Our financial results for the year ended December 31, 2001 include the results of the former operations of Vista for the period from August 1, 2001, the acquisition date, through December 31, 2001. In the fourth quarter of 2001, we recorded certain charges totaling $10.0 million, after applicable taxes, relating to the discontinuation of small-ticket lease origination at FNF Capital and the wholesale international long distance business at Micro General.
Investments as of December 31, 2002, 2001 and 2000 include securities pledged to secure trust deposits of $474.9 million, $319.1 million and $459.4 million, respectively.
Factors Affecting Comparability. Our Consolidated Statements of Earnings for 2001 include the results of the former operations of Vista for the period from August 1, 2001, the acquisition date, through December 31, 2001 and include a full year of operations of Chicago Title as compared to a partial year in 2000. As a result, year over year comparisons may not be meaningful. In addition, during the second quarter of 2001, we recorded a $5.7 million, after-tax charge, reflected as a cumulative effect of a change in accounting principle, as a result of adopting EITF 99-20. Also, in the fourth quarter of 2001, we recorded certain charges totaling $10.0 million, after applicable taxes. These charges relate to the discontinuation of small-ticket lease origination at FNF Capital and the wholesale international long distance business at Micro General.
Our Consolidated Statements of Earnings for 2000 include the results of operations of Chicago Title for the period from March 20, 2000, the merger date, through December 31, 2000. In 2000, we reviewed our existing non-title operations in connection with the merger and related transition and integration. As a result, during the first quarter of 2000 we recorded certain charges totaling $13.4 million, after applicable taxes. These charges primarily relate to the revaluation of non-title assets, including our investment in Express Network, Inc., which was sold in the second quarter of 2000, and existing goodwill associated with Express Network and the write-off of obsolete software.
Net earnings for the year ended December 31, 2002 were $531.7 million, or $5.38 per diluted share as compared with net earnings for the corresponding periods in 2001 and 2000 of $305.5 million, or $3.15 per diluted share and $108.3 million, or $1.47 per diluted share, respectively.
Title insurance revenue is closely related to the level of real estate activity and the average price of real estate sales on both a national and local basis. Real estate sales are directly affected by changes in the cost of financing purchases of real estate - i.e., mortgage interest rates. Other macroeconomic factors affecting real estate activity include, but are not limited to, demand for housing, employment levels, family income levels and general economic conditions. Because these factors can change dramatically, revenue levels in the title insurance industry can also change dramatically. For example, beginning in late 1995 and into 1998, the level of real estate activity increased, including refinancing transactions, new home sales and resales, due in part to decreases in mortgage interest rates. Stable mortgage interest rates and strength in the real estate market, especially in California and throughout the West Coast, contributed to very positive conditions for the title insurance industry throughout 1997 and 1998. However, during the second half of 1999 and through 2000, steady interest rate increases caused by actions taken by the Federal Reserve Board resulted in a significant decline in refinancing transactions. As a result, the market shifted from a refinance-driven market in 1998 to a more traditional market driven by new home purchases and resales in 1999 and 2000. However, beginning in January 2001 and continuing through the fourth quarter of 2002, interest rates have been reduced by 525 basis points, bringing interest rates down to their lowest level in recent history, which again has significantly increased the volume of refinance activity.
Total revenue in 2002 increased $1,208.5 million to $5,082.6 million, an increase of 31.2% over 2001. Total revenue in 2001 increased $1,132.1 million, or 41.3% to $3,874.1 million from $2,742.0 million in 2000. The increase in total revenue in 2002 and 2001 is due to increases in real estate and refinance activity as a result of decreasing interest rates. The inclusion of the Chicago Title operations for a full year in 2001 versus a partial year in 2000 also contributed to the increase in revenue in 2001, as compared with 2000. Further, the increased real estate activity combined with acquisitions of real estate related service companies and the integration of those real estate related service operations into our core businesses in 2001, also contributed to increased revenue in both 2002 and 2001.
Title insurance premiums increased 31.7% to $3,547.7 million in 2002. In 2001, title insurance premiums increased to $2,694.5 million from $1,946.2 million in 2000. These increases in 2002 and 2001 are due to increases in resale and refinance activity as a result of the decline in interest rates. The increase in resale and refinance activity in 2002 and 2001 has been partially offset by a decrease in the average fee per file. The decrease in fee per file is consistent with the overall increased level of refinance activity experienced during 2002 and 2001.
