Two of the significant sources of the Company's funds are dividends and distributions from its subsidiaries. As a holding company, the Company receives cash from its subsidiaries in the form of dividends and as reimbursement for operating and other administrative expenses it incurs. The reimbursements are executed within the guidelines of various management agreements among the Company and its subsidiaries. Fluctuations in operating cash flows are primarily the result of increases or decreases in revenue. See "Overview." The Company's Insurance Subsidiaries and UTCs collect premiums and pay claims and operating expenses. The Insurance Subsidiaries also have cash flow sources derived from investment income, repayments of principal and proceeds from sales and maturities of investments and dividends from subsidiaries. Positive cash flow from Insurance Subsidiaries is invested primarily in short-term investments and medium-term bonds. Short-term investments held by the Company's Insurance Subsidiaries provide liquidity for projected claims and operating expenses. The Insurance Subsidiaries are restricted by state regulations in their ability to pay dividends and make distributions. Each state of domicile regulates the extent to which the Company's title underwriters can pay dividends or make other distributions to the Company. The UTCs are also regulated by insurance regulatory or banking authorities. Positive cash flow from the UTCs is invested primarily in cash and cash equivalents.
Company's total investment securities was $227.7 million. These investments consist of securities which the Company believes are readily marketable and could be liquidated if necessary. See "Business -- Investment Policies and Investment Portfolio."
In the normal course of business certain of the Company's subsidiaries enter into off-balance sheet credit risk associated with certain aspects of its title insurance policies and Manchester's real estate activities. This credit risk is in the form of standby letters of credit and general partnership guarantees. The Company believes that this credit risk is adequately secured by either legal remedies associated with settlement procedures or the underlying real estate assets. See Notes J and N of Notes to Consolidated Financial Statements.
The Company's principal subsidiaries consist of Fidelity National Title Insurance Company ("Fidelity Title"), which, in turn, is the parent company of Fidelity National Title Insurance Company of California ("Fidelity California"), Fidelity National Title Insurance Company of Tennessee ("Fidelity Tennessee") and Nations Title Insurance Company ("Nations Title"); Fidelity National Title Insurance Company of Pennsylvania ("Fidelity Pennsylvania"), which, in turn, was the parent company of American Title Insurance Company ("ATIC"), which was merged into Fidelity Pennsylvania as of November 21, 1996; Fidelity National Title Insurance Company of New York ("Fidelity New York"), which, in turn, is the parent company of Nations Title Insurance of New York Inc. ("Nations New York) and National Title Insurance of New York Inc. ("National") (collectively, the "Insurance Subsidiaries"); and its wholly-owned underwritten title companies (collectively, the "UTCs").
The deferred tax assets and liabilities at December 31, 1996 consist of the following:
Statutorily calculated net worth determines the maximum insurable amount under any single title insurance policy. As of January 1, 1997, the statutory single policy maximum insurable amounts for Fidelity Title, Fidelity Pennsylvania and Fidelity New York were $25.3 million, $30.5 million and $28.6 million, respectively. There are no statutory single risk limits prescribed for Fidelity California or Fidelity Tennessee. The statutory single risk limits for Nations Title, Nations New York and National are $2.4 million, $28.6 million and $7.3 million, respectively. Upon acquisition, the Company took action to have Nations Title business, as well as certain Nations New York and National business, written by Fidelity National Insurance Subsidiaries.
The UTCs are also subject to certain regulation by insurance regulatory or banking authorities, primarily relating to minimum net worth and dividend capability. Minimum net worth of $7.5 million and $2.5 million is required for Fidelity National Title Company ("FNTC") and Fidelity National Title Company of California ("FNCAL), respectively. In addition, the Company has agreed to notify the State of California Department of Insurance of dividend payments by FNTC and FNCAL greater than 30% of earnings before income taxes through 1998. See Note B.
During the years ended December 31, 1996, 1995 and 1994, 307,315, 287,183 and 330,827 shares, respectively, were purchased and allocated to employees, based upon their contributions, at an average price of $13.69, $10.75 and $11.97 per share, respectively. The Company contributed $1.2 million or the equivalent of 88,610 shares for the year ended December 31, 1996, $1.4 million or the equivalent of 130,508 shares for the year ended December 31, 1995 and $1.3 million or the equivalent of 113,403 shares for the year ended December 31, 1994 in accordance with the employer's matching contribution. A total of 5,537,617 shares have been purchased by both the ESPP and employees since the adoption of the ESPP.
- --------------- (1) There were 311,521 options granted in 1994. These options were granted at an exercise price of $11.47 to key employees of the Company who applied deferred bonuses expensed in 1993 amounting to $1,287,000 to the exercise price reducing it to $7.34 per share if exercised within the first year of grant. This is a non-variable plan that allows for exercise prices with a fixed discount from the quoted market price. The exercise price of these options decreases approximately 3.0% per year through 1999 and $.13 per share from 2000 through 2005, at which time the exercise price will be $5.45. 56,089 options were granted in 1995 at an exercise price of $8.47 to key employees of the Company who applied deferred bonuses expensed in 1994 amounting to $236,773 to the exercise price, reducing it to $4.34 if exercised within the first year of the grant. The exercise price of these options decreases approximately 6.0% per year through 2000 and $.18 per share from 2001 through 2006, at which time the exercise price will be $1.77. In 1996, 95,181 options were granted at an exercise price of $11.36 to key employees of the company who applied deferred bonuses expensed in 1995 amounting to $432,640 to the exercise price, reducing it to $6.82 if exercised within the first year of the grant. The exercise price of these options decreases approximately 5% per year through 2001 and $.20 per share from 2002 through 2007, at which time the exercise price will be $4.00.
1996 and 1995. A weighted average expected life of seven years was used as the Company has little history of options being exercised.
The Company has a significant concentration of credit risk in its real estate operation which owns commercial real estate properties for its title insurance related direct operations in California and Arizona. As of December 31, 1996 and 1995, the Company's investments in real estate and partnerships totalled $11,352,000 and $8,659,000, respectively. Real estate related notes receivable of $983,000 and $1,992,000, respectively, were outstanding at December 31, 1996 and 1995, and were secured by either commercial real estate or were due from real estate related partnerships. The balance at December 31, 1995, is net of reserves of $2,357,000. The Company feels that this concentration of credit risk is adequately secured by either the underlying real estate or the related assets available from the general partners guaranteeing the loans. See Notes D and E.