The majority of the branch offices are leased from third parties. We own the remaining branch offices. See Note J to Notes to Consolidated Financial Statements.
As of December 31, 2002, we leased office and storage space as follows:
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 2002 presentation.
During 2001, we recorded a $5.7 million, after-tax charge, reflected as a cumulative effect of a change in accounting principle, as a result of adopting 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).
Cash and cash equivalents as of December 31, 2002, 2001 and 2000 include cash pledged to secure trust deposits of $295.1 million, $367.9 million and $132.1 million, respectively.
In the fourth quarter of 2001, we recorded certain charges totaling $10.0 million, after applicable taxes, relating to the discontinuation of small-ticket lease origination at FNF Capital and the wholesale international long distance business at Micro General.
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, 2002, fluctuated in a pattern generally consistent with the fluctuation in direct title insurance premiums and order counts. Escrow and other title related fees were $970.7 million, $728.4 million and $459.1 million, respectively, during 2002, 2001 and 2000.
Interest and investment income levels are primarily a function of securities markets, interest rates and the amount of cash available for investment. Interest and investment income in 2002 was $78.0 million, compared with $93.1 million in 2001, a decrease of $15.1 million, or 16.2%. Average invested assets, excluding real estate, increased 23.1% to $2,704.9 million, from $2,196.9 million in 2001. The tax equivalent yield in 2002, excluding realized gains and losses was 3.4% as compared with 4.8% in 2001 and 6.1% in 2000. The decrease in interest and investment income in 2002 as compared with 2001, despite the increase in average invested assets, is due to a decrease in interest income reflecting lower interest rates in 2002 as compared with 2001. Interest and investment income increased $5.7 million, or 6.5% in 2001 to $93.1 million from $87.4 million in 2000. Average invested assets, excluding real estate, increased 33.1% in 2001 from $1,650.0 million in 2000. The increase in interest and investment income in 2001 from 2000 is the result of increased interest and dividend income generated by the increased average invested asset base as a result of the inclusion of Chicago Title for a full year in 2001 versus a partial year in 2000.
Net realized gains and (losses) for 2002, 2001 and 2000 were $12.0 million, $6.3 million and $(201), respectively. Net realized gains in 2002 includes a $3.1 million gain recognized on our investment in Santa
Other income represents revenue generated by Micro General, our majority-owned information-services subsidiary, which was merged with FNIS on July 9, 2002 (see “Recent Developments”) and FNF Capital, our equipment-leasing subsidiary. Other income was $38.8 million in 2002, $64.7 million in 2001 and $82.8 million in 2000. The decrease in other income from 2001 to 2002 is due to the discontinuation in the fourth quarter of 2001 of FNF Capital’s small-ticket lease origination business and Micro General’s wholesale international long distance business. The decrease in other income from 2000 to 2001 is primarily due to decreases in externally generated revenue by Micro General.
Personnel costs include base salaries, commissions and bonuses paid to employees, and are one of our most significant operating expenses. These costs generally fluctuate with the level of orders opened and closed and with the mix of revenue. Personnel costs totaled $1,476.4 million, $1,187.2 million and $845.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. Personnel costs as a percentage of total revenue have remained relatively consistent over the three-year period ended December 31, 2002. Those percentages were 29.1% in 2002, 30.6% in 2001 and 30.8% in 2000. We have taken significant measures to maintain appropriate personnel levels and costs relative to the volume and mix of business while maintaining customer service standards and quality controls. We will continue to monitor prevailing market conditions and will adjust personnel costs in accordance with activity.
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 20.1% in 2002 from 21.4% in 2001, and decreased in 2001 from 22.8% in 2000. The decrease in other operating expenses as a percentage of total revenues in 2002 and 2001 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. Other operating expenses totaled $1,021.9 million, $829.4 million and $624.1 million in 2002, 2001 and 2000, respectively.
The provision for claim losses includes an estimate of anticipated title claims and escrow losses. The estimate of anticipated title and title related claims is accrued as a percentage of title premium revenue based on our historical loss experience and other relevant factors. We monitor our claims loss experience on a continual basis and adjust the provision for claim losses accordingly. 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 2002, 2001 and 2000.
