The information set forth below should be read in conjunction with the consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. Share and per share data has been retroactively adjusted for stock dividends and splits since our inception. Certain reclassifications have been made to the prior year amounts to conform with the 2001 presentation.
During 1997, we recognized an extraordinary loss of $1.7 million, net of income taxes of $1.2 million, related to the early retirement of $45.0 million maturity value of our Liquid Yield Option Notes.
Cash and cash equivalents as of December 31, 2001 and 2000 include cash pledged to secure trust deposits of $367.9 million and $132.1 million, respectively.
Our financial results for the year ended December 31, 2001 include the results of the former operations of Vista for the period from August 1, 2001, the acquisition date, through December 31, 2001.
Overview. The following table presents certain financial data for the years indicated:
The following table presents the calculation of earnings before the cumulative effect of a change in accounting principle, amortization of cost in excess of net assets acquired and non-recurring charges. We believe that earnings before amortization of cost in excess of net assets acquired and non-recurring charges better reflects the operational performance of our business.
Amortization of cost in excess of net assets acquired in 2001 excludes an $8.0 million write-off associated with the discontinuance of two businesses in the fourth quarter of 2001. These charges are reflected net of tax as part of the non-recurring charges above.
Total revenue in 2001 increased $1,132.1 million to $3,874.1 million, an increase of 41.3% over 2000. Total revenue in 2000 more than doubled to $2,742.0 million from $1,355.9 million in 1999. The increase in total revenue from 2000 to 2001 is due to increases in real estate and refinance activity as a result of decreasing interest rates as well as the inclusion of the Chicago Title operations for a full year in 2001 versus a partial year in 2000. Further, the increased real estate activity combined with acquisitions of real estate related service companies and the integration of those real estate related service operations into our core businesses in 2001, also contributed to increased revenue. The increase in total revenue from 1999 to 2000 is primarily the result of the merger of Chicago Title on March 20, 2000.
Title insurance premiums increased 38.5% to $2,694.5 million in 2001. In 2000, title insurance premiums increased to $1,946.2 million from $939.5 million in 1999. In 1999, refinance transactions declined from record levels in 1998 to levels consistent with historical norms due to interest rate increases caused by actions taken by the Federal Reserve Board. Increases in mortgage interest rates were partially offset by consumer confidence in the overall economy, which resulted in record home sales in 1999. As the volume of refinance transactions decreased, the market shifted, beginning in the second half of 1999 and continuing through 2000, from a refinance-driven market to a more traditional market driven by new home purchases and resales. In 2000, the decrease in real estate market activity was more than offset by the addition of the Chicago Title operations and an increase in the average fee per file. The increase in fee per file is consistent with a return to more normalized levels of refinance activity and the continuing increase in home prices, as well as increased commercial activity as we continue to grow our National Commercial Division. Beginning in December 2000 and continuing throughout 2001, the Federal Reserve Board has reduced interest rates by 475 basis points, bringing interest rates down to their lowest level in recent history, which again has increased the volume of refinance activity and is attributable to the increase in title insurance premiums from 2000 to 2001. The increase in refinance activity in 2001 has been partially offset by a decrease in the average fee per file.
Trends in escrow and other title related fees are primarily related to title insurance activity generated by our direct operations. Escrow and other title related fees during the three-year period ended December 31, 2001, fluctuated in a pattern generally consistent with the fluctuation in direct title insurance premiums and order counts. Escrow and other title related fees were $728.4 million, $459.1 million and $206.6 million, respectively, during 2001, 2000 and 1999.
Revenues from real estate related 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 related services in 2001, 2000 and 1999 were $287.1 million, $166.7 million and $67.8 million, respectively. The increase in revenues from real estate related services in 2001 is primarily the result of increases in revenue from our property appraisal services, real estate tax services, field services, home warranty insurance, property records business (IDM), which was acquired in the first quarter of 2001, and multiple listing services business (RISCO), which was acquired in the second quarter of 2001. In addition, revenues from real estate related services include the revenues of the former operations of Vista from the period August 1, 2001, the acquisition date, through December 31, 2001. Further, the increase in revenue in 2001 is also due to the inclusion of Chicago Title operations for a full year in 2001 versus a partial year in 2000. The increase in revenues from real estate related services in 2000 is primarily the result of the acquisition of Chicago Title as well as increases in revenue from our credit reporting, flood certification, home warranty insurance and tax qualifying property exchange services.