Other operating expenses consist primarily of facilities expenses, title plant maintenance, premium taxes (which insurance underwriters are required to pay on title premiums in lieu of franchise and other state taxes), postage and courier services, computer services (including personnel costs associated with information technology support), professional services, advertising expenses, general insurance, depreciation and trade and notes receivable allowances. We continue to be committed to cost control measures. In response to market conditions, we have implemented aggressive cost control programs in order to maintain operating expenses at levels consistent with the levels of revenue. However, certain fixed costs are incurred regardless of revenue
Interest expense for the years ended December 31, 2002, 2001 and 2000 was $34.1 million, $46.6 million and $59.4 million, respectively. The decrease in interest expense in 2002 is attributable to the decrease in outstanding notes payable and the decline in interest rates. The decrease in interest expense in 2001 as compared with 2000 is due to a decrease in outstanding notes payable, primarily as a result of using proceeds from our common stock offering in January 2001 and our public offering of 7.3% notes in August 2001 to pay down amounts outstanding under our credit facility. Also included in interest expense in 2001 is the write-off of $3.9 million of debt issuance costs associated with paying down our credit facility.
Income tax expense as a percentage of earnings before income taxes for 2002, 2001 and 2000 was 36.0%, 40.1% and 44.1%, respectively. The fluctuation in income tax expense as a percentage of earnings before income taxes is attributable to our estimate of ultimate income tax liability, and the characteristics of net earnings - i.e., operating income versus investment income, as well as the elimination of goodwill amortization consistent with SFAS No. 142.
Our two significant sources of internally generated funds are dividends and distributions from our subsidiaries. As a holding company, we receive cash from our subsidiaries in the form of dividends and as reimbursement for operating and other administrative expenses we incur. The reimbursements are executed within the guidelines of management agreements among us and our subsidiaries. Our insurance subsidiaries are restricted by state regulation in their ability to pay dividends and make distributions. Each state of domicile regulates the extent to which our title underwriters can pay dividends or make other distributions to us. During 2003, our title insurance subsidiaries can pay dividends or make other distributions to us of $114.9 million. Our underwritten title companies, real estate related service companies and FNIS, collect revenue and pay operating expenses. However, they are not regulated to the same extent as our insurance subsidiaries. Positive cash flow from these subsidiaries is invested primarily in cash and cash equivalents.
$450.0 million term loan facility with a 6 year amortization period, due March 19, 2006.
The credit agreement bears interest at a variable rate of interest based on the debt ratings assigned to us 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 in our 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 our credit agreement and we have $250.0 million in borrowings available to us.
we have repurchased a total of 1,100,000 shares of our common stock for $22.9 million, at an average purchase price of $20.84 per share. In May 2002, we retired those 1,100,000 shares held as treasury stock.
Equity Investments. Our equity investments are in public companies whose security prices are subject to significant volatility. The fair value of certain of these investments is less than our cost basis as of December 31, 2002. We currently believe these declines in fair value to be temporary based on the relatively short time these investments’ cost bases have exceeded their fair value and the financial condition and near-term prospects of these companies. However, should the fair value of these investments remain below our cost bases and/or the financial condition or prospects of these companies deteriorate, we may determine in a future period that this decline in fair value is other-than-temporary, requiring that an impairment loss be recognized in the period such a determination is made.
Prior to the merger, we owned approximately 1% and 37% of the outstanding common shares of CKE and SBRG, respectively. Our Chief Executive Officer and Chairman of the Board of Directors also serves as Chairman of the Board of Directors at CKE and SBRG. In addition, our Vice Chairman of the Board of Directors also serves on the board of directors of both CKE and SBRG. As a result of the merger, our shares of SBRG common stock were converted into common shares of CKE and we recognized a $3.1 million gain. In addition, during the second quarter of 2002 we recorded a $3.4 million gain on the sale of a portion of our CKE common stock. In the fourth quarter of 2002, we recognized an other-than-temporary impairment loss of $11.3 million on our CKE investment. Our investment in CKE had a cost basis of $10.5 million and a fair value of $10.7 million as of December 31, 2002.
Investments. Our fixed maturities available for sale and our equity securities available for sale are recorded at fair value. Our other long-term investments are carried at cost, market or on the equity method, as appropriate. Our short-term investments are carried at amortized cost, which approximates market.
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income on a trade date basis. Unrealized gains or losses on fixed maturity and equity securities that are classified as available for sale, net of applicable deferred income taxes (benefits), are excluded from earnings and credited or charged directly to a separate component of stockholders’ equity. If any unrealized losses on fixed maturity or equity securities are deemed other-than-temporary, such unrealized losses are recognized as realized losses.
