We occupy a leased facility of approximately 8,700 square feet in Scottsdale, Arizona, in which our executive offices are located. In addition, we have a 50-year ground lease in Phoenix, Arizona through December 2047 on which we have built a 24,000 square foot building, which includes our Arizona administration, a title department, and two escrow branches. See Note 10 to our consolidated financial statements for additional information relating to our lease commitments.
(2) The availability of net operating loss carryforwards resulted in a lower tax provision in 2001 than would be expected based on statutory income tax rates. The net operating loss carryforwards were fully utilized in 2001.
We operate through two reportable segments which are Title and Escrow Services and Lender Services. Our Title and Escrow Services segment consists of wholly owned title insurance agencies, a title insurance underwriter and a parent holding company operations, including issuance and repayment of corporate debt obligations. The key subsidiaries within this segment include Capital Title Agency, First California Title Company, Land Title of Nevada, New Century Title Company, United Capital Title Insurance Company and United Title Company. This segment generates its revenue principally from issuing title insurance policies and providing escrow services for residential and commercial real estate transactions, services which are typically marketed to real estate agents, community banks and regional lenders in selected markets in Arizona, California and Nevada.
Because these factors can change dramatically, revenue levels in the title insurance industry can also change dramatically. For example, beginning in 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 June of 2003, the Federal Reserve Board reduced interest rates by 550 basis points, bringing interest rates down to their lowest level in recent history, which again significantly increased the volume of refinance activity. Beginning in mid-June 2003 and continuing through most of 2004, the ten-year treasury bond yield increased from a low of nearly 3.0% to more than 4.5%, causing mortgage interest rates to rise, which decreased the volume of refinance activity.
Beginning in the fourth quarter of 2005, we saw opened order counts decline, which results in lower closings as we move into the first quarter of 2006. Lower revenue, coupled with an increase in the weighted average shares outstanding, will have a negative impact on our first quarter results. The increase in the weighted shares outstanding resulted from our secondary offering in late 2005, for which we haven’t fully deployed the funds raised.
The cyclical nature of the mortgage industry, and hence the title insurance and related settlement services industry, requires us to tightly manage operating expense levels in response to market fluctuations. Larger than anticipated declines in revenue or the inability to manage costs could result in a decline in profitability or future operating losses.
The total reserve for all reported and unreported losses incurred is represented by the reserve for title insurance and escrow losses. The reserve is established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy incurred claims of policyholders which may be reported in the future. Provisions for the reserve are charged to operations and are based upon our estimates after analyzing reported claims, historical loss experience, title industry averages, current and projected legal environment and types of policies written. Despite the variability of such estimates, we believe that the reserves are adequate to cover claim losses which might result from pending and future claims.
Estimating future title insurance and escrow loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are paid or over which they may be reported, significantly varying dollar amounts of individual claims, economic and market conditions and other factors.
Calculating ultimate loss exposure is predicated on evaluating past experience and adjusting for changes in current developments and trends. Our external actuaries use various actuarial loss development and expected loss methods, including a point estimate and a range of estimates to calculate loss development factors. Loss development factors are based on our data and on patterns derived from insurance industry sources. The loss development factors forecast ultimate losses for each policy year based on data such as our historical loss payment and reporting patterns and assumed loss ratios. Older policy year experience is applied to newer policy years to project future development. When new trends surface, the loss development factors are adjusted to incorporate the more recent developments.
Of our consolidated reserve for title insurance and escrow losses, totaling $18.1 million at December 31, 2005, $14.4 million or 79.3% relates to our title insurance underwriter subsidiary, United Capital Title Insurance Company. It is this component of our loss reserve that is subject to the methods discussed above. Our actuary develops a point estimate as well as a range of likely reserve estimates and as of December 31, 2005, our actuary’s point estimate was $13.6 million. Our actual reserve is within our actuary’s range of reserve estimates and above the point estimate.
As required by SFAS 142, we completed our annual goodwill impairment tests on our reporting units and have determined fair values were in excess of carrying values. Accordingly, no goodwill impairments have been recorded.
We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial condition or results of operations.
