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

 

 

 

 

Form 10-K

 

 

 

 

 

Commission File No. 001-34005

 

 

 

 

Lender Processing Services, Inc.

(Exact name of registrant as specified in its charter)

 

 

(904) 854-5100

(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

 

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

 

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

 

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

 

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

 

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

 

(Do not check if a smaller reporting company)

 

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

 

Prior to July 2, 2008, Lender Processing Services, Inc. was a privately-held subsidiary, and there was no public market for the Company’s common stock. As of February 27, 2009, the aggregate market value of the registrant’s common stock held by nonaffiliates was $2,467,180,472 based on the closing sale price of $26.19 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, $0.0001 par value per share, was 95,279,543 as of February 27, 2009.

 

The information in Part III hereof is incorporated herein by reference to the registrant’s Proxy Statement on Schedule 14A for the fiscal year ended December 31, 2008, to be filed within 120 days after the close of the fiscal year that is the subject of this Report.

 

 

LENDER PROCESSING SERVICES, INC.

2008 FORM 10-K ANNUAL REPORT

 

TABLE OF CONTENTS

 

Except as otherwise indicated or unless the context otherwise requires, all references to “LPS,” “we,” the “Company,” or the “registrant” are to Lender Processing Services, Inc., a Delaware corporation that was incorporated in December 2007 as a wholly-owned subsidiary of FIS, and its subsidiaries; all references to “FIS,” the “former parent,” or the “holding company” are to Fidelity National Information Services, Inc., a Georgia corporation formerly known as Certegy Inc., and its subsidiaries, that owned all of LPS’s shares until July 2, 2008; all references to “former FIS” are to Fidelity National Information Services, Inc., a Delaware corporation, and its subsidiaries, prior to the Certegy merger described below; all references to “old FNF” are to Fidelity National Financial, Inc., a Delaware corporation that owned a majority of former FIS’s shares through November 9, 2006; and all references to “FNF” are to Fidelity National Financial, Inc. (formerly known as Fidelity National Title Group, Inc.), formerly a subsidiary of old FNF but now a stand-alone company.

 

 

Overview

 

We are a leading provider of integrated technology and outsourced services to the mortgage lending industry, with market-leading positions in mortgage processing and default management services in the U.S. A large number of financial institutions use our services. Our technology solutions include our mortgage processing system, which processes over 50% of all U.S. residential mortgage loans by dollar volume. Our data and analytics offerings include alternative valuation services, aggregated property and loan data and advanced analytics tools. Our outsourced services include our default management services, which are used by mortgage lenders and servicers to reduce the expense of managing defaulted loans, and our loan facilitation services, which support most aspects of the closing of mortgage loan transactions to national lenders and loan servicers.

 

Lender Processing Services, Inc. was formed as a Delaware corporation in December 2007. Prior to July 2, 2008, the Company was a wholly-owned subsidiary of FIS. In October 2007, the board of directors of FIS approved a plan of restructuring pursuant to which FIS would spin off its lender processing services segment to its shareholders in a tax free distribution. Pursuant to this plan of restructuring, on June 16, 2008, FIS contributed to us all of its interest in the assets, liabilities, businesses and employees related to FIS’s lender processing services operations in exchange for a certain number of shares of our common stock and $1,585.0 million aggregate principal amount of our debt obligations. On July 2, 2008, FIS distributed to its shareholders a dividend of one-half share of our common stock, par value $0.0001 per share, for each issued and outstanding share of FIS common stock held on June 24, 2008, which we refer to as the “spin-off.” Also on July 2, 2008, FIS exchanged 100% of our debt obligations for a like amount of FIS’s existing Tranche B Term Loans issued under its Credit Agreement dated as of January 18, 2007. The spin-off was tax-free to FIS and its shareholders, and the debt-for-debt exchange undertaken in connection with the spin-off was tax-free to FIS.

 

FIS was formed by the February 2006 merger of Certegy and former FIS, which we refer to as the Certegy merger. Certegy survived the merger and was renamed Fidelity National Information Services, Inc. Prior to the Certegy merger, former FIS was a majority-owned subsidiary of old FNF. Old FNF merged into FIS in November 2006 as part of a reorganization, which included old FNF’s spin-off of Fidelity National Title Group, Inc. Fidelity National Title Group, Inc. was renamed Fidelity National Financial, Inc. following this reorganization, and we refer to it as FNF.

 

Information about Reporting Segments

 

We offer a suite of applications and services across the mortgage continuum. Our two reportable segments are Technology, Data and Analytics and Loan Transaction Services. We provide our services to many of the top 50 U.S. banks, as well as a number of other financial institutions, mortgage lenders and mortgage loan servicers, and real estate professionals.

 

In our Technology, Data and Analytics segment, our principal technology offerings are applications provided to mortgage lenders and other lending institutions, together with related support and services. Our technology

services primarily consist of mortgage processing and workflow management. The long term nature of most of our contracts in this business provides us with substantial recurring revenues. Our revenues from mortgage processing are generally based on the number of mortgages processed on our software. The number of mortgages processed includes both new mortgages and existing mortgages that have been originated in prior years and are still on the books of our lending customers. Our technology services include, among others, our Desktop application, which at present is deployed primarily to customers utilizing our default management services, but has broader applications. The Desktop application generally earns revenues on a per transaction basis. Our data and analytics services primarily consist of our alternative valuation services, our property records data businesses and our applied analytical tools. For 2008, the Technology, Data and Analytics segment produced $565.7 million, or 30%, of our consolidated and combined revenues.

 

Our Loan Transaction Services segment consists principally of our loan facilitation services and our default management services. Our loan facilitation services consist primarily of settlement services provided through centralized facilities in accordance with a lender’s specific requirements, regardless of the geographic location of the borrower or property, traditional property appraisals provided through our nationwide network of independent appraisers, and certain other origination and real estate-related services. Our default management services are provided to national lenders and loan servicers. These services allow our customers to outsource some or all of the business processes necessary to take a loan and the underlying property through the default, foreclosure and disposition process. Our revenues from our Loan Transaction Services segment in 2008 were $1,307.8 million, or 70%, of our consolidated and combined revenues.

 

In 2008, 2007 and 2006, all of our revenues were from sources within the U.S. and Puerto Rico.

 

Technology, Data and Analytics

 

Our Technology, Data and Analytics segment offers leading software systems and information solutions that facilitate and automate many of the business processes across the life cycle of a mortgage. Our customers use our technology and services to reduce their operating costs, improve their customer service and enhance their competitive position. We continually work with our customers to customize and integrate our software and services in order to assist them in achieving the value proposition that we offer to them.

 

Technology.  We sell the most widely used mortgage loan servicing platform in the U.S., which offers a comprehensive set of mortgage servicing functions within a single system. We also offer our Desktop application, which is a middleware information system that we have deployed primarily for use within our default management services. The primary applications and services of our technology businesses include:

 

 

When a bank hires us to process its mortgage portfolio, we provide the hardware and the skilled personnel whose role is to keep the system up and running 24 hours a day, seven days a week; to keep the programs and interfaces running smoothly; and to make the system and application changes needed to upgrade the processes and ensure compliance with regulatory changes. We also undertake to perform the processing securely. The bank customer is responsible for all external communications and all keying or other data input, such as reflecting when checks or other payments are received from its loan customers. MSP can be purchased on a stand-alone, licensed basis, but the majority of our MSP customers use us as their processing

partner and engage us to perform all data processing functions in our technology center in Jacksonville, Florida.

 

 

We build all of our technology platforms to be scalable, highly secure, flexible, standards-based, and web connected. Standards and web connectivity ensure that our products are easy to use for our customers. Further, we can bring solutions to market quickly due to investments that we have made in integrating our technology.

 

Data and analytics.  In addition to our technology applications, this segment provides data and analytics that are used in different steps in the life cycle of a mortgage. Our primary data and analytics services are:

 

 

The following table sets forth our revenues for the last three years from our mortgage processing services and other services in this segment (in millions):

 

 

Loan Transaction Services

 

Our Loan Transaction Services segment offers customized outsourced business process and information solutions. We work with our customers to set specific parameters regarding the services they require, and where practicable, provide a single point of contact with us for these services no matter where the property is located.

 

Loan facilitation services.  This segment includes the following services:

 

 

We frequently combine and customize our loan facilitation services to meet the specific requirements of our customers. For example, we have developed an automated process combining certain of our services that enables selected customers to offer special lending programs to their customers, such as expedited refinance transactions. This process includes an automated title search, which ultimately permits us to deliver our services in a substantially shorter period of time compared to the delivery of traditional services in the industry.

 

Default management services.  In addition to loan facilitation services, our Loan Transaction Services segment offers default management services. These services allow our customers to outsource the business processes necessary to take a loan and the underlying real estate securing the loan through the default and

foreclosure process. We offer a full spectrum of outsourcing services relating to the management of defaulted loans, from initial property inspection, to recording and final release of a mortgage lien, through eventual disposition of our customer’s asset.

 

 

Similar to our loan facilitation services, in our default management services we work with our customers to identify specific parameters regarding the services they require and to provide a single point of contact for these services. Based on a customer’s needs, our services can be provided individually or, more commonly, as part of a solution that integrates one or more of the services with our technology applications, such as the Desktop or MSP.

 

The following table sets forth our revenues for the last three years from our loan facilitation and default management services in this segment (in millions):

 

 

Corporate

 

In addition to our two reporting segments, we also have a corporate segment, which includes costs and expenses not allocated to other segments as well as certain smaller investments and operations.

 

Customers

 

We have numerous customers in each category of service that we offer across the mortgage continuum. A significant focus of our marketing efforts is on the top 50 U.S. banks, although we also provide our services to a number of other financial institutions, mortgage lenders, mortgage loan service providers and real estate professionals.

