Represents the number of locations in each state or country listed.
Our financial results for the year ended December 31, 2003 include the results of FIS for the period from April 1, 2003, the acquisition date, through December 31, 2003, and include the results of operations of various other entities acquired on various dates during 2003, as discussed in “Recent Developments” and Note B of Notes to Consolidated Financial Statements.
During the third quarter of 2003, we 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, as discussed in Note L of Notes to Consolidated Financial Statements. 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. Net income, as a result of the adoption of SFAS No. 123, for the year ended December 31, 2003 reflects an expense of $3.9 million, which is included in the reported financial results. The adoption of SFAS 123 increased compensation cost by $5.8 million for the three months ended March 31, 2003, which resulted in a reduction of the reported net earnings of $3.6 million, or $.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.
During the third quarter of 2003, we recorded $26.3 million in pre-tax expenses relating to the migration of data center operations from FNIS to FIS and $12.9 million in pre-tax expenses relating to the relocation of our corporate headquarters to Jacksonville, Florida. In addition, in the third quarter of 2003, we recorded a pre-tax expense of $7.9 million relating to the write-off of intangible assets, software and license fees. The third quarter of 2003 also includes a realized gain of $51.7 million as a result of InterActive Corp’s acquisition of Lending Tree Inc. and the subsequent sale of our InterActive Corp common stock.
The ability to grow our mortgage loan processing business is directly correlated to the total population of mortgage debt outstanding. The total population of residential mortgage debt has been growing approximately 8 to 10% per year in recent years, regardless of the volatility of refinance activity. Specific economic factors relating to mortgage debt growth include housing starts and new home sales.
Revenue volumes for our financial institution processing business are closely tied to total transactional volume of our customers. Increases in deposit and lending transactions can positively impact our business and thus the condition of the overall economy can have an impact on our growth. However, even when the economy is weak, there is a base level of transactional volume.
We are also impacted by the decision of financial institutions to outsource the services we provide versus performing them “in-house”. These decisions generally are based on the size of the institution, consideration of our pricing structure and level of support for our products along with general economic factors that exist at the time.
Revenue Recognition. The following describes our revenue recognition policies as it pertains to each of our segments:
Financial Institution Processing and Outsourcing Segment. Through our FIS subsidiary, we recognize software maintenance and license fees in accordance with the American Institute of Certified Public Accountants’ Statement of Position (“SOP”) 97-2, entitled “Software Revenue Recognition” and SOP 98-9, entitled “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.” Initial license fees are recognized when a contract exists, the fee is fixed or determinable, software delivery has occurred and collection of the receivable is deemed probable. Software licensed with post-contract customer support includes rights to upgrades, when and if available, telephone support, updates and bug fixes. SOP 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. We determine the fair value of each element in multi-element arrangements based on vendor-specific objective evidence (“VSOE”). VSOE for each element is based on the price charged when the same element is sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. Revenue allocated to maintenance and support is recognized ratably over the term of the agreement. We record deferred revenue for maintenance amounts invoiced prior to revenue recognition.
Total revenue in 2003 increased $2,632.6 million to $7,715.2 million, an increase of 51.8% over 2002. Total revenue in 2002 increased $1,208.5 million, or 31.2% to $5,082.6 million from $3,874.1 million in 2001. The increase in total revenue in 2003 and 2002 is due in part to increases in real estate and refinance activity as a result of decreasing interest rates. Further, the acquisitions of financial institution processing and outsourcing service companies, real estate information service companies and specialty insurance companies and the integration of these
operations into our core businesses in 2003 and increased realized gains on investments, also contributed to increased revenue in 2003.
Title insurance premiums increased 33.6% to $4,738.3 million in 2003. In 2002, title insurance premiums increased to $3,547.7 million from $2,694.5 million in 2001. These increases in 2003 and 2002 are due primarily to increases in resale and refinance activity as a result of the decline in interest rates through mid-year 2003. The increase in resale and refinance activity in 2003 and 2002 has been partially offset by a decrease in the average fee per file. The decrease in fee per file is consistent with the overall increased level of refinance activity experienced during 2003 and 2002. However, the overall decrease in fee per file was partially offset by increases in the fee per file in the second half of 2003 as mortgage interest rates rose, and the mix of business changed from a predominately refinance driven market to more of a resale driven market.