Our operating expenses consist primarily of personnel costs, other operating expenses and agent commissions, which are incurred as orders are received and processed. Title insurance premiums, escrow and other title related fees are generally recognized as income at the time the underlying transaction closes. As a result, revenue lags approximately 60-90 days behind expenses and therefore gross margins may fluctuate. The changes in the market environment, mix of business between direct and agency operations and the contributions from our various business units have impacted margins and net earnings. We have implemented programs and have taken necessary actions to maintain expense levels consistent with revenue. However, a short time lag does exist in reducing variable costs and certain fixed costs are incurred regardless of revenue levels.
Other operating expenses consist primarily of facilities expenses, title plant maintenance, premium taxes (which insurance underwriters are required to pay on title premiums in lieu of franchise and other state taxes), postage and courier services, computer services (including personnel costs associated with information technology support), professional services, advertising expenses, general insurance, depreciation and trade and notes receivable allowances. We continue to be committed to cost control measures. In response to market conditions, we have implemented aggressive cost control programs in order to maintain operating expenses at levels consistent with the levels of revenue. However, certain fixed costs are incurred regardless of revenue levels, resulting in period-over-period fluctuations. Our cost control programs are designed to evaluate expenses, both current and budgeted, relative to existing and projected market conditions. Other operating expenses decreased as a percentage of total revenue to 21.5% in 2001 from 22.8% in 2000, and decreased in 2000 from 24.5% in 1999. The decrease in other operating expenses as a percentage of total revenues in 2001 and 2000 is attributable to the change in our cost structure as a result of the addition of the Chicago Title operations, which are primarily title and real estate related. Total other operating expenses totaled $834.5 million, $626.3 million and $332.3 million in 2001, 2000 and 1999, respectively.
The provision for claim losses includes an estimate of anticipated title claims. 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. Based on our loss development studies, we believe that as a result of our underwriting and claims handling practices, as well as the refinancing business of the current and prior years, we will maintain the claim loss trends we have experienced over the past several years. As such, our claim loss provision as a percentage of total title premiums was 5.0% in 2001 and 2000, and 5.6% in 1999.
Amortization of cost in excess of net assets acquired was $54.2 million in 2001, $35.0 million in 2000 and $6.6 million in 1999. The increase in 2001 as compared with 2000 is primarily due to the acquisition of IDM and Risco and the inclusion of a full year of amortization in 2001 compared with a partial year in 2000 related to the Chicago Title merger. Also, amortization of cost in excess of net assets acquired in 2001 includes an $8.0 million pretax write-off associated with the discontinuance of two businesses in the fourth quarter of 2001. In connection with the merger of Chicago Title in 2000, we recorded cost in excess of net assets acquired of approximately $762.3 million. As a result, amortization of cost in excess of net assets acquired has increased accordingly from 1999 to 2000.
Our two significant sources of our funds are dividends and distributions from our subsidiaries. As a holding company, we receive cash from our subsidiaries in the form of dividends and as reimbursement for operating and other administrative expenses we incur. The reimbursements are executed within the guidelines of management agreements among us and our subsidiaries. Our insurance subsidiaries are restricted by state regulation in their ability to pay dividends and make distributions. Each state of domicile regulates the extent to which our title underwriters can pay dividends or make other distributions to us. During 2002, our title insurance subsidiaries could pay dividends or make other distributions to us of $114.3 million. Our underwritten title companies, real estate related service companies, Micro General and FNF Capital, 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.
Seasonality. Historically, real estate transactions have produced seasonal revenue levels for title insurers. The first calendar quarter is typically the weakest quarter in terms of revenue due to the generally low volume of home sales during January and February. The fourth calendar quarter is typically the strongest in terms of revenue due to commercial entities desiring to complete transactions by year-end. Significant changes in interest rates may alter these traditional seasonal patterns due to the effect of the cost of financing has on the volume of real estate transactions.