 

Our most significant customer relationships tend to be long-term in nature and we typically provide an extensive number of services to each customer. Because of the depth of these relationships, we derive a significant portion of our aggregate revenue from our largest customers. For example, in 2008 our three largest customers accounted for approximately 22.4% of our aggregate revenue and approximately 20.7% and 22.9% of the revenue of our Technology, Data and Analytics and Loan Transaction Services segments, respectively, without accounting for recent acquisitions by, or combinations among, some of our significant customers during 2008. However, these

revenues in each case are spread across a range of services. Although the diversity of our services provided to each of these customers reduces the risk that we would lose all of the revenues associated with any of these customers, a significant deterioration in our relationships with or the loss of any one or more of these customers could have a significant impact on our results of operations. See “Management’s discussion and analysis of financial condition and results of operations — Business trends and conditions” and “Risk Factors — Consolidations and failures in the banking and financial services industry could adversely affect our revenues by eliminating some of our existing and potential customers and making us more dependent on a more limited number of customers” and “— If we were to lose any of our largest customers, our results of operations could be significantly affected.”

 

Sales and Marketing

 

Sales Force

 

We have teams of experienced sales personnel with subject matter expertise in particular services or in the needs of particular types of customers. These individuals have important contacts at our lending institution customers and play an important role in prospecting for new accounts. They work collaboratively and are compensated for sales they generate both within their areas of expertise and outside of those areas. These individuals also support the efforts of our Office of the Enterprise, discussed below.

 

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 service, or a combination of services, our direct sales force also targets existing customers to promote cross-selling opportunities. Our strategy is to use the most efficient delivery system available to successfully acquire customers and build awareness of our services.

 

Office of the Enterprise

 

The broad range of services we offer provides us with the opportunity to expand our sales to our existing customer base through cross-selling efforts. We have established a core team of senior managers to lead account management and cross-selling of the full range of our services to existing and potential customers at the top 50 U.S. lending institutions. 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 part of the Office of the Enterprise operations, we engage in strategic account reviews, during which our executives share their knowledge of clients and the market in order to determine the best sales approach on a client-by-client basis. This enterprise approach benefits our clients in the following ways:

 

 

The benefit to us is a more cohesive sales force, with a compensation plan that supports the sale of products across all channels. This eliminates internal competition and confusion over client responsibility. As a result, we have created an effective cross-sell culture within our organization.

 

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 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.

 

Competition

 

A number of the businesses in which we engage are highly competitive. The businesses that make up our Technology, Data and Analytics segment compete with internal technology departments within financial institutions and with third party data processing or software development companies and data and analytics companies. Competitive factors in processing businesses 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 cost. We believe that due to our integrated technology and economies of scale in the mortgage processing business, we have a competitive advantage in each of these categories.

 

With respect to our mortgage servicing platform, we principally compete with our customers’ internal technology departments. MSP is the leading mortgage processing software in the U.S., and processes over 50% of all U.S. residential mortgage loans by dollar volume.

 

Our Desktop application, which is a workflow information system that can be used to manage a range of different workflow processes, is currently the leading mortgage default management application in the U.S. We compete primarily with our customers’ in-house technology departments for this type of business.

 

For the businesses that comprise our Loan Transaction Services segment, key competitive factors include quality of the service, convenience, speed of delivery, customer service and price. Our title and closing services businesses principally compete with large national title insurance underwriters. Our appraisal services businesses principally compete with First American Corporation and small independent appraisal providers, as well as our customers’ in-house appraisers. Due to a lack of publicly available information as to the national market for these services, we are unable to determine our overall competitive position in the national marketplace with respect to our loan facilitation services businesses. Our default management services businesses principally compete with in-house services performed directly by our customers and, to a lesser extent, other third party vendors that offer similar applications and services. Based in part on the range and quality of default management services we offer and our focus on customer service, our default management business has grown significantly and we are now the largest mortgage default management outsourced service provider in the U.S.

 

Research and Development

 

Our research and development activities have related primarily to the design and development of our processing systems and related software applications. 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. We work with our customers to determine the appropriate timing and approach to introducing technology or infrastructure changes to our applications and services.

 

Government Regulation

 

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

 

As a provider of electronic data processing to financial institutions, such as banks 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 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.

Our financial institution clients are required to comply with various privacy regulations imposed under state and federal law, including the Gramm-Leach-Bliley Act. These regulations place restrictions on the 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 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 generally bound by the same limitations on disclosure of the information received from our customers as apply to the financial institutions themselves.

 

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. RESPA also prohibits 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 further regulation. In fact, the Federal Housing Finance Agency (“FHFA”) recently adopted a new Home Valuation Code of Conduct (the “FHFA Code”) that contains new requirements for appraisal management companies. However, the FHFA Code has been challenged in court, and, regardless of the outcome of the litigation, we believe that our appraisal management operations will be able to comply with the new code. Other proposals to regulate the appraisal process could be proposed at the state or federal level, and we monitor such proposals carefully.

 

The title agency and related services we provide are conducted through an underwritten title company, title agencies, and individual escrow officers. Our underwritten title company is domiciled in California and is generally limited by 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 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 adopted regulations that include formulas that would require rate reductions on title insurance that would begin in 2010. However, the Department has proposed and held public hearings on new regulations that would eliminate those formulas and take a more targeted approach to perceived abuses in the title insurance industry. The effect of any such new measures cannot be predicted with certainty until they are adopted. Florida, New Mexico, and Texas have also announced reviews of title insurance rates and other states could follow. At this stage, we are unable to predict what the outcome will be of these or any similar processes. Any such rate reductions could adversely affect our revenues from our title agency services.

 

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, 2008, we had approximately 7,200 employees, all of which were principally employed in the U.S., Puerto Rico and Canada. None of our workforce currently is unionized. We have not experienced any work stoppages, and we consider our relations with employees to be good.

 

Available Information

 

We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet site at www.sec.gov that contains the reports and other information we file electronically. 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 SEC. Our Internet website address is http://www.lpsvcs.com. Our Corporate Governance Guidelines and Code of Business Conduct and Ethics are also available on our website and are available in print, free of charge, to any stockholder who mails a request to the Corporate Secretary, Lender Processing Services, Inc., 601 Riverside Avenue, Jacksonville, Florida 32204. Other corporate governance-related documents can be found on 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 in this report could result in a significant adverse effect on our results of operation and financial condition.

 

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

 

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

 

Consolidations and failures in the banking and financial services industry could adversely affect our revenues by eliminating some of our existing and potential customers and making 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. As a result of the rising mortgage delinquency and default rates, many banks and financial institutions are experiencing negative operating results, including many of our customers. In some cases, these negative operating results have led to the failure and/or consolidation of certain banks and financial institutions, including: the merger of Bank of America and Countrywide Financial Corporation (“Countrywide”); the failure of IndyMac; the acquisition of Merrill Lynch by Bank of America; the acquisition of Washington Mutual’s assets and deposits by JPMorgan Chase; and the acquisition of Wachovia by Wells Fargo.

 

Failures, mergers and consolidations of banks and financial institutions reduce the number of our customers and potential customers, which could adversely affect our revenues even if these events do not reduce the aggregate

activities of the consolidated entities. Further, if our customers fail and/or 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. It is also possible that the larger banks or financial institutions resulting from mergers or consolidations would have greater leverage in negotiating terms with us or 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.

 

The merger of Bank of America and Countrywide is an example of such a consolidation. Prior to the merger, each of these two entities used some of the services we provide while obtaining others from third parties or from internal resources. Since the closing of the merger, Bank of America has informed us that it continues to move toward phasing out the mortgage processing and some of the appraisal services we provide to it and instead obtain these services internally. These services together generated approximately 2.5% of our revenues in 2008. If this decision becomes final, we anticipate that a mortgage processing conversion would occur sometime in 2010. In the meantime, we continue to discuss other revenue opportunities that may offset a phase-out of the mortgage processing and appraisal services. It is also possible that Bank of America could decide to continue to use our mortgage processing and/or appraisal services or continue to expand its relationship with us with respect to other services we offer, although no assurance can be given in this regard.

 

In 2008, Washington Mutual and JPMorgan Chase each used some of the services we provide, as did Wachovia and Wells Fargo. In addition, Merrill Lynch, which was also acquired by Bank of America, used certain of our services in 2008. It is possible that, as a result of one consolidating institution providing internally or obtaining from a different provider certain services which the other consolidating institution has historically obtained from us, they may discontinue using certain of our services or may begin using some of our services they had not previously used as a result of these transactions. However, it is too soon to predict the impact that these consolidations may have on the types, amounts and pricing of services we will provide to these institutions in the future.

 

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

 

Real estate sales are affected by a number of factors, including mortgage interest rates, the availability of funds to finance purchases, the level of home prices and general economic conditions. The volume of refinancing transactions in particular and mortgage originations in general declined in 2005 through 2008 from 2004 levels, resulting in reduction of revenues in some of our businesses. In 2008, the sharply rising mortgage delinquency and default rates caused negative operating results at a number of banks and financial institutions and, as a result, significantly reduced the level of lending activity. Our revenues in future periods will continue to be subject to these and other factors which are beyond our control and, as a result, are likely to fluctuate.

 

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

 

If we were to lose any of our largest customers, our results of operations could be significantly affected.

 

A small number of customers have accounted for a significant portion of our revenues, and we expect that a limited number of customers will continue to represent a significant portion of our revenues for the foreseeable future. In 2008, our three largest customers accounted for approximately 22.4% of our aggregate revenue and approximately 20.7% and 22.9% of the revenue of our Technology, Data and Analytics and Loan Transaction Services segments, respectively. In addition, Countrywide, which was one of our five largest customers in 2008 accounting for 3.9% of our aggregate revenue, merged with Bank of America, which was also one of our five largest customers in 2008. Bank of America also acquired Merrill Lynch, which was one of our significant customers in 2008. The assets and deposits of Washington Mutual, which was one of our three largest customers in 2008, were acquired by JPMorgan Chase, which was also a significant customer of ours in 2008. In addition, Wachovia, which was one of our significant customers in 2008, was acquired by Wells Fargo, which was one of our three largest customers in 2008. Our relationships with these and other large customers are important to our future operating results, and deterioration in any of those relationships, as a result of changes following a merger, consolidation or

otherwise, could significantly reduce our revenues. See “Management’s discussion and analysis of financial condition and results of operations — Business trends and conditions.”

