Old FNF

 

On June 25, 2006, we entered into an agreement and plan of merger (the “FNF Merger Agreement”) with Old FNF (amended September 18, 2006) (the “FNF Merger”). This FNF Merger was one step in a plan that eliminated Old FNF’s holding company structure and majority ownership in FIS. In connection with this plan, Old FNF also entered into a securities exchange and distribution agreement (the “SEDA”) with its subsidiary FNT. Under the SEDA, Old FNF agreed that, prior to the merger, Old FNF would transfer substantially all its assets and liabilities to FNT, in exchange for shares of FNT common stock. Old FNF then would spin-off all shares of FNT stock it held to the stockholders of Old FNF in a tax-free distribution. Pursuant to the FNF Merger Agreement, on November 9, 2006 Old FNF merged with and into FIS, with FIS continuing as the surviving corporation. In consideration for the FNF Merger, Old FNF stockholders received an aggregate of 96,521,877 shares of our stock for their Old FNF shares. In addition, in connection with the FNF Merger we issued options to purchase our common stock and shares of our restricted stock in exchange for Old FNF options and restricted stock outstanding at the time of the FNF Merger. After the completion of all of the transactions, FNT was renamed Fidelity National Financial, Inc. (“FNF”) and trades under the symbol FNF. Former Old FNF Chairman and CEO William P. Foley, II, assumed the same position in FNF and now serves as Executive Chairman of FIS, and other key members of Old FNF senior management continue their involvement in both FNF and FIS in executive capacities.

 

U.S. generally accepted accounting principles require that one of the two parties to the FNF Merger be designated as the acquirer for accounting purposes. However, Financial Accounting Standards Board Technical Bulletin 85-5, “Issues Relating to Accounting for Business Combinations” provides that if a transaction lacks substance, it is not a purchase event and should be accounted for based on existing carrying amounts. In the FNF Merger, the minority interest in FIS has not changed and, in substance, the only assets and liabilities of the combined entity after the exchange are those of FIS prior to the exchange. Because a change in ownership of the minority interest has not taken place, the exchange has been accounted for based on the carrying amounts of our assets and liabilities.

 

Factors Affecting Comparability

 

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

 

 

The Consolidated and Combined Financial Statements present the results of operations of Certegy, the effects of the recapitalization and results of operations of the 2004 acquisitions, in each case, effective as of the date of the

acquisition or recapitalization. As a result of these transactions, the results of operations in the periods covered by the Consolidated and Combined Financial Statements may not be directly comparable.

 

Consolidated and Combined Results of Operations
(in thousands, except per share amounts)

 

 

Processing and Services Revenues

 

Processing and services revenues totaled $4,132.6 million, $2,766.1 million and $2,331.5 million in 2006, 2005 and 2004, respectively. The increase in revenue in 2006 of $1,366.5 million as compared to 2005 is primarily due to incremental revenues from the February 1, 2006 Certegy Merger, which contributed $1,067.2 million to the overall increase. The remaining 2006 increase is attributable to growth across both segments, including 15.2% growth in Transaction Processing Services, excluding the impact of Certegy, and 7.5% growth in Lender Processing Services. The growth in Transaction Processing Services was driven by strong new sales within Integrated Financial Solutions and International, while the growth in Lender Processing Services was driven by market share gains in default and appraisal services. The increase in revenue in 2005 of $434.6 million as compared to 2004 is primarily attributable to an increase of $316.4 million, or 35.5%, from our Transaction Processing Services segment which is the result of including a full year of results for the 2004 acquisitions of Aurum, Sanchez, Kordoba, and InterCept which contributed $301.1 million of the increase. The remaining 2005 increase is primarily due to organic growth across the company.

