As of December 31, 1997, the Company leased office and storage spaces as follows:
The historical operating results data, per share data and balance sheet data set forth below are derived from the Consolidated Financial Statements of the Company. Per share data has been retroactively adjusted for stock dividends and splits since the Company's inception. The Consolidated Financial Statements for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 have been audited by KPMG Peat Marwick LLP, independent certified public accountants. Audited Consolidated Balance Sheets at December 31, 1997 and 1996 and Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for the years ended December 31, 1997, 1996, and 1995, and Notes thereto are included elsewhere herein and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
(5) On July 3, 1997, the Company converted an outstanding note balance in conjunction with the exercise of warrants into a 51% ownership interest of National Alliance Marketing Group ("National Alliance"), subject to certain regulatory approvals. The selected financial data above includes the Company's
interest in the balance sheet accounts of National Alliance at December 31, 1997 and the Company's interest in the results of operations for the period from July 3, 1997 through December 31, 1997.
On August 22, 1997, the Company acquired First Title Corporation ("First Title"). The selected financial data above includes the balance sheet accounts of First Title at December 31, 1997 and the results of its operations for the period from August 22, 1997 through December 31, 1997.
The Company acquired Ifland Credit Services ("ICS") on September 18, 1997. The selected financial data above includes the balance sheet accounts of ICS at December 31, 1997 and the results of its operations for the period from September 18, 1997 through December 31, 1997.
(6) During 1997, the Company recognized an extraordinary loss of $1.7 million, net of related income taxes of $1.1 million, related to the early retirement of $45 million maturity value of the Company's LYONs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Extraordinary Item and Recent Developments."
(8) Average fee per file is based upon title insurance premiums, escrow fees and certain other title-related fees from direct operations divided by orders closed.
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. Other factors affecting real estate activity include demand, mortgage interest rates, family income levels and general economic conditions. While the level of sales activity was relatively depressed in certain geographical areas during the period 1991 through mid-1993, lower mortgage interest rates beginning in the latter part of 1991 triggered an increase in refinancing activity which continued at record levels through 1993 and into the first quarter of 1994. During 1994 and early 1995, steady interest rate increases caused by actions taken by the Federal Reserve Board resulted in a significant decline in refinancing transactions and a stagnation in residential resales and new home sales. Since late 1995, decreases in mortgage interest rates and the resulting improvement in the real estate market have had a favorable effect on the level of real estate activity, including refinancing transactions, new home sales and resales. The overall economic environment, stable mortgage interest rates and strength in the real estate market, especially in California and on the West Coast, contributed to very positive conditions for the industry throughout 1996 and 1997 and into the first quarter of 1998. It is impossible to predict in what future direction interest rates and the real estate market may move or fluctuate.
The following table sets forth information regarding title-related revenue derived from direct operations and title-related revenue derived from agency operations:
Favorable mortgage interest rates in the latter part of 1991 through early 1994 triggered refinancing activity at record levels. Beginning in early 1994 through mid-1995, steady interest rate increases caused by actions taken by the Federal Reserve Board resulted in a significant decline in refinancing transactions and a stagnation in residential resales and new home sales. Title orders and requests for title-related services followed the market trend as expected. Since late 1995, decreases in mortgage interest rates and the resulting improvement in the real estate market have had a positive impact on the level of real estate activity, order counts and closed orders. The overall economic environment, stable mortgage interest rates in the seven percent range and strength in the real estate market, especially in California, the Company's strongest market, and on the West Coast, were positive factors through 1996 and 1997 and into the first quarter of 1998. These factors and the Company's acquisition of Nations Title Inc., which was completed on April 1, 1996, have resulted in title premiums of $533.2 million, $476.0 million and $285.6 million, for 1997, 1996 and 1995, respectively. The difference in title insurance premiums between 1997 and 1996 of $57.2 million represents an increase of 12.0%. Title insurance premiums increased $190.4 million, or 66.7%, in 1996 from 1995.
