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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) |
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For the Fiscal Year Ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) |
Commission File No. 1-9396
Fidelity National Financial,
Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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86-0498599 |
(State or other jurisdiction
of incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
601 Riverside Avenue
Jacksonville, Florida 32204
(Address of principal executive offices, including zip
code) |
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(904) 854-8100
(Registrant’s telephone number,
including area code) |
Securities registered pursuant to Section 12(b) of the
Act:
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Name of each exchange on which registered |
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Common Stock, $.0001 par value
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K, or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
The aggregate market value of the shares of the Common Stock
held by non-affiliates of the registrant as of June 30,
2004 was $6,205,211,279.
The information in Part III hereof is incorporated herein
by reference to the registrant’s Proxy Statement on
Schedule 14A for the fiscal year ended December 31,
2004, to be filed within 120 days after the close of the
fiscal year that is the subject of this Report.
TABLE OF CONTENTS
FORM 10-K
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PART I
We are the largest title insurance company in the United States.
Our title insurance underwriters — Fidelity National
Title, Chicago Title, Ticor Title, Security Union Title and
Alamo Title — together issued approximately 31.4%
of all title insurance policies issued nationally during 2003,
including the 2003 results of American Pioneer Title Insurance
Company, which we acquired in March 2004 (see “Recent
Developments”). We are also a leading provider of
technology solutions, processing services, and information
services to the financial services and real estate industries.
Over 2,800 financial institutions use our services, including 45
of the 50 largest banks in the U.S. Our software
applications process over 50% of all U.S. residential
mortgage loans by dollar volume with balances exceeding
$3.6 trillion, and over 235 million deposit accounts
and non-mortgage consumer loans and leases are processed on our
core bank processing platform. We also provide customized
business process outsourcing related to aspects of the
origination and management of mortgage loans to national lenders
and loan servicers. Our information services, including our
property data and real estate-related services, are used by
mortgage lenders, mortgage investors and real estate
professionals to complete residential real estate transactions
throughout the U.S. We provide information services that
span the entire home purchase and ownership life cycle, from
contact through closing, refinancing and resale.
We have six reporting segments:
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Title Insurance. The title insurance segment
consists of our title insurance underwriters and our
wholly-owned title insurance agencies. The title segment
provides core title insurance and escrow and other title related
services including collection and trust activities,
trustee’s sales guarantees, recordings and reconveyances. |
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Specialty Insurance. The specialty insurance segment,
consisting of our various non-title insurance subsidiaries,
issues flood, home warranty, homeowners, automobile and certain
niche personal lines insurance policies. |
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Financial Institution Software and Services. The
financial institution software and services segment consists
primarily of the operations of Fidelity Information Services,
Inc. (“FI”), which was acquired on April 1, 2003
and subsequent acquisitions of WebTone, Aurum, Sanchez and
InterCept. This segment focuses on two primary markets:
financial institution processing and mortgage loan processing. |
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Lender Outsourcing Solutions. The lender outsourcing
solutions segment includes our loan facilitation services, which
consist of centralized, customized title agency and closing
services, which we offer to first mortgage, refinance, home
equity and sub-prime lenders, and our default management
services, which include foreclosure posting and publishing
services, loan portfolio services, field services and property
management. These services allow our customers to outsource the
business processes necessary to take a loan and the underlying
real estate securing the loan though the default and foreclosure
process. |
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Information Services. The information services segment
offers real estate related information services. Included in the
information services we provide are property appraisal and
valuation services, property records information, real estate
tax services, borrower credit and flood zone information and
certification and multiple listing software and services. |
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Corporate and Other. The corporate and other segment
consists of the operations of the parent holding company;
certain other unallocated corporate overhead expenses, the
operations of our wholly-owned equipment-leasing subsidiary and
other small operations. |
Our title insurance and specialty insurance segments make up our
insurance underwriting businesses, while our financial
institution software and services, lender outsourcing solutions
and information services segments make up the technology
solutions, processing and information-based services businesses
of our subsidiary Fidelity National Information Services, Inc.
(“FIS”).
Strategy
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Title and Specialty Insurance |
Our strategy in the title insurance business is to maximize
operating profits by increasing our market share by aggressively
and effectively managing operating expenses throughout the real
estate business cycle. To accomplish our goals, we intend to:
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Continue to operate each of our five title brands
independently. We believe that in order to maintain and
strengthen our title insurance revenue base, we must leave the
Fidelity Title, Chicago Title, Ticor Title, Security Union Title
and Alamo Title brands intact and operate them independently.
Entrepreneurship and close customer relationships are an
integral part of the culture at each of our title brands. We
believe this culture of independence aids in employee retention,
which is critical to the operating success of each brand. |
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Consistently deliver superior customer service. We
believe customer service and consistent product delivery are the
most important factors in attracting and retaining customers. |
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Effectively manage personnel and cost levels based on
economic factors. We believe that effectively managing
personnel levels and costs are important to delivering value to
shareholders regardless of which stage of the business cycle we
may be in. |
Our strategy in the specialty insurance business is to provide
the most efficient and effective direct and independent agency
property policy delivery mechanism in the market place. We are
positioned to be one of the lowest expense providers in the
marketplace, while strictly adhering to pricing and underwriting
discipline to maintain underwriting profitability.
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We offer our National Flood Insurance Program (“NFIP”)
through two of our property and casualty companies. Fidelity
Property and Casualty Insurance Company provides flood insurance
in all 50 states. Fidelity National Insurance Company
underwrites flood insurance in 30 states and is seeking to
expand into additional states. We are the largest provider of
NFIP flood insurance in the U.S. through our independent
agent network. Our delivery and service is consistently graded
the highest in the industry. Our success has been recognized by
the National Flood Insurance Program, which has given us its
Administrator’s Club Award and the Administrator’s
Quill Award for our outstanding growth. |
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We provide an efficient methodology for obtaining insurance on
newly acquired homes, whether new construction or upon resale.
We have an easy to use fully integrated website, which our
agents use as a completely paperless and fully automated quoting
and policy delivery system. This system is in use for all of our
property products, including flood insurance. |
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Our underwriting practice is conservative. Catastrophe modeling
is closely managed on a real time basis. We also buy reinsurance
to assist in maintaining our profitability and growing our
surplus. |
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Financial Institution Software and Services, Lender
Outsourcing Solutions and Information Services |
Our strategy to achieve continued growth in these businesses
includes:
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Expand our technology leadership. We intend to continue
to build on the reputation, reliability and functionality of our
software applications. To accomplish this, our strategies are to
maintain high-quality functionality for our software
applications, in part through developing software applications
that feature enhanced capabilities such as straight-through
processing and real-time processing; to provide superior
application and technology migration support; and to ensure that
our software applications are able to integrate with existing
and new add-on product used by our customers. Because of our
scale, we are uniquely positioned to efficiently accomplish
these objectives by spreading the capital and resource |
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commitment required to maintain and improve our applications
over a larger revenue base as compared to the revenue base of
our competitors with less market share. |
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Take advantage of our cross-selling opportunities. We
coordinate our sales efforts through a part of our organization
called our Office of the Enterprise to take advantage of
information we obtain about the needs of our financial
institution customers in order to cross-sell our products and
services. We are taking advantage of the significant customer
relationships of our multifaceted businesses to cross-sell our
other products and services. |
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Expand our leadership position in information products and
services. We are one of the leading providers of information
products and services to the real estate industry. We believe
that our technological capabilities and market leadership have
provided us with a competitive advantage in terms of our product
offerings and our ability to meet the needs of our customers. We
intend to maintain and expand this market position, allowing us
to continue to strengthen our relationships with our existing
customers and expand our customer base. We also intend to
continue integrating our property data and real estate-related
information products and services into our other businesses. |
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Broaden our product portfolio and market opportunities
through acquisitions. While we will continue to invest in
developing and enhancing our existing business solutions, we
also intend to continue to acquire technologies and products
that will allow us to further broaden our product offerings and
continue to enhance the functionality of our business solutions.
We may also consider acquisitions that would expand our existing
customer base for a product or service, or acquiring businesses
that have a product or customer base in markets in which we do
not currently compete, particularly if these acquisitions would
allow us to obtain revenue growth through leveraging our
existing capabilities or scale. We will continue to utilize our
ability to integrate newly acquired businesses and we will
continue to be disciplined and strategic in making acquisitions. |
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Grow our international business. We believe that we are
well-positioned to leverage our financial institution software
and services into international markets. In the past, we have
provided products and services to international customers when
such opportunities presented themselves through our existing
customer relationships. With the international customers and
presence we obtained through our recent acquisitions of Sanchez
and Kordoba (see “Recent Developments”), we believe we
are approaching a size and market presence in several
international markets that will allow us to effectively compete
in what we believe will be a growing market for our products and
services. Our international strategy will include focusing on
those products, services and customers that will allow us to
leverage our existing scale and expertise. |
Recent Developments
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Recapitalization of FIS and Minority Interest Sale |
The recapitalization of FIS was accomplished through
$2.8 billion in borrowings under new senior credit
facilities consisting of an $800.0 million Term Loan A
facility, a $2.0 billion Term Loan B facility
(collectively, the “Term Loan Facilities”) and a
$400.0 million revolving credit facility
(“Revolver”). FIS fully drew upon the entire
$2.8 billion in Term Loan Facilities to consummate the
recapitalization while the Revolver remained undrawn at the
closing of the recapitalization. The interest rate on both the
Term Loan Facilities and the Revolver is LIBOR plus 1.75%.
Bank of America, JP Morgan Chase, Wachovia Bank, Deutsche
Bank and Bear Stearns lead a consortium of lenders providing the
new senior credit facilities.
The minority equity interest sale was accomplished through FIS
selling an approximately 25 percent minority equity
interest in the common stock of FIS to an investment group led
by Thomas H. Lee Partners (“THL”) and Texas Pacific
Group (“TPG”). FIS issued a total of approximately
50 million shares of the common stock of FIS to the
investment group for a total purchase price of approximately
$500.0 million. A new Board of Directors has been created
at FIS, with William P. Foley, II, current Chairman and
Chief Executive Officer of FNF, serving as Chairman and Chief
Executive Officer of FIS. FNF has appointed four additional
members to the FIS Board of Directors, while each of THL and TPG
have appointed two new directors.
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The following steps were undertaken to consummate the FIS
recapitalization plan and the minority equity interest sale in
FIS. On March 8, 2005, FIS issued a $2.7 billion note
to FNF as payment of the dividend. On March 9, 2005, FIS
borrowed $2.8 billion under its new senior credit
facilities. FIS then paid FNF $2.7 billion, plus interest,
to repay the $2.7 billion note issued on March 8,
2005. FNF used $400 million of these funds to repay the
outstanding balance of its credit agreement. The remainder will
be used to fund the $10 per share dividend and for general
corporate purposes at FNF, which may include acquisitions. The
minority equity interest sale in FIS was then closed through the
payment of $500.0 million from the investment group led by
THL and TPG to FIS. FIS then repaid approximately
$410.0 million outstanding under its former credit
facility. Finally, FIS paid all expenses related to the
transactions amounting to $80.4 million. All remaining
proceeds will be utilized for other general corporate purposes
at FIS.
On March, 9, 2005, we also announced that our Board of
Directors formally declared a $10 per share special cash
dividend that is payable on March 28, 2005 to stockholders
of record as of March 21, 2005. Because of the magnitude of
the special cash dividend, the New York Stock Exchange has
determined that the ex-dividend date will be March 29,
2005, the business day following the payable date for the
special cash dividend.
Acquisitions
Strategic acquisitions have been an important part of our growth
strategy. We made a number of acquisitions in 2004 and 2003, to
strengthen and expand our service offerings and customer base in
our FIS businesses. Our 2004 acquisitions and more significant
2003 acquisitions are described below.
On December 13, 2004, we acquired ClearParSM, LLC
(“ClearPar”), a provider of a web-based commercial
loan settlement system servicing the primary syndication and
secondary loan trading markets. The acquisition price was
$24.5 million in cash.
On November 8, 2004, we acquired all of the outstanding
stock of InterCept, Inc. (“InterCept”) for
$18.90 per share. The total purchase price was
$419.4 million, primarily in cash. InterCept provides both
outsourced and in-house, fully integrated core banking solutions
for approximately 425 community banks, including loan and
deposit processing and general ledger and financial accounting
operations. InterCept also operates significant item processing
and check imaging operations, providing imaging for customer
statements, clearing and settlement, reconciliation and
automated exception processing in both outsourced and in-house
relationships for approximately 720 customers.
On September 30, 2004, we acquired a 74.9% interest in
KORDOBA Gesellschaft fur Bankensoftware mbH & Co. KG,
Munich, (“Kordoba”), a provider of core processing
software and outsourcing solutions to the German banking market,
from Siemens Business Services GmbH & Co. OHG. The
acquisition price was $123.6 million in cash.
On September 15, 2004, we acquired 11 million shares
of common stock and four million warrants to purchase common
stock of Covansys Corporation (“Covansys”), a
U.S.-based provider of application management and offshore
outsourcing services with India based operations for
$121.0 million in cash. We own approximately 29% of the
common stock of Covansys. We also entered into a 5-year master
services agreement with Covansys under which we are required to
purchase a minimum of $150.0 million in services through
June 2009.
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On July 2, 2004, we acquired 100% of Geotrac, Inc.
(“Geotrac”), a flood zone monitoring services provider
for $40.0 million in cash.
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Sanchez Computer Associates, Inc. |
On April 14, 2004, we acquired Sanchez Computer Associates,
Inc. (“Sanchez”) for $183.7 million, composed of
approximately $88.1 million in cash and the issuance of
2,267,290 shares of our common stock. Sanchez develops and
markets scalable and integrated software and services that
provide banking, customer integration, outsourcing and wealth
management solutions to financial institutions in several
countries. Sanchez’ primary product offering is Sanchez
Profile TM, a real-time, multi-currency, strategic core banking
deposit and loan processing system that can be utilized on both
an outsourced and in-house basis.
On April 7, 2004, we acquired Bankware, a provider of check
imaging solutions for financial institutions for
$47.7 million in cash.
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American Pioneer Title Insurance Company |
On March 22, 2004, we acquired American Pioneer
Title Insurance Company (“APTIC”) for
$115.2 million in cash. APTIC is a 45-state licensed title
insurance underwriter with significant agency operations and
computerized title plant assets in the state of Florida. APTIC
operates under the Company’s Ticor Title brand.
On March 11, 2004, we acquired Aurum Technology, Inc.
(“Aurum”) for $306.4 million, composed of
$185.0 million in cash and the issuance of
3,144,390 shares of our common stock. Aurum is a provider
of outsourced and in-house information technology solutions for
the community bank and credit union markets.
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Hansen Quality Loan Services, LLC |
On February 27, 2004, we acquired an additional 44%
interest in Hansen Quality Loan Services, LLC
(“Hansen”) that we did not already own for
$33.7 million, consisting of $25.2 million in cash and
$8.5 million of our common stock. The stock portion of the
purchase price resulted in the issuance of 220,396 shares
of our common stock. Hansen provides collateral risk assessment
and valuation services for real estate mortgage financing. On
March 26, 2004, we acquired the remaining 1% interest in
Hansen for $0.3 million in cash.
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Fidelity National Information Solutions, Inc. |
On September 30, 2003, we acquired the outstanding minority
interest of Fidelity National Information Solutions, Inc.
(“FNIS”), our majority-owned real estate information
services public subsidiary, whereby FNIS became our wholly-owned
subsidiary. In the acquisition, each share of FNIS common stock
(other than FNIS common stock we already owned) was exchanged
for 0.83 shares of our common stock. We issued
14,292,858 shares of our common stock to FNIS stockholders
in the acquisition.
The acquisition of the minority interest of FNIS on
September 30, 2003 allowed us to further capitalize on the
significant technology resources of FI, which we acquired on
April 1, 2003, by combining all technology resources within
one integrated organization. The Company’s data center
activities have historically been managed by FNIS. However, with
the acquisition of the minority interest of FNIS, we have
migrated substantially all of our data center activities from
FNIS to the existing FI platforms as of September 30, 2003.
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WebTone Technologies, Inc. |
On September 2, 2003, we acquired WebTone Technologies,
Inc. (“WebTone”) for $88.7 million in cash.
WebTone is the developer of the TouchPoint® suite of
customer interactive management solutions for financial services
organizations.
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ALLTEL Information Services, Inc. |
On January 28, 2003, we entered into a stock purchase
agreement with ALLTEL Corporation, Inc., a Delaware corporation
(“ALLTEL”), to acquire from ALLTEL its financial
services division, ALLTEL Information Services, Inc.
(“AIS”). On April 1, 2003, we closed the
acquisition and subsequently renamed the division Fidelity
Information Services, Inc. (“FI”). FI is one of the
largest providers of information-based technology solutions and
processing services to the mortgage and financial services
industries.
We acquired FI for approximately $1,069.6 million
(including the payment for certain working capital adjustments
and estimated transaction costs), consisting of
$794.6 million in cash and $275.0 million of our
common stock. We funded the cash portion of the purchase price
through the issuance of $250.0 million aggregate principal
amount of 5.25% notes due March 15, 2013, and
$544.6 million in available cash. The stock portion of the
purchase price resulted in the issuance of
11,206,692 shares of our common stock to ALLTEL.
As the foregoing discussion illustrates, a significant portion
of our historical growth has resulted from acquisitions. With
assistance from our advisors, on an ongoing basis we actively
evaluate possible strategic transactions, such as acquisitions
and dispositions of business units and operating assets and
business combination transactions, as well as possible
alternative means of financing the growth and operations of our
business units. There can be no assurance, however, that any
suitable opportunities will arise or that any particular
transaction will be effected.
Title Insurance
Market for title insurance. The title insurance market in
the United States is large and has grown in the last
10 years. According to Demotech, Inc., total operating
income for the entire U.S. title insurance industry grew
from $4.8 billion in 1995 to $16.7 billion in 2003.
Growth in the industry is closely tied to various macroeconomic
factors, including, but not limited to, growth in the gross
national product, inflation, interest rates and sales of new and
existing homes, as well as the refinancing of previously issued
mortgages.
Virtually every real estate transaction consummated in the
U.S. requires the use of title insurance by a lending
institution before a transaction can be finalized. Generally,
revenues from title insurance policies are directly correlated
with the value of the property underlying the title policy, and
appreciation in the overall value of the real estate market
drives growth in total industry revenues. Industry revenues are
also driven by swings in interest rates, which affect demand for
new mortgage loans and refinancing transactions.
The U.S. title insurance industry is concentrated among a
handful of industry participants. According to Demotech, Inc.,
the top five title insurance companies accounted for 90.5% of
net premiums collected in 2003. Over 40 independent title
insurance companies accounted for the remaining 9.5% of net
premiums collected in 2003. Over the years, the title insurance
industry has been consolidating, beginning with the merger of
Lawyers Title Insurance and Commonwealth Land
Title Insurance in 1998 to create LandAmerica Financial
Group, Inc., followed by our acquisition of Chicago Title in
March 2000. Consolidation has created opportunities for
increased financial and operating efficiencies for the
industry’s largest participants and should continue to
drive profitability and market share in the industry.
Title Insurance Policies. Generally, real estate
buyers and mortgage lenders purchase title insurance to insure
good and marketable title to real estate. Today, virtually all
real property mortgage lenders require their borrowers to obtain
a title insurance policy at the time a mortgage loan is made.
Title insurance premiums are based upon either the purchase
price of the property insured or the amount of the mortgage
loan. Title
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insurance premiums are due in full at the closing of the real
estate transaction, and the policy generally terminates upon the
resale or refinancing of the property.
Prior to issuing policies, underwriters can reduce or eliminate
future claim losses by accurately performing searches and
examinations. A title company’s predominant expense relates
to such searches and examinations, the preparation of
preliminary title reports, policies or commitments and the
maintenance of title “plants,” which are indexed
compilations of public records, maps and other relevant
historical documents. Claim losses generally result from errors
or mistakes made in the title search and examination process and
from hidden defects such as fraud, forgery, incapacity, missing
heirs or refinancing of the property.
Commercial real estate title insurance policies insure title to
commercial real property, and generally involve higher coverage
amounts and yield higher premiums. Prior to the Chicago Title
merger, we issued primarily residential real property title
insurance policies. In the Chicago Title merger, we acquired
Chicago Title’s National Commercial & Industrial
business group, which specializes in meeting the needs of
clients involved in large commercial transactions. As discussed
later under the heading “Economic Factors Affecting
Title Industry,” the volume of commercial real estate
transactions is affected primarily by fluctuations in local
supply and demand conditions for space, while residential real
estate transaction volume is primarily affected by macroeconomic
and seasonal factors. Thus, we believe the addition of Chicago
Title’s commercial real estate title insurance base helps
in maintaining more uniform revenue levels throughout the
seasons.
Losses and Reserves. While most other forms of insurance
provide for the assumption of risk of loss arising out of
unforeseen events, title insurance serves to protect the
policyholder from risk of loss from events that predate the
issuance of the policy. As a result, claim losses associated
with issuing title policies are less expensive when compared to
other insurance underwriters. The maximum amount of liability
under a title insurance policy is usually the face amount of the
policy plus the cost of defending the insured’s title
against an adverse claim.
Reserves for claim losses are established based upon known
claims, as well as losses we expect to incur based upon
historical experience and other factors, including industry
trends, claim loss history, legal environment, geographic
considerations, expected recoupments and the types of policies
written. We also reserve for losses arising from escrow, closing
and disbursement functions due to fraud or operational error.
A title insurance company can minimize its losses by having
strict quality control systems and underwriting standards in
place. These controls increase the likelihood that the
appropriate level of diligence is conducted in completing a
title search so that the possibility of potential claims is
significantly mitigated. In the case of independent agents, who
conduct their own title searches, the agency agreement between
the agent and the title insurance underwriter gives the
underwriter the ability to proceed against the agent when a loss
arises from a flawed title search.
Courts and juries sometimes award damages against insurance
companies, including title insurance companies, in excess of
policy limits. Such awards are typically based on allegations of
fraud, misrepresentation, deceptive trade practices or other
wrongful acts commonly referred to as “bad faith.”
Although we have not experienced damage awards materially in
excess of policy limits, the possibility of such bad faith
damage awards may cause us to experience increased costs and
difficulty in settling title claims.
The maximum insurable amount under any single title insurance
policy is determined by statutorily calculated net worth. The
highest self-imposed single policy maximum insurable amount for
any of our title insurance subsidiaries is $375.0 million.
Direct and Agency Operations. We provide title insurance
services through our direct operations and wholly-owned
underwritten title companies, and additionally through
independent title insurance agents who issue title policies on
behalf of title underwriters. Title underwriters determine the
terms and conditions upon which they will insure title to the
real property according to their underwriting standards,
policies and procedures. In our direct operations, the title
underwriter issues the title insurance policy and retains the
entire premium paid in connection with the transaction. In our
agency operations, the search and examination function is
performed by an independent agent. The agent thus retains the
majority of the title premium collected, with the balance
remitted to the title underwriter for bearing the risk of loss
in the event that a claim
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is made under the title insurance policy. Independent agents may
select among several title underwriters based upon the amount of
the premium “split” offered by the underwriter, the
overall terms and conditions of the agency agreement and the
scope of services offered to the agent. Premium splits vary by
geographic region.
Our direct operations provide the following benefits:
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higher margins because we retain the entire premium from each
transaction instead of paying a commission to an agent; |
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continuity of service levels to a broad range of
customers; and |
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additional sources of income through escrow and other real
estate information services, such as collection and trust
activities, trustee’s sales guarantees, recordings and
reconveyances, property appraisal services, credit reporting,
flood certification and monitoring, real estate tax services,
exchange intermediary services in connection with real estate
transactions, property data and disclosure services, relocation
services, multiple listing services and mortgage loan
fulfillment services. |
Title Insurance Operations. Our direct operations
are divided into approximately 200 profit centers consisting of
more than 1,500 direct offices. Each profit center processes
title insurance transactions within its geographical area, which
is usually identified by a county, a group of counties forming a
region, or a state, depending on the management structure in
that part of the country. We also transact title insurance
business through a network of approximately 9,500 agents,
primarily in those areas in which agents are the more prevalent
title insurance provider.
The following table sets forth the approximate dollars and
percentages of our title insurance premium revenue by state.
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Year Ended December 31, | |
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2004 | |
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2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
California
|
|
$ |
1,056,672 |
|
|
|
22.3 |
% |
|
$ |
1,184,722 |
|
|
|
25.0 |
% |
|
$ |
895,698 |
|
|
|
25.2 |
% |
|
Texas
|
|
|
514,417 |
|
|
|
10.9 |
|
|
|
527,583 |
|
|
|
11.1 |
|
|
|
429,740 |
|
|
|
12.1 |
|
|
Florida
|
|
|
490,823 |
|
|
|
10.4 |
|
|
|
324,468 |
|
|
|
6.8 |
|
|
|
215,367 |
|
|
|
6.1 |
|
|
New York
|
|
|
407,481 |
|
|
|
8.6 |
|
|
|
392,680 |
|
|
|
8.3 |
|
|
|
295,636 |
|
|
|
8.3 |
|
|
Illinois
|
|
|
202,277 |
|
|
|
4.3 |
|
|
|
222,534 |
|
|
|
4.7 |
|
|
|
173,671 |
|
|
|
4.9 |
|
|
All others
|
|
|
2,067,658 |
|
|
|
43.5 |
|
|
|
2,086,264 |
|
|
|
44.1 |
|
|
|
1,537,617 |
|
|
|
43.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Totals
|
|
$ |
4,739,328 |
|
|
|
100.0 |
% |
|
$ |
4,738,251 |
|
|
|
100.0 |
% |
|
$ |
3,547,729 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the entire title insurance industry, 13 states
accounted for approximately 74.0% of title premiums written in
the United States in 2003. California represented the single
largest state with 21.3%.