The favorable development on prior years’ loss reserves during 2002, 2001 and 2000 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.
As a result of adopting SFAS No. 142, we did not record goodwill amortization in 2002. See Note A of Notes to Consolidated Financial Statements. Goodwill amortization was $54.2 million in 2001 and $35.0 million in 2000. 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, goodwill amortization in 2001 includes an $8.0 million pretax write-off associated with the discontinuance of two businesses in the fourth quarter of 2001.
Minority interest for 2002, 2001 and 2000 was $13.1 million, $3.0 million and $1.4 million, respectively. The increase in minority interest in 2002 and 2001 is primarily attributable to increased earnings of our majority-owned subsidiaries.
Cash Flows. Our cash requirements include debt service, operating expenses, taxes, capital expenditures, systems development, treasury stock repurchases, lease securitizations, business acquisitions and dividends on our common stock. We believe that all anticipated cash requirements for current operations will be met from internally generated funds, through cash dividends from subsidiaries, cash generated by investment securities and bank borrowings through public debt offerings and existing credit facilities. Our short- and long-term liquidity requirements are monitored regularly to match cash inflows with cash requirements. We forecast the daily needs of all of our subsidiaries 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.
The credit agreement and other debt facilities impose certain affirmative and negative covenants on us relating to current debt ratings, certain financial ratios related to liquidity, net worth, capitalization, investments, acquisitions and restricted payments, and certain dividend restrictions. We are in compliance with all of our debt covenants as of December 31, 2002.
On March 11, 2003, we issued $250.0 million aggregate principal amount of 5.25% notes. We received proceeds of approximately $246.1 million, after expenses, which will be used to pay a portion of the $1,050.0 million purchase price for AIS (see “Recent Developments”). Interest is payable semiannually and the notes are due in March 2013.
Contractual Obligations. Our financing obligations generally include our credit agreement and other debt facilities, including the $250.0 million, 5.25% notes we issued on March 11, 2003 (see “Recent Developments”), and operating lease payments on certain of our premises and equipment. Our purchase obligations for business acquisitions relate to the acquisition of LSI and Bankers during the first quarter of 2003 for approximately $75.0 million and $41.6 million, respectively and the January 28, 2003 stock purchase agreement we entered into with ALLTEL for the purchase of AIS for $1,050.0 million (see “Recent Developments”). As of December 31, 2002, our required annual payments relating to these contractual obligations are as follows:
Capital Stock Transactions. On January 24, 2001, we issued 9,740,500 shares of our common stock at a public offering price of $27.69 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.
On April 24, 2001, our Board of Directors authorized us to purchase up to 6,050,000 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 part of this program,
On April 24, 2002, our Board of Directors approved a three-year stock repurchase program, whereby we will devote a portion of our annual cash flow from operations to the systematic repurchase of shares of our common stock. Purchases may be made by us from time to time in the open market, in block purchases or in privately negotiated transactions. As of December 31, 2002, we have repurchased a total of 2,035,170 shares of common stock for $61.2 million, or an average price of $30.08. The amount repurchased includes 439,670 shares of common stock purchased from certain of our officers and directors during the third quarter of 2002, of which 165,950 shares were accepted as full payment of notes receivable, including accrued interest. See Note E of Notes to Consolidated Financial Statements. In December 2002, we retired 563,570 of these shares held as treasury stock, totaling $14.3 million. Through March 18, 2003, a total of 2,546,070 shares of common stock has been repurchased for $78.0 million, or an average price of $30.62.
Critical Accounting Policies. The accounting policies described below are those we consider critical in preparing our Consolidated Financial Statements. Certain of these policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of certain contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. See Note A of Notes to the Consolidated Financial Statements for a more detailed description of our significant accounting policies that have been followed in preparing our Consolidated Financial Statements.
Reserve for Claim Losses. Our reserve for claim losses includes known claims as well as losses we expect to incur, net of recoupments. Each known claim is reserved based on our review as to the estimated amount of the claim and the costs required to settle the claim. Reserves for claims that are incurred but not reported are established at the time premium revenue is recognized based on historical loss experience and other factors, including industry averages, claim loss history, current legal environment, geographic considerations and type of policy written.