Revenues from financial institution processing and outsourcing services relate primarily to revenues from Fidelity Information Services, Inc. (“FIS”), which we acquired on April 1, 2003. As such, the results of operations of FIS are included in the Consolidated Financial Statements for the period from April 1, 2003, through December 31, 2003. See Note B of Notes to Consolidated Financial Statements. Also included are revenues from our Empower and SoftPro software products and revenues from our default management services, which include: foreclosure posting and publishing; loan portfolio services; field services; asset management services; electronic invoice management and land records. Revenues from financial institution processing and outsourcing services in 2003, 2002 and 2001 were $852.7 million, $118.1 million and $57.4 million, respectively. The 2003 increase in revenues is largely attributable to our acquisition of FIS on April 1, 2003, which generated $663.4 million in revenues from April 1, 2003 to December 31, 2003. In addition, default management revenue in 2003 increased $46.6 million to $152.3 million as a result of organic growth in the majority of our default businesses and the increasing number of defaults nationally in 2003 as compared with 2002. The increase in 2003 revenue is also the result of including a full year of revenue from Empower, which was acquired during November 2002. Revenues from financial institution processing and outsourcing services increased $60.7 million in 2002 over 2001. The increase in 2002 revenues is the result of growth in our default management services, particularly field services, loan portfolio services and asset management services.
Revenues from real estate information services generally trend closely with the level and mix of business, as well as the performance, of our title related subsidiaries. Revenues from real estate information services in 2003, 2002 and 2001 were $560.0 million, $372.0 million and $254.8 million, respectively. The 2003 increase in revenue is primarily the result of revenues from LSI, which we acquired in February 2003, increases in revenue from our real estate tax services, flood services, property data and disclosure services, and a full year of revenue from our mortgage
Net realized gains and losses for 2003, 2002 and 2001 were $106.4 million, $15.5 million and $9.8 million, respectively. Net realized gains in 2003 includes a $51.7 million realized gain as a result of InterActive Corp’s acquisition of Lending Tree Inc. and the subsequent sale of our Interactive Corp. common stock and a realized gain of $25.0 million on the sale of New Century Financial Corporation common stock. Also included in net realized gains for 2003 is an $8.9 million loss as a result of the disposal of assets in connection with the migration of data center operations from FNIS to FIS. See Note B of Notes to Consolidated Financial Statements.
The provision for claim losses includes an estimate of anticipated title and title related claims and escrow losses. The estimate of anticipated title and title related claims is accrued as a percentage of title premium revenue based on our historical loss experience and other relevant factors. We monitor our claims loss experience on a continual basis and adjust the provision for claim losses accordingly. During the second quarter of 2003, we increased our claim loss provision as a percentage of total title premiums to 5.5% to cover the expanded variety of title insurance products we offer. Our claim loss provision as a percentage of total title premiums was 5.4% in 2003 and 5.0% in 2002 and 2001.
We assumed LSI’s and ANFI’s outstanding reserve for claim losses in connection with their acquisitions in 2003.
rates. The decrease in interest expense in 2002 is attributable to the decrease in outstanding notes payable and the decline in interest rates.
As a result of adopting SFAS No. 142, we did not record goodwill amortization in 2003 and 2002. See Note A of Notes to Consolidated Financial Statements. Goodwill amortization was $54.2 million in 2001 and includes an $8.0 million pretax write-off associated with the discontinuance of two businesses in the fourth quarter of 2001.
Our two significant sources of internally generated funds are dividends and distributions from our subsidiaries. As a holding company, we receive cash from our subsidiaries in the form of dividends and as reimbursement for operating and other administrative expenses we incur. The reimbursements are executed within the guidelines of management agreements among us and our subsidiaries. Our insurance subsidiaries are restricted by state regulation in their ability to pay dividends and make distributions. Each state of domicile regulates the extent to which our title underwriters can pay dividends or make other distributions to us. As of December 31, 2003, $1,522.3 million of our net assets are restricted from dividend payments without prior approval from the Departments of Insurance. During 2004, our title subsidiaries can pay or make distributions to us of approximately $247.3 million. Our underwritten title companies, financial institution processing and outsourcing companies and real estate information service companies collect revenue and pay operating expenses. However, they are not regulated to the same extent as our insurance subsidiaries. Positive cash flow from these subsidiaries is invested primarily in cash and cash equivalents.
