Represents the number of locations in each state listed. In addition, a number of locations internationally are leased.
Our financial results for the year ended December 31, 2001 include the results of the former operations of Vista Information Solutions, Inc. (“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 Corporation.
Cash and cash equivalents as of December 31, 2004, 2003, 2002, 2001 and 2000 include cash pledged to secure trust deposits of $195.2 million, $231.1 million, $295.1 million, $367.9 million and $132.1 million, respectively.
or $0.03 per diluted per share. Compensation cost decreased by $47,000 for the three months ended June 30, 2003, which resulted in an increase in reported net earnings of $29,000, which had no change to diluted earnings per share. Amounts for the first and second quarters of 2003 are presented as if we adopted SFAS 123 in the first quarter of 2003.
Title Insurance. The title insurance segment consists of our title insurance underwriters and our wholly-owned title insurance agencies. The title segment provides core title insurance and escrow and other title related services including collection and trust activities, trustee’s sales guarantees, recordings and reconveyances.
Specialty Insurance. The specialty insurance segment, consisting of our various non-title insurance subsidiaries, issues flood, home warranty and homeowners insurance policies.
Financial Institution Software and Services. The financial institution software and services segment consists primarily of the operations of Fidelity Information Services, Inc. (“FI”), which was acquired on April 1, 2003 and subsequent acquisitions of WebTone, Aurum, Sanchez, Kordoba and InterCept. This segment focuses on two primary markets, financial institution processing and mortgage loan processing.
Title Insurance Segment. Title insurance revenue is closely related to the level of real estate activity and the average price of real estate sales. Real estate sales are directly affected by the availability of funds to finance purchases, predominantly mortgage interest rates. Other factors affecting real estate activity include, but are not limited to, demand for housing, employment levels, family income levels and general economic conditions. In addition to real estate sales, mortgage refinancing is an important source of title insurance revenue. We have found that residential real estate activity generally decreases in the following situations:
Financial Institution Software and Services Segment. In our financial institution processing business, increases in deposit and lending transactions can positively affect our business and thus the condition of the overall economy can have an effect on our growth. While this segment generally is not significantly affected by the cyclicality of real estate transactions, our ability to expand our mortgage loan processing business is correlated to the total number of mortgage loans outstanding.
In our financial institution software and services segment, we compete for both licensing and outsourcing business, and thus we are affected by the decisions of financial institutions to outsource the services we provide
In contrast, we believe that a higher interest rate environment may increase the volume of consumer defaults and thus favorably affect our default management services business, which provides services relating to residential mortgage loans in default. The overall strength of the economy also affects default revenues.
We have made acquisitions in the past that have resulted in a significant amount of goodwill. As of December 31, 2004 and December 31, 2003, goodwill was $2,798.2 million and $1,926.5 million, respectively. The majority of our goodwill as of December 31, 2004 relates to goodwill recorded in connection with the acquisitions of Aurum in March 2004, Sanchez in April 2004, Kordoba in September 2004, InterCept in November 2004, the acquisition of the minority interest of FNIS in September 2003, the acquisitions of FI in April 2003 and ANFI in March 2003, and the Chicago Title merger in 2000. The process of determining whether or not an asset, such as goodwill, is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Such projections are inherently uncertain and, accordingly, actual future cash flows may differ materially from projected cash flows. In evaluating the recoverability of goodwill, we perform an annual goodwill impairment test on our reporting units based on an analysis of the discounted future cash flows generated by the reporting units’ underlying assets. We have completed our annual goodwill impairment test on our reporting units and have determined that each of our reporting units has a fair value in excess of its carrying value. Such analyses are particularly sensitive to changes in estimates of future cash flows and discount rates. Changes to these estimates might result in material changes in the fair value of the reporting units and determination of the recoverability of goodwill which may result in charges against earnings and a reduction in the carrying value of our goodwill.
In connection with our acquisitions, we have also recognized identifiable intangible assets purchased, which typically consist of software, purchased customer relationships and contracts. The valuation of these assets involves significant estimates and assumptions concerning matters such as customer retention, future cash flows and discount rates. If any of these assumptions change, it could affect the carrying value of these assets. Purchased customer relationships are amortized over their estimated useful lives using an accelerated method which takes into consideration expected customer attrition rates over a ten-year period. Contractual relationships are generally amortized using the straight-line method over their contractual life.
Reserve for Claim Losses. Our reserve for claim losses includes reserves for known claims as well as for losses that have been incurred but have not yet been reported to us, net of expected recoupments. Each known claim is reserved based on our review of the estimated amount of the claim and the costs required to settle the claim. Reserves for claims that are incurred but not reported are estimates that are established at the time premium revenue is recognized based on historical loss experience and other factors, including industry trends, claim loss history, current legal environment, geographic considerations and type of policy written. Loss reserve estimates are reviewed periodically and adjusted by management as experience develops or new information becomes known, and changes in prior estimates affect our reported results.
Title Insurance Segment. Our direct title insurance premiums and escrow and other title related fees are recognized as revenue at the time of closing of the related transaction as the earnings process is then considered complete. Our agency title insurance premiums are recognized as revenue when policies are reported to us and are recorded as revenue on a gross basis (before the deduction of agent commissions). In addition, we accrue for unreported agency title insurance premiums based on historical reporting patterns of our agents and current trends.
The substantial majority of the revenues in this segment are from outsourced data processing and application management arrangements. Revenues from these arrangements are recognized as services are performed in accordance with SEC Staff Accounting Bulletin No. 104 (SAB No. 104), “Revenue Recognition” and related interpretations. SAB No. 104 sets forth guidance as to when revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured. Revenue and deferred costs related to implementation, conversion and programming services associated with our data processing and application management agreements are deferred during the implementation phase and subsequently recognized using the straight-line method over the term of the related agreement. At each reporting period, we evaluate these deferred costs for impairment.
In the event that our arrangements with our customers include more than one product or service, we determine whether the individual elements can be recognized separately in accordance with Financial Accounting Standards Board (FASB) Emerging Issues Task Force No. 00-21 (EITF 00-21), “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 addresses the determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting. If all of the products and services are software related products and services as determined under American Institute of Certified Public Accountants’ Statement of Position 97-2 (SOP NO. 97-2), entitled Software Revenue Recognition, and SOP 98-9, entitled Modification of SOP NO. 97-2, Software Revenue Recognition, with Respect to Certain Transactions, we apply these pronouncements and related interpretations to determine the appropriate units of accounting and how the arrangement consideration should be measured and allocated to the separate units.
property brokerage services. Revenue derived from these services is recognized as the services are performed in accordance with SAB No. 104 as described above.