The Company's direct operations generate escrow fees from holding funds and documents in connection with the closing of real estate transactions, as well as real estate information and technology service fees, trustee sale guarantee fees, credit reporting fees, attorney service fees, flood certification fees, tax monitoring fees, reconveyance fees, recording fees, foreclosure publishing and posting service fees and exchange intermediary service fees in connection with real estate transactions.
EXPENSES. The following table presents the components of the Company's expenses:
The Company's operating expenses primarily consist of personnel costs and other operating expenses which are incurred as title insurance orders are received and processed. Direct title insurance premiums and
escrow fee revenue are recognized as income at the time the underlying real estate transaction closes. As a result, revenue lags approximately 60-90 days behind expenses and therefore gross margins may fluctuate.
Personnel costs include both base salaries and commissions (direct operations) paid to employees and are the most significant operating expense incurred by the Company. These costs generally fluctuate with the level of orders opened and closed and with the mix of revenue between direct and agency operations. Personnel costs totalled $240.2 million, $211.7 million and $165.5 million for the years ended December 31, 1997, 1996 and 1995, respectively. See "Overview" and "Revenue." Personnel costs, as a percentage of total revenue, have decreased to 32.2% from 33.2% in 1996, which had previously decreased from 40.4% in 1995.
The period over period fluctuations in personnel costs and other operating expenses are primarily the result of the fluctuations in total revenue, the impact of the continued implementation of the Company's proprietary title and escrow related technology on productivity and efficiency, as well as the changes in the direct operation and agency operation title premium mix and the effect of the newly acquired ancillary service companies on personnel and other operating expenses. Additionally, the sale of ATC has shifted certain costs from personnel and other operating expenses to commissions.
1996, as well as a decrease in premiums retained by the Company on a year over year basis. Commission rates paid to ATC are higher than average commission rates paid to the 1996 agent base. The 1996 increase in agent commissions as a percentage of agency premiums over 1995, resulting in a decrease in the percentage of agency premiums retained by the Company, is attributable to the fact that the average commissions paid to agents acquired in the Nations Title Inc. acquisition exceed those paid to the former agent base. The combination of higher agency commission rates and the significant agency revenue generated since the sale of ATC and by the Nations Title Inc. acquisition have resulted in higher overall commissions in 1997 and 1996.
The provision for claim losses includes an estimate of anticipated title claims and major claims. The estimate of anticipated title claims is accrued as a percentage of title premium revenue based on the Company's historical loss experience and other relevant factors. The Company monitors its claims experience on a continual basis and adjusts the provision for claim losses accordingly. Based on Company loss development studies, the Company believes that as a result of its underwriting and claims handling practices, as well as the refinancing business of prior years, the Company will maintain the trend of favorable claim loss experience. Based on this information, in 1997, 1996 and 1995, the Company recorded a provision for claim losses of 7.0% of title insurance premiums prior to major claim expense, net of recoupments and the impact of premium rates and Company loss experience in the state of Texas. Premiums are generally higher in Texas for similar coverage than in other states, while loss experience is comparable. As a result, losses as a percentage of premiums are lower. These factors resulted in a net provision for claim losses of 7.3%, 7.0% and 6.7% in 1997, 1996 and 1995, respectively.
Interest expense is incurred by the Company in financing its capital asset purchases and certain acquisitions. Interest expense consists of interest related to the Company's outstanding debt and the amortization of original issue discount and debt issuance costs related to the Liquid Yield Option Notes due 2009 ("LYONs") issued in February 1994. Interest expense on non-LYONs debt totalled $4.1 million, $4.2 million and $4.3 million for the years 1997, 1996 and 1995, respectively. The LYONs-related component of interest expense amounted to $5.3 million, $5.2 million and $4.9 million for 1997, 1996 and 1995, respectively. Interest expense was comparable over the three-year period primarily as a result of slightly more favorable interest rates related to outstanding non-LYONs debt, offset by an increase in the LYONs component of interest expense. See "Extraordinary Item and Recent Developments."