In July 2004, we acquired DPSI, since renamed Nationwide TotalFlood. TotalFlood, through a centralized processing center located in Los Angeles, California, provides residential and commercial flood determinations on property throughout the United States.
In May 2004, we acquired Nationwide Appraisal, which provides appraisal, title and settlement services to its customers in the mortgage and real estate industry through its centralized processing center near Pittsburgh, Pennsylvania.
The following table sets forth, for the periods indicated, the components of our revenue and expenses and such income statement data expressed as a percentage of total revenue ($ in thousands, except segment statistics):
The increase in opened and closed orders in 2005 compared to 2004 reflects a strong demand for our services compared to the prior year. The increase in average revenue per closed order reflects the increase in business mix in favor of residential resale transactions, which typically garner higher revenue per order than residential mortgage refinancings, as well as an increase in property values, which is the main driver of the revenue we charge for a title policy.
The significant components of other income include interest income from invested cash balances and fixed maturity bonds, investment dividends, delivery fee income, revenue from servicing seller-financed mortgages and revenue from flood zone determination services. Other income increased as a percentage of revenue to 9.6% for the year ended December 31, 2005, compared to 6.3% for the year ended December 31, 2004. Other income was higher for the year ended December 31, 2005 primarily due to an increase in flood zone determination services, improving investment yields coupled with a larger fixed maturity bond portfolio and increased earnings on depository accounts.
Overall operating expenses increased $68.7 million or 25.0% for the year ended December 31, 2005, compared to the prior year. Operating expenses decreased as a percentage of revenue to 90.3% for the year ended December 31, 2005 compared to 91.4% in the prior year. Operating expenses were lower as a percentage of revenue primarily due to higher revenue levels which help offset significant fixed expenses such as salaries and rent, which tend to be more fixed than variable.
Personnel costs are the most significant component of our operating expenses, and consist of salaries and other related expenses, commissions and incentives. Total personnel expenses increased $34.8 million, or 20.5%, to $204.4 million for the year ended December, 2005 compared to the prior year. Personnel costs were higher for the year ended December 31, 2005 compared to the prior year, primarily due to a complete year of the additional operations acquired as part of our Lender Services segment in 2004 and to a lesser extent due to increased headcount, commissions and incentives resulting from higher title and escrow revenue. Personnel costs were lower, as a percentage of revenue, for the year ended December 31, 2005 compared to the prior year as a result of the use of third party appraisers and abstractors (see Contract Service Fees below) combined with higher revenue levels which help offset fixed salaries of employees.
Interest expense decreased to $1.0 million for the year ended December 31, 2005 compared to $1.2 million for the prior year. The decrease in the year ended December 31, 2005, was due to lower debt outstanding in 2005 compared to the prior year.
Oxley Act of 2002. Further, we have incurred approximately $1.1 million in legal costs pursuing an action brought against one of our competitors claiming unfair business practices in recruiting certain of our employees. Other operating expenses as a percentage of revenue declined to 20.6% for the year ended December 31, 2005 as compared to 20.8% for the year ended December 31, 2004.
The income tax provision of $15.8 million for the year ended December 31, 2005 provided an effective tax rate of 42.9% for the year ended December 31, 2005. This compares to an effective tax rate of approximately 39.3% for the prior year. The tax rate increased due to an increase in nondeductible expenses and the increased activity in certain high-tax states. In addition, in 2005 we settled an audit by a taxing authority which contributed to the tax rate increase. We do not anticipate this event will recur.
Our revenue, which is reported net of underwriting fees paid to third party title insurance underwriters, increased by $40.5 million, or 15.6%, for the year ended December 31, 2004 compared to the same period ended December 31, 2003. Operations acquired during 2004 contributed $38.3 million of the increase in revenue for the year ended December 31, 2004 compared to 2003. The remaining $2.2 million of the increase was primarily the result of strong demand for title insurance and related services, fueled by a strong housing market resulting from the low mortgage interest rate environment during 2004, as well as an increase in the average revenue per closed order and an increase in investment income due to improved investment returns and higher investment balances during 2004.