We also analyze our business by examining the level of premiums
generated by direct and agency operations. The following table
presents the percentages of title insurance premiums generated
by direct and agency operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
(Dollars in thousands) | |
|
|
|
|
|
Direct
|
|
$ |
2,128,902 |
|
|
|
44.9 |
% |
|
$ |
2,400,870 |
|
|
|
50.7 |
% |
|
$ |
1,610,792 |
|
|
|
45.4 |
% |
|
Agency
|
|
|
2,610,426 |
|
|
|
55.1 |
% |
|
|
2,337,381 |
|
|
|
49.3 |
|
|
|
1,936,937 |
|
|
|
54.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total title insurance premiums
|
|
$ |
4,739,328 |
|
|
|
100.0 |
% |
|
$ |
4,738,251 |
|
|
|
100.0 |
% |
|
$ |
3,547,729 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Our relationship with each agent is governed by an agency
agreement defining how the agent issues a title insurance policy
on our behalf. The agency agreement also prescribes how the
agent may be liable to us for policy losses attributable to the
agent’s errors. The agency agreement is usually terminable
without cause upon 30 days’ notice or immediately for
cause. In determining whether to engage or retain an independent
agent, we consider the agent’s experience, financial
condition, and loss history. For each agent with whom we enter
into an agency agreement, we maintain financial and loss
experience records. We also conduct periodic audits of our
agents.
Escrow and Other Title Related Fees. In addition to
fees for underwriting title insurance policies, we derive a
significant amount of our revenues from escrow and other title
related fees. A title insurance company in a real estate
transaction generally acts as an intermediary completing all the
necessary documentation and services required for closing the
real estate transaction.
In a typical residential transaction, a title insurance order is
received from a realtor, lawyer, developer, mortgage lender or
independent escrow or closing company. When a title order is
received by the title insurance company or agent, the title
search begins and the title order is considered
“open.” Once documentation has been prepared and
signed, mortgage lender payoff demands are in hand and documents
have been ordered and the transaction has been recorded, the
title order is considered “closed.” A lawyer, an
escrow company or a title insurance company or agent performs
the closing function, most commonly referred to as an
“escrow” in the western United States. The entity
providing the closing function (the “closer”) holds
the seller’s deed of trust and the buyer’s mortgage
until all issues relating to the transaction have been settled.
After these issues have been cleared, the closer delivers the
transaction documents, records the appropriate title documents
in the county recorder’s office and arranges the transfer
of funds to pay off prior loans and extinguish the liens
securing such loans. Title policies are then issued. The
lender’s policy insures the lender against any defect
affecting the priority of the mortgage in an amount equal to the
outstanding balance of the related mortgage loan. The
buyer’s policy insures the buyer against defects in title
in an amount equal to the purchase price.
Reinsurance. In the ordinary course of business, we limit
our maximum loss exposure by reinsuring certain risks with other
title insurers. We also earn additional income by assuming
reinsurance for certain risks of other title insurers. In
addition, we cede a portion of certain policy and other
liabilities under agent fidelity, excess of loss and
case-by-case reinsurance agreements. Reinsurance agreements
provide generally that the reinsurer is liable for loss and loss
adjustment expense payments exceeding the amount retained by the
ceding company. However, the ceding company remains primarily
liable in the event the reinsurer does not meet its contractual
obligations.
Specialty Insurance
We issue various insurance policies, which include the following:
|
|
|
| |
• |
Home warranty insurance. We issue one-year, renewable
insurance policies that protect homeowners against defects in
household systems and appliances. |
| |
| |
• |
Flood insurance. We issue new and renewal flood insurance
policies in conjunction with the NFIP. |
| |
| |
• |
Personal lines insurance. We offer and underwrite
homeowners insurance in all 50 states. Automobile insurance
is currently underwritten in 23 states expanding to the
balance of the U.S. in 2005. In addition, we underwrite
personal umbrella, inland marine (boat and recreational
watercraft), and other personal lines niche products in selected
markets. |
Financial Institution Software and Services
The applications and services in our financial institution
software and services segment focus on two primary markets,
financial institution processing and mortgage loan processing.
Our primary applications are software applications that function
as the underlying infrastructure of a financial
institution’s processing environment. These applications
include core bank processing software,
9
which banks use to maintain the primary records of their
customer accounts, and core mortgage processing software, which
banks use to process and service mortgage loans. We also provide
a number of complementary applications and services that
interact directly with the core processing applications,
including applications that facilitate interactions between our
financial institution customers and their clients.
While many of our customers obtain all or a majority of their
key applications from us, the modular design of many of our
applications allows our customers to start with one application,
such as a lending application, and gradually add applications or
services as needed. We provide our customers with additional
flexibility by offering our applications through a range of
delivery and service models, including on-site outsourcing and
remote processing arrangements, as well as on a stand-alone,
in-house, licensed software basis for installation on
customer-owned systems. Because of our ability to integrate and
customize the applications and services we provide to our
customers, we often refer to our applications and services as
“business solutions”.
|
|
|
Financial Institution Processing |
Customers. Over 2,800 financial institutions use our
applications and services, including banks, credit unions,
savings banks and auto finance companies. Revenues in 2004 and
2003 relating to financial institution processing were
$886.2 million and $452.3 million, respectively. The
processing needs of our customers in the financial institution
processing market vary significantly across the size and type of
institutions we serve. These institutions include:
|
|
|
| |
• |
Large Banks. We define the large bank market as banks and
other financial institutions in North America with assets in
excess of $5 billion. Of the 100 largest U.S. banks,
our customers include 26 banks that use our deposit-related core
processing applications, 32 banks that use our lending-related
core processing applications and 29 banks that use our various
retail delivery applications. Our customers in this market
include Harris Bank/ Bank of Montreal, Citizens Bank, and
BancWest. |
| |
| |
• |
Small to Mid-tier Banks. We provide our applications and
services in the small to mid-tier banking market to more than
2,500 customers consisting primarily of U.S. community
banks, credit unions and savings banks. Our customers in this
market typically seek a fully integrated and broad suite of
applications. As a result, our core processing applications sold
to this market have various add-on modules or applications that
integrate into our core processing applications, providing a
broad processing solution. Our customers in this market include
Hudson City Savings Bank, Sterling Bank and VyStar Credit Union. |
| |
| |
• |
International Banks. We offer applications and services
to financial institutions located outside of North America. Our
international business utilizes existing bank processing
applications and services and customizes them for the specific
business needs of our customers in targeted international
markets. Our customers include CitiBank Asia Pacific and CEEMEA,
ING Group and China Construction Bank. Revenues from our
international business were derived principally from 27
customers in the Asia-Pacific market, 31 customers in the
European-Middle East-Africa market and 12 customers in the
Mexico-Latin American market. |
| |
| |
• |
Automotive Finance Institutions. In our automotive
finance processing business, we offer loan and lease servicing
solutions for the automotive finance industry. In 2004, over
20 million automotive loans and leases were processed on
our automotive finance processing applications. Nine of the top
20 U.S. automotive finance companies utilize our
applications and services, including the finance companies of
Honda, Ford and DaimlerChrysler. |
| |
| |
• |
Commercial Lenders. We also provide business solutions
that allow clients to automate and manage their entire
commercial lending and loan trading businesses. Our customers
include more than 91 financial institutions, including 9 of the
top 10 and 27 of the top 50 as ranked by capital. Our customers
include Bank of America, JPMorgan Chase, Barclays Capital, Bank
of Scotland and Rabobank. |
10
Applications and Services. Our primary applications and
services include the following:
|
|
|
| |
• |
Core Processing Applications. Our core processing
software applications are designed to run critical banking
processes of our financial institution customers. These critical
banking processes include deposit and lending systems and most
other core banking systems that a bank must utilize to manage
the products it provides to its customers. |
| |
| |
• |
Retail Delivery Applications. While our core processing
applications support all aspects of a bank’s internal
recordkeeping and reconciliations, our retail delivery
applications facilitate direct interactions between a bank and
its customers through applications that allow for the delivery
of services to these customers. Our retail delivery applications
include TouchPoint, an application suite that supports call
centers, branch and teller environments, and retail and
commercial Internet channels. |
| |
| |
• |
Integration Applications. Our integration applications
access data on our own and third-party core processing systems
and transport information to our customers’ retail delivery
channels. Our integration applications provide transaction
routing and settlement. These applications facilitate tightly
integrated systems and efficient software delivery that reduces
technology costs for our customers. |
| |
| |
• |
Syndicated Loan Applications. Our syndicated loan
applications are designed to support wholesale and commercial
banking requirements necessary for all aspects of syndicated
commercial loan origination and management. |
| |
| |
• |
Automotive Finance Applications. Our primary applications
include an application suite that assists automotive finance
institutions in evaluating loan applications and credit risk,
and allows automotive finance institutions to manage their loan
and lease portfolios. |
| |
| |
• |
Item Processing and Imaging Services. Our item
processing and imaging services provide our customers with a
complete range of outsourcing services relating to the imaging
and processing of checks, statements and other transaction
records. These services are performed at one of our 29
processing centers located throughout the U.S. |
| |
| |
• |
eBanking and Electronic Payments Services. We provide a
full range of eBanking capabilities, including EFT processing
solutions, ranging from ATM and debit card services to card
production and distribution to stored-value gift cards and
payroll cards. We also offer electronic business solutions, such
as personal and business Internet services, web design and
development, web hosting, ISP services and eDelivery. Lastly we
provide telephone banking solutions that can help streamline
operations, improve service and reduce costs. |
Delivery of Applications. We have developed several
models of providing our customers with applications and
services. While we typically deliver the highest value to our
customers when we combine our software applications and deliver
them in one of several types of outsourcing arrangements, we
also are able to deliver individual applications through a
software licensing arrangement. The examples below represent the
typical delivery models that we utilize in providing our
applications:
|
|
|
| |
• |
Software Licensing. In this traditional license and
maintenance model, our customers purchase a license and
maintenance contract for our software. We may also provide these
customers with professional support services on either a time
and materials or fixed-price basis to assist them with the
implementation of, or conversion to, the licensed software, or
with other information technology (“IT”) projects. |
| |
| |
• |
Application Management. In this service deployment model,
we provide applications that are run by the customer at its
processing facility, with a dedicated staff of our application
programmers and business analysts assisting the customer in
managing day-to-day technology-related activities. Our support
staff may be located on-site at the customer’s facility,
off-site at one of our facilities, or at a combination of both
sites. In many cases, our staff supports the customer’s
third-party applications, as well as our own software
applications. |
11
|
|
|
| |
• |
Application Service Provider or ASP. In this
service model, we utilize one of our off-site technology
facilities to provide the user of ASP services with computing
and application management facilities and support. Our support
personnel are generally located off-site in one of our
technology facilities, which communicates through online data
transmission connections with remote devices on-site at the
customer’s location. The ASP customer generally uses a
suite of our applications and services in its business. Our
customers may arrange to utilize our facilities infrastructure
in a shared capacity with other customers, or they may contract
with us to have dedicated computing capacity available solely
for the operation of their applications, sometimes referred to
as remote outsourcing. |
| |
| |
• |
Facilities Management Processing or FM. In the FM
service model, we provide our customers with a computing and
application management function similar to that provided under
ASP services. However, in the case of FM services, our personnel
are located on-site at the location of the customer and act as
the customer’s on-site IT staff in connection with FM
services, generally also supporting the customer’s
third-party software applications. When we enter into one of
these arrangements, we generally hire the customer’s IT
staff, which we supplement with our own employees. |
We also have developed an additional service business, which we
refer to as managed operations, in which we use our
off-site technology and processing infrastructure to offer
computing facilities to customers, without providing any of our
software applications. Unlike our other service customers, our
managed operations customers often include customers that are
not financial institutions. We are able to profitably leverage
our computing capacity and technical expertise to compete in
this type of outsourcing business.
Customers. Our mortgage loan processing customers include
6 of the top 10 and 25 of the top 50 mortgage loan originators
in the U.S. in terms of dollar volume, 19 of the top 30
loan servicers in the U.S., and 10 of the top 20 sub-prime loan
servicers in the U.S. Our mortgage loan processing
customers include Bank of America, National City Mortgage and
U.S. Bank Home Mortgage. Our customer relationships are
typically long-term relationships that generally provide
relatively consistent annual revenues based on the dollar volume
of mortgages processed on our applications. Our mortgage loan
servicing platforms, including our Mortgage Servicing Platform
(“MSP”), are used to process over 50% of all
residential mortgages by dollar volume in the U.S., representing
balances exceeding $3.6 trillion. Revenues in 2004 and 2003 for
mortgage loan processing were $292.7 million and
$280.0 million, respectively.
Applications and Services. We sell the most widely used
mortgage loan servicing system in the U.S. Our primary
applications and services include:
|
|
|
| |
• |
MSP. MSP is an application that automates all areas of
loan servicing, including loan setup and ongoing processing,
customer service, accounting and reporting to the secondary
mortgage market, and federal regulatory reporting. MSP processes
a wide range of loan products, including fixed-rate mortgages,
adjustable-rate mortgages, construction loans, equity lines of
credit and daily simple interest loans. |
| |
| |
• |
Empower! Empower! is a mortgage loan origination software
system used by banks, savings & loans, mortgage bankers
and sub-prime lenders. This application fully automates every
phase of making loans, providing seamless credit bureau access
and interfacing with automated underwriting systems used by
Freddie Mac and Fannie Mae, as well as with vendors providing
servicing, flood certifications, appraisals and title insurance. |
Delivery of Applications and Services. While our mortgage
servicing applications can be purchased on a stand-alone,
licensed basis, the substantial majority of our MSP customers by
both number of customers and loan volume choose to use us as
their processing partner and engage us to perform all data
processing functions in our technology center in Jacksonville,
Florida. Customers determine whether to process their loan
portfolio data under an ASP arrangement in which multiple
clients share the same computing and personnel resources or to
have their own dedicated resources within our facility.
12
Lender Outsourcing Solutions
Our lender outsourcing solutions segment offers customized
outsourced business process and information solutions to
national lenders and loan servicers. We provide loan
facilitation services, which allow our customers to outsource
their title and closing requirements in accordance with
pre-selected criteria, regardless of the geographic location of
the borrower or property. Depending on customer requirements, we
perform these services both in the traditional manner involving
many manual steps, and through more automated processes which
significantly reduce the time required to complete the task. We
also provide default management services, which allow our
customers to outsource the business processes necessary to take
a loan, and the underlying real estate securing the loan,
through the default and foreclosure process. We utilize our own
resources and networks we have established with independent
contractors to provide our outsourcing solutions. We frequently
offer our outsourcing solutions to lenders in combination with
services of our information services segment.
We work with our customers to set specific parameters regarding
the type and quality of services they require and provide a
single point of contact with us for these services no matter
where the property is located. As a result, our customers are
able to utilize our outsourcing services in a manner that we
believe provides a greater level of consistency in service,
pricing and quality than if these customers were to contract
separately for similar services.
|
|
|
Loan Facilitation Services |
Customers. Our customers are financial institutions
involved in the first mortgage, refinance, home equity and
sub-prime lending markets. Customers of our title agency and
closing services delivered under traditional outsourcing
arrangements are typically large, national institutions, and
include Wells Fargo, Washington Mutual, and Bank of America. Our
automated title process and ancillary services are targeted at
the top 20 U.S. mortgage lenders, although we believe that
the benefits provided by our automated services may be
attractive to other national lenders, as well as regional
lenders with significant lending operations. Customers of our
homebuilders’ services described below are
U.S. homebuilders, including Beazer Homes, Trend Homes and
Cambridge Homes. Revenues for loan facilitation services in
2004, 2003 and 2002 were $225.7 million,
$433.6 million and $92.8 million, respectively.
Services. Our primary services include the following:
|
|
|
| |
• |
Title Agency Services. Our centralized financial
institution title agency services include arranging for the
issuance of a title insurance policy by a title insurer, by
conducting title searches and preparing an abstract of title,
reviewing the status of title in a title commitment, resolving
any title exceptions, verifying the payment of existing loans
secured by a subject property and verifying the amount of
prorated expenses. We perform these services on a national
basis, both in the traditional manner and through our
centralized production facilities that incorporate automated
processes, as described more fully below. Additionally, we
typically prepare checks, deeds and affidavits and record
appropriate documents in connection with the closing. In 2004,
all title insurance policies issued as a result of our agency
services were issued by title insurance companies owned by the
Company. |
| |
| |
• |
Closing Services. Our closing management services are
currently available in 48 states and the District of
Columbia. We maintain a network of independent closing agents
who are trained to close loans in accordance with the
lender’s instructions. Our closing management services
cover a variety of types of closings, including purchases and
refinancings, and provide a variety of types of services. |
| |
| |
• |
Homebuilders’ Services. We offer mortgage loan
fulfillment and processing services to U.S. homebuilders.
We enter into partnership and management arrangements with
homebuilders to establish and manage captive mortgage finance
businesses that originate, underwrite, process and place first
mortgages with unaffiliated wholesale lenders that make loans on
newly constructed homes. |
In addition, the title and closing services described above can
be combined and customized with many of our offerings in our
information services segment to meet the specific requirements
of our customers. We have a common sales force for the services
described above and our information services segment.
13
Automated Process. The work of title agents has
traditionally been very labor-intensive and has required
significant manual intervention and individual decision-making.
Although a portion of our title agency business is performed in
the standard manner, we have also developed an automated process
for quickly determining whether a title policy should be issued
on a particular property. This process combines an automated
title plant with an application that contains a customizable set
of decision rules. Although this process largely automates the
work of a traditional title agency, we still perform a manual
review of title in cases where adequate records are not
available online, where certain types of borrowers or properties
are involved or where certain exceptions to good title exist.
Our automated process permits us to deliver our services in a
substantially shorter period of time compared to the delivery of
traditional services in the industry.
We began entering into these automated outsourcing arrangements
in 2003 with a limited number of our lending customers. Current
customers of our automated process are utilizing the services to
more efficiently and uniformly outsource the underwriting and
settlement of loan refinancings with their existing borrowers
that meet certain criteria. We are in the process of adding
automated title services that are capable of supporting
lenders’ requirements with respect to home equity lines of
credit. We also plan to expand the range of services available
through automated service delivery. We have recently introduced
credit reporting as an additional service that can be delivered
with the automated title services we provide, and we are
planning to introduce additional integrated services in the
future, including flood certifications.
|
|
|
Default Management Services |
Customers. We primarily provide our default management
services to national mortgage lenders and loan servicers, many
of which performed default management services in-house prior to
entering into outsourcing arrangements with us. Our customers
include 24 of the top 25 residential mortgage servicers, 24 of
the top 25 subprime servicers, and 16 of the top 25
subservicers. Our major customers include Washington Mutual and
Bank of America. Revenues for default management services for
2004, 2003 and 2002 were $224.7 million ,
$170.8 million and $121.4 million, respectively.
Services. Based in part on the range and quality of
default management services we offer and our focus on customer
service, our default management business has grown significantly
and we are now one of the two largest default management
outsourced service providers in the U.S. We offer a full
spectrum of outsourcing services relating to the management of
defaulted loans, from initial property inspection to recording
the final release of a mortgage lien.
|
|
|
| |
• |
At the onset of a loan default, our services are designed to
assess and preserve the value of the property securing the loan.
For example, through a nationwide network of independent
inspectors, we provide inspection services nationwide, including
daily reports on vacant properties, occupancy inspections and
disaster and insurance inspections. Through a national network
of independent contractors, we perform property preservation and
maintenance services, such as lock changes, window replacement,
lawn service and debris removal. |
| |
| |
• |
As our lender and servicing customers proceed toward the
foreclosure of properties securing defaulted loans, our services
facilitate completing the foreclosure process. For example, we
offer comprehensive posting and publication of foreclosure and
auction notices and conduct mandatory title searches, in each
case as necessary to meet state statutory requirements for
foreclosure. We provide document preparation and recording
services, including mortgage assignment and release preparation,
and due diligence and research services. We also provide various
other title services in connection with the foreclosure process. |
| |
| |
• |
After a property has been foreclosed, we provide property
preservation field services that aid our customers in managing
their real estate owned, or (“REO”), properties. We
also offer a variety of title services relating to the
lender’s ownership and eventual sale of REO properties. We
also offer nationwide advisory and management services to
facilitate a lender’s REO sales. |
Delivery of Services. Based on a customer’s needs,
our services can be provided individually or, more commonly, as
part of a business process outsourcing solution that includes
some or all of those services. We
14
can also offer default management services as part of a package
with MSP, which may lead to additional cost savings for our
customers.
We provide electronic access for all our default management
customers that allows them to monitor the status of our services
over the Internet. We can also create an automated interface
between MSP and the information systems we use in providing
default management services. This interface allows default
services pre-selected by our customers to automatically begin at
a pre-determined stage in the default of any loan which is
serviced by our MSP application.
Information Services
Our property data and real estate-related information services
are utilized by mortgage lenders, investors and real estate
professionals to complete residential real estate transactions
throughout the U.S. We offer a comprehensive suite of
services spanning the entire home purchase and ownership life
cycle, from purchase through closing, refinancing, and resale.
Customers. Customers of our property data business
include loan servicers, banks and consumers, as well as other
participants in the real estate, lending and title insurance
industries. Our customers include ABN Amro, Bank of America,
Freddie Mac, New Century Mortgage and Washington Mutual. Revenue
for property data for 2004, 2003 and 2002 was
$144.7 million, $147.2 million and
$103.9 million, respectively.
Services. Our primary service lines are as follows:
|
|
|
| |
• |
Property Information. We provide property information and
document and map images to title insurers and agents through a
regional network of offices engaged in data collection, research
and electronic data delivery. Our services help our customers
quickly locate, assemble and analyze information needed to
assure the safe transfer and financing of real property. These
services include providing automated title plant indexes
describing the chain of ownership, images of recorded land
records, real estate tax assessment information, real property
parcel map images, and images and electronic abstracts of court
judgments. |
| |
| |
• |
Multiple Listing Services (“MLS”). We provide
services that are used to operate multiple listing services in
the U.S. serving over 300,000 real estate brokers and
agents. We have acquired and developed reliable data base
management tools and provide central hosting of MLS systems in
our data centers for local MLS organizations, enabling realtors
to search for available homes using a potential buyer’s
criteria. |
Delivery of Services. Many of the property data services
discussed above can be combined together to meet the specific
needs of our customers.
|
|
|
Real Estate-Related Information Services |
Customers. Customers of our real estate-related
information services include loan servicers, banks and consumers
as well as other participants in the real estate, lending and
title insurance industries. Our customers include Bank of
America, U.S. Bancorp and Washington Mutual. Revenue for
real estate-related information services for 2004, 2003 and 2002
was $444.4 million, $411.9 million and
$274.1 million, respectively.
Services. Our primary real estate-related information
services include the following:
|
|
|
| |
• |
Valuation and Appraisal Services. We have developed a
broad suite of valuation applications, which include automated
valuation models, traditional appraisals, broker price opinions,
collateral scores and appraisal reviews utilized by participants
in the secondary mortgage markets. We have developed innovative
new hybrid valuation offerings such as collateral valuation
insurance, which combine a traditional valuation with an
insurance policy issued by an unaffiliated third party that
guarantees the accuracy of a valuation within certain
parameters. We have also developed processes and technologies
that allow our lender customers to outsource their valuation
management functions to us. When our |
15
|
|
|
| |
|
customers outsource these functions to us, we utilize various
technologies to allow our lenders to automatically select a
valuation service from our suite of offerings that delivers the
best service/cost solution for each individual situation. |
| |
| |
• |
Real Estate Tax Services. We offer lenders a monitoring
service that will notify them of any change in tax status during
the life of a loan. We also provide complete outsourcing of tax
escrow services, including the establishment of a tax escrow
account that is integrated with the lender’s mortgage
servicing system and the processing of tax payments to taxing
authorities. |
| |
| |
• |
Flood Zone Certifications. We offer flood zone
certifications through a proprietary automated system that
accesses and interprets Federal Emergency Management Agency, or
FEMA, flood maps and certifies whether a property is in a
federally designated flood zone. Additionally, we offer lenders
a life-of-loan flood zone determination service that monitors
previously issued certificates for any changes, such as FEMA
flood map revisions, for as long as that loan is outstanding. |
| |
| |
• |
Credit Reporting. We provide credit information reports
and related services to meet the needs of the mortgage industry
and help commercial banks, mortgage companies and consumer
lenders make loan decisions. Our services include providing a
merged credit report that contains credit history data on
individual or joint credit applicants acquired from the combined
databases of three credit bureaus (Experian, Trans Union and
Equifax) for national coverage. We consolidate and organize
information from these credit bureaus and deliver a concise
report to our customers. |
| |
| |
• |
1031 Exchange Intermediary Services. We act as a
qualified exchange intermediary for those customers who seek to
engage in qualified exchanges under Section 1031 of the
Internal Revenue Code, which allows tax deferral on the sale of
certain investment assets. Through our nationwide network of
regional offices, we provide our customers with direct access to
a full-time staff of exchange professionals, one-third of whom
are attorneys specializing in tax deferred exchange solutions. |
For a discussion of our operating revenues and operating income
for each segment, see “Results of Operations” in
Item 7. For additional information about the segments, see
Note P of Notes to the Consolidated Financial Statements in
Item 8.
Marketing
Our sales and marketing efforts are primarily organized around
our lines of business.
Title and Specialty Insurance
We market and distribute our title and escrow products and
services to customers in the residential, institutional lender,
and commercial market sectors of the real estate industry
through customer solicitation by sales personnel. We actively
encourage our sales personnel to develop new business
relationships with persons in the real estate community, such as
real estate sales agents and brokers, financial institutions,
independent escrow companies and title agents, real estate
developers, mortgage brokers and attorneys. While our smaller,
local clients remain important, large customers, such as
national residential mortgage lenders, real estate investment
trusts and developers have become an increasingly important part
of our business. The buying criteria of locally based clients
differ from those of large, geographically diverse customers in
that the former tend to emphasize personal relationships and
ease of transaction execution, while the latter generally place
more emphasis on consistent product delivery across diverse
geographical regions and ability of service providers to meet
their information systems requirements for electronic product
delivery.
Specialty insurance is marketed through two distinct channels.
We market our program through our in-house agency via direct
mail to customers of our affiliated operations. This direct
channel constituted approximately 30% of our 2004 premium
writings. The other distribution channel is through independent
agents and brokers nationwide. Approximately 70% of our
non-flood premium was placed through this channel and the vast
majority of our flood business. We currently have in excess of
10,000 agencies nationwide actively producing business on our
behalf.
16
|
|
|
Financial Institution Software and Services, Lender
Outsourcing Solutions and Information Services |
In our Financial Institution Software and Services segment, we
have a sales force that markets our products and services to our
large national bank customers. A separate sales group focuses on
credit unions and thrifts, to which we primarily sell a
different product line than we sell to commercial banks. MSP and
related products are sold by a third sales force to all the
foregoing types of customers, as well as to mortgage companies
and specialized servicing companies.