Financing. 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 the credit agreement is LIBOR plus 0.50%. As of December 31, 2003, $75.0 million was outstanding under our credit agreement and we have $625.0 million in borrowings available to us. 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, 2003, we are in compliance with all of our debt covenants.
Contractual Obligations. Our financing obligations generally include our credit agreement and other debt facilities and operating lease payments on certain of our premises and equipment. Our purchase obligations for business acquisitions relate to the acquisition of Hansen and Aurum in the first quarter of 2004 for approximately $34.0 million and $305.0 million, respectively, the definitive agreement we entered into for the purchase of APTIC for approximately $115.0 million and the merger agreement we entered into with Sanchez for approximately $175.0 million (see “Recent Developments”). As of December 31, 2003, our required annual payments relating to these contractual obligations are as follows:
Additional Minimum Pension Liability Adjustment. Discount rates that are used in determining our December 31, 2003 projected benefit obligation and 2004 net periodic pension costs were based on prevailing interest rates as of December 31, 2003. Similar to prior years, we looked at the Moody’s Aa corporate bond index at that date as an appropriate basis in determining the discount rate. A decrease in the discount rate used at December 31, 2003 resulted in an additional minimum pension liability adjustment. As such, we recorded a net-of-tax charge of $10.0 million to accumulated other comprehensive earnings (loss) in 2003 in accordance with Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions”.
Off-Balance Sheet Arrangements. We do not have any material off-balance sheet arrangements.
The accounting policies described below are those we consider critical in preparing our Consolidated Financial Statements. Certain of these policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of certain contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. See Note A of Notes to the Consolidated Financial Statements for a more detailed description of our significant accounting policies that have been followed in preparing our Consolidated Financial Statements.
Goodwill Recoverability. We have made acquisitions in the past that have resulted in a significant amount of goodwill. As of December 31, 2003 and 2002 goodwill was $1,926.5 million and $996.6 million, respectively. The majority of our goodwill as of December 31, 2002 relates to goodwill recorded in connection with the Chicago Title merger in 2000. The increase in goodwill from 2002 to 2003 is primarily from our acquisition of ANFI in March 2003, FIS in April 2003, and the acquisition of the minority interest of FNIS in September 2003. In connection with the acquisitions of Hansen and Aurum, which were completed in first quarter of 2004, APTIC, which we expect to close in the first quarter of 2004, and Sanchez, which we expect to close in April 2004, we anticipate that additional goodwill will be recorded. 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 at December 31, 2003 and have determined that each of our reporting units has a fair value in excess of its carrying value. Accordingly, no goodwill impairment has been recorded. Such analyses are particularly sensitive to changes in discount rates and investment rates. Changes to these rates might result in material changes in the valuation and determination of the recoverability of goodwill.
Reserve for Claim Losses. Our claim loss provision as a percentage of total title premiums was 5.4% in 2003 and 5.0% in 2002 and 2001. During 2003, we experienced unfavorable development of the prior years’ loss reserves as a result of a slight increase in loss payments during 2003 on previous policy years, resulting in an increase in estimated ultimate losses in previous policy years. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations” and Note I of Notes to Consolidated Financial Statements for a summary of our reserve for claim losses at December 31, 2003, 2002 and 2001. Our reserve for claim losses includes known claims as well as losses we expect to incur, net of recoupments. Each known claim is reserved based on our review as to the estimated amount of the claim and the costs required to settle the claim. Reserves for claims that are incurred but not reported 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 provision rates are reviewed periodically and adjusted by management as experience develops or new information becomes known. Our independent actuaries perform projections of required reserves periodically during the year and at year-end. We compare these projections to the recorded reserves to evaluate their adequacy. Our reserves for claim losses are within the range projected by our independent actuaries.
In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of Statement of Financial Accounting Standard No. 123” (“SFAS No. 148”). This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of Statement of Financial Accounting Standard No. 123 and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. In 2003, we have voluntarily adopted the fair value recognition provisions of SFAS No. 123, under the prospective method of transition as permitted by SFAS No. 148. See Note L of Notes to Consolidated Financial Statements.