Overall operating expenses have increased $42.3 million, or 18.2% for the year ended December 31, 2004, compared to the prior year, primarily resulting from expansion of our operations via acquisitions. Operating expenses as a percentage of total revenue increased to 91.4% for the year ended December 31, 2004 compared to 89.4% for the prior year.
An income tax provision of $10.1 million for the year ended December 31, 2004 provided an effective tax rate of 39.3% for the year ended December 31, 2004. This compares to an effective tax rate of 39.7% for the year ended December 31, 2003.
We have two $3.0 million revolving lines of credit. Outstanding borrowings bear interest at the prime rate (7.25% at December 31, 2005). At December 31, 2005, there were no borrowings under either of these credit facilities. There is a total of $0.9 million committed against the credit lines, one for standby letters of credit pursuant to an office lease and the other for standby letters of credit pursuant to insurance policies.
Net cash flows provided by operating activities were $38.8 million for the year ended December 31, 2005 compared to cash flows provided by operating activities of $22.9 during the same period in the prior year. The increase in cash provided is primarily the result of net income of $21.1 million and a decrease of $4.3 million in accounts receivable. The significant non-operating uses of cash for the year ended December 31, 2005 included the purchase of fixed assets, investment securities and debt service payments.
Our title insurance underwriter, United Capital Title Insurance Company, is subject to regulations that limit its ability to pay dividends or make loans or advances to its parent, principally for the protection of policyholders. Generally, the total amount of dividends and distributions is limited to the greater of 10% of United Capital Title Insurance Company’s surplus, which amount was $21.4 million as of December 31, 2005, or 100% of net income for the year period ended December 31, 2005, provided that the amount does not exceed United Capital Title Insurance Company’s earned surplus. Under these restrictions, United Capital Title Insurance Company could pay, to its parent, dividends of $4.5 million during 2006 without prior regulatory approval. Of our $58.5 million in cash and cash equivalents at December 31, 2005, $2.1 million relates to United Capital Title Insurance Company and would be subject to the aforementioned restrictions. Of our $41.6 million as of December 31, 2005 investment portfolio, consisting of short term investments, fixed maturity bonds and equity securities, $40.7 million relates to United Capital Title Insurance Company and would be subject to the aforementioned restrictions.
We believe that cash on hand, anticipated future cash receipts and borrowings available under our credit facilities will be sufficient to meet our operating plans and to pay all obligations as they become due for the next twelve months. In addition, we believe that such sources will be sufficient to meet our expansion and operating plans for the foreseeable future.
The following table sets forth unaudited quarterly operating data for the most recent eight quarters. Such data has been prepared substantially on the same basis as our audited financial statements appearing elsewhere herein, and includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the data. However, our operating results have fluctuated significantly in the past and we expect that they will continue to fluctuate in the future. Future fluctuations may be a result of a variety of factors, including interest rates and general real estate economic conditions, seasonality, the timing of acquisitions, and our ability to control costs in response to declining order volume. Accordingly, we believe that period-to-period comparisons of our historical results may be neither meaningful nor predictive of our future performance. The quarterly data should be read together with the financial statements and accompanying notes appearing elsewhere herein. ($ in thousands, except per share data):
(1) As of December 31, 2005, we had title insurance and escrow loss reserves of $18.1 million. The amount and timing of these obligations are estimated and are not set contractually. Nonetheless, based on historical title insurance claim experience, we anticipate the above payment patterns. While we believe that historical loss payments are a reasonable source for projecting future claim payments, there is significant variability inherent in this payment pattern estimate because of the potential impact of several factors that can cause increases in both the amount and timing of estimated title and escrow loss payments including (i) changes in future mortgage interest rates and the corresponding effect on the quantity of real estate and refinancing transactions; (ii) the legal environment and court decisions of title insurance policy language; and (iii) events such as fraud, defalcation and multiple property title defects.
We have audited the accompanying consolidated balance sheets of Capital Title Group, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005. 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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Capital Title Group, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 27, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
Capital Title Agency Inc. (“Capital Title”) is an Arizona corporation, which has operated under the authority of the Arizona State Banking Commission since November 1981. Capital Title is an independent title agency that provides escrow services and issues title insurance policies to the real estate industry in Maricopa, Yavapai, Mohave and Pinal Counties in Arizona.
