Barbara Restaurant Group, Inc. (“SBRG”) common stock as a result of the merger between SBRG and CKE Restaurants, Inc. (“CKE”) and a $3.4 million gain on the sale of a portion of our CKE common stock in the second quarter of 2002. Net realized gains in 2002 were partially offset by other-than-temporary impairment losses of $11.3 million on CKE recorded during the fourth quarter of 2002 and $3.3 million recorded on MCI WorldCom bonds in the second quarter of 2002. Included in 2001 net realized gains is an other-than-temporary impairment loss of $4.4 million recorded on Enron Corporation bonds.
Additional Minimum Pension Liability Adjustment. Discount rates that are used in determining our December 31, 2002 projected benefit obligation and 2003 net periodic pension costs were based on prevailing interest rates as of December 31, 2002. Similar to prior years, we looked at the Moody’s Aa corporate bond index at that date as an appropriate basis in determining the discount rate. A decrease in the discount rate used at December 31, 2002 resulted in an additional minimum pension liability adjustment. As such, we recorded a net-of-tax charge of $15.9 million to accumulated other comprehensive earnings in 2002 in accordance with Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions”.
Escrow Accounts. In conducting our operations, we routinely hold customers’ assets in escrow, pending completion of real estate transactions. Certain of these amounts are maintained in segregated bank accounts and have not been included in our Consolidated Balance Sheets. We have a contingent liability relating to proper disposition of these balances for our customers which amounted to $6.7 billion at December 31, 2002. As a result of holding these customers’ assets in escrow, we have ongoing programs for realizing economic benefits during the year through favorable borrowing and vendor arrangements with various banks. There were no investments or loans outstanding as of December 31, 2002 related to these arrangements.
In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Long-Lived Assets” (“SFAS No. 144”) which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” it retains many of the fundamental provisions of that statement. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material impact on our financial statements.
During 2002, the FASB Emerging Issues Task Force reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 provides an accounting model for an approach to determine whether a vendor should divide an arrangement with multiple deliverables into separate units of accounting. EITF 00-21 requires an analysis of whether a delivered item has stand-alone value to the customer, whether there is subjective and reliable evidence of fair value for the undelivered items, and whether delivery of the undelivered items is probable and substantially in control of the vendor if the arrangement includes a general right of return relative to the delivered item. Companies are required to adopt EITF 00-21 for fiscal periods beginning after June 15, 2003. Companies may apply EITF 00-21 prospectively to new arrangements initiated after the date of adoption or as a cumulative-effect adjustment. We are currently evaluating the impact of EITF 00-21.
The Company includes the accounts of its majority-owned real estate related services public subsidiary, Fidelity National Information Solutions, Inc. (NASDAQ: FNIS, “FNIS”), formerly VISTA Information Solutions, Inc. (“Vista”), and its majority-owned information services subsidiary, Micro General Corporation (“Micro General”), which was merged with FNIS on July 9, 2002 (see Note B), in its consolidated results. As of December 31, 2002, the Company owns approximately 66.1% of the outstanding common stock of FNIS.
Leases and residual interests in securitizations includes direct financing leases, direct financing leases assigned to lender and residual interests in lease securitizations.
Leases are collateralized by equipment. In addition, lessees generally are required to personally guarantee lease payments. The Company’s risk of loss is partially mitigated by recovering collateral and enforcing guarantees. However, the resale value of leased equipment generally declines at a rate greater than the principal of the lease. As a result, full recovery on defaulted leases is not usually possible.
In the ordinary course of business, the Company limits its maximum loss exposure by reinsuring certain risks with other insurers. The Company also earns additional income by assuming reinsurance for certain risks of other insurers. The Company also cedes a portion of certain policy and other liabilities under agent fidelity, excess of loss and case-by-case reinsurance agreements. Reinsurance agreements provide that in the event of a loss (including costs, attorneys’ fees and expenses) exceeding the retained amounts, the reinsurer is liable for the excess amount assumed. However, the ceding company remains primarily liable in the event the reinsurer does not meet its contractual obligations.
On April 30, 2002, FNIS announced a tender offer for all of the outstanding shares of Micro General, whereby each share of Micro General common stock would be exchanged for shares of FNIS common stock. On July 9, 2002, the tender offer and subsequent short form merger was completed and Micro General became a wholly-owned subsidiary of FNIS. Under the terms of the tender offer and merger, each share of Micro General common stock was exchanged for .696 shares of FNIS common stock. FNIS issued approximately 12.9 million shares of common stock to Micro General stockholders, resulting in approximately 38.3 million outstanding shares of FNIS common stock. As of December 31, 2002, the Company owns
$100.0 million, 18 month revolving credit facility due September 30, 2001, which was repaid and terminated on January 24, 2001;
The credit agreement bears interest at a variable rate of interest based on the debt ratings assigned to the Company by certain independent agencies, and is unsecured. In May 2002, the interest rate was reduced to LIBOR plus 1.00% from LIBOR plus 1.125%, as a result of an upgrade to the Company’s debt ratings. Amounts borrowed under the credit agreement were used to pay the cash portion of the merger consideration, to refinance previously existing indebtedness, to pay fees and expenses incurred in connection with the merger and to fund other general corporate purposes. As of December 31, 2002, $120.3 million was outstanding under the Company’s credit agreement and the Company had $250.0 million of borrowings available under its credit agreement.
During 1998, stockholders approved the adoption of the 1998 Stock Incentive Plan (“1998 Plan”). The 1998 Plan authorizes up to 6,996,220 shares of common stock, plus an additional 266,200 shares of common stock on the date of each annual meeting of the stockholders of the Company, for issuance under the terms of the 1998 Plan. The 1998 Plan provides for grants of “incentive stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options and rights to purchase shares of common stock (“Purchase Rights”). The term of options may not exceed 10 years from the date of grant (five years in the case of a person who owns or is deemed to own more than 10% of the total combined voting power of all classes of stock of the Company), and the right to exercise such options shall vest equally over three years. The option exercise price for each share granted pursuant to an incentive stock option may not be less than 100% of the fair market value of a share of common stock at the time such option is granted (110% of fair market value in the case of an incentive stock option granted to a person who owns more than 10% of the combined voting power of all classes of stock of the Company). There is no minimum purchase price for shares of common stock purchased pursuant to a Purchase Right, and any such purchase price shall be determined by the Board of Directors.
FNF Capital approved contingent fundings of approximately $9.7 million in leases at December 31, 2001. No contingent fundings were approved in 2002.