Goodwill and Other Intangible Assets. We have made acquisitions in the past that resulted in recording a significant amount of goodwill. As of December 31, 2002, goodwill was $996.6 million, of which the majority relates to goodwill recorded in connection with the Chicago Title merger in 2000. Through December 31, 2001, in accordance with generally accepted accounting principles, goodwill has been amortized on a straight-line basis over 7 to 20 years and has been tested for impairment on a continual basis based on the undiscounted cash flows generated by the underlying assets. In 2002, we did not record goodwill amortization as a result of adopting SFAS No. 142. As required by SFAS No. 142, we performed an annual goodwill impairment test on our reporting units and have determined that each of our reporting units has a fair value in excess of our carrying value. Accordingly, no goodwill impairment has been recorded. See Note A of Notes to the Consolidated Financial Statements.
If a loss is related to a policy issued by an independent agent, we may proceed against the independent agent pursuant to the terms of the agency agreement. In any event, we may proceed against third parties who are responsible for any loss under the title insurance policy under rights of subrogation. See Note I of Notes to Consolidated Financial Statements.
ment-sensitive securities including agency interest-only strips, whether purchased or retained in securitization, and determining when these securities must be written down to fair value because of impairment. Adoption of EITF 99-20 requires the valuation of residual interests in securitizations to be recorded as a reduction to the carrying value of the residual interests through a charge to earnings when any portion of the decline in fair value is attributable to an impairment loss, rather than an unrealized loss in stockholders’ equity. As such, we recorded a charge of $5.7 million, net of income tax benefit of $3.0 million, in the second quarter of 2001.
In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others” (“FIN 45”), an interpretation of Financial Accounting Standards Board Statements Nos. 5, 57 and 107 and a rescission of Financial Accounting Standards Board Interpretation No. 34. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on our financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ended after December 15, 2002. See Note N of Notes to Consolidated Financial Statements.
We have audited the accompanying Consolidated Balance Sheets of Fidelity National Financial, Inc. and subsidiaries as of December 31, 2002 and 2001 and the related Consolidated Statements of Earnings, Comprehensive Earnings, Stockholders’ Equity and Cash Flows for each of the years in the three-year period ended December 31, 2002. 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.
As discussed in Note A to the Consolidated Financial Statements, effective January 1, 2002, Fidelity National Financial, Inc. fully adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which resulted in a change to the method of accounting for goodwill and other intangible assets after they have been initially recognized in the financial statements.
The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All intercompany profits, transactions and balances have been eliminated. The Company’s investments in non-majority-owned partnerships and affiliates are accounted for on the equity method. The Company’s financial results for the year ended December 31, 2001 include the results of the former operations of Vista for the period from August 1, 2001, the acquisition date, through December 31, 2001. The Company’s financial results for the year ended December 31, 2000 include the operations of Chicago Title Corporation (“Chicago Title”) for the period from March 20, 2000, the merger date, through December 31, 2000. See Note B.
The Company’s leases are accounted for as direct financing leases. Under this method, the amount by which gross lease rentals exceed the cost of the related assets, less the estimated recoverable residual value at the expiration of the lease, is recognized as income from direct financing leases over the life of the lease using the interest method. Interest is accrued only if deemed collectible.
The Company’s securitizations are generally structured as follows: first, the Company sells a portfolio of lease receivables to a special purpose entity (“SPE”) which has been established for the limited purpose of buying and reselling the Company’s lease receivables; next, the SPE transfers the same receivables to a Trust (the “Trust”), and the Trust in turn issues interest-bearing asset-backed securities generally in an amount equal to the aggregate initial principal balance of the lease receivables, multiplied by an advance rate. At the close of each securitization that is accounted for as a sale, the Company removes from its consolidated balance sheet the lease receivables held for sale and adds to its consolidated balance sheet (i) the cash received and (ii) the allocated cost of residual interests in securitizations, which consists of (a) cash collateral account and (b) net excess cash flows. At December 31, 2002 and 2001, the Company’s remaining securitization facilities had an aggregate outstanding balance of $95.8 million and $218.7 million, respectively. Of those amounts, the remaining balance related to securitizations accounted for as sales were $16.4 million and $79.6 million at December 31, 2002 and 2001, respectively.
During 2002 and 2001, all securitization transactions were structured such that sale accounting was not achieved. The related leases and debt continue to be recognized on the Company’s balance sheet.
The Company is not aware of an active market for the purchase or sale of Residuals at this time. Accordingly, the Company estimates the fair value of the Residuals by calculating the present value of the estimated expected future excess cash flows received by the Company after being released by the Trust (cash out method) using a discount rate of approximately 12%, which management believes is commensurate with the risks involved. The Company estimates the future rates of prepayments, delinquencies, defaults and default loss severity as they impact the amount and timing of the estimated cash flows. The Company uses a zero prepayment estimate because the lease contracts generally require the lessee to pay all or a majority of the lease payments due under the remaining lease term. The Company’s loss is based on historical loss data for comparable leases and the specific characteristics of the leases originated by the Company. The Company’s default estimates resulted in a weighted average life of the pool of leases of between approximately 1.5 and 2.0 years.