During 2002, the FASB Emerging Issues Task Force reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 provides an accounting model for an approach to determine whether a vendor should divide an arrangement with multiple deliverables into separate units of accounting. EITF 00-21 requires an analysis of whether a delivered item has stand-alone value to the customer, whether there is objective and reliable evidence of fair value for the undelivered items, and whether delivery of the undelivered items is probable and substantially in control of the vendor if the arrangement includes a general right of return relative to the delivered item. Companies are required to adopt EITF 00-21 for fiscal periods beginning after June 15, 2003. Companies may apply EITF 00-21 prospectively to new arrangements initiated after the date of adoption or as a cumulative-effect adjustment. The adoption of EITF 00-21 did not have a material effect on our financial statements.
As of December 31, 2003, we adopted the disclosure provisions of Emerging Issues Task Force No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF No. 03-1”), which resulted in additional disclosures regarding our evaluation of impairment of debt and equity securities. Our disclosures in Note C of Notes to Consolidated Financial Statements incorporate the requirements of EITF No. 03-1.
The Consolidated Financial Statements for 2002 and 2001 were prepared using Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” to record stock-based employee compensation. As discussed in Note L to the Consolidated Financial Statements, effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to record stock-based employee compensation, applying the prospective method of adoption in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.”
Net of income tax benefit of $(6.4) million, $(10.2) million and $(7.6) million in 2003, 2002 and 2001, respectively.
Through its subsidiary, Fidelity Information Services, Inc. (“FIS”), which was acquired on April 1, 2003 (see Note B), the Company is a worldwide provider and one of the largest providers of information-based technology solutions and processing services to financial institutions and the mortgage and financial services industries in the United States.
The Company has five reporting segments: title insurance; financial institution processing and outsourcing; real estate information services; specialty insurance; and corporate and other. The title insurance segment consists of the Company’s title insurance underwriters and its 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. The financial institution processing and outsourcing segment consists primarily of the operations of FIS, which was acquired on April 1, 2003. This segment also includes the Company’s default management services, which include foreclosure posting and publishing services, loan portfolio services, field services and property management, as well as its Empower and Softpro software products. The real estate information services segment includes property appraisal services, credit reporting, exchange intermediary services in connection with real estate transactions, real estate tax services, property data and disclosure services, flood certification and monitoring, relocation services, multiple listing services and mortgage loan fulfillment services. The specialty insurance segment, consisting of the Company’s various non-title insurance subsidiaries, issues flood, home warranty and homeowners insurance policies. The corporate and other segment consists of the operations of the parent holding company and the operations of the Company’s wholly-owned equipment-leasing subsidiary.
The Company’s principal title 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 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.
The Company includes the accounts of its wholly-owned real estate information services subsidiary, Fidelity National Information Solutions, Inc. (“FNIS”), which was a majority-owned public subsidiary of the Company (NASDAQ: FNIS) until September 30, 2003. FNIS was formerly VISTA Information Solutions, Inc. (“Vista”), which merged with the Company’s majority-owned information services subsidiary, Micro General Corporation (“Micro General”), on July 9, 2002 (see Note B).
The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned and its former 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 became wholly-or majority owned.
The fair values of financial instruments presented in the applicable notes to the Company’s Consolidated Financial Statements are estimates of the fair values at a specific point in time using available market information and appropriate valuation methodologies. These estimates are subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. Therefore, the fair values presented are not
Direct financing leases which the Company has both the intent and ability to hold to maturity are classified as held to maturity. Direct financing leases originated principally for the purpose of selling in the near term are classified as available for sale and are stated at the lower of amortized cost or market as determined by outstanding commitments from investors or current investor-yield requirements calculated on an aggregate basis.
The Company establishes an allowance for credit losses to provide for expected losses in the Company’s existing portfolio of leases and leases transferred on a recourse basis. The allowance for credit losses is based on the Company’s historical and expected loss experience, industry knowledge and other economic factors. The ultimate obligation for defaults and delinquencies related to leases transferred on a recourse basis is measured and recorded at the time of transfer.
The carrying values reported in the Consolidated Balance Sheets for trade and notes receivables approximate their fair value. Included in trade receivables at December 31, 2003 are unbilled receivables totaling $61.6 million. The Company did not have any unbilled receivables at December 31, 2002. Notes receivable at December 31, 2003 and 2002 include $911 and $2.8 million, respectively, of notes from related parties.