Recent Accounting Pronouncements. During the second quarter of 2001, we 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 prepay-
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. 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. Beginning in 2002, we did not record goodwill amortization. As required by SFAS No. 142, we performed an annual goodwill impairment test on our reporting units and have determined that each of our reporting units has a fair value in excess of our carrying value, therefore no goodwill impairment has been recorded. See Note A of Notes to the Consolidated Financial Statements.
In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of Statement of Financial Accounting Standard No. 123” (“SFAS No. 148”). This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of Statement of Financial Accounting Standard No. 123 and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the method used on reported results. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the Notes to these Consolidated Financial Statements. We will implement Statement of Financial Accounting Standard No. 148 effective January 1, 2003 regarding disclosure requirements for condensed financial statements for interim periods. We have not yet determined whether we will voluntarily change to the fair value based method of accounting for stock-based employee compensation.
Consolidated Statements of Earnings for the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2002, 2001 and 2000
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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
Net of income tax expense of $12.0 million, $3.8 million and $5.8 million for 2002, 2001 and 2000, respectively.
Net of income tax expense (benefit) of $3.5 million, $5.5 million and $(198) for 2002, 2001 and 2000, respectively.
Net of income tax benefit of $(10.2) million and $(7.6) million in 2002 and 2001, respectively.
Fidelity National Financial, Inc., through its principal subsidiaries (collectively, the “Company”), is the largest title insurance and diversified real estate related services company in the United States. The Company’s title insurance underwriters - Fidelity National Title, Chicago Title, Ticor Title, Security Union Title and Alamo Title - together issue all of the Company’s title insurance policies in 49 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands, and in Canada and Mexico.
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 data and disclosure services, multiple listing services, mortgage loan fulfillment services, flood insurance and home owners insurance.
The Company also originates, funds, purchases, sells, securitizes and services equipment leases for a broad range of businesses through its wholly-owned subsidiary, FNF Capital, Inc. (“FNF Capital”). In the fourth quarter of 2001, the Company discontinued its small-ticket lease origination business.
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. 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. Included in fixed maturities are mortgage-backed securities, which are recorded at purchase cost. Discount or premium is recorded for the difference between the purchase price and the principal amount. The discount or premium is amortized using the interest method and is recorded as an adjustment to interest and investment income. The interest method results in the recognition of a constant rate of return on the investment equal to the prevailing rate at the time of purchase or at the time of subsequent adjustments of book value. Changes in prepayment assumptions are accounted for prospectively.
Other long-term investments, which consist of a limited partnership interest in an investment fund, as well as certain other debt instruments and equity investments, are carried at cost, market, or on the equity method, as appropriate.
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.
Direct financing leases which the Company has both the intent and ability to hold to maturity are classified as held to maturity. Direct financing leases originated principally for the purpose of selling in the
near term are classified as available for sale and are stated at the lower of amortized cost or market as determined by outstanding commitments from investors or current investor-yield requirements calculated on an aggregate basis.
Residual interests in securitizations (“Residuals”) of lease receivables in a trust are recorded as a result of the sale of lease receivables through securitization. These Residuals are recorded at estimated fair value and accounted for as available for sale securities. Prior to April 1, 2001, changes in the fair value of the Residuals were recorded as unrealized gains or losses, net of applicable deferred income taxes (benefits), and were excluded from earnings and credited or charged directly to a separate component of stockholders’ equity. Included in accumulated other comprehensive earnings at December 31, 2000 were net unrealized losses of $3.2 million related to Residuals.
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.
Gains or losses resulting from the sales of leases are recognized in the accompanying Consolidated Statements of Earnings at the date of sale and are based upon the excess of the proceeds over the allocated cost of the leases sold. Nonrefundable fees and direct costs associated with the origination of leases are deferred and recognized over the life of the lease and any remaining unamortized balance is recognized when the leases are sold.
presented are not necessarily indicative of amounts the Company could realize or settle currently. The Company does not necessarily intend to dispose of or liquidate such instruments prior to maturity.
As required by SFAS No. 142, the Company has completed an annual goodwill impairment test on its reporting units and has determined that each of its reporting units has a fair value in excess of its carrying value. Accordingly, no goodwill impairment has been recorded.