In our Lender Outsourcing Solutions and Information Services
segments, we utilize three distinct sales teams. The first sales
team is dedicated to the sales and marketing of default
management services. The other two teams are responsible for all
other products in the Lender Outsourcing Solutions and
Information Services segments. One of these two teams targets
the largest 125 U.S. lenders while the other targets
mid-tier lenders not among the largest 125.
A significant portion of our potential customers in each of our
business lines is targeted via direct and/or indirect field
sales, as well as inbound and outbound telemarketing efforts.
Marketing activities include direct marketing, print
advertising, media relations, public relations, tradeshow and
convention activities, seminars and other targeted activities.
The primary markets for the financial institution software and
services segment are the nation’s commercial banks and
saving institutions and financial institutions throughout the
world. Financial software and services are also marketed to
credit unions and to financial institutions originating or
servicing single-family mortgage loans. These financial
institutions, which include many of the nation’s largest
servicers of residential mortgages, are located throughout the
U.S.
We believe customer service and consistent product delivery are
the most important factors in attracting and retaining
customers, and we measure customer service in terms of quality,
consistency and timeliness in the delivery of services.
Technology
To meet the changing business and technology needs of our
customers within our financial institution software and services
and information services segments, we continually invest in our
technology-based products and services. This investment includes
maintenance and enhancement of existing software applications,
the development of new and innovative software applications, and
the ongoing enhancement of capabilities surrounding our
outsourcing infrastructure.
Our product strategy and development group maintains a dialogue
with our extensive and diverse customer base and is highly
attuned to ongoing shifts in industry requirements and
preferences. This active customer and market participation is
translated into multi-year, iterative product development plans
that map the primary areas of investment in our product set.
This group is ultimately responsible for designing, developing
and enhancing applications targeted at the diverse requirements
of the various local, regional, national and international
environments of our numerous customers. We provide updated
versions of our various products or product suites on an
iterative basis as dictated by market requirements. Our software
products include many product features and functions and will
accommodate customized requirements specific to each institution.
As part of our research and development process, we constantly
evaluate current and emerging technology for applicability to
our existing and future software platforms. To this end, we
engage with various hardware and software vendors in evaluation
of various infrastructure components. Where appropriate, we
utilize third-party technology components in the development of
our software products and service offerings. Third-party
software may be used for highly specialized business functions,
which we may not be able to develop internally within time and
budget constraints. Additionally, third-party software may be
used for commodity type functions within a technology platform
environment. We work with our customers to determine the
appropriate timing and approach to introducing technology or
infrastructure changes to our products and services. We intend
to utilize our relationship with Covansys to lower our internal
development costs over time by outsourcing certain programming,
development and maintenance functions.
17
We are currently engaged in significant efforts to upgrade our
core bank processing software and our mortgage processing
software. These products were acquired upon our acquisition of
FI from Alltel in 2003. We spent the period immediately
following the FI acquisition discussing with our key customers
the changes that they would like to see made in those products.
In 2004, we began the development work to implement changes
required to keep pace with the marketplace and the requirements
of our customers. Including amounts already spent, we expect to
spend approximately $60 million on this development of our
mortgage servicing platform. With respect to the core banking
software, during 2005 we expect to spend approximately
$56 million on enhancement and integration projects.
Intellectual Property
In our technology segments, we rely on copyright and trade
secret law to protect our technology. Further, we have developed
a number of brands that have accumulated substantial goodwill in
the marketplace, and we rely on trademark law to protect our
rights in that area. We intend to continue our policy of taking
all measures we deem necessary to protect our copyright, trade
secret and trademark rights. We regard our software as
proprietary and utilize a combination of copyright, trade secret
laws, internal security practices and employee non-disclosure
agreements for intellectual property protection. We believe that
we hold all proprietary rights necessary for the conduct of our
business.
Competition
|
|
|
Title and Specialty Insurance |
The title insurance industry is highly competitive. According to
Demotech, Inc., the top five title insurance companies accounted
for 90.5% of net premiums collected in 2003. Over 40 independent
title insurance companies accounted for the remaining 9.5% of
the market. The number and size of competing companies varies in
the different geographic areas in which we conduct our business.
In our principal markets, competitors include other major title
underwriters such as The First American Corporation, LandAmerica
Financial Group, Inc., Old Republic International Corporation
and Stewart Information Services Corporation, as well as
numerous smaller title insurance companies and independent
agency operations at the regional and local level. These smaller
companies may expand into other markets in which we compete.
Also, the removal of regulatory barriers might result in new
competitors entering the title insurance business, and those new
competitors may include diversified financial services companies
that have greater financial resources than we do and possess
other competitive advantages. Competition among the major title
insurance companies, expansion by smaller regional companies and
any new entrants with alternative products could affect our
business operations and financial condition.
Competition in the title insurance industry is based primarily
on expertise, service and price. In addition, the financial
strength of the insurer has become an increasingly important
factor in decisions relating to the purchase of title insurance,
particularly in multi-state transactions and in situations
involving real estate-related investment vehicles such as real
estate investment trusts and real estate mortgage investment
conduits.
In our specialty insurance segment, we compete with the
national, regional and local insurance carriers. Depending on
geographic location, various personal lines carriers, such as
State Farm, Allstate, Farmers, Hartford, Nationwide and numerous
other companies, compete for this personal lines business. In
addition to price, service and convenience are competitive
factors. We strive through both of our distribution channels to
provide an efficient and streamlined product delivery platform.
|
|
|
Financial Institution Software and Services, Lender
Outsourcing Solutions and Information Services |
The market for financial institution software and services is
highly competitive. The market is very mature and there are a
number of existing providers with a high level of experience in
the market and significant market share. Additionally, given the
attractive market characteristics in financial services, there
are a number of market entrants, which seek to leverage shifts
in technology or product innovation to attract customers. Our
primary competitors include internal technology departments
within banks, data processing or software development
departments of large companies or large computer manufacturers,
independent
18
computer services firms, companies that develop and deploy
software applications, and companies that provide customized
development, implementation and support services. Some of these
competitors possess substantially greater financial, sales and
marketing resources than we do. Competitive factors for products
and services include the quality of the technology-based product
or service, product features and functions, ease of delivery and
integration, ability of the provider to maintain, enhance, and
support the products or services, and price. We believe that we
compete favorably in each of these categories. In addition, we
believe that our ability to offer multiple products and services
to individual customers enhances our competitiveness against
competitors with more limited product offerings. We compete with
vendors that offer similar products and services to financial
institutions, including The Bisys Group, Inc., Computer Services
Corporation, Fiserv, Inc., Jack Henry and Associates, Inc., and
Metavante Corporation. In certain non-U.S. markets, we
compete with regional providers including Alnova, I-Flex and
Temenos.
The principal competitors for our lender outsourcing solutions
services are title companies such as First American and
LandAmerica and in-house services provided directly by our
customers. We believe our customer service and timely delivery
are a large factor in our success.
The markets for information services like those we offer are
also highly competitive. Key competitive factors include quality
of the product or service, convenience, speed of delivery,
customer service and price. We do not believe that there is a
competitor currently offering the same level of product breadth
and scope, market coverage and services that we provide in our
Information Services segment. However, there are a number of
competitors in specific product lines, some of which have
substantial resources. In addition, First American is a
significant competitor in a majority of this segment’s
businesses.
Regulation
|
|
|
Title and Specialty Insurance |
Our insurance subsidiaries, including underwriters, underwritten
title companies and independent agents, are subject to extensive
regulation under applicable state laws. Each of the insurance
underwriters is 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 we transact 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
practices, 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.
Pursuant to statutory accounting requirements of the various
states in which our title insurance subsidiaries are licensed,
those subsidiaries 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, 2004, the combined statutory unearned premium
reserve required and reported for our title insurance
subsidiaries was $1,180.6 million.
The insurance commissioners of their respective states of
domicile regulate our title insurance subsidiaries. Regulatory
examinations usually occur at three-year intervals, and certain
of these examinations are currently ongoing.
Our 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. As of December 31,
2004, $1,731.3 million of our net assets are restricted
from dividend payments without prior approval from the
Departments of Insurance. During 2005, our first-tier title
insurance subsidiaries can pay dividends or make other
distributions to us of approximately $209.8 million.
19
The combined statutory capital and surplus of our title
insurance subsidiaries was $892.6 million,
$879.0 million and $612.6 million as of
December 31, 2004, 2003 and 2002, respectively. The
combined statutory earnings of our title insurance subsidiaries
were $369.5 million, $480.0 million and
$162.6 million for the years ended December 31, 2004,
2003 and 2002, respectively.
As a condition to continued authority to underwrite policies in
the states in which our title insurance subsidiaries conduct
their business, they are required to pay certain fees and file
information regarding their officers, directors and financial
condition. In addition, our escrow and trust business is subject
to regulation by various state banking authorities.
Pursuant to statutory requirements of the various states in
which our title insurance subsidiaries are domiciled, they must
maintain certain levels of minimum capital and surplus. Each of
our title underwriters has complied with the minimum statutory
requirements as of December 31, 2004.
Our 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, $3.0 million and
$400 thousand is required for Fidelity National Title
Company, Fidelity National Title Company of California, Chicago
Title Company and Ticor Title Company of California,
respectively. All of our companies are in compliance with their
respective minimum net worth requirements at December 31,
2004.
Like many other insurance companies, in 2004 our title insurance
subsidiaries received civil subpoenas from the New York State
Attorney General, requesting information about our arrangements
with agents and other matters. We have been cooperating and
intend to continue to cooperate with these inquiries.
In the fall of 2004, the California Department of Insurance
began its investigation into reinsurance practices in the title
insurance industry. This investigation paralleled the inquiries
of the National Association of Insurance Commissioners, which
has been looking into this topic for approximately one year.
Other state insurance departments also have made formal or
informal inquiries to us regarding these matters. We have been
cooperating and intend to continue to cooperate with these
investigations. We have discontinued all reinsurance agreements
of the type the investigations cover. The amount of premiums we
ceded to reinsurers has been approximately $10 million over
the existence of these agreements. These investigations are at
an early stage and as a result we are unable to give any
absolute assurance regarding their consequences for the industry
or for us.
The California Department of Insurance also announced its intent
to examine levels of pricing and competition in the title
insurance industry in California. Other states could follow with
similar inquiries. At this stage, we are unable to predict what
the outcome will be of this or any similar review.
|
|
|
Financial Institution Software and Services, Lender
Outsourcing Solutions and Information Services |
Our financial institution software and services operations are
not directly subject to federal or state regulations
specifically applicable to financial institutions such as banks,
thrifts and credit unions. However, as a provider of services to
these financial institutions, our FIS subsidiary is examined on
a regular basis by the Federal Deposit Insurance Corporation,
the Office of Thrift Supervision, the Office of the Comptroller
of the Currency, the Board of Governors of the Federal Reserve
System, the National Credit Union Administration and various
state regulatory authorities. In addition, independent auditors
annually review several of our operations to provide reports on
internal controls for our clients’ auditors and regulators.
Beginning July 1, 2001, financial institutions were
required to comply with privacy regulations imposed under the
Gramm-Leach-Bliley Act. These regulations place restrictions on
financial institutions’ use of non-public personal
information. All financial institutions must disclose detailed
privacy policies to their customers and offer them the
opportunity to direct the financial institution not to share
information with third parties. The new regulations, however,
permit financial institutions to share information with
non-affiliated parties who perform services for the financial
institutions. As a provider of services to financial
institutions, we are required to comply with the privacy
regulations and are bound by the same limitations on disclosure
of the information received from our customers as apply to the
financial institutions themselves.
20
Ratings
Our title insurance subsidiaries are regularly assigned ratings
by independent agencies designed to indicate their financial
condition and/or claims paying ability. The ratings agencies
determine ratings by quantitatively and qualitatively analyzing
financial data and other information. Our title subsidiaries
include Fidelity National Title, Chicago Title, Ticor Title,
Security Union Title and Alamo Title. Ratings of our principal
title insurance subsidiaries, individually and collectively, are
listed below:
| |
|
|
|
Standard and Poor’s (Financial Strength Rating)
|
|
|
|
FNF Family
|
|
A- |
|
Moody’s (Financial Strength Rating)
|
|
|
|
FNF Family
|
|
A3 |
|
A.M. Best Company (Financial Strength Rating)
|
|
|
|
FNF Family
|
|
A |
|
Fitch (Claims Paying Ability Rating)
|
|
|
|
FNF Family
|
|
A- |
|
Demotech, Inc. (Financial Stability Rating)
|
|
|
|
Fidelity National Title
|
|
A’ |
|
Chicago Title
|
|
A” |
|
Ticor Title
|
|
A’ |
|
Security Union Title
|
|
A’ |
|
Alamo Title
|
|
A’ |
Investment Policies and Investment Portfolio
Our investment policy is designed to maintain a high quality
portfolio, maximize income, minimize interest rate risk and
match the duration of our portfolio to our liabilities. We also
make investments in certain equity securities in order to take
advantage of perceived value and for strategic purposes. Various
states regulate what types of assets qualify for purposes of
capital and surplus and unearned premium reserves. Our
subsidiaries’ investments are restricted by the state
insurance regulations of their domiciliary states and are
limited primarily to cash and cash equivalents, federal and
municipal governmental securities, mortgage loans, certain
investment grade debt securities, equity securities and real
estate.
As of December 31, 2004 and 2003, the carrying amount,
which approximates the fair value, of total investments was
$3,346.3 million and $2,689.8 million, respectively.
We purchase investment grade fixed maturity securities, selected
non-investment grade fixed maturity securities and equity
securities. The securities in our portfolio are subject to
economic conditions and normal market risks and uncertainties.
21
The following table presents certain information regarding the
investment ratings of our fixed maturity portfolio at
December 31, 2004 and 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
Amortized | |
|
% of | |
|
|
|
% of | |
|
Amortized | |
|
% of | |
|
|
|
% of | |
| Rating(1) |
|
Cost | |
|
Total | |
|
Fair Value | |
|
Total | |
|
Cost | |
|
Total | |
|
Fair Value | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
AAA
|
|
$ |
1,474,132 |
|
|
|
63.3 |
% |
|
$ |
1,477,019 |
|
|
|
63.3 |
% |
|
$ |
1,070,821 |
|
|
|
64.3 |
% |
|
$ |
1,089,280 |
|
|
|
64.2 |
% |
|
AA
|
|
|
350,520 |
|
|
|
15.0 |
|
|
|
353,850 |
|
|
|
15.2 |
|
|
|
270,979 |
|
|
|
16.2 |
|
|
|
279,877 |
|
|
|
16.5 |
|
|
A
|
|
|
308,300 |
|
|
|
13.2 |
|
|
|
305,537 |
|
|
|
13.1 |
|
|
|
221,948 |
|
|
|
13.3 |
|
|
|
222,932 |
|
|
|
13.2 |
|
|
BBB
|
|
|
62,239 |
|
|
|
2.7 |
|
|
|
61,407 |
|
|
|
2.6 |
|
|
|
47,885 |
|
|
|
2.9 |
|
|
|
47,853 |
|
|
|
2.8 |
|
|
Other
|
|
|
134,286 |
|
|
|
5.8 |
|
|
|
134,418 |
|
|
|
5.8 |
|
|
|
54,794 |
|
|
|
3.3 |
|
|
|
56,292 |
|
|
|
3.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
2,329,477 |
|
|
|
100.0 |
% |
|
$ |
2,332,231 |
|
|
|
100.0 |
% |
|
$ |
1,666,427 |
|
|
|
100.0 |
% |
|
$ |
1,696,234 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Ratings as assigned by Standard & Poor’s Ratings
Group and Moody’s Investors Service. |
The following table presents certain information regarding
contractual maturities of our fixed maturity securities at
December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
Amortized | |
|
% of | |
|
|
|
% of | |
| Maturity |
|
Cost | |
|
Total | |
|
Fair Value | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
One year or less
|
|
$ |
357,956 |
|
|
|
15.4 |
% |
|
$ |
358,246 |
|
|
|
15.3 |
% |
|
After one year through five years
|
|
|
1,171,776 |
|
|
|
50.3 |
|
|
|
1,172,345 |
|
|
|
50.3 |
|
|
After five years through ten years
|
|
|
435,776 |
|
|
|
18.7 |
|
|
|
437,316 |
|
|
|
18.8 |
|
|
After ten years
|
|
|
273,616 |
|
|
|
11.7 |
|
|
|
273,796 |
|
|
|
11.7 |
|
|
Mortgage-backed securities
|
|
|
90,353 |
|
|
|
3.9 |
|
|
|
90,528 |
|
|
|
3.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
2,329,477 |
|
|
|
100.0 |
% |
|
$ |
2,332,231 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Expected maturities may differ from contractual maturities
because certain borrowers have the right to call or prepay
obligations with or without call or prepayment penalties. Fixed
maturity securities with an amortized cost of
$274.4 million and a fair value of $277.0 million were
callable at December 31, 2004.
Our equity securities at December 31, 2004 and 2003
consisted of investments in various industry groups as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
Cost | |
|
Fair Value | |
|
Cost | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Banks, trust and insurance companies
|
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
1 |
|
|
$ |
5 |
|
|
Industrial, miscellaneous and all other
|
|
|
128,779 |
|
|
|
135,460 |
|
|
|
57,917 |
|
|
|
70,613 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
128,780 |
|
|
$ |
135,465 |
|
|
$ |
57,918 |
|
|
$ |
70,618 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
22
Our investment results for the years ended December 31,
2004, 2003 and 2002 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Net investment income(1)
|
|
$ |
92,862 |
|
|
$ |
74,885 |
|
|
$ |
91,333 |
|
|
Average invested assets
|
|
$ |
3,621,974 |
|
|
$ |
3,101,514 |
|
|
$ |
2,704,925 |
|
|
Effective return on average invested assets
|
|
|
2.6 |
% |
|
|
2.4 |
% |
|
|
3.4 |
% |
|
|
| (1) |
Net investment income as reported in our Consolidated Statements
of Earnings has been adjusted in the presentation above to
provide the tax equivalent yield on tax exempt investments. |
Employees
As of December 31, 2004, we had approximately
32,700 full-time equivalent employees. We believe that our
relations with employees are generally good.
Risk Factors
In addition to the normal risks of business, we are subject to
significant risks and uncertainties, including those listed
below and others described elsewhere in this Annual Report on
Form 10-K or incorporated herein. Any of the risks
described herein could result in a significant or material
adverse effect on our results of operations or financial
condition.
|
|
|
Our revenues may decline during periods when the demand
for our products decreases. |
Title insurance revenue is closely related to the level of real
estate activity and the average price of real estate sales. Real
estate sales are directly affected by the availability of funds
to finance purchases, predominantly mortgage interest rates.
Other factors affecting real estate activity include, but are
not limited to, demand for housing, employment levels, family
income levels and general economic conditions. In addition to
real estate sales, mortgage refinancing is an important source
of title insurance revenue. We have found that residential real
estate activity generally decreases in the following situations:
|
|
|
| |
• |
when mortgage interest rates are high or increasing; |
| |
| |
• |
when the mortgage funding supply is limited; and |
| |
| |
• |
when the United States economy is weak. |
Prevailing mortgage interest rates have declined to record lows
in recent years, and the volume of real estate transactions has
experienced record highs. We do not expect these trends to
continue, and the volume of refinancing transactions in
particular declined in 2004 from 2003 levels.
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
the cost of financing has on the volume of real estate
transactions.
Revenues from our information services and our lender
outsourcing solutions segments are also closely related to the
level of real estate transactions, such as real estate sales and
mortgage refinancings. Our revenues in future periods will
continue to be subject to these and other factors which are
beyond our control and, as a result, are likely to fluctuate.
23
|
|
|
As a holding company, we depend on distributions from our
subsidiaries, and if distributions from our subsidiaries are
materially impaired, our ability to declare and pay dividends
may be adversely affected. |
We are a holding company whose primary assets are the securities
of our operating subsidiaries. Our ability to pay dividends is
dependent on the ability of our subsidiaries to pay dividends or
repay funds to us. If our operating subsidiaries are not able to
pay dividends or repay funds to us, we may not be able to
declare and pay dividends to you.
Our title insurance and specialty insurance subsidiaries must
comply with state and federal laws which require them to
maintain minimum amounts of working capital, surplus and
reserves, and place restrictions on the amount of dividends that
they can distribute to us. Compliance with these laws will limit
the amounts our regulated subsidiaries can dividend to us. As of
December 31, 2004, $1,731.3 million of our net assets
are restricted from dividend payments without prior approval
from the Departments of Insurance. During 2005, our title
insurance subsidiaries can pay dividends or make distributions
to us of approximately $209.8 million.
In addition, under its new credit facilities, FIS is limited in
the amount of dividends it can pay us. See “Liquidity and
Capital Resources” under Item 7 of this report. Also,
due to the minority interest sale, we would only receive 75% of
any dividend FIS was able to pay.
|
|
|
Our rate of growth could be adversely affected if we are
unable to acquire suitable acquisition candidates. |
As part of our growth strategy, we have made numerous
acquisitions and we plan to continue to acquire complementary
businesses, products and services. This strategy depends on our
ability to identify suitable acquisition candidates and,
assuming we find them, to finance such acquisitions on
acceptable terms. We have historically used, and in the future
may continue to use, a variety of sources of financing to fund
our acquisitions, including cash from operations, debt and
equity. Our ability to finance our acquisitions is subject to a
number of risks, including the availability of adequate cash
reserves from operations or of acceptable financing terms and
variability in our stock price. Following its borrowings under
its new credit term loan facilities in connection with its
recapitalization, FIS is highly leveraged and would likely need
to issue equity to raise funds for a significant acquisition.
These steps might require approval of FIS’s lenders, which
might not be forthcoming. These factors may inhibit our ability
to pursue attractive acquisition targets. If we are unable to
acquire suitable acquisition candidates, we may experience
slower growth.
|
|
|
The expansion of our business, particularly in new
industry segments or geographic areas, subjects us to associated
risks, such as the diversion of management’s attention and
lack of experience in operating such businesses. |
We have acquired, and may in the future acquire, businesses in
industries or geographic areas with which management is less
familiar than we are with our core business. For example, in
2004, we acquired Kordoba. Also, in the last four years, we have
expanded the range and amount of real estate information
services we provide, expanded our home warranty, auto and niche
personal lines insurance businesses, expanded our commercial
title insurance business and acquired underwriters of other
lines of insurance products. These activities involve risks that
could adversely affect our operating results, such as diversion
of management’s attention and lack of substantial
experience in operating such businesses.
|
|
|
We may encounter difficulties managing our growth, which
could adversely affect our results of operations. |
We have historically achieved growth through a combination of
developing new products and services, increasing our market
share for existing products, and acquisitions. Part of our
strategy is to pursue opportunities to diversify and expand our
operations by acquiring or making investments in other
companies. The success of each acquisition will depend upon:
|
|
|
| |
• |
our ability to integrate the acquired business’ operations,
products and personnel; |
| |
| |
• |
our ability to retain key personnel of the acquired businesses; |
24
|
|
|
| |
• |
our ability to expand our financial and management controls and
reporting systems and procedures; |
| |
| |
• |
our ability to maintain the customers and goodwill of the
acquired businesses; and |
| |
| |
• |
any unexpected cost or unforeseen liabilities associated with
the acquired businesses. |
|
|
|
Our subsidiaries that engage in insurance related
businesses must comply with additional regulations. These
regulations may impede, or impose burdensome conditions on, our
rate increases or other actions that we might want to take to
increase the revenues of our subsidiaries. |
Our insurance businesses are subject to extensive regulation by
state insurance authorities in each state in which we operate.
These agencies have broad administrative and supervisory power
relating to the following, among other matters:
|
|
|
| |
• |
licensing requirements; |
| |
| |
• |
trade and marketing practices; |
| |
| |
• |
accounting and financing practices; |
| |
| |
• |
capital and surplus requirements; |
| |
| |
• |
the amount of dividends and other payments made by insurance
subsidiaries; |
| |
| |
• |
investment practices; |
| |
| |
• |
rate schedules; |
| |
| |
• |
deposits of securities for the benefit of policyholders; |
| |
| |
• |
establishing reserves; and |
| |
| |
• |
regulation of reinsurance. |
Most states also regulate insurance holding companies like us
with respect to acquisitions, changes of control and the terms
of transactions with our affiliates. State regulations may
impede or impose burdensome conditions on our ability to
increase or maintain rate levels or on other actions that we may
want to take to enhance our operating results, and could affect
our ability to pay dividends on our common stock. In addition,
we may incur significant costs in the course of complying with
regulatory requirements. We cannot assure you that future
legislative or regulatory changes will not adversely affect our
business operations. See “Business-Regulaton.”
|
|
|
We face competition in our title business from traditional
title insurers and from new entrants with alternative
products. |
The title insurance industry is highly competitive. According to
Demotech, Inc., the top five title insurance companies accounted
for 90.5% of net premiums collected in 2003. Over 40 independent
title insurance companies accounted for the remaining 9.5% of
the market. The number and size of competing companies varies in
the different geographic areas in which we conduct our business.
In our principal markets, competitors include other major title
underwriters such as The First American Corporation, LandAmerica
Financial Group, Inc., Old Republic International Corporation
and Stewart Information Services Corporation, as well as
numerous smaller title insurance companies and independent
agency operations at the regional and local level. These smaller
companies may expand into other markets in which we compete.
Also, the removal of regulatory barriers might result in new
competitors entering the title insurance business, and those new
competitors may include diversified financial services companies
that have greater financial resources than we do and possess
other competitive advantages. Competition among the major title
insurance companies, expansion by smaller regional companies and
any new entrants with alternative products could affect our
business operations and financial condition.
25
|
|
|
If we fail to adapt our services to changes in technology
or in the marketplace, we could lose existing customers and be
unable to attract business. |
The markets for our financial institution software and services
and information services segments are characterized by constant
technological changes, frequent introductions of new services
and evolving industry standards. Our future success will be
significantly affected by our ability to enhance our current
services and to develop and introduce new services that address
the increasingly sophisticated needs of our customers and their
clients. There can be no assurance that we will be successful in
developing, marketing and selling new services that meet these
changing demands, that we will not experience difficulties that
could delay or prevent the successful development, introduction
and marketing of these services, or that our new services and
their enhancements will adequately meet the demands of the
marketplace and achieve market acceptance.
We are currently engaged in significant efforts to upgrade our
core bank processing software and our mortgage processing
software. These products were acquired upon our acquisition of
FI from Alltel in 2003. We spent the period immediately
following the FI acquisition discussing with our key customers
the changes that they would like to see made in those products.