EXTRAORDINARY ITEM. In an effort to reduce the leverage of the Company while taking advantage of the favorable environment relative to the Company's common stock, on October 17, 1997, the Company, in a private transaction, purchased $45 million aggregate principal amount at maturity of its outstanding Liquid Yield Option Note due 2009 from Merrill Lynch, Pierce, Fenner & Smith Incorporated for an aggregate purchase price of $27.2 million (or $605 per $1,000 principal amount at maturity of LYONs), which exceeded the accreted value recorded by the Company pursuant to the LYONs Indenture at that date. The purchase price was paid in the form of 1,267,619 shares, $26.4 million, of the Company's common stock and $790,000 in cash. The purchase of the LYONs increased stockholders' equity by approximately $24.7 million while reducing outstanding debt by approximately $24.3 million. An extraordinary loss due to the early retirement of debt of approximately $1.7 million, net of applicable income taxes, related to this transaction has been recorded in the Consolidated Statement of Earnings for the year ended December 31, 1997. See "Recent Developments."
In order to reduce interest expense incurred and interest rates paid, the Company prepaid the Senior Secured Notes (the "Senior Notes") issued in March 1993. Pursuant to the terms and conditions of the Senior Note Agreement, the Company provided for the Make Whole Provision, as defined, and related expenses in 1995. This amount, $813,000, net of applicable income taxes, has been reflected as an extraordinary item in the Consolidated Statements of Earnings for the year ended December 31, 1995.
For purposes of satisfying insurance regulatory requirements, the Company is required to maintain certain levels of readily marketable securities and other liquid assets. At December 31, 1997, the fair value of the Company's total investment securities was approximately $326.3 million. These investments consist of securities which the Company believes are readily marketable and could be liquidated if necessary. See "Business -- Investment Policies and Investment Portfolio."
On September 21, 1995, the Company obtained a $35 million credit facility with a banking syndicate led by Chase Manhattan Bank N.A. The facility includes a $22 million term loan and a $13 million revolving credit facility. The $22 million term loan was used to refinance higher rate indebtedness and for general corporate purposes. $5 million of the $13 million revolving credit facility was used to fund a portion of the Nations Title Inc. acquisition and the remainder was available for general corporate purposes. This credit facility was terminated and paid subsequent to year end with proceeds from a new credit facility containing terms more favorable to the Company. See Note G of Notes to Consolidated Financial Statements.
In February 1994, the Company issued zero coupon, convertible subordinated Liquid Yield Option Notes due February 2009 at an interest rate of 5.5% with a principal amount at maturity of $235,750,000. Net proceeds to the Company were approximately $101,000,000. The proceeds were used for investment and general corporate purposes, including the repurchase of treasury shares. See "Recent Developments" and Note G of Notes to Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS. In March 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), effective for fiscal years ending after December 15, 1997. SFAS 128 introduces and requires the presentation of "basic" earnings per share which represents net earnings divided by the weighted average shares outstanding excluding all common stock equivalents. Dual presentation of "diluted" earnings per share, reflecting the dilutive effects of all common stock equivalents, is also required. The diluted presentation is similar to the former presentation of fully diluted earnings per share. All quarterly and annual per share data have been restated to reflect the impact of SFAS 128. The adoption of SFAS 128 did not have a material impact on the Consolidated Financial Statements of the Company.
and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the revenues derived from the enterprise's products or services and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. Management has not determined whether the adoption of SFAS 131 will have a material impact on the Company's financial reporting.
On November 1, 1996, the Company acquired 80% of the outstanding stock of CRM, Inc. ("CRM") for a purchase price of $3.5 million, $1.0 million in cash and 191,169 shares, $2.5 million, of the Company's common stock. CRM provides real estate information services with a heavy concentration in the areas of tax services and flood certification. The Company combined its existing tax service business with that of CRM. Under certain circumstances the Company can purchase the remaining 20% of the outstanding stock of CRM. CRM, Inc. now operates as Fidelity National Tax Service, Inc. This transaction has been accounted for as a purchase. See Note B of Notes to Consolidated Financial Statements.