Information Services. In this segment, we record revenue from providing data or data-related services. These services principally include appraisal and valuation services, property records information, real estate tax services, borrower credit and flood zone information and multiple listing software and services. Revenue derived from these services is recognized as the services are performed in accordance with SAB No. 104 as described above.
Our flood and tax units provide various services including life-of-loan monitoring services. Revenue for life-of-loan services is deferred and recognized ratably over the estimated average life of the loan service period, which is determined based on our historical experience. We evaluate our historical experience on a periodic basis, and adjust the estimated life of the loan service period prospectively. Revenue derived from software and service arrangements is recognized in accordance with SOP No. 97-2. Revenues from other services in this segment are recognized as the services are performed in accordance with SAB No. 104 as described above.
Year ended December 31, 2003. Our Consolidated Statements of Earnings for 2003 include the results of operations of FI, which we acquired on April 1, 2003, and various other entities acquired on various dates during 2003, as discussed in Note B of Notes to Consolidated Financial Statements. Net earnings from our financial institution software and services segment, which includes FI for the period from April 1, 2003 through December 31, 2003, represented 8.0% of our total net earnings for 2003 as compared with 0.2% of our total net earnings in 2002. The increase in net earnings from our financial institution software and services segment in 2003 is primarily due to the acquisition of FI.
Includes premiums reported in the title segment and lender outsourcing solutions segment.
Net realized gains in 2002 included a $3.1 million gain recognized on our investment in Santa 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.
Personnel costs include base salaries, commissions, benefits and bonuses paid to employees, and are one of our most significant operating expenses. Personnel costs totaled $2,786.3 million, $2,465.0 million and $1,476.4 million for the years ended December 31, 2004, 2003 and 2002, respectively. Personnel costs, as a percentage of total revenue, were 33.6% in 2004, compared with 32.0% in 2003 and 29.1% in 2002. The increase in personnel costs as a percentage of total revenue in 2004 and 2003 can be attributed primarily to the incremental personnel costs associated with our acquisition of FI and our various other acquisitions made in the financial institution software and services segment during 2004 and 2003, which have higher personnel costs as a percentage of revenue because of the nature of those businesses requires many programmers and other personnel with an information technology background. In addition, as a result of adopting SFAS No. 123 during 2003, included in personnel costs for 2004 and 2003 is approximately $21.8 million and $6.2 million in compensation expense, respectively. See Note M of Notes to Consolidated Financial Statements.
A summary of the reserve for claim losses for the title and specialty insurance is as follows:
The title loss provision in the current year reflects a higher estimated loss for the 2004 policy year offset in part by a favorable adjustment from previous policy years. Consistent with 2002, the favorable adjustment was
Minority interest expense for 2004, 2003 and 2002 was $5.0 million, $19.0 million and $13.1 million, respectively. The decrease in minority interest expense in 2004 is primarily due to our acquisition of the minority interest of FNIS, which we acquired in 2003. The increase in minority interest in 2003 as compared with 2002 is primarily attributable to increased earnings of our majority-owned subsidiaries.
Revenues by segment include operating revenues and the segment’s respective share of interest and investment income and realized gains and losses (see Note P to Notes to Consolidated Financial Statements).
As noted in the consolidated results of operations, the large increase in agent commissions in 2004 corresponds to the increase in agency premiums that were earned in 2004, compared with the corresponding 2003 and 2002 amounts. Agent commissions have remained fairly constant as a percentage of premiums at 77.7%, 78.0% and 78.6% in 2004, 2003 and 2002, respectively.
Other operating expenses in the specialty insurance segment were $161.0 million, $94.7 million and $27.8 million in 2004, 2003 and 2002, respectively and are consistent with our increases in revenues.
Claim loss expense was $21.5 million, $7.7 million and $1.9 million in 2004, 2003 and 2002, respectively. The increase was primarily the result of increased activity in the personal lines insurance business.
Revenues from financial institution software and services were $1,286.4 million, $701.0 million and $3.9 million in 2004, 2003 and 2002, respectively. The $585.4 million increase in revenues in 2004 compared with 2003 relates primarily to recording a full year of revenues from FI and Webtone which were acquired in 2003 and the 2004 acquisitions of Aurum, Sanchez, Kordoba and InterCept, along with a few smaller acquisitions. The 2003 revenues were primarily the results of FI and Webtone which were included in the Consolidated Financial Statements for the period from April 1, 2003 and September 1, 2003, respectively, through December 31, 2003. Revenues in 2004 include $988.8 million from FI and Webtone while 2003 includes $674.5 million of revenue from FI and Webtone. The 2004 acquisitions of Aurum, Sanchez, Kordoba and InterCept and other smaller acquisitions contributed $219.1 million of the increase in 2004 compared with 2003. Included in 2004 and 2003 are $62.4 million and $14.8 million, respectively, of intersegment revenues that FI earns relating to IT software and support services that FI provides to the remainder of the company. FI began providing these services in the third quarter of 2003. Revenues in 2004 also include a gain relating to the fair value increase of an FI investment in Covansys warrants of $16.2 million that were acquired as part of the acquisition of 29% of Covansys. Also included in all three years are revenues from our Empower software product, which were $12.3 million in 2004, $11.8 million in 2003 and $3.9 million in 2002.
Personnel costs were $726.3 million, $413.2 million and $0.7 million in 2004, 2003 and 2002, respectively. As a percentage of revenues, personnel costs were 56.5% and 58.9% in 2004 and 2003, respectively. Personnel costs are a high percentage of revenue for this segment due to the fact that this segment requires many employees with a technology background.
Other operating expenses were $378.1 million, $177.0 million and $1.2 million in 2004, 2003, and 2002 respectively. The increase of $201.1 million in 2004 as compared with 2003 was primarily the result of the above mentioned acquisitions including a full year of FI, and includes an increase of $74.5 million in depreciation of assets and amortization costs relating to purchased intangible assets and software.
Interest expense of $4.2 million in 2004 primarily relates to a credit facility specific to the financial institution software and services segment under which approximately $410.0 million was borrowed in November 2004 to fund the acquisition of InterCept.
Personnel costs were $148.7 million, $144.5 million and $69.8 million in 2004, 2003 and 2002, respectively. As a percentage of revenues, personnel costs were 33.0%, 23.9% and 32.5% in 2004, 2003 and 2002. The increase in 2004 as a percentage of revenues is primarily the result of the reduction in revenues from the automated title agency process in 2004 as compared with 2003 as labor costs relating to these revenues are not as closely related to revenue volumes in this line of business. This is also the reason for the decrease in 2003 as compared to 2002, when we did not have any revenues relating to the automated title agency process.