• $450.0 million term loan facility with a 6 year amortization period, due March 19, 2006.
On August 20, 2001, we issued $250.0 million aggregate principal amount of 7.3% notes. We received net proceeds of $247.0 million, after expenses, which were used to pay down a portion of the $450.0 million, 6-year term loan facility. Interest is payable semiannually and the notes are due in August 2011.
On April 24, 2001, our Board of Directors authorized us to purchase up to 5,500,000 shares of our common stock. Purchases may be made by us from time to time in the open market or in block purchases or in privately negotiated transactions depending on market conditions and other factors. As of December 31, 2001, we have repurchased a total of 1,000,000 shares of our common stock for $22.9 million, at an average purchase price of $22.93 per share.
Prior to the merger, we owned approximately 1% and 37% of the outstanding common shares of CKE and SBRG, respectively. Our Chief Executive Officer and Chairman of the Board of Directors also serves as Chairman of the Board of Directors at CKE and SBRG. In addition, our Vice Chairman of the Board of Directors also serves on the board of directors of both CKE and SBRG. As of December 31, 2001, our total investment in both companies was $24.8 million. As a result of the merger, our shares of SBRG common stock will be converted into common shares of CKE and we will own approximately 5% of the outstanding common stock of CKE.
Cost in Excess of Net Assets Acquired (“Goodwill”) and Other Intangible Assets. We have made acquisitions in the past that resulted in recording a significant amount goodwill. As of December 31, 2001, cost in excess of net assets acquired, net, was $808.6 million, of which $762.3 million relates to goodwill recorded in connection with the Chicago Title merger in 2000. Through December 31, 2001, in accordance with generally accepted accounting principles, goodwill has been amortized on a straight-line basis over 7 to 20 years and has been tested for impairment on a continual basis based on the undiscounted cash flows generated by the underlying assets. Effective in 2002, goodwill will no longer be amortized, but will be tested for impairment annually through a comparison of the assets’ fair value to its carrying amount. Other intangible assets that meet certain criteria will continue to be amortized and will also be subject to an impairment test based on estimated fair value. We are currently evaluating the impact of this new accounting standard on existing goodwill and other intangible assets. See Recent Accounting Pronouncements below for further information.
Escrow Accounts. In conducting our operations, we routinely hold customers’ assets in escrow, pending completion of real estate transactions. Certain of these amounts are maintained in segregated bank accounts and have not been included in our Consolidated Balance Sheets. We have a contingent liability relating to proper disposition of these balances for our customers which amounted to $4.4 billion at December 31, 2001. As a result of holding these customers’ assets in escrow, we have ongoing programs for realizing economic benefits during the year through favorable borrowing and vendor arrangements with the various banks. There were no investments or loans outstanding as of December 31, 2001 related to these arrangements.
SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. Existing goodwill will be amortized through 2001 at which time amortization will cease and we will perform a transitional goodwill impairment test. SFAS No. 142 is generally effective for fiscal periods beginning after December 15, 2001 and the amortization provisions of SFAS No. 142 are effective for acquisitions subsequent to June 30, 2001. We are currently evaluating the impact of the new accounting standards on existing goodwill and other intangible assets. While the ultimate impact of the new accounting standards has yet to be determined, goodwill amortization expense for the year ended December 31, 2001 was $54.2 million ($46.1 million, excluding the $8.0 million write-off associated with the discontinuance of two businesses in the fourth quarter of 2001).
In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Long-Lived Assets” (“SFAS No. 144”) which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” it retains many of the fundamental provisions of that statement. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We expect that the adoption of SFAS No. 144 will not have a material impact on our financial statements.
The following describes the significant accounting policies of Fidelity National Financial, Inc. and its subsidiaries (collectively, the “Company”) which have been followed in preparing the accompanying Consolidated Financial Statements.
In addition, the Company provides a broad array of escrow and other title related services, as well as real estate related services, including: collection and trust activities, trustee’s sales guarantees, recordings, reconveyances, property appraisal, credit reporting, exchange intermediary services, real estate tax services, home warranty insurance, foreclosure posting and publishing, loan portfolio services, flood certification, field services, property records and multiple listing services.