Effective July 1, 1997, the Company sold a majority interest (60%) of its subsidiary American Title Company ("ATC"), an underwritten title company, to certain members of ATC's management. ATC will function as an exclusive agent of the Company. The sale price of the 60% interest was $6.0 million resulting in a realized gain of approximately $1.3 million before applicable income taxes.
Effective as of October 1, 1997, the Company acquired Bron Research, Inc. ("BRON"), a flood certification company headquartered in Austin, Texas. The purchase price paid by the Company for the acquisition was $9.85 million, paid in 523,272 shares of Company common stock. BRON now operates as Fidelity National Flood, Inc. This transaction has been accounted for as a pooling-of-interests. See Note B of Notes to Consolidated Financial Statements.
On October 9, 1997, the Company acquired the common stock of Credit Reports, Inc. ("CRI"), a credit reporting company headquartered in Scottsdale, Arizona, with operations in California, Colorado, Nevada and Oregon. CRI has been merged with ICS. The purchase price for CRI was $200,000, subject to certain purchase price adjustments based on the combined equity of CRI and Express Network, Inc., its affiliate, payable in 11,455 shares of Company common stock. This transaction has been accounted for as a purchase. See Note B of Notes to Consolidated Financial Statements.
On October 21, 1997, the Company acquired 100% of the common stock of Classified Credit Data, Inc. ("CCD") a credit reporting company headquartered in Orange County, California, for a purchase price of $300,000 which was paid in cash. CCD was merged with ICS and CRI in order to form Fidelity National Credit Services. This transaction has been accounted for as a purchase.
Effective October 23, 1997, the Company sold its small business investment company subsidiary FNF Ventures, Inc., to certain members of FNF Ventures, Inc.'s management. The sale price was $2.8 million, resulting in a realized gain of approximately $800,000, before applicable income taxes.
On November 17, 1997, Fidelity National Financial, Inc. signed an Agreement and Plan of Merger ("Merger Agreement") to merge a newly-formed subsidiary of the Company into Granite Financial, Inc. ("Granite"). Granite, located in Golden, Colorado, is a rapidly expanding speciality finance company engaged in the business of originating, funding, purchasing, selling, securitizing and servicing equipment leases for a broad range of businesses located throughout the United States. Granite is a prominent consolidator in the $48 billion small-ticket lease finance market with the acquisitions of Global Finance & Leasing in March, 1997; SFR Funding, Inc., in June, 1997; and North Pacific Funding, Inc. (dba C&W Leasing), a privately held corporation based in Seattle, Washington, and its wholly-owned subsidiary, in December, 1997.
Also, on March 25, 1998, the Company announced that it had executed an agreement to merge Matrix Capital Corporation ("Matrix") with a newly-formed subsidiary of the Company. The merger is subject to due diligence, regulatory approvals and other customary conditions, and requires approval of the merger by the
Under the terms of the definitive agreement, each share of Matrix stock will be converted into the right to receive .80 shares of Company common stock without interest, together with cash in lieu of any fractional share. The exchange ratio has been collared between $28.75 and $35.00 per Company share. The market value is to be determined based on the average closing price of Company stock during the 20 day trading period ending on the third business day immediately prior to the last of the stockholders' meetings held to approve the transaction (the "Average Stock Price"). Below $28.75 the Company may make up the difference in additional shares at its option and above $35.00 the exchange ratio would be adjusted to a number equal to $28.00 plus fifty percent of the amount by which the Average Stock Price exceeds $35.00 divided by the Average Stock Price. It is intended that the merger be treated as a reorganization pursuant to Section 368(a)(1) of the Internal Revenue Code and be accounted for as a "pooling-of-interests." See Note O of Notes to Consolidated Financial Statements.