New Century Title Company (“New Century”), a California corporation that commenced operations in July 1998, is an independent title agency that provides escrow and title services to the real estate industry in selected California counties. New Century is licensed to conduct business in San Diego, Orange, Riverside, San Bernardino and Los Angeles Counties. New Century also has operations in northern California, which it obtained by acquisition in November 1998, and expanded through another acquisition in April 2002. New Century’s northern California operation is licensed to conduct business in Sonoma, Sacramento, Contra Costa, Alameda, San Mateo and Santa Clara Counties.
Nations Holding Group (“Nations”), a California corporation, was acquired in September 2002 and includes the following wholly owned subsidiaries:
Land Title of Nevada (“Land Title”) is a Nevada corporation established in 1978. Land Title provides escrow and title services to the real estate industry in Clark County, Nevada, which comprises the metropolitan area of Las Vegas.
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes its estimates and assumptions are reasonable in the circumstances; however, actual results may differ from those estimates under different future conditions.
Short term investments consist of certificates of deposit with original maturities of 91 days to one year. Investments in fixed maturity bonds and equity securities are classified as available-for-sale and, accordingly, are carried at fair value. Fair values of fixed maturity bonds and equity securities are based on quoted market prices.
Title premiums earned and title and escrow fees are recognized as revenue at the time of closing the related real estate transaction. The Company reports title service revenue net of underwriting fees paid pursuant to agreements the Company has with third party title insurance underwriters. Underwriting fees incurred relating to third party title insurance underwriters for the years ended December 31, 2005, 2004 and 2003 were $2.9 million, $3.7 million and $3.2 million, respectively. Revenue from real estate appraisal services, account servicing and other fees are generally recognized when the service is performed. For flood zone determination services, the Company defers all revenue that relates to services the Company is contractually required to provide in future periods, and then recognize the deferred revenue ratably over the average period of time the Company estimates the related loans will be outstanding.
Property and equipment are recorded at cost and are being depreciated on a straight-line basis over the estimated useful lives of the related assets, which range from three to forty years. Leasehold improvements are amortized on a straight-line basis over the lesser of the original lease term or the estimated useful lives of such assets.
Title plants are recorded at the cost incurred to construct and organize historical title information to the point it can be used to perform title searches. Cost incurred to maintain, update and operate title plants are expensed as incurred. Title plants are not amortized as they are considered to have an indefinite life if maintained.
The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. As of December 31, 2005, the Company has not identified any events or circumstances that indicate that any long-lived assets are impaired.
The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, and Interpretation of APB No. 25, issued in March 2000, to account for stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. In December 2004, the FASB issued SFAS 123 (revised 2004) Share-Based Payment, (“SFAS 123R”), which is a revision of SFAS 123, Accounting for Stock-Based Compensation. SFAS 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values rather than pro forma footnote disclosure. SFAS 123R is effective in our first quarter of fiscal 2006 and requires measurement of the cost of share-based payment transactions to employees at the fair value of the award on the grant date and recognition of expense over the requisite service or vesting period. SFAS 123R allows implementation using a modified version of prospective application, under which compensation expense for the unvested portion of previously granted awards and all new awards will be recognized on or after the date of adoption. SFAS 123R also allows companies to implement by restating previously issued financial statements, basing the amounts on the expense previously calculated and reported in their pro forma footnote disclosures required under SFAS 123. We will adopt SFAS 123R using the modified prospective method beginning January 1, 2006. The impact of adopting SFAS 123R on our consolidated results of operations is not currently expected to differ materially from the pro forma disclosures currently required by SFAS 123. As allowed by SFAS 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS 123. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period ($ in thousands, except per share data):
The Company’s two reportable segments are Title and Escrow Services and Lender Services. Additional information related to the Company’s segments are included in Note 16.