 

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 markets for our services are intensely competitive. Our competitors vary in size and in the scope and breadth of the services they offer. We compete for existing and new customers against both third parties and in-house capabilities of our customers. Some of our competitors have substantial resources. 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.

 

In our mortgage processing business, we face direct competition from third parties. Although we have a substantial market position in processing traditional mortgages, our share of the market for processing home equity lines of credit, an area in which we seek to expand, is much smaller. In this area, we also compete against providers of credit card processing systems, which often offer very aggressive pricing.

 

Further, because many of our larger potential customers have historically developed their key processing 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. As a result, gaining new customers in our mortgage processing business can be difficult. For banks and other potential customers, switching from an internally designed system to an outside vendor, or from one vendor of mortgage processing services 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 often resist change. There can be no assurance that our strategies for overcoming potential customers’ reluctance to change will be successful, and this resistance may adversely affect our growth.

 

We have substantial indebtedness, which could have a negative impact on our financing options and liquidity position.

 

As a result of the spin-off, we have approximately $1,547.5 million of total debt outstanding, consisting of (i) a new senior secured credit agreement divided into two tranches, a $700 million Term Loan A under which $665.0 million was outstanding at December 31, 2008, and a $510 million Term Loan B under which $507.5 million was outstanding at December 31, 2008, and (ii) $375 million of senior unsecured notes. As of December 31, 2008, we also had additional borrowing capacity of approximately $139.3 million available under our $140 million revolving credit facility. We also have other contractual commitments and contingent obligations. See “Management’s discussion and analysis of results of operations and financial condition — Contractual obligations.”

 

This high level of debt could have important consequences to us, including the following:

 

 

 

Despite our substantial indebtedness, we may be able to incur additional debt in the future. The terms of our new credit facilities and the indenture governing the notes allow us to incur substantial amounts of additional debt, subject to certain limitations. If new debt is added to our current debt levels, the related risks we could face would be magnified.

 

Our financing arrangements subject us to various restrictions that could limit our operating flexibility.

 

The agreements governing our credit facilities and the indenture governing the notes each impose operating and financial restrictions on our activities. These restrictions include compliance with, or maintenance of, certain financial tests and ratios, including a minimum interest coverage ratio and maximum leverage ratio, and limit or prohibit our ability to, among other things:

 

 

These restrictions on our ability to operate our business could harm our business by, among other things, limiting our ability to take advantage of financing, merger and acquisition and other corporate opportunities.

 

Efforts by the government, financial institutions and other parties to address the troubled mortgage market and the current economic and financial environment could affect us.

 

Several new pieces of legislation have been enacted to address the struggling mortgage market and the current economic and financial environment, including the Housing and Economic Recovery Act of 2008, a piece of wide-ranging legislation aimed at assisting the troubled housing market, and the Emergency Economic Stabilization Act of 2008, which provides broad discretion to the Secretary of the Department of the Treasury to implement a program for the purchase of up to $700 billion in troubled assets from banks and financial institutions (“TARP”). Of the $350 billion that remained of the TARP funds, the Treasury Secretary, in February 2009, proposed spending along the following lines: (1) $50 billion for mortgage loan modifications; (2) $100 billion to expand a federal program that guarantees asset-backed securities; (3) $100 billion to set up one or more facilities to purchase distressed assets (the “bad banks”), which will be combined with additional leverage to relieve the banks of up to $500 billion in toxic assets; and (4) $100 billion for further capital injections into the banks. Also, the recently passed American Recovery and Reinvestment Act of 2009, a $787 billion stimulus package, provides an array of types of relief for homebuyers, such as an $8,000 tax credit that would be available to first-time homebuyers for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009. It is too early to predict the impact that this new legislation may have on our business or results of operations.

It is possible that state and/or federal authorities may take additional action to address the current economic situation. For example, various federal and state initiatives have been proposed concerning foreclosure relief and appraisal management practices, although we cannot predict the final form that any such legislation or other relief may take, when it may become effective or the impact it may have on our business.

 

There is also increasing pressure on lenders and loan servicers to implement loan modification programs to help existing borrowers to avoid foreclosure. The Federal National Mortgage Association, which we refer to as Fannie Mae, and the Federal Home Loan Mortgage Corporation, which we refer to as Freddie Mac, government-sponsored enterprises that are tasked with working with financial institutions to provide liquidity to the mortgage market, have both been placed into conservatorship. Also, as a result of TARP, the federal government has taken an equity ownership interest in a number of banks and financial institutions, and may invest in additional institutions in the future. These situations may place additional pressure on those institutions to adopt these loan modification programs or other policies advocated by the federal government. We are unable to predict the extent to which banks and financial institutions may implement these policies, the form such policies may take or the impact they may have on our business and results of operations.

 

The sharp rise in home foreclosures experienced over the last couple of years has also resulted in investigations and lawsuits against various parties commenced by various governmental authorities and third parties. It has also resulted in governmental review of aspects of the mortgage lending business, which may lead to greater regulation in areas such as appraisals, default management, loan closings and regulatory reporting.

 

We have substantial investments in recorded goodwill as a result of prior acquisitions, and an economic downturn could cause these investments to become impaired, requiring write-downs that would reduce our operating income.

 

Goodwill was approximately $1,091.1 million, or 52% of our total assets, as of December 31, 2008. Current accounting rules require that goodwill be assessed for impairment at least annually or whenever changes in circumstances indicate that the carrying amount may not be recoverable from estimated future cash flows. Factors that may indicate the carrying value of our intangible assets, including goodwill, may not be recoverable include, but are not limited to, significant underperformance relative to historical or projected future operating results, a significant decline in our stock price and market capitalization, and negative industry or economic trends.

 

The results of our fiscal year 2008 annual assessment of the recoverability of goodwill indicated that the fair value of all of the Company’s reporting units were in excess of the carrying value of those reporting units, and thus no goodwill impairment existed as of December 31, 2008. However, if the current economic downturn continues, the carrying amount of our goodwill may no longer be recoverable, and we may be required to record an impairment charge, which would have a negative impact on our results of operations and financial condition. We will continue to monitor our market capitalization and the impact of the current economic downturn on our business to determine if there is an impairment of goodwill in future periods.

 

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

 

We anticipate that we will seek to acquire complementary businesses and services. This strategy will depend on our 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.

 

Acquisitions have not been a substantial factor in our growth in the past several years. Going forward, however, our management has articulated a strategy for us, as a stand-alone company, which includes growth through acquisitions. Our management will have to balance the challenges associated with being a newly stand-alone

company with the demands of completing acquisitions and integrating acquired businesses. There can be no assurance that our management will be able to successfully complete acquisitions or bring new businesses together. Additionally, the acquisition and integration processes may disrupt our business and divert our resources.

 

We could have conflicts with FIS and FNF, and the Chairman of our board of directors could have conflicts of interest due to his relationship with FIS.

 

FNF and FIS were under common ownership by old FNF until October 2006, when old FNF distributed all of its FNF shares to the stockholders of old FNF. In November 2006, old FNF then merged into FIS. However, FNF and FIS have remained parties to a variety of agreements, some of which were assigned to us by FIS in the spin-off.

 

Conflicts may arise between FIS and us, or FNF and us, in each case as a result of our ongoing agreements and the nature of our respective businesses. Among other things, we became a party to a variety of agreements with FIS and FNF in connection with the spin-off, and we may enter into further agreements with FIS or FNF after the spin-off.

 

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

 

 

Additionally, Lee A. Kennedy, who is Chairman of our Board of Directors, is also the President, Chief Executive Officer and a member of the board of directors of FIS. As a result, he has obligations to us as well as to FIS and could have conflicts of interest with respect to matters potentially or actually involving or affecting us and FIS.

 

We will seek to manage these potential conflicts through dispute resolution and other provisions of our agreements with FIS and 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 FIS and FNF, or that the resolution of any such conflicts will be no less favorable to us than if we were dealing with a third party.

 

We have a long sales cycle for many of our technology solutions 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 technology solutions 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 technology solutions and require us to expend substantial time, effort and money educating them as to the value of our technology solutions 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 if we experience delays, it could have a material adverse effect on our business, financial condition and results of operations.

 

We may experience defects, development delays, installation difficulties and system failures with respect to our technology solutions, 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 technology solutions and services. Further, the technology solutions underlying our services have 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. Finally, our systems and operations could be exposed to damage or interruption from fire, natural disaster, power loss, telecommunications failure, unauthorized entry and

computer viruses. Defects in our technology solutions, errors or delays in the processing of electronic transactions, or other difficulties could result in:

 

 

Any one or more of the foregoing occurrences could have a material adverse effect on our business, financial condition and results of operations. 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 our own failure to comply with privacy regulations imposed on providers of services to financial institutions 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 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.

 

Additionally, 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. In addition, if more restrictive privacy laws or rules are adopted in the future on the federal or state level, that could have an adverse impact on us. Any inability to prevent security or privacy breaches could cause our existing customers to lose confidence in our systems and terminate their agreements with us, and could inhibit our ability to attract new customers.

 

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:

 

 

Provisions of our certificate of incorporation may prevent us from receiving the benefit of certain corporate opportunities.

 

Because FIS may engage in the same activities in which we engage, there is a risk that we may be in direct competition with FIS over business activities and corporate opportunities. Further, FNF does engage in some of the same businesses as we do and may in the future compete with us more significantly. To address these potential conflicts, we have adopted a corporate opportunity policy that has been incorporated into our certificate of incorporation. These provisions may limit the corporate opportunities of which we are made aware or which are offered to us.

 

Our historical financial information may not be indicative of our future results as a stand-alone company.

 

The historical financial information we have included in this report may not reflect what our results of operations, financial condition and cash flows would have been had we been a stand-alone company during the periods presented or be indicative of what our results of operations, financial condition and cash flows may be in the future now that we are a stand-alone company. This is primarily a result of the following factors:

 

 

For additional information about the past financial performance of our business and the basis of the presentation of the historical financial statements, see our consolidated and combined financial statements and the accompanying notes.

 

If the contribution, debt exchange and/or spin-off do not qualify as tax-free transactions, tax could be imposed on FIS, us and/or FIS shareholders, and we may have to indemnify for the payment of those taxes and tax related losses.