In 2004, we began the development work to implement changes
required to keep pace with the marketplace and the requirements
of our customers. Including amounts already spent, we expect to
spend approximately $60.0 million on this development of
our mortgage servicing platform. With respect to the core
banking software, during 2005 we expect to spend approximately
$56.0 million on enhancement and integration projects. If
we are unsuccessful in completing or gaining market acceptance
of these and other upgrade efforts, it would likely have a
material adverse effect on our ability to retain existing
customers or attract new ones.
|
|
|
Consolidation in the banking and financial services
industry could reduce our financial institution software and
services and lender outsourcing solutions related revenues by
eliminating some of our existing and potential customers and
could make us overly dependent on a limited number of
customers. |
There has been and continues to be substantial merger,
acquisition and consolidation activity in the banking and
financial services industry. Mergers or consolidations of banks
and financial institutions in the future could reduce the number
of our customers and potential customers, which could adversely
affect our revenues even if these events do not reduce the
aggregate number of customers or banking and other activities of
the consolidated entities. If our customers merge with or are
acquired by other entities that are not our customers, or that
use fewer of our services, they may discontinue or reduce their
use of our services. In addition, it is possible that the larger
banks or financial institutions resulting from mergers or
consolidations could decide to perform in-house some or all of
the services which we currently provide or could provide. Any of
these developments could have a material adverse effect on our
business and results of operations.
|
|
|
Security breaches and computer viruses could harm our
business by disrupting our delivery of services and damaging our
reputation. |
As part of our transaction processing business, we
electronically receive, process, store and transmit sensitive
business information of our customers. Unauthorized access to
our computer systems could result in the theft or publication of
confidential information, the deletion or modification of
records or otherwise cause interruptions in our operations.
These concerns about security are increased when we transmit
information over the Internet. Computer viruses have also been
distributed and have rapidly spread over the Internet. Computer
viruses could infiltrate our systems, disrupting our delivery of
services and making our products unavailable. Any inability to
prevent security breaches or computer viruses could cause
existing customers to lose confidence in our systems and
terminate their agreements with us, and could inhibit our
ability to attract new customers.
|
|
|
Misappropriation of our intellectual property and
proprietary rights could impair our competitive position. |
Our ability to compete depends upon proprietary systems and
technology. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our
services or to obtain and use
26
information that we regard as proprietary. Policing unauthorized
use of our proprietary rights is difficult. We cannot make any
assurances that the steps we have taken will prevent
misappropriation of technology or that the agreements entered
into for that purpose will be enforceable. Effective trademark,
service mark, copyright and trade secret protection may not be
available in every country in which our applications and
services are made available online. Misappropriation of our
intellectual property or potential litigation could have a
material adverse effect on our results of operations or
financial condition. If others claim that we have infringed
their intellectual property rights, we could be liable for
significant damages.
As our information technology applications and services develop,
we may become increasingly subject to infringement claims. Any
claims, whether with or without merit, could:
|
|
|
| |
• |
be expensive and time-consuming to defend; |
| |
| |
• |
cause us to cease making, licensing or using applications that
incorporate the challenged intellectual property; |
| |
| |
• |
require us to redesign our applications, if feasible; |
| |
| |
• |
divert management’s attention and resources; and |
| |
| |
• |
require us to enter into royalty or licensing agreements in
order to obtain the right to use necessary technologies. |
There can be no assurance that third parties will not assert
infringement claims against us in the future with respect to our
current or future applications and services.
|
|
|
If we fail to comply with privacy regulations imposed on
providers of services to financial institutions, our business
could be harmed. |
As a provider of services to financial institutions, we are
bound by the same limitations on disclosure of the information
we receive from our customers as apply to the financial
institutions themselves. If we fail to comply with these
regulations, we could be exposed to suits for breach of contract
or to governmental proceedings, damage our customer
relationships, harm our reputation and inhibit our ability to
obtain new customers. In addition, if more restrictive privacy
laws or rules are adopted in the future on the Federal or State
level, or, with respect to our international operations, by
authorities in foreign jurisdictions on the national,
provincial, state or other level, then it could have an adverse
impact on us.
|
|
|
If the rating agencies downgrade our company or our
insurance subsidiaries, our results of operations and
competitive position in the industry may suffer. |
Ratings have become an increasingly important factor in
establishing the competitive position of insurance companies.
Our insurance companies are rated by A.M. Best Company, Inc. and
Standard & Poor’s Corporation, whose ratings
reflect their opinions of an insurance company’s and
insurance holding company’s financial strength, operating
performance, strategic position and ability to meet its
obligations to policyholders and are not evaluations directed to
investors. Our ratings are subject to periodic review by those
entities and the continued retention of those ratings cannot be
assured. If our ratings are reduced from their current levels by
those entities, our results of operations could be adversely
affected.
|
|
|
Subsequent to December 31, 2004, FIS has substantial
leverage and debt service requirements. |
FIS is highly leveraged. As of March 9, 2005, FIS had total
debt of approximately $2.8 billion. In addition, FIS may
borrow money under its revolving credit facility. Subject to
restrictions in the new senior credit facilities, FIS may borrow
more money for working capital, capital expenditures,
acquisitions or other purposes.
The high level of debt could have important consequences,
including the following:
|
|
|
| |
• |
the debt level makes FIS more vulnerable to economic downturns
and adverse developments in the business, may cause FIS to have
difficulty borrowing money in the future for working capital,
capital |
27
|
|
|
| |
|
expenditures, acquisitions or other purposes and limits the
ability to pursue other business opportunities and implement
certain business strategies; |
| |
| |
• |
FIS will need to use a large portion of the money it earns to
pay principal and interest on its senior credit facilities,
which will reduce the amount of money available to finance
operations and other business activities; |
| |
| |
• |
some of the outstanding debt has a variable rate of interest,
which exposes FIS to the risk of increased interest
rates; and |
| |
| |
• |
FIS has a higher level of debt than certain of its competitors,
which may cause a competitive disadvantage and may reduce
flexibility in responding to changing business and economic
conditions, including increased competition. |
In addition, the terms of its senior credit facilities may
restrict FIS from taking actions that it might believe to be
advantageous to it.
Statement Regarding Forward-Looking Information
The information contained in this Form 10-K contains
forward-looking statements that involve a number of risks and
uncertainties. Statements that are not historical facts,
including statements about our beliefs and expectations, are
forward-looking statements. Forward-looking statements are based
on management’s beliefs, as well as assumptions made by,
and information currently available to, management. Because such
statements are based on expectations as to future economic
performance and are not statements of fact, actual results may
differ materially from those projected. We undertake no
obligation to update any forward-looking statements, whether as
a result of new information, future events or otherwise.
Important factors that may affect these projections or
expectations include, but are not limited to:
|
|
|
| |
• |
general political, economic and business conditions, including
the possibility of intensified international hostilities, acts
of terrorism, and general volatility in the capital markets; |
| |
| |
• |
a decrease in the volume of real estate transactions such as
real estate sales and mortgage refinancings, which can be caused
by high or increasing interest rates, a shortage of mortgage
funding, or a weak United States economy; |
| |
| |
• |
consolidation in the mortgage lending or banking industry; |
| |
| |
• |
security breaches of our systems and computer viruses affecting
our software; |
| |
| |
• |
the impact of competitive products and pricing; |
| |
| |
• |
the ability to identify suitable acquisition candidates and the
ability to finance such acquisitions, which depends upon the
availability of adequate cash reserves from operations or of
acceptable financing terms and the variability of our stock
price; |
| |
| |
• |
our ability to integrate any acquired business’ operations,
products, clients and personnel; |
| |
| |
• |
changes in, or the failure to comply with, government
regulations, including privacy regulations and the extensive
regulations imposed by state insurance authorities in each state
in which our insurance subsidiaries conduct operations; and |
| |
| |
• |
other risks detailed elsewhere in this document (including in
the Risk Factors section which precedes this section) and in our
filings with the Securities and Exchange Commission. |
All of these factors are difficult to predict and many are
beyond our control. Accordingly, while we believe these
forward-looking statements to be reasonable, there can be no
assurance that they will approximate actual experience or that
expectations derived from them will be realized. When used in
our documents or oral presentations, the words
“anticipate,” “believe,”
“estimate,” “objective,”
“projection,” “forecast,” “goal,”
or similar words are intended to identify forward-looking
statements.
28
Additional Information
Our website address is www.fnf.com. We make available free of
charge on or through our website our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and all amendments to those
reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, as
soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and
Exchange Commission. However, the information found on our
website is not part of this or any other report.
The Company owns its Corporate headquarters on its campus in
Jacksonville, Florida. The majority of our branch offices are
leased from third parties. See Note K to Notes to
Consolidated Financial Statements.
As of December 31, 2004, we leased office and storage space
as follows:
| |
|
|
|
|
| |
|
Number of | |
| |
|
Locations(1) | |
| |
|
| |
|
California
|
|
|
538 |
|
|
Texas
|
|
|
146 |
|
|
Arizona
|
|
|
124 |
|
|
Florida
|
|
|
104 |
|
|
Illinois
|
|
|
87 |
|
|
Washington and Oregon
|
|
|
71 |
|
|
Michigan
|
|
|
44 |
|
|
Nevada
|
|
|
39 |
|
|
Ohio
|
|
|
37 |
|
|
New York
|
|
|
32 |
|
|
Indiana
|
|
|
28 |
|
|
North Carolina
|
|
|
27 |
|
|
New Jersey
|
|
|
21 |
|
|
Colorado
|
|
|
20 |
|
|
Kansas and Pennsylvania
|
|
|
17 |
|
|
Hawaii and Minnesota
|
|
|
14 |
|
|
Tennessee and Maryland
|
|
|
13 |
|
|
Missouri
|
|
|
12 |
|
|
Wisconsin
|
|
|
11 |
|
|
Virginia and Louisiana
|
|
|
9 |
|
|
Connecticut and Georgia
|
|
|
7 |
|
|
Massachusetts and Montana
|
|
|
5 |
|
|
New Mexico
|
|
|
4 |
|
|
Alabama and South Carolina
|
|
|
3 |
|
|
Rhode Island, Delaware, Maine, Kentucky and New Hampshire
|
|
|
2 |
|
|
Washington D.C., Idaho, Nebraska, Arkansas, Utah and Oklahoma
|
|
|
1 |
|
|
|
| (1) |
Represents the number of locations in each state listed. In
addition, a number of locations internationally are leased. |
29
|
|
| Item 3. |
Legal Proceedings |
In the ordinary course of business, we are involved in various
pending and threatened litigation matters related to our
operations, some of which include claims for punitive or
exemplary damages which we have accrued for if we believe the
amount to be estimable and probable. We believe that no actions,
other than those listed below, depart from customary litigation
incidental to our business and that the resolution of all
pending and threatened litigation will not have a material
effect on our results of operations, financial position or
liquidity.
We were named in five class action lawsuits alleging
irregularities and violations of law in connection with title
and escrow practices. We, along with the State of California,
plaintiff in the lead case, successfully resolved our
differences concerning representations made during the
settlement process. A stipulated amendment to the previously
entered stipulated final judgment was filed with the court
resulting in a final resolution of this lawsuit. Pursuant to
agreements with counsel and the parties of two of the cases
filed by private parties their suits will also be settled. The
process to secure court approval for those settlements has
begun. The remaining two lawsuits have been stayed pending final
disposition of the settled lawsuits. We believe that the two
stayed lawsuits will be dismissed or settled upon the final
disposition of the three settled lawsuits.
Several class actions are pending alleging improper rates were
charged for title insurance. Four class action cases were filed
in New York and have been consolidated for further proceedings.
The cases allege that the named defendant companies failed to
provide notice of premium discounts to consumers refinancing
their mortgages, and failed to give discounts in refinancing
transactions in violation of the filed rates. The actions seek
refunds of the premiums charged and punitive damages. These
actions were settled in the fall of 2004, and the court has
granted preliminary approval of the settlement. A similar suit
in Minnesota was also settled. Similar allegations have been
made in class actions filed in Ohio, Pennsylvania, and Florida.
Recently, the court refused to certify a class in one of the
Ohio actions. Two class actions, one in California and one in
Michigan allege the Company violated the Real Estate Settlement
Procedures Act (“RESPA”) and state law by giving
favorable discounts or rates to builders and developers. The
actions seek refunds of the premiums charged and additional
damages. We intend to vigorously defend these actions.
Several class actions are pending alleging that we imposed
improper charges in closing real estate transactions. A class
action pending in New Jersey alleges the Company has charged
twice for fees to record satisfactions of mortgages, and charged
for satisfactions that were not recorded. This case has been
settled and the court has granted tentative approval of the
settlement. Class actions making similar allegations were
recently filed in Tennessee, Arkansas and New York. Two other
class actions pending in Indiana allege that we overcharged for
recording fees. The Company intends to vigorously defend the
pending actions.
A class action in Arkansas alleges that the issuance of title
commitments, policies and actions taken in aid of clearing title
by title companies is the unauthorized practice of law. This
case was dismissed by the trial court for lack of jurisdiction
reasoning the dispute could only be brought before the Arkansas
Committee on the Unauthorized Practice of Law. The Arkansas
Supreme Court recently reversed the holding of the trial court
asserting that the trial court had concurrent jurisdiction, and
remanded the matter back to the trial court. The Company will
continue to vigorously defend this action. Two class actions
were recently filed in Georgia alleging that we were complicit
with lenders in denying borrowers their right to representation
of counsel at the closing of their consumer loans, and engaged
in the unauthorized practice of law. One of those cases was
settled, and we intend to vigorously defend the other.
A class action is pending in California alleging that we
violated the Telephone Consumer Protection Act by sending
unsolicited facsimile advertising. Plaintiffs seek statutory
damages. A class was certified in April 2004. We intend to
vigorously defend this action.
30
A threatened regulatory enforcement action initiated by the
Office of the Comptroller of Currency of the U.S. Treasury
Department in conjunction with the Office of Thrift Supervision
of the U.S. Treasury Department, the U.S. Department
of Housing and Urban Development and the Texas Department of
Insurance based on alleged violations of the Real Estate
Settlement Procedures Act (“RESPA”) has been settled
by payment of a civil fine and an agreement to change certain
policies and procedures.
In the fall of 2004, the California Department of Insurance
began its investigation into reinsurance practices in the title
insurance industry. This investigation paralleled the inquiries
of the National Association of Insurance Commissioners, which
has been looking into this topic for approximately one year.
Other state insurance departments also have made formal or
informal inquiries to us regarding these matters. We have been
cooperating and intend to continue to cooperate with these
investigations. We have discontinued all reinsurance agreements
of the type the investigations cover. The amount of premiums we
ceded to reinsurers has been approximately $10 million over
the existence of these agreements. These investigations are at
an early stage and as a result we are unable to give any
absolute assurance regarding their consequences for the industry
or for us.
The California Department of Insurance also announced its intent
to examine levels of pricing and competition in the title
insurance industry in California. Other states could follow with
similar inquiries. At this stage, we are unable to predict what
the outcome will be of this or any similar review.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
Our Annual Meeting of Stockholders was held on December 16,
2004 for the purpose of electing certain members of the board of
directors, to approve the adoption of the Fidelity National
Financial, Inc. 2004 Omnibus Incentive Plan and to approve the
second amendment and restatement of the Fidelity National
Financial, Inc. 2001 and 1998 Stock Incentive Plans and the
amendment and restatement of the 1987 Stock Incentive Plan.
Nominees for directors were elected by the following vote:
| |
|
|
|
|
|
|
|
|
| |
|
Shares Voted | |
|
Authority to Vote | |
| |
|
“For” | |
|
“Withheld” | |
| |
|
| |
|
| |
|
William A. Imparato
|
|
|
111,422,139 |
|
|
|
42,175,623 |
|
|
Donald M. Koll
|
|
|
104,351,269 |
|
|
|
49,246,493 |
|
|
General William Lyon
|
|
|
149,034,049 |
|
|
|
4,563,713 |
|
|
Cary H. Thompson
|
|
|
112,656,028 |
|
|
|
40,941,734 |
|
Directors, whose term of office as a director continued after
the meeting, are as follows: William P. Foley, II;
Frank P. Willey; Terry N. Christensen; John F.
Farrell, Jr., Phillip G. Heasley, Daniel D. (Ron)
Lane and Willie D. Davis.
The proposal to approve the Fidelity National Financial, Inc.
2004 Omnibus Incentive Plan received the following votes:
| |
|
|
|
|
|
|
|
|
| |
|
Votes | |
|
Percentage | |
| |
|
| |
|
| |
|
Shares Voted “For”
|
|
|
105,442,993 |
|
|
|
84.98 |
% |
|
Shares Voted “Against”
|
|
|
17,856,201 |
|
|
|
14.39 |
% |
|
Shares Voted “Abstain”
|
|
|
776,534 |
|
|
|
0.63 |
% |
The proposal to approve the Second Amendment to the Fidelity
National Financial, Inc. 2001 Stock Incentive Plan received the
following votes:
| |
|
|
|
|
|
|
|
|
| |
|
Votes | |
|
Percentage | |
| |
|
| |
|
| |
|
Shares Voted “For”
|
|
|
112,794,277 |
|
|
|
90.90 |
% |
|
Shares Voted “Against”
|
|
|
10,255,419 |
|
|
|
8.26 |
% |
|
Shares Voted “Abstain”
|
|
|
1,026,035 |
|
|
|
0.84 |
% |
31
The proposal to approve the Second Amendment to the Fidelity
National Financial, Inc. 1998 Stock Incentive Plan received the
following votes:
| |
|
|
|
|
|
|
|
|
| |
|
Votes | |
|
Percentage | |
| |
|
| |
|
| |
|
Shares Voted “For”
|
|
|
112,715,709 |
|
|
|
90.84 |
% |
|
Shares Voted “Against”
|
|
|
10,301,133 |
|
|
|
8.3 |
% |
|
Shares Voted “Abstain”
|
|
|
1,058,884 |
|
|
|
0.86 |
% |
The proposal to approve the Amendment to the Fidelity National
Financial, Inc. 1987 Stock Incentive Plan received the following
votes:
| |
|
|
|
|
|
|
|
|
| |
|
Votes | |
|
Percentage | |
| |
|
| |
|
| |
|
Shares Voted “For”
|
|
|
114,472,966 |
|
|
|
92.26 |
% |
|
Shares Voted “Against”
|
|
|
8,526,321 |
|
|
|
6.87 |
% |
|
Shares Voted “Abstain”
|
|
|
1,076,439 |
|
|
|
0.87 |
% |
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity and Related
Stockholder Matters and Issuer Purchase of Equity
Securities |
Our common stock is traded on the New York Stock Exchange under
the symbol “FNF”. The following table shows, for the
periods indicated, the high and low sales prices of our common
stock, as reported by the New York Stock Exchange, and the
amounts of dividends per share declared on our common stock.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Dividends | |
| |
|
High | |
|
Low | |
|
Declared | |
| |
|
| |
|
| |
|
| |
|
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
First quarter
|
|
$ |
39.62 |
|
|
$ |
34.59 |
|
|
$ |
.18 |
|
| |
Second quarter
|
|
|
41.06 |
|
|
|
33.34 |
|
|
|
.18 |
|
| |
Third quarter
|
|
|
38.94 |
|
|
|
35.69 |
|
|
|
.43 |
(a) |
| |
Fourth quarter
|
|
|
45.67 |
|
|
|
34.90 |
|
|
|
— |
|
|
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
First quarter
|
|
$ |
25.31 |
|
|
$ |
22.35 |
|
|
$ |
.11 |
|
| |
Second quarter
|
|
|
29.50 |
|
|
|
25.02 |
|
|
|
.11 |
|
| |
Third quarter
|
|
|
30.52 |
|
|
|
25.59 |
|
|
|
.16 |
|
| |
Fourth quarter
|
|
|
35.25 |
|
|
|
26.53 |
|
|
|
.16 |
|
|
|
| (a) |
During the third quarter of 2004, we declared and paid an
$.18 dividend and declared a $.25 dividend that was paid in
the fourth quarter on our common stock. |
The foregoing amounts have been adjusted to give retroactive
effect to a 10% stock dividend in May 2002, a five-for-four
(5:4) stock split in May 2003 and a 10% stock dividend in
February 2004.
On March 1, 2005, the last reported sale price of our
common stock on the New York Stock Exchange was $44.98 per
share. As of March 1, 2005, we had approximately 3,283
stockholders of record.
Our current dividend policy anticipates the payment of quarterly
dividends in the future. The declaration and payment of
dividends will be in the discretion of our Board of Directors
and will be dependent upon our future earnings, financial
condition and capital requirements. Our ability to declare and
pay dividends is also subject to our compliance with the
financial covenants contained in our existing credit agreement
and further described below.
On March 9, 2005, our Board of Directors formally declared
a $10 per share special cash dividend that is payable on
March 28, 2005 to stockholders of record as of
March 21, 2005.
32
Since we are a holding company, our ability to pay dividends
will depend largely on the ability of our subsidiaries to pay
dividends to us, and the ability of our title insurance
subsidiaries to do so is subject to, among other factors, their
compliance with applicable insurance regulations. As of
December 31, 2004, $1,731.3 million of our net assets
are restricted from dividend payments without prior approval
from the Departments of Insurance. During 2005, our first tier
title insurance subsidiaries can pay dividends or make
distributions to us of approximately $209.8 million without
prior approval. In addition, under its new credit facilities,
FIS is limited in the amount of dividends it can pay us. See
“Liquidity and Capital Resources” under Item 7 of
this report. Also, due to the minority interest sale, we would
only receive 75% of any dividend FIS was able to pay. In
addition, our ability to declare dividends is subject to
restrictions under our existing credit agreement at the FNF
level. We do not believe the restrictions contained in our
credit agreement will, in the foreseeable future, adversely
affect our ability to pay cash dividends at the current dividend
rate.
On April 24, 2002, our Board of Directors approved a
three-year stock repurchase program whereby we could repurchase
up to 7,562,500 shares of our common stock. Purchases can
be made from time to time in the open market, in block purchases
or in privately negotiated transactions. As of December 31,
2003, we had repurchased a total of 4,573,758 shares of our
common stock under this stock repurchase plan. Repurchases of
our common stock under this plan from January 1, 2004
through December 31, 2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Issuer Purchases of Equity Securities | |
| |
|
| |
| |
|
|
|
Total Number of | |
|
Maximum | |
| |
|
|
|
Shares Purchased as | |
|
Number of Shares | |
| |
|
|
|
Average Price | |
|
Part of Publicly | |
|
That May Yet be | |
| |
|
Total Number of | |
|
Paid per | |
|
Announced | |
|
Purchased Under | |
| Period |
|
Shares Purchased | |
|
Share | |
|
Programs | |
|
the Program | |
| |
|
| |
|
| |
|
| |
|
| |
|
January 1, 2004 – January 31, 2004
|
|
|
33,000 |
|
|
$ |
34.76 |
|
|
|
33,000 |
|
|
|
2,955,742 |
|
|
February 1, 2004 – February 29, 2004
|
|
|
277,500 |
|
|
$ |
38.39 |
|
|
|
277,500 |
|
|
|
2,678,242 |
|
|
March 1, 2004 – March 31, 2004
|
|
|
120,000 |
|
|
$ |
39.18 |
|
|
|
120,000 |
|
|
|
2,558,242 |
|
|
April 1, 2004 – June 30, 2004
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,558,242 |
|
|
July 1, 2004 – September 30, 2004
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,558,242 |
|
|
October 1, 2004 – December 31, 2004
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,558,242 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
430,500 |
|
|
$ |
38.33 |
|
|
|
430,500 |
|
|
|
2,558,242 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, on December 13, 2004, we entered into an
agreement to repurchase 2,530,346 shares of Company
common stock from Willis Stein & Partners (“Willis
Stein”) and J.P Morgan Chase, as escrow agent for the
former stockholder of Aurum. We acquired Aurum in March 2004.
The purchase price per share of $44.35 was a discount to the
closing price of the Company’s common stock on
December 13, 2004.
|
|
| Item 6. |
Selected Financial Data |
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 2004 presentation.