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 and Chicago Title Company.
The Company includes the accounts of its majority-owned information-services subsidiary, Micro General Corporation (NASDAQ: MGEN, “Micro General”) and its majority-owned real estate related services subsidiary, Fidelity National Information Solutions, Inc. (NASDAQ: FNIS, “FNIS”), formerly VISTA Information Solutions, Inc. (“Vista”), in its consolidated results. As of December 31, 2001, the Company owns 61.7% of Micro General and 77.9% of FNIS.
The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All material intercompany profits, transactions and balances have been eliminated. The Company’s investments in non-majority-owned partnerships and affiliates are accounted for on the equity method. The Company’s financial results for the year ended December 31, 2001 include the results of the former operations of Vista for the period from August 1, 2001, the acquisition date, through December 31, 2001. The Company’s financial results for the year ended December 31, 2000 include the operations of Chicago Title Corporation (“Chicago Title”) for the period from March 20, 2000, the merger date, through December 31, 2000. See Note B.
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income on a trade date basis. Unrealized gains or losses on fixed maturity and equity securities which are classified as available for sale, net of applicable deferred income taxes (benefits), are excluded from earnings and credited or charged directly to a separate component of stockholders’ equity. If any unrealized losses on fixed maturity or equity securities are deemed other than temporary, such unrealized losses are recognized as realized losses.
On March 1, 2002, a merger between CKE and SBRG was consummated, whereby SBRG became a wholly-owned subsidiary of CKE. As a result of the merger, holders of SBRG common stock received .491 shares of CKE common stock for each whole share of SBRG common stock. As a result of the merger, the Company’s common shares of SBRG will be converted into common shares of CKE and the Company will own approximately 5% of the outstanding common stock of CKE.
During the second quarter of 2001, the Company adopted Emerging Issues Task Force No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”, (“EITF 99-20”). EITF 99-20 sets forth the rules for recognizing interest income on all credit-sensitive mortgage and asset-backed securities and certain prepayment-
The carrying values reported in the Consolidated Balance Sheets for trade receivables approximate their fair value.
Intangible assets include cost in excess of net assets acquired, capitalized software costs and capitalized debt offering costs, and are amortized on a straight-line basis over three to forty years. At December 31, 2001, intangible assets consist of cost in excess of net assets acquired of $902.7 million less accumulated amortization of $94.1 million, capitalized software costs of $81.4 million less accumulated amortization of $19.5 million and capitalized debt offering costs of $15.6 million less accumulated amortization of $7.8 million. Intangible assets at December 31, 2000 consist of cost in excess of net assets acquired of $822.8 million less accumulated amortization of $52.7 million, capitalized software of $33.6 million less accumulated amortization of $17.0 million and capitalized debt offering costs of $13.5 million less accumulated amortization of $3.6 million. See Note P.
The Company’s reserve for claim losses includes known claims as well as losses the Company expects to incur, net of recoupments. Each known claim is reserved for on the basis of a review by the Company as to the estimated amount of the claim and the costs required to settle the claim. Reserves for claims which are incurred but not reported are provided for at the time premium revenue is recognized based on historical loss experience and other factors, including industry averages, claim loss history, current legal environment, geographic considerations and type of policy written.
In the ordinary course of business, the Company limits its maximum loss exposure by reinsuring certain risks with other insurers. The Company also earns additional income by assuming reinsurance for certain risks of other insurers. The Company also cedes a portion of certain policy and other 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. As of December 31, 2001, the Company had a $25.0 million reinsurance recoverable from Lloyds of London on claim loss expense recoverables. This amount was received in full subsequent to December 31, 2001. Reinsurance is not a significant part of the Company’s total revenue.
Other income represents revenue generated from the operations of Micro General, FNF Capital and Express Network, Inc. (“ENI”). ENI was sold in the second quarter of 2000.
On July 24, 2001, the Company declared a 10% stock dividend to stockholders of record on August 9, 2001, payable on August 23, 2001. The fair value of the additional shares of common stock issued in connection with the stock dividend was credited to additional paid-in capital and a like amount charged to retained earnings during 2001. Fractional shares were paid in cash.
