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As filed with the Securities and Exchange Commission on December 23, 2014

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Black Knight Financial Services, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7374   36-4798491

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

601 Riverside Avenue

Jacksonville, Florida 32204

(904) 854-5100

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Michael L. Gravelle

Executive Vice President, General Counsel and Corporate Secretary

601 Riverside Avenue

Jacksonville, Florida 32204

(904) 854-5100

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

Alexander D. Lynch, Esq.

Weil, Gotshal & Manges LLP

767 Fifth Avenue

New York, New York 10153

(212) 310-8000 (Phone)

(212) 310-8007 (Fax)

 

Patrick S. Brown, Esq.

Sullivan & Cromwell LLP

1888 Century Park East, Suite 2100

Los Angeles, California 90067

(310) 712-6600 (Phone)

(310) 712-8800 (Fax)

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering

Price (1)(2)

 

Amount of

Registration Fee

Class A common Stock, $0.0001 par value per share

  $100,000,000   $11,620

 

 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) promulgated under the Securities Act.
(2) Includes shares of Class A common stock that may be issuable upon exercise of an option to purchase additional shares granted to the underwriters.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is neither an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION, DATED DECEMBER 23, 2014

            Shares

 

LOGO

BLACK KNIGHT FINANCIAL SERVICES, INC.

Class A Common Stock

 

 

This is an initial public offering of shares of Class A common stock of Black Knight Financial Services, Inc. Black Knight Financial Services, Inc. is selling                 shares of Class A common stock.

 

 

Prior to this offering, there has been no public market for the Class A common stock. It is currently estimated that the initial public offering price per share of our Class A common stock will be between $         and $        . We intend to file an application for our Class A common stock to be listed on the New York Stock Exchange under the symbol “BKFS.”

 

 

Investing in our Class A common stock involves a high degree of risk. See “Risk Factors” beginning on page 25.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount

   $         $     

Proceeds, before expenses, to us

   $         $     

To the extent that the underwriters sell more than                 shares of Class A common stock, the underwriters will have the option, for a period of 30 days from the date of this prospectus, to purchase up to                  additional shares of our Class A common stock at the initial public offering price, less the underwriting discount.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Black Knight Financial Services, Inc.’s Class A common stock to investors on or about                 , 2015.

Prospectus dated                 , 2015


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     25   

Forward-Looking Statements

     47   

Our Corporate Structure

     48   

Use of Proceeds

     56   

Dividend Policy

     57   

Capitalization

     58   

Dilution

     59   

Selected Historical Consolidated Financial Data

     61   

Selected Historical Combined Financial Data of Commerce Velocity and Property Insight

     64   

Unaudited Pro Forma Condensed Combined Financial Data

     65   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     80   

Business

     111   

Management

     125   

Executive and Director Compensation

     133   

Principal Stockholders

     153   

Certain Relationships and Related Party Transactions

     155   

Description of Capital Stock

     160   

Shares Eligible for Future Sale

     165   

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders

     167   

Underwriting

     171   

Legal Matters

     177   

Experts

     177   

Where You Can Find More Information

     177   

Index to Consolidated Financial Statements

     F-1   

 

 

Neither we (or any of our affiliates), nor the underwriters have authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we nor the underwriters take any responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are not and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus and any free writing prospectus is only accurate as of its date. Our business, financial condition, results of operations and prospects may have changed since that date.


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BASIS OF PRESENTATION OF FINANCIAL INFORMATION

Prior to this offering, we conducted our business through Black Knight Financial Services, LLC, a Delaware limited liability company, and its subsidiaries. Prior to the consummation of this offering, Black Knight Financial Services, LLC will enter into a corporate reorganization, whereby certain indirect holders of membership interests of Black Knight Financial Services, LLC will become stockholders of Black Knight Financial Services, Inc., a Delaware corporation and the registrant. See “Our Corporate Structure.” Except as disclosed in this prospectus, the consolidated financial statements, selected historical consolidated financial data, unaudited pro forma condensed combined financial data and other financial information included in this prospectus are those of Black Knight Financial Services, LLC and its consolidated subsidiaries, or its predecessor, and do not give effect to the corporate reorganization that will be effected in connection with the offering contemplated by this prospectus. Shares of Class A common stock of Black Knight Financial Services, Inc. are being offered by this prospectus. Prior to the corporate reorganization and this offering, Black Knight Financial Services, Inc. held no material assets and did not engage in any operations.

TRADEMARKS, SERVICE MARKS AND TRADE NAMES

We own or have the rights to use various trademarks, service marks and trade names referred to in this prospectus. Solely for convenience, we refer to trademarks, service marks and trade names in this prospectus without the ™, SM and ® symbols. Such references are not intended to indicate, in any way, that we will not assert, to the fullest extent permitted by law, our rights to our trademarks, service marks and trade names. Other trademarks, service marks or trade names appearing in this prospectus are the property of their respective owners.

CERTAIN DEFINITIONS

Unless otherwise expressly indicated in this prospectus or the context otherwise requires:

 

    references to “BKFS” and the “issuer” refer to Black Knight Financial Services, Inc., a newly formed Delaware corporation, and not to any of its subsidiaries;

 

    references to the “company,” “we,” “us” and “our” and similar terms (i) when used in the context of the periods following the completion of this offering refer to BKFS and its consolidated subsidiaries, including BKFS Operating LLC (defined below), (ii) when used in the context of the periods prior to the completion of this offering but following the Acquisition (defined below) refer to BKFS Operating LLC and its consolidated subsidiaries and (iii) when used in the context of periods prior to the Acquisition refer to that portion of the business of our predecessor, LPS (defined below), that was contributed to us in connection with the Internal Reorganization (defined below);

 

    references to “BKFS Operating LLC” refer to Black Knight Financial Services, LLC, a Delaware limited liability company, which, together with its subsidiaries, conducts all of our business operations;

 

    references to “FNF” refer to Fidelity National Financial, Inc., a Delaware corporation;

 

    references to “BKHI” refer to Black Knight Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of FNF;

 

    references to “BKIS” refer to Black Knight InfoServ, LLC, a Delaware limited liability company and wholly-owned subsidiary of BKFS Operating LLC;

 

    references to “LPS” refer to Lender Processing Services, Inc., our predecessor, a Delaware corporation that was converted into a Delaware limited liability company and renamed Black Knight InfoServ, LLC on January 3, 2014, in connection with the Internal Reorganization (defined below);

 

    references to “THL” refer to Thomas H. Lee Partners, L.P., a Delaware limited partnership;

 

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    references to “THL Affiliates” collectively refer to THL Equity Fund VI Investors (BKFS-NB), LLC, a Delaware limited liability company, THL Equity Fund VI Investors (BKFS-LM), LLC, a Delaware limited liability company, THL Equity Fund VI Investors (BKFS) III, L.P., a Delaware limited partnership, THL Equity Fund VI Investors (BKFS), L.P., a Delaware limited partnership, THL Equity Fund VI Investors (BKFS) II, L.P., a Delaware limited partnership, Thomas H. Lee Equity Fund VI, L.P., a Delaware limited partnership, Thomas H. Lee Parallel Fund VI, L.P., a Delaware limited partnership, and Thomas H. Lee Parallel (DT) Fund VI, L.P., a Delaware limited partnership, THL Coinvestment Partners, L.P., a Delaware limited partnership, THL Operating Partners, L.P., a Delaware limited partnership, Great-West Investors, L.P., a Delaware limited partnership and Putnam Investments Employees’ Securities Company III, LLC, a Delaware limited liability company;

 

    references to “THL Intermediaries” refer to THL Black Knight I Holding Corp. and THL Investors Black Knight I Holding Corp., each of which is a Delaware corporation and an affiliate of THL, formed for the purpose of holding investments in BKFS Operating LLC;

 

    references to “THL Managers LLC” refer to THL Managers VI, LLC, a Delaware limited liability company and an affiliate of THL;

 

    references to “Commerce Velocity” refer to Fidelity National Commerce Velocity, LLC, a Delaware limited liability company;

 

    references to “Property Insight” refer to Property Insight, LLC, a California limited liability company;

 

    references to the “Acquisition” refer to the acquisition of LPS by FNF on January 2, 2014;

 

    references to the “Internal Reorganization” refer to the series of transactions following the acquisition of LPS by FNF pursuant to which, ultimately, (i) LPS was converted into a limited liability company and became BKIS; (ii) BKFS Operating LLC acquired all of the membership interests of BKIS; (iii) the former Transaction Services businesses of LPS were transferred by BKIS to BKHI and contributed by BKHI to another of its then wholly-owned subsidiaries or to another subsidiary of FNF; (iv) THL acquired membership interests in BKFS Operating LLC; and (v) all of the outstanding membership interests of Commerce Velocity were contributed by BKHI to BKFS Operating LLC;

 

    references to the “Commerce Velocity Contribution” refer to the contribution by BKHI of all of the outstanding membership interests of Commerce Velocity to BKFS Operating LLC on January 3, 2014;

 

    references to the “Property Insight Contribution” refer to the contribution by two wholly-owned subsidiaries of FNF of their respective interests in Property Insight to BKFS Operating LLC on June 2, 2014; and

 

    references to the “Internal Reorganization Transactions” refer to the Acquisition, the Internal Reorganization and the Property Insight Contribution, collectively.

See the section entitled “Our Corporate Structure” for more information.

MARKET AND INDUSTRY DATA

Market and industry data used throughout this prospectus, including information relating to our relative position in the U.S. mortgage servicing market, is based on the good faith estimates of our management, which in turn are based upon our management’s review of internal surveys, surveys commissioned by us, independent industry surveys and publications and other publicly available information prepared by third parties. Publicly available information relied upon was primarily prepared by the Mortgage Bankers Association, or MBA (www.mbaa.org), National Mortgage News, a weekly newspaper which services the mortgage industry (www.mortgagestats.com), the BKFS Mortgage Monitor report, a product of our own Data and Analytics segment, which is frequently quoted by public real estate and financial institutions, or the Board of Governors of

 

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the Federal Reserve System of the United States, or the Fed (www.federalreserve.gov). Information regarding the largest loan originators and loan servicers was obtained from National Mortgage News and is used herein to comment on our client relationships with large market participants. All of the market data and industry information used in this prospectus involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although we believe that these sources are reliable, neither we nor the underwriters have independently verified this information. While we believe the estimated market position, market opportunity and market size information included in this prospectus is generally reliable, such information, which in part is derived from management’s estimates and beliefs, is inherently uncertain and imprecise.

Projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors,” “Forward-Looking Statements” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in our estimates and beliefs and in the estimates prepared by independent parties.

 

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PROSPECTUS SUMMARY

This summary highlights information appearing elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before making a decision to participate in the offering. You should carefully read the entire prospectus, including the information presented under “Risk Factors,” “Selected Historical Consolidated Financial Data,” “Unaudited Pro Forma Condensed Combined Financial Data” and the historical financial statements and related notes presented elsewhere in this prospectus.

Our Company

We are a leading provider of integrated technology, workflow automation and data and analytics to the mortgage industry. Our solutions facilitate and automate many of the mission-critical business processes across the entire mortgage loan life cycle, from origination until asset disposition. We believe we differentiate ourselves by the breadth and depth of comprehensive, integrated solutions and the insight we provide to our clients.

We have market leading positions in mortgage processing and technology solutions combined with comprehensive real estate data and extensive analytic capabilities. Our solutions are utilized by 21 of the 25 largest U.S. mortgage originators and all of the 25 largest U.S. mortgage servicers, as well as other financial institutions, investors and real estate professionals, to support mortgage lending and servicing operations, analyze portfolios and properties, operate more efficiently, meet regulatory compliance requirements and mitigate risk.

The U.S. mortgage market is a large market. According to the Fed, U.S. total mortgage debt outstanding is approximately $9.9 trillion as of September 2014, while total U.S. mortgage originations are expected to exceed $1.1 trillion in 2014, according to the MBA.

The U.S. mortgage market is undergoing significant change and mortgage market participants have been subjected to more stringent oversight in recent years. Regulators have increasingly focused on better disclosure, improved risk mitigation and enhanced oversight. Mortgage lenders large and small have experienced higher costs in order to comply with this higher level of regulation. Despite these new regulatory burdens, the mortgage industry remains a competitive marketplace with numerous large lenders and smaller institutions competing for new loan originations. In order to comply with this increased regulatory burden and compete more effectively, mortgage market participants have continued to outsource mission-critical functions to third-party technology providers that can offer economical solutions due to their economies of scale.

We believe our comprehensive end-to-end, integrated solutions differentiate us from other technology providers serving the mortgage industry and positions us particularly well for evolving opportunities in this market. We have exclusively served the mortgage and real estate industries for over 50 years and utilize this experience to design and develop solutions that fit our clients’ ever-evolving needs. Our proprietary technology platforms and data and analytics capabilities reduce manual processes, improve compliance and quality, mitigate risk and deliver significant cost savings to our clients. Our scale allows us to continually and cost-effectively invest in our business in order to meet evolving industry requirements and maintain our position as an industry-standard platform for mortgage market participants. Our proprietary technology platform services more than 50% of all U.S. first lien mortgages based on the number of U.S. first lien mortgages according to the BKFS Mortgage Monitor Report, reflecting our leadership in the mortgage servicing market, and our market share has grown by more than four percentage points over the last five years.

Capitalizing on our leadership position, we have launched an innovative product and delivery strategy, called LoanSphere, which provides a workflow management application designed to streamline and automate business processes across the mortgage loan life cycle. Some solutions have already been delivered under LoanSphere, and we are focused on providing integration and automation in all of the solutions we offer.

 

 

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Our business is organized into two segments:

 

    Technology—offers software and hosting solutions that support loan servicing, which includes the core mortgage servicing, specialty mortgage servicing including loss mitigation and default workflow management, loan origination and settlement services.

 

    Data and Analytics—offers solutions to enhance and support our technology products in the mortgage, real estate and capital markets industries. These solutions include property ownership data, lien data, servicing data, automated valuation models, collateral risk scores, prepayment and default models, lead generation and other data solutions.

We offer our solutions to a wide range of clients across the mortgage industry. The quality and breadth of our solutions contributes to the long-standing nature of our relationships with our clients, the majority of whom enter into long-term contracts across multiple products that are embedded in their mission critical workflow and decision processes. Given the contractual nature of our revenues and stickiness of our client relationships, our revenues are highly visible and recurring in nature. Due to our integrated suite of solutions and our scale in the mortgage market, we are able to drive significant operating leverage, which we believe enables our clients to operate more efficiently while allowing us to generate strong margins and cash flow.

Our Industry

The U.S. mortgage market is large and the loan life cycle is complex and consists of several stages. The total U.S. mortgage debt outstanding is approximately $9.9 trillion as of September 2014 according to the Fed. The mortgage loan life cycle includes origination, servicing and default. Mortgages are originated through home purchases or refinancings of existing mortgages. Once the mortgage is originated, it is serviced on a periodic basis by mortgage servicers, which may not be the lenders that originated the mortgage. Furthermore, if a mortgage goes into default, it triggers a set of multifaceted processes with an assortment of potential outcomes depending on a mix of variables.

Underlying the three major components of the mortgage loan life cycle is the technology and data and analytics support behind each process, which has become increasingly critical to industry participants. As the industry has grown in complexity, participants have responded by outsourcing to large scale specialty providers, automating manual processes and seeking end-to-end solutions that support the processes required to manage the entire mortgage loan life cycle.

Overview of the Mortgage Origination Market

The U.S. mortgage origination market consists of both purchase and refinance originations. According to the MBA Mortgage Finance Forecast as of November 19, 2014, the U.S. mortgage origination market is expected to be approximately $1.1 trillion in 2014. Factors that impact this market include unemployment, house prices, interest rates and other general economic factors. The mortgage origination process is complex and involves multiple parties, significant data exchange and significant regulatory oversight, which requires scale and substantial industry experience. As a result, the ten largest originators are expected to represent approximately 53% of the annual origination volume in 2014 according to National Mortgage News.

Overview of the Mortgage Servicing Market

The U.S. mortgage servicing market is comprised of first and second lien mortgage loans. The first lien mortgage market represents approximately 50 million mortgage loans according to the BKFS Mortgage Monitor with an outstanding balance of approximately $9.2 trillion. According to the Fed, the second lien mortgage market represents approximately 18 million mortgage loans with an outstanding balance of approximately $0.7 trillion. Many of these second lien mortgages were historically originated and serviced by banks. It is our experience that the factors that impact the mortgage servicing market include population, housing inventory stock, health of the overall economy and availability of credit.

 

 

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Since 1990, the first lien mortgage servicing market has grown from 18 million loans to 50 million loans, representing a compound annual growth rate of more than four percent according to the MBA. Even through previous downturns, the mortgage servicing market has generally remained stable, as the total number of mortgage loans outstanding tends to stay more constant than mortgage originations. For example, despite the most recent housing downturn, the total number of first lien mortgages outstanding today is approximately 10% higher than at the end of 2004. The mortgage servicing market is concentrated, with the ten largest servicers representing approximately 70% of the total market as of June 30, 2014 according to National Mortgage News.

While delinquent mortgages typically represent a small portion of the overall loan servicing market, the mortgage default process is long and complex and involves multiple parties, a significant exchange of data and documentation and extensive regulatory requirements. Providers to the default process must be able to meet strict regulatory guidelines, which are best met through the use of technology.

Recent Trends in the Mortgage Industry

The U.S. mortgage market has seen significant change over the past few years and is expected to continue to evolve going forward. Increased origination volatility and key regulatory actions arising from the recent financial crisis, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and the establishment of the Consumer Financial Protection Bureau, or the CFPB, impose new and evolving standards for market participants. These regulatory changes have spurred lenders and servicers to seek technology solutions that facilitate compliance obligations in the face of a changing regulatory environment while remaining efficient and profitable.

 

    Increased regulation. Most U.S. mortgage market participants have become subject to increasing regulatory oversight and regulatory requirements as federal and state governments have enacted various new laws, rules and regulations. One example of such legislation is the Dodd-Frank Act, which contains broad changes for many sectors of the financial services and lending industries and established the CFPB, a new federal regulatory agency responsible for regulating consumer financial protection within the United States. It is our experience that mortgage lenders have become more focused on the risk of non-compliance with these evolving regulations and are focused on technologies and solutions that help them to comply with the increased regulatory oversight and burdens.

 

    Lenders increasingly focused on core operations. As a result of increased volatility in originations, greater regulatory scrutiny and the higher cost of doing business, we believe lenders have become increasingly focused on their core operations and customers. We believe lenders are increasingly shifting from affiliate business models and in-house technologies to solutions with third-party providers who can provide better technology and services more efficiently. Lenders require these vendors to provide best-in-class technology and management teams and to assist them in maintaining regulatory compliance. We believe that very few of these providers have the scale and regulatory infrastructure to meet both the technological efficiency and high regulatory standards that lenders require.

 

    Growing role of technology in the U.S. mortgage industry. Banks and other lenders and servicers have become increasingly focused on technology automation and workflow management to operate more efficiently and meet their regulatory guidelines. We believe that vendors must be able to support the complexity in the market, display extensive industry knowledge and possess the financial resources to make the necessary investments in technology to support lenders.

 

    Increased demand for enhanced transparency and analytic insight. As U.S. mortgage market participants work to minimize the risk in lending, servicing and capital markets, they increasingly rely on data and analytics to integrate with technologies that enhance the decision making process. These industry participants rely on large historical databases coupled with enhanced analytics to achieve these goals.

 

 

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Our Solutions

Our solutions provide U.S. mortgage industry participants with a comprehensive integrated technology and work flow management solution set that is supported by what we believe is industry-leading data and analytics to enhance capabilities and drive efficiencies while assisting our clients in maintaining regulatory compliance.

Technology Solutions

Our Technology segment offers leading software and hosting solutions that facilitate and automate many of the business processes across the life cycle of a mortgage. These solutions primarily consist of mortgage origination, processing and workflow management software applications coupled with related support and services.

Our clients in this segment are primarily mortgage lenders and servicers. We believe they use our technology and services to reduce their operating costs, improve their ability to provide superior customer service and enhance the quality and consistency of various aspects of their mortgage operations. We continually work with our clients to enhance and integrate our software and services in order to assist them in gaining the greatest value from the solutions we provide.

The primary applications and services within our Technology segment are as follows:

 

    Servicing Technology. Our mortgage servicing platform, MSP, is a software-as-a-service, or SaaS, application that automates loan servicing, including loan setup and ongoing processing, customer service, accounting and reporting to the secondary mortgage market, and investor reporting. MSP serves as a core application and database of record for non-delinquent first and second lien mortgages.

When a bank hires us to process its mortgage portfolio, we provide a hosted software solution and system support personnel whose role is to ensure our system remains up and running 24 hours a day, seven days a week; to monitor our programs and interfaces effectively; to make system and application changes as necessary; and to assist our clients in becoming or remaining compliant with applicable regulations.

LoanSphere Foreclosure and LoanSphere Bankruptcy are solutions that optimize default service processes. These applications leverage a workflow engine that utilizes sophisticated rules based functionality, can be configured to conform to existing servicer business practices and initiate tasks based on servicer milestones for foreclosure and bankruptcy. We also offer LoanSphere Invoicing, a sophisticated web-based solution designed to enhance the efficiency of processing default-related invoices by incorporating leading-edge technology to standardize and streamline every aspect of the billing and invoice process.

 

    Origination Technology. We offer two solutions that automate and facilitate the origination of mortgage loans in the United States: Empower, which supports retail and wholesale loan originations, and LendingSpace, which supports correspondent loan originations, which are originations that are funded by one lender, who sells the loan to another lender to service the loan or sell it on the secondary market. Our loan origination technologies are continuously enhanced to meet changing regulatory requirements, and are used to improve loan quality and store documents and images.

We also offer the RealEC Exchange and the Insight suite of solutions. The RealEC Exchange is a platform that provides a fully interconnected network of originators, agents, settlement services providers and investors in the United States. This secure and integrated one-to-many platform allows lenders and their service providers to connect and do business electronically. Our Insight suite of solutions is integrated with the RealEC Exchange and is designed to help lenders meet loan quality and disclosure requirements established by the government-sponsored enterprises, or GSEs, CFPB, and Federal Housing Finance Agency, or FHFA.

 

 

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We build all of our technology platforms to be scalable, secure, flexible, standards-based, and web connected for easy use by our clients. Further, we have a history of being able to bring solutions to market quickly due to investments that we have made in integrating our technology and development processes.

Data and Analytics Solutions

Our Data and Analytics segment supports and enhances our technology solutions, and is designed to help lenders and servicers make more informed decisions, improve performance, identify and predict risk and generate more qualified leads. We believe that we have aggregated the largest residential real estate data set in the United States that is derived from both proprietary and public data sources. Our data set is comprised of data from servicers, our core first lien portfolio, home equity data, public records and the Multiple Listing Service, or MLS listings. Utilizing this data, subject to any applicable use restrictions, and our deep history and understanding of the mortgage market, we have created detailed real estate data solutions that assist in portfolio management, valuations, property records, lead generation and improved risk analysis for all aspects of origination, servicing, default and capital markets/investing.

Our primary data and analytics services are as follows:

 

    Property, Mortgage Performance Data and MLS. We make our real estate database available to our clients in a standard, normalized format. We also provide tax status data on properties and offer a number of value-added analytic services designed to enable our clients to utilize our data to assess and mitigate risk, determine property values, track market performance and generate leads. We also provide a MLS system to large MLS groups in the U.S.

 

    Mortgage and Real Estate Analytics. We offer a broad range of property valuation services that allow our clients to analyze the value of underlying properties. These include, among others, automated valuation models, collateral risk scores, appraisal review services and valuation reconciliation services. To deliver these services, we utilize proprietary algorithms, detailed real estate statistical analysis and modified physical property inspections. These offerings are designed to reduce risk in origination, servicing and default transactions as well as aid investors in analysis of property and real estate assets. The offering can be tailored depending upon client needs and any regulatory requirements.

Integrated Platform

We have launched an innovative product and delivery strategy, called LoanSphere, which we believe is the mortgage industry’s only end-to-end integrated technology platform. LoanSphere will deliver business process automation, workflow, rules, integration, data and a common user experience across technologies that support the entire lending life cycle from prospecting until asset disposition.

We believe the innovative LoanSphere platform will seamlessly integrate our industry-leading applications for originations, servicing, default and data and analytics. In the future LoanSphere will feature a centralized database for client’s loan data and documents, as well as client-selected industry data and analytics to enable powerful decision-making, improved loan and portfolio analysis and reduced risk.

 

 

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Delivered in phases, with many capabilities currently available, we believe LoanSphere enables clients to realize greater efficiencies, better manage risk and achieve greater financial results.

 

 

LOGO

Our Competitive Strengths

We believe that our competitive strengths include the following:

 

    Market leadership with comprehensive and integrated solutions. We are a leading provider of comprehensive and integrated solutions to the mortgage industry. We have significant relationships with 21 of the top 25 largest mortgage originators and all of the top 25 largest U.S. mortgage servicers, service over 50% of all U.S. first lien mortgages and operate one of the industry’s largest exchanges connecting originators, agents, settlement services providers and investors. We believe our leadership position is, in part, the result of our unique expertise and insight developed from over 50 years serving the needs of customers in the mortgage industry. We have used this insight to develop an integrated and comprehensive suite of proprietary technology, data, and analytics solutions to automate many of the mission-critical business processes across the entire mortgage loan life cycle. These integrated solutions are designed to reduce manual processes, assist in improving organizational compliance and mitigating risk, and ultimately deliver significant cost savings to our clients.

 

   

Broad and deep client relationships with significant recurring revenue. We have deep and long-standing relationships with our largest clients. Our average relationship with our top 10 servicer clients is over 25 years, and these clients utilize an average of 6 products across our comprehensive solutions. We typically enter into long-term contracts with our clients and our products are typically embedded within our clients’ mission-critical workflow and decision processes across various parts of their

 

 

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organizations. As a result, we have developed recurring and sticky relationships with our clients. For example, the clients representing 95% of our 2013 revenue continued to be our clients in 2014. Given these deep relationships, we believe that we are well-positioned to continue to develop and cross-sell new products and services that will meet the evolving needs of the mortgage industry.

 

    Extensive data assets and analytics capabilities. We develop and maintain large, accurate and comprehensive data sets on the mortgage and housing industry that we believe are competitively differentiated. Our unique data sets provide a combination of public and proprietary data in real-time and each of our data records feature a large number of attributes. Our data scientists utilize our data sets, subject to any applicable use restrictions, and comprehensive analytical capabilities to create highly customized reports, including models of customer behavior for originators and servicers, portfolio analytics for capital markets and government agencies and proprietary market insights for real estate agencies. Our data and analytics capabilities are also embedded into our technology platform and workflow products, providing our clients with integrated and comprehensive solutions.

 

    Scalable and cost effective operating model. We believe we have a highly attractive and scalable operating model derived from our market leadership, hosted technology platforms and the large number of clients we serve across the mortgage industry. Our scalable operating model provides us with significant benefits. Our scale and operating leverage allows us to add incremental clients to our existing platforms with limited incremental cost. As a result, our operating model drives attractive margins and generates significant cash flow. Also, by leveraging our scale and leading market position, we are able to make cost effective investments in our technology platform to meet evolving regulatory and compliance requirements, further increasing our value proposition to clients.

 

    World class management team with depth of experience and track record of success. Our management team has an average of over 20 years of experience in the banking technology and mortgage processing industries and a proven track record of strong execution capabilities. Following the Acquisition, we have significantly improved our operations and enhanced our go-to-market strategy, further integrated our technology platforms, expanded our data and analytics capabilities and introduced several new innovative products. We executed all of these projects while delivering attractive revenue growth and strong profitability.

Our Growth Strategy

Our comprehensive and integrated technology platforms, robust data and analytic capabilities, differentiated business model and other competitive strengths enable us to pursue multiple growth opportunities. We intend to continue to expand our business and grow through the following key strategies:

 

    Further penetration of our solutions with existing clients. We believe our established client base presents a substantial opportunity for growth. We seek to capitalize on the trend of standardization and increased adoption of leading third-party solutions and increase the number of solutions provided to our existing client base. We intend to broaden and deepen our client relationships by cross-selling our suite of end-to-end technology solutions, as well as our robust data and analytics. We have established incentives within our sales force, as well as a core team of account managers, to encourage cross-selling of our full range of solutions to our existing clients. By helping our clients understand the full extent of our comprehensive solutions and the value of leveraging the multiple solutions that we offer, we believe we can expand our existing relationships by freeing our clients to focus on their core businesses and their customers.

 

   

Win new clients in existing markets. We intend to attract new clients in the mortgage industry by leveraging the value proposition provided by our technology platform and comprehensive solutions

 

 

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offering. In particular, we believe there is a significant opportunity to penetrate the underserved mid-tier mortgage originators and servicers market. We believe that these institutions can benefit from our proven solutions suite in order to address increasingly complex regulatory requirements and compete more effectively in the evolving mortgage market. We intend to continue to pursue this channel and benefit from the low incremental cost of adding new customers to our scaled technology infrastructure.

 

    Continued innovation and expansion of new solutions. Our long-term vision is to be the industry leading provider for participants of the mortgage industry for their platform, data, and analytic needs. We intend to enhance what we believe is a leadership position in the industry by continuing to innovate our solutions and refine the insight we provide to our clients. We have a strong track record of introducing and developing new solutions that span the mortgage loan life cycle, are tailored to specific industry trends and that enhance our clients’ core operating functions. By working in partnership with key clients, we have been able to develop and market new and advanced solutions to our client base that meet the evolving demands of the mortgage industry. In addition, we will continue to develop and leverage insights from our large public and proprietary data assets to further improve our customer value proposition.

 

    Powerful focus and dedication to staying up-to-date with regulatory requirements. We have dedicated significant technological and management resources to build and maintain a regulatory infrastructure and human capital base to assist our clients with increased regulatory oversight and requirements. We are able to leverage our consistent investment in this area through our SaaS technology solutions and our market-leading scale. We intend to continue our strategy of building and investing in solutions that help our clients with the regulatory environment.

 

    Selectively pursue strategic acquisitions. The core focus of our strategy is to grow organically. However, we may selectively evaluate strategic acquisition opportunities that may allow us to expand our footprint, broaden our client base and deepen our product and service offerings. We believe that there are meaningful synergies that result from acquiring small companies that provide best-of-breed single point solutions. The potential revenue synergies would result from integrating and cross-selling these point solutions into our broader client base and cost synergies would result from integrating acquisitions into our efficient operating environment.

History and Corporate Structure

History

Acquisition of LPS by FNF and Subsequent Reorganization

On January 2, 2014, FNF acquired LPS, and as a result, LPS became an indirect, wholly-owned subsidiary of FNF. Upon the closing of the transaction, the shares of LPS common stock, which previously traded under the ticker symbol “LPS” on the New York Stock Exchange, or the NYSE, ceased trading on, and were delisted from, the NYSE.

On January 3, 2014, pursuant to the Internal Reorganization, substantially all of the former Technology, Data and Analytics segment of LPS was transferred to us and the former Transaction Services businesses of LPS were transferred by BKIS to BKHI and contributed by BKHI to another of its then wholly-owned subsidiaries or to another subsidiary of FNF.

Also, on January 3, 2014, BKHI contributed Commerce Velocity, a former indirect subsidiary of FNF that had been contributed to BKHI in December 2013, to BKFS Operating LLC, which contributed it to BKIS. Thereafter, we issued 35.0% of the membership interests of BKFS Operating LLC to certain THL Affiliates and THL Intermediaries.

 

 

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Following the Internal Reorganization, we are majority owned by FNF through its wholly-owned subsidiary, BKHI, and minority owned by THL through certain THL Affiliates and THL Intermediaries. FNF and THL Managers LLC also provide us with management and consulting services. The agreements under which FNF and THL Managers LLC provide these services will be terminated in connection with the closing of this offering.