 

Cost of Revenues

 

Cost of revenues totaled $2,929.6 million, $1,793.3 million and $1,525.2 million in 2006, 2005 and 2004 respectively. The increase in cost of revenues in 2006 as compared to 2005 of $1,136.3 million was primarily due to incremental cost of revenues from the February 1, 2006 Certegy Merger which contributed $848.2 million to the overall increase. An increase in depreciation and amortization expense to $383.0 million in 2006 from $252.5 million in 2005 resulting from additional intangible amortization related to the Certegy Merger also contributed to the year-over-year increase. The increase in cost of revenues of $268.1 million in 2005 as compared to 2004 is primarily attributable to including a full year of results for the 2004 acquisitions of Aurum, Sanchez, Kordoba, and InterCept including the amortization of intangibles related to each acquisition.

 

Gross Profit

 

Gross profit as a percentage of revenues (“gross margin”) was 29.1%, 35.2% and 34.6% in 2006, 2005 and 2004, respectively. The decrease in gross margin is primarily due to the February 1, 2006 Certegy Merger, which businesses typically have lower margins than those of the historically owned FIS businesses. Incremental intangible amortization expense relating to the Certegy Merger also contributed to the decrease in gross margin in 2006. The increase in gross margin in 2005 as compared to 2004 resulted from the full year of results for the 2004 acquisitions.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses totaled $505.5 million, $422.6 million and $432.3 million for 2006, 2005 and 2004, respectively. The increase of $82.9 million in selling, general and administrative expenses for 2006 as compared to 2005 primarily relates to incremental selling, general and administrative expenses from the February 1, 2006 Certegy Merger which contributed $73.7 million to the overall increase. Additionally, the increase was also due to an increase in stock based compensation expense which increased from $20.4 million during 2005 to $50.1 million for 2006. This increase in stock-based compensation is primarily attributable to the $24.5 million in expense recorded for the vesting of the FIS performance-based options granted in March 2005 for which the performance criteria was met during the first quarter of 2006 and an acceleration charge of $6.1 million recorded in the fourth quarter relating to the FNF Merger. The decrease of $9.7 million in 2005 as compared to 2004 primarily results from cost control measures implemented in 2005 related to the 2004 acquisitions. Also included in selling, general and administrative expenses are $50.5 million, $47.1 million, and $40.5 million in depreciation and amortization costs in 2006, 2005 and 2004, respectively.

 

Research and Development Costs

 

Research and development costs totaled $105.6 million, $113.5 million and $74.2 for 2006, 2005 and 2004, respectively. The increase of $39.3 million in 2005 as compared to 2004 reflects an increase in research and development activity surrounding the acquired technology assets associated with the 2004 acquisitions of Aurum, Sanchez, Bankware, Kordoba, and InterCept.

 

Operating Income

 

Operating income totaled $591.9 million, $436.7 million and $299.8 million for 2006, 2005 and 2004, respectively. Operating income as a percentage of revenue (“operating margin”) was 14.3%, 15.8% and 12.9% for 2006, 2005 and 2004, respectively. The year-over-year decrease in operating margin for 2006 is primarily due to incremental intangible asset amortization relating to the Certegy Merger, increased stock based compensation costs, other merger related costs, as well as relatively lower gross profit percentage associated with the Certegy product lines, as noted above. The increase in operating margin for 2005 as compared to 2004 is primarily attributable to the higher revenues associated with 2004 acquisitions, for which there was a full year of results in 2005. The addition of these acquisitions resulted in a higher revenue base for spreading more stable administrative costs.

 

Interest Expense

 

Interest expense totaled $192.8 million, $126.8 million and $4.5 million for 2006, 2005 and 2004, respectively. The increase in interest expense in 2006 as compared to 2005 primarily relates to an increase in interest rates and

higher average borrowings. Additionally, the recapitalization that occurred late in the first quarter of 2005 resulted in a full year of interest in 2006 as compared to approximately ten months in 2005. The increase in interest expense in 2005 as compared to 2004 also resulted from the recapitalization in 2005.

 

Income Tax Expense

 

Income tax expense totaled $150.2 million, $116.1 million and $118.3 million for 2006, 2005 and 2004, respectively. This resulted in an effective tax rate of 37.2%, 37.2% and 37.6% for 2006, 2005 and 2004, respectively.

