During 1994, a subsidiary of the Company completed the purchase of a corporate home office building in Irvine, California, which houses the Company's corporate departments and various subsidiaries. The majority of the branch offices of the Company are leased from third parties. The remainder are owned by the Company, leased from partnerships in which the Company has an interest or leased from affiliates.
As of December 31, 1996, 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, 1996, 1995, 1994, 1993 and 1992 have been audited by KPMG Peat Marwick LLP, independent certified public accountants. Audited Consolidated Balance Sheets at December 31, 1996 and 1995 and Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for the years ended December 31, 1996, 1995, and 1994, 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.
(3) The Company acquired Agency Sales and Posting, Pente Enterprises, Inc. and Arizona Sales and Posting, Inc. (collectively, "ASAP") on December 7, 1993. This acquisition was accounted for as a pooling of interests, and certain selected financial data has therefore been restated. The selected financial data above includes the balance sheet accounts of ASAP at December 31, 1996, 1995, 1994, 1993, and 1992, respectively, and the results of ASAP operations for the years then ended.
(4) During 1994, the Company recognized a $2.4 million extraordinary gain, net of related income taxes of $1.3 million, related to the early retirement of $48 million maturity value of the Company's Liquid Yield Option Notes (the "LYONs") issued in February 1994. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Extraordinary Item."
(5) During 1995, the Company recognized an $813,000 extraordinary loss, net of related income taxes of $437,000, related to the early retirement of its Senior Secured Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Extraordinary Item."
(8) This estimate of direct operations market share is based upon the number of title recordings by the Company in the counties where the Company maintains direct operations and excludes title recordings by the Company's agents and excludes title recordings in eastern and southeastern states because such information is not available. The direct operations market share percentage has been weighted to give effect to the Company's related direct revenue in the applicable counties.
- --------------- (1) The net claims paid ratio is the percentage resulting from total title claims paid, net of recoupments, divided by title insurance premiums.
On April 1, 1996, the Company completed its acquisition of the Nations Title Inc. group of companies. See "Recent Developments." The acquisition positioned Fidelity National Financial, Inc. as the nation's fourth largest title insurance underwriter. Nations Title Inc. and its three wholly-owned underwriting subsidiaries, Nations Title Insurance Company, Nations Title Insurance of New York Inc. and National Title Insurance of New York Inc., expanded the Company's national agency network and increased its market share in the more traditional agency driven states. The Nations Title Inc. acquisition resulted in additional agency business and a shift in the mix of business from direct to agency during 1996. The revenue and expense information presented in Management's Discussion and Analysis of Financial Condition and Results of Operations includes Nations Title Inc.'s results of operations for the nine-month period ended December 31, 1996. In 1996, the total title-related revenue (excluding interest and investment income and non-title-related other fees and revenue) generated by agency operations increased to 40.0% from 28.9% in 1995.
During 1995 and 1994, 71.1% and 62.6%, respectively, of total title-related revenue was generated from direct operations. The Company traditionally focused on direct operations because it retains the entire premium from each transaction and is able to generate additional sources of revenue by providing other title- related services. The fluctuation in the percentage of revenue generated by direct operations versus the percentage of revenue generated by agency operations between 1995 and 1994 is due to several factors. During 1995, the Company terminated a number of agency relationships based on the Company's agent retention criteria. The Company continually monitors agency relationships for quality and productivity. Audits of agents are conducted on a periodic basis, and agents which do not meet the Company's standards are not retained. In addition, during 1995, the Company acquired certain former agents which were converted to direct 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. These factors and the Company's acquisition of Nations Title Inc., which was completed on April 1, 1996, have resulted in title premiums of $476.0 million, $285.6 million and $369.3 million, for 1996, 1995 and 1994, respectively. The difference in title insurance premiums between 1996 and 1995 of $190.4 million represents an increase of 66.7%. Title insurance premiums decreased $83.7 million, or 22.7%, in 1995 from 1994.