Revenues from information services generally trend closely with the level and mix of business, as well as the performance, of our title related subsidiaries. Revenues from information services in 2004, 2003, and 2002 were $630.1 million, $600.0 million and $404.7 million, respectively. Revenues in this segment have benefited from the increased levels of real estate activity over the past few years due partially to the favorable interest rate environment. The 2004 increase in revenue of $30.1 million or 5.0% resulted primarily from increased activity at some of our appraisal and valuation businesses in 2004. 2004, 2003 and 2002 also include intersegment revenues of $44.6 million, $38.9 million and $26.6 million, respectively, for services provided primarily to the title insurance segment. The 2003 increase in revenue of $195.3 million resulted primarily from acquisitions made in 2003 and 2002 and organic growth in our real estate tax services, flood services, property data and disclosure services.
Personnel costs were $168.8 million, $166.1 million and $115.8 million in 2004, 2003 and 2002, respectively. As a percentage of revenues, personnel costs were 26.8%, 27.7% and 28.6% in 2004, 2003 and 2002, respectively. The 2003 increase in personnel costs of $50.3 million resulted primarily from acquisitions made in 2003 and 2002.
Other operating expenses in the information services segment consist primarily of data processing costs, depreciation and amortization, costs to purchase real estate data and other expenses. Other operating expenses were $348.3 million, $331.0 million and $222.1 million in 2004, 2003 and 2002, respectively. As a percentage of revenues, other operating expenses were 55.3%, 55.2% and 54.9% for 2004, 2003 and 2002, respectively.
The corporate and other segment is made up of smaller entities that do not fit in our other segment classifications, our leasing operations, and certain corporate expenses not otherwise allocated. Revenues from this segment were $57.3 million, $61.9 million and $59.7 million for 2004, 2003 and 2002, respectively. Operating expenses were $157.4, $140.3 million and $111.1 million for 2004, 2003 and 2002, respectively.
Cash Requirements. Our cash requirements include debt service, operating expenses, taxes, capital expenditures, systems development, treasury stock repurchases, business acquisitions and dividends on our common stock. We believe that all anticipated cash requirements for current operations will be met from internally generated funds, through cash dividends from subsidiaries, cash generated by investment securities and borrowings through public debt offerings and existing credit facilities. Our short-term and long-term liquidity requirements are monitored regularly to match cash inflows with cash requirements. We forecast the daily needs of all of our subsidiaries and periodically review their short-term and long-term projected sources
and uses of funds, as well as the asset, liability, investment and cash flow assumptions underlying these projections.
Financing. On March 9, 2005, we announced that we had completed a previously announced recapitalization plan of FIS (See Recent Developments in Item 1). This recapitalization was accomplished through FIS entering into $3.2 billion in senior credit facilities consisting of a $800.0 million Term Loan A facility, a $2.0 billion Term Loan B facility (collectively, The “Term Loan Facilities”) and a $400.0 million revolving credit facility (“Revolver”) with a consortium of lenders led by Bank of America. FIS fully drew upon the entire $2.8 billion in Term Loan Facilities to consummate the recapitalization. Revolving credit borrowings and Term A Loans bear interest at a floating rate, which will be, at the Borrowers’ option, either the British Bankers Association LIBOR or base rate plus, in both cases, an applicable margin, which is subject to adjustment based on the senior secured leverage ratio of the Borrowers. The Term B Loans bear interest at either the British Bankers Association LIBOR plus 1.75% per annum or, at the Borrowers’ option, a base rate plus 0.75% per annum. The Borrowers may choose one month, two month, three month, six month, and to the extent available, nine month or one year LIBOR, which then applies for a period of that duration. Interest is due at the end of each interest period provided. For LIBOR loans that exceed three months, the interest is due three months after the beginning of such interest period. The Term Loan A matures in March, 2011, the Term Loan B in March, 2013, and the Revolver in March, 2011. The Term Loan Facilities are subject to quarterly amortization of principal in equal installments of .25% of the original principal amount with the remaining balance payable at maturity. In addition to the scheduled amortization, and with certain exceptions, the Term Loan Facilities are subject to mandatory prepayment from excess cash flow, issuance of additional equity and debt and sales of certain assets. Voluntary prepayments of both the Term Loan Facilities and revolving loans and commitment reductions of the revolving credit facility are permitted at any time without fee upon proper notice and subject to minimum dollar requirements.
On November 5, 2003 we entered into a new credit agreement providing for a $700.0 million, 5-year revolving credit facility due November 4, 2008. The credit agreement bears interest at a variable rate based on the debt ratings assigned to us by certain independent agencies, and is unsecured. The current interest rate under this credit agreement is LIBOR plus 0.50%. In addition, we pay a 0.15% facility fee on the entire facility. As of December 31, 2004, $400.0 million was outstanding under our credit agreement and we had $300.0 million in borrowings available to us. During 2004, net borrowings were $325.0 million under our credit facility, primarily to finance our acquisitions of Aurum, Covansys and Kordoba. On March 9, 2005, we used a portion of the proceeds received from the FIS note to pay this line down completely although we did not terminate this facility. Our credit agreement imposes certain affirmative and negative covenants on us relating to current debt ratings, certain financial ratios related to liquidity, net worth, capitalization, investments, acquisitions and restricted payments, and certain dividend restrictions. As of December 31, 2004, we were in compliance with all of our debt covenants.
On March 11, 2003, we issued $250.0 million aggregate principal amount of 5.25% notes. We received proceeds of approximately $246.2 million, after expenses, which was used to pay a portion of the $1,069.6 million purchase price for FI. Interest is payable semiannually and the notes are due in March 2013.
An increase in cash and cash equivalents of $684.0 million relating to an inflow of $2,800.0 million from the Term Loan Facilities and $500.0 million from the sale of a 25% minority interest in FIS, less transaction costs of $80.4 million, repayments of $810.0 million in outstanding credit facilities as of December 31, 2004 and an assumed dividend payout of $1,725.6 million based on outstanding shares at December 31, 2004.
An increase in notes payable of $1,990.0 million relating to the $2,800.0 million from the Term Loan Facilities less the repayment of $810.0 million in credit facilities that were outstanding as of December 31, 2004.
Events such as fraud, defalcation, and multiple property title defects can substantially and unexpectedly cause increases in both the amount and timing of estimated title insurance loss payments;
Claims staffing levels whereby claims may be settled at a different rate based on the future staffing levels of the claims department.