Beginning on January 1, 2002, the Company ceased recording goodwill amortization in accordance with SFAS No. 142. The following table reconciles reported net earnings and net earnings per share to adjusted net earnings and net earnings per share:
At December 31, 2002 and 2001, goodwill was $1,089.5 million and $901.4 million, respectively, less accumulated amortization of $92.9 million in both 2002 and 2001. In accordance with SFAS No. 142, the Company ceased recording goodwill amortization beginning on January 1, 2002.
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 based on 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
Direct title insurance premiums and escrow and other title related fees are recognized as revenue at the time of closing of the related transaction as the earnings process is considered complete. Agency title insurance premiums are recognized as revenue when policies are reported to the Company and are recorded as revenue on a gross basis (before the deduction of agent commissions). The Company accrues for unreported agency title insurance premiums based on historical reporting patterns of its agents and current trends. Real estate related services and other income are recognized over the period the related services are provided.
On April 24, 2002, the Company declared a 10% stock dividend to stockholders of record on May 9, 2002, payable on May 23, 2002. 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 dividends was credited to additional paid-in capital and a like amount charged to retained earnings during 2002 and 2001. 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 the stock dividends.
Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net earnings available to common stockholders plus the impact of assumed conversions
of 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.
Options to purchase 68,120 shares, 207,720 shares and 1,408,170 shares of the Company’s common stock were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares for the years ended December 31, 2002, 2001 and 2000, respectively.
At December 31, 2002, the Company has seven stock-based employee compensation plans, which are described more fully in Note L. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. All options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant; therefore no stock-based compensation cost is reflected in net income. However, certain of the Company’s stock-based compensation plans allow for exercise prices with a fixed discount from the quoted market price, and as such, employee compensation cost is reflected in net income as it pertains to the exercise price decrease. The following table illustrates the effect on net income and
Certain reclassifications have been made in the 2001 and 2000 Consolidated Financial Statements to conform to the classifications used in 2002.
approximately 66.1% of the outstanding common stock of FNIS. In the Company’s Consolidated Financial Statements, this transaction is accounted for in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”) and FASB Technical Bulletin 85-5. Accordingly, FNIS’s acquisition of the minority stockholders’ interest in Micro General (the “noncontrolled equity interest”) was recognized by the Company as the acquisition of shares from a minority interest, which is accounted for by the purchase method under SFAS No. 141. FNIS’s acquisition of the Company’s interest in Micro General (the “controlled equity interest”) is not considered a business combination and, therefore, the Company recognized the related assets and liabilities transferred from the controlled equity interest in Micro General to FNIS at their historical carrying values. The market price per share of FNIS common stock that was issued to Micro General minority stockholders in this transaction exceeded the Company’s carrying amount per share of FNIS common stock, resulting in an increase of $98.7 million to the Company’s consolidated equity and an increase in net assets, the majority of which was goodwill. The Company has recorded certain preliminary purchase accounting adjustments, which are based on estimates utilizing available information. Such purchase accounting adjustments may be refined as additional information becomes available.
On May 23, 2002, the Company acquired a 75% interest in Homebuilders Financial Network, Inc. (“HFN”), a provider of outsource mortgage loan fulfillment services to homebuilders, for approximately $21.0 million in cash.
The change in unrealized gains (losses) on fixed maturities for the years ended December 31, 2002, 2001, and 2000 was $27.3 million, $2.6 million and $29.1 million, respectively.
Equity securities at December 31, 2002 and 2001 consist of investments in various industry groups as follows:
During the years ended December 31, 2002, 2001 and 2000, gross realized gains on sales of fixed maturity securities considered available for sale were $26.1 million, $16.5 million and $1.7 million, respectively; and gross realized losses were $7.7 million, $7.3 million and $586, respectively. Gross proceeds from the sale of fixed maturity securities considered available for sale amounted to $776.9 million, $516.5 million and $289.6 million during the years ended December 31, 2002, 2001 and 2000, respectively.
At December 31, 2002, the weighted average implicit rate of interest is approximately 10.06%.
The allowance for doubtful receivables is primarily related to certain promissory notes at December 31, 2002 and 2001. Interest income is not recognized on the Company’s non-performing notes receivable. There were no non-performing notes receivable at December 31, 2002 or 2001.