 

Net Earnings

 

Net earnings totaled $259.1 million, $196.6 and $189.4 million for 2006, 2005 and 2004, respectively, or $1.37, $1.53 and $1.48 per diluted share, respectively.

 

Segment Results of Operations

 

Transaction Processing Services
(in thousands)

 

 

Revenues for the Transaction Processing Services segment are derived from three main revenue channels; Enterprise Solutions, Integrated Financial Solutions and International. Revenues from Transaction Processing Services totaled $2,458.8 million, $1,208.4 and $892.0 million for 2006, 2005 and 2004, respectively. The overall segment increase of $1,250.4 million during 2006, as compared to 2005 was primarily attributable to the Certegy Merger which contributed $1,067.2 million to the overall increase. The majority of the remaining 2006 growth is attributable to organic growth within the historically owned Integrated Financial Solutions and International revenue channels, with International including $31.9 million related to the newly formed business process outsourcing operation in Brazil. The overall segment increase of $316.4 in 2005 as compared to 2004 results from the inclusion of a full year of results for the 2004 acquisitions of Aurum, Sanchez, Kordoba, and InterCept, which contributed $301.1 million of the increase.

 

Cost of revenues for the Transaction Processing Services segment totaled $1,914.1 million, $904.1 million and $667.1 million for 2006, 2005 and 2004, respectively. The overall segment increase of $1,010.0 million during 2006 as compared to 2005 was primarily attributable to the Certegy Merger which contributed $848.2 million to the increase. Gross profit as a percentage of revenues (“gross margin”) was 22.2%, 25.2% and 25.2% for 2006, 2005 and 2004, respectively. The decrease in gross profit in 2006 as compared to 2005 is primarily due to the February 1, 2006 Certegy Merger, which businesses typically have lower margins than those of the historically owned FIS businesses. Incremental intangible asset amortization relating to the Certegy Merger also contributed to the decrease in gross margin. Included in cost of revenues was depreciation and amortization of $272.4 million, $139.8 million, and $94.6 million for 2006, 2005 and 2004, respectively.

 

Selling, general and administrative expenses totaled $171.1 million, $94.9 million and $99.6 million for 2006, 2005 and 2004, respectively. The increase in 2006 compared to 2005 is primarily attributable to the Certegy Merger which contributed $73.7 million to the overall increase of $76.2 million. The decrease of $4.7 million in 2005 as compared to 2004 is primarily attributable to the effect of acquisition related costs in 2004. Included in selling, general and administrative expenses was depreciation and amortization of $11.0 million, $9.1 million and $2.3 million for 2006, 2005 and 2004, respectively.

 

Research and development costs totaled $70.9 million, $85.7 million and $54.0 million for 2006, 2005 and 2004, respectively. The increase of $31.7 million in 2005 as compared to 2004 reflects an increase in research and development activity surrounding the acquired technology assets associated with the 2004 acquisitions of Aurum, Sanchez, Bankware, Kordoba, and Intercept.

 

Operating income totaled $302.6 million, $123.7 million and $71.3 million for 2006, 2005 and 2004, respectively. Operating margin was approximately 12.3%, 10.2% and 8.0% for 2006, 2005 and 2004, respectively.

 

The increase in operating margin for 2006 as compared to 2005 resulted from a decrease, as a percentage of revenue, of 0.9% in selling, general and administrative expenses and 4.2% in research and development costs, partially offset by a decrease in gross margin as discussed above. The increase in 2005, as compared to 2004, primarily results from the relative stability of selling, general and administrative expenses against a larger revenue base due to the inclusion of a full year of results for the 2004 acquisitions.

 

Lender Processing Services
(in thousands)

 

 

Revenues for the Lender Processing Services segment totaled $1,678.6 million, $1,562.2 million and $1,445.0 million for 2006, 2005 and 2004, respectively. The overall segment increase of $116.4 million during 2006 as compared to 2005 was the result of growth across most of the business lines, but primarily due to increased demand for our appraisal services along with growth in our default management businesses.