33
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004(1) | |
|
2003(2) | |
|
2002 | |
|
2001(3)(4) | |
|
2000(5) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share and other data) | |
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
8,296,002 |
|
|
$ |
7,715,215 |
|
|
$ |
5,082,640 |
|
|
$ |
3,874,107 |
|
|
$ |
2,741,994 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Personnel costs
|
|
|
2,786,297 |
|
|
|
2,465,026 |
|
|
|
1,476,430 |
|
|
|
1,187,177 |
|
|
|
845,349 |
|
| |
|
Other operating expenses
|
|
|
1,967,350 |
|
|
|
1,699,797 |
|
|
|
1,019,992 |
|
|
|
829,433 |
|
|
|
624,087 |
|
| |
|
Agent commissions
|
|
|
2,028,926 |
|
|
|
1,823,241 |
|
|
|
1,521,573 |
|
|
|
1,098,328 |
|
|
|
884,498 |
|
| |
|
Provision for claim losses
|
|
|
282,124 |
|
|
|
263,409 |
|
|
|
179,292 |
|
|
|
134,724 |
|
|
|
97,322 |
|
| |
|
Goodwill amortization
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
54,155 |
|
|
|
35,003 |
|
| |
|
Interest expense
|
|
|
47,214 |
|
|
|
43,103 |
|
|
|
34,053 |
|
|
|
46,569 |
|
|
|
59,374 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
7,111,911 |
|
|
|
6,294,576 |
|
|
|
4,231,340 |
|
|
|
3,350,386 |
|
|
|
2,545,633 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings before income taxes, minority interest and cumulative
effect of a change in accounting principle
|
|
|
1,184,091 |
|
|
|
1,420,639 |
|
|
|
851,300 |
|
|
|
523,721 |
|
|
|
196,361 |
|
| |
Income tax expense
|
|
|
438,114 |
|
|
|
539,843 |
|
|
|
306,468 |
|
|
|
209,488 |
|
|
|
86,624 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings before minority interest and cumulative effect of a
change in accounting principle
|
|
|
745,977 |
|
|
|
880,796 |
|
|
|
544,832 |
|
|
|
314,233 |
|
|
|
109,737 |
|
| |
Minority interest
|
|
|
5,015 |
|
|
|
18,976 |
|
|
|
13,115 |
|
|
|
3,048 |
|
|
|
1,422 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings before cumulative effect of a change in accounting
principle
|
|
|
740,962 |
|
|
|
861,820 |
|
|
|
531,717 |
|
|
|
311,185 |
|
|
|
108,315 |
|
| |
Cumulative effect of a change in accounting principle, net of
income taxes
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,709 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Net earnings
|
|
$ |
740,962 |
|
|
$ |
861,820 |
|
|
$ |
531,717 |
|
|
$ |
305,476 |
|
|
$ |
108,315 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic earnings per share before cumulative effect of a change in
accounting principle
|
|
$ |
4.33 |
|
|
$ |
5.81 |
|
|
$ |
4.05 |
|
|
$ |
2.41 |
|
|
$ |
1.11 |
|
| |
Cumulative effect of a change in accounting principle, net of
income taxes, basic basis
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(.05 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Basic net earnings per share
|
|
$ |
4.33 |
|
|
$ |
5.81 |
|
|
$ |
4.05 |
|
|
$ |
2.36 |
|
|
$ |
1.11 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Weighted average shares outstanding, basic basis
|
|
|
171,014 |
|
|
|
148,275 |
|
|
|
131,135 |
|
|
|
129,316 |
|
|
|
97,863 |
|
| |
Diluted earnings per share before cumulative effect of a change
in accounting principle
|
|
$ |
4.21 |
|
|
$ |
5.63 |
|
|
$ |
3.91 |
|
|
$ |
2.34 |
|
|
$ |
1.07 |
|
| |
Cumulative effect of a change in accounting principle, net of
income taxes, diluted basis
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(.05 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Diluted net earnings per share
|
|
$ |
4.21 |
|
|
$ |
5.63 |
|
|
$ |
3.91 |
|
|
$ |
2.29 |
|
|
$ |
1.07 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004(1) | |
|
2003(2) | |
|
2002 | |
|
2001(3)(4) | |
|
2000(5) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share and other data) | |
| |
Weighted average shares outstanding, diluted basis
|
|
|
176,000 |
|
|
|
153,171 |
|
|
|
135,871 |
|
|
|
133,189 |
|
|
|
101,383 |
|
| |
Dividends declared per share
|
|
$ |
.79 |
|
|
$ |
.54 |
|
|
$ |
.32 |
|
|
$ |
.26 |
|
|
$ |
.24 |
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Investments(6)
|
|
$ |
3,346,276 |
|
|
$ |
2,689,817 |
|
|
$ |
2,565,815 |
|
|
$ |
1,823,512 |
|
|
$ |
1,685,331 |
|
| |
Cash and cash equivalents(7)
|
|
|
331,222 |
|
|
|
459,655 |
|
|
|
482,600 |
|
|
|
542,620 |
|
|
|
262,955 |
|
| |
Total assets
|
|
|
9,270,535 |
|
|
|
7,263,175 |
|
|
|
5,245,951 |
|
|
|
4,415,998 |
|
|
|
3,833,985 |
|
| |
Notes payable
|
|
|
1,370,556 |
|
|
|
659,186 |
|
|
|
493,458 |
|
|
|
565,690 |
|
|
|
791,430 |
|
| |
Reserve for claim losses
|
|
|
998,170 |
|
|
|
943,704 |
|
|
|
888,784 |
|
|
|
881,089 |
|
|
|
907,482 |
|
| |
Minority interests and preferred stock of subsidiary
|
|
|
18,874 |
|
|
|
14,835 |
|
|
|
131,797 |
|
|
|
47,166 |
|
|
|
5,592 |
|
| |
Stockholders’ equity
|
|
|
4,700,091 |
|
|
|
3,873,359 |
|
|
|
2,253,936 |
|
|
|
1,638,870 |
|
|
|
1,106,737 |
|
| |
Book value per share(8)
|
|
$ |
27.24 |
|
|
$ |
23.50 |
|
|
$ |
17.13 |
|
|
$ |
12.65 |
|
|
$ |
9.57 |
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Orders opened by direct title operations
|
|
|
3,680,200 |
|
|
|
4,820,700 |
|
|
|
3,228,300 |
|
|
|
2,635,200 |
|
|
|
1,352,000 |
|
| |
Orders closed by direct title operations
|
|
|
2,636,300 |
|
|
|
3,694,000 |
|
|
|
2,290,300 |
|
|
|
1,770,600 |
|
|
|
971,000 |
|
| |
Provision for claim losses to title insurance premiums
|
|
|
5.5 |
% |
|
|
5.4 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
| |
Title related revenue(9):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Percentage direct operations
|
|
|
54.8 |
% |
|
|
59.7 |
% |
|
|
55.3 |
% |
|
|
59.0 |
% |
|
|
52.8 |
% |
| |
Percentage agency operations
|
|
|
45.2 |
% |
|
|
40.3 |
% |
|
|
44.7 |
% |
|
|
41.0 |
% |
|
|
47.2 |
% |
|
|
| (1) |
Our financial results for the year ended December 31, 2004
include the results of various entities acquired on various
dates during 2004, as discussed in “Business —
Recent Developments” and Note B of Notes to
Consolidated Financial Statements. |
| |
| (2) |
Our financial results for the year ended December 31, 2003
include the results of FI for the period from April 1,
2003, the acquisition date, through December 31, 2003, and
include the results of operations of various other entities
acquired on various dates during 2003, as discussed in
“Business — Recent Developments” and
Note B of Notes to Consolidated Financial Statements. |
| |
| (3) |
Our financial results for the year ended December 31, 2001
include the results of the former operations of Vista
Information Solutions, Inc. (“Vista”) for the period
from August 1, 2001, the acquisition date, through
December 31, 2001. 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
Corporation. |
| |
| (4) |
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”). |
| |
| (5) |
Our financial results for the year ended December 31, 2000
include the operations of Chicago Title for the period from
March 20, 2000, the merger date, through December 31,
2000. In the first quarter of 2000, we recorded certain charges
totaling $13.4 million, after applicable taxes, relating to
the revaluation of non-title assets and the write-off of
obsolete software. |
35
|
|
| (6) |
Investments as of December 31, 2004, 2003, 2002, 2001 and
2000 include securities pledged to secure trust deposits of
$546.0 million, $448.1 million, $474.9 million,
$319.1 million and $459.4 million, respectively. |
| |
| (7) |
Cash and cash equivalents as of December 31, 2004, 2003,
2002, 2001 and 2000 include cash pledged to secure trust
deposits of $195.2 million, $231.1 million,
$295.1 million, $367.9 million and
$132.1 million, respectively. |
| |
| (8) |
Book value per share is calculated as stockholders’ equity
at December 31 of each year presented divided by actual
shares outstanding at December 31 of each year presented. |
| |
| (9) |
Includes title insurance premiums and escrow and other title
related fees. |
Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended | |
| |
|
| |
| |
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
2004(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
1,836,818 |
|
|
$ |
2,204,238 |
|
|
$ |
2,159,879 |
|
|
$ |
2,095,067 |
|
|
Earnings before income taxes and minority interest
|
|
|
242,855 |
|
|
|
360,038 |
|
|
|
299,626 |
|
|
|
281,572 |
|
|
Net earnings
|
|
|
150,241 |
|
|
|
222,053 |
|
|
|
193,802 |
|
|
|
174,866 |
|
|
Basic earnings per share
|
|
|
0.91 |
|
|
|
1.29 |
|
|
|
1.12 |
|
|
|
1.01 |
|
|
Diluted earnings per share
|
|
|
0.88 |
|
|
|
1.26 |
|
|
|
1.09 |
|
|
|
.98 |
|
|
Dividends paid per share
|
|
|
.18 |
|
|
|
.18 |
|
|
|
.18 |
|
|
|
.25 |
|
|
2003(2)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
1,436,876 |
|
|
$ |
2,006,301 |
|
|
$ |
2,230,411 |
|
|
$ |
2,041,627 |
|
|
Earnings before income taxes and minority interest
|
|
|
230,454 |
|
|
|
412,030 |
|
|
|
460,288 |
|
|
|
317,867 |
|
|
Net earnings
|
|
|
139,973 |
|
|
|
248,289 |
|
|
|
277,342 |
|
|
|
196,216 |
|
|
Basic earnings per share
|
|
|
1.06 |
|
|
|
1.67 |
|
|
|
1.87 |
|
|
|
1.20 |
|
|
Diluted earnings per share
|
|
|
1.02 |
|
|
|
1.62 |
|
|
|
1.81 |
|
|
|
1.16 |
|
|
Dividends paid per share
|
|
|
.09 |
|
|
|
.22 |
|
|
|
.16 |
|
|
|
.16 |
|
|
|
| (1) |
Our financial results for the year ended December 31, 2004
include the results of various entities acquired on various
dates during 2004, as discussed in “Business —
Recent Developments” and Note B of Notes to
Consolidated Financial Statements. |
| |
| (2) |
Our financial results for the year ended December 31, 2003
include the results of FI for the period from April 1,
2003, the acquisition date, through December 31, 2003, and
include the results of operations of various other entities
acquired on various dates during 2003, as discussed in
“Business — Recent Developments” and
Note B of Notes to Consolidated Financial Statements. |
| |
| (3) |
During the third quarter of 2003, we adopted the fair value
recognition provisions of Statement of Financial Accounting
Standards No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”), for
stock-based employee compensation, effective as of the beginning
of 2003, as discussed in Note M of Notes to Consolidated
Financial Statements. Under this method, stock-based employee
compensation cost is recognized from the beginning of 2003 as if
the fair value method of accounting had been used to account for
all employee awards granted, modified, or settled in years
beginning after December 31, 2002. Net income, as a result
of the adoption of SFAS No. 123, for the year ended
December 31, 2003 reflects an expense of $3.9 million,
which is included in the reported financial results. The
adoption of SFAS 123 increased compensation cost by
$5.8 million for the three months ended March 31,
2003, which resulted in a reduction of the reported net earnings
of $3.6 million, |
36
|
|
|
or $0.03 per diluted per share. Compensation cost decreased
by $47,000 for the three months ended June 30, 2003, which
resulted in an increase in reported net earnings of $29,000,
which had no change to diluted earnings per share. Amounts for
the first and second quarters of 2003 are presented as if we
adopted SFAS 123 in the first quarter of 2003. |
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto and
Selected Financial Data included elsewhere in this
Form 10-K.
Overview
We are the largest title insurance company in the United States.
Our title insurance underwriters — Fidelity National
Title, Chicago Title, Ticor Title, Security Union Title and
Alamo Title — together issued approximately 31.4% of
all title insurance policy premiums issued nationally during
2003, including the 2003 results of American Pioneer
Title Insurance Company, which we acquired in March 2004.
We are also a leading provider of technology solutions,
processing services, and information services to the financial
services and real estate industries. Over 2,400 financial
institutions use our services, including 45 of the 50 largest
banks in the U.S. Our applications process nearly 50% of
all U.S. residential mortgage loans by dollar volume with
balances exceeding $3.6 trillion, and over 235 million
deposit accounts and non-mortgage consumer loans and leases are
processed on our core bank processing platform. We also provide
customized business process outsourcing related to aspects of
the origination and management of mortgage loans to national
lenders and loan servicers. Our information services, including
our property data and real estate-related services, are used by
mortgage lenders, mortgage investors and real estate
professionals to complete residential real estate transactions
throughout the U.S. We provide information services that
span the entire home purchase and ownership life cycle, from
contact through closing, refinancing and resale.
We have six reporting segments:
|
|
|
| |
• |
Title Insurance. The title insurance segment consists of
our title insurance underwriters and our wholly-owned title
insurance agencies. The title segment provides core title
insurance and escrow and other title related services including
collection and trust activities, trustee’s sales
guarantees, recordings and reconveyances. |
| |
| |
• |
Specialty Insurance. The specialty insurance segment,
consisting of our various non-title insurance subsidiaries,
issues flood, home warranty and homeowners insurance policies. |
| |
| |
• |
Financial Institution Software and Services. The
financial institution software and services segment consists
primarily of the operations of Fidelity Information Services,
Inc. (“FI”), which was acquired on April 1, 2003
and subsequent acquisitions of WebTone, Aurum, Sanchez, Kordoba
and InterCept. This segment focuses on two primary markets,
financial institution processing and mortgage loan processing. |
| |
| |
• |
Lender Outsourcing Solutions. The lender outsourcing
solutions segment includes our loan facilitation services, which
consist of centralized, customized title agency and closing
services, which we offer to first mortgage, refinance, home
equity and sub-prime lenders, and our default management
services, which include foreclosure posting and publishing
services, loan portfolio services, field services and property
management. These services allow our customers to outsource the
business processes necessary to take a loan and the underlying
real estate securing the loan though the default and foreclosure
process. |
| |
| |
• |
Information Services. The information services segment
offers real estate related information services. Included in the
information services we provide are property appraisal and
valuation services, property records information, real estate
tax services, borrower credit and flood zone information and
certification and multiple listing software and services. |
37
|
|
|
| |
• |
Corporate and Other. The corporate and other segment
consists of the operations of the parent holding company,
certain other unallocated corporate overhead expenses, the
operations of our wholly-owned equipment-leasing subsidiary and
other small operations. |
Our title insurance and specialty insurance segments make up our
insurance underwriting businesses, while our financial
institution software and services, lender outsourcing solutions
and information services segments make up the technology
solutions, processing and information-based services businesses
of our subsidiary Fidelity National Information Services, Inc.
(“FIS”).
Business Trends and Conditions
Title Insurance Segment. Title insurance revenue is
closely related to the level of real estate activity and the
average price of real estate sales. Real estate sales are
directly affected by the availability of funds to finance
purchases, predominantly mortgage interest rates. Other factors
affecting real estate activity include, but are not limited to,
demand for housing, employment levels, family income levels and
general economic conditions. In addition to real estate sales,
mortgage refinancing is an important source of title insurance
revenue. We have found that residential real estate activity
generally decreases in the following situations:
|
|
|
| |
• |
when mortgage interest rates are high or increasing; |
| |
| |
• |
when the mortgage funding supply is limited; and |
| |
| |
• |
when the United States economy is weak. |
Because commercial real estate transactions tend to be driven
more by supply and demand for commercial space and occupancy
rates in a particular area rather than by macroeconomic events,
our commercial real estate title insurance business can generate
revenues which offset the industry cycles discussed above.
Because these factors can change dramatically, revenue levels in
the title insurance industry can also change dramatically. For
example, beginning in the second half of 1999 and through 2000,
steady interest rate increases caused by actions taken by the
Federal Reserve Board resulted in a significant decline in
refinancing transactions. As a result, the market shifted from a
refinance-driven market in 1998 to a more traditional market
driven by new home purchases and resales in 1999 and 2000.
However, beginning in January 2001 and continuing through June
of 2003, the Federal Reserve Board reduced interest rates by
550 basis points, bringing interest rates down to their
lowest level in recent history, which again significantly
increased the volume of refinance activity. Beginning in
mid-June 2003 and continuing through December 2003, the ten-year
treasury bond yield steadily increased from a low of nearly 3.0%
to more than 4.5%, causing mortgage interest rates to rise,
which decreased the volume of refinance activity. Although
mortgage interest rates again dropped during February and March
of 2004, causing open orders to increase substantially towards
the end of the first quarter of 2004, rates have fluctuated only
slightly since then, and have not decreased to a level that
triggered significant refinance volume in 2004 such as that
experienced in 2003.
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 customers desiring to complete
transactions by year-end. Significant changes in interest rates
may alter these traditional seasonal patterns due to the effect
the cost of financing has on the volume of real estate
transactions.
Financial Institution Software and Services Segment. In
our financial institution processing business, increases in
deposit and lending transactions can positively affect our
business and thus the condition of the overall economy can have
an effect on our growth. While this segment generally is not
significantly affected by the cyclicality of real estate
transactions, our ability to expand our mortgage loan processing
business is correlated to the total number of mortgage loans
outstanding.
In our financial institution software and services segment, we
compete for both licensing and outsourcing business, and thus we
are affected by the decisions of financial institutions to
outsource the services we provide
38
instead of simply licensing our applications. As a provider of
outsourcing solutions, we benefit from the greater revenues that
result from a financial institution’s decision to outsource
its processing to us. Generally, financial institutions of all
sizes will consider outsourcing information technology and
business process services to varying degrees, although smaller
financial institutions are more likely to outsource all
information technology functions to companies such as ours since
they generally do not have the staff, budget or competencies to
implement and operate highly complex technical environments.
Larger financial institutions have historically chosen to limit
outsourcing to specific application functions or services in
connection with a particular product or operation such as
mortgage processing. Generally, demand for outsourcing solutions
has increased over time as providers such as ourselves realize
economies of scale and improve our ability to provide services
that improve customer efficiencies and reduce costs.
We may be affected by the industry consolidation trend in the
banking industry. This trend may be beneficial or detrimental to
our financial institution software and services businesses. When
consolidations occur, merger partners often operate disparate
systems licensed from competing service providers. The newly
formed entity generally makes a determination to migrate its
core systems to a single platform. When a financial institution
processing client is involved in a consolidation, we may benefit
by expanding the use of our services if they are chosen to
survive the consolidation and support the newly combined entity.
Conversely, we may lose market share if a customer of ours is
involved in a consolidation and our services are not chosen to
survive the consolidation and support the newly combined entity.
Lender Outsourcing Solutions Segment. The level of
residential real estate activity, which depends in part on the
level of interest rates, affects the level of revenues from our
lender outsourcing solutions segment. Revenues from loan
facilitation services increase as the amount of mortgage
originations, from both home purchases and mortgage
refinancings, increases. During the second half of 2000,
mortgage interest rates began to decline, causing an increase in
refinance activity. This trend continued through the first six
months of 2003. The increasing refinance activity, coupled with
record levels of residential resale and new home sales, resulted
in an exceptionally strong business climate for our loan
facilitation services in 2003. According to the Mortgage Bankers
Association, U.S. mortgage originations (including
refinancings) were approximately $3.8 trillion,
$2.9 trillion and $2.2 trillion in 2003, 2002 and
2001, respectively.
While prevailing mortgage interest rates have declined to record
lows in recent years and the volume of real estate transactions
has experienced record highs, we do not expect these trends to
continue. Although originations in 2003 surpassed the record
levels set in 2002, interest rates began to rise during the
fourth quarter of 2003. Mortgage originations declined in 2004
to an estimated $2.8 trillion as the interest rate
environment slowed the pace of refinancings. Most economists
expect a relatively stable to marginally increasing mortgage
interest rate environment in 2005 and the current Mortgage
Bankers Association forecast is for $2.5 trillion of
mortgage originations in 2005. Relatively higher interest rates
are also likely to result in seasonal effects having more
influence on real estate activity. Traditionally, the greatest
volume of real estate activity, particularly residential resale
transactions, has occurred in the spring and summer months.
In contrast, we believe that a higher interest rate environment
may increase the volume of consumer defaults and thus favorably
affect our default management services business, which provides
services relating to residential mortgage loans in default. The
overall strength of the economy also affects default revenues.
Information Services Segment. The level of residential
real estate activity, such as the number of residential resales,
new home sales and mortgage originations, also affects revenues
derived from many of the services we provide in our information
services segment. We experienced increased residential loan
refinancing activity coupled with record levels of residential
resale and new home sales during 2000 through 2003. While
refinancing activity declined, residential sales remained strong
in 2004. We expect that current interest rate levels and any
future increase in interest rates will most likely result in
levels of mortgage originations in 2005 that are lower than 2004.
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
39
affect the reported amounts of assets and liabilities and
disclosures with respect to 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 amounts could differ from those estimates. See
Note A of Notes to the Consolidated Financial Statements
for a more detailed description of the significant accounting
policies that have been followed in preparing our Consolidated
Financial Statements.
Valuation of Investments. We regularly review our
investment portfolio for factors that may indicate that a
decline in fair value of an investment is other-than-temporary.
Some factors considered in evaluating whether or not a decline
in fair value is other-than-temporary include: (i) our
ability and intent to retain the investment for a period of time
sufficient to allow for a recovery in value; (ii) the
duration and extent to which the fair value has been less than
cost; and (iii) the financial condition and prospects of
the issuer. Such reviews are inherently uncertain and the value
of the investment may not fully recover or may decline in future
periods resulting in a realized loss.
Goodwill and Other Intangible Assets. We have significant
intangible assets that were acquired through business
acquisitions. These assets consist of purchased customer
relationships, contracts, and the excess of purchase price over
the fair value of identifiable net assets acquired (goodwill).
The determination of estimated useful lives and the allocation
of the purchase price to the fair values of the intangible
assets requires significant judgment and may affect the amount
of future amortization on intangible assets other than goodwill.
We have made acquisitions in the past that have resulted in a
significant amount of goodwill. As of December 31, 2004 and
December 31, 2003, goodwill was $2,798.2 million and
$1,926.5 million, respectively. The majority of our
goodwill as of December 31, 2004 relates to goodwill
recorded in connection with the acquisitions of Aurum in March
2004, Sanchez in April 2004, Kordoba in September 2004,
InterCept in November 2004, the acquisition of the minority
interest of FNIS in September 2003, the acquisitions of FI in
April 2003 and ANFI in March 2003, and the Chicago Title merger
in 2000. The process of determining whether or not an asset,
such as goodwill, is impaired or recoverable relies on
projections of future cash flows, operating results and market
conditions. Such projections are inherently uncertain and,
accordingly, actual future cash flows may differ materially from
projected cash flows. In evaluating the recoverability of
goodwill, we perform an annual goodwill impairment test on our
reporting units based on an analysis of the discounted future
cash flows generated by the reporting units’ underlying
assets. We have completed our annual goodwill impairment test on
our reporting units and have determined that each of our
reporting units has a fair value in excess of its carrying
value. Such analyses are particularly sensitive to changes in
estimates of future cash flows and discount rates. Changes to
these estimates might result in material changes in the fair
value of the reporting units and determination of the
recoverability of goodwill which may result in charges against
earnings and a reduction in the carrying value of our goodwill.
In connection with our acquisitions, we have also recognized
identifiable intangible assets purchased, which typically
consist of software, purchased customer relationships and
contracts. The valuation of these assets involves significant
estimates and assumptions concerning matters such as customer
retention, future cash flows and discount rates. If any of these
assumptions change, it could affect the carrying value of these
assets. Purchased customer relationships are amortized over
their estimated useful lives using an accelerated method which
takes into consideration expected customer attrition rates over
a ten-year period. Contractual relationships are generally
amortized using the straight-line method over their contractual
life.
Long-Lived Assets. We review long-lived assets, primarily
computer software, property and equipment and other intangibles,
such as customer relationships and contracts, for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If
indicators of impairment are present, we estimate the future net
cash flows expected to be generated from the use of those assets
and their eventual disposal. We would recognize an impairment
loss if the aggregate future net cash flows were less than the
carrying amount. As a result, the carrying values of these
assets could be significantly affected by the accuracy of our
estimates of future net cash flows, which cannot be selected
with certainty. In 2004 and 2003, we determined that the
carrying value of certain of our intangible assets may not be
recoverable and recorded impairment charges of $6.3 million
and $7.9 million, respectively relating to the
40
write-off of these assets, respectively. These impairments were
recorded as other operating expenses in our 2004 and 2003
Consolidated Statements of Earnings.
Reserve for Claim Losses. Our reserve for claim losses
includes reserves for known claims as well as for losses that
have been incurred but have not yet been reported to us, net of
expected recoupments. Each known claim is reserved based on our
review of the estimated amount of the claim and the costs
required to settle the claim. Reserves for claims that are
incurred but not reported are estimates that are established at
the time premium revenue is recognized based on historical loss
experience and other factors, including industry trends, claim
loss history, current legal environment, geographic
considerations and type of policy written. Loss reserve
estimates are reviewed periodically and adjusted by management
as experience develops or new information becomes known, and
changes in prior estimates affect our reported results.
Our claim loss provision for our title insurance segment as a
percentage of total title premiums was 5.5% in 2004, 5.4% in
2003 and 5.0% in 2002. The title loss provision in our 2004
financial statements reflects a higher estimated loss for the
2004 policy year offset in part by a favorable adjustment in
reserves for business in previous policy years. Consistent with
2002, the favorable adjustment was attributable to lower than
expected payment levels on previous issue years that included
periods of increased resale activity as well as a high
proportion of refinance business. As a result, title policies
issued in previous years have been replaced by the more recently
issued policies, therefore generally terminating much of the
loss exposure on the previously issued policies. The unfavorable
development during 2003 reflects the higher than expected
payment levels on previously issued policies. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Results of
Operations” and Note J of Notes to Consolidated
Financial Statements for a summary of our reserves for claim
losses at December 31, 2004, 2003 and 2002. Our independent
actuaries perform projections of required reserves periodically
during the year and at year-end. We compare these projections to
the recorded reserves to evaluate their adequacy. Our reserves
for claim losses are within the range projected by our
independent actuaries. Our loss reserves for our specialty
insurance business also require significant estimates.
Revenue Recognition. The following describes our revenue
recognition policies as they pertain to each of our segments:
Title Insurance Segment. Our 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 then considered complete. Our agency
title insurance premiums are recognized as revenue when policies
are reported to us and are recorded as revenue on a gross basis
(before the deduction of agent commissions). In addition, we
accrue for unreported agency title insurance premiums based on
historical reporting patterns of our agents and current trends.
Specialty Insurance Segment. Revenues from home warranty
and personal lines insurance policies are recognized over the
life of the policy, which is one year. Revenues and commissions
related to the sale of flood insurance are recognized when the
policy is reported.
Financial Institution Software and Services. In this
segment, we recognize revenues relating to bank processing
services and mortgage processing services along with software
licensing and software related services. Several of our
contracts include a software license and one or more of the
following services: data processing, development,
implementation, conversion, training, programming, maintenance
and application management. In some cases, these services are
offered in combination with one another and in other cases we
offer them individually. Revenues from bank and mortgage
processing services are typically volume-based depending on
factors such as the estimated number of accounts, transactions
processed and computer resources utilized.
The substantial majority of the revenues in this segment are
from outsourced data processing and application management
arrangements. Revenues from these arrangements are recognized as
services are performed in accordance with SEC Staff Accounting
Bulletin No. 104 (SAB No. 104),
“Revenue Recognition” and related interpretations.