The preparation of these Consolidated Financial Statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
On March 20, 2000, Chicago Title Corporation (“Chicago Title”) merged with and into the Company pursuant to an Agreement and Plan of Merger, dated August 1, 1999, as amended on October 13, 1999. Pursuant to the merger agreement, Chicago Title stockholders received aggregate merger consideration valued at approximately $1.1 billion. The merger consideration was paid in the form of 1.9440 shares of Company common stock and $26.00 in cash for each share of Chicago Title common stock, resulting in the issuance of approximately 42.6 million shares of Company common stock valued at an average price during the applicable trading period of $11.9792 per share and the payment of approximately $570.2 million in cash. The merger was accounted for as a purchase.
On August 1, 2001, the Company acquired approximately 80% of the outstanding common stock of Fidelity National Information Solutions, Inc. (NASDAQ:FNIS) (“FNIS”), formerly VISTA Information Solutions, Inc. (“Vista”), a provider of real estate information products and services, including multiple listing services and environmental data and disclosure information businesses. In consideration for this acquisition, the Company contributed its wholly-owned tax, credit, flood, appraisal, property records (IDM) and multiple listing service (Risco) businesses to the former Vista entity and as a result, immediately following the consummation of the transaction, the Company owned 80% of the combined entity.
In accordance with the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, the cost in excess of net assets acquired in the FNIS transaction will not be amortized. As of December 31, 2001 and for the period from August 1, 2001, the acquisition date, through December 31, 2001, the results of the former operations of Vista are included in the Company’s Consolidated Financial Statements.
The carrying amounts and fair values of the Company’s fixed maturity securities at December 31, 2001 and 2000 are as follows:
Equity securities at December 31, 2001 and 2000 consist of investments in various industry groups as follows:
The change in unrealized gains (losses) on equity securities for the years ended December 31, 2001, 2000 and 1999 was $16.2 million, ($12.2) million and ($13.3) million, respectively.
Net realized gains (losses) included in interest and investment income amounted to $6.3 million, ($201) and ($76) for the years ended December 31, 2001, 2000 and 1999, respectively. Included in 2001 net realized gains is an other than temporary impairment loss of $7.5 million, of which $4.4 million relates to an impairment loss taken on Enron Corporation bonds. There were no individually significant net realized gains or losses in 2000 or 1999. All amounts are before applicable income taxes.
Direct financing leases at December 31, 2001 and 2000 consist of the following:
The Company has four remaining securitization facilities with an aggregate outstanding balance of $218.7 million and $218.1 million as of December 31, 2001 and 2000, respectively. FNF Funding X is accounted for as a collateralized borrowing. FNF Funding IX, GF Funding II and GF Funding III were closed during 2001.
The following table presents certain information related to the Company’s securitization facilities at December 31, 2001 and 2000:
The allowance for doubtful receivables is primarily related to certain promissory notes at December 31, 2001 and 2000. Interest income is not recognized on the Company’s non-performing notes receivable. There were no non-performing notes receivable at December 31, 2001 or 2000.
The carrying value of the Company’s notes payable, excluding Lease-backed notes payable approximated estimated fair values, at December 31, 2001 and 2000. The fair value of the Company’s fixed rate and variable rate notes payable is estimated using discounted cash flow analyses based on current market interest rates and comparison of interest rates being paid to the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
The credit agreement and other debt facilities impose certain affirmative and negative covenants on the Company relating to current debt ratings, certain financial ratios related to liquidity, net worth, capitalization, investments, acquisitions and restricted payments, and certain dividend restrictions. The Company is in compliance with all of its debt covenants as of December 31, 2001.
On January 24, 2001, the Company issued 8,855,000 shares of its common stock at a public offering price of $30.45 per share. Proceeds from this offering, net of underwriting discounts and commissions and other related expenses, were $256.3 million. Net proceeds of $100.0 million were used to repay in full and terminate the $100.0 million, 18 month revolving credit facility and net proceeds of $149.5 million were used to pay down in full the $250.0 million, 6 year revolving credit facility. The remainder of the cash proceeds are available for general corporate purposes.
The Company’s 1997 - 1999 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 Company.