Contribution of Property Insight, LLC

On June 2, 2014, as part of an additional internal reorganization, two wholly-owned subsidiaries of FNF contributed to us their respective interests in Property Insight, a company that provides property information used by title insurance underwriters, title agents and closing attorneys to underwrite title insurance policies for real property sales and transfers. As a result, we are now the sole member of Property Insight. In connection with the Property Insight Contribution, BKFS Operating LLC issued an additional 6.4 million of its Units (as defined below) to BKHI. As a result of this issuance, THL Affiliates’ and certain THL Intermediaries’ combined percentage ownership in BKFS Operating LLC was reduced from 35.0% to 32.9%.

Corporate Structure and Reorganization

BKFS, the issuer in this offering, was incorporated in the State of Delaware on October 27, 2014 for the purpose of this offering and to date has engaged only in activities in contemplation of this offering. Prior to the completion of this offering, all of our business operations are being conducted through BKFS Operating LLC and its subsidiaries.

 

 

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As further described in “Our Corporate Structure,” we will effect a reorganization in connection with the offering contemplated by this prospectus, which we refer to herein as the Offering Reorganization. The diagram below depicts our organizational structure immediately prior to the Offering Reorganization:

 

 

LOGO

 

(1) FNF owns 100% of the equity interests of BKHI.
(2) BKHI owns 67.1% of the Class A membership interests in BKFS Operating LLC, which we refer to herein as Units, and 100% of the shares of common stock of BKFS.
(3) THL, through THL Intermediaries and certain THL Affiliates, owns 32.9% of the Units.
(4) Members of the BKFS management team and other key employees of BKFS or FNF or its subsidiaries hold equity incentive awards in the form of profits interests in BKFS Operating LLC, which we refer to herein as Grant Units.

 

 

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The Offering Reorganization

Prior to the closing of this offering, we will complete transactions that will result in the following:

 

    the amendment and restatement of the issuer’s certificate of incorporation to authorize the issuance of two classes of common stock, Class A common stock and Class B common stock, which we collectively refer to herein as our common stock, and which will generally vote together as a single class on all matters submitted for a vote to stockholders;

 

    the issuance of shares of Class B common stock by the issuer to BKHI and certain THL Affiliates, the holders of Units prior to the offering (Class B common stock will not entitle the holders thereof to any of the economic rights, including rights to dividends and distributions upon liquidation that will be provided to holders of Class A common stock, and the total voting power of the Class B common stock will be equal to the percentage of Units not held by the issuer); and

 

    the issuance of shares of Class A common stock to certain THL Affiliates, in connection with the merger of the THL Intermediaries with and into the issuer, pursuant to which the issuer will acquire Units.

In connection with this offering, the following transactions will occur:

 

    the issuance of shares of Class A common stock by the issuer to the investors in this offering (the total voting power of Class A common stock outstanding will be proportional to the percentage of Units that will be held by the issuer);

 

    the contribution by the issuer of the net cash proceeds received in this offering to BKFS Operating LLC in exchange for     % of the Units and a managing member’s membership interest in BKFS Operating LLC; and

 

    the restatement of the current limited liability company agreement of BKFS Operating LLC (which we refer to herein as the Amended and Restated Operating Agreement) to provide for the governance and control of BKFS Operating LLC by the issuer as its managing member and to establish the terms upon which other holders of Units may exchange those Units, and a corresponding number of shares of Class B common stock, for, at the issuer’s option, either shares of Class A common stock on a one-for-one basis, or a cash payment.

Following the consummation of the Offering Reorganization, this offering and the application of the net proceeds therefrom, the issuer will be a holding company and through its managing member interest, will control the business and affairs of BKFS Operating LLC and its subsidiaries. The sole asset of the issuer will be its interest in BKFS Operating LLC.

In this prospectus, we refer to the transactions described above as the Offering Reorganization. For a detailed description of the Offering Reorganization, including a summary of the material terms and conditions of the documents and agreements adopted or that will be entered into in connection with the Offering Reorganization, see “Our Corporate Structure” and “Certain Relationships and Related Party Transactions.”

 

 

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The diagram below summarizes our anticipated organizational structure immediately after completion of the Offering Reorganization, including this offering and the application of the net proceeds from this offering (assuming an initial public offering price of $         per share, which is the mid-point of the estimated public offering range set forth on the cover page of this prospectus, and no exercise of the underwriters’ option to purchase additional shares).

 

 

LOGO

 

(1) FNF will own 100% of the equity interests of BKHI.
(2) BKHI will own no outstanding shares of Class A common stock and        % of the outstanding shares of Class B common stock of BKFS, representing no economic interest and        % voting interest in BKFS and        % of the Units of BKFS Operating LLC.
(3) The public shareholders (excluding FNF and THL Affiliates) will own        % of the outstanding shares of Class A common stock and no shares of Class B common stock of BKFS, representing a        % economic and voting interest in BKFS.
(4) THL, through certain THL Affiliates, will beneficially own        % of the outstanding shares of Class A common stock and                 shares of Class B common stock of BKFS, representing a        % economic and voting interest in BKFS and        % of the Units of BKFS Operating LLC.
(5) BKFS will own        % of the Units and a managing member interest of BKFS Operating LLC.

 

 

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(6) Members of the BKFS management team and other key employees of BKFS or FNF or its other subsidiaries will hold Grant Units.

See “Our Corporate Structure,” “Certain Relationships and Related Party Transactions,” and “Description of Capital Stock” for more information on our corporate structure and the rights associated with our common stock, Units and Grant Units of BKFS Operating LLC.

Our Principal Equityholders

BKHI, which will hold         % of our outstanding Class B common stock and         % of the Units of BKFS Operating LLC following the consummation of this offering, is a wholly-owned subsidiary of FNF. FNF is a leading provider of title insurance, technology and transaction services to the real estate and mortgage industries. FNF is a leading title insurance company through its title insurance underwriters (Fidelity National Title, Chicago Title, Commonwealth Land Title, Alamo Title and National Title of New York) that collectively issue more title insurance policies than any other title company in the United States. FNF also provides mortgage transaction services through its indirectly, wholly-owned subsidiary ServiceLink Holdings LLC, or ServiceLink. In addition, in FNF’s FNF Ventures group, FNF owns majority and minority equity investment stakes in a number of entities, including American Blue Ribbon Holdings, LLC, J. Alexander’s, LLC, Ceridian HCM, Inc. and Digital Insurance, Inc.

THL, through certain THL Affiliates, will hold         % of our outstanding Class A common stock,         % of our outstanding Class B common stock and         % of the Units of BKFS Operating LLC following the consummation of this offering. THL invests in growth-oriented companies, and focuses on global businesses headquartered primarily in North America. Since the firm’s founding in 1974, THL has acquired more than 100 portfolio companies and has completed over 200 add-on acquisitions, representing a combined value of more than $150 billion.

Agreements with Our Principal Equityholders

In addition to the documents and agreements described above that comprise the Offering Reorganization, in connection with this offering, we intend to enter into certain additional agreements with our existing equity holders regarding aspects of our relationship with them following this offering, including a registration rights agreement. We will also be a party to a reimbursement agreement with FNF, the parent holding company of our largest stockholder, BKHI, in which we will agree to reimburse FNF, at cost, for certain limited administrative services provided from time to time to us by FNF affiliated employees.

Upon the closing of this offering, we expect to enter into a tax receivable agreement with BKHI and certain THL Affiliates. See “Our Corporate Structure” and “Certain Relationships and Related Party Transactions” for a complete description of the foregoing agreements.

Class A Common Stock and Class B Common Stock

After completion of this offering, our outstanding capital stock will consist of shares of Class A common stock and shares of Class B common stock. Investors in this offering will receive shares of Class A common stock of BKFS, the managing member of BKFS Operating LLC. See “Description of Capital Stock.”

Implications of Being a Controlled Company

Upon completion of this offering, after giving effect to the Offering Reorganization, FNF, through BKHI and its affiliates, will beneficially own approximately         % of the voting power of our outstanding common stock,

 

 

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or         % if the underwriters exercise in full their option to purchase additional shares. As a result, we will be a “controlled company” within the meaning of the NYSE’s corporate governance rules as a result of the ownership position and voting rights of these persons. For a discussion of the applicable limitations and risks that may result from our status as a controlled company, see “Risk Factors—Risks Related to Our Structure—We are a ‘controlled company’ within the meaning of NYSE rules, and as a result, we qualify for, and may rely on, exemptions from certain corporate governance requirements. You may not have the same protections afforded to stockholders of companies that are subject to such requirements,” and “Management—Independent Directors.”

Risk Factors

An investment in our Class A common stock involves a high degree of risk. Our ability to execute on our strategy also is subject to certain risks. These risks are discussed more fully in the section titled “Risk Factors” immediately following this prospectus summary. Some of the more significant challenges and risks include the following:

 

    if we are unable to protect our information systems against data corruption, cyber-based attacks or network security breaches, or if we are unable to provide adequate security in the electronic transmission of sensitive data, it could have a material adverse effect on our business, financial condition and results of operations;

 

    we rely on our top clients for a significant portion of our revenue and profit, which makes us susceptible to the same macro-economic and regulatory factors that impact our clients. If these clients are negatively impacted by current economic or regulatory conditions or otherwise experience financial hardship or stress, or if the terms of our relationships with these clients change, it could have a material adverse effect on our business, financial condition and results of operations;

 

    we have a long sales cycle for many of our technology solutions and services and if we fail to close sales after expending significant time and resources on the sales process, it could have a material adverse effect on our business, financial condition and results of operations;

 

    if we fail to meet the service level commitments we typically provide under our client contracts, we could be obligated to provide credits or refunds for prepaid amounts related to unused subscription services or face contract terminations, which could adversely affect our revenues;

 

    any failure to offer high-quality technical support services may adversely affect our relationships with our clients and could have a material adverse effect on our business, financial condition and results of operations;

 

    our clients and we are subject to various governmental regulations, and a failure to comply with government regulations or changes in these regulations could result in penalties, restrict or limit our or our clients’ operations or make it more burdensome to conduct such operations, any of which could have a material adverse effect on our business, financial condition and results of operations;

 

    we may experience delays or difficulty in developing or implementing new or enhanced mortgage processing or technology solutions, which may negatively affect our relationships with existing and potential clients, reduce or delay the generation of revenues or increase development and implementation costs, which could have a material adverse effect on our business, financial condition and results of operations;

 

    we are a holding company and our only material asset after completion of the Offering Reorganization and this offering will be our interest in BKFS Operating LLC and, accordingly, we are dependent upon distributions from BKFS Operating LLC to pay taxes and other expenses;

 

    any payments made under the tax receivable agreement to our equity holders that are parties to such agreement could be significant and will reduce the amount of overall cash flow that would otherwise be available to us;

 

 

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    we may not be able to realize all or a portion of the tax benefits that are expected to result from future exchanges of Units by holders;

 

    because we are a “controlled company” within the meaning of NYSE rules, and as a result, we qualify for, and may rely on, exemptions from certain corporate governance requirements, you may not have the same protections afforded to stockholders of companies that are subject to such requirements; and

 

    future sales of our Class A common stock in the public market could cause the market price of our Class A common stock to decrease significantly.

The above list is not exhaustive. Before you invest in our Class A common stock, you should carefully consider all of the information in this prospectus, including matters set forth under the heading “Risk Factors” immediately following this prospectus summary.

Corporate Information

We were incorporated in Delaware on October 27, 2014. Our principal executive offices are located at 601 Riverside Avenue, Jacksonville, Florida 32204, and our telephone number is (904) 854-5100. Our corporate website address is www.bkfs.com. Our website and the information contained on, or that can be accessed through, the website is not deemed to be incorporated by reference in, and is not considered part of, this prospectus. You should not rely on any such information in making your decision whether to purchase our Class A common stock.

 

 

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THE OFFERING

 

Issuer

Black Knight Financial Services, Inc.

 

Class A common stock offered by us

                shares of Class A common stock.

 

Total offering

                shares of Class A common stock.

 

Class A common stock to be outstanding after this offering

                shares of Class A common stock (                 shares if the underwriters’ option to purchase additional shares is exercised in full).

 

Class B common stock to be outstanding after this offering

                shares. Each share of our Class B common stock will generally have one vote on all matters submitted to a vote of stockholders but will have no economic rights (including no rights to dividends or distributions upon liquidation). Shares of our Class B common stock will be issued to the holders of Units, other than the issuer, in an amount equal to the number of Units held by such holders. The aggregate voting power of the outstanding Class B common stock will be equal to the aggregate percentage of Units held by the holders of Units other than the issuer. See “Description of Capital Stock.”

 

Option to purchase additional shares of Class A common stock

The underwriters have an option to purchase a maximum of additional shares of Class A common stock from us. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Voting rights

Each share of our Class A common stock will have one vote per share on all matters submitted to a vote of stockholders. Class A common stock and Class B common stock generally vote together as a single class on all matters submitted to a vote of stockholders. See “Description of Capital Stock.”

 

Use of proceeds

We estimate that the net proceeds from the sale of our Class A common stock in this offering, after deducting the underwriting discount and estimated offering expenses payable by us, will be approximately $        million ($        million if the underwriters exercise in full their option to purchase additional shares) based on an assumed initial public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus).

 

  We intend to contribute the entire net proceeds of this offering, including any proceeds received from the underwriters’ option to purchase additional shares, if exercised, to BKFS Operating LLC in exchange for        Units, at a purchase price per Unit equal to the initial public offering price per share of Class A common stock in this offering.

 

 

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  We intend that BKFS Operating LLC will use a portion of the net proceeds contributed to it to repay $        principal amount of our outstanding debt. The remaining net proceeds received by BKFS Operating LLC will be used to continue to support its growth and for working capital and general corporate purposes. See “Use of Proceeds.”

 

Dividend policy

We do not intend to pay dividends on our Class A common stock for the foreseeable future. We will not pay dividends on our Class B common stock (which holds no economic interest in the issuer). See “Dividend Policy.”

 

Listing

We intend to apply to have our Class A common stock listed on the NYSE under the symbol “BKFS.”

 

Risk Factors

Investing in our Class A common stock involves a high degree of risk. See the “Risk Factors” section of this prospectus for a discussion of factors you should carefully consider before deciding to purchase shares of our Class A common stock.

Except as otherwise indicated, all information in this prospectus assumes:

 

    no exercise of the underwriters’ option to purchase additional shares;

 

                    shares of Class A common stock are reserved for issuance upon the exchange of Units held by persons that own Units (along with the corresponding number of shares of our Class B common stock); and

 

    an initial public offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus).

 

 

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SUMMARY HISTORICAL FINANCIAL DATA

Summary Historical Consolidated Financial Data of the Company

The following tables present our summary historical and pro forma consolidated financial data for the periods ending on and as of the dates indicated. The following tables should be read in conjunction with “Unaudited Pro Forma Condensed Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the related footnotes thereto, included elsewhere in this prospectus. The periods presented below prior to January 2, 2014, the date of the Acquisition, are referred to as Predecessor periods and the periods presented after and including January 2, 2014 are referred to as Successor periods. The financial data for the Predecessor periods reflect the financial position and results of operations of our predecessor, LPS, which include the Transaction Services segment of LPS that was distributed by us to ServiceLink and another FNF subsidiary in connection with the Internal Reorganization on January 3, 2014. The financial data for the Successor periods does not include the financial position and results of operations of the Transaction Services segment of LPS. As a result, the financial data included in the Successor periods are not comparable to the financial data included in the Predecessor periods. See “Risk Factors,” “Selected Historical Consolidated Financial Data,” “Unaudited Pro Forma Condensed Combined Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The consolidated statements of operations data for the years ended December 31, 2013, December 31, 2012 and December 31, 2011 and the consolidated balance sheet data as of December 31, 2013 and December 31, 2012 are derived from the audited financial statements from our predecessor, LPS, included in this prospectus. The consolidated balance sheet data as of December 31, 2011 is derived from the audited financial statements from our predecessor, LPS, not included in this prospectus.

 

     Successor           Predecessor  
     Period
January 2,
2014 through
September 30,
2014
          One day
ended

January 1,
2014
    Year Ended December 31,  
            2013     2012     2011  
     (unaudited)           (unaudited)                    
     (In millions, except per share amounts)  

Statements of Operations Data:

               

Revenues

   $ 631.8           $ —        $ 1,716.2      $ 1,991.3      $ 1,980.0   

Net (loss) earnings from continuing operations

   $ (117.1        $ (50.1   $ 104.2      $ 79.6      $ 135.3   

Net (loss) earnings

   $ (117.8        $ (39.0   $ 102.7      $ 70.4      $ 96.5   

Net earnings per share—basic from continuing operations

            $ 1.22      $ 0.94      $ 1.58   

Net earnings per share—basic

            $ 1.20      $ 0.83      $ 1.13   

Weighted average shares—basic

              85.4        84.6        85.6   

Net earnings per share—diluted from continuing operations

            $ 1.21      $ 0.94      $ 1.58   

Net earnings per share—diluted

            $ 1.19      $ 0.83      $ 1.13   

Weighted average shares—diluted

              85.9        84.9        85.7   
 

Balance Sheet Data:

               

Cash and cash equivalents

   $ 52.4             $ 329.6      $ 236.2      $ 77.4   

Total assets

   $ 3,608.3             $ 2,486.7      $ 2,445.8      $ 2,245.4   

Total debt (current and long-term)

   $ 2,155.0             $ 1,068.1      $ 1,068.1      $ 1,149.2   

Cash dividends per share

            $ 0.40      $ 0.40      $ 0.40   
 

Technology and Data and Analytics Financial Data (unaudited)(1):

               

Revenues

   $ 631.8           $ —        $ 744.8      $ 718.9      $ 670.4   

Operating (loss) income

   $ (14.7        $ (50.1   $ 184.2      $ 176.1      $ 152.7   

Adjusted Revenue(2)

   $ 642.2           $ —        $ 744.8      $ 718.9      $ 670.4   

Adjusted EBITDA

   $ 255.2           $ —        $ 294.0      $ 286.7      $ 286.6   

Adjusted EBITDA Margin

     39.7          —          39.5     39.9     42.8

 

 

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(1) The financial data provided under “Technology and Data and Analytics Financial Data (unaudited)” for the years ended December 31, 2013, 2012 and 2011 is derived from the results of operations of the former Technology, Data and Analytics segment of LPS and does not include the former Transaction Services segment of LPS.

 

(2) See “—Non-GAAP Financial Measures (Unaudited)” for a more detailed description of adjustments to our financial measures that are not reported in accordance with U.S. generally accepted accounting principles, or GAAP.

Non-GAAP Financial Measures (Unaudited)

Adjusted Revenue and Adjusted EBITDA are non-GAAP financial measures that we use to measure the performance of our businesses. The tables below reconcile these non-GAAP measures to the nearest GAAP financial measure for the former Technology and Data and Analytics segment (including corporate) of LPS for periods prior to the Acquisition and for BKFS Operating LLC for the period following the Acquisition. The results of operations for the former Transaction Services segment of LPS are not included in the non-GAAP financial measures below.

The following tables reconcile Revenue to Adjusted Revenue:

 

     Successor      Predecessor  
     Period January 2,
2014 through
September 30, 2014
     One Day Ended
January 1, 2014
     Nine Months Ended
September 30, 2013
 
     (In millions)  

Revenue (as reported)

   $ 631.8       $ —         $ 560.5   

Deferred revenue adjustment(1)

     10.4         —           —     
  

 

 

    

 

 

    

 

 

 

Adjusted Revenue

   $ 642.2       $ —         $ 560.5   
  

 

 

    

 

 

    

 

 

 

 

(1) To adjust GAAP Revenue for the effect of purchase accounting related to the Acquisition.
(2) For the years ending December 31, 2013, 2012 and 2011, there is no adjustment to GAAP Revenue.

 

 

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The following tables reconcile GAAP Operating Income to Adjusted EBITDA:

 

     Successor     Predecessor  
     Period January 2,
2014 through

September 30, 2014
    One Day Ended
January 1,
2014
    Nine Months Ended
September 30,

2013
 
           (In millions)        

Operating (loss) income (as reported)

   $ (14.7   $ (50.1   $ 145.4   

Operating margin

     —          —          —     

Depreciation and amortization

     143.1        —          62.2   

Deferred revenue adjustment

     10.4        —          —     

Equity-based compensation

     5.3        —          11.7   

Legal and regulatory charges

     —          —          0.8   

Exits costs, impairments and other charges

     —          —          4.1   

Transition and integration costs (including acquisition costs)

     111.1        50.1        —     
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 255.2      $ —        $ 224.2   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA margin(1)

     39.7     —       40.0

 

     Year Ended December 31,  
     2013(2)     2012(2)     2011(2)  
    

(In millions)

 

Operating income (as reported)

   $ 184.2      $ 176.1      $ 152.7   

Depreciation and amortization

     83.6        75.8        68.4   

Equity-based compensation

     15.6        14.5        13.2   

Legal and regulatory charges

     2.5        14.4        10.4   

Exits costs, impairments and other charges (including acquisition costs)

     8.1        5.9        37.7   

Other non-recurring charges

     —          —          4.2   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 294.0      $ 286.7      $ 286.6   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA margin(1)

     39.5     39.9     42.8

 

(1) Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by GAAP Revenue for periods prior to the Acquisition or Adjusted Revenue for periods after the Acquisition.

 

(2) Operating income reported for this period is derived from our predecessor’s, LPS, GAAP Operating Income reported in the audited financial statements from LPS.

 

 

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Quarterly Financial Data (Unaudited)

 

     Predecessor  
     2013 Quarter Ended  
     March 31      June 30      September 30      December 31  
     (In millions, except per share data)  

Revenues

   $ 469.7       $ 466.9       $ 417.2       $ 362.4   

Net earnings (loss) from continuing operations(1)

   $ 54.3       $ 20.5       $ 34.8       $ (5.4

Net earnings (loss)(1)

   $ 53.9       $ 19.1       $ 35.5       $ (5.8

Net earnings (loss) per share—basic from continuing operations

   $ 0.64       $ 0.24       $ 0.41       $ (0.06

Net earnings (loss) per share—basic

   $ 0.63       $ 0.22       $ 0.42       $ (0.07

Weighted average shares—basic

     84.9         85.1         85.3         86.3   

Net earnings (loss) per share—diluted from continuing operations

   $ 0.64       $ 0.24       $ 0.40       $ (0.07

Net earnings (loss) per share—diluted

   $ 0.63       $ 0.22       $ 0.41       $ (0.07

Weighted average shares—diluted

     85.1         85.6         86.0         86.9   

 

     Predecessor  
     2012 Quarter Ended  
     March 31,      June 30,     September 30,      December 31,  
     (In millions except per share data)  

Revenues

   $ 484.6       $ 511.7      $ 495.7       $ 499.3   

Net earnings (loss) from continuing operations(2)

   $ 48.7       $ (35.2   $ 60.2       $ 5.9   

Net earnings (loss)(2)

   $ 47.1       $ (37.9   $ 58.3       $ 2.9   

Net earnings (loss) per share—basic from continuing operations

   $ 0.58       $ (0.42   $ 0.71       $ 0.07   

Net earnings (loss) per share—basic

   $ 0.56       $ (0.45   $ 0.69       $ 0.03   

Weighted average shares—basic

     84.4         84.6        84.7         84.9   

Net earnings (loss) per share—diluted from continuing operations

   $ 0.58       $ (0.42   $ 0.71       $ 0.07   

Net earnings (loss) per share—diluted

   $ 0.56       $ (0.45   $ 0.69       $ 0.03   

Weighted average shares—diluted

     84.6         84.6        84.9         85.1   

 

(1) During the fourth quarter of 2013, the company’s net earnings (loss) and net earnings (loss) from continuing operations included an asset impairment charge of $28.6 million and an addition to the legal and regulatory accrual of $20.4 million, as discussed in notes 8 and 15, respectively, to LPS’s audited consolidated financial statements of LPS included elsewhere in this prospectus. In addition, results for the fourth quarter of 2013 included expenses related to the Acquisition by FNF (see note 2 of LPS’s audited consolidated financial statements included elsewhere in this prospectus) of $8.1 million.

 

(2) During the second and fourth quarters of 2012, the company’s net earnings (loss) and net earnings (loss) from continuing operations included an addition to the legal and regulatory accrual of $144.5 million and $47.9 million, respectively, as discussed in note 14 to LPS’s audited consolidated financial statements included elsewhere in this prospectus.

 

 

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SUMMARY UNAUDITED HISTORICAL COMBINED FINANCIAL DATA OF COMMERCE VELOCITY AND PROPERTY INSIGHT

The following selected summary unaudited historical combined financial information has been derived from the unaudited financial information of Commerce Velocity and Property Insight which are not included or incorporated by reference into this prospectus. Certain financial information for Commerce Velocity and Property Insight has been included in the audited Black Knight Financial Services, LLC combined financial statements as of December 31, 2013 and for the period from October 16, 2013 through December 31, 2013 included elsewhere in this prospectus and in the unaudited Pro Forma Condensed Consolidated Financial Information for BKFS subsequent to the Acquisition.

The selected unaudited financial information as of and for each of the three years ending December 31, 2013 is derived from the historical financial records of FNF and includes all material adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of the unaudited periods. You should not rely on these results as being indicative of the results of Commerce Velocity and Property Insight after their contribution to BKFS Operating LLC or in the future.

 

     Year Ended December 31,  
     2013     2012      2011  
     (In millions)  

Statement of Operations Data:

       

Revenues

   $ 71.9      $ 73.5       $ 64.5   

(Loss) earnings

   $ (14.4   $ 4.1       $ 4.6   

Balance Sheet Data:

       

Total assets

   $ 88.1      $ 90.4       $ 79.6   

 

 

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PRO FORMA CONDENSED COMBINED FINANCIAL DATA

Selected Unaudited Pro Forma Condensed Combined Financial Information

The following table presents selected unaudited pro forma condensed combined financial information about our consolidated balance sheet and statements of operations, after giving effect to the Internal Reorganization Transactions, the refinancing and other debt related activities undertaken in connection therewith, or the Acquisition Related Refinancing and the offering and the Offering Reorganization, with the resulting company being the issuer. The information under “Unaudited Pro Forma Condensed Combined Balance Sheet Data” in the table below assumes the Internal Reorganization Transactions, the Acquisition Related Refinancing and the Offering Reorganization had been completed on September 30, 2014. The information under “Unaudited Pro Forma Condensed Combined Statement of Operations Data” in the table below gives effect to the Internal Reorganization Transactions, the Acquisition Related Refinancing and the Offering Reorganization, as if all had been consummated on January 1, 2013, the beginning of the earliest period presented. This unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting with FNF considered the acquirer of LPS as pertaining to the Acquisition and using the accounting for transactions between entities under common control as pertaining to the Commerce Velocity Contribution and the Property Insight Contribution.

The information presented below should be read in conjunction with the historical consolidated financial statements and the related notes thereto, the unaudited pro forma condensed combined financial statements and the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. See the section entitled “Where You Can Find More Information” and “Unaudited Pro Forma Condensed Combined Financial Information.” The unaudited pro forma condensed combined financial information has been presented for informational purposes only. The pro forma information is not necessarily indicative of what our financial position or results of operations actually would have been had the Internal Reorganization Transactions, the Acquisition Related Refinancing and the offering and Offering Reorganization been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project our future financial position or operating results. Transactions among the entities included in the unaudited pro forma condensed combined financial statements during the periods presented have been eliminated. In addition, the unaudited pro forma condensed combined financial information includes adjustments that are preliminary and may be revised. There can be no assurance that such revisions will not result in material changes.

Unaudited Pro Forma Condensed Combined Balance Sheet Data:

 

     As of September 30, 2014  
     (In millions)  

Total assets

   $                            

Total liabilities

   $     

Total equity

   $     

Total liabilities and equity

   $     

Unaudited Pro Forma Condensed Combined Statement of Operations Data:

 

     Nine Months Ended
September 30, 2014
     Year Ended
December 31, 2013
 
     (In millions)  

Total revenues

   $ 634.5       $ 809.0   

Total operating income

   $ 104.5       $ 72.2   

Net earnings (loss)

   $ 9.8       $ (53.8

Net earnings from continuing operations attributable to BKFS common shareholders

   $         $     

 

 

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Unaudited Comparative Per Share Data

Presented below is our unaudited pro forma combined per share data for the nine months ended September 30, 2014 and for the year ended December 31, 2013. The information presented below should be read in conjunction with the historical audited financial statements and the related notes, the unaudited pro forma condensed combined financial statements and the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere elsewhere in this prospectus. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the Internal Reorganization Transactions, the Acquisition Related Refinancing and the Offering Reorganization had been completed on January 1, 2013, the beginning of the earliest period presented, nor is it necessarily indicative of our future operating results or financial position. The pro forma earnings per share is computed by dividing the pro forma net earnings attributable to BKFS Class A common shareholders by the pro forma weighted average number of shares outstanding. The unaudited pro forma combined basic and diluted earnings per share for the periods presented are based on the pro forma combined basic and diluted shares expected to be issued as part of the offering.

Unaudited Pro Forma Per Share Data

For the Nine Months Ended September 30, 2014

(In millions, except per share data)

 

    BKFS Operating LLC   Pro Forma
Adjustments
  Pro Forma BKFS
Combined

Net earnings per share—basic, attributable to BKFS Class A common shareholders

     
 

 

 

 

 

 

Weighted average shares outstanding—basic

     
 

 

 

 

 

 

Net earnings per share—diluted, attributable to BKFS Class A common shareholders

     
 

 

 

 

 

 

Weighted average shares outstanding—diluted

     
 

 

 

 

 

 

Unaudited Pro Forma Per Share Data

For the Year Ended December 31, 2013

(In millions, except per share data)

 

    BKFS Operating LLC   Pro Forma
Adjustments
  Pro Forma BKFS
Combined

Net earnings per share—basic, attributable to BKFS Class A common shareholders

     
 

 

 

 

 

 

Weighted average shares outstanding—basic

     
 

 

 

 

 

 

Net earnings per share—diluted, attributable to BKFS Class A common shareholders

     
 

 

 

 

 

 

Weighted average shares outstanding—diluted

     
 

 

 

 

 

 

 

 

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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our Class A common stock. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our Class A common stock could decline and you may lose some or all of your investment.

Risks Related to Our Business

If we are unable to protect our information systems against data corruption, cyber-based attacks or network security breaches, or if we are unable to provide adequate security in the electronic transmission of sensitive data, it could have a material adverse effect on our business, financial condition and results of operations.

We are highly dependent on information technology networks and systems, including the Internet, to securely process, transmit and store electronic information. Security breaches of this infrastructure, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information, including non-public personal information, consumer data and proprietary business information. Unauthorized access, including through use of fraudulent schemes such as “phishing” schemes, could jeopardize the security of information stored in our systems. In addition, malware or viruses could jeopardize the security of information stored or used in a user’s computer. If we are unable to prevent such security or privacy breaches, our operations could be disrupted, or we may suffer loss of reputation, financial loss, lawsuits and other regulatory imposed restrictions and penalties because of lost or misappropriated information, including sensitive consumer data, which could have a material adverse effect on our business, financial condition and results of operations.

Likewise, our clients are increasingly imposing more stringent contractual obligations on us relating to our information security protections. If we are unable to maintain protections and processes at a level commensurate with that required by our large clients, it could negatively affect our relationships with those clients, increase our operating costs or subject us to liability under those contractual obligations, which could have a material adverse effect on our business, financial condition and results of operations.

We rely on our top clients for a significant portion of our revenue and profit, which makes us susceptible to the same macro-economic and regulatory factors that impact our clients. If these clients are negatively impacted by current economic or regulatory conditions or otherwise experience financial hardship or stress, or if the terms of our relationships with these clients change, it could have a material adverse effect on our business, financial condition and results of operations.

We operate in a consolidated industry and as a result, a small number of our clients have accounted for a significant portion of our revenues. We expect that a limited number of our clients will continue to represent a significant portion of our revenues for the foreseeable future. During the period from January 2, 2014 to September 30, 2014, our largest client, Wells Fargo, N.A., or Wells Fargo, accounted for approximately 14% of our consolidated revenues and approximately 16% and 1% of the revenue from our Technology and Data and Analytics segments, respectively. JPMorgan Chase Bank, N.A., or JPMorgan Chase, our second largest client, accounted for approximately 13% of our consolidated revenues and approximately 14% and 1% of the revenues of our Technology and Data and Analytics segments, respectively. During the period from January 2, 2014 to September 30, 2014, our five largest clients accounted for approximately 40% of our consolidated revenues, approximately 42% of our Technology segment revenues and approximately 27% of our Data and Analytics segment revenues.