In addition to the amounts shown in the table, at December 31, 2004, we held claim reserves of $11.1 million in respect of our specialty insurance reserves. Because of uncertainty with respect to the precise payout pattern of these reserves, and their small size, we have not allocated them to the periods shown, although we would expect the substantial majority of these amounts to be paid by 2009. In addition, the above tables do not reflect amounts under FIS’s new credit facilities, which were entered into after December 31, 2004 or the recent payments under our other credit facilities as described above.
On March 26, 2003, we issued 5,183,103 shares of our common stock in connection with the acquisition of ANFI, Inc. On April 1, 2003, we issued 11,206,692 shares of our common stock to ALLTEL in connection with our acquisition of FI. On September 30, 2003, we issued 14,292,858 shares of our common stock in connection with the acquisition of FNIS. On February 27, 2004, we issued 220,396 shares of our common stock in connection with the acquisition of an additional 44% interest in Hansen. On March 11, 2004, we issued 3,144,390 shares of our common stock in connection with the acquisition of Aurum. On April 14, 2004, we issued 2,267,290 shares of our common stock in connection with the acquisition of Sanchez. See Note B of Notes to Condensed Consolidated Financial Statements.
On January 27, 2004, our Board of Directors declared a 10% stock dividend to stockholders of record as of February 12, 2004, payable on February 26, 2004. On April 22, 2003, our Board of Directors declared a five-for-four (5:4) stock split payable May 23, 2003 to stockholders of record as of May 9, 2003. All data with respect to earnings per share, dividends per share and share information, including price per share where applicable, in the Consolidated Financial Statements and Notes and elsewhere in this Form 10-K have been retroactively adjusted to reflect the stock split and stock dividend.
Additional Minimum Pension Liability Adjustment. Discount rates that are used in determining our December 31, 2004 projected benefit obligation and 2005 net periodic pension costs were based on prevailing interest rates as of December 31, 2004. Similar to prior years, we considered 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, 2004 resulted in an additional minimum pension liability adjustment. As such, we recorded a net-of-tax charge of $11.8 million to accumulated other comprehensive loss in 2004 in accordance with Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions”.
Off-Balance Sheet Arrangements. Other than facility and equipment leasing arrangements, we do not engage in off-balance sheet financing activities. On June 29, 2004 we entered into an off-balance sheet financing arrangement (commonly referred to as a “synthetic lease”). The owner/ lessor in this arrangement acquired land and various real property improvements associated with new construction of an office building in Jacksonville, Florida that will be part of our corporate campus and headquarters. The lease expires on September 28, 2011, with renewal subject to consent of the lessor and the lenders. The lessor is a third-party limited liability company. The synthetic lease facility provides for amounts up to $75.0 million. As of December 31, 2004, approximately $10.0 million had been drawn on the facility to finance land costs and related fees and expenses. The leases include guarantees by us for a substantial portion of the financing, and options to purchase the facilities at the outstanding lease balance; the maximum guarantee is 86.5% of the
outstanding lease balance. The guarantee becomes effective if we decline to purchase the facilities at the end of the lease and also decline to renew the lease. The lessor financed the acquisition of the facilities through funding provided by third-party financial institutions. We have no affiliation or relationship with the lessor or any of its employees, directors or affiliates, and our transactions with the lessor are limited to the operating lease agreements and the associated rent expense that will be included in other operating expenses in the Consolidated Statements of Earnings after the end of the construction period.
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 the Consolidated Balance Sheets. 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, 2004 related to these arrangements (see Note K).
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Fidelity National Financial, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Fidelity National Financial, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
In our opinion, management’s assessment that Fidelity National Financial, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Fidelity National Financial, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of Fidelity National Financial, Inc. and subsidiaries as of December 31, 2004 and 2003, 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, 2004, and our report dated March 16, 2005 expressed an unqualified opinion on those consolidated financial statements.
Net of income tax expense (benefit) of $0.7 million, $(0.3) million and $1.0 million for 2004, 2003 and 2002, respectively.
Title Insurance. The title insurance segment consists of the Company’s title insurance underwriters and our wholly-owned title insurance agencies. The title segment provides core title insurance and escrow and other title related services including collection and trust activities, trustee’s sales guarantees, recordings and reconveyances.
Financial Institution Software and Services. The financial institution software and services segment consists primarily of the operations of Fidelity Information Services, Inc. (“FI”), which was acquired on April 1, 2003 (Note B) and subsequent acquisitions of WebTone, Aurum, Sanchez and InterCept. This segment focuses on two primary markets, financial institution processing and mortgage loan processing.
Lender Outsourcing Solutions. The lender outsourcing solutions segment includes our loan facilitation services, which consist of centralized, customized title agency and closing services, which the Company offers to first mortgage, refinance, home equity and sub-prime lenders, and our default management services, which include foreclosure posting and publishing services, loan portfolio services, field services and property management. These services allow the Company’s customers to outsource the business processes necessary to take a loan and the underlying real estate securing the loan though the default and foreclosure process.
Information Services. The information services segment offers real estate-related information services. Included in the information services we provide are property appraisal and valuation services, property records information, real estate tax services, borrower credit and flood zone information and certification and multiple listing software and services.
Corporate and Other. The corporate and other segment consists of the operations of the parent holding company, certain other unallocated corporate overhead expenses, the operations of the Company’s wholly-owned equipment-leasing subsidiary and other small operations.
The Company’s principal title insurance subsidiaries consist of Fidelity National Title Insurance Company, Fidelity National Title Insurance Company of New York, Chicago Title Insurance Company, Chicago Title Insurance Company of Oregon, Ticor Title Insurance Company, Security Union Title Insurance Company and Alamo Title Insurance. The Company’s principal underwritten title company subsidiaries, essentially title agencies, consist of Fidelity National Title Company, Fidelity National Title Company of California, Chicago Title Company and Ticor Title of California, formerly American Title Company, which was acquired in connection with the Company’s acquisition of ANFI, Inc. (See Note B).
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 until such time that they become wholly-or majority owned.
Fixed maturity securities are purchased to support the investment strategies of the Company, which are developed based on factors including rate of return, maturity, credit risk, tax considerations and regulatory requirements. Fixed maturity securities which may be sold prior to maturity to support the Company’s investment strategies are carried at fair value and are classified as available for sale as of the balance sheet dates. Fair values for fixed maturity securities are principally a function of current interest rates and are based on quoted market prices. Included in fixed maturities are mortgage-backed securities, which are recorded at purchase cost. Discount or premium is recorded for the difference between the purchase price and the principal amount. The discount or premium is amortized using the interest method and is recorded as an adjustment to interest and investment income. The interest method results in the recognition of a constant rate of return on the investment equal to the prevailing rate at the time of purchase or at the time of subsequent adjustments of book value. Changes in prepayment assumptions are accounted for retrospectively.