The fair values of financial instruments presented in the applicable notes to the Company’s Consolidated Financial Statements are estimates of the fair values at a specific point in time using available market information and appropriate valuation methodologies. These estimates are subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. Therefore, the fair values
Adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Intangible Assets” (“SFAS No. 142”)
SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount.
Prior to the adoption of SFAS No, 142, goodwill was amortized on a straight-line basis over the expected periods to be benefited, generally 7 to 20 years, and assessed for recoverability by an analysis of the undiscounted future cash flows generated by the underlying assets. In 2001, the Company recorded pre-tax asset impairment losses totaling $16.6 million, of which $13.5 million related to the Company’s decision to discontinue FNF Capital’s small-ticket lease origination business and $3.1 million related to Micro General’s decision to discontinue its wholesale international long distance business. These amounts are included as part of the $10.0 million after tax charges the Company recorded in the fourth quarter of 2001. In 2000, the Company recorded pre-tax impairment losses totaling $7.0 million, primarily relating to the write-off of goodwill and capitalized software costs of non-title related businesses. These amounts are included as part of the $13.4 million after tax charges the Company recorded in the first quarter of 2000.
Intangible assets are included in prepaid expenses and other assets and include capitalized software costs and other intangible assets, which consist mainly of capitalized debt offering costs, contracts, customer relationships, patents and trademarks, and are amortized on a straight-line basis over 3 to 20 years. At December 31, 2002, capitalized software costs were $136.1 million, less accumulated amortization of $27.5 million and other intangible assets were $ 71.8 million, less accumulated amortization of $14.8 million. At December 31, 2001, capitalized software costs were $97.0 million, less accumulated amortization of $20.3 million and other intangible assets were $20.7 million, less accumulated amortization of $8.2 million.
As of December 31, 2002 and 2001 and for the years ended
incurred but not reported are established at the time premium revenue is recognized based on historical loss experience and other factors, including industry averages, claim loss history, current legal environment, geographic considerations and type of policy written.
Title Premiums, Escrow and Other Title Related Fees, Real Estate Related Services and Other Income
Other income represents revenue generated from the operations of Micro General, which was merged with FNIS on July 9, 2002, and FNF Capital.
The following table presents the computation of basic and diluted earnings per share before cumulative effect of a change in accounting principle:
earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation (see Note L):
On March 20, 2000, Chicago Title Corporation (“Chicago Title”) merged with and into the Company pursuant to an Agreement and Plan of Merger, dated August 1, 1999, as amended on October 13, 1999. Pursuant to the merger agreement, Chicago Title stockholders received aggregate merger consideration valued at approximately $1.1 billion. The merger consideration was paid in the form of 1.9440 shares of Company common stock and $26.00 in cash for each share of Chicago Title common stock, resulting in the issuance of approximately 46.9 million shares of Company common stock valued at an average price during the applicable trading period of $11.9792 per share and the payment of approximately $570.2 million in cash. The merger was accounted for as a purchase.
The assets acquired, including goodwill, (see Note A), and liabilities assumed in the Chicago Title merger were as follows (dollars in thousands):
Selected unaudited pro forma combined results of operations for the year ended December 31, 2000, assuming the merger had occurred as of January 1, 2000, and using actual general and administrative expenses prior to the merger, are set forth below:
On January 3, 2001, the Company acquired International Data Management Corporation (“IDM”), a leading provider of real estate information services, for $20.8 million in cash. IDM’s real estate information databases contain over 100 million real property ownership and sales records from the continental United States. The databases are updated daily to reflect new sales, mortgage information and other changes in real property ownership. The acquisition was accounted for as a purchase.
On August 1, 2001, the Company acquired approximately 80% of the outstanding common stock of FNIS, formerly VISTA, a provider of real estate information products and services, including multiple listing services and environmental data and disclosure information businesses. In consideration for this acquisition, the Company contributed its wholly-owned tax, credit, flood, appraisal, property records (IDM) and multiple listing service (Risco) businesses to the former Vista entity and as a result, immediately following the consummation of the transaction, the Company owned approximately 80% of the combined entity. For the period from August 1, 2001, the acquisition date, through December 31, 2002, the results of the former operations of Vista are included in the Company’s Consolidated Financial Statements.
In accordance with the provisions of SFAS No. 142, goodwill recorded in transactions occurring after June 30, 2001, will not be amortized. See Note A.