INFLATION. To the extent real estate prices or mortgage interest rates increase due to inflationary factors, the Company's title insurance premium revenue generally increases because premiums are determined in part by the value of property or the amount of the mortgage loan. The Company's personnel costs and other operating expenses are also sensitive to inflation.
Los Angeles, California February 16, 1998, except as to Note O of the Consolidated Financial Statements, which is as of March 25, 1998
The Company's principal subsidiaries consist of Fidelity National Title Insurance Company ("Fidelity Title"), which, in turn, is the parent company of Fidelity National Title Insurance Company of Tennessee ("Fidelity Tennessee"), and was the parent company of Fidelity National Title Insurance Company of California ("Fidelity California"), which was merged into Fidelity Title as of August 7, 1997, and was the parent company of Nations Title Insurance Company ("Nations Title"), which was merged into Fidelity Title as of December 29, 1997; Fidelity National Title Insurance Company of New York ("Fidelity New York"), which, in turn, is the parent company of Nations Title Insurance of New York Inc. ("Nations New York") and National Title Insurance of New York Inc. ("National"); Fidelity National Title Insurance Company of Pennsylvania ("Fidelity Pennsylvania"), which was merged into Fidelity New York as of April 11, 1997, which in turn, was the parent company of American Title Insurance Company ("ATIC"), which was merged into Fidelity Pennsylvania as of November 21, 1996; (collectively, the "Insurance Subsidiaries"); its wholly-owned underwritten title companies (collectively, the "UTCs"); and its network of wholly-owned title-related ancillary service companies known as Fidelity's Lender Express Network ("FLEXNet").
Title plants are recorded at the cost incurred to construct or obtain and organize historical title information to the point it can be used to perform title searches. Costs 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. Sales of title plants are reported at the amount received net of the adjusted costs of the title plant sold. Sales of title plant copies are reported at the amount received. No cost is allocated to the sale of copies of title plants unless the value of the title plant is diminished.
amounts greater than $500,000 are reserved for as they become known because the unique circumstances surrounding most major claims make it inherently impractical to predict the incidence and amount of such claims. The occurrence of a significant major claim in any given period could have a material adverse effect on the Company's financial condition and results of operations for such period. Escrow losses are expensed when they become known and are included in other operating expenses. See Note I.
In the ordinary course of business, the Company reinsures certain risks with other insurers for the purpose of limiting its maximum loss exposure and also assumes reinsurance for certain risks of other insurers for the purpose of earning additional revenue. The Company cedes or assumes a portion of certain policy liabilities under agent fidelity, excess of loss and case-by-case reinsurance agreements. Reinsurance agreements provide that in the event of a loss (including costs, attorneys' fees and expenses) exceeding the retained amounts, the reinsurer is liable for the excess amount assumed. However, the ceding company remains primarily liable in the event the reinsurer does not meet its contractual obligations. Reinsurance activity is not considered significant.
On December 13, 1995, the Company declared a 10% stock dividend, to shareholders of record on January 15, 1996, distributed February 2, 1996. The par value of the additional shares of common stock issued in connection with the stock dividend was credited to common stock and a like amount charged to retained earnings as of December 31, 1995. Fractional shares were paid in cash.
On December 17, 1997, the Company declared a 10% stock dividend, to shareholders of record on December 29, 1997, distributed January 14, 1998. The par value of the additional shares of common stock issued in connection with the stock dividend was credited to common stock and a like amount charged to retained earnings as of December 31, 1997. 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 and Notes thereto have been retroactively adjusted to reflect all stock dividends and splits.
calculated by dividing net earnings available to common shareholders plus the impact of assumed conversions by dilutive potential securities. The Company has granted certain options and warrants which have been treated as common share equivalents for purposes of calculating diluted earnings per share. The Liquid Yield Option Notes ("LYONs") are considered other dilutive securities for purposes of calculating diluted earnings per share to the extent that they are not antidilutive.