The trends in escrow fees are primarily related to the title insurance activity generated by the Company's direct operations. Escrow fees have fluctuated during the 1996, 1995 and 1994 years in a pattern generally consistent with the fluctuation in title insurance premiums. Escrow fees increased $17.2 million to $66.9 million in 1996, a 34.6% increase from $49.7 million in 1995. The 1996 percentage increase in escrow fees is not as significant as the percentage increase in title premiums due to the change in the direct operation/agency business mix. See "Overview." Escrow fees decreased $2.6 million, or 5.0%, in 1995 from 1994 to $49.7 million from $52.3 million. The decrease in escrow fees in 1995 from 1994 is not as great as the decrease in title insurance premiums due to the decrease in agency title insurance premiums as a percentage of total title-related revenue. Agency title insurance premiums do not generate escrow fees for the Company.
Other fees and revenue trend closely with the level and mix of business, as well as the performance of certain of the Company's title-related subsidiaries. In 1996, other fees and revenue increased $19.3 million, or 33.9%, to $76.3 million from $57.0 million in 1995. The increase is primarily attributable to the increase in title premiums and escrow fees generated by the Company's direct operations. Direct operations generate other fees and income. Additionally, the Company's foreclosure publishing and posting business, exchange intermediary service and appraisal service have significantly expanded their market presence and revenue, which are included in other fees and income. Other fees and revenue were generated at comparable levels in 1995 and 1994, primarily as a result of the type of business in 1995, which was primarily resale business, and the direct operation/agency business mix. During 1995, other fees and revenue decreased $2.4 million, or 4.0%, to $57.0 million from $59.4 million in 1994. Thus, even in a year when overall title revenue may be down, the level of other fees and revenue can be maintained, depending on the direct operation/agency business mix. The consistency between the 1995 and 1994 years is primarily attributable to the nature of the revenue included and the title insurance market environment which shifted from a refinance to a resale oriented market. In a resale transaction, other fees and revenue are greater than in a refinancing transaction. See "Overview."
Extraordinary Item. During 1994, due to favorable market prices and the Company's belief that the Company's Common Stock and LYONs represent excellent investments, the board of directors authorized the Company to repurchase up to 6.1 million shares of its Common Stock or a comparable amount of its LYONs which are convertible into 23.204 shares of Common Stock per $1,000 maturity value of LYONs. In accordance with this authorization, the Company purchased $48.0 million principal amount of LYONs at an average purchase price of $366.51 per $1,000 maturity value of LYONs. As a result of the LYONs purchase transactions, the Company recorded an extraordinary gain on the early retirement of debt of $2.4 million, net of the related income tax effect. In March 1995, the board of directors authorized the repurchase of an additional 2.4 million shares of Common Stock or the equivalent amount of LYONs increasing the total amount authorized to 8.4 million shares or the equivalent amount of LYONs. See "Liquidity and Capital Resources" and "Recent Developments."
Other operating expenses consist of facilities expenses, title plant maintenance, premium taxes (which insurance underwriters are required to pay on title premiums and title-related revenue in lieu of franchise and other state taxes), escrow losses, courier services, computer services, professional services, general insurance, trade and notes receivable allowances and depreciation. Other operating expenses decreased as a percentage of total revenue to 24.2% in 1996 from 30.2% in 1995, which had previously increased from 26.3% in 1994. In response to market conditions, the Company implemented aggressive cost control programs in order to maintain operating expenses at levels consistent with the levels of title-related revenue; however, certain fixed costs are incurred regardless of revenue levels, resulting in the year over year percentage fluctuations. The Company continues to be committed to these cost control measures. Total other operating expenses totalled $154.0 million, $123.9 million and $129.4 million in 1996, 1995 and 1994, respectively. See "Overview."
The period over period fluctuations in personnel costs and other operating expenses are primarily the result of the fluctuations in total revenue, as well as the changes in the direct operation and agency operation title premium mix. The 1996 addition of Nations Title Inc. title premiums, which are primarily agency related, has provided a balance between direct operation and agency revenue. In previous periods the majority of title premiums and total revenue were generated by direct operations, which resulted in higher personnel costs and other operating expenses.
Agent commissions and the resulting percentage of agent premiums retained by the Company varies according to regional differences in real estate closing practices and state regulations. 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 by the Nations Title Inc. acquisition have resulted in higher overall commissions in 1996. The percentage of agency premiums retained by the Company increased in 1995 over 1994 primarily due to the Company's expansion of operations outside of California into states where underwriters' retained premiums are generally greater.