The Company discloses fair value information about financial instruments where it is practicable to estimate their value. The Company estimates that the carrying value of its financial instruments, consisting of cash and cash equivalents, short term investments, notes receivable, accounts payable and accrued expenses approximate their fair values at December 31, 2005 and 2004 due to the short term nature of these items. Fixed maturity bonds and equity securities are classified as available-for-sale and accordingly, are carried at fair value. The terms of the Company’s long term debt instruments provide for fixed rates of interest with the exception of one term loan which has a variable interest rate tied to a market index. All are comparable to what they could be replaced for in the current market, therefore the carrying value approximates their fair value at December 31, 2005 and 2004.
The Company is the custodian of cash deposited by customers with specific instructions as to its disbursement from active escrow, trust and account servicing files. The balances in these accounts have not been included in the consolidated financial statements. As of December 31, 2005 and 2004, the accounts contain balances of $980.4 million and $789.7 million, respectively. As a result of holding these deposits in escrow, the Company is involved in ongoing programs for realizing economic benefits during the year through favorable borrowing agreements and vendor arrangements with the various financial institutions where the deposits are held. There were no investments or loans outstanding as of December 31, 2005 and 2004 related to these arrangements.
The Company maintains cash and cash equivalents with various financial institutions. Deposits which exceed $100,000 at each institution are not insured by the Federal Deposit Insurance Corporation. Of the $61.9 million in cash and cash equivalents and short-term investments on hand at December 31, 2005, $56.2 million was not insured by the Federal Deposit Insurance Corporation.
The Company’s accounts receivable are typically not collateralized. The Company is not dependent upon any single customer or single group of customers. The loss of any one customer would not have a material adverse effect on the Company.
In July 2004, The Company acquired Determination Processing Services, Inc., which was subsequently renamed Nationwide TotalFlood Services, Inc. (“Nationwide TotalFlood”). Nationwide TotalFlood, based in Los Angeles, California, provides residential and commercial flood determinations on property throughout the United States, and increases the Company’s service capacity for our Lender Services segment. Under the terms of the acquisition the purchase price was $1.7 million and was financed from cash on hand. The operations of Nationwide TotalFlood have been included in the consolidated financial statements of the Company since July 1, 2004, which was the effective date of the transaction.
In May 2004, the Company acquired Nationwide Appraisal Services Corporation (“Nationwide”). Under the terms of the acquisition the Company paid $25.0 million in cash at closing, with $3.0 million in deferred cash consideration payable if certain conditions are satisfied after the closing of the transaction. Subsequent to the closing, it was determined that certain conditions relating to $1.0 million of the deferred cash consideration will not be required to be paid, in accordance with provisions of the acquisition agreement. Nationwide provides real estate appraisal services and also issues title insurance policies throughout most large markets in the United States and is the cornerstone of the Company’s Lender Services segment. The purchase price was financed from cash on hand, proceeds from the private placement of common stock and warrants to purchase common stock, and a credit facility from a bank totaling $16.0 million. The credit facility included a loan bearing interest at a fixed rate of 4.75%. The terms of the credit facility required a $6.0 million payment of principal on September 30, 2004. The remaining balance outstanding under the credit facility is being amortized over a five year period with monthly payments of $166,667 plus interest. The operations of Nationwide have been included in the consolidated financial statements of the Company since May 1, 2004, which was the effective date of the transaction.
Selected unaudited pro forma combined results of operations for the years ended December 31, 2005 and 2004, assuming acquisitions made in 2004, discussed above, occurred January 1, 2004, were as follows ($ in thousands, except per share data):
The change in unrealized gains (losses) on fixed maturities for the years ended December 31, 2005, 2004 and 2003 were $(429,000), $(120,000) and $21,000, respectively.