 

On June 20, 2008, FIS received a favorable private letter ruling from the Internal Revenue Service, which we refer to as the IRS, regarding the contribution of all of FIS’s interest in the assets, liabilities, businesses and employees related to FIS’s lender processing services operations in exchange for the receipt by FIS of our common stock and our debt obligations, which we refer to as the contribution, the expected exchange by FIS of our debt obligations for certain outstanding FIS debt, which we refer to as the debt exchange, and the distribution of our common stock to FIS shareholders, which we refer to as the spin-off. The IRS ruling was to the effect that:

 

(i) the contribution taking into account the spin-off will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986 (the “Code”), as amended, which we refer to as the Code, in which neither we nor FIS will recognize any gain or loss;

 

(ii) no gain or loss will be recognized by FIS in the debt exchange, pursuant to Section 361 of the Code; and

 

(iii) no gain or loss will be recognized by FIS or any FIS shareholder on the spin-off, pursuant to Section 355 and related provisions of the Code (including Section 361(c) of the Code), except that any gain that FIS shareholders realize on cash received in lieu of any fractional shares of our common stock to which such shareholders may be entitled in the spin-off generally will be taxable to the FIS shareholders.

 

Notwithstanding FIS’s receipt of the IRS private letter ruling, the IRS could determine that the contribution, debt exchange and/or spin-off constitute taxable transactions if it determines that there was a misstatement or omission of any of the facts, representations, or undertakings that were included in the request for the private letter ruling, or if it disagrees with the conclusions FIS reached regarding certain requirements for tax-free treatment that, consistent with the IRS’s standard ruling policy, were not covered by the IRS ruling.

If one or more of the contribution, debt exchange or spin-off transactions ultimately were determined to be subject to tax, FIS would recognize gain and the amount of that gain would be up to the excess of the fair market value of our stock and debt obligations FIS received in the contribution over its basis in the assets it contributed to us in the contribution. The amount of such gain could be substantial. Further, if the spin-off transaction were subject to tax, in addition to tax imposed on FIS, the FIS shareholders generally would be treated as if they received a taxable distribution equal to the full fair market value of our stock on the distribution date. In addition, FIS could be subject to tax on certain of the preliminary asset transfers within FIS that were made in connection with the contribution transaction.

 

Notwithstanding the favorable IRS ruling that the spin-off qualified for tax-free treatment, it would become taxable to FIS, pursuant to Section 355(e) of the Code, if 50% or more of the shares of either its common stock or our common stock were acquired, directly or indirectly, as part of a plan or series of related transactions that included the spin-off. Such determination could result in the recognition of substantial gain by FIS under Section 355(e).

 

Although the taxes resulting from the contribution, debt exchange or spin-off not qualifying for tax-free treatment for United States Federal income tax purposes generally would be imposed on FIS shareholders and FIS, under the tax disaffiliation agreement entered into by FIS and us in connection with the distribution, we would be required to indemnify FIS and its affiliates against all tax related liabilities caused by the failure of any of those transactions to qualify for tax-free treatment for United States Federal income tax purposes (including as a result of Section 355(e) of the Code) to the extent these liabilities arise as a result of any action taken by us or any of our affiliates following the spin-off or otherwise result from any breach of any representation, covenant or obligation of ours or any of our affiliates under a tax disaffiliation agreement we have entered into with FIS. The amount of our indemnification obligation could be significant.

 

We have agreed to certain restrictions to help preserve the tax-free treatment to FIS of the spin-off, which may reduce our strategic and operating flexibility.

 

In order to help preserve the tax-free treatment of the spin-off, we have agreed not to take certain actions without first securing the consent of certain FIS officers or securing an opinion from a nationally recognized law firm or accounting firm that such action will not cause the spin-off to be taxable. In general, such actions would include:

 

(i) for a period of two years after the spin-off, engaging in certain transactions involving (a) the acquisition of our stock or (b) the issuance of shares of our stock;

 

(ii) repurchasing or repaying our new debt prior to maturity other than in accordance with its terms; and

 

(iii) making certain modifications to the terms of the debt that could affect its characterization for federal income tax purposes.

 

The covenants in, and our indemnity obligations under, our tax disaffiliation agreement with FIS may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business. The limitations on our ability to issue capital stock could, for example, make it harder for us to raise capital if we need additional funds to satisfy our debt service or other debt obligations.

 

Statement Regarding Forward-Looking Information

 

The statements contained in this report 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, 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 undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

 

None.

 

 

Our corporate headquarters are located in Jacksonville, Florida, in an owned facility. FNF and FIS occupy and pay us rent for approximately 197,395 square feet in this facility. We also own one facility in Sharon, Pennsylvania. We lease office space as follows:

 

 

 

 

We have no leased properties 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:

 

 

 

National Title Insurance of New York, Inc. Litigation

 

One of our subsidiaries, National Title Insurance of New York, Inc., has been named in thirteen putative class action lawsuits: Barton v. National Title Insurance of New York, Inc. et al., filed in the U.S. District Court for the Northern District of California on March 10, 2008; Gentilcore v. National Title Insurance of New York, Inc. et al., filed in the U.S. District Court for the Northern District of California on March 11, 2008; Martinez v. National Title Insurance of New York, Inc. et al., filed in the U.S. District Court for the Southern District of California on March 18, 2008; Swick v. National Title Insurance of New York, Inc. et al., filed in the U.S. District Court for the District of New Jersey on March 19, 2008; Davis v. National Title Insurance of New York, Inc. et al., filed in the U.S. District Court for the Central District of California, Western Division, on March 20, 2008; Pepe v. National Title Insurance of New York, Inc. et al., filed in the U.S. District Court for the District of New Jersey on March 21, 2008; Kornbluth v. National Title Insurance of New York, Inc. et al., filed in the U.S. District Court for the District of New Jersey on March 24, 2008; Lamb v. National Title Insurance of New York, Inc. et al., filed in the U.S. District Court for the District of New Jersey on March 24, 2008; Blackwell v. National Title Insurance of New York, Inc. et al., filed in the U.S. District Court for the Northern District of California on April 11, 2008; Magana v. National Title Insurance of New York, Inc. et al., filed in the U.S. District Court for the Central District of California on June 4, 2008; Moynihan v. National Title Insurance of New York, Inc. et al., filed in the U.S. District Court for the Central District of California on June 10, 2008; Romero v. National Title Insurance of New York, Inc. et al., filed in the U.S. District Court for the Northern District of California on July 14, 2008; and Doolittle, Susan v. National Insurance of New York, Inc. et al., filed in the U.S. District for the Northern District of California on July 25, 2008. The complaints in these lawsuits are substantially similar and allege that the title insurance underwriters named as defendants, including National Title Insurance of New York, Inc., engaged in illegal price fixing as well as market allocation and division that resulted in higher title insurance prices for consumers. The complaints seek treble damages in an amount to be proved at trial and an injunction against the defendants from engaging in any anti-competitive practices under the Sherman Antitrust Act and various state statutes. A motion was filed before the Multidistrict Litigation Panel to consolidate and/or coordinate these actions in the United States District Court in the Southern District of New York. However, that motion was denied. Accordingly, the cases have been consolidated before one district court judge in each of California and New Jersey and scheduled for the filing of consolidated complaints and motion practice. Motions to dismiss have been filed and are pending in each complaint.

 

Harris, Ernest and Mattie v. FIS Foreclosure Solutions, Inc.

 

A putative class action was filed on January 16, 2008 as an adversary proceeding in the Bankruptcy Court in the Southern District of Texas. The complaint alleges that LPS engaged in unlawful attorney fee-splitting practices in its default management business. The complaint sought declaratory and equitable relief reversing all attorneys’ fees charged to debtors in bankruptcy court and disgorging any such fees we collected. We filed a Motion to Dismiss, and the Bankruptcy Court dismissed three of the six counts contained in the complaint. We also filed a Motion to Withdraw the Reference and remove the case to federal district court as the appropriate forum for the resolution of the allegations contained in the complaint. The Bankruptcy Court recommended removal to the U.S. District Court for the Southern District of Texas, and the U.S. District Court accepted that recommendation in

April 2008. The U.S. District Court dismissed the case with prejudice on December 3, 2008. In connection with the action, LPS paid no monetary damages (including no attorney fees, costs or expenses) nor was the plaintiff granted any equitable relief.

 

 

None

 

 

Our common stock trades on the New York Stock Exchange under the ticker symbol “LPS.” As of February 28, 2009, there were approximately 8,430 registered holders of our common stock. The table set forth below provides the high and low sales prices of our common stock and the cash dividends declared per share of common stock for the third and fourth quarters of 2008. Prior to the spin-off in the third quarter of 2008, we were a wholly-owned subsidiary of FIS and there was no established public trading market for our common stock. Accordingly, there is no data available for the first and second quarters of 2008 or for any period of 2007.

 

 

We currently pay a dividend of $0.10 per common share on a quarterly basis, and expect to continue to do so in the future. The declaration and payment of future dividends is at the discretion of the Board of Directors, and depends on, among other things, our investment policy and opportunities, results of operations, financial condition, cash requirements, future prospects, and other factors that may be considered relevant by our Board of Directors, including legal and contractual restrictions. Additionally, the payment of cash dividends may be limited by covenants in certain debt agreements. A regular quarterly dividend of $0.10 per common share is payable March 26, 2009 to stockholders of record as of the close of business on March 12, 2009.

 

The following table provides information as of December 31, 2008, about our common stock which may be issued under our equity compensation plans:

 

 

On October 22, 2008, our Board of Directors approved a plan authorizing repurchases of up to $75.0 million worth of our common stock. Our ability to repurchase shares is subject to restrictions contained in our senior secured credit agreement and in the indenture governing our senior unsecured notes. During the fourth quarter of 2008, we did not repurchase any of our common stock under this plan. We currently have available $75.0 million of authorized repurchases as of December 31, 2008.