The carrying amounts and fair values of the Company’s fixed maturity securities at December 31, 2002 and 2001 are as follows:
The following table presents certain information regarding the Company’s fixed maturity securities at December 31, 2002:
Fixed maturity securities valued at approximately $61.3 million and $38.1 million were on deposit with various governmental authorities at December 31, 2002 and 2001, respectively, as required by law.
The carrying value of the Company’s investment in equity securities is fair value. As of December 31, 2002, gross unrealized gains and gross unrealized losses on equity securities were $15.4 million and $3.2 million, respectively. Gross unrealized gains and gross unrealized losses on equity securities were $5.7 million and $2.5 million, respectively, as of December 31, 2001.
The change in unrealized gains (losses) on equity securities for the years ended December 31, 2002, 2001 and 2000 was $9.0 million, $16.2 million and ($12.2) million, respectively.
Net realized gains (losses) amounted to $12.0 million, $6.3 million and ($201) for the years ended December 31, 2002, 2001 and 2000, respectively. Included in 2002 net realized gains are other-than-temporary impairment losses of $11.3 million recorded on CKE 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. There were no individually significant net realized gains or losses in 2000. All amounts are before applicable income taxes.
During the years ended December 31, 2002, 2001 and 2000, gross realized gains on sales of equity securities considered available for sale were $26.6 million, $18.4 million and $8.9 million, respectively; and gross realized losses were $53.9 million, $36.1 million and $9.4 million, respectively. Gross proceeds from the sale of equity securities amounted to $351.4 million, $376.3 million and $50.4 million during the years ended December 31, 2002, 2001 and 2000, respectively.
Direct financing leases at December 31, 2002 and 2001 consist of the following:
The carrying value of the direct financing leases at December 31, 2002 and 2001 approximates fair value because of the short-term period that these leases are held before sale or securitization or, in certain cases, because the interest rate approximates current market rates. The fair value of the direct financing leases assigned to lender at December 31, 2002 and 2001 approximated the carrying value because the interest rate on the related lease-backed notes approximates current market rates.
The Company had two remaining securitization facilities with an aggregate outstanding balance of $95.8 million as of December 31, 2002. As of December 31, 2001, the Company had four remaining securitization facilities with an outstanding balance of $218.7 million. FNF Funding X is accounted for as a collateralized borrowing. GF Funding IV and GF Funding V were closed during 2002.
The following table presents certain information related to the Company’s securitization facilities at December 31, 2002 and 2001:
On March 17, 1999, the Company’s Board of Directors approved the adoption of the Fidelity National Financial, Inc. Employee Stock Purchase Loan Plan (“Employee Plan”) and the Non-Employee Director Stock Purchase Loan Program (“Director Plan”). The purpose of the Employee Plan and Director Plan was to provide key employees and directors with further incentive to maximize stockholder value. Employee Plan and Director Plan funds were used to make private or open market purchases of Company common stock through a broker-dealer designated by the Company. All loans are full recourse and unsecured, and have a five-year term. Interest accrues on the loans at a rate of 5.0% per annum, due at maturity. These loans may be prepaid any time without penalty. The Company originally loaned an aggregate of $7.3 million to purchase 575,397 shares of Company common stock at an average purchase price of $12.39 per share under the Employee and Direct Plans. As of December 31, 2001, the balance of these loans was $6.1 million. During 2002, $5.9 million in principal of these loans were repaid, of which the Company accepted 165,950 shares of its common stock as full payment for certain of these loans, including accrued interest, in connection with its stock repurchase program (see Note K). The price per share was determined based on the closing price on the date the loans were repaid and averaged $30.19 per share. The shares received were retired in December 2002. Subsequent to December 31, 2002, the remaining $150 of Employee and Director Plan loans was paid in full.
The carrying value of the Company’s notes receivable approximated their estimated fair values at December 31, 2002 and 2001. The fair values of significant notes receivable are established using discounted cash flow analyses based on current market interest rates and comparison of rates being received to interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. All other notes receivable are not significant individually or in the aggregate, or are current and at market rates, and their carrying value approximates fair value.
The carrying value of the Company’s notes payable, excluding lease-backed notes payable, approximated estimated fair values at December 31, 2002 and 2001. The fair value of the Company’s fixed rate and variable rate notes payable is estimated using discounted cash flow analyses based on current market interest rates and comparison of interest rates being paid to the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
On January 24, 2001, the Company issued 9,740,500 shares of its common stock at a public offering price of $27.69 per share. Proceeds from this offering, net of underwriting discounts and commissions and other related expenses, were $256.3 million. Net proceeds of $100.0 million were used to repay in full and terminate the $100.0 million, 18 month revolving credit facility and net proceeds of $149.5 million were used to pay down in full the $250.0 million, 6 year revolving credit facility. The remainder of the cash proceeds are available for general corporate purposes.