As required by SFAS No. 142, the Company has completed its annual goodwill impairment test in the fourth quarter of 2004 on its reporting units, using a September 30, 2004 measurement date, and has determined that each of its reporting units has a fair value in excess of its carrying value. Accordingly, no goodwill impairment has been recorded.
The Company has other intangible assets which consist primarily of customer relationships and are generally recorded in connection with acquisitions at their fair value. Customer relationships are amortized over their estimated useful lives using an accelerated method which takes into consideration expected customer attrition rates over a ten-year period. Contractual relationships are generally amortized over their contractual life.
Property and equipment are recorded at cost, less depreciation. Depreciation is computed primarily using the straight-line method based on the estimated useful lives of the related assets: thirty years for buildings and three to seven years for furniture, fixtures and computer equipment. Leasehold improvements are amortized on a straight-line basis over the lesser of the term of the applicable lease or the estimated useful lives of such assets.
If a loss is related to a policy issued by an independent agent, the Company may proceed against the independent agent pursuant to the terms of the agency agreement. In any event, the Company may proceed against third parties who are responsible for any loss under the title insurance policy under rights of subrogation. See Note J.
In the state of Illinois, a trust company is permitted to commingle and invest customers’ assets with those of the Company, pending completion of real estate transactions. Accordingly, the Company’s Consolidated Balance Sheets reflects a secured trust deposit liability of $735.3 million and $671.9 million at December 31, 2004 and 2003, respectively, representing customers’ assets held by us and corresponding assets including cash and investments pledged as security for those trust balances.
The substantial majority of the revenues in this segment are from outsourced data processing and application management arrangements. Revenues from these arrangements are recognized as services are performed in accordance with SEC Staff Accounting Bulletin No. 104 (SAB No. 104), “Revenue Recognition” and related interpretations. SAB No. 104 sets forth guidance as to when revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectability is reasonably assured. Revenue and deferred costs related to implementation, conversion and programming services associated with the Company’s data processing and application management agreements are deferred during the implementation phase and subsequently recognized using the straight-line method over the term of the related agreement. At each reporting period, the Company evaluates these deferred costs for impairment.
In the event that the Company’s arrangements with its customers include more than one product or service, the Company determines whether the individual elements can be recognized separately in accordance with Financial Accounting Standards Board (FASB) Emerging Issues Task Force No. 00-21 (EITF 00-21), “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 addresses the determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting. If all of the products and services are software related products and services as determined under American Institute of Certified Public Accountants’ Statement of Position 97-2 (SOP NO. 97-2), entitled Software Revenue Recognition, and SOP 98-9, entitled Modification of SOP NO. 97-2, Software Revenue Recognition, with Respect to Certain Transactions, the Company applies these pronouncements and related interpretations to determine the appropriate units of accounting and how the arrangement consideration should be measured and allocated to the separate units.
With respect to a small percentage of revenues, the Company uses contract accounting, as required by SOP NO. 97-2, when the arrangement with the customer includes significant customization, modification, or production of software. For elements accounted for under contract accounting, revenue is recognized in accordance with SOP 81-1, Accounting for Performance of Construction Type and Certain Production-Type Contracts, using the percentage-of-completion method since reasonably dependable estimates of revenues and contract hours applicable to various elements of a contract can be made. Revenues in excess of billings on these agreements are recorded as unbilled receivables and is included in accounts receivable. Billings in excess of revenue recognized on these agreements are recorded as deferred revenue until revenue recognition criteria are met. Changes in estimates for revenues, costs and profits are recognized in the period in which they are determinable. When the Company’s estimate indicates that the entire contract will be performed at a loss, a provision for the entire loss is recorded in that accounting period.
Lender Outsourcing Solutions. In this segment, the Company recognizes revenues from loan facilitation services and default management services. Loan facilitation services of centralized title agency and closing services for various types of lenders. Revenues relating to centralized title agency and closing services are recognized at the time of closing of the related real estate transaction. Ancillary service fees are recognized when the service is provided. Default management services consist of services provided to assist customers through the default and foreclosure process, including property preservation and maintenance services (such as lock changes, window replacement, debris removal and lawn service), posting and publication of foreclosure and auction notices, title searches, document preparation and recording services, and referrals for legal and property brokerage services. Revenue derived from these services is recognized as the services are performed in accordance with SAB No. 104 as described above.
The Company accounts for derivative financial instruments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended. The Company does not currently engage in any hedging activities and thus records all derivative financial instruments at fair value in the Consolidated Balance Sheet and all changes in fair value are recognized in realized gains and losses in the Consolidated Statement of Earnings. During 2004, the Company’s derivative financial instruments are limited to an investment in warrants to purchase common stock of Covansys Corporation (Covansys), an equity investee of the Company, and certain put and call options relating to the minority interest in certain majority-owned subsidiaries. The Company did not have any derivative activity during 2003 or 2002.
On January 27, 2004, the Company declared a 10% stock dividend to stockholders of record on February 12, 2004, payable on February 26, 2004. On April 22, 2003, the Company declared a five-for-four (5:4) stock split payable May 23, 2003 to stockholders of record on May 9, 2003. On April 24, 2002, the Company declared a 10% stock dividend to stockholders of record on May 9, 2002, payable on May 23, 2002. The fair value of the additional shares of common stock issued in connection with the 10% stock dividends was
All data with respect to earnings per share, dividends per share and share information, including price per share where applicable, in the Consolidated Financial Statements and Notes thereto have been retroactively adjusted to reflect the stock split and the stock dividends.
from engaging in the business relating to the assets acquired by the Company for a period of two years after the transaction.
The Company allocated the purchase price as follows: $450.7 million to goodwill; $348.0 million to other intangible assets, namely acquired customer relationship intangibles; and $95.0 million to capitalized software based on studies and valuations that are finalized. The Company is amortizing the other intangible assets using an accelerated method which takes into consideration expected customer attrition rates over a 10-year period. The acquired software is amortized over a seven-year period using an accelerated method that contemplates the period of expected economic benefit and future enhancements to the underlying software. Under the terms of the stock purchase agreement, the Company made a joint election with ALLTEL to treat the acquisition as a sale of assets in accordance with Section 338 (h) (10) of the Internal Revenue Code, which resulted in the revaluation of the assets acquired to fair value. As such, the fair value assignable to the historical assets, as well as intangible assets and goodwill, will be deductible for federal and state income tax purposes.