Our clients face continued pressure in the current economic and regulatory climate. Many of our relationships with these clients are long-standing and are important to our business and results of operations, but there is no

 

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guarantee that we will be able to retain or renew existing agreements or maintain our relationships on acceptable terms or at all. Additionally, we rely on cross-selling our products and services to our existing clients as a source of growth. The deterioration in or termination of any of these relationships could significantly reduce our revenue and could have a material adverse effect on our business, financial condition and results of operations. As a result, we may be disproportionately affected by declining revenue from, or loss of, a significant client. In addition, by virtue of their significant relationships with us, these clients may be able to exert pressure on us with respect to the pricing of our services.

We have a long sales cycle for many of our technology solutions and services and if we fail to close sales after expending significant time and resources on the sales process, it could have a material adverse effect on our business, financial condition and results of operations.

The sales of many of our technology solutions and services often involve significant capital commitments by our clients, particularly those with smaller operations. Potential clients 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 client as a result of this process. 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 clients’ 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.

The time and expense associated with switching from our competitors’ software and services to ours may limit our growth.

The costs for a mortgage lender to switch providers of technology, data and analytics solutions and services can be significant and the process can sometimes take 12 to 18 months to complete. As a result, potential clients may decide that it is not worth the time and expense to begin using our solutions and services, even if we offer competitive and economic advantages. If we are unable to convince these clients to switch to our software and services, our ability to increase market share will be limited, which could have a material adverse effect on our business, financial condition and results of operations.

We typically provide service level commitments under our client contracts. If we fail to meet these contractual commitments, we could be obligated to provide credits or refunds for prepaid amounts related to unused subscription services or face contract terminations, which could adversely affect our revenues.

Our client agreements typically provide service level commitments measured on a daily and monthly basis. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability for our applications, we may be contractually obligated to provide these clients with service credits or refunds or we could face contract terminations. If we suffer unscheduled downtime that exceeds the allowed downtimes under our agreements with our clients or if we experience any extended service outages, it could have a material adverse effect on our business, financial condition and results of operations.

Any failure to offer high-quality technical support services may adversely affect our relationships with our clients and could have a material adverse effect on our business, financial condition and results of operations.

Once our applications and technology are deployed, our clients depend on our support organization to resolve technical issues relating thereto. We may be unable to respond adequately to accommodate short-term increases in client demand for support services. We also may be unable to modify the format of our support services to compete with changes in support services provided by our competitors. Increased client demand for these services, without corresponding revenues, could increase costs and adversely affect our results of operations. In addition, our sales process is highly dependent on our applications and business reputation and on positive

 

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recommendations from our existing clients. Any failure to maintain high-quality technical support, or a market perception that we do not maintain high-quality support, could adversely affect our reputation and our ability to sell our applications to existing and prospective clients, any of which could have a material adverse effect on our business, financial condition and results of operations.

Our clients and we are subject to various governmental regulations, and a failure to comply with government regulations or changes in these regulations could result in penalties, restrict or limit our or our clients’ operations or make it more burdensome to conduct such operations, any of which could have a material adverse effect on our business, financial condition and results of operations.

Many of our clients’ and our businesses are subject to various federal, state, local and foreign laws and regulations. Our failure to comply with applicable laws and regulations could restrict our ability to provide certain services or result in imposition of civil fines and criminal penalties, substantial regulatory and compliance costs, litigation expense, adverse publicity and loss of revenue.

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 Reserve Board, the Office of the Comptroller of the Currency, or the OCC, the Federal Deposit Insurance Corporation, or the FDIC, and various other federal and state regulatory authorities. In addition, independent auditors annually review several of our operations to provide reports on internal controls for our clients’ 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.

In addition, our businesses are subject to an increasing degree of compliance oversight by regulators and by our clients. Specifically, the CFPB has authority to write rules affecting the business of, supervise, conduct examinations of, and enforce compliance as to federal consumer financial protection laws and regulations with respect to certain “non-depository covered persons” determined by the CFPB to be “larger participants” that offer consumer financial products and services. The CFPB and the prudential financial institution regulators such as the OCC also have the authority to examine us in our role as a service provider to large financial institutions, although it is yet unclear how broadly they will apply this authority going forward. In addition, we believe that some of our largest bank clients are subject to consent orders with the OCC and/or are parties to the National Mortgage Settlement, both of which require them to exercise greater oversight and perform more rigorous audits of their key vendors such as us.

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 real estate-related settlement services. 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.

Changes to laws and regulations and enhanced regulatory oversight of our clients and us may compel us to increase our prices in certain situations or decrease our prices in other situations, may restrict our ability to implement price increases, or otherwise limit the manner in which we conduct our business. In addition, in response to increased regulatory oversight, participants in the mortgage lending industry may develop policies pursuant to which they limit the extent to which they can rely on any one vendor or service provider. If we are unable to adapt our products and services to conform to the new laws and regulations, or if these laws and regulations have a negative impact on our clients, we may experience client losses or increased operating costs, which could have a material adverse effect on our business, financial condition and results of operations.

 

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There may be consolidation in our end client market, which would reduce the use of our services by our clients and could have a material adverse effect on our business, financial condition and results of operations.

Mergers or consolidations among existing or potential clients could reduce the number of our clients and potential clients. If our clients merge with or are acquired by other entities that are not our clients, or that use fewer of our services, they may discontinue or reduce their use of our services. In addition, if potential clients merge, our ability to increase our client base may be adversely affected and the ability of our customers to exert pressure on our pricing may increase. Any of these developments could have a material adverse effect on our business, financial condition and results of operations.

Regulatory developments with respect to use of consumer data and public records could have a material adverse effect on our business, financial condition and results of operations.

Because our databases include certain public and non-public personal information concerning consumers, we are subject to government regulation and potential adverse publicity concerning our use of consumer data. We acquire, store, use and provide many types of consumer data and related services that are subject to regulation under the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, the Driver’s Privacy Protection Act and, to a lesser extent, various other federal, state, and local laws and regulations. These laws and regulations are designed to protect the privacy of consumers and to prevent the unauthorized access and misuse of personal information in the marketplace. Our failure to comply with these laws, or any future laws or regulations of a similar nature, could result in substantial regulatory penalties, litigation expense and loss of revenue, which could have a material adverse effect on our business, financial condition and results of operations.

In addition, some of our data suppliers face similar regulatory requirements and, consequently, they may cease to be able to provide data to us or may substantially increase the fees they charge us for this data which may make it financially burdensome or impossible for us to acquire data that is necessary to offer our products and services. Further, many consumer advocates, privacy advocates and government regulators believe that existing laws and regulations do not adequately protect privacy or ensure the accuracy of consumer-related data. As a result, they are seeking further restrictions on the dissemination or commercial use of personal information to the public and private sectors as well as contemplating requirements relative to data accuracy and the ability of consumers to opt to have their personal data removed from databases such as ours. Any future laws, regulations or other restrictions limiting the dissemination or use of personal information may reduce the quality and availability of our solutions and services, which could have a material adverse effect on our business, financial condition and results of operations.

Participants in the mortgage industry are under intense scrutiny, and efforts by the government to reform the mortgage industry or address the troubled mortgage market and the current economic environment could have a material adverse effect on our business, financial condition and results of operations.

Since the beginning of the housing crisis, the mortgage industry has been under intense scrutiny by governmental authorities, judges and the news media, among others. This scrutiny has included federal and state governmental review of all aspects of the mortgage lending business, and several actions to aid the housing market and the economy in general, and to implement more rigorous standards around mortgage servicing, with particular focus on loans that are in default.

New national servicing standards have been implemented that, among other things, require very specific loan modification procedures to be followed and offered to the borrower before any foreclosure proceeding can be implemented. These standards have further reduced the number of loans entering the foreclosure process and have negatively impacted our default technology revenue and profit, and it is unclear what effect these standards will have on us in the future.

 

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Additional state and federal government actions directed at housing and the mortgage industry are likely to occur and could have a material adverse effect on our business, financial condition and results of operations.

Our clients’ relationships with GSEs are subject to change, which could have a material adverse effect on our business, financial condition and results of operations.

Our clients have significant relationships with Fannie Mae and Freddie Mac, which are GSEs, tasked with working with financial institutions to provide liquidity to the mortgage market. They do this by purchasing loans from the lenders either for cash or in exchange for a mortgage-backed security that comprises those loans and that, for a fee, carries the GSE’s guarantee of timely payment of interest and principal. Because our clients service the loans owned by GSEs, we provide solutions and services for many of those loans. As a result of these relationships, GSEs have been able to implement changes to our pricing structure on certain products and services we provide. GSEs or other governmental agencies may be able to exert similar pressure on the pricing of our solutions and services in the future, which could have a material adverse effect on our business, financial condition and results of operations.

If we fail to adapt our solutions to technological changes or evolving industry standards, or if our ongoing efforts to upgrade our technology are not successful, we could lose clients and have difficulty attracting new clients for our solutions, which could have a material adverse effect on our business, financial condition and results of operations.

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

We operate in a competitive business environment and, if we are unable to compete effectively, it could have a material adverse effect on our business, financial condition and results of operations.

The markets for our solutions are intensely competitive. Our competitors vary in size and in the scope and breadth of the services they offer. Some of our competitors have substantial resources. 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 have a material adverse effect on our business, financial condition and results of operations.

Recently, several new entrants in the mortgage industry have been aggressively acquiring mortgage servicing rights from large national lenders. These new entrants primarily use affiliated service providers rather than third parties such as us. Although we believe we compete favorably against these affiliates, to the extent this trend continues it could have a material adverse effect on our business, financial condition and results of operations.

Further, because many of our larger potential clients 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 clients’ in-house capacities. As a result, gaining new clients in our mortgage

 

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processing business can be difficult. For banks and other potential clients, 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. These potential clients worry about potential disadvantages such as loss of custom functionality, increased costs and business disruption. As a result, these potential clients often resist change. There can be no assurance that our strategies for overcoming potential clients’ reluctance to change will be successful, and if we are unsuccessful, it could have a material adverse effect on our business, financial condition and results of operations.

To the extent the availability of free or relatively inexpensive information increases, the demand for some of our data and information solutions may decrease, which could have a material adverse effect on our business, financial condition and results of operations.

Public sources of free or relatively inexpensive information have become increasingly available recently, particularly through the Internet, and this trend is expected to continue. Governmental agencies in particular have increased the amount of information to which they provide free public access. Public sources of free or relatively inexpensive information may reduce demand for, or the price that clients are willing to pay for, our data and information solutions. To the extent that clients choose not to obtain data and information from us and instead rely on information obtained at little or no cost from these public sources, it could have a material adverse effect on our business, financial condition and results of operations.

We rely upon proprietary technology and information rights, and if we are unable to protect our rights, it could have a material adverse effect on our business, financial condition and results of operations.

Our success depends, in part, upon our intellectual property rights. We rely primarily on a combination of patents, copyrights, trade secrets, and trademark laws and nondisclosure and other contractual restrictions on copying, distribution and creation of derivative products to protect our proprietary technology and information. This protection is limited, and our intellectual property could be used by others without our consent. In addition, patents may not be issued with respect to our pending or future patent applications, and our patents may not be upheld as valid or may not prevent the development of competitive products. Any infringement, disclosure, loss, invalidity of, or failure to protect our intellectual property could have a material adverse effect on our business, financial condition and results of operations. Moreover, litigation may be necessary to enforce or protect our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. Such litigation could be time-consuming, result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations.

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, any of which could have a material adverse effect on our business, financial condition and results of operations.

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

 

    be expensive and time-consuming to defend;

 

    cause us to cease providing solutions that incorporate the challenged intellectual property;

 

    require us to redesign our solutions, if feasible;

 

    divert management’s attention and resources; and

 

    require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies.

Any one or more of the foregoing outcomes could have a material adverse effect on our business, financial condition and results of operations. Additionally, we may be liable for damages for past infringement if a court determines that our software or technologies infringe upon a third party’s patent or other proprietary rights.

 

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If we are unable to successfully consummate and integrate acquisitions, it could have a material adverse effect on our business, financial condition and results of operations.

One of our strategies to grow our business is to opportunistically acquire complementary businesses, technologies 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. Raising additional capital for acquisitions through debt financing would result in increased interest expense and may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional capital for acquisitions through equity financing, the ownership interests of existing stockholders will be diluted.

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. Additionally, the acquisition and integration processes may disrupt our business and divert management attention and our resources. If we fail to successfully integrate acquired businesses, products, technologies and personnel, it could impair relationships with employees, clients and strategic partners, distract management attention from our core businesses, result in control failures and otherwise disrupt our ongoing business, any of which could have a material adverse effect on our business, financial condition and results of operations. We also may not be able to retain key management and other critical employees after an acquisition. In addition, we may be required to record future charges for impairment of goodwill resulting from such acquisitions.

Our profitability may be impacted by gains or losses on any sales of businesses, or lost operating income or cash flows from such businesses. We also may be required to record asset impairment or restructuring charges related to divested businesses, or indemnify buyers for liabilities, which may reduce our profitability and cash flows. We may also be unable to negotiate such divestitures on terms acceptable to us. If we are unsuccessful in divesting such businesses, it could have a material adverse effect on our business, financial condition and results of operations.

Our reliance on third parties subjects us to risk and may disrupt or adversely affect our operations. In addition, we may not realize the full benefit of our third-party arrangements, which may result in increased costs, or may adversely affect the service levels we are able to provide our clients.

We rely upon third parties for various business process and information technology services, including information security testing, telecommunications and software code development. Although we have contractual provisions with our providers that specify performance requirements, we do not ultimately control their performance, which may make our operations vulnerable to their performance failures. In addition, our failure to adequately monitor and regulate the performance of our third-party vendors could subject us to additional risk. Reliance on third parties also makes us vulnerable to changes in our vendors’ business, financial condition and other matters outside of our control, including their violations of laws or regulations, which could increase our exposure to liability or otherwise increase the costs associated with the operation of our business. The failure of our providers to perform as expected or as contractually required could result in significant disruptions and costs to our operations and to the services we provide to our clients, which could have a material adverse effect on our business, financial condition and results of operations.

 

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We depend on our ability to access data from external sources to maintain and grow our businesses. If we are unable to access needed data from these sources or if the prices charged for these services increase, the quality, pricing and availability of our solutions may be adversely affected, which could have a material adverse impact on our business, financial condition and results of operations.

We rely extensively upon data from a variety of external sources to maintain our proprietary and non-proprietary databases, including data from third-party suppliers, various government and public record sources and data contributed by our clients. Our data sources could cease providing or reduce the availability of their data to us, increase the price we pay for their data, or limit our use of their data for a variety of reasons, including legislatively- or judicially-imposed restrictions on use. If a number of suppliers are no longer able or are unwilling to provide us with certain data, or if our public record sources of data become unavailable or too expensive, we may need to find alternative sources. If we are unable to identify and contract with suitable alternative data suppliers and efficiently and effectively integrate these data sources into our service offerings, we could experience service disruptions, increased costs and reduced quality of our services. Moreover, some of our suppliers compete with us in certain product offerings, which may make us vulnerable to unpredictable price increases from them. Significant price increases could require us to seek substitute sources of data on more favorable economic terms, which may not be available at all. Loss of such access or the availability of data in the future on commercially reasonable terms or at all may reduce the quality and availability of our services and solutions, which could have a material adverse effect on our business, financial condition and results of operations.

Our international third-party service providers and our own international operations subject us to additional risks, which could have a material adverse effect on our business, financial condition and results of operations.

Over the last few years, we have sought to reduce our costs by utilizing lower-cost labor outside the United States in countries such as India. These countries are subject to higher degrees of political and social instability than the United States and may lack the infrastructure to withstand political unrest or natural disasters. Such disruptions can impact our ability to deliver our solutions on a timely basis, if at all, and to a lesser extent can decrease efficiency and increase our costs. Weakness of the U.S. dollar in relation to the currencies used and higher inflation rates experienced in these countries may also reduce anticipated savings. Furthermore, the practice of utilizing labor based in foreign countries has come under increased scrutiny in the United States and, as a result, many of our clients may require us to use labor based in the United States. We may not be able to pass on the increased costs of higher-priced United States-based labor to our clients, which could have a material adverse effect on our business, financial condition and results of operations.

In addition, the foreign countries in which we have outsourcing arrangements or operate could adopt new legislation or regulations that would make it difficult, more costly or impossible for us to continue our foreign activities as currently being conducted. In addition, in many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act, or the FCPA, or other local anti-corruption laws. Any violations of FCPA or local anti-corruption laws by us, our subsidiaries or our local agents, could result in substantial financial and other penalties, which could have a material adverse effect on our business, financial condition and results of operations.

We have substantial investments in recorded goodwill as a result of the Acquisition, and an economic downturn or troubled mortgage market could cause these investments to become impaired, requiring write-downs that could have a material adverse effect on our results of operations.

Goodwill recorded on our balance sheet was approximately $2.2 billion, or approximately 61% of our total assets, as of September 30, 2014. 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

 

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goodwill, may not be recoverable include, but are not limited to, significant underperformance relative to historical or projected future results of operations, a significant decline in our stock price and market capitalization, and negative industry or economic trends.

We expect that the results of our 2014 annual assessment of the recoverability of goodwill will indicate that the fair value net assets we acquired will be in excess of the carrying value. The valuation model that is used to estimate fair value contemplates certain assumptions made by management about the timing and volume of incremental business resulting from our investments. If actual results are not consistent with our assumptions, we may be required to record goodwill impairment charges in the future which could have a material adverse effect on our results of operations.

If we fail to develop widespread brand awareness cost-effectively, it could have a material adverse effect on our business, financial condition and results of operations.

We believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to our ability to achieve widespread acceptance of our technology and attract new clients. Brand promotion activities may not generate client awareness or increase revenues, and even if they do, any increase in revenues may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses, we may fail to attract or retain clients necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad client adoption of our applications.

We may experience system failures with respect to our technology solutions, damage or interruption which could harm our business and reputation and expose us to potential liability.

We depend heavily upon the computer systems and our existing technology infrastructure located in our data centers and certain systems interruptions or events beyond our control could interrupt or terminate the delivery of our solutions and services to our clients and may interfere with our suppliers’ ability to provide necessary data to us and our employees’ ability to attend to work and perform their responsibilities.

These potential interruptions include, but are not limited to, damage or interruption from hurricanes, floods, fires, power losses, telecommunications outages, terrorist attacks, acts of war, human errors and similar events. Our U.S. corporate offices and primary data center are located in Jacksonville, Florida, which is an area that is at high risk of hurricane and flood damage. In addition, acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural areas, could cause disruptions in our business or the economy as a whole. The servers that we use through various third-party service providers may also be vulnerable to similar disruptions, which could lead to interruptions, delays and loss of critical data. Such service providers may not have sufficient protection or recovery plans in certain circumstances, and our insurance may not be sufficient to compensate us for losses that may occur.

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

 

    interruption of business operations;

 

    delay in market acceptance;

 

    us, or our clients, missing a regulatory deadline;

 

    additional development and remediation costs;

 

    diversion of technical and other resources;

 

    loss of clients;

 

    negative publicity; or

 

    exposure to liability claims.

 

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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 client agreements, we cannot be certain that these measures will be successful in limiting our liability.

We may experience delays or difficulty in developing or implementing new or enhanced software or hosting solutions, which may negatively affect our relationships with existing and potential clients, reduce or delay the generation of revenues or increase development and implementation costs, which could have a material adverse effect on our business, financial condition and results of operations.

Our future financial performance and revenue growth depend upon the successful development, implementation and client acceptance of new and enhanced versions of our software and hosting solutions. We continually seek to develop enhancements to our solutions, including updates in response to changes in applicable laws, as well as new offerings to supplement our existing solutions, As a result, we are subject to the risks inherent in the development and integration of new technologies, including defects or undetected errors in our technology solutions, difficulties in installing or integrating our technologies on platforms used by our clients, or other unanticipated performance, stability and compatibility problems. Any of these problems could result in material delays in the introduction or acceptance of our solutions, increased costs, decreased client satisfaction, breach of contract claims, harm to our industry reputation and reduced or delayed revenues. If we are unable to deliver new solutions or upgrades or other enhancements to our existing solutions on a timely and cost-effective basis, it could have a material adverse effect on our business, financial condition and results of operations.

Because our revenue from clients in the mortgage lending industry is affected by the strength of the economy and the housing market generally, including the volume of real estate transactions, a change in any of these conditions could have a material adverse effect on our business, financial condition and results of operations.

Our revenue is primarily generated from technology, data and analytics we provide to the mortgage lending industry and, as a result, a weak economy or housing market may have a material adverse effect on our business, financial condition and results of operations. The volume of mortgage origination and residential real estate transactions is highly variable and reductions in these transaction volumes could have a direct impact on the revenues we generate from our technology business and some of our data and analytics businesses.

The revenues we generate from our servicing technology depend upon the total number of mortgage loans processed on our MSP platform, which tends to be comparatively consistent regardless of economic conditions. However, in the event that a difficult economy or other factors lead to a decline in levels of home ownership and a reduction in the number of mortgage loans outstanding and we are not able to counter the impact of those events with increased market share or higher fees, our mortgage processing revenues could be adversely affected. Moreover, negative economic conditions, including increased unemployment or interest rates or a downturn in other general economic factors, among other things, could adversely affect the performance and financial condition of some of our clients in many of our businesses, which may have a material adverse effect on our business, financial condition and results of operations if these clients go bankrupt or otherwise exit certain businesses.

A weaker economy and housing market tend to increase the volume of consumer mortgage defaults, which can increase revenues from our applications focused on supporting default management functions. However, government regulation of the mortgage industry in general, and the default and foreclosure process in particular, has greatly slowed the processing of defaulted mortgages in recent years and has changed the way many of our clients address mortgage loans in default. A downturn in the origination market and a concurrent slowdown or change in the way mortgage loans in default are addressed could have a material adverse effect on our business, financial condition and results of operations.

 

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

As of September 30, 2014, we had approximately $2.2 billion of total debt outstanding, consisting of senior unsecured notes and intercompany loans that are payable to FNF.

Our substantial indebtedness could have important consequences to us, including:

 

    making us more vulnerable to economic downturns and adverse developments in our business, which may cause us to have difficulty borrowing money in the future for working capital, capital expenditures, acquisitions or other purposes and may limit our ability to pursue other business opportunities and implement certain business strategies;

 

    requiring us to use a large portion of the money we earn to pay principal and interest on our debt, which will reduce the amount of money available to finance operations, acquisitions and other business activities;

 

    exposing us to the risk of increased interest rates as approximately $820 million in principal amount of our debt bears interest at a floating rate (a one percent increase in interest rates would result in a $1.0 million increase in our annual interest expense for every $100 million of floating rate debt we incur, which may make it more difficult for us to service our debt);

 

    exposing us to costs and risks associated with agreements limiting our exposure to higher interest rates that we may enter into in the future, as such agreements may not offer complete protection from these risks, and we are subject to the risk that one or more of the counterparties to these agreements may fail to satisfy their obligations under such agreements; and

 

    causing a competitive disadvantage if we have higher levels of debt than our competitors by reducing our flexibility in responding to changing business and economic conditions, including increased competition.

Risks associated with our indebtedness could have a material adverse effect on our business, financial condition and results of operations.

Despite our indebtedness level, we still may be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the agreements governing our intercompany loans and the indenture governing our senior unsecured notes each will impose operating and financial restrictions on our activities, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. If new debt is added to our outstanding debt levels, the risks related to our indebtedness that we will face would increase.

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

The indenture governing our senior unsecured notes imposes operating and financial restrictions on our activities, and future debt instruments may as well. These restrictions may 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:

 

    create, incur or assume any additional debt and issue preferred stock;

 

    create, incur or assume certain liens;

 

    redeem and/or prepay certain subordinated debt we might issue in the future;

 

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    pay dividends on our stock or repurchase stock;

 

    make certain investments and acquisitions;

 

    enter into or permit to exit contractual limits on the ability of our subsidiaries to pay dividends to us;

 

    enter new lines of business;

 

    engage in consolidations, mergers and acquisitions;

 

    engage in specified sales of assets; and

 

    enter into transactions with affiliates.

These restrictions on our ability to operate our business could limit our ability to take advantage of financing, merger and acquisition and other corporate opportunities, which could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our outstanding debt instruments, which may not be successful.

Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and results of operations, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would have a material adverse effect on our business, financial condition and results of operations. If we cannot make scheduled payments on our debt, we will be in default and holders of the intercompany loans or senior unsecured notes could declare all outstanding principal and interest to be due and payable, and we could be forced into bankruptcy or liquidation.

Our risk management policies and procedures may prove inadequate for the risks we face, which could have a material adverse effect on our business, financial condition and results of operations.

We have devoted significant resources to develop our risk management policies and procedures and expect to continue to do so in the future. Nonetheless, our risk management strategies may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk, including risks that are unidentified or unanticipated. If our solutions change and as the markets in which we operate evolve, our risk management strategies may not always adapt to such changes. Some of our methods of managing risk are based upon our use of observed historical market behavior and management’s judgment. Other of our methods of managing risk depend on the evaluation of information regarding markets, customers, catastrophe occurrence or other matters that is publicly available or otherwise accessible to us. This information may not always be accurate, complete, up-to-date or properly evaluated. As a result, these methods may not predict future risk exposures, which could be significantly greater than the historical measures or available information indicate. In addition, management of operational, legal and regulatory risks requires, among other things, policies and procedures to record and verify large numbers of transactions and events, which may not be fully effective. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the timing of such outcomes. If our risk management efforts are ineffective, we could suffer losses that could have a material adverse effect on our business, financial condition or results of operations. In addition, we could be subject to litigation, particularly from our clients, and sanctions or fines from regulators.

 

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Certain members of our board of directors and certain of our officers and directors have interests and positions that could present potential conflicts.

We are party to a variety of related party agreements and relationships with FNF, certain of FNF’s subsidiaries and THL. Certain of our executive officers are employed by FNF or FNF’s subsidiaries and certain of our directors serve on the boards of directors of FNF or its subsidiaries or are affiliated with THL. As a result of the foregoing, there may be circumstances where certain of our executive officers and directors may be subject to conflicts of interest with respect to, among other things: (i) our ongoing relationships with FNF, FNF’s subsidiaries or THL, including related party agreements and other arrangements with respect to the administration of tax matters, employee benefits and indemnification; (ii) the quality, pricing and other terms associated with services that we provide to FNF or its subsidiaries, or that they provide to us, under related party agreements; (iii) business opportunities arising for any of us, FNF, FNF’s subsidiaries or THL; and (iv) conflicts of time with respect to matters potentially or actually involving or affecting us.

We seek to manage these potential conflicts through abstention by interested directors from approval of such arrangements and 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, or that the resolution of any such conflicts will be no less favorable to us than if we were dealing with an unaffiliated third party.

Our senior leadership team is critical to our continued success and the loss of such personnel could have a material adverse effect on our business, financial condition and results of operations.

Our future success substantially depends on the continued service and performance of the members of our senior leadership team. These personnel possess business and technical capabilities that are difficult to replace. We have attempted to mitigate this risk by entering into long-term (two to three year) employment contracts with the members of our senior management operating team. If we lose key members of our senior management operating team, we may not be able to effectively manage our current operations or meet ongoing and future business challenges, and this could have a material adverse effect on our business, financial condition and results of operations.

We may fail to attract and retain enough qualified employees to support our operations, which could have an adverse effect on our ability to expand our business and service our clients.

Our business relies on large numbers of skilled employees and our success depends on our ability to attract, train and retain a sufficient number of qualified employees. If our attrition rate increases, our operating efficiency and productivity may decrease. We compete for employees not only with other companies in our industry but also with companies in other industries, such as software services, engineering services and financial services companies, and there is a limited pool of employees who have the skills and training needed to do our work. If our business continues to grow, the number of people we will need to hire will increase. We will also need to increase our hiring if we are not able to maintain our attrition rate through our current recruiting and retention policies. Increased competition for employees could have a material adverse effect on our ability to expand our business and service our clients, as well as cause us to incur greater personnel expenses and training costs.

We may not be able to effectively achieve our growth strategies, which could adversely affect our financial condition or results of operations.

Our growth strategies depend in part on maintaining our competitive advantage with current solutions in new and existing markets, as well as our ability to develop new technologies and solutions to serve such markets. There can be no assurance that we will be able to compete successfully in new markets or continue to compete effectively in our existing markets. If we fail to introduce new technologies or solutions effectively or on a timely basis, or if we are not successful in introducing or obtaining regulatory or market acceptance for new solutions, we may lose market share and our results of operations or cash flows could be adversely affected.

 

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Current and future litigation, investigations or other actions against us could be costly and time consuming to defend.

We are from time to time subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our clients in connection with commercial disputes and employment claims made by our current or former employees. Litigation can result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, overall financial condition and operating results.

For instance, as described in note 15 to the audited consolidated financial statements of our predecessor, LPS, titled “Commitments and Contingencies,” we have, in the past, incurred substantial costs associated with the settlement of a number of inquiries made by governmental agencies and claims made by several litigants concerning various current and past business practices of primarily our predecessor’s default operations, which since January 2014 have been owned by our sister company, ServiceLink. Also, as described in note 7 to the unaudited condensed consolidated financial statements of BKFS Operating LLC titled “Commitments and Contingencies,” we have recorded expenses relating to a proceeding filed by Merion Capital L.P. and Merion Capital II L.P., together referred to herein as Merion Capital, in connection with the Acquisition seeking a judicial determination of the “fair value” of Merion Capital’s shares of LPS common stock under Delaware law, together with statutory interest. On September 18, 2014, we reached an agreement with Merion Capital to resolve an interest motion and FNF paid Merion Capital the merger consideration and we paid interest of $9.0 million through the date of payment. As of the date of this prospectus, the appraisal proceeding is ongoing. Also, BKIS has been named as a defendant in lawsuits and investigations filed against the former LPS, even though the businesses associated with these cases have been contributed to ServiceLink.

In addition, in April 2011, the former LPS, now BKIS, and certain of its subsidiaries entered into a consent order, or the Consent Order, with several banking agencies in relation to its default operations, which are now part of ServiceLink. As part of the Consent Order, LPS agreed to further study the issues identified in a review by several banking agencies and to enhance its compliance, internal audit, risk management and board oversight plans, among additional agreed undertakings. In January 2013, LPS entered into settlement agreements with 49 states and the District of Columbia relating to certain practices within its default operations. However, the banking agencies are not precluded from seeking civil money penalties in the future. While the businesses underlying the subject matter of the Consent Order have been transferred to ServiceLink in connection with the Internal Reorganization and while we have entered into an indemnification agreement with ServiceLink that indemnifies us from claims relating to civil money penalties sought by the banking agencies relating to the Consent Order, there can be no guarantee that the banking agencies will not seek civil money penalties from us in the future or that we will be forestalled from making payments related thereto.

As of September 30, 2014, our accrual for legal and regulatory matters that are probable and estimable is $3.9 million, and includes costs associated with recently settled matters, as well as estimated costs of settlement, damages and associated legal fees applicable to certain pending litigation and regulatory matters, and assumes no third-party recoveries. There can be no assurance that we will not incur additional material costs and expenses in connection with ongoing or future investigations or claims, including but not limited to fines or penalties and legal costs, or be subject to other remedies, any of which could have a material adverse effect on our business, financial condition and results of operations. Insurance may not cover such investigations and claims, may not be sufficient for one or more such investigations and claims and may not continue to be available on terms acceptable to us. An investigation or claim brought against us that is uninsured or underinsured could result in unanticipated costs, management distraction or reputational harm, which could have a material adverse effect on our business, financial condition and results of operations and adversely impact the trading price of our stock.

 

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Risks Related to Our Structure

We are a holding company and our only material asset after completion of the Offering Reorganization and this offering will be our interest in BKFS Operating LLC and, accordingly, we are dependent upon distributions from BKFS Operating LLC to pay taxes and other expenses.