 

Cost of revenues for the Lender Processing Services segment totaled $1,015.4 million, $889.2 million and $858.2 million for 2006, 2005 and 2004, respectively. Gross margin was 39.5%, 43.1% and 40.6% for 2006, 2005 and 2004, respectively. The decrease in gross margin is primarily due to growth in lower margin product lines including default and appraisal services along with declining margins in our tax services due to the lengthening of the service period. Included in cost of revenues was depreciation and amortization of $110.6 million, $112.8 million and $103.3 million for 2006, 2005 and 2004, respectively.

 

Selling, general and administrative expenses for the Lender Processing Services segment totaled $208.7 million, $234.7 million and $261.0 million for 2006, 2005 and 2004, respectively. The decreasing trend is primarily the result of cost control measures and the increased revenue base in the Transaction Processing Services segment for allocating certain combined selling and administrative expenses. Included in selling, general and administrative expenses was depreciation and amortization of $29.2 million, $31.8 million, and $35.1 million for 2006, 2005 and 2004, respectively.

 

Research and development costs for the Lender Processing Services segment totaled $34.7 million, $27.8 million, and $20.2 million for 2006, 2005 and 2004, respectively. The increasing trend relates primarily to additional activities surrounding our mortgage processing and loan origination software lines.

 

Operating income for the Lender Processing Services segment totaled $419.8 million, $410.5 million, and $305.6 million for 2006, 2005 and 2004, respectively. Operating margin was 25.0%, 26.3% and 21.1% for 2006, 2005 and 2004, respectively.

 

Corporate and Other

 

Selling, general and administrative expenses from the Corporate and Other segment consist of corporate overhead costs that have been allocated from FNF prior to the merger with FNF and other amounts incurred directly

by FIS, including stock based compensation. Selling, general and administrative expenses were $125.7 million, $93.1 million and $71.7 million in 2006, 2005 and 2004, respectively. The increase in 2006 as compared to 2005 of $32.6 million primarily relates to an increase in stock based compensation expense which increased from $20.4 million in 2005 to $50.1 million in 2006, as well as an increase in merger and merger related integration costs. The increase in stock based compensation primarily related to the $24.5 million in expense recorded in the first quarter of 2006 for the vesting of the FIS performance based options granted in March of 2005 for which the performance criteria were met during 2006 and a $6.1 million charge related to the acceleration of vesting of stock options recorded in the fourth quarter relating to the FNF merger.

 

Pro forma Segment Information

 

Summarized pro forma financial information for 2006 and 2005 concerning the Company’s reportable segments is shown in the following tables. The results below have been adjusted on a pro forma basis to reflect a January 1, 2005, effective date for the Certegy Merger, purchase of minority interests of Kordoba, and the March 2005 recapitalization and sale of minority interests by FIS.

 

For the year ended December 31, 2006 (in thousands):

 

 

For the year ended December 31, 2005 (in thousands):

 

 

Liquidity and Capital Resources

 

Cash Requirements

 

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

 

At December 31, 2006, we have cash on hand of $211.8 million and long-term debt including the current portion of approximately $3.0 billion. We expect cash flows from operations over the next twelve months will be sufficient to fund our operating cash requirements, and pay principal and interest on our outstanding debt absent any unusual circumstances such as acquisitions or adverse changes in the business environment.

 

We currently pay quarterly dividends to our shareholders of $0.05 per share and expect to continue to do so in the future, although the payment of any future dividends is at the discretion of our Board of Directors and subject to any limits in our debt or other agreements.

 

We intend to limit dilution caused by option exercises, including anticipated exercises, by repurchasing shares on the open market or in privately negotiated transactions. During 2006, we repurchased 4,261,200 shares at an average price of $37.60 under this program. On October 25, 2006, our Board of Directors approved a plan authorizing repurchases up to an additional $200 million worth of our common stock.

 

Capital Expenditures

 

Our principal capital expenditures are for computer software and additions to property and equipment. In 2006, we spent approximately $300.2 million on capital expenditures and in 2007, we expect to spend approximately $300 million, primarily on equipment, purchased software and internally developed software.