SAB No. 104 sets forth guidance as to when revenue is
realized or realizable and earned when all of the following
criteria are met: (1) persuasive evidence of an arrangement
41
exists; (2) delivery has occurred or services have been
rendered; (3) the seller’s price to the buyer is fixed
and determinable; and (4) collectibility is reasonably
assured. Revenue and deferred costs related to implementation,
conversion and programming services associated with our data
processing and application management agreements are deferred
during the implementation phase and subsequently recognized
using the straight-line method over the term of the related
agreement. At each reporting period, we evaluate these deferred
costs for impairment.
In the event that our arrangements with our customers include
more than one product or service, we determine whether the
individual elements can be recognized separately in accordance
with Financial Accounting Standards Board (FASB) Emerging Issues
Task Force No. 00-21 (EITF 00-21), “Revenue
Arrangements with Multiple Deliverables.” EITF 00-21
addresses the determination of whether an arrangement involving
more than one deliverable contains more than one unit of
accounting and how the arrangement consideration should be
measured and allocated to the separate units of accounting. If
all of the products and services are software related products
and services as determined under American Institute of Certified
Public Accountants’ Statement of Position 97-2 (SOP
NO. 97-2), entitled Software Revenue Recognition,
and SOP 98-9, entitled Modification of SOP
NO. 97-2, Software Revenue Recognition, with Respect to
Certain Transactions, we apply these pronouncements and
related interpretations to determine the appropriate units of
accounting and how the arrangement consideration should be
measured and allocated to the separate units.
We recognize software license and maintenance fees as well as
associated development, implementation, training, conversion and
programming fees in accordance with SOP NO. 97-2 and SOP
NO. 98-9. Initial license fees are recognized when a
contract exists, the fee is fixed or determinable, software
delivery has occurred and collection of the receivable is deemed
probable, provided that vendor-specific objective evidence, or
VSOE, has been established for each element or for the
undelivered elements. We determine the fair value of each
element or the undelivered elements in multi-element software
arrangements based on VSOE. If the arrangement is subject to
accounting under SOP NO. 97-2, VSOE for each element is
based on the price charged when the same element is sold
separately. If evidence of fair value of all undelivered
elements exists but evidence does not exist for one or more
delivered elements, then revenue is recognized using the
residual method. Under the residual method, the fair value of
the undelivered elements is deferred and the remaining portion
of the arrangement fee is recognized as revenue. If evidence of
fair value does not exist for one or more undelivered elements
of a contract, then all revenue is deferred until all elements
are delivered or fair value is determined for all remaining
undelivered elements. Revenue from maintenance and support is
recognized ratably over the term of the agreement. We record
deferred revenue for maintenance amounts invoiced prior to
revenue recognition.
With respect to a small percentage of revenues, we use contract
accounting, as required by SOP NO. 97-2, when the
arrangement with the customer includes significant
customization, modification, or production of software. For
elements accounted for under contract accounting, revenue is
recognized in accordance with SOP 81-1, Accounting for
Performance of Construction Type and Certain Production-Type
Contracts, using the percentage-of-completion method since
reasonably dependable estimates of revenues and contract hours
applicable to various elements of a contract can be made.
Revenues in excess of billings on these agreements are recorded
as unbilled receivables and is included in accounts receivable.
Billings in excess of revenue recognized on these agreements are
recorded as deferred revenue until revenue recognition criteria
are met. Changes in estimates for revenues, costs and profits
are recognized in the period in which they are determinable.
When our estimate indicates that the entire contract will be
performed at a loss, a provision for the entire loss is recorded
in that accounting period.
Lender Outsourcing Solutions. In this segment, we
recognize revenues from loan facilitation services and default
management services. Loan facilitation services primarily
consist of centralized title agency and closing services for
various types of lenders. Revenues relating to centralized title
agency and closing services are recognized at the time of
closing of the related real estate transaction. Ancillary
service fees are recognized when the service is provided.
Default management services consist of services provided to
assist customers through the default and foreclosure process,
including property preservation and maintenance services (such
as lock changes, window replacement, debris removal and lawn
service), posting and publication of foreclosure and auction
notices, title searches, document preparation and recording
services, and referrals for legal and
42
property brokerage services. Revenue derived from these services
is recognized as the services are performed in accordance with
SAB No. 104 as described above.
Information Services. In this segment, we record revenue
from providing data or data-related services. These services
principally include appraisal and valuation services, property
records information, real estate tax services, borrower credit
and flood zone information and multiple listing software and
services. Revenue derived from these services is recognized as
the services are performed in accordance with
SAB No. 104 as described above.
Our flood and tax units provide various services including
life-of-loan monitoring services. Revenue for life-of-loan
services is deferred and recognized ratably over the estimated
average life of the loan service period, which is determined
based on our historical experience. We evaluate our historical
experience on a periodic basis, and adjust the estimated life of
the loan service period prospectively. Revenue derived from
software and service arrangements is recognized in accordance
with SOP No. 97-2. Revenues from other services in this
segment are recognized as the services are performed in
accordance with SAB No. 104 as described above.
Factors Affecting Comparability
Year ended December 31, 2004. Our Consolidated
Statements of Earnings for 2004 include the full year results of
operations of FI, which we acquired on April 1, 2003, and
various other entities acquired on various dates during 2004 and
in 2003, as discussed in Note B of Notes to Consolidated
Financial Statements. Our weighted average shares outstanding
have increased in 2004 as compared with 2003 primarily as a
result of issuing shares of our common stock to finance the
acquisitions of ANFI, FI, FNIS, Hansen, Aurum and Sanchez. As
such, basic and diluted net earnings per share have decreased in
2004 as compared with 2003, at a greater rate than our decrease
in net earnings. In 2003, we adopted the fair value recognition
provisions of Statement of Financial Accounting Standards
No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”), for
stock-based employee compensation, effective as of the beginning
of 2003, as discussed in Note M of Notes to Consolidated
Financial Statements. Under this method, stock-based employee
compensation cost is recognized from the beginning of 2003 as if
the fair value method of accounting had been used to account for
all employee awards granted, modified, or settled in years
beginning after December 31, 2002. Net income, as a result
of the adoption of SFAS No. 123, for the year ended
December 31, 2004 and 2003 reflect an expense of
$21.8 million and $9.5 million, respectively, which is
included in the reported financial results as other operating
expense.
Year ended December 31, 2003. Our Consolidated
Statements of Earnings for 2003 include the results of
operations of FI, which we acquired on April 1, 2003, and
various other entities acquired on various dates during 2003, as
discussed in Note B of Notes to Consolidated Financial
Statements. Net earnings from our financial institution software
and services segment, which includes FI for the period from
April 1, 2003 through December 31, 2003, represented
8.0% of our total net earnings for 2003 as compared with 0.2% of
our total net earnings in 2002. The increase in net earnings
from our financial institution software and services segment in
2003 is primarily due to the acquisition of FI.
43
Results of Operations
|
|
|
Consolidated Results of Operations |
Net Earnings. The following table presents certain
financial data for the years indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Total revenue
|
|
$ |
8,296,002 |
|
|
$ |
7,715,215 |
|
|
$ |
5,082,640 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$ |
7,111,911 |
|
|
$ |
6,294,576 |
|
|
$ |
4,231,340 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
740,962 |
|
|
$ |
861,820 |
|
|
$ |
531,717 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic net earnings per share
|
|
$ |
4.33 |
|
|
$ |
5.81 |
|
|
$ |
4.05 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted net earnings per share
|
|
$ |
4.21 |
|
|
$ |
5.63 |
|
|
$ |
3.91 |
|
| |
|
|
|
|
|
|
|
|
|
Revenue. The following table presents the components of
our revenue:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Direct title insurance premiums
|
|
$ |
2,128,902 |
|
|
$ |
2,400,870 |
|
|
$ |
1,610,792 |
|
|
Agency title insurance premiums
|
|
|
2,610,426 |
|
|
|
2,337,381 |
|
|
|
1,936,937 |
|
|
Escrow and other title related fees
|
|
|
1,042,243 |
|
|
|
1,056,448 |
|
|
|
789,730 |
|
|
Financial institution software and services
|
|
|
1,207,325 |
|
|
|
686,480 |
|
|
|
3,922 |
|
|
Lender outsourcing solutions (excludes title premiums of
$128.2 million, $288.2 million, and $46.7 million
in 2004, 2003 and 2002, respectively, that are included in title
premiums above)
|
|
|
322,194 |
|
|
|
316,211 |
|
|
|
167,492 |
|
|
Information services
|
|
|
589,153 |
|
|
|
559,110 |
|
|
|
377,983 |
|
|
Specialty insurance
|
|
|
239,256 |
|
|
|
135,231 |
|
|
|
46,061 |
|
|
Interest and investment income
|
|
|
70,874 |
|
|
|
60,345 |
|
|
|
74,577 |
|
|
Realized gains and losses, net
|
|
|
36,961 |
|
|
|
106,385 |
|
|
|
15,459 |
|
|
Other income
|
|
|
48,668 |
|
|
|
56,794 |
|
|
|
59,687 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total revenue
|
|
$ |
8,296,002 |
|
|
$ |
7,715,215 |
|
|
$ |
5,082,640 |
|
| |
|
|
|
|
|
|
|
|
|
|
Orders opened by direct title operations
|
|
|
3,680,200 |
|
|
|
4,820,700 |
|
|
|
3,228,300 |
|
|
Orders closed by direct title operations
|
|
|
2,636,300 |
|
|
|
3,694,000 |
|
|
|
2,290,300 |
|
Total revenue in 2004 increased $580.8 million to
$8,296.0 million, an increase of 7.5% over 2003. Total
revenue in 2003 increased $2,632.6 million, or 51.8% to
$7,715.2 million from $5,082.6 million in 2002. The
increase in revenue in 2004 is primarily attributable to a full
year of results from the 2003 acquisitions of FI and Webtone,
along with the 2004 acquisitions of Aurum, Sanchez, Kordoba and
InterCept in the financial institution software and services
segment, and an increase in the specialty insurance segment
relating to significant organic growth, offset in part by a
reduction in realized gains and losses. Although the mix of
direct and agency title premiums changed from 2003 to 2004,
total title premiums and escrow and other title related fees
remained fairly consistent in 2004 as compared with 2003. The
increase in total revenue in 2003 is due in part to increases in
real estate and refinance activity as a result of decreasing
interest rates. Further, the acquisitions of financial
institution software and services companies, real estate-related
information service companies and specialty insurance companies
and the integration of these operations into our core businesses
in 2003, as well as increased realized gains on investments,
also contributed to increased revenue in 2003 compared to 2002.
44
Title insurance premiums, including those that are part of the
lender outsourcing solutions segment, were $4,739.3 million
in 2004, $4,738.3 million in 2003 and $3,547.7 million
in 2002. Direct title premiums decreased from 2003 to 2004 while
agency title premiums increased during the same period. The
decrease in direct title premiums is primarily due to a
reduction in refinancing activity experienced in 2004 as
compared with 2003 and was partially offset by an increase in
the average fee per file. The increase in direct title premiums
in 2003 was due primarily to increases in resale and refinance
activity as a result of the decline in interest rates through
mid-year 2003. The increase in resale and refinance activity in
2003 was partially offset by a decrease in the average fee per
file. The increase in the fee per file in 2004 and the decrease
in fee per file in 2003 is consistent with the overall level of
refinance activity experienced during 2004 and 2003. The fee per
file tends to increase as mortgage interest rates rise, and the
mix of business changes from a predominately refinance driven
market to more of a resale driven market.
The following table presents the percentages of title insurance
premiums generated by our direct and agency operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Direct(1)
|
|
$ |
2,128,902 |
|
|
|
44.9 |
% |
|
$ |
2,400,870 |
|
|
|
50.7 |
% |
|
$ |
1,610,792 |
|
|
|
45.4 |
% |
|
Agency(1)
|
|
|
2,610,426 |
|
|
|
55.1 |
|
|
|
2,337,381 |
|
|
|
49.3 |
|
|
|
1,936,937 |
|
|
|
54.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total title insurance premiums
|
|
$ |
4,739,328 |
|
|
|
100.0 |
% |
|
$ |
4,738,251 |
|
|
|
100.0 |
% |
|
$ |
3,547,729 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Includes premiums reported in the title segment and lender
outsourcing solutions segment. |
In 2004, our mix of direct and agency title premiums changed,
with agency premiums making up 55.1% of total premiums compared
with 49.3% in 2003. Agency premiums increased in 2004 by
$273.0 million, of which $193.5 million was attributed
to our acquisition of APTIC in March 2004. The remainder of the
increase can be attributed to our agent’s mix of business
being different from our direct operations and the agency
business not fluctuating as much in relation to the refinancing
environment. However, agency business in general is not as
profitable as direct business. Our mix of direct and agency
title insurance premiums changed in 2003 as compared with 2002,
primarily as a result of our acquisition of ANFI in March 2003,
and the inclusion of ANFI’s title insurance premiums as
direct title insurance premiums in 2003 and the acquisitions of
LSI and Key Title in 2003. In 2002, ANFI’s title insurance
premiums were included in agency title insurance premiums.
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, 2004, fluctuated in a
pattern generally consistent with the fluctuation in direct
title insurance premiums and order counts. Escrow and other
title related fees were $1,042.2 million,
$1,056.4 million and $789.7 million, respectively,
during 2004, 2003 and 2002.
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 2004
was $70.8 million compared with $60.3 million in 2003
and $74.6 million in 2002. Average invested assets
increased 16.8% to $3,622.0 million, from
$3,101.5 million in 2003. The tax equivalent yield in 2004,
excluding realized gains and losses, was 2.6% as compared with
2.4% in 2003 and 3.4% in 2002. Interest and investment income
decreased $14.3 million, or 19.1% in 2003 to
$60.3 million from $74.6 million in 2002.
Net realized gains and losses for 2004, 2003 and 2002 were
$37.0 million, $106.4 million and $15.5 million,
respectively. Net realized gains in 2004 include
$16.2 million relating to the investment in Covansys
warrants at FIS. Net realized gains in 2003 includes a
$51.7 million realized gain as a result of InterActive
Corp’s acquisition of Lending Tree Inc. and the subsequent
sale of our Interactive Corp. common stock and a realized gain
of $25.0 million on the sale of New Century Financial
Corporation common stock.
45
Also included in net realized gains for 2003 is an
$8.9 million loss as a result of the disposal of assets in
connection with the migration of data center operations from
FNIS to FI. See Note B of Notes to Consolidated Financial
Statements.
Net realized gains in 2002 included a $3.1 million gain
recognized on our investment in Santa Barbara Restaurant
Group, Inc. (“SBRG”) common stock as a result of the
merger between SBRG and CKE Restaurants, Inc. (“CKE”)
and a $3.4 million gain on the sale of a portion of our CKE
common stock in the second quarter of 2002. Net realized gains
in 2002 were partially offset by other-than-temporary impairment
losses of $11.3 million on CKE recorded during the fourth
quarter of 2002 and $3.3 million recorded on MCI WorldCom
bonds in the second quarter of 2002.
Other income represents revenue generated by other smaller
businesses, including our leasing business that are not included
in a specific business segment. Other income was
$48.7 million in 2004, $56.8 million in 2003 and
$59.7 million in 2002.
Expenses. The following table presents the components of
our expenses:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Personnel costs
|
|
$ |
2,786,297 |
|
|
$ |
2,465,026 |
|
|
$ |
1,476,430 |
|
|
Other operating expenses
|
|
|
1,967,350 |
|
|
|
1,699,797 |
|
|
|
1,019,992 |
|
|
Agent commissions
|
|
|
2,028,926 |
|
|
|
1,823,241 |
|
|
|
1,521,573 |
|
|
Provision for claim losses
|
|
|
282,124 |
|
|
|
263,409 |
|
|
|
179,292 |
|
|
Interest expense
|
|
|
47,214 |
|
|
|
43,103 |
|
|
|
34,053 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total expenses
|
|
$ |
7,111,911 |
|
|
$ |
6,294,576 |
|
|
$ |
4,231,340 |
|
| |
|
|
|
|
|
|
|
|
|
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 45-60 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 streams.
However, a short time lag does exist in reducing variable costs
and certain fixed costs are incurred regardless of revenue
levels.
Personnel costs include base salaries, commissions, benefits and
bonuses paid to employees, and are one of our most significant
operating expenses. Personnel costs totaled
$2,786.3 million, $2,465.0 million and
$1,476.4 million for the years ended December 31,
2004, 2003 and 2002, respectively. Personnel costs, as a
percentage of total revenue, were 33.6% in 2004, compared with
32.0% in 2003 and 29.1% in 2002. The increase in personnel costs
as a percentage of total revenue in 2004 and 2003 can be
attributed primarily to the incremental personnel costs
associated with our acquisition of FI and our various other
acquisitions made in the financial institution software and
services segment during 2004 and 2003, which have higher
personnel costs as a percentage of revenue because of the nature
of those businesses requires many programmers and other
personnel with an information technology background. In
addition, as a result of adopting SFAS No. 123 during
2003, included in personnel costs for 2004 and 2003 is
approximately $21.8 million and $6.2 million in
compensation expense, respectively. See Note M of Notes to
Consolidated Financial Statements.
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,
amortization of other intangibles and trade and notes receivable
allowances. Other operating expenses increased as a
46
percentage of total revenue to 23.7% in 2004 from 22.0% in 2003
and increased from 20.1% in 2002. The increase in other
operating expenses as a percentage of total revenue in 2004 and
2003 is consistent with the increase in personnel costs as a
percentage of total revenue.
Agent commissions represent the portion of premiums retained by
agents pursuant to the terms of their respective agency
contracts. Agent commissions and the resulting percentage of
agent premiums we retain vary according to regional differences
in real estate closing practices and state regulations.
The following table illustrates the relationship of agent title
premiums and agent commissions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Agent title premiums
|
|
$ |
2,610,426 |
|
|
|
100.0 |
% |
|
$ |
2,337,381 |
|
|
|
100.0 |
% |
|
$ |
1,936,937 |
|
|
|
100.0 |
% |
|
Agent commissions
|
|
|
2,028,926 |
|
|
|
77.7 |
|
|
|
1,823,241 |
|
|
|
78.0 |
|
|
|
1,521,573 |
|
|
|
78.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net
|
|
$ |
581,500 |
|
|
|
22.3 |
% |
|
$ |
514,140 |
|
|
|
22.0 |
% |
|
$ |
415,364 |
|
|
|
21.4 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for claim losses includes an estimate of
anticipated title and title related claims and specialty
insurance 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.
A summary of the reserve for claim losses for the title and
specialty insurance is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Beginning balance
|
|
$ |
943,704 |
|
|
$ |
888,784 |
|
|
$ |
881,089 |
|
| |
Reserves assumed(1)
|
|
|
38,597 |
|
|
|
8,622 |
|
|
|
— |
|
| |
Claim loss provision related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Current year
|
|
|
299,142 |
|
|
|
249,320 |
|
|
|
209,134 |
|
| |
|
Prior years
|
|
|
(17,018 |
) |
|
|
14,089 |
|
|
|
(29,842 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total claim loss provision
|
|
|
282,124 |
|
|
|
263,409 |
|
|
|
179,292 |
|
| |
Claims paid, net of recoupments related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Current year
|
|
|
(30,894 |
) |
|
|
(16,246 |
) |
|
|
(11,137 |
) |
| |
|
Prior years
|
|
|
(235,361 |
) |
|
|
(200,865 |
) |
|
|
(160,460 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total claims paid, net of recoupments
|
|
|
(266,255 |
) |
|
|
(217,111 |
) |
|
|
(171,597 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$ |
998,170 |
|
|
$ |
943,704 |
|
|
$ |
888,784 |
|
| |
|
|
|
|
|
|
|
|
|
|
Provision for claim losses as a percentage of title and
specialty insurance premiums
|
|
|
5.9 |
% |
|
|
5.6 |
% |
|
|
5.1 |
% |
| |
|
|
|
|
|
|
|
|
|
|
Ending balance of claim loss reserves for title insurance only
|
|
$ |
987,076 |
|
|
$ |
940,217 |
|
|
$ |
887,973 |
|
| |
|
|
|
|
|
|
|
|
|
|
Provision for claim losses as a percentage of title insurance
premiums only
|
|
|
5.5 |
% |
|
|
5.4 |
% |
|
|
5.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
We assumed APTIC’s outstanding reserve for claim losses in
connection with its acquisition in 2004. We assumed LSI’s
and ANFI’s outstanding reserve for claim losses in
connection with their acquisitions in 2003. |
The title loss provision in the current year reflects a higher
estimated loss for the 2004 policy year offset in part by a
favorable adjustment from previous policy years. Consistent with
2002, the favorable adjustment was
47
attributable to lower than expected payment levels on previous
issue years that included periods of increased resale activity
as well as a high proportion of refinance business. As a result,
title policies issued in previous years have been replaced by
the more recently issued policies, therefore generally
terminating much of the loss exposure on the previously issued
policies. The unfavorable development during 2003 reflects
higher than expected payment levels on previously issued
policies.
Interest expense for the years ended December 31, 2004,
2003 and 2002 was $47.2 million, $43.1 million and
$34.1 million, respectively. The increase in interest
expense in 2004 is attributable to the increase in outstanding
balances relating to our credit facilities and a full year of
interest relating to our $250.0 million aggregate principal
amount of 5.25% notes. The increase in interest expense in
2003 is attributable to the increase in outstanding notes
payable as a result of the issuance of $250.0 million
aggregate principal amount of 5.25% notes in March 2003
(see Note H of Notes to Consolidated Financial Statements),
which was partially offset by the decline in interest rates.
Income tax expense as a percentage of earnings before income
taxes for 2004, 2003 and 2002 was 37.0%, 38.0%, and 36.0%,
respectively. The fluctuation in income tax expense as a
percentage of earnings before income taxes is attributable to
our estimate of ultimate income tax liability, and changes in
the characteristics of net earnings year to year, such as the
acquisition of FI and operating income versus investment income.
The decrease in 2004 is due to change in state income tax
apportionment. The increase in 2003 as compared with 2002 is due
to an increase in the state income tax rate and the effect of
foreign taxes as a result of our various acquisitions in 2003.
Minority interest expense for 2004, 2003 and 2002 was
$5.0 million, $19.0 million and $13.1 million,
respectively. The decrease in minority interest expense in 2004
is primarily due to our acquisition of the minority interest of
FNIS, which we acquired in 2003. The increase in minority
interest in 2003 as compared with 2002 is primarily attributable
to increased earnings of our majority-owned subsidiaries.
|
|
|
Segment Results of Operations |
Revenues by segment include operating revenues and the
segment’s respective share of interest and investment
income and realized gains and losses (see Note P to Notes
to Consolidated Financial Statements).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Revenues
|
|
$ |
5,841,514 |
|
|
$ |
5,913,944 |
|
|
$ |
4,410,094 |
|
|
Personnel costs
|
|
|
1,656,843 |
|
|
|
1,666,006 |
|
|
|
1,242,534 |
|
|
Other operating expenses
|
|
|
943,227 |
|
|
|
883,993 |
|
|
|
659,838 |
|
|
Agent commissions
|
|
|
2,117,258 |
|
|
|
2,035,894 |
|
|
|
1,568,231 |
|
|
Provision for claim losses
|
|
|
260,662 |
|
|
|
255,694 |
|
|
|
177,391 |
|
|
Interest expense
|
|
|
1,033 |
|
|
|
1,113 |
|
|
|
1,335 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total expenses
|
|
|
4,979,023 |
|
|
|
4,842,700 |
|
|
|
3,649,329 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
$ |
862,491 |
|
|
$ |
1,071,244 |
|
|
$ |
760,765 |
|
| |
|
|
|
|
|
|
|
|
|
Revenue for the title insurance segment includes direct and
agency title premiums, including those earned from the lender
outsourcing solutions segment, as well as escrow and other title
related fees, interest and investment income and realized gains
and losses. The primary reason for the $72.4 million
decrease in total title segment revenue in 2004 as compared with
2003 is a $79.8 million decrease in realized gains and
losses attributable to investments owned by our title companies.
For a discussion of title segment premiums and escrow and other
title related fees, see the Consolidated Results of Operations
revenues discussion above.
48
Personnel costs were $1,656.8 million,
$1,666.0 million and $1,242.5 million in 2004, 2003
and 2002, respectively. As a percentage of title insurance
revenues, personnel costs were 28.4% in 2004 and 28.2% in 2003
and 2002. 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. As such, with the decline in open orders
on refinance transactions resulting from the increase in
mortgage interest rates during the second half of 2003, we began
reducing personnel costs with the reduction of approximately 22%
of the title and escrow workforce from July to December of 2003
and maintained personnel at appropriate levels during 2004. We
will continue to monitor prevailing market conditions and will
adjust personnel costs in accordance with activity.
Other operating expenses were $943.2 million,
$884.0 million and $659.8 million in 2004, 2003 and
2002, respectively. As a percentage of title insurance revenues,
other operating expenses were 16.1%, 14.9% and 15.0% in 2004,
2003 and 2002, respectively.
As noted in the consolidated results of operations, the large
increase in agent commissions in 2004 corresponds to the
increase in agency premiums that were earned in 2004, compared
with the corresponding 2003 and 2002 amounts. Agent commissions
have remained fairly constant as a percentage of premiums at
77.7%, 78.0% and 78.6% in 2004, 2003 and 2002, respectively.
As noted in the consolidated results of operations, the
provision for claim losses includes an estimate of anticipated
title and title related 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.
Earnings before income taxes and minority interest for this
segment decreased in 2004 as compared with 2003 due primarily to
the fact that the revenue mix changed towards agency premiums as
discussed above which have a much lower margin.
|
|
|
Specialty Insurance Segment |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Revenues
|
|
$ |
242,820 |
|
|
$ |
137,423 |
|
|
$ |
47,568 |
|
|
Personnel costs
|
|
|
28,815 |
|
|
|
19,821 |
|
|
|
12,787 |
|
|
Other operating expenses
|
|
|
160,991 |
|
|
|
94,655 |
|
|
|
27,800 |
|
|
Provision for claim losses
|
|
|
21,462 |
|
|
|
7,715 |
|
|
|
1,901 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total expenses
|
|
|
211,268 |
|
|
|
122,191 |
|
|
|
42,488 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
$ |
31,552 |
|
|
$ |
15,232 |
|
|
$ |
5,080 |
|
| |
|
|
|
|
|
|
|
|
|
Revenues from specialty insurance were $242.8 million,
$137.4 million and $47.6 million in 2004, 2003 and
2002, respectively, and include revenues from the issuance of
flood, home warranty and personal lines insurance policies. The
increase in revenues in 2004 as compared with 2003 was primarily
the result of significant organic growth of these business lines
in 2004. Specialty insurance revenue increased in 2003 as
compared with 2002 as a result of our January 2003 acquisition
of Bankers Insurance Group and First Community Insurance
Company, which gave us the ability to issue new and renewal
flood insurance policies.