 

 

The following table presents our selected historical financial data and should be read in conjunction with Item 7. and Item 8. included elsewhere in this Annual Report on Form 10-K. Except with respect to pro forma shares

and per share amounts, the consolidated and combined statement of earnings data for the years ended December 31, 2008, 2007 and 2006 and the consolidated and combined balance sheet data as of December 31, 2008 and 2007 have been derived from our audited financial statements included in this report. The combined statement of earnings data for the year ended December 31, 2005 and the combined balance sheet data as of December 31, 2006 are derived from our audited financial statements not included in this report. The combined statement of earnings data for the year ended December 31, 2004 and the combined balance sheet data as of December 31, 2005 and 2004 are derived from unaudited financial statements not included in this report.

 

The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information set forth in this report.

 

The selected historical financial data presented below should be read in conjunction with our consolidated and combined financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report. Our financial information may not be indicative of our future performance and does not necessarily reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented, including changes that occurred in our operations and capitalization as a result of our spin-off from FIS.

 

We intend to pay quarterly cash dividends to our stockholders of $0.10 per share, although the payment of dividends is at the discretion of our Board and subject to any limits in our debt or other agreements and the requirements of state and federal law.

 

 

 

 

Selected Quarterly Financial Data (Unaudited):

 

 

 

The following discussion should be read in conjunction with Item 8: Financial Statements and Supplementary Data and the Notes thereto included elsewhere in this report.

 

Overview

 

We are a leading provider of integrated technology and outsourced services to the mortgage lending industry, with market-leading positions in mortgage processing and default management services in the U.S. We have two reporting segments, Technology, Data and Analytics and Loan Transaction Services, which produced approximately 30% and 70%, respectively, of our revenues for the year ended December 31, 2008. A large number of financial institutions use our services. Our technology solutions include our mortgage processing system, which processes over 50% of all U.S. residential mortgage loans by dollar volume. Our outsourced services include our default management services, which are used by mortgage lenders and servicers to reduce the expense of managing defaulted loans, and our loan facilitation services, which support most aspects of the closing of mortgage loan transactions to national lenders and loan servicers.

 

Our Technology, Data and Analytics segment principally includes:

 

 

Our Loan Transaction Services segment offers a range of services used mainly in the production of a mortgage loan, which we refer to as our loan facilitation services, and in the management of mortgage loans that go into default, which we refer to as default management services.

Our loan facilitation services include:

 

 

Our default management services include, among others:

 

 

Corporate overhead costs and other operations that are not included in our operating segments are included in Corporate and Other.

 

Prior to July 2, 2008, the Company was a wholly-owned subsidiary of FIS. In October 2007, the board of directors of FIS approved a plan of restructuring pursuant to which FIS would spin off its lender processing services segment to its shareholders in a tax free distribution. Pursuant to this plan of restructuring, on June 16, 2008, FIS contributed to us all of its interest in the assets, liabilities, businesses and employees related to FIS’s lender processing services operations in exchange for a certain number of shares of our common stock and $1,585.0 million aggregate principal amount of our debt obligations. On July 2, 2008, FIS distributed to its shareholders a dividend of one-half share of our common stock, par value $0.0001 per share, for each issued and outstanding share of FIS common stock held on June 24, 2008, which we refer to as the “spin-off.” Also on July 2, 2008, FIS exchanged 100% of our debt obligations for a like amount of FIS’s existing Tranche B Term Loans issued under its Credit Agreement dated as of January 18, 2007. The spin-off was tax-free to FIS and its shareholders, and the debt-for-debt exchange undertaken in connection with the spin-off was tax-free to FIS.

 

Business Trends and Conditions

 

Revenues in our loan facilitation businesses and certain of our data businesses are affected by the level of residential real estate activity, which largely depends on the average price of real estate sales, the availability of funds to finance real estate purchases and the level of interest rates. Both the volume and average price of residential real estate transactions have recently experienced declines in many parts of the country, and these trends appear likely to continue. The increase in interest rates and tightening of lending standards in 2007 and early 2008 resulted in a reduction in new loan originations and refinancing activity. In the second half of 2008, new loan originations and refinancing activity were further impacted by uncertainty and negative trends in general economic conditions in the United States and abroad, including significant tightening of credit markets and rising unemployment.

 

Our various businesses are impacted differently by the level of mortgage originations and refinancing transactions. For instance, while our loan facilitation and some of our data businesses are directly affected by the volume of real estate transactions and mortgage originations, our mortgage processing business is generally less affected as it earns revenues based on processing the total amount of mortgage loans outstanding which tends to stay more constant. During 2008, the impact of lower levels of mortgage originations and refinancing transactions had a negative impact on our loan facilitation and other data services businesses.

 

In contrast, we believe that a rising interest rate environment or a weaker economy tends to increase the volume of consumer mortgage defaults, and thus favorably affects our default management operations, in which we service

residential mortgage loans in default. These factors also increase revenues from our Desktop services, as the Desktop application, at present, is primarily used in connection with default management. Currently, our default management services provide a natural hedge against the volatility of the real estate business, and resulting impact on our loan facilitation services. However, federal and state governments have proposed legislation aimed at mitigating the current downturn in the housing market, including initiatives concerning foreclosure relief and loan modification programs. We cannot predict the final form that such legislation may take, how it may be implemented, when it may become effective or the impact it may have on our default management businesses.

 

Our 2006, 2007 and 2008 results demonstrate the extent to which rising default management revenues can offset declines in loan facilitation revenues. In 2006, our revenues from loan facilitation and default management (excluding Desktop revenues) were $623.1 million and $277.8 million, respectively; in 2007 they were $652.9 million and $473.0 million, respectively; and in 2008 they were $456.0 million and $851.8 million, respectively.

 

Historically, some of our default management businesses have had lower margins than our loan facilitation businesses. However, as our default volumes have increased, our margins have improved significantly on the incremental sales in 2007 and 2008. Because we are often not paid for our default services until completion of the foreclosure, default does not contribute as quickly to our cash flow from operations as it does to our revenues. Our trade receivables balance increased by approximately $100.6 million from December 31, 2006 to December 31, 2007 and approximately $58.6 million from December 31, 2007 to December 31, 2008, largely due to the increase in our default business.

 

At the same time, as revenue from our loan facilitation businesses has decreased, the associated margins have declined. Sharply lower levels of subprime lending in the second half of 2007 and in 2008 have particularly affected our tax business, the customers of which were heavily weighted to subprime lenders. The rate at which subprime loans are refinanced or repaid due to sales has declined significantly, which in turn has substantially increased the service period for life of loan tax monitoring without any associated additional revenue. Further, our traditional appraisal services tend to have lower margins than the remainder of our loan facilitation services.

 

We have approximately $1.5 billion in long-term debt outstanding as of December 31, 2008, of which approximately $1.1 billion bears interest at a fixed rate ($750 million through interest rate swaps), while the remaining portion bears interest at a floating rate. As a result, we are highly leveraged and subject to risk from changes in interest rates. Having this amount of debt also makes us more susceptible to negative economic changes, as a large portion of our cash is committed to servicing our debt. Therefore, in a bad economy or if interest rates rise, it will be harder for us to attract executive talent, invest in acquisitions or new ventures, or develop new services.

 

We may also be affected by failures, mergers and consolidations of banks and financial institutions, which reduce the number of our customers and potential customers. Such reductions could adversely affect our revenues even if these events do not reduce the aggregate activities of the consolidated entities. Further, if our customers fail and/or 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. It is also possible that the larger banks or financial institutions resulting from mergers or consolidations would have greater leverage in negotiating terms with us or 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.

 

In a number of our business lines, we are also affected by the decisions of potential customers to outsource the types of functions our businesses provide or to perform those functions internally. 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 increase customer efficiencies and reduce costs. Further, in a slowing economy or mortgage market, we believe that larger financial institutions may seek additional outsourcing solutions to avoid the fixed costs of operating or investing in internal capabilities.

 

Recent Developments

 

In February 2009, we completed a sale of all of our interest in Investment Property Exchange Services, Inc. (“IPEX”), our IRS Code Section 1031 property exchange business, to FNF in exchange for the remaining 61% of

the equity interests of Fidelity National Real Estate Solutions, Inc. (“FNRES”). The exchange results in FNRES becoming our wholly-owned subsidiary.

 

On March 15, 2009, William P. Foley, II retired from our Board of Directors and from his position as chairman of the Board and an officer of the Company. Lee A. Kennedy has been elected Chairman of our Board effective March 15, 2009. Daniel D. (Ron) Lane and Cary H. Thompson also retired from our Board on that date and Jeffrey S. Carbiener, John F. Farrell, Jr. and Philip G. Heasley have been elected our Board of Directors effective March 15, 2009.

 

Factors Affecting Comparability

 

The consolidated and combined financial statements included in this report that present our financial condition and operating results reflect the following significant transactions:

 

 

As a result of the above transactions, the results of operations in the periods covered by the consolidated and combined financial statements may not be directly comparable.

 

Critical Accounting Policies

 

The accounting policies described below are those we consider critical in preparing our consolidated and combined financial statements. These policies require management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosures with respect to contingent liabilities and assets at the date of the consolidated and combined financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts could differ from those estimates. See Note 2 of the notes to our consolidated and combined financial statements for a more detailed description of the significant accounting policies that have been followed in preparing our consolidated and combined financial statements.

 

Revenue Recognition

 

We recognize revenues in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition (“SAB 104”), and related interpretations, Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”) No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”), the American Institute of Certified Public Accountants (the “AICPA”) Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition (“SOP 97-2”), SOP No. 98-9, Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to Certain Transactions (“SOP 98-9”), and SOP No. 81-1, Accounting for Performance of Construction Type and Certain Production-Type Contracts (“SOP 81-1”). Recording revenues under the provisions of these pronouncements requires judgment, including determining whether an arrangement includes multiple elements, whether any of the elements are essential to the functionality of any other elements, and whether evidence of fair value exists for those elements. Customers receive certain contract elements over time and changes to the elements in an arrangement, or in our ability to identify fair value for these elements, could materially impact the amount of earned and unearned revenue reflected in our financial statements.