 

Financing

 

On March 9, 2005, FIS completed a recapitalization. FIS entered into $3.2 billion in 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”) with a consortium of lenders led by Bank of America. FIS fully drew upon the entire $2.8 billion in Term Loan Facilities to consummate the recapitalization. FIS used proceeds from the loans to repay the outstanding principal and interest on a $2.7 billion note it previously issued as a dividend to FNF. Revolving credit borrowings and Term A and B Loans bore interest at a floating rate and as a result of scheduled and other repayments, the aggregate principal balance of the Term Loan Facilities at December 31, 2006 was $2.5 billion. These credit facilities were paid in full as a result of the refinancing transaction completed on January 18, 2007 as described below.

 

FIS used proceeds from the Term Loans to repay all outstanding principal and interest on a $2.7 billion principal amount promissory note that it distributed to FNF as a dividend on March 8, 2005. On March 9, 2005, FIS also completed its minority interest sale, in which it issued common shares representing a 25% interest in FIS to an investor group for $500 million. 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.

 

On January 18, 2007, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer, Bank of America, N.A., as Swing Line Lender, and other financial institutions party thereto (the “Credit Agreement”). The Credit Agreement replaces the Bank of America Term Loan and Revolver as well as the $100 million Wachovia Settlement Facility. The Credit Agreement, which is unsecured, provides for a committed $2.1 billion five-year term facility denominated in U.S. Dollars (the “JPM Term Loan”) and a committed $900 million revolving credit facility (the “JPM Revolving Loan”) with a sublimit of $250 million for letters of credit and a sublimit of $250 million for swing line loans, maturing on the fifth anniversary of the closing date (the “Maturity Date”). The JPM Revolving Loan is bifurcated into a $735 million multicurrency revolving credit loan (the “Multicurrency Tranche”) that can be denominated in any combination of U.S. Dollars, Euro, British Pounds Sterling and Australian Dollars, and any other foreign currency in which the relevant lenders agree to make advances and a $165 million U.S. Dollar revolving credit loan that can be denominated only in U.S. Dollars. The swingline loans and letters of credit are available as a sublimit under the Multicurrency Tranche. In addition, the Credit Agreement provides for an uncommitted incremental loan facility in the uncommitted maximum principal amount of $600 million, which will be made available only upon receipt of further commitments from lenders under the Credit Agreement sufficient to fund the amount requested by FIS.

 

The JPM Term Loan was fully drawn on the closing date and a total of $557 million was borrowed under the JPM Revolving Loan on the closing date. The obligations under the Credit Agreement have been jointly and severally, unconditionally guaranteed by substantially all of the domestic subsidiaries of the Company.

 

FIS may borrow, repay and re-borrow amounts under the JPM Revolving Loan from time to time until the maturity of the JPM Revolving Loan. FIS must make quarterly principal payments under the JPM Term Loan in scheduled installments of: (a) $13,125,000 per quarter from March 31, 2007 through December 31, 2008; (b) $26,250,000 per quarter from March 31, 2009 through December 31, 2009; and (c) $52,500,000 per quarter from March 31, 2010 through September 30, 2011, with the remaining balance of approximately $1,522,500,000 payable on the Maturity Date.

 

In addition to the scheduled principal payments, the JPM Term Loan is (with certain exceptions) subject to mandatory prepayment upon issuances of debt, casualty and condemnation events, and sales of assets. Voluntary prepayments of the Loans are generally permitted at any time without fee upon proper notice and subject to a minimum dollar requirement. Commitment reductions of the JPM Revolving Loan are also permitted at any time without fee upon proper notice. The JPM Revolving Loan has no scheduled principal payments, but it will be due and payable in full on the Maturity Date.

 

The outstanding balance of the Loans bear interest at a floating rate, which is at our option, either (a) the eurocurrency rate plus an applicable margin and mandatory cost or (b) a base rate plus an applicable margin. The applicable margin is subject to adjustment based on a leverage ratio (total indebtedness to EBITDA of the Company and its consolidated subsidiaries, as further defined in the Credit Agreement). Alternatively, the Company has the ability to request the lenders to submit competitive bids for one or more advances under the JPM Revolving Loan (“Bid Rate Advances”).