Personnel costs were $28.8 million, $19.8 million and
$12.8 million in 2004, 2003 and 2002, respectively. As a
percentage of specialty insurance revenues, personnel costs were
11.9%, 14.4% and 26.9% in 2004, 2003
49
and 2002, respectively. The decrease as a percentage of revenues
in 2004 and 2003 is primarily the result of organic growth of
the business lines, which has not required a proportionate
increase in personnel.
Other operating expenses in the specialty insurance segment were
$161.0 million, $94.7 million and $27.8 million
in 2004, 2003 and 2002, respectively and are consistent with our
increases in revenues.
Claim loss expense was $21.5 million, $7.7 million and
$1.9 million in 2004, 2003 and 2002, respectively. The
increase was primarily the result of increased activity in the
personal lines insurance business.
|
|
|
Financial Institution Software and Services Segment |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Revenues
|
|
$ |
1,286,444 |
|
|
$ |
701,003 |
|
|
$ |
3,924 |
|
|
Personnel costs
|
|
|
726,289 |
|
|
|
413,175 |
|
|
|
734 |
|
|
Other operating expenses
|
|
|
378,119 |
|
|
|
177,015 |
|
|
|
1,237 |
|
|
Interest expense
|
|
|
4,244 |
|
|
|
12 |
|
|
|
8 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total expenses
|
|
|
1,108,652 |
|
|
|
590,202 |
|
|
|
1,979 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
$ |
177,792 |
|
|
$ |
110,801 |
|
|
$ |
1,945 |
|
| |
|
|
|
|
|
|
|
|
|
Revenues from financial institution software and services were
$1,286.4 million, $701.0 million and $3.9 million
in 2004, 2003 and 2002, respectively. The $585.4 million
increase in revenues in 2004 compared with 2003 relates
primarily to recording a full year of revenues from FI and
Webtone which were acquired in 2003 and the 2004 acquisitions of
Aurum, Sanchez, Kordoba and InterCept, along with a few smaller
acquisitions. The 2003 revenues were primarily the results of FI
and Webtone which were included in the Consolidated Financial
Statements for the period from April 1, 2003 and
September 1, 2003, respectively, through December 31,
2003. Revenues in 2004 include $988.8 million from FI and
Webtone while 2003 includes $674.5 million of revenue from
FI and Webtone. The 2004 acquisitions of Aurum, Sanchez, Kordoba
and InterCept and other smaller acquisitions contributed
$219.1 million of the increase in 2004 compared with 2003.
Included in 2004 and 2003 are $62.4 million and
$14.8 million, respectively, of intersegment revenues that
FI earns relating to IT software and support services that FI
provides to the remainder of the company. FI began providing
these services in the third quarter of 2003. Revenues in 2004
also include a gain relating to the fair value increase of an FI
investment in Covansys warrants of $16.2 million that were
acquired as part of the acquisition of 29% of Covansys. Also
included in all three years are revenues from our Empower
software product, which were $12.3 million in 2004,
$11.8 million in 2003 and $3.9 million in 2002.
Personnel costs were $726.3 million, $413.2 million
and $0.7 million in 2004, 2003 and 2002, respectively. As a
percentage of revenues, personnel costs were 56.5% and 58.9% in
2004 and 2003, respectively. Personnel costs are a high
percentage of revenue for this segment due to the fact that this
segment requires many employees with a technology background.
Other operating expenses were $378.1 million,
$177.0 million and $1.2 million in 2004, 2003, and
2002 respectively. The increase of $201.1 million in 2004
as compared with 2003 was primarily the result of the above
mentioned acquisitions including a full year of FI, and includes
an increase of $74.5 million in depreciation of assets and
amortization costs relating to purchased intangible assets and
software.
Interest expense of $4.2 million in 2004 primarily relates
to a credit facility specific to the financial institution
software and services segment under which approximately
$410.0 million was borrowed in November 2004 to fund the
acquisition of InterCept.
50
|
|
|
Lender Outsourcing Solutions Segment |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Revenues
|
|
$ |
451,148 |
|
|
$ |
605,352 |
|
|
$ |
214,679 |
|
|
Personnel costs
|
|
|
148,746 |
|
|
|
144,528 |
|
|
|
69,824 |
|
|
Other operating expenses
|
|
|
202,874 |
|
|
|
260,403 |
|
|
|
90,880 |
|
|
Interest expense
|
|
|
27 |
|
|
|
(33 |
) |
|
|
174 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total expenses
|
|
|
351,647 |
|
|
|
404,898 |
|
|
|
160,878 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
$ |
99,501 |
|
|
$ |
200,454 |
|
|
$ |
53,801 |
|
| |
|
|
|
|
|
|
|
|
|
Revenues from our lender outsourcing solutions primarily relate
to our loan facilitation services and revenues from our default
management services. Including title premiums generated and
reported by this segment and also reported in the title
insurance segment (eliminated as intersegment revenue), revenues
from lender outsourcing solutions were $451.1 million,
$605.4 million and $214.7 million in 2004, 2003 and
2002, respectively. The decrease in revenue for 2004 was
primarily due to a decrease in loan facilitation services which
had revenues of $225.7 million in 2004 as compared with
$433.6 million in 2003. In 2003, we began a program whereby
we automated the process for performing title agency services in
connection with loan refinancings for borrowers who meet
specific criteria. Loan facilitation services revenue decreased
from 2003 because of the reduction in refinancing activity in
2004, which resulted in revenues from this automated process of
$57.6 million in 2004 as compared with $188.7 million
in 2003. Default management revenues were $224.7 million,
$170.8 million and $121.4 million in 2004, 2003 and
2002, respectively. The significant increases in 2004 and in
2003 were the result of organic growth in the majority of our
default businesses.
Personnel costs were $148.7 million, $144.5 million
and $69.8 million in 2004, 2003 and 2002, respectively. As
a percentage of revenues, personnel costs were 33.0%, 23.9% and
32.5% in 2004, 2003 and 2002. The increase in 2004 as a
percentage of revenues is primarily the result of the reduction
in revenues from the automated title agency process in 2004 as
compared with 2003 as labor costs relating to these revenues are
not as closely related to revenue volumes in this line of
business. This is also the reason for the decrease in 2003 as
compared to 2002, when we did not have any revenues relating to
the automated title agency process.
Other operating expenses in the lender outsourcing solutions
segment consist primarily of professional fees, data processing
costs, depreciation and amortization costs, costs to purchase
real estate data and other expenses. Other operating expenses
were $202.9 million, $260.4 million and
$90.9 million in 2004, 2003 and 2002, respectively. The
decrease in other operating costs of $57.5 million or 22.1%
in 2004 is consistent with the decrease in revenues as other
operating expenses are more closely related to the volume of
business in this segment than are personnel costs. As a
percentage of revenues, other operating expenses were 45.0%,
43.0% and 42.3% for 2004, 2003 and 2002, respectively.
51
|
|
|
Information Services Segment |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Revenues
|
|
$ |
630,129 |
|
|
$ |
599,993 |
|
|
$ |
404,747 |
|
|
Personnel costs
|
|
|
168,795 |
|
|
|
166,078 |
|
|
|
115,759 |
|
|
Other operating expenses
|
|
|
348,289 |
|
|
|
330,995 |
|
|
|
222,072 |
|
|
Interest expense
|
|
|
222 |
|
|
|
1,590 |
|
|
|
806 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total expenses
|
|
|
517,306 |
|
|
|
498,663 |
|
|
|
338,637 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
$ |
112,823 |
|
|
$ |
101,330 |
|
|
$ |
66,110 |
|
| |
|
|
|
|
|
|
|
|
|
Revenues from information services generally trend closely with
the level and mix of business, as well as the performance, of
our title related subsidiaries. Revenues from information
services in 2004, 2003, and 2002 were $630.1 million,
$600.0 million and $404.7 million, respectively.
Revenues in this segment have benefited from the increased
levels of real estate activity over the past few years due
partially to the favorable interest rate environment. The 2004
increase in revenue of $30.1 million or 5.0% resulted
primarily from increased activity at some of our appraisal and
valuation businesses in 2004. 2004, 2003 and 2002 also include
intersegment revenues of $44.6 million, $38.9 million
and $26.6 million, respectively, for services provided
primarily to the title insurance segment. The 2003 increase in
revenue of $195.3 million resulted primarily from
acquisitions made in 2003 and 2002 and organic growth in our
real estate tax services, flood services, property data and
disclosure services.
Personnel costs were $168.8 million, $166.1 million
and $115.8 million in 2004, 2003 and 2002, respectively. As
a percentage of revenues, personnel costs were 26.8%, 27.7% and
28.6% in 2004, 2003 and 2002, respectively. The 2003 increase in
personnel costs of $50.3 million resulted primarily from
acquisitions made in 2003 and 2002.
Other operating expenses in the information services segment
consist primarily of data processing costs, depreciation and
amortization, costs to purchase real estate data and other
expenses. Other operating expenses were $348.3 million,
$331.0 million and $222.1 million in 2004, 2003 and
2002, respectively. As a percentage of revenues, other operating
expenses were 55.3%, 55.2% and 54.9% for 2004, 2003 and 2002,
respectively.
|
|
|
Corporate and Other Segment |
The corporate and other segment is made up of smaller entities
that do not fit in our other segment classifications, our
leasing operations, and certain corporate expenses not otherwise
allocated. Revenues from this segment were $57.3 million,
$61.9 million and $59.7 million for 2004, 2003 and
2002, respectively. Operating expenses were $157.4,
$140.3 million and $111.1 million for 2004, 2003 and
2002, respectively.
Liquidity and Capital Resources
Cash Requirements. Our cash requirements include debt
service, operating expenses, taxes, capital expenditures,
systems development, treasury stock repurchases, 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
borrowings through public debt offerings and existing credit
facilities. Our short-term 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-term and
long-term projected sources
52
and uses of funds, as well as the asset, liability, investment
and cash flow assumptions underlying these projections.
We have $500.0 million of capacity under a shelf
registration statement that may be used, subject to market
conditions, to issue debt or other securities at our discretion.
We presently intend to use the proceeds from the sale of any
securities under the shelf registration statement primarily to
finance strategic opportunities. While we seek to give ourselves
flexibility with respect to meeting such needs, there can be no
assurance that market conditions would permit us to sell such
securities on acceptable terms at any given time, or at all.
Our two significant sources of internally generated funds are
dividends and distributions from our subsidiaries. As a holding
company, we receive cash from our subsidiaries in the form of
dividends and as reimbursement for operating and other
administrative expenses we incur. The reimbursements are
executed within the guidelines of management agreements among us
and our subsidiaries. Our insurance subsidiaries are restricted
by state regulation in their ability to pay dividends and make
distributions. Each state of domicile regulates the extent to
which our title underwriters can pay dividends or make other
distributions to us. As of December 31, 2004,
$1,731.3 million of our net assets were restricted from
dividend payments without prior approval from the Departments of
Insurance. During 2005, our first tier title subsidiaries can
pay or make distributions to us of approximately
$209.8 million without prior approval. Our underwritten
title companies, financial institution software and services
companies, lender outsourcing businesses and information
services companies collect revenue and pay operating expenses.
However, they are not regulated to the same extent as our
insurance subsidiaries. Positive cash flow from these
subsidiaries is invested primarily in cash and cash equivalents.
Financing. On March 9, 2005, we announced that we
had completed a previously announced recapitalization plan of
FIS (See Recent Developments in Item 1). This
recapitalization was accomplished through FIS entering into
$3.2 billion in senior credit facilities consisting of a
$800.0 million Term Loan A facility, a
$2.0 billion Term Loan B facility (collectively, The
“Term Loan Facilities”) and a $400.0 million
revolving credit facility (“Revolver”) with a
consortium of lenders led by Bank of America. FIS fully drew
upon the entire $2.8 billion in Term Loan Facilities
to consummate the recapitalization. Revolving credit borrowings
and Term A Loans bear interest at a floating rate, which
will be, at the Borrowers’ option, either the British
Bankers Association LIBOR or base rate plus, in both cases, an
applicable margin, which is subject to adjustment based on the
senior secured leverage ratio of the Borrowers. The Term B
Loans bear interest at either the British Bankers Association
LIBOR plus 1.75% per annum or, at the Borrowers’ option, a
base rate plus 0.75% per annum. The Borrowers may choose one
month, two month, three month, six month, and to the extent
available, nine month or one year LIBOR, which then applies for
a period of that duration. Interest is due at the end of each
interest period provided. For LIBOR loans that exceed three
months, the interest is due three months after the beginning of
such interest period. The Term Loan A matures in March,
2011, the Term Loan B in March, 2013, and the Revolver in
March, 2011. The Term Loan Facilities are subject to quarterly
amortization of principal in equal installments of .25% of the
original principal amount with the remaining balance payable at
maturity. In addition to the scheduled amortization, and with
certain exceptions, the Term Loan Facilities are subject to
mandatory prepayment from excess cash flow, issuance of
additional equity and debt and sales of certain assets.
Voluntary prepayments of both the Term Loan Facilities and
revolving loans and commitment reductions of the revolving
credit facility are permitted at any time without fee upon
proper notice and subject to minimum dollar requirements.
The new credit facilities contain affirmative, negative, and
financial covenants customary for financings of this type,
including, among other things, limits on the creation of liens,
limits on the incurrence of indebtedness, restrictions on
investments and dispositions, limitations on dividends and other
restricted payments and capital expenditures, a minimum interest
coverage ratio, and a maximum secured leverage ratio.
On November 8, 2004, we, through a subsidiary, entered into
a new credit agreement providing for a $500.0 million,
5-year revolving credit facility due November 8, 2009. The
facility provided an option to increase the size of the credit
facility an additional $100.0 million. This credit
agreement bore interest at a variable rate based on leverage and
was unsecured. The interest rate under the new credit agreement
during
53
the time it was outstanding was LIBOR plus 0.50%. In addition,
we were required to pay a 0.15% commitment fee on the entire
facility. On November 8, 2004 we drew down approximately
$410 million to fund the acquisition of InterCept. On
March 9, 2005, we repaid this facility with a portion of
the net proceeds from our sale of a minority interest in FIS to
a group of investors and terminated the agreement.
On November 5, 2003 we entered into a new credit agreement
providing for a $700.0 million, 5-year revolving credit
facility due November 4, 2008. The credit agreement bears
interest at a variable rate based on the debt ratings assigned
to us by certain independent agencies, and is unsecured. The
current interest rate under this credit agreement is LIBOR plus
0.50%. In addition, we pay a 0.15% facility fee on the entire
facility. As of December 31, 2004, $400.0 million was
outstanding under our credit agreement and we had
$300.0 million in borrowings available to us. During 2004,
net borrowings were $325.0 million under our credit
facility, primarily to finance our acquisitions of Aurum,
Covansys and Kordoba. On March 9, 2005, we used a portion
of the proceeds received from the FIS note to pay this line down
completely although we did not terminate this facility. Our
credit agreement imposes certain affirmative and negative
covenants on us relating to current debt ratings, certain
financial ratios related to liquidity, net worth,
capitalization, investments, acquisitions and restricted
payments, and certain dividend restrictions. As of
December 31, 2004, we were in compliance with all of our
debt covenants.
On March 11, 2003, we issued $250.0 million aggregate
principal amount of 5.25% notes. We received proceeds of
approximately $246.2 million, after expenses, which was
used to pay a portion of the $1,069.6 million purchase
price for FI. Interest is payable semiannually and the notes are
due in March 2013.
The table below shows the pro forma impact on our capitalization
of the recapitalization, minority interest sale, related debt
agreements and the $10 per share special dividend as if the
events announced on March 9, 2005 had occurred on
December 31, 2004 (see Note R):
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
Historical | |
|
Pro Forma | |
| |
|
| |
|
| |
|
Cash and cash equivalents
|
|
$ |
331,222 |
|
|
$ |
1,015,220 |
(a) |
| |
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,370,556 |
|
|
|
3,360,556 |
(b) |
| |
|
|
|
|
|
|
| |
Minority interest
|
|
|
18,804 |
|
|
|
157,798 |
(c) |
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
| |
Common Stock, $0.0001 par value
|
|
|
18 |
|
|
|
18 |
|
| |
Additional paid-in capital
|
|
|
3,424,261 |
|
|
|
3,411,637 |
|
| |
Retained earnings
|
|
|
1,515,215 |
|
|
|
— |
|
| |
Other equity
|
|
|
(239,403 |
) |
|
|
(239,403 |
) |
| |
|
|
|
|
|
|
| |
|
Total
|
|
$ |
4,700,091 |
|
|
$ |
3,172,247 |
(d) |
| |
|
|
|
|
|
|
| |
Total capitalization
|
|
$ |
6,070,647 |
|
|
$ |
6,532,803 |
|
| |
|
|
|
|
|
|
The pro forma adjustments in the above table include the
following:
|
|
| (a) |
An increase in cash and cash equivalents of $684.0 million
relating to an inflow of $2,800.0 million from the Term
Loan Facilities and $500.0 million from the sale of a 25%
minority interest in FIS, less transaction costs of
$80.4 million, repayments of $810.0 million in
outstanding credit facilities as of December 31, 2004 and
an assumed dividend payout of $1,725.6 million based on
outstanding shares at December 31, 2004. |
| |
| (b) |
An increase in notes payable of $1,990.0 million relating
to the $2,800.0 million from the Term Loan Facilities less
the repayment of $810.0 million in credit facilities that
were outstanding as of December 31, 2004. |
| |
| (c) |
An increase in minority interest of $138.9 million relating
to the sale of 25% of FIS. |
| |
| (d) |
A decrease in equity of $1,527.8 million relating to the
payment of the $1,725.6 million dividend offset by a gain
of $197.7 million on the sale of the 25% minority interest
in FIS. |
54
Following the recapitalization, FIS is highly leveraged. As of
March 14, 2005, it is paying interest at a rate of one
month LIBOR plus 1.75%, or 4.51%. At that rate, the annual
interest on its $2,800.0 million of debt would be
$127.3 million. A one percent increase in the LIBOR rate
would increase its annual debt service on the Term Loan
Facilities by $28 million. The credit rating assigned to
the Term Loan Facilities and Revolver by Standard &
Poor’s is currently BB. We believe that FIS and its
subsidiaries will generate sufficient cash flow from operations
to pay all interest due on the Term Loan Facilities over at
least the next twelve months. Over the long term, FIS may have
to seek other sources of funds to repay the principal balances
of the Term Loan Facilities. Because the performance of FIS is
subject to risks and uncertainties, including those described in
“Business — Risk Factors,” there can be no
assurance that sufficient funds will be available for such
purposes when needed.
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 the cost of financing has on the
volume of real estate transactions.
Contractual Obligations. Our financing obligations
generally include our credit agreement and other debt facilities
and operating lease payments on certain of our premises and
equipment. As of December 31, 2004, our required annual
payments relating to these contractual obligations are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Notes payable
|
|
$ |
35,861 |
|
|
$ |
10,000 |
|
|
$ |
16,514 |
|
|
$ |
400,298 |
|
|
$ |
410,084 |
|
|
$ |
497,799 |
|
|
$ |
1,370,556 |
|
|
Operating lease payments
|
|
|
165,008 |
|
|
|
136,477 |
|
|
|
107,338 |
|
|
|
73,002 |
|
|
|
44,173 |
|
|
|
55,990 |
|
|
|
581,988 |
|
|
Purchase commitments
|
|
|
30,000 |
|
|
|
30,000 |
|
|
|
30,000 |
|
|
|
30,000 |
|
|
|
25,000 |
|
|
|
— |
|
|
|
145,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
230,869 |
|
|
$ |
176,477 |
|
|
$ |
153,852 |
|
|
$ |
503,300 |
|
|
$ |
479,257 |
|
|
$ |
553,789 |
|
|
$ |
2,097,544 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our title claims loss reserve projected annual payments as of
December 31, 2004 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Title claim loss reserve
|
|
$ |
179,596 |
|
|
$ |
147,037 |
|
|
$ |
115,761 |
|
|
$ |
86,806 |
|
|
$ |
63,108 |
|
|
$ |
394,768 |
|
|
$ |
987,076 |
|
|
Percentage of total
|
|
|
18.2 |
% |
|
|
14.9 |
% |
|
|
11.7 |
% |
|
|
8.8 |
% |
|
|
6.4 |
% |
|
|
40 |
% |
|
|
100 |
% |
As of December 31, 2004 we had title insurance reserves of
$987.1 million. The amounts and timing of these obligations
are estimated and are not set contractually. Nonetheless, based
on historical title insurance claim experience, we anticipate
the above payment patterns. While we believe that historical
loss payments are a reasonable source for projecting future
claim payments, there is significant inherent uncertainty in
this payment pattern estimate because of the potential impact of
changes in:
|
|
|
| |
• |
Future mortgage interest rates, which will affect the number of
real estate and refinancing transactions and, therefore, the
rate at which title insurance claims will emerge; |
| |
| |
• |
The legal environment whereby court decisions and
reinterpretations of title insurance policy language to broaden
coverage could increase total obligations and influence claim
payout patterns; |
| |
| |
• |
Events such as fraud, defalcation, and multiple property title
defects can substantially and unexpectedly cause increases in
both the amount and timing of estimated title insurance loss
payments; |
| |
| |
• |
Loss cost trends whereby increases/decreases in inflationary
factors (including the value of real estate) will influence the
ultimate amount of title insurance loss payments; and |
| |
| |
• |
Claims staffing levels whereby claims may be settled at a
different rate based on the future staffing levels of the claims
department. |
55
In addition to the amounts shown in the table, at
December 31, 2004, we held claim reserves of
$11.1 million in respect of our specialty insurance
reserves. Because of uncertainty with respect to the precise
payout pattern of these reserves, and their small size, we have
not allocated them to the periods shown, although we would
expect the substantial majority of these amounts to be paid by
2009. In addition, the above tables do not reflect amounts under
FIS’s new credit facilities, which were entered into after
December 31, 2004 or the recent payments under our other
credit facilities as described above.
Capital Stock Transactions. On April 24, 2002, our
Board of Directors approved a three-year stock repurchase
program. Purchases are made by us from time to time in the open
market, in block purchases or in privately negotiated
transactions. From January 1, 2004, through
December 31, 2004, we repurchased a total of
430,500 shares of common stock for $16.5 million, or
an average price of $38.33. Additionally, on December 13,
2004, we entered into an agreement to
repurchase 2,530,346 shares of Company common stock
from Willis Stein & Partners (“Willis Stein”)
and J.P. Morgan Chase, as escrow agent for the former
stockholder of Aurum. We acquired Aurum in March 2004. The
purchase price per share of $44.35 was a discount to the closing
price of the Company’s common stock on December 13,
2004.
On March 26, 2003, we issued 5,183,103 shares of our
common stock in connection with the acquisition of ANFI, Inc. On
April 1, 2003, we issued 11,206,692 shares of our
common stock to ALLTEL in connection with our acquisition of FI.
On September 30, 2003, we issued 14,292,858 shares of
our common stock in connection with the acquisition of FNIS. On
February 27, 2004, we issued 220,396 shares of our
common stock in connection with the acquisition of an additional
44% interest in Hansen. On March 11, 2004, we issued
3,144,390 shares of our common stock in connection with the
acquisition of Aurum. On April 14, 2004, we issued
2,267,290 shares of our common stock in connection with the
acquisition of Sanchez. See Note B of Notes to Condensed
Consolidated Financial Statements.
On January 27, 2004, our Board of Directors declared a 10%
stock dividend to stockholders of record as of February 12,
2004, payable on February 26, 2004. On April 22, 2003,
our Board of Directors declared a five-for-four (5:4) stock
split payable May 23, 2003 to stockholders of record as of
May 9, 2003. 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 and elsewhere in this Form 10-K have been
retroactively adjusted to reflect the stock split and stock
dividend.
Additional Minimum Pension Liability Adjustment. Discount
rates that are used in determining our December 31, 2004
projected benefit obligation and 2005 net periodic pension
costs were based on prevailing interest rates as of
December 31, 2004. Similar to prior years, we considered
the Moody’s Aa corporate bond index at that date as an
appropriate basis in determining the discount rate. A decrease
in the discount rate used at December 31, 2004 resulted in
an additional minimum pension liability adjustment. As such, we
recorded a net-of-tax charge of $11.8 million to
accumulated other comprehensive loss in 2004 in accordance with
Statement of Financial Accounting Standards No. 87,
“Employers’ Accounting for Pensions”.
Equity Investments. Our equity investments are in public
companies whose security prices are subject to significant
volatility. Should the fair value of these investments fall
below our cost bases and/or the financial condition or prospects
of these companies deteriorate, we may determine in a future
period that this decline in fair value is other-than-temporary,
requiring that an impairment loss be recognized in the period
such a determination is made.
Off-Balance Sheet Arrangements. Other than facility and
equipment leasing arrangements, we do not engage in off-balance
sheet financing activities. On June 29, 2004 we entered
into an off-balance sheet financing arrangement (commonly
referred to as a “synthetic lease”). The owner/ lessor
in this arrangement acquired land and various real property
improvements associated with new construction of an office
building in Jacksonville, Florida that will be part of our
corporate campus and headquarters. The lease expires on
September 28, 2011, with renewal subject to consent of the
lessor and the lenders. The lessor is a third-party limited
liability company. The synthetic lease facility provides for
amounts up to $75.0 million. As of December 31, 2004,
approximately $10.0 million had been drawn on the facility
to finance land costs and related fees and expenses. The leases
include guarantees by us for a substantial portion of the
financing, and options to purchase the facilities at the
outstanding lease balance; the maximum guarantee is 86.5% of the
56
outstanding lease balance. The guarantee becomes effective if we
decline to purchase the facilities at the end of the lease and
also decline to renew the lease. The lessor financed the
acquisition of the facilities through funding provided by
third-party financial institutions. We have no affiliation or
relationship with the lessor or any of its employees, directors
or affiliates, and our transactions with the lessor are limited
to the operating lease agreements and the associated rent
expense that will be included in other operating expenses in the
Consolidated Statements of Earnings after the end of the
construction period.
We do not believe the lessor is a variable interest entity, as
defined in FASB Interpretation No. 46R, “Consolidation
of Variable Interest Entities” (“FIN 46”).