The following table sets forth the calculation of basic and diluted earnings per share for each of the years in the three-year period ended December 31, 1997:
On September 18, 1997, the Company acquired the common stock of Ifland Credit Services ("ICS"), a credit reporting company headquartered in Lexington, Kentucky, for a purchase price of $3.75 million. ICS has been merged with Credit Reports, Inc. ("CRI") and Classified Credit Data, Inc. ("CCD") in order to form Fidelity National Credit Services. The purchase price was payable 80% in common stock of the Company (170,155 shares or $3.0 million) and 20% cash ($750,000). This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Ifland Credit Services acquisition were as follows (dollars in thousands):
Effective as of October 1, 1997, the Company acquired Bron Research, Inc. ("BRON"), a flood certification company headquartered in Austin, Texas. The purchase price paid by the Company for the acquisition was $9.85 million, paid in 523,272 shares of Company common stock. BRON now operates as Fidelity National Flood, Inc. This transaction has been accounted for as a pooling-of-interests. BRON's financial position and results of operations as of and for the year ended December 31, 1997 are included in the Consolidated Financial Statements. Prior to 1997, BRON's financial position and results of operations were insignificant, and as such, the Consolidated Financial Statements have not been restated.
Also on October 9, 1997, the Company acquired the common stock of Express Network, Inc. ("ENI"), a provider of attorney services such as courier, messenger, courthouse filing, process serving, investigation and reprographics. ENI provides services to legal firms in Los Angeles, Orange County, San Diego, Riverside and San Francisco, California. The purchase price for ENI was $10.55 million; subject to certain purchase price adjustments based on the combined equity of ENI and CRI, its affiliate, payable in 50% common stock of the Company (302,158 shares or $5.275 million) and 50% cash (approximately $5.275 million). Approximately $2.8 million of the cash portion of the purchase price will be paid in equal installments over a four-year period. This transaction has been accounted for as a purchase.
Selected unaudited pro forma combined results of operations for the years ended December 31, 1997, 1996 and 1995, assuming the Nations Title Inc. and Fidelity National Tax acquisitions occurred on January 1, 1997, 1996 and 1995, and assuming the National Alliance, First Title, ICS, CRI, ENI and CCD acquisitions occurred on January 1, 1997 and 1996, are presented as follows:
The change in unrealized gains (losses) on fixed maturities for the years ended December 31, 1997, 1996, and 1995 was $4,695,000, $(3,255,000) and $13,025,000, respectively.
The amortized cost and estimated fair value of fixed maturity securities, which are classified as available for sale at December 31, 1997, by contractual maturity, are shown as follows. Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties:
During the years ended December 31, 1997, 1996 and 1995, gross realized gains on sales of fixed maturity securities considered available for sale were $735,000, $452,000 and $1,700,000, respectively; and gross realized losses were $429,000, $714,000 and $1,331,000, respectively. Gross proceeds from the sale of fixed
The allowance for doubtful receivables is primarily related to promissory notes at December 31, 1997 and 1996. Interest income is not recognized on the Company's non-performing notes receivable.
The carrying amounts and estimated fair values of the Company's notes receivable were as follows at December 31, 1997 and 1996 (dollars in thousands):
At December 31, 1997 and 1996, the Company had a 92.5% and a 76.3% interest in real estate partnerships which are consolidated with the Company.
During 1997, the Company sold an investment in real estate at a purchase price that approximated book value.