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 LYONs issued in February 1994. Interest expense on non-LYONs debt totalled $4.2 million, $4.3 million and $3.8 million for the years 1996, 1995, and 1994, respectively. The LYONs-related component of interest expense amounted to $5.2 million, $4.9 million and $4.8 million for 1996, 1995 and 1994, respectively. Interest expense in 1996 was comparable to that of 1995 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. Interest expense increased in 1995 over 1994 primarily as a result of an increase in the average outstanding balance of a certain subsidiary's equipment financing and increases in the prime interest rate and LIBOR, to which certain of the interest rates paid by the Company are indexed. See "Recent Developments."
The Company's cash requirements include debt service, operating expenses, taxes and dividends on its Common Stock. The Company believes that all anticipated cash requirements for current operations will be met from internally generated funds, through cash received from subsidiaries, cash generated by investment securities and short-term bank borrowings through existing credit facilities.
The short- and long-term liquidity requirements of the Company, Insurance Subsidiaries and UTCs are monitored regularly to match cash inflows with cash requirements. The Company, Insurance Subsidiaries and UTCs forecast their daily cash needs and periodically review their short- and long-term projected sources and uses of funds, as well as the asset, liability, investment and cash flow assumptions underlying these projections.
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, 1996, the fair value of the
Recent Accounting Pronouncements. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("Statement 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Statement 121 provides guidance for the recognition and measurement of impairment of long-lived assets, certain identifiable intangibles and goodwill related both to assets to be held and used and assets to be disposed of. Statement 121 requires that under certain conditions entities perform separate calculations for assets to be held and used to determine whether recognition of an impairment loss is required and, if so, to measure the impairment. If the sum of the expected future cash flows, undiscounted and without interest charges, is less than the asset's carrying amount, an impairment loss is considered; if the sum of the expected future cash flows is more than the asset's carrying amount, an impairment loss cannot be recognized. Measurement of an impairment loss is based on the fair value of the asset. Statement 121 requires long-lived assets and certain identifiable intangibles to be disposed of to be reported at the lower of carrying amount or fair value less cost to sell, except for assets covered by the provisions of Accounting Pronouncements Board Opinion No. 30. Statement 121 was effective for financial statements issued for fiscal years beginning after December 15, 1995. The adoption of Statement 121 did not have a material effect on the Consolidated Financial Statements of the Company.
Statement of Financial Accounting Standards No. 123 ("Statement 123"), "Accounting for Stock-Based Compensation", was issued by the Financial Accounting Standards Board in October 1995. Statement 123 applies to all transactions in which an entity acquires goods or services by issuing instruments or by incurring liabilities where the payment amounts are based on the entity's common stock price, except for employee stock ownership plans ("ESOPs"). Statement 123 covers transactions with employees and non-employees and is applicable to both public and non-public entities. Statement 123 establishes a new method of accounting for stock-based compensation arrangements with employees. The new method is a fair value method rather than the intrinsic value method that is contained in Accounting Pronouncements Board Opinion No. 25 ("Opinion 25"). However, the Statement does not require an entity to adopt the new fair value based method for purposes of preparing its basic financial statements. Entities are allowed (1) to continue to use the Opinion 25 method or (2) to adopt the Statement 123 fair value based method. Once the fair value based method is adopted, an entity cannot change back to the Opinion 25 method. Also, the selected method applies to all of an entity's compensation plans and transactions. The Statement 123 fair value based method will result in higher compensation cost than the Opinion 25 intrinsic value based method for fixed stock option compensation plans and will result in a different compensation cost for variable stock option compensation plans. Sometimes the amount will be higher and sometimes the amount will be lower. Also, many employee
In February of 1996, the Company proposed a merger with Giant Group, Ltd. ("Giant"). The Company had purchased 705,489 shares (or 14.8%) of Giant's outstanding common stock. The Company's intent in acquiring Giant was to utilize its liquid assets to take advantage of investment opportunities in non-interest rate sensitive businesses. On April 26, 1996, the parties reached a settlement agreement pursuant to which Giant repurchased its shares from Fidelity. In addition, as part of the settlement, Fidelity acquired 767,807 shares of Rally's Hamburger, Inc. ("Rally's") stock from Giant for $.83 per share, as well as an option to purchase additional shares of Rally's common stock.