The favorable development on prior year loss reserves during 2001, 2000 and 1999 was attributable to lower than expected payment levels on recent issue years which included periods of increased resale activity as well as a high proportion of refinance business. As a result, title policies issued in prior years have been replaced by the more recently issued policies, therefore generally terminating much of the loss exposure on the previously issued policies.
Title insurance companies, including underwriters, underwritten title companies and independent agents, are subject to extensive regulation under applicable state laws. Each insurance underwriter is usually subject to a holding company act in its state of domicile which regulates, among other matters, the ability to pay dividends and investment policies. The laws of most states in which the Company transacts business establish supervisory agencies with broad administrative powers relating to issuing and revoking licenses to transact business, regulating trade practices, licensing agents, approving policy forms, accounting principles, financial practices, establishing reserve and capital and surplus as regards policyholders (“capital and surplus”) requirements, defining suitable investments for reserves and capital and surplus and approving rate schedules. Effective January 2001, the Company’s insurance subsidiaries were required to prepare its statutory financial statements in accordance with the National Association of Insurance Commissioners’ Statements of Statutory Accounting Principles (“Codification”), subject to the adoption by its respective domicilary states. The adoption of Codification did not have a material effect on the statutory capital and surplus of the Company’s insurance subsidiaries.
The Company’s title insurance subsidiaries are subject to regulations that restrict their ability to pay dividends or make other distributions of cash or property to their immediate parent company without prior approval from the Department of Insurance of their respective states of domicile. During 2002, the Company’s title insurance subsidiaries could pay dividends or make other distributions to the Company of $114.3 million.
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, 2001, 2000 and 1999, 723,796, 653,375 and 694,756 shares, respectively, were purchased and allocated to employees, based upon their contributions, at an average price of $24.24, $16.51 and $15.25 per share, respectively. The Company contributed $5.3 million or the equivalent of 216,329 shares for the year ended December 31, 2001; $4.0 million or the equivalent of 241,259 shares for the year ended December 31, 2000 and $3.3 million or the equivalent of 213,315 shares for the year ended December 31, 1999 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. Beginning in April 2000, the Company began matching 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, 2001 and 2000 was $13.9 million and $5.0 million, respectively.
The Company’s 1987 Stock Option Plan expired in December 1997. Options generally had a term of five to 11 years from date of grant, became exercisable at the discretion of the Board of Directors and were priced at not less than the fair market value on the date of grant. A total of 1,993,006 shares were available for grants of options under this plan.
The Company’s 1991 Stock Option Plan (“1991 Plan”) expired in March 2001. Options generally had a term of 12 years from the date of grant and were exercisable subject to the terms and conditions set by the Board of Directors. The price per share was determined at the date of grant and may be less than the fair market value of the common stock at the date of grant to reflect the application of the optionee’s deferred bonus, if applicable. The 1991 Plan allows for exercise prices with a fixed discount from the quoted market price. A total of 4,563,653 shares were available for grants of options under this plan.
In 1999, options were granted at an exercise price of $8.75 to key employees of the Company who applied deferred bonuses expensed in 1998 amounting to $4.9 million to the exercise price. The exercise price of these options decreases approximately $.32 per year through 2004 and $.20 per share from 2005 through 2010, at which time the exercise price will be $5.93. Options were granted in 2000 at an exercise price of $6.14 to key employees of the Company who applied deferred bonuses expensed in 1999 amounting to $4.4 million to the exercise price. The exercise price of these options decreases approximately $.32 per year through 2005 and $.20 per share from 2006 through 2011, at which time the exercise price will be $3.32. In 2001, options were granted at an exercise price of $21.68 to key employees of the Company who applied deferred bonuses expensed in 2000 amounting to $4.9 million to the exercise price. The exercise price of these options decreases approximately $.32 per year through 2006 and $.20 per share from 2007 through 2012, at which time the exercise price will be $18.86. Additionally, the Company recorded compensation expense relating to the price decrease of $674, $473 and $460, for the years ended December 31, 2001, 2000 and 1999, respectively.