Computer software development costs are accounted for in accordance with either SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” or with SOP No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” After the technological feasibility of the software has been established (for SFAS No. 86 software) or at the beginning of application development (for SOP 98-1 software), material software development costs, which include salaries and related payroll costs incurred during development, are capitalized. Purchased software is recorded at cost. Research and development costs incurred prior to the establishment of technological feasibility (for SFAS No. 86 software) or prior to application development (for SOP 98-1 software) of a product are expensed as incurred. The cost of capitalized software is amortized on a product-by-product basis commencing on the date of general release of the products for internally developed software and the date of purchase for purchased software.
At December 31, 2003 and December 31, 2002, capitalized software costs were $344.0 million, less accumulated amortization of $53.9 million and $127.7 million, less accumulated amortization of $19.2 million, respectively. The increase in capitalized software costs is due to our acquisition of FIS in April 2003 (see Note B).
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 I.
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 $671.9 million and $750.9 million at December 31, 2003 and 2002, respectively, representing customers’ assets held by us and corresponding assets including cash and investments pledged as security for those trust balances.
Title Segment. 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 considered complete. Agency title insurance premiums are recognized as revenue when policies are reported to the Company and are recorded as revenue on a gross basis (before the deduction of agent commissions). In addition, the Company accrues for unreported agency title insurance premiums based on historical reporting patterns of its agents and current trends.
Many of the Company’s contracts include a software license and one or more of the following services: development and implementation, conversion, programming, maintenance, application management and data processing. The Company uses contract accounting, as required by SOP 97-2, when the arrangement with the customer includes significant customization, modification, or production of software. The Company uses multiple element accounting required by SOP 97-2 and accounts for certain elements of the arrangement separately as the services are performed based on the element’s VSOE of fair value (i.e., maintenance and certain other services). For the one or more elements accounted for under SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” the Company uses the percentage-of-completion method since reasonably dependable estimates of revenue and contract hours applicable to various elements of a contract can be made. Changes in estimates for revenues, costs and profits are recognized in the period in which they are determinable. When the Company’s estimates indicate that the entire contract will be performed at a loss, a provision for the entire loss is recorded in that accounting period.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to all outstanding and unvested awards in each period (see Note L):
Certain reclassifications have been made in the 2002 and 2001 Consolidated Financial Statements to conform to the classifications used in 2003.
The Company acquired FIS for approximately $1,069.6 million (including the payment for certain working capital adjustments and estimated transaction costs), consisting of $794.6 million in cash and $275.0 million of the Company’s common stock. The Company funded the cash portion of the purchase price through the issuance of $250.0 million aggregate principal amount of 5.25% notes due March 15, 2013 (See Note G, and $544.6 million in available cash. The stock portion of the purchase price resulted in the issuance of 11,206,692 shares of the Company’s common stock to ALLTEL.
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 currently being finalized. Such purchase accounting adjustments may be refined as additional information becomes available. 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
Selected unaudited pro forma combined results of operations for the years ended December 31, 2003 and 2002, assuming the acquisition had occurred as of January 1, 2002, and using actual general and administrative expenses prior to the acquisition, are set forth below:
On January 27, 2004, the Company signed a merger agreement with Sanchez Computer Associates, Inc. (“Sanchez” - NASDAQ:SCAI), pursuant to which the Company will acquire all of the outstanding common stock of Sanchez for approximately $175.0 million. Under the terms of the merger agreement, total consideration for each share of Sanchez common stock will be $6.50, composed of $3.25 in cash and $3.25 in shares of the Company’s common stockSanchez stockholders will have the option to elect any combination of cash and stock, subject to proration such that the overall limitation for the consideration in the transaction will be 50% cash compensation and 50% compensation in the form of our common stock. The Company has entered into voting agreements to support the transaction with Sanchez stockholders holding in excess of 40% of the common stock vote. The transaction is
Sanchez develops and markets scalable and integrated software and services that provide banking, customer integration, outsourcing and wealth management solutions to financial institutions in several countries. Sanchez’ primary product offering is Sanchez Profile TM, a real-time, multi-currency, strategic core banking deposit and loan processing system that can be utilized on both an outsourced and in-house basis.
On October 27, 2003, the Company signed a definitive agreement to acquire American Pioneer Title Insurance Company (“APTIC”) for an estimated cash purchase price of $115.0 million, subject to certain equity adjustments. The transaction is subject to regulatory approvals and is expected to close in the first quarter of 2004. APTIC is a 45-state licensed title insurance underwriter with significant agency operations and computerized title plant assets in the state of Florida. APTIC will operate under the Company’s Ticor Title brand.