On September 30, 2004, FNF acquired a 74.9% interest in KORDOBA Gesellschaft fur Bankensoftware mbH & Co. KG, Munich, or Kordoba, a provider of core processing software and outsourcing solutions to the German banking market, from Siemens Business Services GmbH & Co. OHG (Siemans). The acquisition price was $123.6 million in cash. The Company recorded the Kordoba acquisition based on its proportional share of the fair value of the assets and liabilities assumed on the purchase date.
On March 22, 2004, the Company acquired American Pioneer Title Insurance Company (“APTIC”) for $115.2 million in cash, subject to certain equity adjustments. APTIC is a 45-state licensed title insurance underwriter with significant agency operations and computerized title plant assets in the state of Florida. APTIC operates under the Company’s Ticor Title brand.
The acquisition of the minority interest of FNIS on September 30, 2003 allowed the Company to further capitalize on the significant technology resources of FI, which the Company acquired on April 1, 2003, by combining all technology resources within one integrated organization. The Company’s data center activities have historically been managed by FNIS. However, with the acquisition of the minority interest of FNIS, the Company has migrated substantially all of its data center activities from FNIS to the existing FI platforms as of September 30, 2003.
The assets acquired and liabilities assumed in the FNIS minority interest acquisition were as follows (dollars in thousands):
Selected unaudited pro forma combined results of operations for the years ended December 31, 2004 and 2003, assuming the above acquisitions had occurred as of January 1, 2003, and using actual general and administrative expenses prior to the acquisition, are set forth below:
On July 2, 2004, the Company acquired 100% of Geotrac, Inc. (“Geotrac”), a flood zone monitoring services provider for $40 million in cash.
On February 27, 2004, the Company acquired an additional 44% interest in Hansen Quality Loan Services, LLC (“Hansen”) that it did not already own for $33.7 million, consisting of $25.2 million in cash and $8.5 million of the Company’s common stock. The stock portion of the purchase price resulted in the issuance of 220,396 shares of the Company’s common stock, which is restricted from sale to the public. Hansen provides collateral risk assessment and valuation services for real estate mortgage financing. On March 26, 2004, we acquired the remaining 1% interest in Hansen for $.3 million in cash.
On September 2, 2003, the Company acquired WebTone Technologies, Inc. (“WebTone”) for $88.7 million in cash. WebTone is the developer of the TouchPoint® suite of customer interactive management solutions for financial services organizations.
On January 9, 2003, the Company acquired certain assets of Bankers Insurance Group (“Bankers”) for $41.6 million in cash. The assets include the right to issue new and renewal flood insurance policies underwritten by Bankers and its subsidiaries, Bankers Insurance Company, Bankers Security Insurance Company and First Community Insurance Company (“FCIC”). As part of the transaction, the Company also acquired FCIC, a fifty-state licensed insurance carrier, to act as the underwriter for the policies. FCIC has been subsequently renamed Fidelity National Property and Casualty Insurance Company.
On July 9, 2002, FNIS acquired Micro General, the Company’s majority-owned public subsidiary, through a tender offer and subsequent short-form merger. Under the terms of the tender offer and merger, each share of Micro General common stock was exchanged for 0.696 shares of FNIS common stock. FNIS issued approximately 12.9 million shares of common stock to Micro General stockholders. In the Company’s Consolidated Financial Statements, this transaction is accounted for in accordance with SFAS No. 141 and FASB Technical Bulletin 85-5. Accordingly, FNIS’s acquisition of the minority stockholders’ interest in Micro General (the “noncontrolled equity interest”) was recognized by the Company as the acquisition of shares from a minority interest, which is accounted for by the purchase method under SFAS No. 141. FNIS’s acquisition of the Company’s interest in Micro General (the “controlled equity interest”) is not considered a business combination and, therefore, the Company recognized the related assets and liabilities transferred
from the controlled equity interest in Micro General to FNIS at their historical carrying values. The market price per share of FNIS common stock that was issued to Micro General minority stockholders in this transaction exceeded the Company’s carrying amount per share of FNIS common stock, resulting in an increase of $100.4 million to the Company’s consolidated equity and an increase in net assets, the majority of which was goodwill.
The carrying amounts and fair values of the Company’s fixed maturity securities at December 31, 2004 and 2003 are as follows:
The change in unrealized gains (losses) on fixed maturities for the years ended December 31, 2004, 2003, and 2002 was $(27.1) million, $(22.4) million and $27.3 million, respectively.
Fixed maturity securities valued at approximately $86.6 million and $79.8 million were on deposit with various governmental authorities at December 31, 2004 and 2003, respectively, as required by law.
Equity securities at December 31, 2004 and 2003 consist of investments in various industry groups as follows:
The change in unrealized gains (losses) on equity securities for the years ended December 31, 2004, 2003 and 2002 was $(6.0) million, $0.5 million and $9.0 million, respectively.
During 2004, the Company incurred an impairment charge relating to one investment that it determined to be other than temporarily impaired, which resulted in a charge of $8.0 million. Unrealized losses relating to U.S. government, state and political subdivisions and corporate securities were caused by interest rate increases. Since the decline in fair value of these investments is attributable to changes in interest rates and not credit quality, and the Company has the intent and ability to hold these securities, the Company does not consider these investments other-than-temporarily impaired.
The credit agreement and other debt facilities impose certain affirmative and negative covenants on the Company relating to current debt ratings, certain financial ratios related to liquidity, net worth, capitalization, investments, acquisitions and restricted payments, and certain dividend restrictions. The Company is in compliance with all of its debt covenants as of December 31, 2004.
Principal maturities at December 31, 2004, are as follows (dollars in thousands):
Tax benefits of $36.1 million, $18.9 million and $21.3 million associated with the exercise of employee stock options and the vesting of restricted stock grants were allocated to stockholders’ equity for the years ended December 31, 2004, 2003 and 2002, respectively.
As of January 1, 2005 the Internal Revenue Service has selected the Company to participate in a new pilot program (Compliance Audit Program or CAP) that is a real-time audit for 2005 and future years. The Internal Revenue Service is also currently examining the Company’s tax returns for years 2003 and 2002. Management believes the ultimate resolution of this examination will not result in a material adverse effect to the Company’s financial position or results of operations.
The Company assumed APTIC’s outstanding reserve for claim losses in connection with its acquisition in 2004. The Company assumed LSI’s and ANFI’s outstanding reserve for claim losses in connection with their acquisitions in 2003.