 

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

 

If the deliverables under a contract are software related as determined under SOP 97-2 or SOP 98-9, we apply these pronouncements and related interpretations to determine the appropriate units of accounting and how the arrangement consideration should be measured and allocated to the separate units. This determination, as well as

management’s ability to establish vendor specific objective evidence (“VSOE”) for the individual deliverables, can impact both the amount and timing of revenue recognition under these agreements. The inability to establish VSOE for each contract deliverable results in having to record deferred revenues and/or applying the residual method as defined in SOP 98-9. For arrangements where we determine VSOE for software maintenance using a stated renewal rate within the contract, we use judgment to determine whether the renewal rate represents fair value for that element as if it had been sold on a stand-alone basis. For a small percentage of revenues, we use contract accounting, as required by SOP 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 using the percentage-of-completion method since reasonably dependable estimates of revenues and contract hours applicable to various elements of a contract can be made.

 

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

 

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

 

Goodwill and Other Intangible Assets

 

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

 

As of December 31, 2008 and 2007, goodwill was $1,091.1 million and $1,078.2 million, respectively. Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) requires that goodwill should not be amortized, but shall be tested for impairment annually or more frequently if circumstances indicate potential impairment. The process of determining whether or not an asset, such as goodwill, is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Such projections are inherently uncertain and, accordingly, actual future cash flows may differ materially from projected cash flows. In evaluating the recoverability of goodwill, we perform an annual goodwill impairment test on our reporting units based on an analysis of the discounted future net cash flows generated by the reporting units’ underlying assets. Such analyses are particularly sensitive to changes in 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, 2008 and 2007, intangible assets, net of accumulated amortization, were $83.5 million and $118.1 million, respectively, which consist primarily of purchased customer relationships and trademarks. SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”) requires that long-lived assets and intangible assets with definite useful lives be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The valuation of these assets involves significant estimates and assumptions concerning matters such as customer retention, future cash flows and discount rates. If any of these assumptions change, it could affect the recoverability of the carrying value of these assets. Purchased customer relationships are amortized over their estimated useful lives using an accelerated method which takes into consideration expected customer attrition rates over a period of up to ten years. All intangible assets that have been determined to have indefinite lives are not amortized, but are reviewed for impairment at least annually in accordance with SFAS 142. The determination of estimated useful lives and the allocation of the purchase price to the fair values of the intangible assets other than goodwill require significant judgment and may affect the amount of future amortization of such intangible assets. Amortization expense for

intangible assets other than goodwill was $40.0 million, $42.4 million and $51.5 million in 2008, 2007 and 2006, respectively. Definite-lived intangible assets are amortized over their estimated useful lives ranging from 5 to 10 years using accelerated methods. There is an inherent uncertainty in determining the expected useful life of or cash flows to be generated from intangible assets. We have not historically experienced significant changes in these estimates but could be subject to them in the future.

 

Computer Software

 

Computer software includes the fair value of software acquired in business combinations, purchased software and capitalized software development costs. As of December 31, 2008 and 2007, computer software, net of accumulated amortization was $157.5 million and $150.4 million, respectively. Purchased software is recorded at cost and amortized using the straight-line method over its estimated useful life. Software acquired in business combinations is recorded at its fair value and amortized using straight-line or accelerated methods over its estimated useful life, ranging from five to ten years. Internally developed software costs are amortized using the greater of the straight-line method over the estimated useful life or based on the ratio of current revenues to total anticipated revenue over the estimated useful lives. Useful lives of computer software range 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 86”), or with the AICPA SOP No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (“SOP 98-1”). After the technological feasibility of the software has been established (for SFAS 86 software), or at the beginning of application development (for SOP 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 86 software), or prior to application development (for SOP 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 86 software) and the date placed in service for purchased software (for SOP 98-1 software). Amortization expense for computer software was $32.9 million, $31.1 million and $29.0 million in 2008, 2007 and 2006, respectively. We also assess the recorded value of computer software for impairment on a regular basis by comparing the carrying value to the estimated future cash flows to be generated by the underlying software asset. There is an inherent uncertainty in determining the expected useful life of or cash flows to be generated from computer software. We have not historically experienced significant changes in these estimates but could be subject to them in the future.

 

Accounting for Income Taxes

 

As part of the process of preparing the consolidated and combined financial statements, we are required to determine income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax expense together with assessing temporary differences resulting from differing recognition of items for income tax and accounting purposes. These differences result in deferred income tax assets and liabilities, which are included within our consolidated and combined balance sheets. We must then assess the likelihood that deferred income tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must reflect this increase as an expense within income tax expense in the statement of earnings. Determination of the income tax expense requires estimates and can involve complex issues that may require an extended period to resolve. Further, changes in the geographic mix of revenues or in the estimated level of annual pre-tax income can cause the overall effective income tax rate to vary from period to period.

 

Recent Accounting Pronouncements

 

Discussion of recent accounting pronouncements is included in Note 2 of the notes to our consolidated and combined financial statements.

 

Related Party Transactions

 

We have historically conducted business with FNF. We have various agreements with FNF under which we have provided title agency services, software development and other data services. Additionally, we have been

allocated corporate costs from FIS and will continue to receive certain corporate services from FIS for a period of time.

 

A detail of related party items included in revenues for the years ended December 31, 2008, 2007 and 2006 is as follows (in millions):

 

 

A detail of related party items included in expenses for the years ended December 31, 2008, 2007 and 2006 is as follows (in millions):

 

 

Descriptions of these related party agreements and other related party relationships are included in Note 3 of notes to our consolidated and combined financial statements.

Results of Operations for the Years Ended December 31, 2008, 2007 and 2006

 

Consolidated and Combined Results of Operations

 

 

 

 

Processing and Services Revenues

 

Processing and services revenues increased $171.3 million, or 10.1%, during 2008, when compared to 2007, and $205.6 million, or 13.8%, during 2007, when compared to 2006. The increase during 2008, when compared to 2007, was primarily driven by growth in our Loan Transaction Services segment which resulted from growth in default services, offset by a decline in loan facilitation services due to ongoing weakness in the housing market and the resulting impact on our loan origination services. Additionally, the increase was supported by growth in our Desktop application and applied analytics services. The increase during 2007, when compared to 2006, was driven by growth across both operating segments, including an increase in mortgage processing revenues, primarily due to a termination fee recognized from the deconversion of a large customer in 2007, the growth in Desktop services primarily resulting from increased foreclosure activity, and corresponding growth in default services. These increases were partially offset by the deconsolidation of FNRES (discussed in Note 3 of the notes to our consolidated and combined financial statements) which had revenues of approximately $45.1 million in 2006.

 

Cost of Revenues

 

Cost of revenues increased $124.3 million, or 11.7%, during 2008, when compared to 2007, and $158.4 million, or 17.6%, during 2007, when compared to 2006. Cost of revenues as a percentage of processing and services revenues was 63.5%, 62.6% and 60.6% during 2008, 2007 and 2006, respectively. The increases during 2008 when compared to 2007, and during 2007 when compared to 2006, were primarily due to a change in revenue mix as the growth in default

services, which has a higher cost of revenue associated with its operations was offset by contraction in our higher margin loan facilitation services, loan origination software sales, and data and analytic services. The increases during 2007 when compared to 2006 were partially offset by the deconsolidation of FNRES.

 

Gross Profit

 

Gross profit was $679.0 million, $632.0 million and $584.8 million during 2008, 2007 and 2006, respectively. Gross profit as a percentage of processing and services revenues (“gross margin”) was 36.5%, 37.4% and 39.4% during 2008, 2007 and 2006, respectively. The declines in gross margin during 2008 when compared to 2007, and during 2007 when compared to 2006, were a result of the factors described above.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased $31.0 million, or 14.9%, during 2008 when compared to 2007; however, these expenses decreased $49.4 million, or 19.2%, during 2007 when compared to 2006. Selling, general and administrative expenses as a percentage of processing and services revenues was 12.8%, 12.3% and 17.3% during 2008, 2007 and 2006, respectively. The increase during 2008 when compared to 2007 was primarily due to restructuring and spin-off related charges recognized during 2008, incremental public company costs incurred since our spin-off from FIS, as well as higher stock compensation and other incentive related costs. The decrease during 2007 when compared to 2006 was primarily due to a decrease in stock compensation and other incentive related costs, as well as the deconsolidation of FNRES.

 

Operating Income

 

Operating income increased $16.0 million, or 3.8%, during 2008 when compared to 2007, and $96.6 million, or 29.5%, during 2007 when compared to 2006. Operating income as a percentage of processing and services revenues (“operating margin”) was 23.7%, 25.1% and 22.1% during 2008, 2007 and 2006, respectively. The decrease during 2008 when compared to 2007, and the increase during 2007 when compared to 2006, was a result of the factors described above.

 

Other Income (Expense)

 

Other income (expense) consists of interest income, interest expense and other items. Other income (expense) was $(56.7) million, $1.5 million and $2.2 million during 2008, 2007 and 2006, respectively. The change during 2008 when compared to 2007 was primarily due to increased interest expense from bank credit facilities entered into and senior notes issued on July 2, 2008 in connection with our spin-off from FIS. Interest expense was $49.9 million and $0.2 million during 2008 and 2007, respectively. The remaining change during 2008 when compared to 2007 was due to the write-down of other-than-temporary impaired investments in connection with our Section 1031 exchange business. The change during 2007 when compared to 2006 was primarily due to decreased interest income.

 

Income Taxes

 

Income taxes were $146.6 million, $164.7 million and $128.0 million during 2008, 2007 and 2006, respectively. The effective tax rate was 38.3%, 38.7% and 38.8% during 2008, 2007 and 2006, respectively. The decrease in the tax rate for 2008 as compared to 2007 is attributable to the utilization of federal tax credits and sourcing of state activity from higher taxing jurisdictions to lower taxing jurisdictions.

 

Equity in Loss of Unconsolidated Affiliate and Minority Interest

 

Equity in loss of unconsolidated affiliate and minority interest was $5.9 million, $4.1 million and $0.6 million during 2008, 2007 and 2006, respectively. The increase during 2008 when compared to 2007 was primarily due to increased losses from our investment in FNRES. The increase during 2007 when compared to 2006 was primarily due to the deconsolidation of FNRES resulting in the recognition of equity losses. Prior to 2007, FNRES had been included in our consolidated and combined results of operations as a wholly-owned subsidiary.