We will be a holding company and will have no material assets other than our ownership of Units of BKFS Operating LLC. We will have no independent means of generating revenue. BKFS Operating LLC will be treated as a partnership for United States federal income tax purposes and, as such, will not itself be subject to United States federal income tax. Instead, its taxable income will generally be allocated to its members, including us, according to the membership interests each member owns. Accordingly, we will incur income taxes on our share of any taxable income of BKFS Operating LLC and also will incur expenses related to our operations. Subject to the availability of net cash flow at the BKFS Operating LLC level and to applicable legal and contractual restrictions, we intend to cause BKFS Operating LLC to distribute cash to its members, including us, in an amount at least equal to the amount necessary to cover their respective tax liabilities, if any, with respect to their allocable share of the income of BKFS Operating LLC and to cover any other costs or expenses of the issuer, including dividends, if we ever determine to pay dividends, as well as any payments due under the tax receivable agreement, as described below. Prior to the completion of this offering, we intend to enter into an advancement agreement with BKFS Operating LLC pursuant to which BKFS Operating LLC will advance the cost of (or pay on behalf of the issuer) expenses incurred by the issuer, including fees and expenses incurred in any equity offering by the issuer, including this offering, customary costs and expenses associated with being a public company, including costs of professional advisors engaged by the issuer or board of directors, indemnification obligations of the issuer, directors fees and certain taxes. See “Certain Relationships and Related Party Transactions—Advancement Agreement.” To the extent that we need funds to pay our liabilities or to fund our operations, and BKFS Operating LLC is restricted from making distributions to us under applicable agreements, laws or regulations or does not have sufficient cash to make these distributions, we may have to borrow funds to meet these obligations and operate our business, and our liquidity and financial condition could be materially adversely affected. To the extent that we are unable to make payments under the tax receivable agreement for any reason, such payments will be deferred and will accrue interest until paid.

Any payments made under the tax receivable agreement to our equity holders that are parties to such agreement could be significant and will reduce the amount of overall cash flow that might otherwise be available to us if we did not distribute any income tax benefits we may be entitled to.

Upon the closing of this offering, we expect to enter into a tax receivable agreement with holders of our Units that will require us to pay such holders a fixed percentage of certain tax benefits to which we may become entitled. The payments we make under the tax receivable agreement may be substantial and would reduce the amount of overall cash flow that might otherwise be available to us if we did not distribute any income tax benefits to which we may be entitled. See “Our Corporate Structure—Tax Receivable Agreement.”

If we elect to have BKFS Operating LLC make cash payments for future exchanges of Units, in lieu of issuing shares of Class A common stock, such payments may reduce the amount of overall cash flow that would otherwise be available to us.

Each outstanding Unit, together with one share of our Class B common stock, is exchangeable for, at the issuer’s option, either one share of Class A common stock or a cash payment from BKFS Operating LLC, as described under “Our Corporate Structure—The Amended and Restated Operating Agreement.” We also expect that the Amended and Restated Operating Agreement will provide that, at the election of a Grant Unit holder, vested Grant Units may be converted into the right to receive a number of Units based on the value of BKFS Operating LLC above a specified hurdle amount in respect of such Grant Units, which can then be exchanged for, at the issuer’s option, either shares of our Class A common stock on a one-for-one basis, according to the terms of the Amended and Restated Operating Agreement, or a cash payment. If the issuer elects to have BKFS Operating LLC make cash payments in respect of exchanges of Units in lieu of issuing shares of Class A common stock,

 

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such payments may require the payment of significant amounts of cash and may reduce the amount of overall cash flow that would otherwise be available for distribution to us from BKFS Operating LLC, and our ability to successfully execute our growth strategy may be negatively affected.

We are a “controlled company” within the meaning of NYSE rules, and as a result, we qualify for, and may rely on, exemptions from certain corporate governance requirements. You may not have the same protections afforded to stockholders of companies that are subject to such requirements.

BKHI controls a majority of the voting power of our outstanding common stock and, upon completion of this offering, will continue to hold a controlling interest in us as a result of its ownership of Class B common stock. As a result, we qualify as a “controlled company” within the meaning of the corporate governance rules of the NYSE. Under these rules, a company of which more than 50% of the voting power in the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that (i) a majority of the board of directors consist of independent directors and (ii) that the board of directors have compensation and nominating and corporate governance committees composed entirely of independent directors.

We intend to utilize the independence exception provided for our compensation and nominating and corporate governance committees. As a result, immediately following this offering we will not have a compensation or nominating and corporate governance committee composed entirely of independent directors. In addition, while our board of directors is currently composed of a majority of independent directors, we may have a board of directors that is not composed of a majority of independent directors at any time in the future so long as we are still a controlled company. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements set by the NYSE. In the event that we cease to be a “controlled company” and our shares continue to be listed on the NYSE, we will be required to comply with these provisions within the applicable transition periods. These exemptions do not modify the independence requirements for our audit committee, and we intend to comply with the applicable requirements of the Securities and Exchange Commission, or the SEC, and the NYSE with respect to our audit committee within the applicable time frame following the completion of this offering.

We are controlled by FNF, whose interests may differ from those of our public stockholders.

We are controlled by FNF through its wholly-owned subsidiary, BKHI, and after this offering will continue to be controlled by FNF. After the completion of this offering, FNF, through BKHI, will beneficially own in the aggregate approximately         % of the combined voting power of our common stock (or approximately         % if the underwriters exercise their option to purchase additional shares in full). As a result of this ownership, FNF will have effective control over the outcome of votes on all matters requiring approval by our stockholders, including the election of directors, the adoption of amendments to our charter and bylaws and other significant corporate transactions, including a sale of control or such other corporate transactions that may affect our obligations under the tax receivable agreement. FNF can also cause BKHI to take actions that have the effect of delaying or preventing a change of control of us or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. These actions may be taken even if other stockholders oppose them.

In addition, persons associated with FNF currently serve on our board of directors. Following this offering, the interests of FNF may not always coincide with the interests of our other stockholders, and the concentration of effective control in FNF will limit other stockholders’ ability to influence corporate matters. The concentration of ownership and voting power of FNF, through BKHI, may also delay, defer or even prevent an acquisition by a third party or other change of control and may make some transactions more difficult or impossible without their support, even if such events are in the best interests of our other stockholders. Therefore, the concentration of voting power controlled by FNF, through BKHI, may have an adverse effect on the price of our Class A common stock. We may also take actions that our other stockholders do not view as beneficial, which may adversely affect our results of operations and financial condition and cause the value of your investment to decline.

 

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Further, FNF may have an interest in pursuing acquisitions, divestitures, financing or other transactions, including, but not limited to, the issuance of additional debt or equity and the declaration and payment of dividends, that, in its judgment, could enhance their equity investments, even though such transactions may involve risk to us or to our creditors. Additionally, FNF may make investments in businesses that directly or indirectly compete with us, or may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us.

Our charter and bylaws, the Amended and Restated Operating Agreement and provisions of Delaware law may discourage or prevent strategic transactions, including a takeover of our company, even if such a transaction would be beneficial to our stockholders.

Provisions contained in our charter and bylaws, the Amended and Restated Operating Agreement and provisions of the Delaware General Corporate Law, or DGCL, could delay or prevent a third party from entering into a strategic transaction with us, as applicable, even if such a transaction would benefit our stockholders. For example, our charter and bylaws:

 

    divide our board of directors into three classes with staggered three-year terms, which may delay or prevent a change of our management or a change of control;

 

    authorize the issuance of “blank check” preferred stock that could be issued by us upon approval of our board of directors to increase the number of outstanding shares of capital stock, making a takeover more difficult and expensive;

 

    provide that directors may be removed from office only for cause and only by the affirmative vote of 66 2/3% or more of the voting power of all of the shares of our capital stock entitled to vote and that any vacancy on our board of directors may only be filled by a majority of our directors then in office, which may make it difficult for other stockholders to reconstitute our board of directors;

 

    do not permit stockholders to take action by written consent;

 

    provide that special meetings of the stockholders may be called only upon the request of a majority of our board of directors or by our Chief Executive Officer;

 

    require advance notice to be given by stockholders for any stockholder proposals or director nominees;

 

    require a super-majority vote of the stockholders to amend certain provisions of our charter; and

 

    allow our board of directors to amend our bylaws by the affirmative vote of a majority of directors but only allow stockholders to amend our bylaws upon the approval of 66 2/3% or more of the voting power of all of the shares of our capital stock entitled to vote.

In addition, we are subject to certain provisions of Delaware law that limit, in some cases, our ability to engage in certain business combinations with significant stockholders. See “Description of Capital Stock.”

These restrictions and provisions could keep us from pursuing relationships with strategic partners and from raising additional capital, which could impede our ability to expand our business and strengthen our competitive position. These restrictions could also limit stockholder value by impeding a sale of us or BKFS Operating LLC.

Risks Related to this Offering

There is no existing market for our Class A common stock, and we do not know if one will develop. Even if a market does develop, the stock prices in the market may not exceed the offering price.

Prior to this offering, there has not been a public market for our Class A common stock or any of our equity interests. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NYSE, or how liquid that market may become. An active public market for our Class A

 

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common stock may not develop or be sustained after this offering. If an active trading market does not develop or is not sustained, you may have difficulty selling any shares of our Class A common stock that you buy.

The initial public offering price for our Class A common stock will be determined by negotiations among us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our Class A common stock at prices equal to or greater than the price you pay in this offering.

The market price of our Class A common stock may be volatile and you may lose all or part of your investment.

The market price of our Class A common stock could fluctuate significantly, and you may not be able to resell your shares at or above the offering price. Those fluctuations could be based on various factors in addition to those otherwise described in this prospectus, including those described under “—Risks Related to Our Business” and the following:

 

    our operating performance and the performance of our competitors and fluctuations in our operating results;

 

    the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

 

    the failure of security analysts to cover our Class A common stock after this offering or changes in earnings estimates or recommendations by research analysts who follow us or other companies in our industry;

 

    global, national or local economic, legal and regulatory factors unrelated to our performance;

 

    announcements by us or our competitors of new products, services, strategic investments or acquisitions;

 

    actual or anticipated variations in our or our competitors’ operating results, and our and our competitors’ growth rates;

 

    failure by us or our competitors to meet analysts’ projections or guidance that we or our competitors may give the market;

 

    changes in laws or regulations, or new interpretations or applications of laws and regulations, that are applicable to our business;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    the arrival or departure of key personnel;

 

    the number of shares to be publicly traded after this offering;

 

    future sales or issuances of our Class A common stock, including sales or issuances by us, our officers or directors and our significant stockholders, including BKHI; and

 

    other developments affecting us, our industry or our competitors.

In addition, in recent years the stock market has experienced significant price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations, as well as general economic, political and market conditions such as recessions or interest rate changes, may cause declines in the market price of our Class A common stock. If the market price of our Class A common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment.

 

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As we operate in a single industry, we are especially vulnerable to these factors to the extent that they affect our industry or our products. In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

Future sales of our Class A common stock in the public market could cause the market price of our Class A common stock to decrease significantly.

Sales of substantial amounts of our Class A common stock in the public market following this offering by our existing stockholders, by persons who acquire shares in this offering or by persons that acquire shares or our Class A common stock upon the exchange of Units (together with an equal number of shares of our Class B common stock) may cause the market price of our Class A common stock to decrease significantly. These issuances, or the possibility that these issuances may occur, may also make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate.

In connection with this offering, we expect that our officers, directors and holders of substantially         % of our outstanding common stock will enter into lock-up agreements with the underwriters of this offering that, subject to certain exceptions, prohibit the signing party from selling, contracting to sell or otherwise disposing of any Class A common stock or securities that are convertible or exchangeable for Class A common stock, including Units, or entering into any arrangement that transfers the economic consequences of ownership of our Class A common stock for at least 180 days from the date of this prospectus filed in connection with this offering, although the representatives of the underwriters may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to these lock-up agreements. Upon a request to release any shares subject to a lock-up, the representatives of the underwriters would consider the particular circumstances surrounding the request including, but not limited to, the length of time before the lock-up expires, the number of shares requested to be released, reasons for the request, the possible impact on the market for our Class A common stock and whether the holder of our shares requesting the release is an officer, director or other affiliate of ours. As a result of these lock-up agreements, notwithstanding earlier eligibility for sale under the provisions of Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, none of these shares would be allowed to be sold until at least 180 days after the date of this prospectus. See “Shares Eligible for Future Sale” and “Underwriting.”

Additional shares of Class A common stock may be issued in the future upon the exchange of Units and the conversion and exchange of vested Grant Units. We also may adopt an equity incentive plan pursuant to which stock options to purchase shares of Class A common stock and other stock-based awards are anticipated to be issued in the future from time to time to our officers, directors and employees. Upon an adoption of this equity incentive plan, we would file a registration statement registering under the Securities Act the shares of Class A common stock that are reserved for issuance under our equity incentive plan.

As restrictions on resale expire or as shares are registered, our share price could drop significantly if the holders of these restricted or newly registered shares sell them or are perceived by the market as intending to sell them. These sales might also make it more difficult for us to raise capital through the sale of equity securities in the future at a time and at a price that we deem appropriate.

See “Shares Eligible for Future Sale” for a more detailed description of the shares that will be available for future sales upon completion of this offering.

If you purchase shares of our Class A common stock sold in this offering, you will incur immediate and substantial dilution and may incur additional dilution in the future.

If you purchase shares of our Class A common stock in this offering, you will incur immediate and substantial dilution in the amount of $         per share because the initial public offering price of $            , which represents

 

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the midpoint of the estimated offering price range set forth on the cover page of this prospectus, is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding Class A common stock. See “Dilution.”

If we elect to issue shares of Class A common stock upon exchange or conversion of Units, in lieu of making a cash payment, such issuance of Class A common stock may dilute your ownership of Class A common stock.

Each outstanding Unit, together with one share of our Class B common stock, is exchangeable for, at the issuer’s option, either one share of Class A common stock or a cash payment, as described under “Our Corporate Structure—The Amended and Restated Operating Agreement.” In addition, we expect that the Amended and Restated Operating Agreement will provide that vested Grant Units may be converted, at the election of a Grant Unit holder, into the right to receive a number of Units based upon the value of BKFS Operating LLC above a specific hurdle amount in respect of such Grant Units, which can then be immediately exchanged for, at the issuer’s option, either shares of our Class A common stock or a cash payment, as described under “Our Corporate Structure—The Amended and Restated Operating Agreement.” If the issuer elects to issue Class A common stock in respect of these exchanges, your ownership of Class A common stock will be diluted.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our Class A common stock will be influenced in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no or few securities or industry analysts commence coverage of us, the trading price for our Class A common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who cover us downgrades our Class A common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our Class A common stock could decrease, which could cause our stock price and trading volume to decline.

We do not intend to pay dividends for the foreseeable future.

We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any future determination to declare and pay cash dividends will be at the discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, cash requirements, contractual restrictions and such other factors as our board of directors deems relevant. In addition, our current credit facility restricts our ability to pay dividends. Our ability to pay dividends may also be limited by covenants of any future outstanding indebtedness we or our subsidiaries incur. As a result, you may not receive any return on an investment in our Class A common stock unless you sell our Class A common stock for a price greater than that which you paid for it. See “Dividend Policy.”

If we are unable to implement and maintain the effectiveness of our internal control over financial reporting, our investors may lose confidence in the accuracy and completeness of our financial reports, which could adversely affect our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules adopted by the SEC and the PCAOB, starting with the second annual report that we file with the SEC after the consummation of this offering, our management will be required to report on the effectiveness of our internal control over financial reporting. We may encounter problems or delays in completing the implementation of any changes necessary to our internal control over financial reporting to conclude such controls are effective. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investor confidence and our stock price could decline.

 

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Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of NYSE rules, and result in a breach of the covenants under our financing arrangements. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could suffer if we were to report a material weakness in our internal controls over financial reporting. This could materially adversely affect us and lead to a decline in the price of our Class A common stock.

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.

Our charter and bylaws that will be in effect immediately prior to the completion of this offering provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law. In addition, we have entered and expect to continue to enter into agreements to indemnify our directors, executive officers and other employees as determined by our board of directors. Upon the consummation of this offering, we expect to enter into indemnification agreements with our director nominees and amended indemnification agreements with each of our directors and officers. Under the terms of such indemnification agreements, we are required to indemnify each of our directors and officers, to the fullest extent permitted by the laws of the State of Delaware, if the basis of the indemnitee’s involvement was by reason of the fact that the indemnitee is or was a director or officer of the company or any of its subsidiaries or was serving at the company’s request in an official capacity for another entity. We must indemnify our officers and directors against all reasonable fees, expenses, charges and other costs of any type or nature whatsoever, including any and all expenses and obligations paid or incurred in connection with investigating, defending, being a witness in, participating in (including on appeal), or preparing to defend, be a witness or participate in any completed, actual, pending or threatened action, suit, claim or proceeding, whether civil, criminal, administrative or investigative, or establishing or enforcing a right to indemnification under the indemnification agreement. The indemnification agreements also require us, if so requested, to advance within 30 days of such request all reasonable fees, expenses, charges and other costs that such director or officer incurred, provided that such person will return any such advance if it is ultimately determined that such person is not entitled to indemnification by us. Any claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.

Future offerings of debt securities, which would rank senior to our Class A common stock upon our bankruptcy or liquidation, and future offerings of equity securities that may be senior to our Class A common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our Class A common stock.

In the future, we may attempt to increase our capital resources by making offerings of debt securities or additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our Class A common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our Class A common stock, or both, and may result in future limitations under the tax code that could reduce the rate at which we utilize any net operating loss carryforwards to reduce our taxable income. Preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to make a dividend distribution to the holders of our Class A common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or estimate the amount, timing or nature of our future offerings, and purchasers of our Class A common stock in this offering bear the risk of our future offerings reducing the market price of our Class A common stock and diluting their ownership interest in our company.

 

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We have broad discretion to use the proceeds from this offering and our investment of those proceeds may not yield favorable returns.

Our management will have broad discretion over the use of proceeds from this offering, and we could spend the proceeds from this offering in ways with which you may not agree or that do not yield a favorable return. We intend to contribute all of the net proceeds from this offering to acquire Units from BKFS Operating LLC. We intend that BKFS Operating LLC will use a portion of the net proceeds contributed to it to repay $         principal amount of outstanding debt. The remaining net proceeds received by BKFS Operating LLC will be used to continue to support its growth and for working capital and general corporate purposes. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, products and technologies, although we have no current plans, commitments or agreements with respect to any such acquisitions or investments, and we have not allocated the net proceeds from this offering for any specific purposes. If we do not invest or apply the proceeds of this offering in ways that improve our operating results, we may fail to achieve expected financial results, which could cause our stock price to decline.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “aim to,” “plan,” “intend,” “believe,” “may,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

The forward-looking statements contained in this prospectus are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this prospectus, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements. We believe these factors include, but are not limited to, those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements.

Any forward-looking statement made by us in this prospectus speaks only as of the date on which we make it. Factors or events that could cause our actual operating and financial performance to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

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OUR CORPORATE STRUCTURE

BKFS was incorporated in the State of Delaware on October 27, 2014 for the purpose of undertaking this offering and the transactions contemplated by this offering and to date has engaged only in activities in contemplation of this offering. Prior to the completion of this offering, all of our business operations are being conducted through BKFS Operating LLC and its subsidiaries.

FNF Acquisition of LPS

On January 2, 2014, FNF acquired LPS, and as a result, LPS became an indirect, wholly-owned subsidiary of FNF. Upon the closing of the transaction, the shares of LPS common stock, which previously traded under the ticker symbol “LPS” on the NYSE, ceased trading on, and were delisted from, the NYSE.

On January 3, 2014, pursuant to the Internal Reorganization, substantially all of the former Technology, Data and Analytics segment of LPS was transferred to us and the former Transaction Services businesses of LPS were transferred by BKIS to BKHI and contributed by BKHI to another of its then wholly-owned subsidiaries or to another subsidiary of FNF.

Also, on January 3, 2014, BKHI contributed Commerce Velocity, a former indirect subsidiary of FNF that had been contributed to BKHI in December 2013, to BKFS Operating LLC, which contributed it to BKIS. Thereafter, we issued 35.0% of the membership interests of BKFS Operating LLC to certain THL Affiliates and THL Intermediaries.

Following the Internal Reorganization, we are majority owned by FNF through its wholly-owned subsidiary, BKHI, and minority owned by THL through certain THL Affiliates and THL Intermediaries. FNF and THL Managers LLC also provide us with management and consulting services. The agreements under which FNF and THL Managers LLC provide these services will be terminated in connection with the closing of this offering.

Contribution of Property Insight, LLC

On June 2, 2014, as part of an additional internal reorganization, two wholly-owned subsidiaries of FNF contributed to us their respective interests in Property Insight, a company that provides property information used by title insurance underwriters, title agents and closing attorneys to underwrite title insurance policies for real property sales and transfers. As a result, we are now the sole member of Property Insight. In connection with the Property Insight Contribution, BKFS Operating LLC issued an additional 6.4 million of its Units to BKHI. As a result of this issuance, THL Affiliates’ and THL Intermediaries’ combined percentage ownership in BKFS Operating LLC was reduced from 35.0% to 32.9%.

 

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Structure Prior to the Offering Reorganization

Prior to the completion of this offering, we will effect the Offering Reorganization described in “—The Offering Reorganization.” The diagram below depicts our organizational structure immediately prior to the completion of the offering:

 

 

LOGO

 

(1) FNF owns 100% of the equity interests of BKHI.
(2) BKHI owns 67.1% of the Units and 100% of the shares of common stock of BKFS.
(3) THL, through THL Intermediaries and certain THL Affiliates, owns 32.9% of the Units.
(4) Members of the BKFS Management team and other key employees of BKFS or FNF or its subsidiaries will hold Grant Units.

The Offering Reorganization

Prior to the closing of this offering, we will complete transactions that will result in the following:

 

    the amendment and restatement of the issuer’s certificate of incorporation to authorize the issuance of two classes of common stock, Class A common stock and Class B common stock, which we collectively refer to herein as our common stock, and which will generally vote together as a single class on all matters submitted for a vote to stockholders;

 

   

the issuance of shares of Class B common stock by the issuer to BKHI and certain THL Affiliates, the holders of Units prior to the offering (Class B common stock will not entitle the holders thereof to any

 

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of the economic rights including rights to dividends and distributions upon liquidation that will be provided to holders of Class A common stock, and the total voting power of the Class B common stock will be equal to the percentage of Units not held by the issuer); and

 

    the issuance of shares of Class A common stock to certain THL Affiliates, in connection with the merger of the THL Intermediaries with and into the issuer, pursuant to which the issuer will acquire Units.

In connection with this offering, the following transactions will occur:

 

    the issuance of shares of Class A common stock by the issuer to the investors in this offering (the total voting power of Class A common stock outstanding will be proportional to the percentage of Units that will be held by the issuer);

 

    the contribution by the issuer of the net cash proceeds received in this offering to BKFS Operating LLC in exchange for     % of the Units and a managing member’s membership interest in BKFS Operating LLC; and

 

    the restatement of the Amended and Restated Operating Agreement to provide for the governance and control of BKFS Operating LLC by the issuer as its managing member and to establish the terms upon which other holders of Units may exchange those Units, and a corresponding number of shares of Class B common stock, for, at the issuer’s option, either shares of Class A common stock on a one-for-one basis or a cash payment.

Following the consummation of the Offering Reorganization, this offering and the application of the net proceeds therefrom, the issuer will be a holding company and through its managing member interest, will control the business and affairs of BKFS Operating LLC and its subsidiaries. The sole asset of the issuer will be its interest in BKFS Operating LLC.

 

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Structure Following the Offering Reorganization

The diagram below summarizes our anticipated organizational structure immediately after completion of the Offering Reorganization, including this offering and the application of the net proceeds from this offering (assuming an initial public offering price of $         per share, which is the mid-point of the estimated public offering range set forth on the cover page of this prospectus, and no exercise of the underwriters’ option to purchase additional shares).

 

 

LOGO

 

(1) FNF will own 100% of the equity interests of BKHI.
(2) BKHI will own no shares of Class A common stock and     % of the outstanding shares of Class B common Stock of BKFS, representing no economic interest and     % voting interest in BKFS and     % of the Units of BKFS Operating LLC.
(3) The public shareholders (excluding FNF and THL Affiliates) will own     % of the outstanding shares of Class A common stock and no shares of Class B common stock of BKFS, representing a     % economic and voting interest in BKFS.
(4) THL, through certain THL Affiliates, will beneficially own     % of the outstanding shares of Class A common stock and shares of Class B common stock of BKFS, representing a     % economic and voting interest in BKFS and     % of the Units of BKFS Operating LLC.
(5) BKFS will own     % of the Units and a managing member interest of BKFS Operating LLC.
(6) Members of the BKFS management team and other key employees of BKFS or FNF or its other subsidiaries will hold Grant Units.

 

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The Amended and Restated Operating Agreement

Following the Offering Reorganization and this offering, we will operate our business through BKFS Operating LLC and its subsidiaries. The operations of BKFS Operating LLC and the rights and obligations of its members will be governed by the Amended and Restated Operating Agreement, which we expect to enter into in connection with the consummation of this offering. The following is a description of material terms that we expect will be contained in the Amended and Restated Operating Agreement.

Governance

BKFS will serve as managing member and will control the business and affairs of BKFS Operating LLC. No other members of BKFS Operating LLC, in their capacity as such, will have any authority or right to control the management of BKFS Operating LLC or to bind it in connection with any matter. BKFS will exercise control of the business of BKFS Operating LLC through BKFS’s executive officers, who will manage the day-to-day activities of BKFS Operating LLC and its subsidiaries, subject to the direction of the board of directors of BKFS. The executive officers of BKFS will also be officers of BKFS Operating LLC and will be authorized to act on behalf of each such entity, subject to the ultimate direction of the board of directors of BKFS.

Voting and Economic Rights of Members

BKFS Operating LLC has authorized the issuance of three series of equity: (i) Units, (ii) Preferred Units and (iii) Grant Units. As of the date of the offering, no Preferred Units will have been issued or be outstanding. The Units will be held by BKHI, a wholly-owned subsidiary of FNF, certain THL Affiliates and BKFS. The Units will entitle their holders to a pro rata share in the profits and losses of, and distributions from, BKFS Operating LLC. Grant Units will entitle their holders to a pro rata share in the profits and losses of, and distributions from, BKFS Operating LLC, but only following such time as a specified dollar hurdle amount has been previously distributed to holders of Units. Holders of Units other than BKFS will have no voting rights, except in respect of amendments to the Amended and Restated Operating Agreement that adversely affect such holder, the dissolution of BKFS Operating LLC, and other matters adversely affecting such holders.

Net profits and losses of BKFS Operating LLC generally will be allocated, and distributions made, to its members pro rata in accordance with the number of Units owned by each member. Holders of Grant Units will participate in allocations and distributions by BKFS Operating LLC in accordance with the Amended and Restated Operating Agreement.

Subject to the availability of net cash flow at the BKFS Operating LLC level and to applicable legal and contractual restrictions, we intend to cause BKFS Operating LLC to distribute to us, and to the other holders of Units or Grant Units, cash payments for the purposes of funding tax obligations in respect of any net taxable income that is allocated to us and the other holders of Units or Grant Units as members of BKFS Operating LLC, to fund dividends, if any, declared by us and to make any payments due under the tax receivable agreement, as described below. See “Dividend Policy” and “Risk Factors—Risks Related to Our Structure.” If BKFS Operating LLC makes distributions to its members in any given year, the determination to pay the proceeds of such distributions received by the issuer, if any, to holders of our Class A common stock will be made by our board of directors. We do not, however, expect to declare or pay any cash or other dividends in the foreseeable future on our Class A common stock, as we intend to reinvest any cash flow generated by operations in our business. Holders of our Class B common stock will not be entitled to any dividend payments. We may enter into credit agreements or other borrowing arrangements in the future that prohibit or restrict our ability to declare or pay dividends on our Class A common stock.

Exchange of Units

Pursuant to and subject to the terms of the Amended and Restated Operating Agreement, holders of Units (other than the issuer), at any time and from time to time, may exchange one or more Units, together with an equal

 

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number of shares of our Class B common stock, for, at the issuer’s option, either shares of our Class A common stock on a one-for-one basis or a cash payment.

The determination to issue shares of Class A common stock or to pay cash in exchange for Units and corresponding shares of Class B common stock, and other related issuer determinations discussed below, will be made by the audit committee of our board of directors, pursuant to its responsibility and authority to review and approve any potential conflict of interest transaction involving our directors or executive officers, director nominees, any person known by us to be the beneficial owner of more than five percent of any class of our voting securities, or any family member of or related party to such persons.

Holders will not have the right to exchange Units if we determine that such exchange would be prohibited by law or regulation or would violate other agreements to which we may be subject. We may impose additional restrictions on exchange that we determine necessary or advisable so that BKFS Operating LLC is not treated as a “publicly traded partnership” for U.S. federal income tax purposes. If the IRS were to contend successfully that BKFS Operating LLC should be treated as a “publicly traded partnership” for U.S. federal income tax purposes, BKFS Operating LLC would be treated as a corporation for U.S. federal income tax purposes and thus would be subject to entity-level tax on its taxable income.

In connection with each exchange for a cash payment, the exchanged Units and shares of Class B common stock will automatically be deemed cancelled concurrently with such payment. The Amended and Restated Operating Agreement also provides that, at the election of a Grant Unit holder, vested Grant Units may be converted into the right to receive a number of Units based on the value of BKFS Operating LLC above a specified hurdle amount in respect of such Grant Units, which can then be immediately exchanged for, at the issuer’s option, either shares of our Class A common stock on a one-for-one basis, according to the terms of the Amended and Restated Operating Agreement, or a cash payment.

Thus, as holders exchange their Units and Class B common stock for Class A common stock, our economic interest in BKFS Operating LLC will increase. We and the exchanging holder will each generally bear our own expenses in connection with an exchange.

In lieu of the issuance of shares of Class A common stock in such exchange, the Amended and Restated Operating Agreement provides that the issuer may elect to cause BKFS Operating LLC to pay to the exchanging holder of Units or Grant Units an amount in cash per Unit equal to the then market value per share of our Class A common stock or the fair value of each Grant Unit, respectively. Upon the exchange of Units, any corresponding share of Class B common stock will be automatically cancelled.

We have reserved for issuance shares of our Class A common stock for potential issuance in respect of future exchanges of Units, including the aggregate number of Units anticipated to be outstanding after completion of the Offering Reorganization and this offering.

Coordination of BKFS and BKFS Operating LLC

Whenever we issue one share of Class A common stock for cash (other than pursuant to exchanges of Units under the Amended and Restated Operating Agreement), the net proceeds of such issuance will be transferred promptly to BKFS Operating LLC, and BKFS Operating LLC will issue to us one additional Unit. If we issue other classes or series of equity securities, we will contribute to BKFS Operating LLC the net proceeds we receive in connection with such issuance, and BKFS Operating LLC will issue to us an equal number of equity securities with designations, preferences and other rights and terms that are substantially the same as our newly issued equity securities. Conversely, if we repurchase any shares of Class A common stock (or equity securities of other classes or series) for cash, BKFS Operating LLC will, immediately prior to our repurchase, redeem an equal number of Units (or its equity securities of the corresponding classes or series), upon the same terms and for the same price, as the shares of our Class A common stock (or our equity securities of such other classes or

 

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series) that are repurchased. Units, Grant Units and shares of our common stock will be subject to equivalent stock splits, dividends and reclassifications.

We will not conduct any business other than the management and ownership of BKFS Operating LLC and its subsidiaries, or own any other assets (other than on a temporary basis), although we may take such actions and own such assets as are necessary to comply with applicable law, including compliance with our responsibilities as a public company under the U.S. federal securities laws, and may incur indebtedness and may take other actions if we determine that doing so is in the best interest of BKFS Operating LLC. To the extent the issuer incurs expenses in connection with its operations, including this offering, BKFS Operating LLC will reimburse the issuer pursuant to an advancement agreement between BKFS Operating LLC and the issuer. See “Certain Relationships and Related Party Transactions—Advancement Agreement.”