 

The Credit Agreement provides procedures for lenders to submit bids for Bid Rate Advances and for the Company to accept or reject them. The Credit Agreement contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, limits on the creation of liens, limits on the incurrence of indebtedness, restrictions on investments and dispositions, limitations on dividends and other restricted payments, a minimum interest coverage ratio and a maximum leverage ratio. Upon an event of default, the Administrative Agent can accelerate the maturity of the loan. Events of default include conditions customary for such an agreement, including failure to pay principal and interest in a timely manner and breach of certain covenants.

 

The foregoing does not constitute a complete summary of the terms of the Credit Agreement and reference is made to the complete text of the agreement, which was filed as Exhibit 10.1 to Form 8-K dated January 19, 2007.

 

In connection with the new Credit Agreement, the Company terminated the Bank of America Term Loan and Revolver on January 18, 2007 and repaid it in full before its final scheduled expiration date of March 9, 2013. The final payment was approximately $2.64 billion, including principal, interest and fees. The Company incurred no early termination penalties in terminating the Bank of America credit agreement.

 

In connection with the Certegy Merger, the Company has an obligation to service $200 million (aggregate principal amount) of unsecured 4.75% fixed-rate notes due in September 2008. The notes were recorded in purchase accounting at a discount of $5.7 million, which is being amortized on a straight-line basis over the term of the notes. The notes accrue interest at a rate of 4.75% per year, payable semi-annually in arrears on each March 15 and September 15.

 

The Company had a $100 million unsecured revolving credit facility that it used to finance its customers’ shortfalls in the daily funding requirements associated with the Company’s credit and debit card settlement operations (“Settlement Facility”). Amounts borrowed were typically repaid within one to two business days, as customers funded the shortfalls. This facility had a term of 364 days and was renewed annually. There were no amounts outstanding under this facility at December 31, 2006. The Settlement Facility was terminated on January 18, 2007.

 

Contractual Obligations

 

FIS’s long-term contractual obligations generally include its long-term debt and operating lease payments on certain of its property and equipment. The following table summarizes FIS’s significant contractual obligations and

commitments as of December 31, 2006, after giving effect to the debt refinancing completed on January 18, 2007 (in thousands):

 

 

Off-Balance Sheet Arrangements

 

FIS does not have any material off-balance sheet arrangements, other than the Wisconsin operating leases disclosed below and in Note 15 to the Consolidated and Combined Financial Statements.

 

The Company has a synthetic lease arrangement (the “Wisconsin Lease”) which is not included in the Company’s consolidated balance sheets with respect to its facilities in Madison, Wisconsin (the “Wisconsin Leased Property”). In connection with the Certegy Merger, the term of the Wisconsin Lease was amended so that it was scheduled to expire on December 31, 2006. The term of the Wisconsin Lease has since been further amended so that it now expires on June 30, 2007. The original cost to the lessor of the Wisconsin Leased Property when Certegy 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.

 

Recent Accounting Pronouncements

 

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans” (“SFAS 158”). SFAS 158 requires entities to recognize on their balance sheets the funded status of pension and other postretirement benefit plans. Entities are required to recognize actuarial gains and losses, prior service cost, and any remaining transition amounts from the initial application of SFAS No. 87, “Employers’ Accounting for Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” when recognizing a plan’s funded status, with the offset to accumulated other comprehensive income. SFAS 158 will not change the amounts recognized in the income statement as net periodic benefit cost. All of the requirements of SFAS 158 are effective as of December 31, 2006 for calendar-year public companies, except for a requirement for fiscal-year-end measurements of plan assets and benefit obligations with which the Company is already in compliance. Adoption of this standard resulted in the Company recording a $6.9 million pre-tax adjustment to other long-term liabilities and other comprehensive income.

 

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (Topic 1N), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). This SAB addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB 108 requires registrants to quantify misstatements using both the balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial adoption is determined to be material, the SAB allows registrants to record that effect as a cumulative effect adjustment to beginning-of-year retained earnings. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. Adoption of this standard had no effect on the Company’s statements of financial position and operations.