Net Earnings

 

Net earnings were $230.9 million, $256.8 million and $201.1 million during 2008, 2007 and 2006, respectively. The decrease during 2008 when compared to 2007, and the increase during 2007 when compared to 2006, was a result of the factors described above.

 

Segment Results of Operations — Technology, Data and Analytics

 

 

Processing and Services Revenues

 

Processing and services revenues decreased nominally during 2008 when compared to 2007; however, revenues increased $23.1 million, or 4.2%, during 2007 when compared to 2006. The decrease during 2008 when compared to 2007 was primarily driven by decreases in revenues in our loan origination software sales and data and analytics services, partially offset by continued growth in our Desktop application resulting from increased foreclosure activity. The increase during 2007 when compared to 2006 was driven by increased mortgage processing revenues, primarily due to a termination fee recognized from the deconversion of a large customer in 2007, as well as growth in our Desktop application, partially offset by a decrease in our alternative valuation services.

 

Cost of Revenues

 

Cost of revenues decreased nominally during 2008 when compared to 2007; however, cost of revenues increased $14.0 million, or 4.7%, during 2007 when compared to 2006. Cost of revenues as a percentage of processing and services revenues was 54.8%, 55.0% and 54.8% during 2008, 2007 and 2006, respectively. The decrease in expenses during 2008 when compared to 2007, and the increase in expenses during 2007 when compared to 2006, was primarily driven by changes in variable costs associated with sales volume.

 

Gross Profit

 

Gross profit was $255.7 million, $256.4 million and $247.3 million during 2008, 2007 and 2006, respectively. Gross margin was 45.2%, 45.0% and 45.2% during 2008, 2007 and 2006, respectively. The nominal changes in gross margin during 2008 when compared to 2007, and during 2007 when compared to 2006, was a result of the factors described above.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased nominally during 2008 when compared to 2007, and during 2007 when compared to 2006. Selling, general and administrative expenses as a percentage of processing and services revenues was 11.4%, 11.4% and 12.4% during 2008, 2007 and 2006, respectively. These results were relatively flat year-over-year for the periods presented.

Operating Income

 

Operating income decreased nominally during 2008 when compared to 2007; however, operating income increased $12.0 million, or 6.7%, during 2007 when compared to 2006. Operating margin was 33.8%, 33.6% and 32.8% during 2008, 2007 and 2006, respectively. The increases during 2008 when compared to 2007, and during 2007 when compared to 2006, were a result of the factors described above.

 

Segment Results of Operations — Loan Transaction Services

 

 

Processing and Services Revenues

 

Processing and services revenues increased $181.9 million, or 16.2%, during 2008 when compared to 2007, and $225.0 million, or 25.0%, during 2007 when compared to 2006. The increases during 2008 when compared to 2007, and during 2007 when compared to 2006, were primarily driven by our default management services due to strong market growth as well as continued market share gains. These increases were partially offset by declines in our loan facilitation services, which includes our front-end loan origination related services, due to ongoing weakness in the housing market. The most significant declines were in our loan facilitation services including appraisal, tax and settlement services.

 

Cost of Revenues

 

Cost of revenues increased $135.2 million, or 18.0%, during 2008 when compared to 2007, and $163.2 million, or 27.8%, during 2007 when compared to 2006. Cost of revenues as a percentage of processing and services revenues was 67.7%, 66.6% and 65.2% during 2008, 2007 and 2006, respectively. The increases during 2008 when compared to 2007, and during 2007 when compared to 2006, were primarily due to the growth in several of our default management operations, including field services and asset management solutions, which have a higher cost of revenue associated with their operations.

 

Gross Profit

 

Gross profit was $422.4 million, $375.7 million and $313.9 million during 2008, 2007 and 2006, respectively. Gross margin was 32.3%, 33.4% and 34.8% during 2008, 2007 and 2006, respectively. The decreases in gross margin during 2008 when compared to 2007, and during 2007 when compared to 2006, were a result of the factors described above.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased nominally during 2008 when compared to 2007, and during 2007 when compared to 2006. Selling, general and administrative expenses as a percentage of processing and services revenues was 8.7%, 9.8% and 11.9% during 2008, 2007 and 2006, respectively, primarily due to increased revenues within the segment.

Operating Income

 

Operating income increased $42.5 million, or 16.0%, during 2008 when compared to 2007, and $59.3 million, or 28.7%, during 2007 when compared to 2006. Operating margin was 23.6%, 23.6% and 22.9% during 2008, 2007 and 2006, respectively, primarily due to the factors described above.

 

Segment Results of Operations — Corporate and Other

 

The Corporate and Other segment consists of corporate overhead costs that are not included in the other segments as well as certain smaller operations. Net expenses for this segment were $59.0 million, $33.1 million and $58.4 million during 2008, 2007 and 2006, respectively. The increase in net corporate expenses in 2008 as compared to 2007 is primarily due to restructuring and spin-off related costs recognized in 2008, incremental public company costs incurred since our spin-off from FIS and higher incentive and stock related compensation costs. The decrease in net corporate expenses in 2007 as compared to 2006 is primarily due to the deconsolidation of FNRES as well as lower incentive and stock related compensation costs. Stock related compensation costs were $21.5 million, $14.1 million and $24.1 million during 2008, 2007 and 2006, respectively.

 

Liquidity and Capital Resources

 

Cash Requirements

 

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

 

At December 31, 2008, we had cash on hand of $126.0 million and debt, including current portion, of $1,547.5 million. We expect that 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 intend to pay quarterly cash dividends to our stockholders of $0.10 per common share, although the payment of dividends is at the discretion of our Board and subject to any limits in our debt or other agreements and the requirements of state and federal law.

 

Operating Activities

 

Cash provided by operating activities reflects net income adjusted for certain non-cash items and changes in certain assets and liabilities. Cash provided by operating activities was approximately $363.9 million, $283.0 million and $342.0 million during 2008, 2007 and 2006, respectively. The increase in cash provided by operating activities during 2008 when compared to 2007 was primarily related to improvements in our billing and collection processes, changes in billing practices for our REO asset management services and deferred recognition of implementation fees for several new mortgage processing customers whom we are converting to our system over an 18-month period, partially offset by a decrease in net earnings. The decrease in cash provided by operating activities during 2007 when compared to 2006 was primarily related to growth in our default management services which generally has a longer receivables cycle, partially offset by an increase in net earnings.

 

Investing Activities

 

Investing cash flows consist primarily of capital expenditures and acquisitions, net of cash acquired. Cash used in investing activities was approximately $82.2 million, $107.9 million and $81.6 million during 2008, 2007 and 2006, respectively. The decrease in cash used in investing activities during 2008 when compared to 2007 was related to a decrease in the level of capital expenditures and acquisition related activities. The increase in cash used in investing activities during 2007 when compared to 2006 was primarily related to acquisition activities.

 

Our principal capital expenditures are for computer software (purchased and internally developed) and additions to property and equipment. We spent approximately $62.3 million, $70.6 million and $70.2 million on capital expenditures during 2008, 2007 and 2006, respectively.

Our recent acquisitions include McDash Analytics, LLC and Espiel, Inc. and Financial Systems Integrators, Inc. We spent (net of cash acquired) approximately $19.9 million, $37.3 million ($43.3 million including non-cash payments) and $11.3 million on acquisitions during 2008, 2007 and 2006, respectively.

 

Financing Activities

 

Prior to the spin-off, financing cash flows consisted entirely of contributions by and distributions to FIS. These primarily included distributions of excess cash flows to FIS, partially offset by contributions by FIS to fund payroll, operating expenses, corporate allocations, income taxes, capital expenditures and acquisitions. Subsequent to the spin-off, financing cash flows consist primarily of our borrowings, related debt issuance costs and service payments, proceeds from the sale of shares through our employee equity incentive plans and payment of dividends to stockholders.

 

Cash used in financing activities was approximately $195.2 million, $183.4 million and $272.3 million during 2008, 2007 and 2006, respectively. Approximately $114.9 million of the cash used in financing activities during 2008 was related to net distributions to FIS that occurred prior to the spin-off. The increase in cash used in financing activities during 2008 when compared to 2007 was primarily due to the payment of debt issuance costs under our new credit facilities, as well as the payment of shareholder dividends and debt service payments following our spin-off from FIS. These items were partially offset by a decrease in the net distributions to FIS due to the termination of cash sweep arrangements following our spin-off from FIS. The decrease in cash used in financing activities during 2007 when compared to 2006 was related to an increase in contributions from FIS to fund payroll, operating expenses, income taxes and acquisitions from FIS, primarily offset by an increase in distributions of excess cash flows to FIS.

 

Financing

 

On July 2, 2008, we entered into a Credit Agreement (the “Credit Agreement”) among JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender and Letters of Credit Issuer and various other lenders who are parties to the Credit Agreement. The Credit Agreement consists of: (i) a 5-year revolving credit facility in an aggregate principal amount outstanding at any time not to exceed $140.0 million (with a $25.0 million sub-facility for Letters of Credit) under which no borrowings were outstanding at December 31, 2008; (ii) a Term A Loan in an initial aggregate principal amount of $700.0 million under which $665.0 million was outstanding at December 31, 2008; and (iii) a Term B Loan in an initial aggregate principal amount of $510.0 million under which $507.5 million was outstanding at December 31, 2008. Proceeds from disbursements under the 5-year revolving credit facility are to be used for general corporate purposes.

 

The loans under the Credit Agreement bear interest at a floating rate, which is an applicable margin plus, at our option, either (a) the Eurodollar (LIBOR) rate or (b) the higher of (i) the prime rate or (ii) the federal funds rate plus 0.5% (the higher of clauses (i) and (ii), the “ABR rate”). The annual margin on the Term A Loan and the revolving credit facility, for the first six months after issuance, is 2.5% in the case of LIBOR loans and 1.5% in the case of ABR rate loans, and thereafter a percentage per annum to be determined in accordance with a leverage ratio-based pricing grid; and on the Term B Loan is 2.5% in the case of LIBOR loans, and 1.5% in the case of ABR rate loans.