In connection with the Chicago Title merger, the Company entered into a syndicated credit agreement. The credit agreement provides for three distinct credit facilities:
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, 2002.
On August 20, 2001, the Company completed a public offering of $250.0 million aggregate principal amount of 7.3% notes due August 15, 2011. The notes were priced at 99.597% of par to yield 7.358% annual interest. As such, the Company recorded a discount of $1.0 million, which is netted against the $250.0 million aggregate principal amount of notes. The discount is amortized to interest expense on a straight-line basis over 10 years, the term of the notes. The Company 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.
On March 11, 2003, the Company completed a public offering of $250.0 million aggregate principal amount of 5.25% notes due March 15, 2013. The notes were priced at 99.247% of par to yield 5.433% annual interest. The Company received net proceeds of approximately $246.1 million, after expenses, which will be used to pay a portion of the $1,050.0 million purchase price of ALLTEL Information Services, Inc. See Note P.
Principal maturities, including the $250.0 million, 5.25% notes issued subsequent to December 31, 2002, are as follows (dollars in thousands):
The effective income tax rate differs from the statutory income tax rate as follows:
Based upon the Company’s current and historical pretax earnings, management believes it is more likely than not that the Company will realize the benefit of its existing deferred tax assets. Management believes the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. However, there can be no assurance that the Company will generate any earnings or any specific level of continuing earnings in future years. Certain tax planning or other strategies could be implemented, if necessary, to supplement income from operations to fully realize recorded tax benefits.
The Company’s 1998 and 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 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.
The Company was named in class action lawsuits alleging irregularities and violations of law in connection with title and escrow practices. Three lawsuits are currently pending. Four previously filed lawsuits have been settled or dismissed. The three pending suits are filed by private parties in State court in Los Angeles. On October 8, 2002, the Company reached a settlement with the Attorney General and the State of California in the defendant class lawsuit filed against the Company and the Company’s principal competitors on behalf of the entire title and escrow industry in California. Under the terms of the settlement, the Company will pay $5.1 million to the California Attorney General and a total of up to $26.0 million in the form of (i) cash payments to former escrow customers that meet certain eligibility requirements and file timely claims, and (ii) discounts on future escrow and title insurance services to eligible customers as agreed to in the settlement. In reaching the settlement, the Company denied any liability or wrongdoing. The settlement is contingent upon certain verification procedures which are currently ongoing.
Three lawsuits, captioned Schneider v. Fidelity National Financial, Inc. et al. (Case No. 03CC00017), Rossi V. Michael C. Lowther, et al. (Case No,. 03CC0021) and Miller v. Michael C. Lowther, et al. (Case No. 03CC00018), have been filed in Orange County Superior Court naming as defendants the Company and the members of the Board of Directors of ANFI. The complaints seek class action status and allege breach of fiduciary duty in connection with the approval of the merger by ANFI’s directors. The Company believes the lawsuits are without merit.
In conducting its operations, the Company routinely holds 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 the accompanying Consolidated Balance Sheets. The Company has a contingent liability relating to proper disposition of these balances for our customers which amounted to $6.7 billion at December 31, 2002. As a result of holding these customers’ assets in escrow, the Company has ongoing programs for realizing economic benefits during the year through favorable borrowing and vendor arrangements with various banks. There were no investments or loans outstanding as of December 31, 2002 related to these arrangements.
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
Pursuant to statutory accounting requirements of the various states in which the Company’s title insurance subsidiaries are licensed, they must defer a portion of premiums earned as an unearned premium reserve for the protection of policyholders and must maintain qualified assets in an amount equal to the statutory requirements. The level of unearned premium reserve required to be maintained at any time is determined by statutory formula based upon either the age, number of policies and dollar amount of policy liabilities underwritten or the age and dollar amount of statutory premiums written. As of December 31, 2002, the combined statutory unearned premium reserve required and reported for the Company’s title insurance subsidiaries was $861.4 million.
The Company’s underwritten title companies are also subject to certain regulation by insurance regulatory or banking authorities, primarily relating to minimum net worth. Minimum net worth of $7.5 million, $2.5 million and $3.0 million is required for Fidelity National Title Company, Fidelity National Title Company of California and Chicago Title Company, respectively. The Company is in compliance with all of its respective minimum net worth requirements at December 31, 2002.