The deferred tax assets and liabilities at December 31, 2002 and 2001 consist of the following:
Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. No valuation allowance is necessary for 2002 and 2001.
The favorable development on prior years’ loss reserves during 2002, 2001 and 2000 was attributable to lower than expected payment levels on recent issue years which included periods of increased resale activity as well as a high proportion of refinance business. As a result, title policies issued in prior years have been replaced by the more recently issued policies, therefore generally terminating much of the loss exposure on the previously issued policies.
The Company leases certain of its premises and equipment under leases which expire at various dates. Several of these agreements include escalation clauses and provide for purchases and renewal options for periods ranging from one to five years.
Rent expense incurred under operating leases during the years ended December 31, 2002, 2001 and 2000 was $126.0 million, $108.8 million and $86.5 million, respectively.
a holding company act in its state of domicile which regulates, among other matters, the ability to pay dividends and investment policies. The laws of most states in which the Company transacts business establish supervisory agencies with broad administrative powers relating to issuing and revoking licenses to transact business, regulating trade practices, licensing agents, approving policy forms, accounting principles, financial practices, establishing reserve and capital and surplus as regards policyholders (“capital and surplus”) requirements, defining suitable investments for reserves and capital and surplus and approving rate schedules. Effective January 2001, the Company’s insurance subsidiaries were required to prepare their statutory financial statements in accordance with the National Association of Insurance Commissioners’ Statements of Statutory Accounting Principles (“Codification”), subject to the adoption by its respective domiciliary states. The adoption of Codification did not have a material effect on the statutory capital and surplus of the Company’s insurance subsidiaries.
The Company’s title insurance subsidiaries are subject to regulations that restrict their ability to pay dividends or make other distributions of cash or property to their immediate parent company without prior approval from the Department of Insurance of their respective states of domicile. During 2003, the Company’s title insurance subsidiaries can pay dividends or make other distributions to the Company of $114.9 million.
The combined statutory capital and surplus of the Company’s title insurance subsidiaries was $614.8 million, $514.7 million and $461.4 million as of December 31, 2002, 2001 and 2000, respectively. The combined statutory earnings of the Company’s title insurance subsidiaries were $162.6 million, $162.5 million and $87.2 million for the years ended December 31, 2002, 2001 and 2000, respectively.
Pursuant to statutory requirements of the various states in which the Company’s title insurance subsidiaries are domiciled, they must maintain certain levels of minimum capital and surplus. Each of the Company’s title underwriters has complied with the minimum statutory requirements as of December 31, 2002.
On March 17, 1999, the Company’s Board of Directors approved an increase to the number of shares of outstanding Company common stock authorized for purchase under the Company’s previously announced purchase program. The additional authorization permitted the Company to purchase up to 4,840,000 shares. On September 13, 1999, the Company announced that its Board of Directors had approved a second increase of 2,420,000 shares, bringing the total number of shares of outstanding Company common stock authorized for purchase to 7,260,000. As of December 31, 1999, the Company had purchased 6,523,000 shares at an average purchase price of $12.55 per share totaling $81.9 million. In January 2000 the Company purchased another 47,432 shares of its common stock at an average purchase price of $11.60 per share totaling $551. In March 2000, the Company retired all of its 14,610,200 shares held as treasury stock totaling $136.8 million.
On January 24, 2001, the Company issued 9,740,500 shares of its common stock at a public offering price of $27.69 per share. Proceeds from this offering, net of underwriting discounts and commissions and other related expenses, were $256.3 million. Net proceeds were primarily used to pay down existing indebtedness. See Note G.
On April 24, 2002, The Company’s Board of Directors approved a three-year stock repurchase program, whereby the Company will devote a portion of its annual cash flow from operations to the systematic repurchase of shares of its common stock. Purchases may be made by the Company from time to time in the open market, in block purchases or in privately negotiated transactions. As of December 31, 2002, the Company has repurchased a total of 2,035,170 shares of common stock for $61.2 million, or an average price of $30.08. The amount repurchased includes 439,670 shares of common stock purchased from certain of the Company’s officers and directors during the third quarter of 2002, of which 165,950 shares were accepted as full payment for certain of these notes, including accrued interest. See Note E. In December 2002, the Company retired 563,570 of these shares held as treasury stock, totaling $14.3 million. Through March 18, 2003, a total of 2,546,070 shares of common stock has been repurchased for $78.0 million, or an average price of $30.62.