On September 30, 2003, the Company acquired the outstanding minority interest of FNIS, its majority-owned real estate information services public subsidiary, whereby FNIS became a wholly-owned subsidiary of the Company. In the acquisition, each share of FNIS common stock (other than FNIS common stock the Company already owned) was exchanged for 0.83 shares of the Company’s common stock. The Company issued 14,292,858 shares of its common stock to FNIS stockholders in the acquisition. The Company has allocated $154.8 million of the purchase price to goodwill and $88.9 million of the purchase price to other intangible assets and capitalized software based on preliminary studies and valuations that are being finalized. Such purchase accounting adjustments may be refined as additional information becomes available.
On March 31, 2003, the Company acquired Key Title Company (“Key Title”) for approximately $22.5 million in cash. Key Title operates in 12 counties in the state of Oregon.
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.
On May 23, 2002, the Company acquired a 75% interest in Homebuilders Financial Network, Inc., a provider of outsource mortgage loan fulfillment services to homebuilders, for approximately $21.0 million in cash.
On June 19, 2001 the Company acquired Risco, Inc. (“Risco”), a multiple listing service vendor in the United States, for approximately $12.0 million in cash. The acquisition was accounted for as a purchase.
The carrying amounts and fair values of the Company’s fixed maturity securities at December 31, 2003 and 2002 are as follows:
The change in unrealized gains (losses) on fixed maturities for the years ended December 31, 2003, 2002, and 2001 was $(22.4) million, $27.3 million and $2.6 million, respectively.
Net realized gains (losses) amounted to $106.4 million, $15.5 million and $9.8 million for the years ended December 31, 2003, 2002 and 2001, respectively. Included in 2003 net realized gains is a $51.7 million realized gain as a result of InterActive Corp’s acquisition of Lending Tree Inc. and the subsequent sale of the Company’s InterActive Corp common stock and a realized gain of $25.0 million on the sale of New Century Financial Corporation common stock. Included in 2002 net realized gains are other-than-temporary impairment losses of $11.3 million recorded on CKE Restaurants, Inc. during the fourth quarter of 2002 and $3.3 million recorded on MCI WorldCom bonds in the second quarter of 2002. Included in 2001 net realized gains is an other-than-temporary impairment loss of $4.4 million recorded on Enron Corporation bonds. All amounts are before applicable income taxes.
During the years ended December 31, 2003, 2002 and 2001, gross realized gains on sales of fixed maturity securities considered available for sale were $18.5 million, $26.1 million and $16.5 million, respectively; and gross realized losses were $2.2 million, $7.7 million and $7.3 million, respectively. Gross proceeds from the sale of fixed maturity securities considered available for sale amounted to $1,451.7 million, $776.9 million and $516.5 million during the years ended December 31, 2003, 2002 and 2001, respectively.
Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2003 were as follows:
The majority of the Company’s unrealized losses relate to its portfolio of corporate debt securities. The unrealized losses on corporate debt securities were caused by interest rate increases. Since the decline in fair value 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 Company’s outstanding notes payable, excluding lease-backed notes, approximated estimated fair value. The fair value of the Company’s unsecured notes payable is based on established market prices for the securities on December 31, 2003 and 2002. The fair value of the Company’s remaining fixed rate and variable rate notes payable is estimated using discounted cash flow analyses based on current market interest rates and comparison of interest rates being paid to the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
On November 5, 2003, the Company terminated its prior credit agreement, which provided for two distinct credit facilities:
Principal maturities at December 31, 2003, are as follows (dollars in thousands):
Three class action lawsuits were filed in June 2003 alleging breach of FNIS’ fiduciary duties in connection with the Company’s acquisition of the outstanding minority interest of FNIS. These actions have recently been consolidated and are pending in the Chancery Court of Delaware. FNIS has retained counsel to represent them and the named members of their board of directors, three of whom are also directors of the Company. These actions are not being actively prosecuted and the Company and FNIS believe the lawsuits are without merit.
The combined statutory capital and surplus of the Company’s title insurance subsidiaries was $930.3 million, $614.8 million and $514.7 million as of December 31, 2003, 2002 and 2001, respectively. The combined statutory earnings of the Company’s title insurance subsidiaries were $480.0, $162.6 million and $162.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Pursuant to statutory requirements of the various states in which the Company’s title insurance subsidiaries are domiciled, they must maintain certain levels of minimum capital and surplus. Each of the Company’s title underwriters has complied with the minimum statutory requirements as of December 31, 2003.