The title loss provision in the current year reflects a higher estimated loss for the 2004 policy year offset in part by a favorable adjustment from previous policy years. Consistent with 2002, the favorable adjustment was attributable to lower than expected payment levels on previous issue years that included periods of increased resale activity as well as a high proportion of refinance business. As a result, title policies issued in previous years have been replaced by the more recently issued policies, therefore generally terminating much of the loss exposure on the previously issued policies. The unfavorable development during 2003 reflects the higher than expected payment levels on previously issued policies.
insurance they have issued or other services performed on behalf of insured policyholders and other customers. The Company believes that the reserves reflected in its Consolidated Financial Statements are adequate to pay losses and loss adjustment expenses which may result from such claims and proceedings; however, such estimates may be more or less than the amount ultimately paid when the claims are settled.
The Company was named in five class action lawsuits alleging irregularities and violations of law in connection with title and escrow practices. The Company, along with the State of California, plaintiff in the lead case, successfully resolved our differences concerning representations made during the settlement process. A stipulated amendment to the previously entered stipulated final judgment was filed with the court resulting in a final resolution of this lawsuit. Pursuant to agreements with counsel and the parties to two of the cases filed by private parties their suits will also be settled. The process to secure court approval for those settlements has begun. The remaining two lawsuits have been stayed pending final disposition of the settled lawsuits. The Company believes that the two stayed lawsuits will be dismissed or settled upon the final disposition of the three settled lawsuits.
Georgia alleging that we were complicit with lenders in denying borrowers their right to representation of counsel at the closing of their consumer loans, and engaged in the unauthorized practice of law. One of those cases was settled, and the Company intends to vigorously defend the other.
A class action is pending in California alleging that the Company violated the Telephone Consumer Protection Act by sending unsolicited facsimile advertising. Plaintiffs seek statutory damages. A class was certified in April 2004. The Company intends to vigorously defend this action.
Rent expense incurred under operating leases during the years ended December 31, 2004, 2003 and 2002, was $197.3 million, $165.9 million and $126.0 million, respectively.
On June 29, 2004, the Company entered into an off-balance sheet financing arrangement (commonly referred to as a “synthetic lease”). The owner/lessor in this arrangement acquired land and various real property improvements associated with new construction of an office building in Jacksonville, Florida that will be part of the Company’s corporate campus and headquarters. The lease expires on September 28, 2011, with renewal subject to consent of the lessor and the lenders. The lessor is a third-party limited liability company. The synthetic lease facility provides for amounts up to $75.0 million. As of December 31, 2004, approximately $10.0 million had been drawn on the facility to finance land costs and related fees and expenses. The leases include guarantees by us for a substantial portion of the financing, and options to purchase the facilities at the outstanding lease balance; the maximum guarantee is 86.5% of the outstanding lease balance. The guarantee becomes effective if the Company declines to purchase the facilities at the end of the lease and also declines to renew the lease. The lessor financed the acquisition of the facilities through funding provided by third-party financial institutions. The Company has no affiliation or relationship with the lessor or any of its employees, directors or affiliates, and its transactions with the lessor are limited to the operating lease agreements and the associated rent expense that will be included in other operating expenses in the Consolidated Statements of Earnings after the end of the construction period.
The Company does not believe the lessor is a variable interest entity, as defined in FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46”). In addition, the Company has verified that even if the lessor was determined to be a variable interest entity, the Company would not have to consolidate the lessor nor the assets and liabilities associated with the assets leased to the Company. This is because the assets leased by the Company will not exceed 50% of the total fair value of the lessor’s assets excluding any assets that should be excluded from such calculation under FIN 46, nor did the lessor finance 95% or more of the leased balance with non-recourse debt, target equity or similar funding.
The Company’s 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. As of December 31, 2004, $1,731.3 million of the Company’s net assets are restricted from dividend payments without prior approval from the Departments of Insurance. During 2005, the Company’s title insurance subsidiaries can pay or make distributions to the Company of approximately $209.8 million.
The Company’s underwritten title companies are also subject to certain regulation by insurance regulatory or banking authorities, primarily relating to minimum net worth. Minimum net worth of $7.5 million, $2.5 million, $3.0 million and $400 thousand is required for Fidelity National Title Company, Fidelity National Title Company of California, Chicago Title Company and Ticor Title Company of California, respectively. The Company is in compliance with all of its respective minimum net worth requirements at December 31, 2004.
On April 24, 2001, the Company’s Board of Directors authorized the Company to purchase up to 8,318,750 shares of its common stock. Purchases may be made from time to time by the Company in the open market or in block purchases or in privately negotiated transactions depending on market conditions and other factors. As part of this program, the Company repurchased in 2001 a total of 1,512,500 shares of common stock for $22.9 million, at an average price of $15.15 per share. In May 2002, the Company retired those 1,512,500 shares held as treasury stock.
On January 27, 2004, the Company’s Board of Directors declared a 10% stock dividend to stockholders of record as of February 12, 2004, payable on February 26, 2004. On April 22, 2003, the Company’s Board of Directors declared a five-for-four (5:4) stock split payable May 23, 2003, to stockholders of record as of May 9, 2003. On April 24, 2002, the Company’s Board of Directors declared a 10% stock dividend to stockholders of record as of May 9, 2002, payable on May 23, 2002. On July 24, 2001, the Company declared a 10% stock dividend to stockholders of record on August 9, 2001, payable on August 23, 2001. The fair value of the additional shares of common stock issued in connection with the 10% stock dividends was credited to additional paid-in capital and a like amount charged to retained earnings during 2002 and 2001. Fractional shares were paid in cash. All data with respect to earnings per share, dividends per share and share information, including price per share where applicable, in the Consolidated Financial Statements has been retroactively adjusted to reflect the stock split and stock dividends.
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
The Company’s 1991 Stock Option Plan (“1991 Plan”) expired in March 2001. Options generally had a term of 12 years from the date of grant and were exercisable subject to the terms and conditions set by the Board of Directors. The price per share was determined at the date of grant and may be less than the fair market value of the common stock at the date of grant to reflect the application of the optionee’s deferred bonus, if applicable. The 1991 Plan allows for exercise prices with a fixed discount from the quoted market price. A total of 560,058 stock options were outstanding as of December 31, 2004. No further awards may be granted under this plan.
The Company’s 1993 Stock Plan (“1993 Plan”) expired in June 2003. Options generally had a term of 10 years from the date of grant and were exercisable subject to the terms and conditions set by the Board of Directors. The per share option price was 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. A total of 594,787 stock options were outstanding as of December 31, 2004. No further awards may be granted under this plan.