 

In addition to the scheduled principal payments, the Term Loans are (with certain exceptions) subject to mandatory prepayment upon issuances of debt, casualty and condemnation events, and sales of assets, as well as from up to 50% of excess cash flow (as defined in the Credit Agreement) in excess of an agreed threshold commencing with the cash flow for the year ended December 31, 2009. Voluntary prepayments of the loans are generally permitted at any time without fee upon proper notice and subject to a minimum dollar requirement. However, optional prepayments of the Term B Loan in the first year after issuance made with the proceeds of certain loans having an interest spread lower than the Term B Loan are required to be made at 101% of the principal amount repaid. Commitment reductions of the revolving credit facility are also permitted at any time without fee upon proper notice. The revolving credit facility has no scheduled principal payments, but it will be due and payable in full on July 2, 2013.

The obligations under the Credit Agreement are jointly and severally, unconditionally guaranteed by certain of our domestic subsidiaries. Additionally, the Company and such subsidiary guarantors pledged substantially all our respective assets as collateral security for the obligations under the Credit Agreement and our respective guarantees.

 

The Credit Agreement contains customary affirmative, negative and financial covenants including, among other things, limits on the creation of liens, limits on the incurrence of indebtedness, restrictions on investments and dispositions, limits on the payment of 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 events customary for such an agreement, including failure to pay principal and interest in a timely manner and breach of covenants. These events of default include a cross-default provision that permits the lenders to declare the Credit Agreement in default if (i) we fail to make any payment after the applicable grace period under any indebtedness with a principal amount in excess of a specified amount or (ii) we fail to perform any other term under any such indebtedness, as a result of which the holders thereof may cause it to become due and payable prior to its maturity.

 

On July 2, 2008, we issued senior notes (the “Notes”) in an aggregate principal amount of $375.0 million. The Notes were issued pursuant to an Indenture dated July 2, 2008 (the “Indenture”) among the Company, the guarantors party thereto and U.S. Bank Corporate Trust Services, as Trustee.

 

The Notes bear interest at a rate of 8.125% per annum. Interest payments are due semi-annually each January 1 and July 1, with the first interest payment due on January 1, 2009. The maturity date of the Notes is July 1, 2016. From time to time we may be in the market to repurchase portions of the Notes.

 

The Notes are our general unsecured obligations. Accordingly, they rank equally in right of payment with all of our existing and future unsecured senior debt; senior in right of payment to all of our future subordinated debt; effectively subordinated to our existing and future secured debt to the extent of the assets securing such debt, including all borrowings under our credit facilities; and effectively subordinated to all of the liabilities of our non-guarantor subsidiaries, including trade payables and preferred stock.

 

The Notes are guaranteed by each existing and future domestic subsidiary that is a guarantor under our credit facilities. The guarantees are general unsecured obligations of the guarantors. Accordingly, they rank equally in right of payment with all existing and future unsecured senior debt of our guarantors; senior in right of payment with all existing and future subordinated debt of such guarantors; and effectively subordinated to such guarantors’ existing and future secured debt to the extent of the assets securing such debt, including the guarantees by the guarantors of obligations under our credit facilities.

 

We may redeem some or all of the Notes on or after July 1, 2011, at the redemption prices described in the Indenture, plus accrued and unpaid interest. Upon the occurrence of a change of control, unless we have exercised our right to redeem all of the Notes as described above, each holder may require us to repurchase such holder’s Notes, in whole or in part, at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the purchase date.

 

The Indenture contains customary events of default, including a cross default provision that, with respect to any other debt of the Company or any of our restricted subsidiaries having an outstanding principal amount equal to or more than a specified amount in the aggregate for all such debt, occurs upon (i) an event of default that results in such debt being due and payable prior to its scheduled maturity or (ii) failure to make a principal payment. Upon the occurrence of an event of default (other than a bankruptcy default with respect to the Company), the trustee or holders of at least 25% of the Notes then outstanding may accelerate the Notes by giving us appropriate notice. If, however, a bankruptcy default occurs with respect to the Company, then the principal of and accrued interest on the Notes then outstanding will accelerate immediately without any declaration or other act on the part of the trustee or any holder.

Interest Rate Swaps

 

On July 10, 2008, we entered into the following 2-year amortizing interest rate swap transaction:

 

 

On October 6, 2008, we entered into the following interest rate swap transaction:

 

 

 

 

We have designated these interest rate swaps as cash flow hedges in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The estimated fair value of these cash flow hedges resulted in a liability of $23.3 million as of December 31, 2008, which is included in the accompanying consolidated balance sheets in other noncurrent liabilities and as a component of accumulated other comprehensive earnings, net of deferred taxes. A portion of the amount included in accumulated other comprehensive earnings will be reclassified into interest expense as a yield adjustment as interest payments are made on the Term Loans. In accordance with the provisions of SFAS No. 157, Fair Value Measurements (“SFAS 157”), the inputs used to determine the estimated fair value of our interest rate swaps are Level 2-type measurements.

 

It is our policy to execute such instruments with credit-worthy banks and not to enter into derivative financial instruments for speculative purposes.

 

Contractual Obligations

 

Our long-term contractual obligations generally include our debt, data processing and maintenance commitments and operating lease payments on certain of our property and equipment. As of December 31, 2008, our required annual payments relating to these contractual obligations were as follows (in thousands):

 

 

 

 

Indemnifications and Warranties

 

We often indemnify our customers against damages and costs resulting from claims of patent, copyright, or trademark infringement associated with use of our software through software licensing agreements. Historically, we have not made any payments under such indemnifications, but continue to monitor the conditions that are subject to the indemnifications to identify whether a loss has occurred that is both probable and estimable that would require recognition. In addition, we warrant to customers that our software operates substantially in accordance with the software specifications. Historically, no costs have been incurred related to software warranties and none are expected in the future, and as such no accruals for warranty costs have been made.

 

Tax Indemnification Agreement

 

Under the tax disaffiliation agreement entered into by our former parent and us in connection with the distribution, we are required to indemnify FIS against all tax related liabilities caused by the failure of the spin-off to qualify for tax-free treatment for United States Federal income tax purposes (including as a result of Section 355(e) of the Code) to the extent these liabilities arise as a result of any action taken by us or any of our affiliates following the spin-off or otherwise result from any breach of any representation, covenant or obligation of our company or any of our affiliates under the tax disaffiliation agreement.

 

Off-Balance Sheet Arrangements

 

We do not have any material off-balance sheet arrangements other than operating leases and the escrow arrangements described below.

 

Escrow Arrangements

 

In conducting our title agency, closing and tax services, we routinely hold customers’ assets in escrow accounts, pending completion of real estate related transactions. Certain of these amounts are maintained in segregated accounts, and these amounts have not been included in the accompanying consolidated and combined balance sheets. As an incentive for holding deposits at certain banks, we have ongoing programs for realizing economic benefits through favorable arrangements with these banks. As of December 31, 2008, the aggregate value of all amounts held in escrow in our title agency, closing and tax services operations totaled $134.2 million. In addition, at December 31, 2008, we held customers’ assets in escrow and investment accounts in connection with our Section 1031 tax deferred exchange business, IPEX. We had a contingent liability to fund the off-balance sheet portfolio, if required, to ensure that exchange transactions are completed for our customers. During 2008, we recorded an $8.7 million other-than-temporary impairment charge related to the investment portfolio.

 

In February 2009, we completed a sale of all of our interest in IPEX to FNF in exchange for the remaining 61% of the equity interests of FNRES (discussed in Note 16 of the notes to our consolidated and combined financial statements). As a result of the sale, we no longer have any commitments or contingencies related to IPEX’s operations.

 

 

In the normal course of business, we are routinely subject to a variety of risks, including those described in Item 1A: Risk Factors of Part I of this report. For example, we are exposed to the risk that decreased lending and real estate activity, which depend in part on the level of interest rates, may reduce demand for certain of our services and adversely affect our results of operations. The risks related to our business also include certain market risks that may affect our debt and other financial instruments. In particular, we face the market risks associated with our cash equivalents and interest rate movements on our outstanding debt. We regularly assess market risks and have established policies and business practices to protect against the adverse effects of these exposures.

 

Our cash equivalents are predominantly invested with high credit quality financial institutions, and consist of short-term investments such as money market accounts, time deposits and floating rate notes.

 

We are a highly leveraged company, with approximately $1,547.5 million in long-term debt outstanding as of December 31, 2008. We have entered into interest rate swap transactions which converted a portion of the interest rate exposure on our floating rate debt from variable to fixed. Of the remaining variable rate debt not covered by the swap arrangements, we estimate that a one percent increase in the LIBOR rate would increase our annual interest expense by approximately $4.0 million.

 

 

LENDER PROCESSING SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATES

INDEX TO FINANCIAL INFORMATION

 

 

The Board of Directors

Lender Processing Services, Inc.:

 

We have audited the accompanying consolidated and combined balance sheets of Lender Processing Services, Inc. and subsidiaries and affiliates (the “Company”) as of December 31, 2008 and 2007, and the related consolidated and combined statements of earnings, comprehensive earnings, stockholders’ equity, and cash flows and for each of the years in the three-year period ended December 31, 2008. 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 Lender Processing Services, Inc. and subsidiaries and affiliates as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

 

As discussed in Note 1 to the consolidated and combined financial statements, the Company completed its spin-off from Fidelity National Information Services, Inc. on July 2, 2008.

 

 

March 16, 2009

Jacksonville, Florida

Certified Public Accountants

LENDER PROCESSING SERVICES, INC.

AND SUBSIDIARIES AND AFFILIATES

 

Consolidated and Combined Balance Sheets

 

 

See accompanying notes to consolidated and combined financial statements.

LENDER PROCESSING SERVICES, INC.

AND SUBSIDIARIES AND AFFILIATES

 

Consolidated and Combined Statements of Earnings

 

 

 

 

See accompanying notes to consolidated and combined financial statements.

LENDER PROCESSING SERVICES, INC.

AND SUBSIDIARIES AND AFFILIATES

 

Consolidated and Combined Statements of Comprehensive Earnings