On January 24, 2001, the Company issued 13,393,188 shares of its common stock at a public offering price of $20.14 per share. Proceeds from this offering, net of underwriting discounts and commissions and other related expenses, were $256.3 million. Net proceeds were primarily used to pay down existing indebtedness.
In 1987, stockholders approved the adoption of an Employee Stock Purchase Plan (“ESPP”). Under the terms of the ESPP and subsequent amendments, eligible employees may voluntarily purchase, at current market prices, shares of the Company’s common stock through payroll deductions. Pursuant to the ESPP, employees may contribute an amount between 3% and 15% of their base salary and certain commissions. The Company contributes varying amounts as specified in the ESPP. During the years ended December 31, 2003, 2002 and 2001, 1,315,065, 980,837 and 1,094,742 shares, respectively, were purchased and allocated to employees, based upon their contributions, at an average price of $27.46, $20.57 and $16.03 per share, respectively. The Company contributed $9.2 million or the equivalent of 336,234 shares for the year ended December 31, 2003; $7.5 million or the equivalent of 366,765 shares for the year ended December 31, 2002 and $5.3 million or the equivalent of 327,198 shares for the year ended December 31, 2001 in accordance with the employer’s matching contribution.
The Company offers the Fidelity National Financial, Inc. 401(k) Profit Sharing Plan (“401(k) Plan”), a qualified voluntary contributory savings plan, available to substantially all Fidelity employees. Eligible employees may contribute up to 15% of their pretax annual compensation, up to the amount allowed pursuant to the Internal Revenue Code. The Company matches 50% of each dollar of employee contribution up to six percent of the employee’s total compensation. The Company’s cost for the 401(k) Plan for the years ended December 31, 2003, 2002 and 2001 was $22.3 million, $17.5 million and $13.9 million, respectively.
During 1998, stockholders approved the adoption of the 1998 Stock Incentive Plan (“1998 Plan”). The 1998 Plan authorizes up to 9,985,828 shares of common stock, plus an additional 366,025 shares of common stock on the date of each annual meeting of the stockholders of the Company, for issuance under the terms of the 1998 Plan. As of December 31, 2003, there were 5,391,686 options outstanding under this plan. The 1998 Plan provides for grants of “incentive stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options and rights to purchase shares of common stock (“Purchase Rights”). The term of options may not exceed 10 years from the date of grant (five years in the case of a person who owns or is deemed to own more than 10% of the total combined voting power of all classes of stock of the Company), and the right to exercise such options shall vest equally over three years. The option exercise price for each share granted pursuant to an incentive stock option may not be less than 100% of the fair market value of a share of common stock at the time such option is granted (110% of fair market value in the case of an incentive stock option granted to a person who owns more than 10% of the combined voting power of all classes of stock of the Company). There is no minimum purchase price for shares of common stock purchased pursuant to a Purchase Right, and any such purchase price shall be determined by the Board of Directors.
portion of the Restricted Shares vest over a five-year period and a portion of the Restricted Shares vest over a four-year period, of which one-fifth vested immediately on the date of grant. The Company recorded compensation expense of $3.3 million and unearned compensation expense of $23.0 million in connection with the issuance of Restricted Stock in 2003. The Company used 769,450 shares of its common stock held as treasury shares and 110,000 newly issued common shares for the sale of Restricted Shares to its employees.
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, 2003, there were 605,527 options outstanding under these plans.
In connection with the acquisition of FNIS, the Company assumed 2,585,387 options outstanding under FNIS’ existing option plans: the Fidelity National Information Solutions 2001 Stock Incentive Plan, the Vista Information Solutions, Inc. 1999 Stock Option Plan, the Micro General Corporation 1999 Stock Incentive Plan and the Micro General Corporation 1998 Stock Incentive Plan. The options granted under these plans generally had a term of 10 years. As of December 31, 2003, there were 2,311,650 options outstanding under these plans.