 

In June 2006, The Financial Accounting Standards Board issued FASB Interpretation Number 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. FIN 48 is effective for fiscal years beginning after December 15, 2006. The interpretation clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement Number 109, Accounting for Income Taxes. The interpretation

outlines recognition thresholds and measurement attributes to determine the amount, if any, of a tax benefit to be recognized in an enterprise’s financial statements. The Interpretation also provides guidance on subsequent recognition, de-recognition, measurement, recognition of interest and penalties, classification and disclosure. The Company has reviewed FIN 48 and has determined that its implementation will not have a material impact on the Company’s financial statements.

 

In December 2004, the FASB issued FASB Statement No. 123R (“SFAS No. 123R”), “Share-Based Payment,” which requires that compensation cost relating to share-based payments be recognized in the financial statements. During 2003, FIS adopted the fair value recognition provision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), for stock-based employee compensation, effective as of the beginning of 2003. FIS had 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 was 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 in the first quarter of 2006. Since SFAS No. 123 was adopted in 2003, the impact of recording additional expense in 2006 under SFAS No. 123R relating to options granted prior to January 1, 2003 is not significant as all options accounted for under other methods were fully vested as of December 31, 2005.

 

FIS is highly leveraged. As of December 31, 2006, it was paying interest on the Term Loan Facilities and Revolver at a rate of LIBOR plus 1.25 to 1.75%, or (6.60-7.10%). As of January 18, 2007, FIS was paying interest on the new Credit Agreement at LIBOR plus 1.00%. A one percent increase in the LIBOR rate would increase its annual debt service on the Credit Agreement by $22.6 million (based on amounts outstanding at December 31, 2006). The credit rating assigned to FIS by Standard & Poor’s is currently BB+ with a positive outlook.

 

On April 11, 2005, FIS entered into interest rate swap agreements which have effectively fixed the interest rate at approximately 5.4% through April 2008 on $350 million of the term loan facilities and at approximately 5.2% through April 2007 on an additional $350 million of the term loan facilities. The estimated fair value of the cash flow hedges results in an asset of FIS of $4.9 million as of December 31, 2006, which is included in the accompanying consolidated balance sheets in other noncurrent assets and as a component of accumulated other comprehensive earnings, net of deferred taxes.

 

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATES

INDEX TO FINANCIAL INFORMATION

 

 

The Board of Directors and Stockholders

Fidelity National Information Services, Inc.:

 

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Fidelity National Information Services, Inc. and subsidiaries and affiliates (the Company) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Fidelity National Information Services, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our 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 Fidelity National Information Services, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by COSO. Also, in our opinion, Fidelity National Information Services, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by COSO.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Fidelity National Information Services, Inc. and subsidiaries and affiliates as of December 31, 2006 and 2005, 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, 2006, and our report dated March 1, 2007 expressed an unqualified opinion on those consolidated and combined financial statements.

 

 

March 1, 2007

Jacksonville, Florida

Certified Public Accountants

 

The Board of Directors and Stockholders

Fidelity National Information Services, Inc.:

 

We have audited the accompanying consolidated balance sheets of Fidelity National Information Services, Inc. and subsidiaries and affiliates (the Company) as of December 31, 2006 and 2005, 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, 2006. These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits.

 

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

 

In our opinion, the consolidated and combined financial statements referred to above present fairly, in all material respects, the financial position of Fidelity National Information Services, Inc. and subsidiaries and affiliates as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Accounting Oversight Board (United States), the effectiveness of Fidelity National Information Services, Inc. and subsidiaries and affiliates’ internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

 

As discussed in note 5 to the consolidated and combined financial statements, the Company completed a merger with Certegy Inc. on February 1, 2006.

 

 

March 1, 2007

Jacksonville, Florida

Certified Public Accountants

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATES

 

Consolidated Balance Sheets
December 31, 2006 and 2005

 

 

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

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATES

 

Consolidated and Combined Statements of Earnings
Years ended December 31, 2006, 2005 and 2004