Exculpation and Indemnification

The Amended and Restated Operating Agreement contains provisions limiting the liability of its managing member, members, officers and their respective affiliates to BKFS Operating LLC or any of its members and contains broad indemnification provisions for BKFS Operating LLC’s managing member, members, officers and their respective affiliates. Because BKFS Operating LLC is a limited liability company, these provisions are not subject to the limitations on exculpation and indemnification contained in the DGCL with respect to the indemnification that may be provided by a Delaware corporation to its directors and officers. The amended and restated charter of the issuer will include similar exculpation provisions and indemnification obligations of the issuer for the benefit of the issuer’s directors and officers, and permissive indemnification obligations of the issuer for employees and other agents of the issuer.

Voting Rights of Class A Stockholders and Class B Stockholders

Each share of our Class A common stock and our Class B common stock will entitle its holder to one vote. Immediately after this offering, our Class B shareholders will collectively hold approximately     % of the total voting power of the outstanding common stock of the issuer, and, through an equal number of Units, an equivalent economic interest in BKFS Operating LLC (or     % if the underwriters exercise in full their option to purchase additional shares).

Tax Consequences

Holders of Units and Grant Units, including the issuer, generally will incur U.S. federal, state and local income taxes on their share of any taxable income of BKFS Operating LLC. Although net profits and net losses of BKFS Operating LLC generally will be allocated to the holders in proportion to the Units or Grant Units they hold, certain items of deduction will be allocated disproportionately to us and to THL Affiliates. We expect that the Amended and Restated Operating Agreement will provide for cash distributions to the holders of Units or Grant Units in an amount at least equal to the holders’ assumed tax liability attributable to BKFS Operating LLC. Generally, distributions in respect of the holders’ assumed tax liability will be computed based on our estimate of the taxable income of BKFS Operating LLC allocable to the Unit or Grant Unit multiplied by an assumed tax rate. In accordance with the Amended and Restated Operating Agreement, BKFS Operating LLC intends to make distributions to the holders in respect of such assumed tax liability and to fund dividends, if any, declared by the issuer.

BKFS Operating LLC intends to make an election under Section 754 of the Internal Revenue Code of 1986, as amended (the “Code”), which is effective for the 2015 tax year and for each taxable year in which there occurs an exchange of Units, together with an equal number of shares of Class B common stock, for shares of our Class A common stock or cash from BKFS Operating LLC. We expect that, as a result of this election, the acquisition of Units, together with an equal number of shares of Class B common stock, in exchange for shares of our Class A common stock or cash from BKFS Operating LLC will result in increases in the tax basis in our share of the tangible and intangible assets of BKFS Operating LLC at the time of such acquisition or exchange, which will

 

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increase the tax depreciation and amortization deductions available to us and which could create other tax benefits. Any such increases in tax basis and tax depreciation and amortization deductions or other tax benefits could reduce the amount of tax that we would otherwise be required to pay in the future. We may be required to pay a fixed percentage of the cash savings in U.S. federal, state and local income tax we actually realize from such increase to certain holders of Units pursuant to the tax receivable agreement we expect to enter into with such holders.

Tax Receivable Agreement

In connection with this offering, we expect to enter into a tax receivable agreement with certain existing holders of Units. The agreement will require us to pay to such holders a fixed percentage of the cash savings, if any, in U.S. federal, state and local income tax we realize as a result of certain tax benefits to which we may become entitled. This will be the issuer’s obligation and not an obligation of BKFS Operating LLC. Estimating the amount of payments to be made under the tax receivable agreement cannot be done reliably at this time. The payments that we make under the tax receivable agreement could be substantial.

Registration Rights Agreement

In connection with this offering, we expect to enter into a registration rights agreement with certain holders of the outstanding Units. This agreement will provide these holders (and their permitted transferees) with the right to require us, at our expense, to register shares of our Class A common stock that are issuable to them upon exchange of Units (and an equal number of shares of our Class B common stock) in accordance with the terms of the Amended and Restated Operating Agreement. The agreement will also provide that we will pay certain expenses of these electing holders relating to such registrations and indemnify them against certain liabilities that may arise under the Securities Act. For a detailed description of the registration rights agreement, see “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $         million, or approximately $         million if the underwriters exercise in full their option to purchase additional shares, assuming an initial public offering price of $         per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting the underwriting discount and estimated offering expenses payable by us.

We intend to contribute all of the net proceeds of this offering, including any proceeds received from the underwriters’ option to purchase additional shares, if exercised, to BKFS Operating LLC in exchange for              Units (or              Units if the underwriters exercise in full their option to purchase additional shares) from BKFS Operating LLC, at a purchase price per Unit equal to the initial public offering price per share of Class A common stock in this offering.

We intend that BKFS Operating LLC will use a portion of the net proceeds contributed to it to repay $         principal amount of our outstanding debt. The remaining net proceeds received by BKFS Operating LLC will be used to continue to support its growth and for working capital and general corporate purposes.

Each $1.00 increase or decrease in the public offering price per share would increase or decrease , as applicable, our net proceeds, after deducting the underwriting discount and estimated offering expenses payable by us, by $         million (assuming no exercise of the underwriters’ option to purchase additional shares). Similarly, an increase or decrease of one million shares of Class A common stock sold in this offering by us would increase or decrease, as applicable, our net proceeds, after deducting the underwriting discount and estimated offering expenses payable by us, by $        , based on an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus.

 

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DIVIDEND POLICY

We do not intend to pay cash dividends on our Class A common stock in the foreseeable future. We are a holding company that does not conduct any business operations of our own. As a result, our ability to pay cash dividends on our Class A common stock, if any, will be dependent upon cash dividends and distributions and other transfers from BKFS Operating LLC. The amounts available to us to pay cash dividends may be restricted by our debt instruments. The declaration and payment of dividends also is subject to the discretion of our board of directors and depends on various factors, including our net income, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors.

If dividends are declared, holders of shares of our Class A common stock could be eligible to receive dividends in respect of such shares, however, holders of shares of our Class B common stock would not be entitled to any dividend payments in respect of such shares.

Any future determination to pay dividends will be at the discretion of our board of directors and will take into account:

 

    restrictions in our debt instruments;

 

    general economic business conditions;

 

    our financial condition and results of operations;

 

    the ability of our operating subsidiaries to pay dividends and make distributions to us; and

 

    such other factors as our board of directors may deem relevant.

Accordingly, you may need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. See “Risk Factors—Risks Related to this Offering—We do not intend to pay dividends for the foreseeable future.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of September 30, 2014:

 

    on an actual basis;

 

    on a pro forma basis to give effect to the Offering Reorganization as more fully described in “Our Corporate Structure;” and

 

    on a pro forma as adjusted basis to give effect to the sale of shares of our Class A common stock in this offering and the application of the net proceeds received by us from this offering as described under “Use of Proceeds.”

This table should be read in conjunction with “Our Corporate Structure,” “Use of Proceeds,” “Selected Historical Consolidated Financial Data,” “Unaudited Pro Forma Condensed Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and the financial statements and notes thereto appearing elsewhere in this prospectus.

 

    As of September 30, 2014  
    BKFS Actual(1)     Pro Forma     Pro Forma
As Adjusted(2)
 
   

(In millions)

 

Cash and cash equivalents

  $ 52.4      $                   $                
 

 

 

   

 

 

   

 

 

 

Debt:

     

Intercompany Notes

  $ 718.4      $        $     

Mirror Note Tranche “T”

    644.0       

Mirror Note Tranche “R”

    176.0       

Senior Unsecured Notes(3)

    594.9       
 

 

 

   

 

 

   

 

 

 

      Total debt

    2,133.3       
 

 

 

   

 

 

   

 

 

 

Redeemable members’ interest

    353.1       

Member’s/stockholders’ equity:

     

Member’s equity

    925.4       

Class A common stock, $0.0001 par value per share,                 shares authorized, no shares outstanding actual and                 shares outstanding pro forma as adjusted

    —         

Class B common stock, $0.0001 par value per share,                 shares authorized, no shares outstanding actual and                 shares outstanding pro forma as adjusted

    —         
 

 

 

   

 

 

   

 

 

 

Total member’s/stockholders’ equity

    925.4       
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 3,464.2      $        $     
 

 

 

   

 

 

   

 

 

 

 

(1) As of September 30, 2014, BKFS Operating LLC directly or indirectly held all of our assets and liabilities, and BKFS, which was incorporated on October 27, 2014, did not exist. Accordingly, the actual capitalization as of September 30, 2014 presents that of BKFS Operating LLC.

 

(2) Each $1.00 increase or decrease in the public offering price per share would increase or decrease , as applicable, our net proceeds, after deducting the underwriting discount and estimated offering expenses payable by us, by $         million (assuming no exercise of the underwriters’ option to purchase additional shares). Similarly, an increase or decrease of one million shares of Class A common stock sold in this offering by us would increase or decrease, as applicable, our net proceeds, after deducting the underwriting discount and estimated offering expenses payable by us, by $            , based on an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus.

 

(3) Excludes the unamortized bond premium of $21.7 million.

 

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DILUTION

If you invest in our Class A common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma net tangible book value per share of our Class A common stock after the Offering Reorganization described in “Our Corporate Structure” and this offering. Dilution results from the fact that the per share offering price of the Class A common stock is substantially in excess of the book value per share attributable to our existing investors.

Our pro forma net tangible book value as of September 30, 2014 would have been approximately $            , or $         per share of our Class A common stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, and pro forma net tangible book value per share represents pro forma net tangible book value divided by the number of shares of Class A common stock outstanding, in each case, after giving effect to the Offering Reorganization but not this offering.

After giving effect to (i) the completion of the Offering Reorganization as more fully described in “Our Corporate Structure,” (ii) the sale of             shares of Class A common stock in this offering at the assumed initial public offering price of $          per share (the midpoint of the range set forth on the cover of this prospectus) after deducting the underwriting discount and estimated offering expenses payable by us and (iii) the application of the net proceeds from this offering and assuming all Units, together with an equal number of shares of our Class B common stock, are exchanged for an equal number of shares of Class A common stock, our pro forma net tangible book value would have been $            , or $         per share. This represents an immediate increase in pro forma net tangible book value of $         per share to our existing investors and an immediate dilution in pro forma net tangible book value of $         per share to new investors.

The following table illustrates this dilution on a per share of Class A common stock basis:

 

Assumed initial public offering price per share

   $                

Pro forma net tangible book value per share as of             , 2014

  

Increase in pro forma net tangible book value per share attributable to new investors

  

Pro forma net tangible book value per share after this offering

  

Dilution per share to new investors in this offering

   $     

The following table summarizes, on a pro forma basis as of September 30, 2014 after giving effect to the Offering Reorganization and this offering, the total number of shares of Class A common stock purchased from us, the total cash consideration paid to us and the average price per share paid by our existing investors and by new investors purchasing shares in this offering.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number    Percent     Amount      Percent    

Existing stockholders

               $                             $                

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100.0   $           100.0   $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

If the underwriters were to fully exercise their option to purchase              additional shares of our Class A common stock, the percentage of shares of our common stock held by existing investors would be     %, and the percentage of shares of our common stock held by new investors would be     %.

 

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The above discussion and tables are based on the number of shares outstanding at September 30, 2014 on a pro forma basis and excludes an aggregate of             additional shares of our Class A common stock that will be issuable upon exchange of Units or reserved for future awards pursuant to our equity incentive plans. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our stockholders.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table presents our selected historical financial data and should be read in conjunction with “Unaudited Pro Forma Condensed Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related footnotes thereto, included elsewhere in this prospectus. The periods presented below prior to January 2, 2014, the date of the Acquisition, are referred to as Predecessor periods and the periods presented after and including January 2, 2014 are referred to as Successor periods. The financial data for the Predecessor periods reflect the financial position and results of operations of our predecessor, LPS, which include the Transaction Services segment of LPS that was distributed by us to ServiceLink in connection with the Internal Reorganization on January 3, 2014. The financial data for the Successor periods do not include the financial position and results of operations of the Transaction Services segment of LPS. As a result, the financial data included in the Successor periods are not comparable to the financial data included in the Predecessor periods. See “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The consolidated statements of operations data for the years ended December 31, 2013, December 31, 2012 and December 31, 2011 and the consolidated balance sheet data as of December 31, 2013 and December 31, 2012 are derived from the audited financial statements from our predecessor, LPS, included in this prospectus. The consolidated statement of earnings for the years ended December 31, 2010 and 2009, and consolidated balance sheet data as of December 31, 2011, December 31, 2010 and December 31, 2009 are derived from the audited financial statements from our predecessor, LPS, not included in this prospectus.

 

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     Successor      Predecessor  
     Period
January 2,
2014 through
September 30,

2014
     One day
ended
January 1,
2014
    Year Ended December 31,  
          2013      2012      2011      2010      2009  
           

(In millions, except per share amounts)

 

Statements of Earnings Data:

                     

Revenues

   $ 631.8       $      $ 1,716.2       $ 1,991.3       $ 1,980.0       $ 2,196.6       $ 2,094.8   

Net (loss) earnings from continuing operations

   $ (117.1    $ (50.1   $ 104.2       $ 79.6       $ 135.3       $ 305.1       $ 280.4   

Net (loss) earnings

   $ (117.8    $ (39.0   $ 102.7       $ 70.4       $ 96.5       $ 302.3       $ 275.7   

Net earnings per share—basic from continuing operations

          $ 1.22       $ 0.94       $ 1.58       $ 3.28       $ 2.93   

Net earnings per share—basic

          $ 1.20       $ 0.83       $ 1.13       $ 3.25       $ 2.88   

Weighted average shares—basic

            85.4         84.6         85.6         93.1         95.6   

Net earnings per share—diluted from continuing operations

          $ 1.21       $ 0.94       $ 1.58       $ 3.26       $ 2.91   

Net earnings per share—diluted

          $ 1.19       $ 0.83       $ 1.13       $ 3.23       $ 2.87   

Weighted average shares—diluted

            85.9         84.9         85.7         93.6         96.2   
 

Balance Sheet Data:

                     

Cash and cash equivalents

   $ 52.4       $      $ 329.6       $ 236.2       $ 77.4       $ 52.3       $ 70.5   

Total assets

   $ 3,608.3       $      $ 2,486.7       $ 2,445.8       $ 2,245.4       $ 2,251.8       $ 2,197.3   

Total debt (current and long-term)

   $ 2,155.0       $      $ 1,068.1       $ 1,068.1       $ 1,149.2       $ 1,249.4       $ 1,289.4   

Cash dividends per share

          $ 0.40       $ 0.40       $ 0.40       $ 0.40       $ 0.40   

 

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Quarterly Financial Data (Unaudited)

 

     Predecessor  
     2013 Quarter Ended  
     March 31,      June 30,     September 30,      December 31,  
     (In millions, except per share data)  

Revenues

   $ 469.7       $ 466.9      $ 417.2       $ 362.4   

Net earnings (loss) from continuing operations(1)

   $ 54.3       $ 20.5      $ 34.8       $ (5.4

Net earnings (loss)(1)

   $ 53.9       $ 19.1      $ 35.5       $ (5.8

Net earnings (loss) per share—basic from continuing operations

   $ 0.64       $ 0.24      $ 0.41       $ (0.06

Net earnings (loss) per share—basic

   $ 0.63       $ 0.22      $ 0.42       $ 0.07

Weighted average shares—basic

     84.9         85.1        85.3         86.3   

Net earnings (loss) per share—diluted from continuing operations

   $ 0.64       $ 0.24      $ 0.40       $ (0.07

Net earnings (loss) per share—diluted

   $ 0.63       $ 0.22      $ 0.41       $ (0.07

Weighted average shares—diluted

     85.1         85.6        86.0         86.9   
     2012 Quarter Ended  
     March 31,      June 30,     September 30,      December 31,  
     (In millions, except per share data)  

Revenues

   $ 484.6       $ 511.7      $ 495.7       $ 499.3   

Net earnings (loss) from continuing operations(2)

   $ 48.7       $ (35.2   $ 60.2       $ 5.9   

Net earnings (loss)(2)

   $ 47.1       $ (37.9   $ 58.3       $ 2.9   

Net earnings (loss) per share—basic from continuing operations

   $ 0.58       $ (0.42   $ 0.71       $ 0.07   

Net earnings (loss) per share—basic

   $ 0.56       $ (0.45   $ 0.69       $ 0.03   

Weighted average shares—basic

     84.4         84.6        84.7         84.9   

Net earnings (loss) per share—diluted from continuing operations

   $ 0.58       $ (0.42   $ 0.71       $ 0.07   

Net earnings (loss) per share—diluted

   $ 0.56       $ (0.45   $ 0.69       $ 0.03   

Weighted average shares—diluted

     84.6         84.6        84.9         85.1   

 

(1) During the fourth quarter of 2013, the company’s net earnings (loss) and net earnings (loss) from continuing operations included an asset impairment charge of $28.6 million and an addition to the legal and regulatory accrual of $20.4 million, as discussed in notes 8 and 15, respectively, to the audited consolidated financial statements of LPS’s included elsewhere in this prospectus. In addition, results for the fourth quarter of 2013 included expenses related to the Acquisition by FNF (see note 2 of LPS’s audited consolidated financial statements included elsewhere in this prospectus) of $8.1 million.

 

(2) During the second and fourth quarters of 2012, the company’s net earnings (loss) and net earnings (loss) from continuing operations included an addition to the legal and regulatory accrual of $144.5 million and $47.9 million, respectively, as discussed in note 14 to LPS’s consolidated financial statements included elsewhere in this prospectus.

 

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SELECTED HISTORICAL COMBINED FINANCIAL DATA OF COMMERCE

VELOCITY AND PROPERTY INSIGHT

The following selected unaudited historical combined financial information has been derived from the unaudited financial information of Commerce Velocity and Property Insight which are not included or incorporated by reference into this prospectus. Certain financial information for Commerce Velocity and Property Insight has been included in the audited Black Knight Financial Services, LLC combined financial statements as of December 31, 2013 and for the period from October 16, 2013 through December 31, 2013 included elsewhere in this prospectus and in the unaudited Pro Forma Condensed Consolidated Financial Information for BKFS subsequent to the Acquisition.

The selected unaudited financial information as of and for each of the three years ending December 31, 2013 is derived from the historical financial records of FNF and includes all material adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of the unaudited periods. You should not rely on these results as being indicative of the results of Commerce Velocity and Property Insight after their contribution to BKFS Operating LLC or in the future.

 

     Year Ended December 31,  
     2013     2012      2011  
     (In millions)  

Statement of Operations Data:

       

Revenues

   $ 71.9      $ 73.5       $ 64.5   

(Loss) earnings

   $ (14.4   $ 4.1       $ 4.6   

Balance Sheet Data:

       

Total assets

   $ 88.1      $ 90.4       $ 79.6   

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

The following table presents selected unaudited pro forma condensed combined financial information about our combined balance sheet and statements of operations, after giving effect to the Internal Reorganization Transactions, the Acquisition Related Refinancing, as described below, and the Offering Reorganization. The information under “Unaudited Pro Forma Condensed Combined Balance Sheet Data” in the table below gives effect to the Internal Reorganization Transactions, the Acquisition Related Refinancing and the offering and Offering Reorganization, as if all had been consummated on September 30, 2014. The information under “Unaudited Pro Forma Condensed Combined Statement of Operations Data” in the table below gives effect to the Internal Reorganization Transactions, the Acquisition Related Refinancing and the offering and Offering Reorganization as if all had been consummated on January 1, 2013, the beginning of the earliest time period presented. This unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting under U.S. generally accepted accounting principles, or GAAP, which is subject to change and interpretation, as pertaining to the Acquisition. FNF has been treated as the acquirer of LPS for accounting purposes. This unaudited pro forma condensed combined financial information was prepared using the accounting for transactions between entities under common control under GAAP as pertaining to the Commerce Velocity Contribution and the Property Insight Contribution.

BKFS was incorporated in the State of Delaware on October 27, 2014 for the purpose of completing this offering of Class A common stock of BKFS. To date BKFS has engaged only in activities in contemplation of this offering. Prior to the completion of this offering, all of our business operations will have been conducted through BKFS Operating LLC and its subsidiaries.

Beginning January 2, 2014, pursuant to the Acquisition, the Internal Reorganization and the Acquisition Related Refinancing the following transactions occurred:

On January 2, 2014, FNF completed the Acquisition, pursuant to the Agreement and Plan of Merger (the “Merger Agreement, dated as of May 28, 2013, among FNF, BKHI, and Lion Merger Sub, Inc., a Delaware corporation and a subsidiary of BKHI, or Merger Sub, and LPS. Pursuant to the Merger Agreement, Merger Sub merged with and into LPS, with LPS surviving as a subsidiary of BKHI. The purchase consideration paid by FNF was $3.4 billion, which consisted of $2,535 million in cash and $839 million in FNF common stock, or approximately 25.9 million shares. Upon the closing of the Acquisition, the shares of LPS common stock, which previously traded under the ticker symbol “LPS” on the NYSE, ceased trading on, and were delisted from, the NYSE.

In connection with the Acquisition, all LPS assets and liabilities were set to their fair value on January 2, 2014 as part of FNF’s allocation of the LPS purchase price to the identifiable assets and liabilities acquired. The purchase price has been initially allocated to the LPS assets acquired and liabilities assumed based on our best estimates of their fair values as of the acquisition date. Goodwill has been recorded based on the amount that the purchase price exceeds the fair value of the net assets acquired. The estimate is still preliminary and subject to adjustments as we complete our valuation process, which we expect to complete by the end of 2014.

On January 3, 2014, LPS was converted into a Delaware limited liability company and was renamed BKIS, a member managed limited liability company. Also on that date, pursuant to the Internal Reorganization, BKIS distributed all of its limited liability company membership interests and equity interests in its subsidiaries engaged in the Transaction Services business (the “TS subs”) to BKHI, which we refer to as the Distribution. Following the Distribution, Black Knight contributed the Transaction Services subsidiaries to its wholly-owned subsidiary Black Knight Financial Services II, LLC, which has been renamed ServiceLink Holdings, LLC and contributed BKIS to its subsidiary BKFS Operating LLC. BKFS Operating LLC is considered the successor to LPS.

On January 3, 2014, BKFS Operating LLC undertook certain refinancing and other debt related activities, known as the Acquisition Related Refinancing. The Acquisition Related Refinancing is described further in Note 2 below.

 

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Also on January 3, 2014, FNF, through BKHI, contributed its subsidiary, Commerce Velocity to BKFS Operating LLC, which then contributed Commerce Velocity to BKIS. In addition, BKIS sold its interest in National Title Insurance of New York, Inc. to a wholly owned subsidiary of FNF on this date. Subsequent to the contribution of Commerce Velocity, 35% of the membership interest of BKFS was issued to certain THL Affiliates and THL Intermediaries.

As part of the Amended and Restated Operating Agreement, certain THL Affiliates and THL Intermediaries have an option to put their ownership interest of BKFS Operating LLC to BKFS Operating LLC or FNF if no public offering of BKFS Operating LLC has been consummated after four years. The units owned by certain THL Affiliates and THL Intermediaries may be settled in cash or common stock of FNF, or a combination of both, at the election of FNF in an amount equivalent. The units owned by certain THL Affiliates and THL Intermediaries will be settled at the current fair value at the time FNF receives notice of certain THL Affiliates and THL Intermediaries put election as determined by the parties or by a third party appraisal. As this redeemable interest provides for redemption features not solely within the control of BKFS Operating LLC or FNF, it is classified outside of permanent equity in accordance with accounting standards on distinguishing liabilities from equity.

As part of the Acquisition, all of the LPS outstanding equity awards as of December 31, 2013 were accelerated and vested and subsequently converted to a mix of FNF common stock and cash in accordance with the Merger Agreement. In addition, certain other incentive compensation plans for senior executives were also accelerated due to change in control provisions triggered by the Acquisition. As a result, approximately $24.6 million in unrecognized compensation costs were not included within these unaudited pro forma condensed combined statements of operations.

On June 2, 2014, as a result of the Property Insight Contribution, BKFS Operating LLC issued 6.4 million Units to FNF. As a result of the additional shares issued, certain THL Affiliates and THL Intermediaries now collectively own 32.9% of the outstanding member interests of BKFS Operating LLC, while FNF and its subsidiaries collectively own 67.1% of the outstanding member interests of BKFS Operating LLC.

In accordance with GAAP requirements for transactions between entities under common control the Commerce Velocity Contribution and the Property Insight Contribution were recorded at their respective historical FNF book values on the date of contribution in the BKFS Operating LLC financial statements as of and for the period from January 2, 2014 to September 30, 2014.

The events on January 3, 2014 and June 2, 2014 are reflected in the pro forma unaudited condensed combined financial statements as if all had occurred as of the earliest date presented.

The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the Internal Reorganization Transactions, the Acquisition Related Refinancing and this offering and the Offering Reorganization, (2) factually supportable, and (3) with respect to the statements of operations, expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial information should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. See the section entitled “Where You Can Find More Information.” In addition, the unaudited pro forma condensed combined financial information was based on and should be read in conjunction with the following, which are included elsewhere in this prospectus:

 

    separate audited financial statements of LPS as of December 31, 2013 and 2012, and for each year in the three-year period ended December 31, 2013, and the related notes included elsewhere in this prospectus,

 

    separate audited financial statements of Black Knight Financial Services, LLC, a legal entity formed by FNF prior to the Acquisition, to which LPS was contributed after the Acquisition, (BKFS, LLC) as of December 31, 2013 and for the period from October 16, 2013 through December 31, 2013 and the related notes included elsewhere in this prospectus,

 

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    separate unaudited interim condensed consolidated financial statements of BKFS Operating LLC as of September 30, 2014 (Successor period) and for the three month period ended September 30, 2014 and for the period from January 2, 2014 through September 30, 2014 (Successor periods), and for the one day period January 1, 2014 and the three and nine months ended September 30, 2013 (Predecessor periods) and the related notes included elsewhere in this prospectus, and

 

    separate audited balance sheet of BKFS as of October 27, 2014 and the related notes included elsewhere in this prospectus.

The unaudited pro forma condensed combined financial information has been presented for informational purposes only. The pro forma information is not necessarily indicative of what our financial position or results of operations actually would have been had the Internal Reorganization Transactions, the Acquisition Related Refinancing and this offering and Offering Reorganization been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project our future financial position or operating results. Transactions among the entities included in the unaudited pro forma condensed combined financial statements during the periods presented have been eliminated. In addition, the unaudited pro forma condensed combined financial information includes adjustments which are preliminary and may be revised. There can be no assurance that such revisions will not result in material changes.

The acquisition accounting applied to the Acquisition was prepared in accordance with GAAP and is dependent upon certain valuations and other studies that are substantially complete, but ongoing. Accordingly, the pro forma adjustments are subject to change. Differences between these preliminary estimates and the final acquisition accounting may occur and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and our future results of operations and financial position.

The unaudited pro forma condensed combined financial information may not reflect all cost savings, operating synergies or revenue enhancements that we may achieve as a result of the Internal Reorganization Transactions, the costs to integrate the operations of FNF and LPS or the costs necessary to achieve these cost savings, operating synergies and revenue enhancements. These activities are ongoing. The unaudited pro forma condensed combined financial information does not reflect future costs which may be incurred in the future as a result of this offering and becoming a publicly traded company.

 

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Unaudited Pro Forma Condensed Combined Balance Sheet Data

As of September 30, 2014

(In millions)

 

     BKFS
Operating LLC
    Pro Forma
Adjustments
    Pro Forma BKFS  

Assets

      

Current assets:

      

Cash and cash equivalents

   $ 52.4       

Trade receivables, net

     128.1        —          128.1   

Prepaid expenses and other current assets

     30.5          (a)   

Receivables from related parties

     11.7        —         11.7   
  

 

 

   

 

 

   

 

 

 

Total current assets

     222.7       

Property and equipment, net

     131.5        —          131.5   

Computer software, net

     505.8        —          505.8   

Other intangible assets, net

     438.3        —          438.3   

Goodwill

     2,209.7        —          2,209.7   

Other non-current assets

     100.3          (a)   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,608.3       
  

 

 

   

 

 

   

 

 

 

Liabilities, Redeemable Members’ Interest and Equity

      

Liabilities:

      

Current liabilities:

      

Trade accounts payable and other accrued liabilities

   $ 37.0          (a)    $     

Accrued salaries and benefits

     47.0        —          47.0   

Legal and regulatory accrual

     3.9        —          3.9   

Current portion of long-term debt

     48.3       

Accrued interest

     15.9        —          15.9   

Payable to related parties

     6.6        —          6.6   

Deferred revenues

     23.8        —         23.8   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     182.5       

Deferred revenues

     26.0        —          26.0   

Long-term debt, net of current portion

     2,106.7       

Other non-current liabilities

     14.6          (a)  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     2,329.8       
  

 

 

   

 

 

   

 

 

 

Redeemable members’ interest

     353.1       

Equity:

      

Common stock

     —         

Additional paid-in capital

     —         

Contributed member capital

     1,079.1       

(Accumulated loss) retained earnings

     (153.6     —          (153.6

Accumulated other comprehensive loss

     (0.1     —         (0.1
  

 

 

   

 

 

   

 

 

 

Total equity attributable to BKFS, Inc.

     925.4       

Noncontrolling interest

     —        
  

 

 

   

 

 

   

 

 

 

Total equity

     925.4       
  

 

 

   

 

 

   

 

 

 

Total liabilities, redeemable members’ interest and equity

   $ 3,608.3       
  

 

 

   

 

 

   

 

 

 

See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of these statements. The pro forma adjustments are explained in Note 2. Pro Forma Adjustments.

 

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Unaudited Pro Forma Condensed Combined Statement of Operations Data

For the Nine Months Ended September 30, 2014

(In millions)

 

     BKFS Operating LLC
for the period from
January 2, 2014
through
September 30, 2014
    Pro Forma
Adjustments
    Pro Forma
BKFS
 

Revenue

   $ 631.8      $ 2.7 (c)    $ 634.5   

Operating expenses

     392.3        —          392.3   

Depreciation and amortization

     143.1        (5.4 )(i)      137.7   

Legal and regulatory charges

     —          —          —     

Exit costs, impairments and other

     —          —          —     

Transition and integration costs

     111.1        (111.1 )(f)(h)      —     
  

 

 

   

 

 

   

 

 

 

Total expenses

     646.5        (116.5     530.0   
  

 

 

   

 

 

   

 

 

 

Operating income

     (14.7     119.2        104.5   
  

 

 

   

 

 

   

 

 

 

Interest income

     —          —          —     

Interest expense

     (96.8     (3.5 )(j)      (93.3

Other expense/income (net)

     (11.1     (11.0 )(f)      (0.1
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (107.9     14.5        (93.4
  

 

 

   

 

 

   

 

 

 

(Loss) Earnings from continuing operations before taxes

     (122.6     133.7        11.1   

(Benefit) provision for income taxes

     (5.5     6.1 (k)      0.6   
  

 

 

   

 

 

   

 

 

 

Net (loss) earnings from continuing operations

     (117.1     127.6        10.5   

Loss from discontinued operations, net

     (0.7     —          (0.7
  

 

 

   

 

 

   

 

 

 

Net (loss) earnings

   $ (117.8   $ 127.6      $ 9.8   
  

 

 

   

 

 

   

 

 

 

See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of these statements. The pro forma adjustments are explained in Note 2. Pro Forma Adjustments.

