(2) An income tax benefit was recorded in 2000 reflecting the net loss reported in 1999 and 2000. The availability of net operating loss carryforwards resulted in a lower tax provision in 2001 than would be expected based on statutory income tax rates. The net operating loss carryforwards were fully utilized in 2001.
We are engaged in the business of issuing title insurance policies, performing other title-related services, such as escrow activities and performing valuation services in connection with real estate transactions. We operate through approximately 130 offices located in Arizona, California, Nevada, Ohio, Pennsylvania and Texas and employ over 2,500 individuals. Our management’s discussion and analysis of financial condition and results of operations addresses our key performance indicators (revenue, net income) and non-GAAP, non-financial performance indicators (opened orders, closed orders, average revenue per closed order), as well as the trends and uncertainties affecting our industry and markets and analyzes our liquidity and capital resources. While management believes the key performance indicators of revenue and net income are the best indicators of the Company’s financial and operating performance, the non-GAAP, non-financial performance indicators may also provide management with additional insight into the volume of transactions and trend in operating performance for the Company’s traditional title and escrow services.
We operate through two reportable segments which are Title and Escrow Services and Lender Services. Our Title and Escrow Services segment consists of wholly-owned title insurance agencies, a title insurance underwriter and parent holding company operations, including issuance and repayment of corporate debt obligations. The significant subsidiaries within this segment includes Capital Title Agency, First California Title Company, Land Title of Nevada, New Century Title Company, United Capital Title Insurance Company and United Title Company. This segment generates its revenue principally from issuing title insurance policies and providing escrow services for residential and commercial real estate transactions, services which are typically marketed to real estate agents, community banks and regional lenders in selected local markets.
Interest expense increased to $0.8 million for the year ended December 31, 2003 primarily resulting from a term loan with an average balance of approximately $11.3 million during 2003, used to partially fund the acquisition of Nations Holding Group and the note used to partially fund the acquisition of Land Title of Nevada, Inc.
Provision for title insurance and escrow losses increased as a percentage of revenue for capital the year ended December 31, 2003 to 3.7% from 2.4% for the prior year. The increase was primarily due to the inclusion of United Title Insurance Company, a title insurance underwriter, in 2003 operating results as a result of the Nations Holding Group acquisition. Prior to this acquisition, our provision related solely to escrow losses, and title losses that were generally limited to a $5,000 deductible per claim. However, for policies underwritten by United Capital Title Insurance Company, we were typically responsible for up to $500,000 per claim. These factors also contribute to the $4.5 million increase in the reserve for title insurance and escrow losses on our balance sheet at December 31, 2003 compared to December 31, 2002.
A significant component of personnel expense includes incentive bonuses, which are earned by employees during the year, a significant portion of which is paid after the end of the year. At December 31, 2004, we had approximately $9.4 million accrued for incentive bonuses that we intend to pay during the first quarter 2005.
We have audited the accompanying consolidated balance sheets of Capital Title Group, Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
The following table sets forth the computation of basic and diluted EPS ($ in thousands, except per share data):
In November 2004, the Company acquired the assets of Real Estate Appraisal Services, Inc. (“REAS”). Under the terms of the agreement, approved by the Board of Directors of each company, the purchase price was $0.8 million, $0.3 of which was paid in cash and $0.5 million of which was a note payable in favor of the seller, Citizens Financial Group. REAS, located in Cleveland, Ohio, is a provider of appraisal and flood determination services for residential and commercial property primarily in Ohio, and provides an extension of services to customers of our Lender Services segment. The operations of REAS have been included in the consolidated financial statements of the Company since November 6, 2004, which was the effective date of the transaction. The allocation of the purchase price included allocation of $0.3 million to goodwill.