The Company’s 1987 Stock Option Plan expired in December 1997. Options generally had a term of five to 11 years from date of grant, became exercisable at the discretion of the Board of Directors and were priced at not less than the fair market value on the date of grant. A total of 2,192,302 shares were available for grants of options under this plan.
Options were granted in 2000 at an exercise price of $5.58 to key employees of the Company who applied deferred bonuses expensed in 1999 amounting to $4.4 million to the exercise price. The exercise price of these options decreases approximately $.29 per year through 2005 and $.19 per share from 2006 through 2011, at which time the exercise price will be $3.02. In 2001, options were granted at an exercise price of $19.71 to key employees of the Company who applied deferred bonuses expensed in 2000 amounting to $4.9 million to the exercise price. The exercise price of these options decreases approximately $.29 per year through 2006 and $.19 per share from 2007 through 2012, at which time the exercise price will be $17.15.
In 1994, stockholders approved the adoption of the 1993 Stock Plan (“1993 Plan”). The number of shares of common stock reserved for issuance under the 1993 Plan is 1,328,670. The per share option price is determined at the date of grant, provided that the price for incentive stock options shall not be less than 100% of their market value or award stock shares. The 1993 Plan also contains an automatic grant of non-qualified stock options to non-employee directors at an exercise price equal to 100% of fair value at date of grant, and the right to exercise such options shall vest equally over three years. Stock options granted under the 1993 plan are exercisable subject to the terms and conditions set by the Board of Directors, however, options shall be exercisable no earlier than six months nor later than 10 years following the grant date.
In connection with the merger of Chicago Title, the Company assumed the options outstanding under Chicago Title’s existing stock option plans: the 1998 Long-Term Incentive Plan and the Director’s Stock Option Plan. Pursuant to the terms of the merger, options under these plans, totaling 3,857,787, became fully vested on March 20, 2000. The options granted in accordance with these two plans generally have a term of five to 10 years.
In 2001, stockholders approved the adoption of the 2001 Stock Incentive Plan (“2001 Plan”). The 2001 Plan authorized up to 2,686,200 shares of common stock, plus an additional 242,000 shares of common stock on the date of each annual meeting of stockholders of the Company, for issuance under the terms of the 2001 Plan. The 2001 Plan provides for grants of “incentive stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended, nonqualified stock options, rights to purchase shares of common stock (“Purchase Rights”) and deferred shares. The term of options may not exceed 10 years from the date of grant (five years in the case of an incentive stock option granted to 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 are exercisable subject to the terms and conditions set by the Board of Directors. 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 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). The option exercise price for each share granted pursuant to a nonqualified stock option may be less than the fair value of the common stock at the date of grant to reflect the application of the optionee’s deferred bonus, if applicable. The 2001 Plan allows for exercise prices with a fixed discount from the quoted market price only for those key employees of the Company who applied deferred bonuses expensed in 2001. Options were granted in 2002 at an exercise price of $15.68 to key employees of the Company who applied
deferred bonuses expensed in 2001 amounting to $5.7 million to the exercise price. The exercise price of these options decreases approximately $.48 per year through 2007 and $.31 per year from 2008 through 2013, at which time the exercise price will be $11.45. The Company recorded compensation expense relating to the exercise price decrease in the 1991 and 2001 Plans of $829, $674 and $473, for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“Opinion 25”) and related Interpretations in accounting for its employee stock options. As discussed below, in management’s opinion, the alternative fair value accounting provided for under Statement of Accounting Standards No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”) requires use of option valuation models that were not developed for use in valuing employee stock options. Under Opinion 25, when the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized.
Pro forma information regarding net earnings and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions. The risk free interest rates used in the calculation is the rate that corresponds to the weighted average expected life of an option. The risk free interest rate used for options granted during 2002, 2001 and 2000 was 2.0%, 4.3% and 5.1%, respectively. A volatility factor for the expected market price of the common stock of 44%, 47% and 50% were used for options granted in 2002, 2001 and 2000, respectively. The expected dividend yield used for 2002, 2001 and 2000 was 1.3%, 1.5% and 1.2%, respectively. A weighted average expected life of 3.25 years was used for 2002 and 5.0 years was used for 2001 and 2000. The weighted average fair value of each option granted during 2002, 2001 and 2000 was $8.79, $9.27 and $6.06, respectively.