On April 1, 1996, the Company completed its acquisition of one hundred percent of Nations Title Inc. and its wholly-owned subsidiaries Nations Title Insurance Company, Nations Title Insurance of New York Inc. and National Title Insurance of New York Inc. from Nations Holding Group for an adjusted purchase price of $19.3 million plus 193,600 shares, $2.1 million, of the Company's Common Stock. The acquisition positioned Fidelity National Financial, Inc. as the nation's fourth largest title insurance underwriter. The Company believes that the combination of its direct operations and Nations Title Inc.'s strong agency network provides a balance to the Company's title premium revenue between direct and agency, as well as a hedge against future market downturns. The acquisition of Nations Title Inc. has also increased the Company's revenue and positively impacted its balance sheet and margins due to the operating economies of the combined companies. The acquisition has also increased market share in areas where the Company has had a limited presence, particularly in those areas where business is primarily agent driven, as well as in states where the Company has a strong market position. This transaction has been accounted for as a purchase. See Note B of Notes to Consolidated Financial Statements.
acquire an additional 14% of National common stock. In addition, the Company loaned $1,200,000 to National at closing at a rate of prime plus one percent. Subsequently, the Company agreed to increase the credit facility from $1,200,000 to $1,700,000. In consideration for the increase in the credit facility National agreed to increase the warrant shares which the Company can purchase. If the entire $1,700,000 is borrowed the Company may purchase an additional 34% of the outstanding shares of National. After receiving approval of the transaction from the California Department of Insurance, the transaction closed on July 12, 1996. National is the parent company of Alliance Home Warranty Company, a California insurance company. Alliance sells home warranty plans to buyers of resale homes, primarily in the central and Southern California markets. A home warranty contract generally promises the repair or replacement of major operating systems and built-in appliances inside a home for a period of one year.
On September 30, 1996, the Company accepted the assignment from a real estate partnership of the right to redeem a retail shopping center valued at $4.5 million in exchange for a net payment of $434,000. Officers and directors of the Company who held ownership interests in the real estate partnership assigned their rights to redeem to the Company. On November 21, 1996, the Company redeemed the retail property at a price of $2.8 million. The Company continues to collect rent from the retail tenants while actively marketing the property for sale. The property is carried at cost, which approximates fair value.
In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the consolidated financial position of Fidelity National Financial, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles.
For purposes of reporting cash flows, highly liquid instruments purchased with original maturities of three months or less are considered cash equivalents. The carrying amounts reported in the Consolidated Balance Sheets for these instruments approximate their fair value.
Fixed maturity securities are purchased to support the investment strategies of the Company, which are developed based on many factors including rate of return, maturity, credit risk, tax considerations and regulatory requirements. Prior to a reassessment of the investment strategy and subsequent reclassification of the held to maturity portfolio in 1995, the Company had the ability and intent to hold those fixed maturity
securities which it had on deposit with regulatory authorities and certain other fixed maturity securities, to maturity and carried them at amortized cost. Those fixed maturity securities which may be sold prior to maturity to support the Company's investment strategies are carried at fair value and are classified as available for sale as of the balance sheet dates. Fair values for fixed maturity securities are principally a function of current interest rates and are based on quoted market prices. Care should be used in evaluating the significance of these estimated fair values.
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 bonds and common stocks which are classified as available for sale, net of applicable deferred income taxes (benefits), are excluded from income and credited or charged directly to a separate component of stockholders' equity. The carrying value for investments considered available for sale is reduced to estimated realizable value if the decline in fair value is deemed other than temporary. Such reductions are recognized as realized losses.
Intangible assets include cost in excess of net assets acquired, capitalized licensing costs and capitalized software costs and are amortized on a straight line basis over seven to forty years. Intangible assets at December 31, 1996 consist of cost in excess of net assets acquired of $8,349,000 less accumulated amortization of $1,733,000, capitalized licensing costs of $3,937,000 less accumulated amortization of $98,000, capitalized software of $11,720,000 less accumulated amortization of $2,740,000 and capitalized debt offering costs of $4,738,000 less accumulated amortization of $1,738,000. At December 31, 1995, intangible assets consist of cost in excess of net assets acquired of $5,303,000 less accumulated amortization of $1,378,000, capitalized licensing costs of $2,458,000, capitalized software of $11,135,000 less accumulated amortization of $1,105,000 and capitalized debt offering costs of $4,738,000 less accumulated depreciation of $1,505,000.
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. Major claims (greater than $500,000) are evaluated and 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.