 

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Unaudited Pro Forma Condensed Combined Statement of Operations Data

For the Year Ended December 31, 2013

(In millions)

 

    LPS     Period
October 16,
2013 -

through
December 31,
2013

BKFS, LLC
    Subtotal     Less: TS
Subs &
Other
    Add:
Period
January 1,
2013 –
through
October 15
2013

BKFS,
LLC
    Other Pro
Forma
Adjustments
    Pro
Forma
BKFS
 

Revenue

  $ 1,716.2      $ 15.0      $ 1,731.2      $ 971.4      $ 56.9      $ (7.7 )(b)(c)(g)    $ 809.0   

Operating expenses

    1,280.6        16.9        1,297.5        814.1        64.3        (1.0 )(b)(e)(g)      546.7   

Depreciation and amortization

    104.0        1.1        105.1        20.4        4.0        100.7 (i)      189.4   

Legal and regulatory charges

    74.4        —          74.4        71.9        —          (2.5 )(f)      —     

Exit costs, impairments and other

    49.4        —          49.4        41.3        —          (7.4 )(d)(f)      0.7   

Transition and integration costs

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    1,508.4        18.0        1,526.4        947.7        68.3        89.8        736.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    207.8        (3.0     204.8        23.7        (11.4     (97.5     72.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

    2.3        —          2.3        2.2        —          —          0.1   

Interest expense

    (52.4     —          (52.4     1.2        —          74.4 (j)      (128.0

Other expense/income (net)

    0.1        —          0.1        (0.1     —          —          0.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (50.0     —          (50.0     3.3        —          (74.4     (127.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before taxes

    157.8        (3.0     154.8        27.0        (11.4     (171.9     (55.5

Provision (benefit) for income taxes

    53.6        —          53.6        7.9        —          (48.9 )(k)      (3.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) from continuing operations

    104.2        (3.0     101.2        19.1        (11.4     (123.0     (52.3

Loss from discontinued operations, net

    (1.5     —          (1.5     —          —          —          (1.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

  $ 102.7      ($ 3.0   $ 99.7      $ 19.1      ($ 11.4   ($ 123.0   ($ 53.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of these statements. The pro forma adjustments are explained in Note 2. Pro Forma Adjustments.

 

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Unaudited Comparative Per Share Data

Presented below is BKFS’s unaudited pro forma combined per share data for the nine months ended September 30, 2014 and for the year ended December 31, 2013. This information should be read together with the consolidated financial statements and related notes of LPS, BKFS and BKFS Operating LLC as well as the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein and with the unaudited pro forma combined financial data included under “—Selected Unaudited Pro Forma Condensed Combined Financial Information of BKFS.” The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Internal Reorganization Transactions, the Acquisition Related Refinancing and the Offering Reorganization had been completed on January 1, 2013, the beginning of the earliest period presented, nor is it necessarily indicative of the future operating results or financial position of the Combined Company. The pro forma earnings per share of the Combined Company is computed by dividing the pro forma net earnings attributable to BKFS Class A common shareholders by the pro forma weighted average number of shares outstanding.

Unaudited Pro Forma Per Share Data

For the Nine Months Ended September 30, 2014

(In millions, except per share data)

 

    BKFS Operating LLC
for the period from
January 2, 2014 through
September 30, 2014
  Pro Forma
Adjustments
  Pro Forma BKFS
Combined

Net earnings per share—basic, attributable to BKFS Class A common shareholders

     
 

 

 

 

 

 

Weighted average shares outstanding—basic

     
 

 

 

 

 

 

Net earnings per share—diluted, attributable to BKFS Class A common shareholders

     
 

 

 

 

 

 

Weighted average shares outstanding—diluted

     
 

 

 

 

 

 

 

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Unaudited Pro Forma Per Share Data

For the Year Ended December 31, 2013

(In millions, except per share data)

 

    BKFS Operating LLC   Pro Forma
Adjustments
  Pro Forma BKFS
Combined

Net earnings per share—basic, attributable to BKFS Class A common shareholders

     
 

 

 

 

 

 

Weighted average shares outstanding—basic

     
 

 

 

 

 

 

Net earnings per share—diluted, attributable to BKFS Class A common shareholders

     
 

 

 

 

 

 

Weighted average shares outstanding—diluted

     
 

 

 

 

 

 

See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of these statements. The pro forma adjustments are explained in Note 2. Pro Forma Adjustments.

 

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED

COMBINED FINANCIAL STATEMENTS

 

(1) Basis of Presentation

The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting and is based on the historical financial statements of LPS. The acquisition method of accounting is based on Accounting Standard Code, or ASC, Topic 805, Business Combinations, or ASC 805, and uses the fair value concepts defined in ASC Topic 820, Fair Value Measurements, or ASC 820. Certain reclassifications have been made to the historical financial statements of LPS to conform to the BKFS Operating LLC presentation.

ASC 805 requires that most assets acquired and liabilities assumed be recognized at their fair values as of the date of a merger. In addition, ASC 805 establishes that the consideration transferred be measured at the closing date of a merger at the then-current market price. ASC 820 defines the term “fair value” and sets forth the valuation requirements for any asset or liability measured at fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined in ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. As a result of these standards, the acquiring company may be required to record assets which are not intended to be used or sold and/or to value assets at fair value measures that do not reflect the future intended use of those assets. Many of these fair value measurements can be highly subjective and it is also possible that others applying reasonable judgment to the same facts and circumstances could develop and support a range of alternative estimated amounts.

Under the acquisition method of accounting, the LPS assets acquired and liabilities assumed were recorded as of the closing of the Acquisition at their respective fair values and added to those of FNF. The acquisition accounting applied to the Acquisition was prepared in accordance with GAAP and is dependent upon certain valuations and other studies that are substantially complete but ongoing. Accordingly, the pro forma adjustments are subject to change. Differences between these preliminary estimates and the final acquisition accounting may occur and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and the Combined Company’s future results of operations and financial position.

Financial statements and reported results of operations of BKFS Operating LLC issued after the closing of the Internal Reorganization Transactions and the Acquisition Related Refinancing will reflect these values, but will not be retroactively restated to reflect the historical financial position or results of operations of LPS. The condensed combined financial information presents the acquired assets and liabilities assumed of LPS at the acquisition date fair value as determined by FNF.

Pursuant to ASC 805, the unaudited pro forma condensed combined financials have been adjusted for costs related to the Internal Reorganization Transactions and the Acquisition Related Refinancing, which we collectively refer to herein as the Transaction Costs. The Transaction Costs include legal fees, integration and restructuring costs, professional fees, severance payments, acquisition related incentive bonuses, retention bonuses, bank fees and others. Total Transaction Costs incurred by BKFS Operating LLC during the period from January 2, 2014 through September 30, 2014 and the year ending December 31, 2013 were $104.4 million and $7.0 million, respectively. The Transaction Costs and costs associated with the Offering Reorganization have been eliminated in the pro forma condensed combined statements of earnings (Note (2), item (f)) as prescribed by Article 11 of Regulation S-X. Certain transactions costs related to the Acquisition were incurred by LPS on January 1, 2014, prior to being converted to an LLC. These transactions costs were excluded from the unaudited pro forma condensed combined financial statements for the nine months ending September 30, 2014. There was no other activity in the January 1, 2014 period.

 

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(2) Pro Forma Adjustment

This note should be read in conjunction with other notes in the unaudited pro forma condensed combined financial statements. Adjustments included in the column under the heading “Pro Forma Adjustments” represent the following:

 

(a) To record $             million of estimated income taxes receivable (payable) and to record $             million of estimated deferred income taxes as of September 30, 2014 as a result of our being a taxable entity as a result of this offering. Our future taxes will depend on the proportion of BKFS Operating LLC owned by the public company. For the purposes of the unaudited pro forma condensed combined financial information, we have assumed that we will own 15% of BKFS Operating LLC after this offering and an effective tax rate of 38%.

 

(b) To eliminate $2.4 million of revenue earned by Property Insight on transactions with LPS and corresponding expense to LPS for the year ending December 31, 2013.

 

(c) To adjust deferred revenue recognition as a result of fair value accounting associated with the Acquisition. Certain revenues are deferred for accounting purposes but require minimal or no future incremental direct costs in order to be recognized. The net effect was a change to pro forma BKFS deferred revenues recognized of $2.7 million and $(15.1) million for the nine months ending September 30, 2014 and the year ending December 31, 2013, respectively.

 

(d) To reverse $0.4 million charge for discontinuation of a computer software project recorded by LPS during the year ended December 31, 2013.

 

(e) To record the following adjustments to personnel cost:

 

     Year Ended
December 31, 2013
 

Reverse share-based compensation recorded by LPS

   $ (15.7

Record estimated stock-based compensation related to profits interests on BKFS Operating LLC issued to certain employees and directors during 2014, subsequent to the Acquisition

     7.3   
  

 

 

 
   $ 8.4   
  

 

 

 

 

(f) To reverse the Transaction Costs incurred by LPS and BKFS Operating LLC of $104.4 million and $7.0 million incurred during the nine months ending September 30, 2014 and the year ending December 31, 2013, respectively. Also, to reverse $11.0 and $2.5 million in legal costs associated with shareholder litigation incurred in the nine months ending September 30, 2014 and the year ending December 31, 2013, respectively.

 

(g) To reclassify $9.8 million of intercompany Revenues from the TS subs netted in Operating expenses.

 

(h) To reverse the member management fees of $6.7 million for nine months ending September 30, 2014 which were payable to FNF and THL annually in accordance with the Amended and Restated Operating Agreement.

 

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(i) To record adjustments to amortization pertaining to deferred costs, which are included in Other assets in the unaudited pro forma condensed combined financial statements, Computer software and Intangible assets as a result of fair value accounting.

 

     Nine Months Ended
September 30, 2014
    Year Ended
December 31, 2013
 
     (In millions)  

Reverse historical depreciation and amortization of LPS Property and equipment, Computer software and Intangible assets

   $ —        $ (71.6 )

Record incremental BKFS Operating LLC depreciation and amortization on Property and equipment, Computer software and Intangible assets as a result of fair value accounting

     (7.4     183.3   

Reverse historical amortization of LPS Deferred costs

     —          (12.0 )

Record incremental deferred cost amortization on BKFS Operating LLC as a result of fair value accounting

                         2.0                            1.0   
  

 

 

   

 

 

 
   $ (5.4   $ 100.7   
  

 

 

   

 

 

 

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 5 years to 10 years. Internally developed software costs are amortized using the straight-line method over its estimated useful life. Useful lives of computer software range from 3 years to 10 years. The resulting estimated amortization is $68.2 million per year.

The assumed life for the other intangible assets is 2-15 years and is determined based on the expected future cash flows of the intangible asset. Intangible asset amortization is estimated using the accelerated, pattern-of-benefit amortization method, resulting in amortization for the next 5 years as follows:

 

     (In millions)  

2015

   $ 82.2   

2016

     76.4   

2017

     65.5   

2018

     55.3   

2019

     45.2   

 

(j) To record adjustments to interest expense as a result of fair value accounting and certain refinancing and debt related activity which occurred simultaneously with the Internal Reorganization Transactions, the Acquisition Related Refinancing and the Offering Reorganization. These activities are described in further detail below. The pro forma condensed combined statements of operations reflect this activity as if it had occurred on January 1, 2013, the beginning of the earliest period presented.

 

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The following are adjustments to interest expense on debt as a result of the Internal Reorganization Transactions and the Acquisition Related Refinancing:

 

     Nine Months Ended
September 30, 2014
    Year Ended
December 31, 2013
 
     (In millions)  

Eliminate amortization of debt issuance costs and fees recorded by LPS

   $ —        $ (5.9

Eliminate interest expense related to LPS interest rate swap terminated as part of the Acquisition

     —          (4.2

Eliminate interest expense related to change of control offering of LPS’s unsecured Senior Notes in February 2014

     —          (0.3

Eliminate interest on LPS’s outstanding Term A Loan that was repaid as part of the Acquisition

     —          (10.8

Amortization of $23.3 million bond premium recognized on LPS unsecured Senior Notes as a result of fair value accounting

                         —          (2.1

Adjustments for estimated interest on BKFS Operating LLC Intercompany Notes and Mirror Notes with FNF

     (3.5                         97.7   
  

 

 

   

 

 

 
   $ (3.5   $ 74.4   
  

 

 

   

 

 

 

On January 2, 2014, BKHI issued (i) a Mirror Note, or the Original Mirror Note, in the original principal amount of $1,400.0 million and (ii) an Intercompany Note, or the Original Intercompany Note, in the original principal amount of $1,175.0 million to FNF. BKFS Operating LLC entered into an assumption agreement, dated as of January 3, 2014, among BKFS Operating LLC, BKHI and FNF pursuant to which it assumed $820.0 million of the debt issued under the Original Mirror Note and $688.0 million of the debt issued under the Original Intercompany Note and FNF released BKHI of its obligations with respect to the debt assumed by BKFS Operating LLC from BKHI under the Original Mirror Note and Original Intercompany Note. Subsequently, on January 6, 2014, BKFS Operating LLC borrowed an additional sum of $63.0 million pursuant to an intercompany note issued by BKFS Operating LLC to FNF, or the Second Intercompany Note, and on March 31, 2014, BKFS Operating LLC borrowed an additional sum of $25.0 million pursuant to the Second Intercompany Note. The Original Intercompany Note and the Second Intercompany Note are collectively known as the Intercompany Notes.

The amount assumed by BKFS Operating LLC on the Original Mirror Note is divided into two tranches known as Tranche “T” and Tranche “R”, collectively, the “Mirror Notes”. The Tranche “T” in the original amount of $644.0 million bears interest at the rate or rates of interest charged on borrowings under FNF’s Term Loan Credit Agreement, plus 100 basis points. The Tranche “R” in the original amount of $176.0 million bears interest at the rate or rates of interest charged on borrowings under FNF’s Revolving Credit Agreement, plus 100 basis points. As of September 30, 2014, BKFS Operating LLC was paying 2.75% plus LIBOR on Tranche “T” and 2.45%, plus LIBOR on Tranche “R”. The interest rates in effect for Tranche “T” and Tranche “R” Loans at September 30, 2014 were 2.98% and 2.60%, respectively.

The Original Mirror Note agreement requires BKFS Operating LLC to repay the outstanding principal amount of Tranche “T” in equal quarterly installments on the last day of each fiscal quarter as follows, with the first such

 

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payment to be made on the last day of the fifth full fiscal quarter after January 2, 2014, or the Funding Date: (1) 0.0% in the first year after the Funding Date, (2) 10.0% in the second year after the Funding Date, (3) 15.0% in the third year after the Funding Date, (4) 20.0% in the fourth year after the Funding Date and (5) 20.0% in the fifth year after the Funding Date, in each case of the original aggregate principal amount of Tranche “T” made on the Funding Date. The remaining balance of the original amount shall be repaid on January 2, 2019. Tranche “R” has no scheduled principal payments, but will be due and payable in full on July 15, 2018.

The Intercompany Notes bear interest at a fixed rate of 10% per annum. Such interest shall be calculated and payable quarterly on the last day of each March, June, September and December of each fiscal year. The Intercompany Notes agreements originally required BKFS Operating LLC to repay the outstanding principal amounts in equal quarterly installments of 2.5% of the original principal sum on the last day of each March, June, September and December of each fiscal year prior to the maturity date, which is January 2, 2024 in the case of the $688.0 million Intercompany Note and January 6, 2024 in the case of the $63.0 million and $25.0 million Intercompany Notes. On May 30, 2014, BKFS Operating LLC entered into an amended and restated intercompany note agreement to eliminate the requirement to make scheduled principal payments prior to the maturity dates.

BKFS Operating LLC has the right to prepay, at any time and from time to time, all or any portion of the outstanding principal amount of the Mirror Notes and the Intercompany Notes without premium or penalty.

At the date of the Acquisition, LPS had outstanding $600.0 million in 5.75% Senior Notes due 2023 (the “Senior Notes”). The Senior Notes were registered under the Securities Act, and carry an interest rate of 5.75% and will mature on April 15, 2023. Interest is paid semi-annually on the 15th day of April and October. The Senior Notes are senior unsecured obligations. At any time and from time to time, prior to October 15, 2015, BKFS Operating LLC may redeem up to a maximum of 35% of the original aggregate principal amount of the Senior Notes with the proceeds of one or more equity offerings, at a redemption price equal to 105.75% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the redemption date. Prior to October 15, 2017, BKFS Operating LLC may redeem some or all of the Senior Notes by paying a “make-whole” premium based on U.S. Treasury rates. On or after October 15, 2017, BKFS Operating LLC may redeem some or all of the Senior Notes at the redemption prices described in the indenture governing the Senior Notes, plus accrued and unpaid interest. In addition, if a change of control occurs, BKFS Operating LLC is required to offer to purchase all outstanding Senior Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of purchase. Pursuant to these change of control provisions, on January 16, 2014, BKFS Operating LLC, as the successor to LPS, issued an offer to purchase the Senior Notes at a purchase price of 101% of the principal amount plus accrued interest to the purchase date. As a result of the offer, bondholders tendered $5.2 million in principal of the Senior Notes, which were subsequently purchased by BKFS Operating LLC on February 24, 2014. In connection with this tender offer, BKFS Operating LLC paid $0.3 million of interest to these bondholders. On February 7, 2014, BKIS, FNF, Black Knight Lending Solutions, Inc., a Delaware corporation and wholly-owned subsidiary of BKIS, or BKLS, and the Trustee entered into a second supplemental indenture, or the Second Supplemental Indenture, to the indenture governing the Senior Notes. Under the Second Supplemental Indenture, the financial reporting covenant under the Indenture was amended to substitute reporting of FNF for that of BKIS and BKLS. In connection with the consent to remove the financial reporting covenant, BKFS Operating LLC paid $0.7 million to the holders of the Senior Notes in February 2014.

As a result of the Acquisition, the Senior Notes were adjusted to fair market value, resulting in BKFS Operating LLC recording a premium on the Senior Notes of approximately $23.3 million. The premium is amortized over the remaining term of the Senior Notes using the effective interest method.

Prior to the Acquisition, LPS’s debt included a Term A Loan outstanding of $468.1 million, which was issued pursuant to an Amended and Restated Credit Agreement dated August 18, 2011, or the Term A Loan, with JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender and Letters of Credit Issuer, and various other lenders. Voluntary prepayments were generally permitted at any time without fee upon proper notice and subject to minimum dollar requirements. The Term A Loan was subject to a variable interest rate

 

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equal to LIBOR plus an annual margin percentage determined in accordance with a leverage ratio-based pricing grid. At December 31, 2013, the Term A Loan carried an interest rate of 2.17%. Upon consummation of the Acquisition, the Term A Loan was fully repaid.

Prior to the Acquisition, LPS entered into interest rate swap transactions in order to convert a portion of its interest rate exposure on its floating rate debt from variable to fixed. These interest rate swaps were designated as cash flow hedges. The interest rate swap outstanding at the time of the Acquisition was terminated subsequent to payment of the Term A Loan on January 2, 2014.

The debt transactions described above are referred to as the “Acquisition Related Refinancing”.

The following are expected changes to the BKFS outstanding debt and related interest expense as a result of this offering:

 

     Nine Months Ended
September 30, 2014
     Year Ended
December 31, 2013
 
     (In millions)  

Eliminate amortization of premium on unsecured notes recorded by BKFS Operating LLC

   $                                $                     —     

Eliminate interest expense on BKFS Operating LLC debt repaid with proceeds from this offering

        —     
  

 

 

    

 

 

 
   $         $ —     
  

 

 

    

 

 

 

 

(k) To record $6.1 million and $(48.9) million of corporate income tax expense (benefit) to the nine months ending September 30, 2014 and the year ending December 31, 2013, respectively, in order to reflect our expected tax structure. Our future taxes will depend on the proportion of BKFS Operating LLC owned by the public company. For the purposes of the unaudited pro forma condensed consolidated financial information, we have assumed that we will own 15% of BKFS Operating LLC after this offering and an effective tax rate of 38%. This 15% ownership assumption is for the purposes of these pro forma results and may not reflect the future ownership of BKFS Operating LLC by the new public company.

 

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(l) To record the adjustments to member capital, additional paid in capital, redeemable member interest, noncontrolling interest and net earnings attributable to noncontrolling interest ownership subsequent as a result of this offering and the Offering Reogranization, as follows:

 

     September 30, 2014  

Increase to Additional paid in capital as a result of the Offering

   $                    

Reclass of Contributed member capital to Additional paid in capital

  

Decrease to Redeemable members’ interest due to the elimination of THL’s put option on the BKFS Operating LLC member interests

  

Decrease to Redeemable members’ interest due to the elimination of profits interest holder’s put option on the BKFS Operating LLC profits interests

  

Increase in Noncontrolling interest due to THL’s pro forma minority ownership of BKFS

  
  

 

 

 

Total adjustment to equity and redeemable members’ interest

   $     
  

 

 

 

 

     Nine Months Ended
September 30, 2014
     Year Ended
December 31, 2013
 

Adjustment to Net earnings attributable to noncontrolling interests on historical net earnings, based on THL’s pro forma ownership of BKFS after the Offering Reorganziation

   $                        $                    

Adjustment to Net earnings attributable to noncontrolling interests on pro forma revenue and expense adjustments, net of tax, based on THL’s minority ownership of BKFS Operating LLC

   $         $     
  

 

 

    

 

 

 

Total adjustment to noncontrolling interest expense

   $         $     
  

 

 

    

 

 

 

The unaudited pro forma combined basic and diluted earnings per share for the periods presented are based on the combined basic and diluted weighted-average shares outstanding to be issued by BKFS in this offering.

The unaudited pro forma condensed combined financial statements, for the nine months ending September 30, 2014, reflect certain realized savings from cost reduction initiatives implemented by management subsequent to the Acquisition but do not reflect anticipated savings that may be realized in future periods. There can be no assurance that any additional cost savings will be achieved or the extent to which they will impact BKFS results of operations in the future. The unaudited pro forma condensed combined financial information does not reflect future costs that may be incurred in the future as a result of becoming a publicly traded company.

The unaudited pro forma condensed combined financial statements do not present a combined dividend per share amount.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis of our historical combined financial statements includes periods before the Internal Reorganization Transactions. Accordingly, the discussion and analysis of such periods does not reflect the significant impact the Internal Reorganization Transactions have had and will have on our results of operations. As a result, our historical results of operations are not comparable and may not be indicative of our future results of operations. In addition, the statements in the discussion and analysis regarding industry outlook, our expectations regarding the performance of our business, our liquidity and capital resources and the other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by the forward-looking statements. You should read the following discussion together with the sections entitled “Risk Factors,” “Selected Historical Financial Data,” “Unaudited Pro Forma Condensed Combined Financial Data,” “—Liquidity and Capital Resources” and the financial statements and the related notes thereto included elsewhere in this prospectus.

Overview

We are a leading provider of integrated technology, workflow automation and data and analytics to the mortgage industry. Our solutions facilitate and automate many of the mission-critical business processes across the entire mortgage loan life cycle, from origination until asset disposition. We believe we differentiate ourselves by the breadth and depth of comprehensive, integrated solutions and the insight we provide to our clients.

We have market leading positions in mortgage processing and technology solutions combined with comprehensive real estate data and extensive analytic capabilities. Our solutions are utilized by 21 of the 25 largest U.S. mortgage originators and all of the 25 largest U.S. mortgage servicers, as well as other financial institutions, investors and real estate professionals, to support mortgage lending and servicing operations, analyze portfolios and properties, operate more efficiently, meet regulatory compliance requirements and mitigate risk.

The U.S. mortgage market is a large market. According to the Fed, U.S. total mortgage debt outstanding is approximately $9.9 trillion as of September 2014, while total U.S. mortgage originations are expected to exceed $1.1 trillion in 2014, according to the MBA.

The U.S. mortgage market is undergoing significant change and mortgage market participants have been subjected to more stringent oversight in recent years. Regulators have increasingly focused on better disclosure, improved risk mitigation and enhanced oversight. Mortgage lenders large and small have experienced higher costs in order to comply with this higher level of regulation. Despite these new regulatory burdens, the mortgage industry remains a competitive marketplace with numerous large lenders and smaller institutions competing for new loan originations. In order to comply with this increased regulatory burden and compete more effectively, mortgage market participants have continued to outsource mission-critical functions to third-party technology providers that can offer economical solutions due to their economies of scale.

We believe our comprehensive end-to-end, integrated solutions differentiate us from other technology providers serving the mortgage industry and positions us particularly well for evolving opportunities in this market. We have exclusively served the mortgage and real estate industries for over 50 years and utilize this experience to design and develop solutions that fit our clients’ ever-evolving needs. Our proprietary technology platforms and data and analytics capabilities reduce manual processes, improve compliance and quality, mitigate risk and deliver significant cost savings to our clients. Our scale allows us to continually and cost-effectively invest in our business in order to meet evolving industry requirements and maintain our position as an industry-standard platform for mortgage market participants. Our proprietary technology platform services more than 50% of all U.S. first lien mortgages based on the number of U.S. first lien mortgages according to the BKFS Mortgage Monitor Report, reflecting our leadership in the mortgage servicing market, and our market share has grown by more than four percentage points over the last five years.

 

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Capitalizing on our leadership position, we launched LoanSphere, an innovative product and delivery strategy, which provides a workflow management application designed to streamline and automate business processes across the mortgage loan life cycle. Some solutions have already been delivered under LoanSphere, and we are focused on providing integration and automation in all of the solutions we offer.

Our business is organized into two segments:

 

    Technology—offers software and hosting solutions that support loan servicing, which includes the core mortgage servicing, specialty mortgage servicing including loss mitigation and default workflow management, loan origination and settlement services.

 

    Data and Analytics—offers solutions to enhance and support our technology products in the mortgage, real estate and capital markets industries. These solutions include property ownership data, lien data, servicing data, automated valuation models, collateral risk scores, prepayment and default models, lead generation and other data solutions.

We offer our solutions to a wide range of clients across the mortgage industry. The quality and breadth of our solutions contributes to the long-standing nature of our relationships with our clients, the majority of whom enter into long-term contracts across multiple products that are embedded in their mission critical workflow and decision processes. Given the contractual nature of our revenues and stickiness of our client relationships, our revenues are highly visible and recurring in nature. Due to our integrated suite of solutions and our scale in the mortgage market, we are able to drive significant operating leverage, which we believe enables our clients to operate more efficiently while allowing us to generate strong margins and cash flow.

Our History

Our business generally represents a reorganization of the former Technology, Data and Analytics segment of LPS, a former provider of integrated technology, data and services to the mortgage lending industry in the United States. Our business also includes the businesses of Commerce Velocity and Property Insight, two companies that were contributed to us by our majority owner, FNF.

Acquisition of LPS by FNF and Subsequent Reorganization

On January 2, 2014, FNF acquired LPS, and as a result, LPS became an indirect, wholly-owned subsidiary of FNF. Upon the closing of the transaction, the shares of LPS common stock, which previously traded under the ticker symbol “LPS” on the NYSE, ceased trading on, and were delisted from, the NYSE.

On January 3, 2014, pursuant to the Internal Reorganization, substantially all of the former Technology, Data and Analytics segment of LPS was transferred to us and the former Transaction Services businesses of LPS were transferred by BKIS to BKHI and contributed by BKHI to another of its then wholly-owned subsidiaries or to another subsidiary of FNF.

Also, on January 3, 2014, BKHI contributed Commerce Velocity, a former indirect subsidiary of FNF that had been contributed to BKHI in December 2013, to BKFS Operating LLC, which contributed it to BKIS. Thereafter, we issued 35.0% of the membership interests of BKFS Operating LLC to certain THL Affiliates and THL Intermediaries.

Following the Internal Reorganization, we are majority owned by FNF through its wholly-owned subsidiary, BKHI, and minority owned by THL through certain THL Affiliates and THL Intermediaries. FNF and THL Managers LLC also provide us with management and consulting services. The agreements under which FNF and THL Managers LLC provide these services will be terminated in connection with the closing of this offering.

 

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Contribution of Property Insight, LLC

On June 2, 2014, as part of an additional internal reorganization, two wholly-owned subsidiaries of FNF contributed to us their respective interests in Property Insight, a company that provides property information used by title insurance underwriters, title agents and closing attorneys to underwrite title insurance policies for real property sales and transfers. As a result, we are now the sole member of Property Insight. In connection with the Property Insight Contribution, BKFS Operating LLC issued an additional 6.4 million of its Units to BKHI. As a result of this issuance, THL Affiliates’ and THL Intermediaries’ combined percentage ownership in BKFS Operating LLC was reduced from 35.0% to 32.9%.

In accordance with GAAP requirements for transactions between entities under common control, assets and liabilities contributed in the Commerce Velocity Contribution and the Property Insight Contribution were recorded at their respective historical FNF book values and our consolidated financial statements have been adjusted to reflect the combined entity as if the contribution occurred on January 2, 2014.

Basis of Presentation

As a result of the Internal Reorganization Transactions, our financial position, results of operations and cash flows include:

 

    the consolidated financial position, results of operations and cash flows of LPS for all periods prior to January 2, 2014; and

 

    the consolidated financial position, results of operations and cash flows of BKFS Operating LLC following the Acquisition, including the results of operations and cash flows of the businesses of Commerce Velocity and Property Insight for the time period beginning on January 2, 2014.

Accordingly, in the following discussion and analysis:

 

    the results of operations and cash flows for the periods from January 1, 2011 to January 1, 2014 are referred to herein as the Predecessor Period;

 

    the results of operations and cash flows for January 1, 2014 are referred to herein as the Predecessor 2014 Interim Day;

 

    the results of operations and cash flows for the period from January 1, 2013 to September 30, 2013 are referred to herein as the Predecessor 2013 Interim Period;

 

    the results of operations and cash flows for the period from January 1, 2013 to December 31, 2013 are referred to herein as the Predecessor 2013 Annual Period;

 

    the results of operations and cash flows for the period from January 1, 2012 to December 31, 2012 are referred to herein as the Predecessor 2012 Annual Period;

 

    the results of operations and cash flows for the period from January 1, 2011 to December 31, 2011 are referred to herein as the Predecessor 2011 Annual Period;

 

    the results of operations and cash flows for the periods from January 2, 2014 to September 30, 2014 are referred to herein as the Successor 2014 Interim Period or Successor Period;

 

    the Successor 2014 Interim Period and Predecessor 2013 Interim Period are collectively referred to herein as the Interim Periods; and

 

    the Predecessor 2013 Annual Period, Predecessor 2012 Annual Period and Predecessor 2011 Annual Period are collectively referred to herein as the Annual Periods.

In this discussion and analysis, the results of operations and cash flows we report for the nine months ended September 30, 2014 do not include the financial data from the Predecessor 2014 Interim Day, during which we did not conduct significant operations but to which $50.1 million of transaction costs related to the Acquisition are attributed.

 

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Our Reporting Segments

We have two reporting segments, Technology and Data and Analytics. Our Technology segment offers leading software and hosting solutions that facilitate and automate many of the business processes across the life cycle of a mortgage. Our Data and Analytics segment provides data and analytics solutions that are used to support and enhance our technology solutions, and help lenders and servicers make more informed decisions, improve performance, identify and predict risk and generate more qualified leads. In addition to our two reporting segments, we have a corporate organization that consists primarily of general and administrative expenses that are not included in the other segments, legal and regulatory charges, and transition and integration costs.

The following table sets forth our revenues from continuing operations for our operating segments and our corporate organization for the Interim Periods and Annual Periods:

 

     Successor      Predecessor  
     Period from
January 1, 2014
through
September 30,
2014
     Nine Months
Ended
September 30,
2013
     Year Ended December 31,  
         2013      2012     2011  
            (in millions)               

Technology

   $ 518.5       $ 499.0       $ 663.6       $ 640.3      $ 594.2   

Data and Analytics

     113.2         61.4         80.8         79.1        76.1   

Corporate/Other

     0.1         0.1         0.4         (0.5     0.1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 631.8       $ 560.5       $ 744.8       $ 718.9      $ 670.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Factors Affecting Comparability of Our Results of Operations

As a result of a number of factors, our results of operations for the Predecessor Period are not comparable to the Successor Period, and our historical results of operations may not be comparable to our results of operations in future periods and our results of operations may vary from period to period. Set forth below is a brief discussion of the key factors impacting the comparability of our results of operations.

Transfer of the Transaction Services Businesses of LPS. Our results of operations for the Predecessor Period include the former Transaction Services segment of LPS that is not a part of our business following the Internal Reorganization and, therefore, is not and will not be reflected in the results of operations for the Successor Period or future periods.

Contributions of Commerce Velocity and Property Insight. Commerce Velocity and Property Insight were contributed to us on January 3, 2014 and June 2, 2014, respectively. Therefore, our results of operations for the Predecessor Period do not include the results of operations of the businesses of Commerce Velocity and Property Insight. In accordance with GAAP, the results of operations of Commerce Velocity and Property Insight are included in our results of operations for the period beginning on January 2, 2014.