For purpose of pro forma disclosures, the estimated fair value of the options is amortized into expense over the options’ vesting period. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123:
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 11.0% in 2002, declining to 5.0% in 2009, 12.0% in 2001, declining to 5.0% in 2009 and 5.5% in 2000, declining to 5.0% in 2002. The discount rate used was 6.75% in 2002, 7.25% in 2001 and 7.75% in 2000. If the health care cost trend rate assumptions were increased 1.0%, the accumulated postretirement benefit obligation as of December 31, 2002, 2001 and 2000 would increase by $1.6 million, $1.9 million and $3.3 million, respectively. The effect of this change on the sum of the service and interest cost would be an increase of $120 in 2002, $423 in 2001 and $590 in 2000. If the health care costs trend rate assumptions were decreased 1.0%, the accumulated post retirement benefit obligation as of December 31, 2002, 2001 and 2000 would decrease by $1.4 million, $1.7 million and $2.8 million, respectively. The effect of this change on the sum of the service and interest cost would be a decrease of $110 in 2002, $360 in 2001 and $480 in 2000.
The accrued cost of the accumulated postretirement benefit obligation included in the Company’s Consolidated Balance Sheets at December 31, 2002, 2001 and 2000 is as follows:
The Company’s postretirement health care and life insurance costs included in the results of operations for 2002, 2001 and from the period April 1, 2000 through December 31, 2000 are as follows:
The corporate segment consists of the operations of the parent holding company, as well as the operations of Micro General, which was merged with FNIS on July 9, 2002, and FNF Capital, Inc., as well as the issuance and repayment of corporate debt obligations. Certain after tax charges of $10.0 million recorded in 2001 and $13.4 million recorded in 2000 primarily relate to the corporate segment.
On January 28, 2003, the Company entered into a stock purchase agreement with ALLTEL Corporation, Inc., a Delaware corporation (“ALLTEL”), pursuant to which the Company will acquire from ALLTEL its financial services division, ALLTEL Information Services, Inc. (“AIS”), an Arkansas corporation and wholly-owned subsidiary of ALLTEL. As a result of the acquisition, AIS will become a wholly-owned subsidiary of the Company. AIS is one of the world’s largest providers of information-based technology solutions and processing services to the mortgage and financial services industries. The transaction is expected to close by the end of the first quarter of 2003. Under the terms of the stock purchase agreement, all of the issued and outstanding shares of AIS common stock will be purchased by the Company for consideration consisting of $775.0 million in cash and $275.0 million in the Company’s common stock. Consummation of the acquisition is subject to customary closing conditions. In connection with the stock purchase agreement, prior to closing the Company will enter into a stockholder’s agreement, a non-competition agreement and certain transition agreements with ALLTEL. The stockholder’s agreement will: (1) restrict the sale by ALLTEL of the Company’s common stock received in the transaction for up to one year, (2) grant ALLTEL the right to designate one nominee to the Company’s Board of Directors, so long as it continues to hold at least 50% of the shares of the Company’s common stock received in the transaction, and (3) grant ALLTEL certain registration rights with respect to the Company’s common stock it receives in the transaction. The non-competition agreement will prohibit, with certain exceptions, ALLTEL and its affiliates from engaging in the business relating to the assets acquired by the Company for a period of two years after the transaction. In accordance with the provisions of SFAS No. 142, any goodwill recorded as a result of the acquisition of AIS will not be amortized. See Note A.
On January 9, 2003, the Company entered into an Agreement and Plan of Merger with ANFI, Inc. The merger agreement was subsequently amended on February 21, 2003. Pursuant to the merger agreement, ANFI will merge with and into the Company’s wholly-owned merger subsidiary. In the merger, each share of ANFI common stock (other than ANFI common stock the Company already owns) will be exchanged for 0.454 of a share of the Company’s common stock. The consummation of the transaction is subject to the approval of ANFI stockholders. The ANFI stockholder meeting is currently scheduled to be held on March 26, 2003 and the Company currently anticipates closing the merger on March 27, 2003. The Company anticipates that it will issue approximately 3.2 million shares of its common stock to the ANFI stockholders in the merger.
During the second quarter of 2001, the Company adopted Emerging Issues Task Force No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”, (“EITF 99-20”). EITF 99-20 sets forth the rules for recognizing interest income on all credit-sensitive mortgage and asset-backed securities and certain prepayment-sensitive securities including agency interest-only strips, whether purchased or retained in securitization, and determining when these securities must be written down to fair value because of impairment. Adoption of EITF 99-20 requires the valuation of residual interests in securitizations to be recorded as a reduction to the carrying value of the residual interests through a charge to earnings when any portion of the decline in fair value is attributable to an impairment loss, rather than an unrealized loss in stockholders’ equity. As such, the
In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others” (“FIN 45”), an interpretation of Financial Accounting Standards Board Statements Nos. 5, 57 and 107 and a rescission of Financial Accounting Standards Board Interpretation No. 34. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company’s financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ended after December 15, 2002. See Note N.
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. The Company is currently evaluating the impact of EITF 00-21.