The terms of the Fidelity Pennsylvania (formerly Meridian Title Insurance Company) acquisition provided $31 million of additional claim loss protection for Fidelity Pennsylvania and ATIC policies issued on or before December 31, 1991. As part of the acquisition, Fidelity Pennsylvania paid its former parent company, Meridian Bank, a cash dividend of $11 million and Meridian Bank retained a $20 million investment in ATIC Redeemable Series A Preferred Stock ("ATIC Preferred Stock"). Under certain circumstances, Meridian Bank would be required to repay the Company some or all of the dividend and relinquish some or all of the redemption value of the ATIC Preferred Stock as reimbursement for excess claims incurred by Fidelity Pennsylvania and ATIC over the reserves established at December 31, 1991 for policies issued on or before December 31, 1991. On March 31, 1994, the Company purchased from Meridian Bank the ATIC Preferred Stock for $15.5 million, which represented a discount of approximately $6.2 million. As part of the agreement with Meridian Bank to purchase the ATIC Preferred Stock, the Company released Meridian Bank from its obligations to provide an additional $11 million in claims protection pursuant to the purchase agreement for Fidelity Pennsylvania and ATIC. The Company believes that the loss reserves for Fidelity Pennsylvania and ATIC, when combined with the $6.2 million reduction in the purchase price of the ATIC Preferred Stock, which has been added to reserves for claim losses, will be sufficient to meet pre-1992 policy claims. This $11 million, in addition to the $20 million of ATIC Preferred Stock, had been available as protection to offset claim losses on pre-1992 policies in excess of assumed reserves if necessary, and therefore any development on the pre-1992 policies had not been reflected in the Company's Consolidated Statements of Earnings. Subsequent to the Company's purchase of the ATIC Preferred Stock, adverse or favorable loss development on these pre-1992 policies is reflected in the Consolidated Statements of Earnings.
On December 11, 1996, the Company declared a 10% stock dividend, to shareholders of record on December 23, 1996, distributed January 7, 1997. 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, 1996. Fractional shares were paid in cash.
Certain reclassifications have been made in the 1995 and 1994 Consolidated Financial Statements to conform to the classifications used in 1996.
On May 2, 1995, the Company acquired the common stock of Butte County Title Company, an underwritten title company with operations in Butte County in the state of California. Butte County Title Company was acquired from its selling shareholders for $400,000 in cash, which approximated book value.
On June 14, 1995, the Company acquired certain assets of World Title Company ("World") for a purchase price to be determined based on the collection of certain accounts. In the case of trade accounts receivable acquired, the Company retained certain percentages of amounts collected subsequent to the acquisition date and remitted the remaining amounts to the Department of Insurance of the State of California ("Department"). The Company has also acquired the open title orders of World as of the purchase date. The Company retained certain percentages of amounts collected on open title orders subsequent to the acquisition date and remits the remaining amounts to the Department. The Company retained a total of $2.1 million in 1996. The amount retained by the Company in 1995 was not material.
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 173,790 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. operates as a majority-owned subsidiary of the Company and is now known as Fidelity National Tax Service, Inc. ("Fidelity National Tax"). This transaction has been accounted for as a purchase. The CRM results of operations were not material to the 1996 Consolidated Financial Statements.
The carrying amounts and fair values of the Company's fixed maturity securities at December 31, 1996 and 1995 are as follows:
The change in unrealized gains (losses) on fixed maturities for the years ended December 31, 1996, 1995, and 1994 was $(3,255,000), $13,025,000 and $(16,574,000), respectively.
Equity securities at December 31, 1996 and 1995 consist of investments in various industry groups as follows:
The change in unrealized gains (losses) on equity securities for the years ended December 31, 1996, 1995 and 1994 was $15,245,000, $9,369,000 and $(2,725,000), respectively.
During the years ended December 31, 1996, 1995, and 1994, gross realized gains on sales of fixed maturity securities considered available for sale were $452,000, $1,700,000 and $248,000, respectively; and gross realized losses were $714,000, $1,331,000 and $3,057,000, respectively. Gross proceeds from the sale of fixed maturity securities considered available for sale amounted to $93,108,000, $188,902,000 and $101,323,000, during the years ended December 31, 1996, 1995, and 1994, respectively.
increasing rental rates approximately 20%. The terms of the agreement between Manchester and Folco provide that each of the subordinated deeds of trust will be released and reconveyed upon payment to Manchester of 15% of the net sales proceeds from the sale of the property encumbered by the subordinated deeds of trust. As of December 31, 1996 and 1995, the balance outstanding on the note approximated $471,000 and $587,000, respectively, and one property remains unsold.