Expenses Associated with the Internal Reorganization Transactions. In connection with the Internal Reorganization Transactions, we incurred significant transaction costs and transition and integration expenses, including employee severance, bonuses under our Synergy Incentive Program, a short-term compensation program that rewards our executive officers for maximizing cost-reductions relating to the Acquisition and certain other non-recurring professional fees and other costs.

Related Party Transactions. We are party to certain transactions with entities that became our related parties on January 2, 2014 as part of the Acquisition. For example, we have a management agreement with each of THL Managers and FNF pursuant to which services are provided and we pay a fee for such services in the annual amount of $3.2 million to THL Managers and $5.9 million to FNF. We did not have similar agreements in place prior to the Acquisition. In addition, prior to the Acquisition, the Technology and Data and Analytics businesses

 

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provided software and services to certain of LPS’s former Transaction Services businesses. For financial reporting purposes, those transactions were accounted for as cost transfers with no effect on revenue. Following the Acquisition, those transactions are accounted for as revenue with a corresponding amount of operating expenses. The effect of this change was to record incremental revenue for the period of January 2, 2014 to September 30, 2014 in the amount of approximately $3.2 million for the Technology segment and approximately $5.2 million for the Data and Analytics segment. There is no effect on operating (loss) income or (loss) income from continuing operations from this change. The other related party transactions with FNF, THL, THL Managers, THL Affiliates and ServiceLink do not have a material effect on the comparability of our results of operations.

Increased Interest Expense. In connection with the Acquisition, our total long-term debt outstanding increased from $1,068.1 million at December 31, 2013 to $2,155.0 million at September 30, 2014. Specifically, our term loans of $468.1 million at December 31, 2013 were repaid and replaced with intercompany loans payable to FNF. The amount payable to FNF at September 30, 2014 under the intercompany loans was $1,538.4 million. As a result of the increase in total long-term debt outstanding and higher interest rates on the intercompany loans when compared to our former term loans, our annual interest expense is significantly higher following the Internal Reorganization Transactions.

Increased Depreciation and Amortization Expense. In connection with the Acquisition, all assets and liabilities contributed to BKFS were set to their fair value on January 2, 2014 as part of the allocation of FNF’s purchase price to identifiable assets acquired and liabilities assumed. The result of the purchase price allocation was a significant increase to intangible assets, including developed technology and client relationships. As a result, our depreciation and amortization is significantly higher following the Acquisition.

Decreased Income Taxes. Our effective tax rate for the Successor 2014 Interim Period and the Predecessor 2013 Interim Period was (4.5%) and 35%, respectively. The decrease in the effective rate is primarily due to the change in taxable status from a corporation to a partnership under federal and state income tax laws. The tax benefit we recognized during the Successor 2014 Interim Period is primarily a result of the deductible transaction costs incurred by LPS prior to the change in taxable status. We will again be taxed as a corporation following the offering.

Legal and Regulatory Matters. During the Successor 2014 Interim Period we recorded $11.0 million in expenses, including interest, relating to an appraisal proceeding filed by Merion Capital in connection with the Acquisition seeking a judicial determination of the “fair value” of Merion Capital’s shares of LPS common stock under Delaware law, together with statutory interest. On September 18, 2014, we reached an agreement with Merion Capital to resolve an interest motion and FNF paid Merion Capital the merger consideration (cash and stock) and BKFS paid interest of $9.0 million accrued through the date of payment. The parties will continue the appraisal proceeding. For periods prior to the Acquisition, the legal and regulatory charges primarily related to the former Transaction Services businesses of LPS, which have been transferred to ServiceLink and another FNF Subsidiary in connection with the Internal Reorganization.

Deferred Revenue. In connection with the Acquisition, we recorded an adjustment to reflect deferred revenue at its fair value in accordance with GAAP. The result is that we will not recognize revenue of approximately $13.9 million in 2014, $10.2 million in 2015 and $8.1 million in 2016.

Cost Reduction Actions. In connection with the Acquisition, we put action plans in place to reduce operating costs and increase our profitability. We also put a compensation plan in place, referred to herein as the “Synergy Incentive Program,” to incentivize our management team to accomplish planned cost reductions. As a result of the actions taken during 2014, we have reduced our operating expenses as a percent of revenue as compared to periods prior to 2014. Substantially all of our planned cost reduction actions were complete as of September 30, 2014.

 

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Factors Affecting Our Results of Operations

Mortgage Originations

Our various businesses are impacted differently by the level of mortgage originations including refinancing transactions. MSP is generally less affected by varying levels of mortgage originations because it earns revenues based on the total number of mortgage loans it processes, which tend to stay more constant than the market for originations. Our origination technology and some of our data businesses are directly affected by the volume of real estate transactions and mortgage originations, but many of our client contracts for origination technology contain minimum charges.

Changing Mortgage Market

Our various businesses are also impacted by an evolving mortgage market. Some of the changes we are seeing in the mortgage industry that may affect our results of operations are as follows:

 

    mortgage originators and servicers have seen volatility in their earnings as a result of significant changes in mortgage origination and default volumes and increasing regulatory compliance costs. As a result of increased volatility in originations, greater regulatory scrutiny and the higher cost of doing business, lenders have become increasingly focused on their core operations and customers. We believe lenders are increasingly shifting from affiliate business models and in-house technologies to solutions with third-party providers who can provide better technology and services more efficiently;

 

    the complexity of the mortgage origination and servicing processes have led some banks, lenders and servicers to become increasingly focused on technology automation and workflow management to operate more efficiently and meet their regulatory guidelines; and

 

    industry participants are working to minimize risk in lending, servicing and capital markets and increasingly rely on data and analytics to integrate with technologies and enhance the decision making process.

Economic Conditions

Our various businesses are also impacted by general economic conditions. For example, in the event that a difficult economy or other factors lead to a decline in levels of home ownership and a reduction in the number of mortgage loans outstanding and we are not able to counter the impact of those events with increased market share or higher fees, it could have a material adverse effect on our mortgage processing revenues. In contrast, we believe that a weaker economy tends to increase the volume of consumer mortgage defaults, which can increase the revenues in our specialty servicing technology business that is used to service residential mortgage loans in default. Also, interest rates tend to decline in a weaker economy driving higher than normal refinance transactions that provide potential volume increases to our origination technology offerings, most specifically the RealEC Exchange platform.

Regulatory Requirements

In recent years, there has been an increased legislative and regulatory focus on consumer protection practices. As a result, federal and state governments have enacted various new laws, rules and regulations. One example of such legislation is the Dodd-Frank Act, which was signed into law in July 2010. The Dodd-Frank Act contains broad changes for many sectors of the financial services and lending industries and established the CFPB, a new federal regulatory agency responsible for regulating consumer financial protection within the U.S. This has led banks and other lenders to seek technology solutions that assist them in satisfying their regulatory compliance obligations in the face of a changing regulatory environment. We have developed solutions that target this need, which has resulted in additional revenue.

 

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The CFPB has issued guidance that applies to “supervised service providers,” which the CFPB has defined to include service providers, like us, to CFPB-supervised banks and non-banks. In addition, the Dodd-Frank Act contains the Mortgage Reform and Anti-Predatory Lending Act that imposes a number of additional requirements on lenders and servicers of residential mortgage loans. It is difficult to predict the form that new rules or regulations implemented by the CFPB or other regulations implemented under other requirements of the Dodd-Frank Act may take, what additional legislative or regulatory changes may be approved in the future, or whether those changes may require us to change our business practices or incur increased costs of compliance.

Key Components of Results of Operations

Revenue

We generate revenue primarily through contractual arrangements that we enter into with clients to provide services, software and software-related services either individually or as part of an integrated offering of multiple services. These arrangements occasionally include offerings from more than one business unit to the same client.

The following is a description of our revenues by segment:

Technology

Our Technology segment revenues are primarily derived from mortgage processing, outsourced business processing services, and software and software-related services. In some cases, these services are offered in combination with one another, and in other cases we offer them individually. Revenues from mortgage processing and outsourced business processing services are typically volume-based and depend on factors such as the number of accounts processed, transactions processed and computer resources utilized.

The majority of the revenues in our Technology segment are from outsourced data processing and application hosting, and outsourced business processing services.

Data and Analytics

Our Data and Analytics segment revenues are primarily derived from data and valuation-related services. Our Data and Analytics segment owns or licenses data assets that primarily include loan information and property sales and characteristic information. We both license our data directly to our clients and provide our clients with analytical products and workflow solutions for risk management, multiple listing services, insurance underwriting, collateral assessment and loan quality reviews.

Expenses

The following is a brief description of the components of our expenses:

 

    Operating expenses include payroll, employee benefits, occupancy costs, data processing costs, program design and development costs and professional services.

 

    Depreciation and amortization expense consists of our depreciation related to investments in property and equipment, including information technology hardware, as well as amortization of purchased and developed software and other intangible assets, principally client relationships recorded in connection with the Acquisition. It also includes the amortization of previously deferred implementation-related expenses. Depreciation and amortization expense increased significantly in 2014 compared to 2013 as a result of fair value adjustments recorded in connection with the Acquisition.

 

    Transition and integration costs consist of incremental costs associated with executing the Acquisition, as well as the related transitioning costs including employee severance, expenses associated with our Synergy Incentive Program, certain other non-recurring professional and other costs as well as member management fees paid to FNF and THL Managers LLC.

 

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    Exit costs, impairments and other charges consist of certain lease exit charges, employee severance, stock compensation acceleration charges, impairments of long-lived assets and other non-recurring charges. In 2014, costs incurred of this nature were directly the result of the Acquisition and are included in transition and integration costs.

 

    Legal and regulatory charges consist of either actual or estimated costs of settlement, damages and associated legal and professional fees with respect to legal and regulatory matters. For periods prior to the Acquisition, the legal and regulatory charges primarily related to the former Transaction Services businesses that are now part of ServiceLink and another FNF Subsidiary.

 

    Interest expense for 2014 consists of interest on our senior notes and interest on our intercompany loans that are payable to FNF. Following the Acquisition, our annual interest expense is significantly higher, as a result of the increase in total long-term debt outstanding and higher interest rates on the intercompany loans when compared to our former term loans.

 

    Other expense for 2014 consists of costs associated with the Merion Capital legal matter that resulted from the Acquisition, including interest and estimated costs to defend ourselves in this matter. On September 18, 2014, we reached an agreement with Merion Capital to resolve an interest motion and FNF paid Merion Capital the merger consideration (cash and stock). As of September 30, 2014 BKFS has incurred expenses of $11.0 million in connection with this matter, including a payment of $9.0 million for interest accrued through the settlement date and a $2.0 million accrual for legal defense expenses.

 

    Provision for income tax expense (benefit) represents federal, state and local taxes based on income in multiple jurisdictions for our corporate subsidiaries. In connection with the Acquisition and Internal Reorganization, we elected to change our taxable status to a partnership under federal and state income tax laws.

Key Metrics

We evaluate the performance of our business using a variety of operating and performance metrics. The following is a description of our key performance metrics.

Adjusted Revenues

We define Adjusted Revenues as reported Revenues adjusted to include the revenues that were not recorded by the company during the period presented due to the deferred revenue purchase accounting adjustment recorded in accordance with GAAP.

We believe Adjusted Revenues is useful to investors and management as a supplemental measure to evaluate the performance of the company on a consistent basis. For a reconciliation of Adjusted Revenues to Revenues, the most directly comparable GAAP measure, see “Prospectus Summary—Summary Historical Financial Data.”

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA as Operating income (loss) before depreciation and amortization, with further adjustments to reflect the addition or elimination of certain income statement items including, but not limited to (i) the deferred revenue purchase accounting adjustment recorded in accordance with GAAP; (ii) equity-based compensation; (iii) acquisition-related costs; (iv) non-recurring costs associated with the achievement of synergies; (v) charges associated with material legal matters; (vi) member management fees paid to FNF and THL Managers LLC; (vii) exit costs, impairments and other charges; and (viii) other significant, non-recurring items. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by Revenue for periods prior to the Acquisition or Adjusted revenue for periods after the Acquisition.

 

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We believe Adjusted EBITDA is useful to investors as a supplemental measure to evaluate the overall operating performance of companies in our industry. Management uses Adjusted EBITDA as a measurement used to compare our operating performance to our peers and competitors. For a reconciliation of Adjusted EBITDA to Operating income (loss), the most directly comparable GAAP measure, see “Prospectus Summary—Summary Historical Financial Data.”

Results of Operations

The following table sets forth our consolidated statements of operations for the periods presented:

Interim Periods

 

     Successor     Predecessor  
     Period January 2,
2014 through
September 30,
2014
    One Day Ended
January 1
2014
    Nine Months Ended
September 30,
2013
 
     (In millions)  

Revenues:

      

Technology and Data and Analytics

   $ 631.8      $ —        $ 560.5   

Transaction Services(1)

     —          —          793.3   
    

 

 

   

 

 

 

Total Revenues

     631.8        —          1,353.8   

Operating expenses

     392.3        —          1,003.8   

Depreciation and amortization

     143.1        —          77.8   

Legal and regulatory charges

     —          —          54.0   

Exit costs, impairment and other charges

     —          —          12.0   

Transition and integration costs

     111.1        50.1        —     
  

 

 

   

 

 

   

 

 

 

Total expenses

     646.5        50.1        1,147.6   
  

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (14.7     (50.1     206.2   

Operating margin

     -2.3     N/A        15.2
 

Interest expense, net

     (96.8     —          (37.9

Other (expense) income

     (11.1     —          0.2   
  

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (122.6     (50.1     168.5   

Provision for income tax (benefit) expense

     (5.5     (11.1     59.0   
  

 

 

   

 

 

   

 

 

 

Net (loss) earnings from continuing operations

     (117.1     (39.0     109.5   

Loss from discontinued operations

     (0.7     —          (1.0
  

 

 

   

 

 

   

 

 

 

Net (loss) earnings

   $ (117.8   $ (39.0   $ 108.5   
  

 

 

   

 

 

   

 

 

 

 

(1) As described in “Factors Affecting Comparability of Our Results of Operations” above, the former Transaction Services segment of LPS was transferred to ServiceLink in January 2014. As a result, there are no revenues or expenses of the former Transaction Services segment in the Successor 2014 Interim Period.

Revenues

Revenues were $631.8 million for the Successor 2014 Interim Period as compared to $1,353.8 million for the Predecessor 2013 Interim Period. The decline resulted from the transfer of the former Transaction Services

 

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segment to ServiceLink in January 2014 and reflected the impact of purchase accounting on our deferred revenue, which was partially offset by revenues generated by the Property Insight and Commerce Velocity businesses that were contributed by FNF to BKFS during 2014 and included in our results of operations from January 2, 2014 and growth in our Technology segment.

The following table sets forth our revenues by segment for the periods presented:

 

     Successor      Predecessor  
     Period January 2,
2014 through
September 30,
2014
     One Day Ended
January 1,
2014
     Nine Months Ended
September 30,
2013
 
     (In millions)  

Technology

   $ 518.5       $ —         $ 499.0   

Data and Analytics

     113.2         —           61.4   

Corporate and Other

     0.1         —           0.1   
  

 

 

    

 

 

    

 

 

 

BKFS Subtotal

     631.8         —           560.5   

Transaction Services

     —           —           793.3   
  

 

 

    

 

 

    

 

 

 

Total

   $ 631.8       $ —         $ 1,353.8   
  

 

 

    

 

 

    

 

 

 

Technology segment revenues were $518.5 million for the Successor 2014 Interim Period as compared to $499.0 million for the Predecessor 2013 Interim Period, an increase of $19.5 million, or 4%. This increase was driven by growth in our servicing technology business from loan growth on our mortgage servicing platform and annual price increases; higher professional services, new clients and a contract termination fee in our loan origination technology business; and the Commerce Velocity Contribution. The aforementioned increases were partially offset by the effect of purchase accounting on our deferred revenue that reduced our revenues in the Successor 2014 Interim Period by approximately $10.4 million.

Data and Analytics segment revenues were $113.2 million for the Successor 2014 Interim Period as compared to $61.4 million for the Predecessor 2013 Interim Period, an increase of $51.8 million, or 84%. This increase was driven by the Property Insight Contribution, which accounted for an increase of $49.7 million, and the effect of reclassifying sales to LPS’s former Transaction Services segment as revenue in 2014. Prior to the Acquisition, sales to LPS’s former Transaction Services segment were treated as cost transfers with no effect on revenue.

Operating Expenses

Operating expenses were $392.3 million for the Successor 2014 Interim Period as compared to $1,003.8 million for the Predecessor 2013 Interim Period. The decline resulted from the transfer of the former Transaction Services segment of LPS to ServiceLink in January 2014 and cost reduction actions taken following the Acquisition, which were partially offset by expenses from the Property Insight business that was contributed by FNF to BKFS during 2014 and operating expenses associated with the revenue growth in our businesses. As a percent of revenue, operating expenses were 62% for the Successor 2014 Interim Period compared to 74% for the Predecessor 2013 Interim Period. The decrease in operating expenses as a percent of revenue was primarily due to the transfer of the former Transaction Services segment, which had higher operating expenses as a percentage of revenue than the BKFS businesses and the benefit of the cost reduction actions.

 

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The following table sets forth our operating expenses by segment for the periods presented:

 

     Successor      Predecessor  
     Period January 2,
2014 through
September 30,
2014
     One Day Ended
January 1,
2014
     Nine Months Ended
September 30,
2013
 
     (In millions)  

Technology

   $ 255.6       $ —         $ 254.3   

Data and Analytics

     107.1         —           58.8   

Corporate and Other

     29.6         —           34.9   
  

 

 

    

 

 

    

 

 

 

BKFS Subtotal

     392.3         —           348.0   

Transaction Services

     —           —           655.8   
  

 

 

    

 

 

    

 

 

 

Total

   $ 392.3       $ —         $ 1,003.8   
  

 

 

    

 

 

    

 

 

 

Technology segment operating expenses were $255.6 million for the Successor 2014 Interim Period as compared to $254.3 million for the Predecessor 2013 Interim Period, an increase of $1.3 million or 1%. As a percent of revenue, operating expenses for the Successor 2014 Interim Period were 49% compared to 51% for the Predecessor 2013 Interim Period. The decrease was the result of cost reduction actions taken following the Acquisition and revenue growth.

Data and Analytics segment operating expenses were $107.1 million for the Successor 2014 Interim Period as compared to $58.8 million for the Predecessor 2013 Interim Period, an increase of $48.3 million or 82%. This increase was driven by the contribution of Property Insight by FNF to BKFS in 2014, the effect of the reclassification as revenue of our sales to LPS’s former Transaction Services segment, and maintenance costs associated with our property records database.

Corporate and Other operating expenses were $29.6 million for the Successor 2014 Interim Period as compared to $34.9 million for the Predecessor 2013 Interim Period, a decrease of $5.3 million or 15%. This decrease was driven by cost reduction actions taken following the LPS Acquisition.

Depreciation and Amortization

Depreciation and amortization was $143.1 million for the Successor 2014 Interim Period as compared to $77.8 million for the Predecessor 2013 Interim Period. The increase was primarily driven by the amortization of intangible assets recorded in connection with the Acquisition, partially offset by the effect of the transfer of the former Transaction Services segment to ServiceLink in January 2014.

The following table sets forth our depreciation and amortization by segment for the Interim Periods:

 

     Successor      Predecessor  
     Period January 2,
2014 through
September 30,
2014
     One Day Ended
January 1,
2014
     Nine Months Ended
September 30,
2013
 
     (In millions)  

Technology

   $ 130.6         —         $ 56.3   

Data and Analytics

     10.4         —           3.5   

Corporate and Other

     2.1         —           2.4   
  

 

 

    

 

 

    

 

 

 

BKFS Subtotal

     143.1         —           62.2   

Transaction Services

     —           —           15.6   
  

 

 

    

 

 

    

 

 

 

Total

   $ 143.1       $ —         $ 77.8   
  

 

 

    

 

 

    

 

 

 

 

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Technology segment depreciation and amortization was $130.6 million for the Successor 2014 Interim Period as compared to $56.3 million for the Predecessor 2013 Interim Period, an increase of $74.3 million. This increase was driven by the amortization of intangible assets and the impact of fair value adjustments recorded in connection with the Acquisition as a result of purchase accounting and investments in key technology platforms and IT infrastructure.

Data and Analytics segment depreciation and amortization was $10.4 million for the Successor 2014 Interim Period as compared to $3.5 million for the Predecessor 2013 Interim Period. The increase was driven by the amortization of intangible assets and the impact of fair value adjustments recorded in connection with the Acquisition as a result of purchase accounting and the contribution of the Property Insight business by FNF to BKFS in 2014.

Corporate and Other depreciation and amortization was $2.1 million for the Successor 2014 Interim Period as compared to $2.4 million for the Predecessor 2013 Interim Period.

Legal and Regulatory Charges

During the Predecessor 2013 Interim Period, we increased our legal and regulatory accrual by $54.0 million to reflect management’s assessment of legal matters, of which $53.2 million related to the Transaction Services segment of LPS that has been distributed to ServiceLink in connection with the Internal Reorganization. In 2014, adjustments to the legal and regulatory accrual for matters that existed on January 2, 2014 were recorded as a result of purchase accounting, with the exception of the Merion Capital legal matter. The accrual for costs associated with the Merion Capital legal matter, including interest and estimated costs to defend ourselves, were recorded in other expense.

Exit Costs, Impairments and Other Charges

Exit costs, impairments and other charges were $12.0 million for the Predecessor 2013 Interim Period and related to employment matters and severance costs resulting from various cost reduction initiatives and transaction costs associated with the Acquisition. Costs of this nature during the Successor 2014 Interim Period were directly the result of the Acquisition and are included in transition and integration costs.

The following table sets forth our exit costs, impairments and other charges by segment for the periods indicated:

 

     Successor      Predecessor  
     Period January 2,
2014 through
September 30,
2014
     One Day Ended
January 1,
2014
     Nine Months Ended
September 30,
2013
 
            (In millions)         

Technology

   $ —         $ —         $ 0.4   

Data and Analytics

     —           —           0.1   

Corporate and Other

     —           —           3.6   
  

 

 

    

 

 

    

 

 

 

BKFS Subtotal

     —           —           4.1   

Transaction Services

     —           —           7.9   
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 12.0   
  

 

 

    

 

 

    

 

 

 

Transition and Integration Costs

Transition and integration costs represent non-recurring expenses incurred as a result of the Acquisition. The transition and integration costs for the Predecessor 2014 Interim Day represent transaction costs paid on behalf of FNF and THL on January 2, 2014. The transition and integration costs for the Successor 2014 Interim Period

 

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primarily represent legal and professional fees related to the Acquisition, severance, transaction-related bonuses and management fees paid to FNF and THL Managers LLC and other costs directly resulting from the Acquisition.

Operating (Loss) Income

Operating (loss) income was ($14.7) million for the Successor 2014 Interim Period as compared to $206.2 million for the Predecessor 2013 Interim Period.

The following table sets forth our operating (loss) income by segment for the Interim Periods:

 

     Successor      Predecessor  
     Period January 2,
2014 through
September 30,
2014
     One Day Ended
January 1,
2014
    Nine Months Ended
September 30,
2013
 
     (In millions)  

Technology

   $ 128.9       $ —        $ 188.0   

Data and Analytics

     (4.8      —          (1.0

Corporate and Other

     (138.8      (50.1     (41.6
  

 

 

    

 

 

   

 

 

 

BKFS Subtotal

     (14.7      (50.1     145.4   

Transaction Services

     —           —          60.8   
  

 

 

    

 

 

   

 

 

 

Total

   $ (14.7    $ (50.1     206.2   
  

 

 

    

 

 

   

 

 

 

Technology segment operating income was $128.9 million for the Successor 2014 Interim Period as compared to $188.0 million for the Predecessor 2013 Interim Period, a decrease of $59.1 million, or 31%. Operating margin was 25% for the Successor 2014 Interim Period compared to 38% for the Predecessor 2013 Interim Period.

Data and Analytics segment operating loss was $4.8 million for the Successor 2014 Interim Period as compared to $1.0 million for the Predecessor 2013 Interim Period.

Corporate and Other operating loss was $138.8 million for the Successor 2014 Interim Period as compared to $41.6 million for the Predecessor 2013 Interim Period. The increase in operating loss was driven by $107.3 million of transition and integration costs in the Successor 2014 Interim Period.

Interest Expense, Net

Interest expense, net was $96.8 million for the Successor 2014 Interim Period compared to $37.9 million for the Predecessor 2013 Interim Period. The increase was a result of the increase in total debt outstanding and a higher weighted average interest rate in the Successor 2014 Interim Period than in the Predecessor 2013 Interim Period.

Other (Expense) Income

Other (expense) income was ($11.1) million for the Successor 2014 Interim Period compared to $0.2 million for the Predecessor 2013 Interim Period. The increase is a result of the interest and estimated defense costs in 2014 associated with the Merion Capital litigation.

Provision of Income Tax (Benefit) Expense

The provision for income tax (benefit) expense for the Successor 2014 Interim Period was a benefit of ($5.5) million compared to a provision of $59.0 million for the Predecessor 2013 Interim Period. The variance is principally due to the conversion of LPS into a Delaware limited liability company on January 3, 2014 in

 

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connection with the Acquisition and the election to be treated as a partnership under applicable federal and state income tax laws. The tax benefit recognized in 2014 is primarily due to the tax impact of certain fees and expenses recognized immediately following the acquisition by FNF prior to BKFS’ conversion to a limited liability company.

Predecessor Annual Periods

 

     Predecessor(1)  
     Years Ended December 31,  
     2013     2012     2011  
     (In millions, except per share amounts)  

Revenues:

      

Technology and Data and Analytics

   $ 744.8      $ 718.9      $ 670.4   

Transaction Services(2)

     971.4        1,272.4        1,309.6   
  

 

 

   

 

 

   

 

 

 

Total Revenues

     1,716.2        1,991.3        1,980.0   

Operating expenses

     1,280.5        1,459.6        1,477.7   

Depreciation and amortization

     104.0        95.7        88.2   

Legal and regulatory charges

     74.4        192.4        78.5   

Exit costs, impairment and other charges

     49.4        10.5        56.9   
  

 

 

   

 

 

   

 

 

 

Total expenses

     1,508.3        1,758.2        1,701.3   
  

 

 

   

 

 

   

 

 

 

Operating income

     207.9        233.1        278.7   

Operating margin

     12.1     11.7     14.1

Interest expense, net

     (50.2     (86.1     (66.1

Other income (expense)

     0.1        0.2        (0.2
  

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before income taxes

     157.8        147.2        212.4   

Provision for income taxes

     53.6        67.6        77.2   
  

 

 

   

 

 

   

 

 

 

Net earnings from continuing operations

     104.2        79.6        135.2   

Loss from discontinued operations

     (1.5     (9.2     (38.7
  

 

 

   

 

 

   

 

 

 

Net earnings

   $ 102.7      $ 70.4      $ 96.5   
  

 

 

   

 

 

   

 

 

 

Net earnings per share—diluted

   $ 1.19      $ 0.83      $ 1.13   
  

 

 

   

 

 

   

 

 

 

 

(1) The results of operations for the Predecessor Annual Periods have been restated to reflect PCLender.com Inc., a former wholly-owned, consolidated subsidiary, or PCLender, as a discontinued operation. PCLender was sold during the Successor 2014 Interim Period.

 

(2) As described above, the former Transaction Services segment was transferred to ServiceLink in January 2014. As a result, there are no revenues or expenses of the former Transaction Services segment subsequent to the Predecessor 2013 Annual Period.

Predecessor 2013 Annual Period Compared to Predecessor 2012 Annual Period

Revenues

Revenues decreased $275.1 million, or 14%, during the Predecessor 2013 Annual Period when compared to the Predecessor 2012 Annual Period due to a $301.0 million, or 24%, decrease in Transaction Services partially offset by a $25.9 million, or 4% increase in Technology, Data and Analytics.

 

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The following table sets forth our revenues by segment for the Predecessor 2013 Annual Period and Predecessor 2012 Annual Period (in millions):

 

     Predecessor  
     Year Ended December 31,  
     2013      2012  
     (In millions)  

Technology

   $ 663.6       $ 640.3   

Data and Analytics

     80.8         79.1   

Corporate and Other

     0.4         (0.5
  

 

 

    

 

 

 

BKFS Subtotal

     744.8         718.9   

Transaction Services

     971.4         1,272.4   
  

 

 

    

 

 

 

Total

   $ 1,716.2       $ 1,991.3   
  

 

 

    

 

 

 

Technology segment revenues were $663.6 million during the Predecessor 2013 Annual Period as compared to $640.3 million during the Predecessor 2012 Annual Period, an increase of $23.3 million, or 4%. The increase was driven by growth in servicing technology primarily due to higher loan counts, new client implementations, continued strong data access and professional services revenue and from incremental revenue from LendingSpace, our loan origination software company that was acquired in July 2012.

Data and Analytics segment revenues were $80.8 million during the Predecessor 2013 Annual Period as compared to $79.1 million during the Predecessor 2012 Annual Period, an increase of $1.7 million, or 2%. The increase was driven by new contract wins that were partially offset by lower MLS revenues.

Revenues of LPS’s former Transaction Services segment declined by $301.0 million, or 24%, due to continued delays in foreclosure volumes from new federal and state regulations and requirements, such as the California Homeowner Bill of Rights, and from a decrease in foreclosure volumes resulting from (i) continued improvements in macro-economic conditions, including the rate of unemployment and interest rates, (ii) the impact of various governmental programs that allowed borrowers who may not otherwise have been able to qualify to refinance their loans, (iii) the availability of alternatives to foreclosure such as short-sales and deeds-in-lieu, and (iv) a more rigorous discipline around aligning risk and return within our default operations, which resulted in the non-renewal of certain contracts. In addition, the former Transaction Services segment experienced a decrease in origination services primarily from declining revenues from its appraisal business due to the impact of an increase in Home Affordable Refinance Program loans, which do not require an appraisal, and exiting certain low-margin contracts.

Operating Expenses

Operating expenses decreased $179.1 million, or 12%, during the Predecessor 2013 Annual Period when compared to the Predecessor 2012 Annual Period. Operating expenses as a percentage of revenues increased to 75% during the Predecessor 2013 Annual Period as compared to 73% during the Predecessor 2012 Annual Period. The increase as a percent of revenue is primarily attributable to the effect of the revenue decline in the former Transaction Services segment.

 

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The following table sets forth our operating expenses by segment for the Predecessor 2013 Annual Period and Predecessor 2012 Annual Period:

 

     Predecessor  
     Year Ended December 31,  
     2013      2012  
     (In millions)  

Technology

   $ 340.5       $ 329.6   

Data and Analytics

     80.4         69.4   

Corporate and Other

     45.5         47.8   
  

 

 

    

 

 

 

BKFS Subtotal

     466.4         446.8   

Transaction Services

     814.1         1,012.8   
  

 

 

    

 

 

 

Total

   $ 1,280.5       $ 1,459.6   
  

 

 

    

 

 

 

Technology segment operating expenses were $340.5 million during the Predecessor 2013 Annual Period as compared to $329.6 million during the Predecessor 2012 Annual Period, an increase of $10.9 million, or 3%. As a percent of revenue, operating expenses were 51% in both the Predecessor 2013 Annual Period and the Predecessor 2012 Annual Period. The higher marginal contributions from the revenue growth described above were offset by continued investments in our loan origination technology.

Data and Analytics segment operating expenses were $80.4 million during the Predecessor 2013 Annual Period, an increase of $11.0 million, or 16% compared to the Predecessor 2012 Annual Period. The increase in operating expenses was primarily due to maintenance expenses for our property records database.

Transaction Services segment operating expenses were $814.1 million during the Predecessor 2013 Annual Period as compared to $1,012.8 million during the Predecessor 2013 Annual Period. As a percent of revenue, operating expenses were 84% the Predecessor 2013 Annual Period compared to 80% in the Predecessor 2012 Annual Period. The increase as a percent of revenue is primarily attributable to reduced operating leverage in default services resulting from the continued slowdown in foreclosure volumes and an elongation of foreclosure timelines that extends servicing obligations.