On April 24, 2001, the Company’s Board of Directors authorized the Company to purchase up to 6,050,000 shares of its common stock. Purchases may be made from time to time by the Company in the open market or in block purchases or in privately negotiated transactions depending on market conditions and other factors. As part of this program, the Company has repurchased a total of 1,100,000 shares of common stock for $22.9 million, at an average price of $20.84 per share. In May 2002, the Company retired those 1,100,000 shares held as treasury stock.
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, 2002, 2001 and 2000 was $17.5 million, $13.9 million and $5.0 million, respectively.
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 5,020,018 shares were available for grants of options under this plan.
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 829,713 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, 2002:
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the value of an estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The following table sets forth the funded status of the Pension Plan and amounts reflected in the Company’s Consolidated Balance Sheets as of December 31, 2002, 2001 and 2000:
The net pension liability included in accounts payable and accrued liabilities of December 31, 2002 and 2001 is $44.9 million and $27.2 million, respectively. The net pension liability at December 31, 2002 and 2001 includes the additional minimum pension liability adjustment of $26.1 million and $19.1 million, respectively, which was recorded as a net of tax charge of $15.9 million and $11.5 million to accumulated other comprehensive earnings in 2002 and 2001 in accordance with SFAS No. 87.
The principal weighted average assumptions used in the actuarial calculations of projected benefit obligations and net periodic pension expense are as follows: discount rate of 6.75% for 2002 and 7.25% for 2001 and 2000, and an expected return on Pension Plan assets of 9.0% for 2002, 2001 and 2000.
In the normal course of business the Company and certain of its subsidiaries enter into off-balance sheet credit risk associated with certain aspects of its title insurance business and other activities. The Company has various guarantees for agent loans totaling $1.3 million as of December 31, 2002.
The Company generates a significant amount of title insurance premiums in California and Texas. In 2002, 2001 and 2000 (on an unaudited pro forma basis, assuming the Chicago Title merger had been consummated on January 1, 2000), California and Texas accounted for 25.2% and 12.1%, 24.8% and 13.4% and 20.6% and 14.6% of total title premiums, respectively.
The Company places its cash equivalents and short-term investments with high credit quality financial institutions and, by policy, limits the amount of credit exposure with any one financial institution. Investments in commercial paper of industrial firms and financial institutions are rated investment grade by nationally recognized rating agencies.
This segment, consisting of title insurance underwriters and wholly-owned title insurance agencies, provides core title insurance and escrow services, including document preparation, collection and trust activities. This segment coordinates its activities with those of the real estate related services segment described below in order to offer the full range of real estate products and services required to execute and close a real estate transaction.
This segment, consisting of various real estate related and ancillary service subsidiaries, offers the complementary specialized products and services required to execute and close a real estate transaction that are not offered by the title insurance segment 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 data and disclosure services, multiple listing services, and mortgage loan fulfillment services. These services require specialized expertise and have been centralized for efficiency and management purposes.
The accounting policies of the segments are the same as those described in Note A. Intersegment sales or transfers which occurred in the ordinary course of consolidated operations, have been eliminated from the segment information provided.
On March 11, 2003, the Company completed a public offering of $250.0 million aggregate principal amount of 5.25% notes due March 15, 2013. The notes were priced at 99.247% of par to yield 5.433% annual interest. The Company received net proceeds of approximately $246.1 million, after expenses, which will be used to pay a portion of the $1,050.0 million purchase price of AIS.
Company recorded a charge of $5.7 million, net of income tax benefit of $3.0 million, in the second quarter of 2001.
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. 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. Beginning in 2002, the Company did not record goodwill amortization. As required by SFAS No. 142, the Company performed an annual goodwill impairment test on its reporting units and have determined its reporting units have a fair value in excess of its carrying amounts, therefore no goodwill impairment has been recorded. See Note A.
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. The adoption of SFAS No. 144 did not have a material impact on the Company’s financial statements.
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” (SFAS No. 146). This standard is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 is not expected to have a material effect on the Company’s financial statements.
In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 123” (“SFAS No. 148”). This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 and APB Opinion No. 28, “Interim