At December 31, 1996, the Company had financial interests ranging from 22% to 50% in three real estate partnerships which are accounted for under the equity method. The Company had financial interests ranging from 22% to 50% in five real estate partnerships which were accounted for under the equity method at December 31, 1995. These partnerships are involved in the ownership and management of commercial office buildings, retail facilities and have acquired specific parcels of real property for investment purposes. The Company, through Manchester Development Corporation ("Manchester"), a wholly-owned subsidiary, had a general partnership interest in one of the three real estate partnerships at December 31, 1996, and general partnership interests in three of the five real estate partnerships at December 31, 1995. See Note N.
Two of these partnerships, representing raw land investments, also have officers and directors of the Company as partners with ownership interests that are based on cash contributions. These two partnerships require that all of the partners, including the Company, make pro-rata capital contributions should the partnerships require additional funds to pay liabilities.
On May 16, 1996, the Company paid $3.1 million to acquire a first lien loan of $3.4 million secured by a commercial office building owned by a real estate partnership in which Manchester is the sole general partner. During 1996, but prior to the Company's acquisition of the loan, officers and directors of the Company assigned their ownership interests in the real estate partnership to Manchester. The Company leases space in the commercial office building.
At December 31, 1996, the Company had a 92.5% and a 76% interest in real estate partnerships which are consolidated with the Company. The Company also had a 76% interest in a real estate partnership which was consolidated with the Company at December 31, 1995.
Manchester is presently a partner with Sussex Holdings, Ltd. (an affiliate of Folco) in Folco Mission Valley Partners Limited Partnership, a California limited partnership. Manchester owns a 22% limited partnership interest and Sussex Holdings, Ltd. owns a 78% general partnership interest. Fidelity Title is the sole tenant in the building and received an approximate 30% decrease in its annual rental rate based upon its lease with Folco Mission Valley.
The Company's Credit Agreement, dated as of September 21, 1995, which includes a $22 million term loan and a $13 million revolving credit facility, is collateralized by the common stock of certain Insurance Subsidiaries. Additionally, the Company must comply with certain affirmative and negative covenants related to the Credit Agreement which require, among other things, that the Company maintain certain financial ratios related to liquidity, net worth, capitalization, investments, restricted payments and certain dividend restrictions. The Company is in compliance with these covenants. At December 31, 1996, the maximum
The carrying amounts and estimated fair values of the Company's notes payable were as follows at December 31, 1996 and 1995 (dollars in thousands):
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.
The Company's title insurance underwriting subsidiaries are, in the ordinary course of business, subject to claims made under, and from time-to-time are named as defendants in legal proceedings relating to, policies of insurance they have issued or other services performed on behalf of insured policyholders and other customers. The Company believes that the reserves reflected in its Consolidated Financial Statements are adequate to pay losses and loss adjustment expenses which may result from such claims and proceedings; however, such estimates may be more or less than the amount ultimately paid when the claims are settled.
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. The Compensation Committee of the Board of Directors is currently negotiating new employment agreements with the four executives.
Management believes that no other actions depart from customary litigation incidental to the business of the Company and that resolution of all such litigation will not have a material adverse effect on the Company.
In conducting its operations, the Company routinely holds customers' assets in trust, pending completion of real estate transactions. Such amounts are maintained in segregated bank accounts and have not been included in the accompanying Consolidated Balance Sheets. The Company has a contingent liability relating to proper disposition of these balances for its customers which amounted to $329.4 million at December 31, 1996.
Rent expense incurred under operating leases during the years ended December 31, 1996, 1995 and 1994 was $23,413,000, $21,388,000 and $24,795,000, respectively. Included in rent expense for 1996, 1995 and 1994 is $523,000, $523,000 and $772,000, respectively, paid to related parties.
The Insurance Subsidiaries are regulated by the insurance commissioners of their respective states of domicile. Regulatory examinations usually occur at three year intervals. Examinations are currently in progress for Fidelity Pennsylvania (1995), Fidelity Tennessee (1995), ATIC (1994) and Nations Title (1995 and 1996). Examinations have been completed for Fidelity Title and Fidelity California as of and for the three-year period ended December 31, 1993.