Depreciation and Amortization

Depreciation and amortization increased $8.3 million, or 9%, during the Predecessor 2013 Annual Period when compared to the Predecessor 2012 Annual Period. The increase is primarily due to increased investments in infrastructure and key technology platforms during the Predecessor 2012 Annual Period.

The following table sets forth our depreciation and amortization by segment for the Predecessor 2013 Annual Period and Predecessor 2012 Annual Period:

 

     Predecessor  
     Year Ended December 31,  
     2013      2012  
     (In millions)  

Technology

   $ 75.8       $ 67.1   

Data and Analytics

     4.6         5.4   

Corporate and Other

     3.2         3.3   
  

 

 

    

 

 

 

BKFS Subtotal

     83.6         75.8   

Transaction Services

     20.4         19.9   
  

 

 

    

 

 

 

Total

   $ 104.0       $ 95.7   
  

 

 

    

 

 

 

 

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Legal and Regulatory Charges

During the Predecessor 2013 Annual Period and the Predecessor 2012 Annual Period, we increased our legal and regulatory accrual by $74.4 million and $192.4 million, respectively, to reflect management’s assessment of legal matters primarily related to the businesses that have been distributed to ServiceLink, but for which LPS as the former public company was named as a party to these legal matters, in connection with the Internal Reorganization Transactions.

Exit Costs, Impairments and Other Charges

During the Predecessor 2013 Annual Period, we recorded charges totaling $49.4 million related to the impairment of computer software projects that were no longer recoverable, employment matters and severance costs resulting from various cost reduction initiatives and transaction costs associated with the pending acquisition by FNF. During the Predecessor 2012 Period, we recorded charges totaling $10.5 million related to employment matters and severance costs and the impairment of computer software projects that were no longer recoverable.

The following table sets forth our exit costs, impairments and other charges by segment for the Predecessor 2013 Annual Period and Predecessor 2012 Annual Period:

 

     Predecessor  
     Year Ended December 31,  
     2013      2012  
     (In millions)  

Technology

   $ 0.4       $ 1.5   

Data and Analytics

     0.3         1.3   

Corporate and Other

     7.4         3.1   
  

 

 

    

 

 

 

BKFS Subtotal

     8.1         5.9   

Transaction Services

     41.3         4.6   
  

 

 

    

 

 

 

Total

   $ 49.4       $ 10.5   
  

 

 

    

 

 

 

Corporate/Other exit costs, impairments and other charges were $7.4 million during the Predecessor 2013 Annual Period compared to $3.1 million during the Predecessor 2012 Annual Period. The 2013 amount primarily reflects transaction fees related to the pending acquisition by FNF, and costs associated with employment matters. The 2012 amount is comprised of severance charges.

Transaction Services exit costs, impairments and other charges were $41.3 million in the Predecessor 2013 Annual Period compared to $4.6 million in the Predecessor 2012 Annual Period. The 2013 amount includes $28.6 million of impairment charges related to computer software projects that were no longer recoverable; an allocation of transaction fees related to the pending acquisition by FNF and costs associated with employment matters. The 2012 amount primarily relates to severance benefits resulting from various employment matters.

Operating Income

Operating income decreased $25.2 million during the Predecessor 2013 Annual Period when compared to the Predecessor 2012 Annual Period. Operating margin was 12% during the Predecessor 2013 Annual Period and the Predecessor 2012 Annual Period.

 

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The following table sets forth our operating income by segment for the Predecessor 2013 Annual Period and Predecessor 2012 Annual Period:

 

     Predecessor  
     Year Ended December 31,  
     2013     2012  
     (In millions)  

Technology

   $ 246.9      $ 242.1   

Data and Analytics

     (4.5     3.0   

Corporate and Other

     (58.2     (69.0
  

 

 

   

 

 

 

BKFS Subtotal

     184.2        176.1   

Transaction Services

     23.7        57.0   
  

 

 

   

 

 

 

Total

   $ 207.9      $ 233.1   
  

 

 

   

 

 

 

Interest Expense, Net

Interest expense, net decreased $35.9 million during the Predecessor 2013 Annual Period when compared to the Predecessor 2012 Annual Period, primarily due to the impact of lower interest rates and reduced principal balances on our long-term debt. During the fourth quarter of 2012, we refinanced our senior notes to take advantage of the favorable interest rate environment by retiring our Term Loan B and 2016 senior notes with the proceeds from an offering of our 2023 senior notes that have an interest rate of 5.75%. In connection with the retirement of the 2016 senior notes, we incurred a call premium of $15.8 million that was reflected in interest expense in the Predecessor 2012 Annual Period.

Provision for Income Taxes

Income taxes on continuing operations were $53.6 million and $67.6 million during the Predecessor 2013 Annual Period and the Predecessor 2012 Annual Period, respectively, which resulted in an effective tax rate of 34.0% and 45.9%, respectively. The decrease in the effective rate during the Predecessor 2013 Annual Period is due to an increase in federal and state deductions and credits related to the development and licensing of our technology platforms partially offset by the prior year impact of the assumed non-deductibility of certain components of the legal and regulatory charges recognized.

Loss from Discontinued Operations, net

During the Successor 2014 Interim Period and the Predecessor 2012 Annual Period, we sold or disposed of certain non-core or underperforming business units. Loss from discontinued operations, net of tax, was $1.5 million and $9.2 million during the Predecessor 2013 Annual Period and the Predecessor 2012 Annual Period, respectively.

Net Earnings and Net Earnings Per Share—Diluted

Net earnings increased $32.3 million during the Predecessor 2013 Annual Period when compared to the Predecessor 2012 Annual Period. Net earnings per diluted share increased to $1.19 during the Predecessor 2013 Annual Period as compared to $0.83 during the Predecessor 2012 Annual Period. The increases in net earnings and net earnings per diluted share were a result of the factors described above.

 

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Predecessor 2012 Annual Period Compared With Predecessor 2011 Annual Period

Revenues

Revenues increased $11.3 million, or 1% during the Predecessor 2012 Annual Period when compared to the Predecessor 2011 Annual Period. This increase was primarily due to $46.1 million, or 8%, increase in our Technology segment, partially offset by a $37.2 million, or 3% decrease in revenues in LPS’s former Transaction Services segment.

The following table sets forth our revenues by segment for the Predecessor 2012 Annual Period and Predecessor 2011 Annual Period:

 

     Predecessor  
     Year Ended December 31,  
     2012     2011  
     (In millions)  

Technology

   $ 640.3      $ 594.2   

Data and Analytics

     79.1        76.1   

Corporate and Other

     (0.5     0.1   
  

 

 

   

 

 

 

BKFS Subtotal

     718.9        670.4   

Transaction Services

     1,272.4        1,309.6   
  

 

 

   

 

 

 

Total

   $ 1,991.3      $ 1,980.0   
  

 

 

   

 

 

 

Technology segment revenues were $640.3 million during the Predecessor 2012 Annual Period, an increase of $46.1 million, or 8% compared to the Predecessor 2011 Annual Period. The increase is primarily due to growth in servicing technology due to loan growth from new and existing clients on our mortgage servicing platform as well as higher transactional fees, growth in origination technology due to higher refinancing activity which drives incremental transactional fees, and from growth in workflow technology from the annualization of new client implementations in the Predecessor 2011 Annual Period.

Data and Analytics segment revenues were $79.1 million during the Predecessor 2012 Annual Period, an increase of 4% compared to the Predecessor 2011 Annual Period. The increase was driven by new clients in our multiple listing service business and higher volumes in our tax data business.

Revenues of LPS’s former Transaction Services segment declined by $37.2 million, or 3%, largely driven by a decline in default services as a result of continued delays in the foreclosure process causing reduced volumes, and from an increase in the sales allowance reserve of $5.2 million during the Predecessor 2012 Annual Period based on management’s ongoing assessment of the impact of these delays on the realizability of our recorded revenues. The decrease in default services was largely offset by an increase in origination services as a result of higher loan origination volumes due to the continued low interest rate environment, the impact of Home Affordable Refinance Program 2.0 and from market share gains.

Operating Expenses

Operating expenses decreased $18.1 million, or 1%, during the Predecessor 2012 Annual Period when compared to the Predecessor 2011 Annual Period. Operating expenses as a percentage of revenues were 73% during the Predecessor 2012 Annual Period and 75% during the Predecessor 2011 Annual Period. The factors contributing to this decrease include favorable revenue mix and related operating leverage in our higher margin origination services resulting from increased loan origination volumes, partially offset by near-term investments in our loan origination technology in order to extend our services from a software licensing model to a SaaS model.

 

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The following table sets forth our operating expenses by segment for the Predecessor 2012 Annual Period and Predecessor 2011 Annual Period:

 

     Predecessor  
     Year Ended December 31,  
     2012      2011  
     (In millions)  

Technology

   $ 329.6       $ 287.0   

Data and Analytics

     69.4         65.7   

Corporate and Other

     47.8         48.5   
  

 

 

    

 

 

 

BKFS Subtotal

     446.8         401.2   

Transaction Services

     1,012.8         1,076.5   
  

 

 

    

 

 

 

Total

   $ 1,459.6       $ 1,477.7   
  

 

 

    

 

 

 

Technology segment operating expenses were $329.6 million during the Predecessor 2012 Annual Period compared to $287.0 million during the Predecessor 2011 Annual Period. As a percent of revenue, operating expenses were 51% in the Predecessor 2012 Annual Period compared to 48% in the Predecessor 2011 Annual Period. The increase as a percent of revenue was driven by near-term investments in our loan origination technology to extend our services from a software licensing model to a SaaS model.

Data and Analytics segment operating expenses were $69.4 million during the Predecessor 2012 Annual Period compared to $65.7 million during the Predecessor 2011 Annual Period. As a percent of revenue, operating expenses were 88% in the Predecessor 2012 Annual Period compared to 86% in the Predecessor 2011 Annual Period. The increase as a percent of revenue was due to investments in management and sales infrastructure.

Corporate and Other segment operating expenses were $47.8 million during the Predecessor 2012 Annual Period compared to $48.5 million during the Predecessor 2011 Annual Period.

Transaction Services segment operating expenses were $1,012.8 million during the Predecessor 2012 Annual Period compared to $1,076.5 million during the Predecessor 2011 Annual Period. As a percent of revenue, operating expenses were 80% in the Predecessor 2012 Annual Period compared to 82% in the Predecessor 2011 Annual Period. This decrease is primarily attributable to a favorable revenue mix and related operating leverage in our higher margin origination operations resulting from increased loan origination volumes.

Depreciation and Amortization

Depreciation and amortization increased $7.5 million, or 9%, during the Predecessor 2012 Annual Period when compared to the Predecessor 2011 Annual Period.

 

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The following table sets forth our depreciation and amortization by segment for the Predecessor 2012 Annual Period and Predecessor 2011 Annual Period:

 

     Predecessor  
    

Year Ended December 31,

 
     2012        2011  
     (In millions)  

Technology

   $ 67.1         $ 60.8   

Data and Analytics

     5.4           4.2   

Corporate and Other

     3.3           3.4   
  

 

 

      

 

 

 

BKFS Subtotal

     75.8           68.4   

Transaction Services

     19.9           19.8   
  

 

 

      

 

 

 

Total

   $ 95.7         $ 88.2   
  

 

 

      

 

 

 

Technology segment depreciation and amortization was $67.1 million during the Predecessor 2012 Annual Period compared to $60.8 million during the Predecessor 2011 Annual Period. This increase was driven by investments in key technology platforms and IT infrastructure.

Legal and Regulatory Charges

We recorded a $192.4 million increase to our legal and regulatory accrual during the Predecessor 2012 Annual Period, which was previously established in the fourth quarter of 2011. These legal and regulatory charges were primarily related to the businesses that have been distributed to ServiceLink in connection with the Internal Reorganization Transactions.

Exit Costs, Impairments and Other Charges

We recorded charges totaling $10.5 million and $56.9 million during the Predecessor 2012 Annual Period and the Predecessor 2011 Annual Period, respectively, primarily related to severance charges resulting from various cost reduction initiatives and impairment charges related to the write-down of computer software projects.

The following table sets forth our exit costs, impairments and other charges by segment for the Predecessor 2012 Annual Period and Predecessor 2011 Annual Period:

 

     Predecessor  
     Year Ended December 31,  
     2012      2011  
     (In millions)  

Technology

   $ 1.5       $ 10.5   

Data and Analytics

     1.3         2.2   

Corporate and Other

     3.1         25.0   
  

 

 

    

 

 

 

BKFS Subtotal

     5.9         37.7   

Transaction Services

     4.6         19.2   
  

 

 

    

 

 

 

Total

   $ 10.5       $ 56.9   
  

 

 

    

 

 

 

Technology segment exit costs, impairments and other charges were $1.5 million during the Predecessor 2012 Annual Period and $10.5 million during the Predecessor 2011 Annual Period. The charges related to severance resulting from our various cost reduction initiatives and impairment charges related to the write-down of computer software projects.

 

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Corporate and Other exit costs, impairments and other charges were $3.1 million during the Predecessor 2012 Annual Period compared to $25.0 million during the Predecessor 2011 Annual Period. The charges related to severance, restructuring and other charges resulting from cost reduction initiatives.

Transaction Services segment exit costs, impairments and other charges were $4.6 million during the Predecessor 2012 Annual Period compared to $19.2 million during the Predecessor 2011 Annual Period. The charges related to severance, restructuring and other charges resulting from cost reduction initiatives.

Operating Income

Operating income decreased $45.6 million, or 16% during the Predecessor 2012 Annual Period when compared to the Predecessor 2011 Annual Period. Operating margin decreased to 12% during the Predecessor 2012 Annual Period from 14% during the Predecessor 2011 Annual Period as a result of the factors described above.

The following table sets forth our operating income by segment for the Predecessor 2012 Annual Period and Predecessor 2011 Annual Period:

 

                   Predecessor                 
    

Year Ended December 31,

 
     2012     2011  
     (In millions)  

Technology

   $ 242.1      $ 235.9   

Data and Analytics

     3.0        4.0   

Corporate and Other

     (69.0     (87.3
  

 

 

   

 

 

 

BKFS Subtotal

     176.1        152.6   

Transaction Services

     57.0        126.1   
  

 

 

   

 

 

 

Total

   $ 233.1      $ 278.7   
  

 

 

   

 

 

 

Interest Expense, Net

Interest expense, net increased $20.0 million during the Predecessor 2012 Annual Period when compared to the Predecessor 2011 Annual Period. The increase was primarily related to a $15.8 million call premium paid to retire our old senior notes in connection with our 2012 debt refinancing.

Provision for Income Taxes

The provision for income taxes decreased $9.6 million in the Predecessor 2012 Annual Period when compared to the Predecessor 2011 Annual Period. The effective tax rate increased to 45.9% in the Predecessor 2012 Annual Period from 36.3% during the Predecessor 2011 Annual Period, primarily due to assumptions regarding the deductibility of the legal and regulatory accrual and a non-cash tax charge related to stock option forfeitures during the Predecessor 2012 Annual Period.

Loss from Discontinued Operations, net

During the Predecessor 2012 Annual Period and the Predecessor 2011 Annual Period, management made the decision to sell or dispose of certain non-core or underperforming business units including Verification Bureau, SoftPro, Rising Tide Auction, True Automation, Aptitude Solutions, IRMS and certain operations previously included in our Real Estate group. Management also made the decision to shut down our Asset Management Solutions business and sell our Tax Services business (other than our tax data services that provide lenders with information about the tax status of a property). As of December 31, 2012, all of these businesses were sold or disposed of. Loss from discontinued operations, net of tax, decreased to $9.2 million in the Predecessor 2012

 

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Annual Period from $38.7 million in the Predecessor 2011 Annual Period due to the disposal of certain loss generating businesses and from a decrease in impairments related to the net assets of the discontinued operations during the Predecessor 2012 Annual Period, partially offset by realized gains on disposal, net of tax, totaling $2.0 million.

Net Earnings and Net Earnings Per Share—Diluted

Net earnings and net earnings per diluted share totaled $70.4 million and $0.83, respectively, during the Predecessor 2012 Annual Period and $96.5 million and $1.13, respectively, during the Predecessor 2011 Annual Period. The decreases in the Predecessor 2012 Annual Period were a result of the factors described above.

Liquidity and Capital Resources

Cash Requirements

Our primary sources of liquidity are, and after the completion of this offering are expected to continue to be, our existing cash balances and cash flows from operations.

Our primary cash requirements include operating expenses, debt service payments (principal and interest), capital expenditures and systems development expenditures and may include business acquisitions.

Our capital expenditures primarily consist of computer software (purchased and internally developed) and additions to property and equipment. Our capital expenditures for the Successor 2014 Interim Period and Predecessor 2013 Interim Period were $44.1 million and $86.1 million, respectively, and for the Predecessor 2013 Annual Period, Predecessor 2012 Annual Period and Predecessor 2011 Annual Period were $113.8 million, $113.3 million, and $104.9 million, respectively. As of September 30, 2014, we had cash on hand of $52.4 million and debt of $2,133.3 million (excluding the unamortized premium associated with our senior unsecured notes). We believe that our cash flow from operations and available cash and cash equivalents will be sufficient to meet our liquidity needs. We anticipate that to the extent that we require additional liquidity, it will be funded through the incurrence of other indebtedness, equity issuance or a combination. We cannot assure you that we will be able to obtain this additional liquidity on reasonable terms, or at all. Additionally, our liquidity and our ability to meet our obligations and fund our capital requirements are also dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control. Accordingly, we cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available from additional indebtedness or otherwise to meet our liquidity needs. Although we have no specific current plans to do so, if we decide to pursue one or more significant acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions.

Cash Flows

The following tables provide a summary of cash flows from operating, investing and financing activities for the periods presented:

 

    Successor      Pred\ecessor  
    Period January 2,
2014 through
September 30,
2014
     One Day Ended
January 1,

2014
    Nine Months Ended
September 30,
2013
 
           (In millions)        

Cash flows from operating activities

  $ (20.9    $ (51.2   $ 107.6   

Cash flows from investing activities

    (42.6      —          (112.7

Cash flows from financing activities

    (162.5      —          (27.9
 

 

 

    

 

 

   

 

 

 

Net decrease in cash and cash equivalents

  $ (226.0    $ (51.2   $ (33.0
 

 

 

    

 

 

   

 

 

 

 

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     Predecessor  
     Year Ended December 31,  
     2013     2012     2011  
     (In millions)  

Cash flows from operating activities

   $ 201.0      $ 434.4      $ 477.9   

Cash flows from investing activities

     (140.8     (146.3     (155.7

Cash flows from financing activities

     33.2        (129.2     (297.1
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

   $ 93.4      $ 158.9      $ 25.1   
  

 

 

   

 

 

   

 

 

 

Operating Activities

Cash flows from operating activities reflect net earnings (loss) adjusted for certain non-cash items and changes in certain assets and liabilities.

Interim Periods

Cash used in operating activities was $20.9 million for the Successor 2014 Interim Period reflecting the effect of non-recurring costs incurred resulting from the Acquisition, the transfer of LPS’s former Transaction Services segment to ServiceLink in January 2014 and working capital timing. The net cash outflows for the Predecessor 2014 Interim Day reflects certain transaction costs paid related to the Acquisition.

Annual Periods

Cash provided by operating activities was $201.0 million, $434.4 million and $477.9 million during the Predecessor 2013 Annual Period, the Predecessor 2012 Annual Period and the Predecessor 2011 Annual Period, respectively. The decline in cash provided by operating activities during the Predecessor 2013 Annual Period compared to the Predecessor 2012 Annual Period was primarily due to $196.4 million of payments related to certain legal and regulatory matters, substantially all of which related to the Transaction Services segment of LPS, and a decline in profitability in Transaction Services, partially offset by lower tax and interest payments. The decline in cash provided by operating activities during the Predecessor 2012 Annual Period when compared to the Predecessor 2011 Annual Period was primarily related to an increase in cash paid for taxes, an increase in interest primarily related to a $15.8 million call premium on our then outstanding notes, as well as a decrease in working capital contributions mainly from lower accounts receivable collections from default services, which carries a higher “days sales outstanding” ratio due to the lag between revenue recognition and collection.

Investing Activities

Investing cash flows consist primarily of capital expenditures and acquisitions and dispositions. Our principal capital expenditures are for computer software (purchased and internally developed) and additions to property and equipment.

Interim Periods

Cash used in investing activities was $42.6 million for the Successor 2014 Interim Period compared to $112.7 million for the Predecessor 2013 Interim Period. The decrease is the result of lower capital expenditures, along with the absence of purchases of investments and acquisition costs for title plants and property records data in the Successor Period. Following the completion of our property records database in the Predecessor 2013 Annual Period, the maintenance costs associated with that database are expensed as incurred. Capital expenditures were $44.1 million during the Successor 2014 Interim Period compared to $86.1 million in the Predecessor 2013 Interim Period. The decrease is due to heightened investment discipline, project timing and the transfer of our former Transaction Services segment to ServiceLink.

There were no investing activities during the Predecessor 2014 Interim Day.

 

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Annual Periods

Cash used in investing activities was $140.8 million, $146.3 million and $155.7 million during the Predecessor 2013 Annual Period, the Predecessor 2012 Annual Period and the Predecessor 2011 Annual Period, respectively. Capital expenditures were approximately $113.8 million, $113.3 million and $104.9 million during the Predecessor 2013 Annual Period, the Predecessor 2012 Annual Period and the Predecessor 2011 Annual Period, respectively. Cash used in investing activities in the Predecessor 2013 Annual Period was less than 2012 as the absence of proceeds from the sale of businesses was offset by the absence of cash paid for acquisitions, a decrease in the acquisition of title plants and property data and lower net purchases of investments. The decrease in cash used in investing activities during the Predecessor 2012 Annual Period as compared to the Predecessor 2011 Annual Period was primarily due to the net impact of our disposition activities, as we disposed of Tax Services, SoftPro, True Automation, Aptitude Solutions and IRMS business units during the Predecessor 2012 Annual Period for net cash proceeds of $42.6 million. This cash inflow was partially offset by a $20.8 million increase in the acquisition of title plants and property records data and an $8.4 million increase in capital expenditures.

We acquired LendingSpace in the Predecessor 2012 Annual Period and PCLender in the Predecessor 2011 Annual Period. We spent (net of cash acquired) approximately $12.3 million and $9.8 million on these acquisitions during the Predecessor 2012 Annual Period and the Predecessor 2011 Annual Period, respectively.

Financing Activities

Financing cash flows consist primarily of our borrowings, related debt issuance costs and principal payments, proceeds from the sale of shares through our employee equity incentive plans, repurchase of treasury shares and payment of dividends to stockholders.

Interim Periods

Cash used in financing activities for the Successor 2014 Interim Period was approximately $162.5 million and related to cash flows associated with the Internal Reorganization Transactions in January 2014 as well as $62.7 million of debt principal payments that we made during the period.

Cash used in financing activities for the Predecessor 2013 Interim Period was $27.9 million and was primarily related to dividends paid to LPS common shareholders.

There were no financing activities during the Predecessor 2014 Interim Day.

Annual Periods

Cash provided by (used in) financing activities was $33.2 million, $(129.2) million and $(297.1) million during the Predecessor 2013 Annual Period, the Predecessor 2012 Annual Period and the Predecessor 2011 Annual Period, respectively. Cash provided by financing activities in the Predecessor 2013 Annual Period resulted from proceeds from the exercise of stock options partially offset by dividends paid to LPS common shareholders. The decrease in cash used in financing activities during the Predecessor 2012 Annual Period when compared to the Predecessor 2011 Annual Period was primarily due to treasury stock repurchases of $136.9 million made in the Predecessor 2011 Annual Period as well as a decrease in our net debt service payments of approximately $30.6 million, including debt issuance costs paid, during the Predecessor 2012 Annual Period as compared to the Predecessor 2011 Annual Period.

Financing

On January 2, 2014, BKHI issued (i) the Original Mirror Note in the original principal amount of $1,400.0 million and (ii) the Original Intercompany Note in the original principal amount of $1,175.0 million to FNF.

 

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BKFS Operating LLC entered into an assumption agreement, dated as of January 3, 2014, among BKFS Operating LLC, BKHI and FNF pursuant to which BKFS Operating LLC assumed $820.0 million of the debt issued under the Original Mirror Note and $688.0 million of the debt issued under the Original Intercompany Note, releasing BKHI of its obligations with respect to such amounts. Subsequently, on January 6, 2014, BKFS Operating LLC borrowed an additional sum of $63.0 million pursuant to the Second Intercompany Note and on March 31, 2014, BKFS Operating LLC borrowed an incremental loan of $25.0 million pursuant to the Second Intercompany Note. The Original Intercompany Note and the Second Intercompany Note are collectively referred to as the Intercompany Notes. We amended each of the Intercompany Notes on May 30, 2014, and the descriptions below describe the Intercompany Notes as amended.

The amount assumed by BKFS on the Original Mirror Note is divided into two tranches known as Tranche T and Tranche R, which we refer to collectively as the Mirror Notes. Tranche T, in the original assumed amount of $644.0 million, bears interest at the rate or rates of interest charged on borrowings under FNF’s Term Loan Credit Agreement plus 100 basis points. Tranche R, in the original assumed amount of $176.0 million, bears interest at the rate or rates of interest charged on borrowings under FNF’s Revolving Credit Agreement plus 100 basis points. As of September 30, 2014, we were paying 2.75% plus LIBOR on Tranche T and 2.45%, plus LIBOR on Tranche R. The interest rates in effect for Tranche T and Tranche R Loans as of September 30, 2014 were 2.98% and 2.60%, respectively.

The Original Mirror Note agreement requires us to repay the outstanding principal amount of Tranche T in equal quarterly installments on the last day of each fiscal quarter as follows, with the first such payment to be made on the Funding Date: (i) 0.0% in the first year after the Funding Date, (ii) 10.0% in the second year after the Funding Date, (iii) 15.0% in the third year after the Funding Date, (iv) 20.0% in the fourth year after the Funding Date and (v) 20.0% in the fifth year after the Funding Date, in each case of the original aggregate principal amount of Tranche T made on the Funding Date. The remaining balance of the original amount shall be repaid on January 2, 2019. Tranche R has no scheduled principal payments, but will be due and payable in full on July 15, 2018.

The Intercompany Notes bear interest at a fixed rate of 10% per annum. Such interest is calculated and payable quarterly on the last day of each March, June, September and December of each fiscal year. We are not required to make scheduled principal payments prior to the maturity dates of the Intercompany Notes.

We have the right to prepay, at any time and from time to time, all or any portion of the outstanding principal amount of the Mirror Notes and the Intercompany Notes without premium or penalty.

On January 2, 2014, upon consummation of the Acquisition, LPS entered into a supplemental indenture, or the Supplemental Indenture, with FNF, BKLS and U.S. Bank National Association, as trustee, or the Trustee, to an indenture dated as of October 12, 2012, among LPS, the subsidiary guarantors party thereto and the Trustee, as supplemented by the Supplemental Indenture and the Second Supplemental Indenture, the Indenture, relating to the Senior Notes. Pursuant to the terms of the Supplemental Indenture, (i) FNF became a guarantor of LPS’s obligations under the Senior Notes and agreed to fully and unconditionally guarantee the Senior Notes, on a joint and several basis with the guarantors named in the Indenture and (ii) BKLS became a “co-issuer” of the Senior Notes and agreed to become a co-obligor of LPS’ obligations under the Indenture and the Senior Notes, on the same terms and subject to the same conditions as LPS, on a joint and several basis. As a result of FNF’s guarantee of the Senior Notes, the Senior Notes were rated as investment grade, which resulted in the suspension of most of the restrictive covenants in the Indenture.

The Senior Notes were registered under the Securities Act carry an interest rate of 5.75% and will mature on April 15, 2023. Interest is paid semi-annually on the 15th day of April and October. The Senior Notes are senior unsecured obligations. At any time and from time to time, prior to October 15, 2015, we

 

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may redeem up to a maximum of 35% of the original aggregate principal amount of the Senior Notes with the proceeds of one or more equity offerings, at a redemption price equal to 105.75% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the redemption date. Prior to October 15, 2017, we may redeem some or all of the Senior Notes by paying a “make-whole” premium based on U.S. Treasury rates. On or after October 15, 2017, we may redeem some or all of the Senior Notes at the redemption prices described in the Indenture, plus accrued and unpaid interest. In addition, if a change of control occurs, we are required to offer to purchase all outstanding Senior Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of purchase.

The Senior Notes contain covenants that, among other things, limit our ability (a) to incur or guarantee additional indebtedness or issue preferred stock, (b) to make certain restricted payments, including dividends or distributions on equity interests held by persons other than us or certain subsidiaries, in excess of an amount generally equal to 50% of consolidated net income generated since July 1, 2008, (c) to create or incur certain liens, (d) to engage in sale and leaseback transactions, (e) to create restrictions that would prevent or limit the ability of certain subsidiaries to (i) pay dividends or other distributions to us or certain other subsidiaries, (ii) repay any debt or make any loans or advances to us or certain other subsidiaries or (iii) transfer any property or assets to us or certain other subsidiaries, (f) to sell or dispose of our assets or any restricted subsidiary or enter into merger or consolidation transactions and (g) to engage in certain transactions with affiliates. As a result of FNF’s guarantee of the Senior Notes on January 2, 2014, and the Senior Notes becoming rated investment grade, certain covenants were suspended. As of September 30, 2014, covenants (a), (b), (e), (f) and (g) outlined above are suspended. These covenants will continue to be suspended as long as the Senior Notes are rated investment grade, as defined in the Indenture. These covenants are subject to a number of exceptions, limitations and qualifications in the Indenture. We have no independent assets or operations and our guarantees are full and unconditional and joint and several. There are no significant restrictions on our ability to obtain funds from any of our subsidiaries. The Senior Notes contain customary events of default, including failure (i) to pay principal and interest when due and payable and breach of certain other covenants and (ii) to accept and pay for the Senior Notes tendered as required by the Indenture. Events of default also include cross defaults, with respect to any other of our debt or debt of certain subsidiaries having an outstanding principal amount of $80.0 million or more in the aggregate for all such debt, arising from (i) failure to make a principal payment when due and such defaulted payment is not made, waived or extended within the applicable grace period or (ii) the occurrence of an event which results in such debt being due and payable prior to its scheduled maturity. Upon the occurrence of an event of default (other than a bankruptcy default), the trustee or holders of at least 25% of the Senior Notes then outstanding may accelerate the Senior Notes by giving us appropriate notice. If, however, a bankruptcy default occurs, then the principal of and accrued interest on the Senior Notes then outstanding will accelerate immediately without any declaration or other act on the part of the trustee or any holder.

On January 16, 2014, we issued an offer to purchase our Senior Notes pursuant to the change of control provisions under the related Indenture at a purchase price of 101% of the principal amount plus accrued interest to the purchase date. The offer expired on February 18, 2014. As a result of the offer, bondholders tendered $5.2 million in principal of the Senior Notes, which were subsequently purchased by us on February 24, 2014. On February 7, 2014, BKIS, BKLS and the Trustee entered into a second Supplemental Indenture to the Indenture, pursuant to which the financial reporting covenant under the Indenture was amended to substitute reporting of FNF for that of BKIS. In connection with the consent to remove the financial reporting covenant, we paid $0.7 million to the holders of the Senior Notes in February 2014.

Fair Value of Long-Term Debt

The fair value of our Senior Notes as of September 30, 2014 was $621.6 million. The fair value of our Intercompany Notes and Mirror Notes approximates carrying value, as the agreements were entered into during the first quarter of 2014.

 

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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, 2014, our required annual payments relating to these contractual obligations were as follows:

 

            Payments Due by Period  
     Total      2015      2016-2017      2018-2019      Thereafter  
     (In millions)  

Long-term debt

   $                $                $                $                $            

Interest on long-term debt

              

Data processing and maintenance commitments

              

Operating lease payments

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $         $         $         $         $     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Indemnifications and Warranties

We often indemnify our clients against damages and costs resulting from claims of patent, copyright, trademark infringement or breaches of confidentiality 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 clients 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.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements other than operating leases.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires 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 financial statements and the reported amounts of revenues and expenses during the reporting periods. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of our existing contracts, our evaluation of trends in the industry, information pr