On October 17, 1997, the Company in a private transaction, purchased $45 million aggregate principal amount at maturity of its outstanding Liquid Yield Option Notes due 2009 from Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") for an aggregate purchase price of $27.2 million (or $605 per $1,000 principal amount at maturity of LYONs). The purchase price was paid in the form of 1,267,619 shares, $26.4 million, of the Company's common stock (the "Exchange Shares"). The Company also paid Merrill Lynch, the excess of a base price of $21.48 per Exchange Share over the actual sales price (less $0.05 per share in commissions) realized by Merrill Lynch for sales of up to 552,619 Exchange Shares. The Company also paid Merrill Lynch, for each day, an amount in cash to be determined by multiplying the Net Carry Amount (number of Exchange Shares multiplied by $21.48) by the Applicable Rate (LIBOR plus 2.50%). The Company's payment obligations were subject to reduction for dividends on Exchange Shares received by Merrill Lynch during the period. The Company paid the foregoing amounts to Merrill Lynch in cash of approximately $790,000 on November 7, 1997. The purchase of the LYONs increased stockholders' equity by approximately $24.7 million while reducing outstanding debt by approximately $24.3 million. Additionally, an extraordinary loss due to the early retirement of debt of approximately $1.7 million, net of applicable income taxes, was recorded in the fourth quarter of 1997. The maturity value of LYONs outstanding at December 31, 1997 is approximately $140.6 million.
The carrying amounts and estimated fair values of the Company's notes payable were as follows at December 31, 1997 and 1996 (dollars in thousands):
Total income tax expense (benefit) for the years ended December 31, 1997, 1996 and 1995 was allocated as follows:
The Company's 1990 through 1994 Federal income tax returns are currently under examination by the Internal Revenue Service. Based on information currently available, management does not believe the outcome of these examinations will have a material impact on the financial condition or results of operations of the Company.
Effective January 1996, the Company extended the term of an employment agreement with its Chief Executive Officer for an additional period of five years through March 31, 2001. Under this extension, he is to receive a minimum annual base salary and an annual bonus based on the Company's performance. In addition, the Board of Directors may grant the Chief Executive Officer an annual merit bonus in cash or common stock based on his individual performance during each year of the extension.
Effective January 1, 1996, the Company entered into one year employment agreements with four of its key executives, whereby each was to receive a minimum annual base salary and an annual bonus based on the Company's performance. Bonuses in the form of cash or Common Stock could be paid to the executives at the discretion of the Compensation Committee of the Board of Directors. Certain terms of these contracts were subsequently amended/revised effective January 1, 1997 and April 1, 1997. Additionally, effective September 15, 1997, the Company entered into a three year employment agreement with a fifth key executive. Terms and conditions of the fifth executive's contract are similar to the other four.
Rent expense incurred under operating leases during the years ended December 31, 1997, 1996 and 1995 was $24,929,000, $23,413,000 and $21,388,000, respectively. Included in rent expense for 1997, 1996 and 1995 is $523,000 paid to related parties.
Statutorily calculated net worth determines the maximum insurable amount under any single title insurance policy. As of January 1, 1998, the Company's self-imposed single policy maximum insurable amounts, which comply with all statutory limitations, for Fidelity Title, Fidelity New York and Fidelity Tennessee were $42.0 million, $80.0 million and $6.0 million, respectively. The self-imposed single policy maximum insurable amounts for Nations New York and National are $20.0 million and $6.7 million, respectively.
The 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. In the case of Fidelity Title, the total amount of dividends made in any twelve-month period may not exceed the greater of 10% of the surplus as regards policyholders as of the last day of the preceding year or net income for the twelve-month period ending the last day of the preceding year. In the case of Fidelity New York, the total amount of dividends and distributions is limited to surplus as regards policyholders, excluding capital stock, less fifty percent of statutory premium reserve as of the last day of the preceding year and capital contributions received in the latest five-year period. As of January 1, 1998, Fidelity Title could pay dividends or make other distributions to the Company of $6,823,000. Fidelity New York does not have any dividend paying capability as of January 1, 1998.
of Insurance of dividend payments by FNTC and FNCAL greater than 30% of earnings before income taxes through 1998.