Transactions under all stock option plans, including stock options granted by the Company’s Board of Directors which are outside of the Company’s stock option plans, are as follows:
Pro forma information regarding net earnings and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for all of its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions. The risk free interest rates used in the calculation are the rate that corresponds to the weighted average expected life of an option. The risk free interest rate used for options granted during 2003, 2002 and 2001 was 2.0%, 2.0% and 4.3%, respectively. A volatility factor for the expected market price of the common stock of 43%, 44% and 47% were used for options granted in 2003, 2002 and 2001, respectively. The expected dividend yield used for 2003, 2002 and 2001 was 1.4%, 1.3% and 1.5%, respectively. A weighted average expected life of 3.5 years, 3.25 years and 5.0 years was used for 2003, 2002 and 2001, respectively. The weighted average fair value of each option granted during 2003, 2002 and 2001 was $10.57, $6.39 and $6.75, respectively.
The net pension liability included in accounts payable and accrued liabilities as of December 31, 2003 and 2002 is $54.2 million and $44.9 million, respectively. The net pension liability at December 31, 2003 and 2002 includes the additional minimum pension liability adjustment of $16.4 million and $26.1 million, respectively, which was recorded as a net of tax charge of $10.0 million and $15.9 million to accumulated other comprehensive earnings (loss) in 2003 and 2002 in accordance with SFAS No. 87.
The components of net periodic (income) expense included in the results of operations for 2003, 2002 and 2001 are as follows:
The expected long term rate of return on plan assets was 8.5% in 2003 and 9.0% in 2002 and 2001, 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 Company’s pension plan asset allocation at December 31, 2003 and 2002 and target allocation for 2004 are as follows:
The Company’s funding policy is to contribute annually at least the minimum required contribution under the Employee Retirement Income Security Act (ERISA). Contributions are intended to provide not only for benefits accrued to date, but also for those expected to be earned in the future. In 2003 and 2002, the Company made contributions of $12.2 million and $13.6 million, respectively. Due to regulatory requirements, the Company is not required to make a contribution to the pension plan in 2004. The Company has not yet determined if a voluntary contribution to the plan will be made in 2004.
The accrued cost of the accumulated postretirement benefit obligation included in the Company’s Consolidated Balance Sheets at December 31, 2003, 2002 and 2001 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 benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In accordance with FASB Staff Position FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” the Company has elected to defer recognition of the effects of the Act in any measures of the benefit obligation or cost. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information. Currently, the Company does not believe it will need to amend its plan to benefit from the Act. The measurement date used to determine pension and other postretirement benefit measures for the pension plan and the postretirement benefit plan is December 31.
The Company’s postretirement health care and life insurance costs included in the results of operations for 2003, 2002 and 2001 are as follows:
N. Financial Instruments with Off-Balance Sheet Risk and Concentration of Risk
In the normal course of business the Company and certain of its subsidiaries enter into off-balance sheet credit risk associated with certain aspects of its title insurance business and other activities. The Company has various guarantees for agent loans totaling $948 as of December 31, 2003.
The Company generates a significant amount of title insurance premiums in California and Texas. In 2003, 2002 and 2001, California and Texas accounted for 25.0% and 11.1%, 25.2% and 12.1% and 24.8% and 13.4% of total title premiums, respectively.
As of and for the year ended December 31, 2002 (dollars in thousands):
This segment consists of the operations of FIS, which was acquired on April 1, 2003. See Note B. FIS provides information-based technology solutions and processing services to the mortgage and financial services industries. This segment also includes our default management services, which include foreclosure posting and publishing services, loan portfolio services, field services and property management, as well as our Empower and Softpro software products.
The corporate segment consists of the operations of the parent holding company and the Company’s leasing operations, as well as the issuance and repayment of corporate debt obligations. Included in the corporate and other segment for the year ended December 31, 2003 is $1.6 million in pre-tax expenses relating to the relocation of the Company’s corporate headquarters to Jacksonville, Florida, pursuant to SFAS No. 146. See Note A.
June 15, 2003. Companies may apply EITF 00-21 prospectively to new arrangements initiated after the date of adoption or as a cumulative-effect adjustment. The adoption of EITF 00-21 did not have a material effect on the Company’s financial statements.
In December 2003, Financial Accounting Standards Board Statement No. 132 (revised), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” (“SFAS No. 132”) was issued. SFAS No. 132 (revised) prescribes employers’ disclosures about pension plans and other postretirement benefit plans; it does not change the measurement or recognition of those plans. The Statement retains and revises the disclosure requirements contained in the original Statement 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. SFAS No. 132 (revised) is effective for fiscal years ending after December 15, 2003. The Company’s disclosures in Note L incorporate the requirements of SFAS No. 132 (revised).