In connection with the 1998 acquisition of FNF Capital (formerly known as “Granite”), which was accounted for as a pooling-of-interests, the Company assumed 754,285 options outstanding under Granite’s existing stock option plan (“Granite Plan”). The Granite Plan provides that qualified stock options be granted at an exercise price equal to fair market value on the date of the grant, and must be at least 110% of fair market value when granted to a 10% or more stockholder. The term of all qualified stock options granted under the Granite Plan may not exceed 10 years, except the term of qualified stock options granted to a 10% or more stockholder, which may not exceed five years. The Granite Plan provides that non-qualified stock options be granted at an exercise price not less than 85% of the fair market value on the date of grant. The term of all non-qualified stock options granted under the Granite Plan may not exceed 10 years, except the term of non-qualified stock options granted to a 10% or more stockholder, which may not exceed five years.
The following table summarizes information related to stock options outstanding and exercisable as of December 31, 2001:
The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“Opinion 25”) and related Interpretations in accounting for its employee stock options. As discussed below, in management’s opinion, the alternative fair value accounting provided for under Statement of Accounting Standards No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”) requires use of option valuation models that were not developed for use in valuing employee stock options. Under Opinion 25, 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.
Pro forma information regarding net earnings and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions. The risk free interest rates used in the calculation is the rate on the date the options were granted. The risk free interest rate used for options granted during 2001, 2000 and 1999 were 4.3%, 5.1% and 6.5%, respectively. A volatility factor for the expected market price of the
For purpose of pro forma disclosures, the estimated fair value of the options is amortized into expense over the options’ vesting period. The Company’s pro forma information follows:
In connection with the Chicago Title merger, the Company also assumed Chicago Title’s noncontributory defined contribution plan and noncontributory defined benefit pension plan (the “Pension Plan”).
The Pension Plan covers certain Chicago Title employees. The benefits are based on years of service and the employee’s average monthly compensation in the highest 60 consecutive calendar months during the 120 months ending at retirement or termination. 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. The Company made no contribution for the period from April 1, 2000 to December 31, 2000. Effective December 31, 2000, the Pension Plan was frozen and there will be no future credit given for years of service or changes in salary.
Under Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions,” (“SFAS No. 87”) the measurement date shall be as of the date of the financial statements, or if used consistently from year to year, as of a date not more than three months prior to that date. The Company’s measurement date is September 30.
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 12.0% in 2001, declining to 5.0% in 2009 and 5.5% in 2000, declining to 5.0% in 2002. The discount rate used was 7.25% in 2001 and 7.75% in 2000. If the health care cost trend rate assumptions were increased 1.0%, the accumulated postretirement benefit obligation as of December 31, 2001 and 2000 would increase by $1.9 million and $3.3 million, respectively. The effect of this change on the sum of the service and interest cost would be an increase of $423 in 2001 and $590 in 2000. If the health care costs trend rate assumptions were decreased 1.0%, the accumulated post retirement benefit obligation as of December 31, 2001 and 2000 would decrease by $1.7 million and $2.8 million, respectively. The effect of this change on the sum of the service and interest cost would be a decrease of $360 in 2001 and $480 in 2000.
As of and for the year ended December 31, 2001 (dollars in thousands):
As of and for the year ended December 31, 2000 (dollars in thousands):
described above. These services include property appraisal, credit reporting, exchange intermediary services, real estate tax services, home warranty insurance, foreclosure posting and publishing, loan portfolio services, flood certification, field services, property records and multiple listing services. These services require specialized expertise and have been centralized for efficiency and management purposes.
During the second quarter of 2001, the Company adopted Emerging Issues Task Force No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”, (“EITF 99-20”). EITF 99-20 sets forth the rules for recognizing interest income on all credit-sensitive mortgage and asset-backed securities and certain prepayment-sensitive securities including agency interest-only strips, whether purchased or retained in securitization, and determining when these securities must be written down to fair value because of impairment. Adoption of EITF 99-20 requires the valuation of residual interests in securitizations to be recorded as a reduction to the carrying value of the residual interests through a charge to earnings when any portion of the decline in fair value is attributable to an impairment loss, rather than an unrealized loss in stockholders’ equity. As such, the Company recorded a charge of $5.7 million, net of income tax benefit of $3.0 million, in the second quarter of 2001.