In connection with the 1998 acquisition of FNF Capital, Inc. (formerly known as “Granite”), which was accounted for as a pooling-of-interests, the Company assumed 1,140,855 options outstanding under Granite’s existing stock option plan (“Granite Plan”), of which 36,050 stock options were outstanding as of December 31, 2004. The Granite Plan provides that qualified stock options be granted at an exercise price equal to fair market value on the date of the grant with a term not to exceed 10 years. The Granite Plan provides that non-qualified stock options be granted at an exercise price not less than 85% of the fair market value on the date of grant with a term not to exceed 10 years.
In connection with the acquisition of ANFI, the Company assumed 988,389 options outstanding under ANFI’s existing option plans: the American National Financial, Inc. 1999 Stock Option Plan and the American National Financial, Inc. 1998 Stock Incentive Plan. The options granted under these plans generally had a term of 10 years. As of December 31, 2004, there were 436,963 options outstanding under these plans.
In connection with the acquisition of InterCept, the Company assumed 1,708,155 options outstanding under InterCept’s existing option plans - 2002 InterCept Stock Option Plan, 1996 InterCept Stock Option Plan, 1994 InterCept Option Plan and the Boggs InterCept Stock Option Plan. The options granted under these plans were fully vested prior to the acquisition and the majority of them had a remaining term of 90 days which expired on February 7, 2005. As of December 31, 2004, there were 1,284,613 options outstanding under this plan.
During the third quarter of 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), for stock-based employee compensation, effective as of the beginning of 2003. Under the fair value method of accounting, compensation cost is measured based on the fair value of the award at the grant date and recognized over the service period. The Company has elected to use the prospective method of transition, as permitted by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (“SFAS No. 148”). Under this method, stock-based employee compensation cost is recognized from the beginning of 2003 as if the fair value method of accounting had been used to account for all employee awards granted, modified, or settled in years beginning after December 31, 2002. Prior year financial statements were not restated. Net income, as a result of the adoption of SFAS 123, for the year ended December 31, 2004 and 2003 reflect an expense of $21.8 million and $6.2 million, respectively, which is included in personnel costs in the reported financial results. In December 2004, the FASB issued Statement 123R “Share Based Payment” (See Note Q).
The Pension Plan covered certain Chicago Title employees. The benefits are based on years of service and the employee’s average monthly compensation in the highest 60 consecutive calendar months during the 120 months ending at retirement or termination and effective December 31, 2000, the Pension Plan was frozen and there will be no future credit given for years of service or changes in salary.
The following table sets forth the funded status of the Pension Plan as of December 31, 2004, 2003 and 2002:
The expected long term rate of return on plan assets was 8.5% in 2004 and 2003, derived using the plan’s asset mix, historical returns by asset category, expectations for future capital market performance, and the fund’s past experience. Both the plan’s investment policy and the expected long-term rate of return assumption are reviewed periodically. The Company’s strategy is to focus on a one to three-year investment horizon, maintaining equity securities at 50-55% of total assets while maintaining an average duration in debt securities, extending that duration as interest rates rise and maintaining cash funds at appropriate levels relating to the current economic environment.
The accrued cost of the accumulated postretirement benefit obligation included in the Company’s Consolidated Balance Sheets at December 31, 2004, 2003 and 2002 is as follows:
In December 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (“the Act”) became law in the United States. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. The Company has elected to recognize the effects of the Act in measures of the benefit obligation and cost.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, lease receivables, residual interests in securitizations and trade receivables.
The Financial Institution Software and Services segment focuses on two primary markets, financial institution processing and mortgage loan processing. The primary applications are software applications that function as the underlying infrastructure of a financial institution’s processing environment. These applications include core bank processing software, which banks use to maintain the primary records of their customer accounts, and core mortgage processing software, which banks use to process and service mortgage loans. This segment also provides a number of complementary applications and services that interact directly with the
core processing applications, including applications that facilitate interactions between the segment’s financial institution customers and their clients.
In the Information Services segment, the Company operates a real estate-related information services business. The Company’s real estate-related information services are utilized by mortgage lenders, investors and real estate professionals to complete residential real estate transactions throughout the U.S. The Company offers a comprehensive suite of applications and services spanning the entire home purchase and ownership life cycle, from purchase through closing, refinancing and resale. Included in the information services segment for the years ended December 31, 2004 and 2003 is $6.3 million and $3.2 million, respectively of pre-tax expenses relating to asset impairment charges pursuant to SFAS No. 144. See Notes A.
The recapitalization of FIS was accomplished through $2.8 billion in borrowings under new senior credit facilities consisting of an $800 million Term Loan A facility, a $2.0 billion Term Loan B facility (collectively, the “Term Loan Facilities”) and a $400 million revolving credit facility (“Revolver”). FIS fully drew upon the entire $2.8 billion in Term Loan Facilities to consummate the recapitalization while the Revolver remained undrawn at the closing of the recapitalization. The current interest rate on both the Term Loan Facilities and the Revolver is LIBOR +1.75%. Bank of America, JP Morgan Chase, Wachovia Bank, Deutsche Bank and Bear Stearns lead a consortium of lenders providing the new senior credit facilities.
The minority equity interest sale was accomplished through FIS selling an approximately 25 percent minority equity interest in the common stock of FIS to an investment group led by Thomas H. Lee Partners (“THL”) and Texas Pacific Group (“TPG”). FIS issued a total of 50 million shares of the common stock of FIS to the investment group for a total purchase price of $500 million. A new Board of Directors has been created at FIS, with William P. Foley, II, current Chairman and Chief Executive Officer of FNF, serving as Chairman and Chief Executive Officer of FIS. FNF has appointed four additional members to the FIS Board of Directors, while each of THL and TPG have appointed two new directors.
On March 9, 2005, the Company also announced that its Board of Directors formally declared a $10 per share special cash dividend that is payable on March 28, 2005 to stockholders of record as of March 21, 2005. Because of the magnitude of the special cash dividend, the New York Stock Exchange has determined that the ex-dividend date will be March 29, 2005, the business day following the payable date for the special cash dividend.
The pro forma adjustments in the above table include the following:
An increase in cash and cash equivalents of $684.0 million relating to an inflow of $2,800.0 million from the Term Loan Facilities and $500.0 million from the sale of a 25% minority interest in FIS, less transaction costs of $80.4 million, repayments of $810.0 million under outstanding credit facilities as of December 31, 2004 and an assumed dividend payout of $1,725.6 million based on outstanding shares at December 31, 2004.
A decrease in equity of $1,527.8 million relating to the payment of the $1,725.6 million assumed dividend offset by an assumed gain of $197.7 million on the sale of the 25% minority interest in FIS.