In 1987, stockholders also approved the adoption of a Stock Option Plan ("1987 Option Plan"). Under the terms of the 1987 Option Plan, the Company may grant stock options to certain key employees and non-employee directors or officers. The number of shares issuable under the 1987 Option Plan is 1,647,113 shares of Common Stock at not less than fair market value on the date of grant. Employees are eligible to receive incentive stock options or non-qualified stock options and non-employee directors are eligible to receive non-qualified stock options. Options available to directors or officers may not exceed one-half of the aggregate number of shares available for grant. All options granted become exercisable at the discretion of the Board of Directors and expire five to eleven years from the date of grant. Options that lapse or are cancelled prior to exercise are added to the shares authorized for future grants. The 1987 Option Plan expired December 31, 1997.
- --------------- (1) This variable plan allows for exercise prices with a fixed discount from the quoted market price. 63,030 options were granted in 1995 at an exercise price of $7.70 to key employees of the Company who applied deferred bonuses expensed in 1994 amounting to $236,773 to the exercise price, reducing it to $3.95 if exercised within the first year of the grant. The exercise price of these options decreases approximately 6.0% per year through 2000 and $.16 per share from 2001 through 2006, at which time the exercise price will be $1.61. 104,699 options were granted in 1996 at an exercise price of $10.33 to key employees of the Company who applied deferred bonuses expensed in 1995 amounting to $432,640 to the exercise price, reducing it to $6.20 if exercised within the first year of the grant. The exercise price of these options decreases approximately 5.0% per year through 2001 and $.18 per share from 2002 through 2007, at which time the exercise price will be $3.64. In 1997, 182,881 options were granted at an exercise price of $11.48 to key employees of the company who applied deferred bonuses expensed in 1996 amounting to $875,730 to the exercise price, reducing it to $6.93 if exercised within the first year of the grant. The exercise price of these options decreases approximately 7% per year through 2002 and $.20 per share from 2003 through 2008, at which time the exercise price will be $4.11.
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25") and related Interpretations in accounting for its employee stock options. As discussed below, in management's opinion, the alternative fair value accounting provided for under Statement of Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("Statement 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under Opinion 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized.
method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions. The risk free interest rates used in the calculation is the rate on the date the options were granted. The risk free interest rate used for options granted during 1997, 1996 and 1995 were 6.0%, 6.5% and 6.9%, respectively. A volatility factor for the expected market price of the common stock of 50% was used for options granted in 1997, 1996 and 1995. The expected dividend yield used for 1997, 1996 and 1995 was 1.0%, 2.0% and 2.0%, respectively. A weighted average expected life of seven years was used in all years as the Company has little history of options being exercised.
The weighted average remaining contractual life of the options outstanding at December 31, 1997 is 7.6 years.
The following table sets forth options outstanding and exercisable by price range as of December 31, 1997:
During 1997, the Company generated 38.0% and 11.3% of its title insurance premiums in California and New York, respectively. The Company generated a significant amount of title insurance premiums in California and Texas, 38.5% and 8.9% in 1996, and 43.6% and 10.1% in 1995, respectively.
On March 19, 1998, the Company's Board of Directors declared a cash dividend of $.07 per share which will be payable on May 1, 1998, to stockholders of record on April 10, 1998.
On March 25, 1998, the Company closed a new credit facility, the proceeds of which were used to terminate and pay the Company's credit agreement dated as of September 21, 1995. Additional amounts available under the new credit facility are available for general corporate purposes.
Under the terms of the definitive agreement, each share of Matrix stock will be converted into the right to receive .80 shares of Company common stock without interest, together with cash in lieu of any fractional share. The exchange ratio has been collared between $28.75 and $35.00 per Company share. The market value
is to be determined based on the average closing price of Company stock during the 20 day trading period ending on the third business day immediately prior to the last of the stockholders' meetings held to approve the transaction (the "Average Stock Price"). Below $28.75 the Company may make up the difference in additional shares at its option and above $35.00 the exchange ratio would be adjusted to a number equal to $28.00 plus fifty percent of the amount by which the Average Stock Price exceeds $35.00 divided by the Average Stock Price. It is intended that the merger be treated as a reorganization pursuant to Section 368(a)(1) of the Internal Revenue Code and be accounted for as a "pooling-of-interests."