The Department of Commerce and Insurance of the State of Tennessee has completed the field portion of their triennial examination of Fidelity Tennessee as of and for the three-year period ended December 31, 1995. The Company has recently received a preliminary report of examination. The preliminary report, as forwarded to the Company by the Department of Commerce and Insurance of the State of Tennessee, indicates that the examiners are proposing certain immaterial adjustments. These adjustments have previously been included in the 1995 Fidelity Tennessee Statutory Annual Statement as amended and filed with insurance regulatory authorities.
The Kansas Department of Insurance has completed a triennial examination of Nations Title as of and for the two-year period ended December 31, 1995 and is currently performing an examination as of and for the year ended December 31, 1996. The Company received a report of examination as of and for the two-year period ended December 31, 1995. The report, as forwarded to the Company by the Kansas Department of Insurance, indicates that the examiners are proposing adjustments that materially impact the statutory capital and surplus of Nations Title. These adjustments have been included in the 1996 Statutory Annual Statement as filed with insurance regulatory authorities and have been considered in the calculation of dividend capability, statutory surplus and statutory income (loss) reported below. Further, Nations Title has recently entered into a voluntary consent order with the Kansas Department of Insurance agreeing to cease writing all new insurance business and to certain other conditions and restrictions. This is consistent with the Company's intent in acquiring Nations Title, which was to have all policies which formerly would have been issued by Nations Title issued by one of the Fidelity National Insurance Subsidiaries.
distributions to the Company of $5,621,000. Fidelity Pennsylvania and Fidelity New York do not have any dividend paying capability as of January 1, 1997.
The combined statutory capital and surplus of the Insurance Subsidiaries was $77,125,000, $67,525,000 and $90,153,000 as of December 31, 1996, 1995 and 1994, respectively. The December 31, 1996, combined capital and surplus includes $11,189,000 of restricted surplus resulting from the aggregate excess of loss reinsurance transaction entered effective December 31, 1996. The Company has submitted the aggregate excess of loss reinsurance contract to the appropriate Departments of Insurance for approval. See Note A. The combined statutory income (loss) of the Insurance Subsidiaries was $17,451,000, $(1,533,000) and $6,664,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Combined statutory income for the year ended December 31, 1996, also includes a reinsurance gain of $11,189,000 related to the aggregate excess of loss reinsurance transaction. These amounts do not include certain of the proposed ATIC examination adjustments previously discussed.
Pursuant to statutory requirements of the various states in which the Insurance Subsidiaries are domiciled, they must maintain certain levels of minimum capital and surplus. Under California law, the minimum statutory requirement is $500,000 for paid-in capital represented by shares of stock. Under Tennessee law, minimum statutory requirements are $100,000 for capital, and $500,000 for capital and surplus combined. Under Pennsylvania law, the minimum statutory requirements are capital of not less than $250,000, and paid in initial surplus at least equal to fifty percent of capital. Under New York law, the minimum statutory requirement is $250,000 for capital and initial surplus. Under Kansas law, minimum statutory requirements are $450,000 for capital and $300,000 for initial surplus. Each of the Company's title underwriters have complied with the minimum statutory requirements as of December 31, 1996.
In 1987, stockholders approved the adoption of an Employee Stock Purchase Plan ("ESPP"). Under the terms of the ESPP and subsequent amendments, there are 7,260,000 shares of the Company's Common Stock available for purchase at current market prices by Company employees who meet certain vesting requirements. Pursuant to the ESPP, Company employees may contribute an amount between 5% and 15% of their base salary and certain commissions. The Company contributes varying amounts as specified in the ESPP.
Pro forma information regarding net earnings and earnings per share is required by Statement 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 rate used in the calculation is the rate on the date the options were granted. The risk free interest rate used for options granted during 1996 was 6.5% and for options granted during 1995 the risk free interest rate used was 6.9%. A volatility factor for the expected market price of the Common Stock of 50% was used for options granted in
Concentrations of credit risk with respect to notes receivable are limited because a number of diverse entities make up the Company's notes receivable base, thus spreading the credit risk. The Company controls credit risk through credit approvals, credit limits and monitoring procedures. The Company performs in-depth credit evaluations for all notes and requires guarantees and/or collateral, if deemed necessary.