Contractual maturities at December 31, 2005, which may differ from expected maturities because certain borrowers have the right to call or prepay obligations with or without prepayment penalties, are as follows ($ in thousands):
The change in unrealized gains (losses) in equity securities for the years ended December 31, 2005, 2004 and 2003 were $(261,000), $143,000 and $402,000, respectively. Gross realized gains related to fixed maturity bonds, available-for-sale were $25,000, $0 and $27,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Gross proceeds from the sale of fixed maturity bonds, available for sale amounted to $3.2 million, $9.6 million and $4.0 million during the years ended December 31, 2005 2004 and 2003, respectively. Gross realized gains related to equity securities, available-for-sale were $274,000, $289,000 and $279,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Gross realized losses related to equity securities, available-for-sale were $52,000, $89,000 and $0 for the years ended December 31, 2005, 2004 and 2003, respectively. Gross proceeds from the sale of equity securities available for sale amounted to $1.5 million, $1.4 million and $1.6 million during the years ended December 31, 2005, 2004 and 2003, respectively.
The income tax expense consisted of the following ($ in thousands):
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets/liabilities as of December 31, 2005 and 2004 were as follows ($ in thousands):
The reconciliation of the provision for income taxes with the expected income taxes based on the statutory federal income tax rate is as follows ($ in thousands):
The Company is subject to regular audits by various taxing authorities in the jurisdictions in which the Company conducts operations. In 2005, the Company settled an audit by a taxing authority resulting in an increase to tax expense of $166,000.
The favorable adjustments reflected in 2005, 2004 and 2003 were 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 Company has two $3 million revolving lines of credit, which bear interest on any outstanding balance at the prime rate. As of December 31, 2005, there were no cash draws against either credit line. There is $908,000 committed against one credit line for standby letters of credit required pursuant to an office lease and group insurance policies.
The maturities of long-term debt after December 31, 2005 were as follows ($ in thousands):
The following supplemental cash flow information is provided with respect to interest and tax payments, as well as certain non-cash investing and financing activities ($ in thousands):
The Company maintains a profit sharing plan under Section 401(k) of the Internal Revenue Code.
The Company’s matching contributions were approximately $0.9 million, $0.8 million and $0.5 million for the years ended December 31, 2005, 2004 and 2003, respectively.
The Company’s 1996 Stock Option Plan (“The Plan”) has authorized the grant of common stock options to all the Company’s employees. Currently, 6,400,000 shares of Common Stock are authorized for issuance pursuant to the Plan. As of December 31, 2005, 3,154,275 options are outstanding under the Plan. All options granted have 5-year terms. Fifty percent of each option grant can be exercised after two years from the date granted; the remaining options can be exercised after three years provided the optionee remains employed with the Company at such vesting date. Options granted under the Plan are not transferable and the per share exercise price of an incentive stock option granted under the Plan may not be less than the fair market value of the common stock on the date of grant.
The Company’s Non-Employee Directors Stock Option Plan (“Directors Plan”) has authorized the grant of options to non-employee members of the Board of Directors and advisory boards. Currently, 750,000 shares of Common Stock are authorized for issuance pursuant to the Directors Plan. As of December 31, 2005, 270,000 options are outstanding under the Directors Plan. All options granted have 5-year terms. Fifty percent of each option grant can be exercised after two years from the date granted; the remaining shares can be exercised after three years provided the optionee remains an eligible director at such vesting date. Upon election to the Board of Directors each board member is granted the option to purchase 15,000 shares of common stock. In addition to the foregoing option grants, each year every non-employee director automatically receives an option to acquire 10,000 shares of the Company’s common stock on the third business day following the date the Company publicly announces its annual financial results, provided that such director has attended at least 75% of the meetings of the Board of Directors and the Board Committees of which such non-employee director is a member in the preceding fiscal year.
A summary of the Company’s stock option activity pursuant to its stock option plans, and related information for the years ended December 31 is as follows:
Warrants to purchase up to 889,252 shares of common stock at an exercise price of $4.00 per share were issued to investors and placement agents as part of a private placement of 2.8 million shares of common stock in April 2004. At December 31, 2005 and 2004, 809,852 and 825,852 warrants, respectively, were outstanding and exercisable.
This segment consists of wholly-owned title insurance agencies, a title insurance underwriter and parent holding company operations, including issuance and repayment of corporate debt obligations. This segment generates its revenue principally from issuing title insurance policies and providing escrow services for residential and commercial real estate transactions, services which are typically marketed to real estate agents, community banks and regional lenders in selected local markets.