In addition, we have verified that even if the lessor was
determined to be a variable interest entity, we would not have
to consolidate the lessor nor the assets and liabilities
associated with the assets leased to us. This is because the
assets leased by us will not exceed 50% of the total fair value
of the lessor’s assets excluding any assets that should be
excluded from such calculation under FIN 46, nor did the
lessor finance 95% or more of the leased balance with
non-recourse debt, target equity or similar funding (see
Note K).
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 the
Consolidated Balance Sheets. 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 various banks. There were
no investments or loans outstanding as of December 31, 2004
related to these arrangements (see Note K).
Recent Accounting Pronouncements
In December 2004, the FASB issued FASB Statement No. 123R
(“SFAS No. 123R”), “Share-Based
Payment”, which requires that compensation cost relating to
share-based payments be recognized in the Company’s
financial statements. The Company is preparing to implement this
standard effective July 1, 2005. During 2003, the Company
adopted the fair value recognition provision of Statement of
Financial Accounting Standards No. 123, “Accounting
for Stock-Based Compensation”
(“SFAS No. 123”), for stock-based employee
compensation, effective as of the beginning of 2003. The Company
had elected to use the prospective method of transition, as
permitted by Statement of Financial Accounting Standards
No. 148, “Accounting for Stock-Based
Compensation — Transition and Disclosure”
(“SFAS No. 148”). Under this method,
stock-based employee compensation cost is recognized from the
beginning of 2003 as if the fair value method of accounting had
been used to account for all employee awards granted, modified,
or settled in years beginning after December 31, 2002.
SFAS No. 123R does not allow for the prospective
method, but requires the recording of expense relating to the
vesting of all unvested options beginning in the third quarter
of 2005. Since we adopted SFAS No. 123 in 2003, the
impact of recording additional expense in 2005 under
SFAS No. 123R relating to options granted prior to
January 1, 2003 will not be significant.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosure About Market
Risk |
Our Consolidated Balance Sheet includes a substantial amount of
assets and liabilities whose fair values are subject to market
risks. See “Business — Investment Policies and
Investment Portfolio” and Note C of Notes to
Consolidated Financial Statements. The following sections
address the significant market risks associated with our
financial activities for the year ended December 31, 2004.
Interest Rate Risk
Our fixed maturity investments and borrowings are subject to
interest rate risk. Increases and decreases in prevailing
interest rates generally translate into decreases and increases
in fair values of those instruments. Additionally, fair values
of interest rate sensitive instruments may be affected by the
creditworthiness of the issuer, prepayment options, relative
values of alternative investments, the liquidity of the
instrument and other general market conditions.
57
Equity Price Risk
The carrying values of investments subject to equity price risks
are based on quoted market prices as of the balance sheet date.
Market prices are subject to fluctuation and, consequently, the
amount realized in the subsequent sale of an investment may
significantly differ from the reported market value. Fluctuation
in the market price of a security may result from perceived
changes in the underlying economic characteristics of the
investee, the relative price of alternative investments and
general market conditions. Furthermore, amounts realized in the
sale of a particular security may be affected by the relative
quantity of the security being sold.
Caution should be used in evaluating our overall market risk
from the information below, since actual results could differ
materially because the information was developed using estimates
and assumptions as described below, and because our reserve for
claim losses (representing 21.8% of total liabilities) is not
included in the hypothetical effects.
The hypothetical effects of changes in market rates or prices on
the fair values of financial instruments would have been as
follows as of or for the year ended December 31, 2004:
|
|
| |
a. An approximate $62.2 million net increase
(decrease) in the fair value of fixed maturity securities would
have occurred if interest rates were 100 basis points
(lower) higher as of December 31, 2004. The change in fair
values was determined by estimating the present value of future
cash flows using various models, primarily duration modeling. |
| |
| |
b. An approximate $25.8 million net increase
(decrease) in the fair value of equity securities would have
occurred if there was a 20% price increase (decrease) in market
prices. |
| |
| |
c. It is not anticipated that there would be a significant
change in the fair value of other long-term investments or
short-term investments if there was a change in market
conditions, based on the nature and duration of the financial
instruments involved. |
| |
| |
d. Interest expense on average variable rate debt
outstanding would have increased (decreased) approximately
$4.3 million, if interest rates increased (decreased)
100 basis points for 2004. Assuming that our new credit
facilities were outstanding, interest expense on the
$2,800.00 million facility would increase (decrease)
approximately $28 million, if interest rates increased
(decreased) 100 basis points. |
58
|
|
| Item 8. |
Financial Statements and Supplementary Data |
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
| |
|
|
|
|
| |
|
Page | |
| |
|
Number | |
| |
|
| |
|
|
|
|
60 |
|
|
|
|
|
61 |
|
|
|
|
|
62 |
|
|
|
|
|
63 |
|
|
|
|
|
64 |
|
|
|
|
|
65 |
|
|
|
|
|
67 |
|
|
|
|
|
68 |
|
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Fidelity National Financial, Inc.:
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control Over
Financial Reporting, that Fidelity National Financial,
Inc. maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria
established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Fidelity
National Financial, Inc.’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Fidelity
National Financial, Inc. maintained effective internal control
over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established
in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Also, in our opinion, Fidelity
National Financial, Inc. maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Consolidated Balance Sheets of Fidelity National Financial, Inc.
and subsidiaries as of December 31, 2004 and 2003, and the
related Consolidated Statements of Earnings, Comprehensive
Earnings, Stockholders’ Equity and Cash Flows for each of
the years in the three-year period ended December 31, 2004,
and our report dated March 16, 2005 expressed an
unqualified opinion on those consolidated financial statements.
KPMG LLP
Jacksonville, Florida
March 16, 2005
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Fidelity National Financial, Inc.:
We have audited the accompanying Consolidated Balance Sheets of
Fidelity National Financial, Inc. and subsidiaries as of
December 31, 2004 and 2003 and the related Consolidated
Statements of Earnings, Comprehensive Earnings,
Stockholders’ Equity and Cash Flows for each of the years
in the three-year period ended December 31, 2004. These
Consolidated Financial Statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these Consolidated Financial Statements based on our
audits.
We conducted our audits in accordance with auditing standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
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, 2004 and 2003, and
the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2004,
in conformity with U.S. generally accepted accounting
principles.
The Consolidated Financial Statements for 2002 were prepared
using Accounting Principles Board (APB) Opinion
No. 25, “Accounting for Stock Issued to
Employees,” to record stock-based employee compensation. As
discussed in Note M to the Consolidated Financial
Statements, effective January 1, 2003, the Company adopted
the fair value recognition provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation”, to record
stock-based employee compensation, applying the prospective
method of adoption in accordance with SFAS No. 148,
“Accounting for Stock-Based Compensation —
Transition and Disclosure.”
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the internal control over financial reporting
of Fidelity National Financial, Inc. and subsidiaries as of
December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Tradeway
Commission (COSO), and our report dated March 16, 2005
expressed an unqualified opinion on management’s assessment
of, and the effective operation of, internal control over
financial reporting.
KPMG LLP
Jacksonville, Florida
March 16, 2005
61
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands, except | |
| |
|
share and per share data) | |
|
ASSETS |
|
Investments:
|
|
|
|
|
|
|
|
|
| |
Fixed maturities available for sale, at fair value, at
December 31, 2004 and 2003 include $265,639 and $262,193,
respectively, of pledged fixed maturity securities related to
secured trust deposits
|
|
$ |
2,332,231 |
|
|
$ |
1,696,234 |
|
| |
Equity securities, at fair value
|
|
|
135,465 |
|
|
|
70,618 |
|
| |
Other long-term investments
|
|
|
190,456 |
|
|
|
44,579 |
|
| |
Short-term investments, at December 31, 2004 and 2003
include $280,351 and $185,956, respectively, of pledged
short-term investments related to secured trust deposits
|
|
|
688,124 |
|
|
|
878,386 |
|
| |
|
|
|
|
|
|
| |
|
Total investments
|
|
|
3,346,276 |
|
|
|
2,689,817 |
|
|
Cash and cash equivalents, at December 31, 2004 and 2003
include $195,200 and $231,142, respectively, of pledged cash
related to secured trust deposits
|
|
|
331,222 |
|
|
|
459,655 |
|
|
Trade and notes receivables, net of allowance of $35,909 in 2004
and $39,048 in 2003
|
|
|
562,864 |
|
|
|
446,102 |
|
|
Goodwill
|
|
|
2,798,249 |
|
|
|
1,926,478 |
|
|
Prepaid expenses and other assets
|
|
|
431,756 |
|
|
|
316,864 |
|
|
Capitalized software
|
|
|
440,780 |
|
|
|
290,108 |
|
|
Other intangible assets
|
|
|
672,185 |
|
|
|
529,940 |
|
|
Title plants
|
|
|
302,201 |
|
|
|
286,398 |
|
|
Property and equipment, net
|
|
|
385,002 |
|
|
|
317,813 |
|
| |
|
|
|
|
|
|
| |
|
$ |
9,270,535 |
|
|
$ |
7,263,175 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable and accrued liabilities
|
|
$ |
948,882 |
|
|
$ |
815,177 |
|
| |
Deferred revenue
|
|
|
394,811 |
|
|
|
194,077 |
|
| |
Notes payable
|
|
|
1,370,556 |
|
|
|
659,186 |
|
| |
Reserve for claim losses
|
|
|
998,170 |
|
|
|
943,704 |
|
| |
Secured trust deposits
|
|
|
735,295 |
|
|
|
671,882 |
|
| |
Deferred tax liabilities
|
|
|
103,167 |
|
|
|
84,224 |
|
| |
Income taxes payable
|
|
|
689 |
|
|
|
6,731 |
|
| |
|
|
|
|
|
|
| |
|
|
4,551,570 |
|
|
|
3,374,981 |
|
| |
Minority interests and preferred stock of subsidiary
|
|
|
18,874 |
|
|
|
14,835 |
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Preferred stock, $.0001 par value; authorized,
3,000,000 shares; issued and outstanding, none
|
|
|
— |
|
|
|
— |
|
| |
Common stock, $.0001 par value; authorized,
250,000,000 shares as of December 31, 2004 and 2003;
issued, 178,321,790 as of December 31, 2004 and 167,650,280
as of December 31, 2003
|
|
|
18 |
|
|
|
17 |
|
| |
Additional paid-in capital
|
|
|
3,424,261 |
|
|
|
2,453,841 |
|
| |
Retained earnings
|
|
|
1,515,215 |
|
|
|
1,517,494 |
|
| |
|
|
|
|
|
|
| |
|
|
4,939,494 |
|
|
|
3,971,352 |
|
| |
Accumulated other comprehensive loss
|
|
|
(27,353 |
) |
|
|
(9,891 |
) |
| |
Unearned compensation
|
|
|
(18,437 |
) |
|
|
(23,017 |
) |
| |
Less treasury stock, 5,765,846 shares as of
December 31, 2004 and 2,809,400 shares as of
December 31, 2003, at cost
|
|
|
(193,613 |
) |
|
|
(65,085 |
) |
| |
|
|
|
|
|
|
| |
|
|
4,700,091 |
|
|
|
3,873,359 |
|
| |
|
|
|
|
|
|
| |
|
$ |
9,270,535 |
|
|
$ |
7,263,175 |
|
| |
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
62
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Direct title insurance premiums
|
|
$ |
2,128,902 |
|
|
$ |
2,400,870 |
|
|
$ |
1,610,792 |
|
| |
Agency title insurance premiums
|
|
|
2,610,426 |
|
|
|
2,337,381 |
|
|
|
1,936,937 |
|
| |
Escrow and other title related fees
|
|
|
1,042,243 |
|
|
|
1,056,448 |
|
|
|
789,730 |
|
| |
Financial Institution software and services
|
|
|
1,207,325 |
|
|
|
686,440 |
|
|
|
3,922 |
|
| |
Lender outsourcing solutions (excludes title premiums of
$128.2 million, $288.2 million and $46.7 million
in 2004, 2003 and 2002 respectively that are included in title
premiums above)
|
|
|
322,194 |
|
|
|
316,211 |
|
|
|
167,492 |
|
| |
Information services
|
|
|
589,153 |
|
|
|
559,110 |
|
|
|
377,983 |
|
| |
Specialty insurance
|
|
|
239,256 |
|
|
|
135,231 |
|
|
|
46,061 |
|
| |
Interest and investment income
|
|
|
70,874 |
|
|
|
60,345 |
|
|
|
74,577 |
|
| |
Realized gains and losses, net
|
|
|
36,961 |
|
|
|
106,385 |
|
|
|
15,459 |
|
| |
Other income
|
|
|
48,668 |
|
|
|
56,794 |
|
|
|
59,687 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
8,296,002 |
|
|
$ |
7,715,215 |
|
|
$ |
5,082,640 |
|
| |
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Personnel costs
|
|
|
2,786,297 |
|
|
|
2,465,026 |
|
|
|
1,476,430 |
|
| |
Other operating expenses
|
|
|
1,967,350 |
|
|
|
1,699,797 |
|
|
|
1,019,992 |
|
| |
Agent commissions
|
|
|
2,028,926 |
|
|
|
1,823,241 |
|
|
|
1,521,573 |
|
| |
Provision for claim losses
|
|
|
282,124 |
|
|
|
263,409 |
|
|
|
179,292 |
|
| |
Interest expense
|
|
|
47,214 |
|
|
|
43,103 |
|
|
|
34,053 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
7,111,911 |
|
|
|
6,294,576 |
|
|
|
4,231,340 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Earnings before income taxes and minority interest
|
|
|
1,184,091 |
|
|
|
1,420,639 |
|
|
|
851,300 |
|
| |
Income tax expense
|
|
|
438,114 |
|
|
|
539,843 |
|
|
|
306,468 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Earnings before minority interest
|
|
|
745,977 |
|
|
|
880,796 |
|
|
|
544,832 |
|
| |
Minority interest
|
|
|
5,015 |
|
|
|
18,976 |
|
|
|
13,115 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net earnings
|
|
$ |
740,962 |
|
|
$ |
861,820 |
|
|
$ |
531,717 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Basic net earnings per share
|
|
$ |
4.33 |
|
|
$ |
5.81 |
|
|
$ |
4.05 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Weighted average shares outstanding, basic basis
|
|
|
171,014 |
|
|
|
148,275 |
|
|
|
131,135 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted net earnings per share
|
|
$ |
4.21 |
|
|
$ |
5.63 |
|
|
$ |
3.91 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Weighted average shares outstanding, diluted basis
|
|
|
176,000 |
|
|
|
153,171 |
|
|
|
135,871 |
|
| |
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
63
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Net earnings
|
|
$ |
740,962 |
|
|
$ |
861,820 |
|
|
$ |
531,717 |
|
| |
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Unrealized gains on investments, net(1)
|
|
|
8,299 |
|
|
|
55,836 |
|
|
|
16,567 |
|
| |
Foreign currency translation unrealized gain (loss)(2)
|
|
|
14,819 |
|
|
|
(490 |
) |
|
|
1,458 |
|
| |
Reclassification adjustments for (gains) losses included in
net earnings(3)
|
|
|
(28,816 |
) |
|
|
(67,552 |
) |
|
|
5,283 |
|
|
Minimum pension liability adjustment(4)
|
|
|
(11,764 |
) |
|
|
(9,988 |
) |
|
|
(15,871 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (loss)
|
|
|
(17,462 |
) |
|
|
(22,194 |
) |
|
|
7,437 |
|
| |
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings
|
|
$ |
723,500 |
|
|
$ |
839,626 |
|
|
$ |
539,154 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Net of income tax expense of $5.7 million,
$37.2 million and $11.0 million for 2004, 2003 and
2002, respectively. |
| |
| (2) |
Net of income tax expense (benefit) of $0.7 million,
$(0.3) million and $1.0 million for 2004, 2003 and
2002, respectively. |
| |
| (3) |
Net of income tax expense (benefit) of $(17.8) million,
$(45.0) million and $3.5 million for 2004, 2003 and
2002, respectively. |
| |
| (4) |
Net of income tax benefit of $(6.9) million,
$(6.4) million and $(10.2) million in 2004, 2003 and
2002, respectively. |
See Notes to Consolidated Financial Statements.
64
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
| |
|
Common Stock | |
|
Additional | |
|
|
|
Other | |
|
|
|
Treasury Stock | |
| |
|
| |
|
Paid-In | |
|
Retained | |
|
Comprehensive | |
|
Unearned | |
|
| |
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Earnings | |
|
Earnings (Loss) | |
|
Compensation | |
|
Shares | |
|
Amount | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Balance, December 31, 2001
|
|
|
131,105 |
|
|
$ |
13 |
|
|
$ |
1,158,844 |
|
|
$ |
498,073 |
|
|
$ |
4,866 |
|
|
$ |
— |
|
|
|
1,512 |
|
|
$ |
(22,926 |
) |
| |
Purchase of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,798 |
|
|
|
(61,210 |
) |
| |
Exercise of stock options
|
|
|
4,800 |
|
|
|
— |
|
|
|
50,350 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Tax benefit associated with the exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
21,329 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other comprehensive gain — unrealized gain on foreign
currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other comprehensive earnings — unrealized gain on
investments and other financial instruments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21,850 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other comprehensive loss — minimum pension liability
adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15,871 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Capital transactions of investees and less than 100% owned
subsidiaries
|
|
|
— |
|
|
|
— |
|
|
|
8,318 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Retirement of treasury stock
|
|
|
(2,287 |
) |
|
|
— |
|
|
|
(37,226 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,287 |
) |
|
|
37,226 |
|
| |
Cash dividends declared ($0.32 per share)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(41,607 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
FNIS/Micro General merger
|
|
|
— |
|
|
|
— |
|
|
|
100,360 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Unearned compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,628 |
) |
|
|
— |
|
|
|
— |
|
| |
Effect of 10% stock dividend
|
|
|
— |
|
|
|
— |
|
|
|
249,661 |
|
|
|
(249,661 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Net earnings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
531,717 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
133,618 |
|
|
|
13 |
|
|
|
1,551,636 |
|
|
|
738,522 |
|
|
|
12,303 |
|
|
|
(1,628 |
) |
|
|
2,023 |
|
|
|
(46,910 |
) |
| |
Purchase of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,775 |
|
|
|
(45,436 |
) |
| |
Retirement of treasury stock
|
|
|
(989 |
) |
|
|
— |
|
|
|
(27,261 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(989 |
) |
|
|
27,261 |
|
| |
Exercise of stock options
|
|
|
3,459 |
|
|
|
1 |
|
|
|
38,012 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Issuance of restricted stock
|
|
|
879 |
|
|
|
— |
|
|
|
26,292 |
|
|
|
— |
|
|
|
— |
|
|
|
(22,989 |
) |
|
|
— |
|
|
|
— |
|
| |
Tax benefit associated with the exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
18,914 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Acquisition of ANFI
|
|
|
5,183 |
|
|
|
1 |
|
|
|
139,288 |
|
|
|
— |
|
|
|
— |
|
|
|
(2,559 |
) |
|
|
— |
|
|
|
— |
|
| |
Acquisition of FIS
|
|
|
11,207 |
|
|
|
1 |
|
|
|
274,999 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Acquisition of the minority interest of FNIS
|
|
|
14,293 |
|
|
|
1 |
|
|
|
420,424 |
|
|
|
— |
|
|
|
— |
|
|
|
1,628 |
|
|
|
— |
|
|
|
— |
|
| |
Other comprehensive loss — unrealized loss on foreign
currency
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(490 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other comprehensive loss — unrealized loss on
investments and other financial instruments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11,716 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other comprehensive loss — minimum pension liability
adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9,988 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Amortization of unearned compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,531 |
|
|
|
— |
|
|
|
— |
|
65
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
| |
|
Common Stock | |
|
Additional | |
|
|
|
Other | |
|
|
|
Treasury Stock | |
| |
|
| |
|
Paid-In | |
|
Retained | |
|
Comprehensive | |
|
Unearned | |
|
| |
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Earnings | |
|
Earnings (Loss) | |
|
Compensation | |
|
Shares | |
|
Amount | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
| |
Capital transactions of investees and less than 100% owned
subsidiaries
|
|
|
— |
|
|
|
— |
|
|
|
5,704 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Adoption of SFAS No. 123
|
|
|
— |
|
|
|
— |
|
|
|
5,833 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Cash dividends declared ($0.54 per share)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(82,848 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Net earnings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
861,820 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
167,650 |
|
|
|
17 |
|
|
|
2,453,841 |
|
|
|
1,517,494 |
|
|
|
(9,891 |
) |
|
|
(23,017 |
) |
|
|
2,809 |
|
|
|
(65,085 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchase of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,961 |
|
|
|
(128,723 |
) |
| |
Retirement of treasury stock
|
|
|
(4 |
) |
|
|
— |
|
|
|
(195 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
|
|
195 |
|
| |
Issuance of restricted stock
|
|
|
6 |
|
|
|
— |
|
|
|
192 |
|
|
|
— |
|
|
|
— |
|
|
|
(155 |
) |
|
|
— |
|
|
|
— |
|
| |
Exercise of stock options
|
|
|
5,039 |
|
|
|
— |
|
|
|
76,899 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Tax benefit associated with the exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
36,085 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Acquisition of Aurum Technology, Inc.
|
|
|
3,144 |
|
|
|
1 |
|
|
|
121,369 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Acquisition of Hansen Quality Loan Services, Inc.
|
|
|
220 |
|
|
|
— |
|
|
|
8,500 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Acquisition of Sanchez Computer Associates, Inc.
|
|
|
2,267 |
|
|
|
— |
|
|
|
95,579 |
|
|
|
— |
|
|
|
— |
|
|
|
(3,823 |
) |
|
|
— |
|
|
|
— |
|
| |
Acquisition of InterCept, Inc.
|
|
|
— |
|
|
|
— |
|
|
|
12,031 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other comprehensive earnings — unrealized gain on
foreign currency
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14,819 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other comprehensive loss — unrealized loss on
investments and other financial instruments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(20,517 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other comprehensive loss — minimum pension liability
adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11,764 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Amortization of unearned compensation
|
|
|
— |
|
|
|
— |
|
|
|
(572 |
) |
|
|
— |
|
|
|
— |
|
|
|
8,202 |
|
|
|
— |
|
|
|
— |
|
| |
Effect of 10% stock dividend
|
|
|
|
|
|
|
|
|
|
|
607,162 |
|
|
|
(607,162 |
) |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
| |
Stock-based compensation
|
|
|
— |
|
|
|
— |
|
|
|
13,370 |
|
|
|
— |
|
|
|
— |
|
|
|
356 |
|
|
|
— |
|
|
|
— |
|
| |
Cash dividends declared ($0.79 per share)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(136,079 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Net earnings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
740,962 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
178,322 |
|
|
$ |
18 |
|
|
$ |
3,424,261 |
|
|
$ |
1,515,215 |
|
|
$ |
(27,353 |
) |
|
$ |
(18,437 |
) |
|
|
5,766 |
|
|
$ |
(193,613 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
66
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY — (Continued)
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net earnings
|
|
$ |
740,962 |
|
|
$ |
861,820 |
|
|
$ |
531,717 |
|
| |
Adjustment to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Depreciation and amortization
|
|
|
338,434 |
|
|
|
227,937 |
|
|
|
74,163 |
|
| |
Net increase in reserve for claim losses
|
|
|
15,734 |
|
|
|
42,180 |
|
|
|
6,920 |
|
| |
Gain on sales of investments and other assets
|
|
|
(36,961 |
) |
|
|
(106,385 |
) |
|
|
(15,459 |
) |
| |
Stock-based compensation cost
|
|
|
21,450 |
|
|
|
9,526 |
|
|
|
— |
|
| |
Tax benefit associated with the exercise of stock options
|
|
|
36,085 |
|
|
|
18,914 |
|
|
|
21,329 |
|
| |
Changes in assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net decrease in leases
|
|
|
17,880 |
|
|
|
51,387 |
|
|
|
54,641 |
|
| |
Net decrease (increase) in secured trust deposits
|
|
|
1,467 |
|
|
|
11,719 |
|
|
|
(5,316 |
) |
| |
Net increase in trade receivables
|
|
|
(39,416 |
) |
|
|
(64,542 |
) |
|
|
(49,993 |
) |
| |
Net (increase) decrease in prepaid expenses and other assets
|
|
|
21,422 |
|
|
|
(36,276 |
) |
|
|
38,075 |
|
| |
Net increase in accounts payable, accrued liabilities and
minority interests
|
|
|
60,261 |
|
|
|
180,122 |
|
|
|
161,000 |
|
| |
Net (decrease) increase in income taxes
|
|
|
(6,716 |
) |
|
|
54,105 |
|
|
|
47,235 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash provided by operating activities
|
|
|
1,170,602 |
|
|
|
1,250,507 |
|
|
|
864,312 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Proceeds from sales of investment securities available for sale
|
|
|
2,810,659 |
|
|
|
1,918,721 |
|
|
|
1,128,301 |
|
| |
Proceeds from maturities of investment securities available for
sale
|
|
|
219,084 |
|
|
|
326,407 |
|
|
|
165,166 |
|
| |
Proceeds from sales of real estate
|
|
|
6,330 |
|
|
|
7,862 |
|
|
|
9,669 |
|
| |
Collections of notes receivable
|
|
|
6,490 |
|
|
|
7,324 |
|
|
|
11,779 |
|
| |
Additions to title plants
|
|
|
(648 |
) |
|
|
(2,692 |
) |
|
|
(564 |
) |
| |
Additions to property and equipment
|
|
|
(134,318 |
) |
|
|
(141,338 |
) |
|
|
(77,245 |
) |
| |
Additions to capitalized software
|
|
|
(94,919 |
) |
|
|
(63,904 |
) |
|
|
(50,323 |
) |
| |
Additions to notes receivable
|
|
|
(6,516 |
) |
|
|
(4,189 |
) |
|
|
(5,668 |
) |
| |
Purchases of investment securities available for sale
|
|
|
(3,741,056 |
) |
|
|
(2,286,954 |
) |
|
|
(1,467,938 |
) |
| |
Net proceeds (purchases) of short-term investment activities
|
|
|
190,262 |
|
|
|
14,851 |
|
|
|
(392,336 |
) |
| |
Sale of subsidiary, net of cash sold
|
|
|
5,000 |
|
|
|
— |
|
|
|
15,500 |
|
| |
Acquisition of businesses, net of cash acquired
|
|
|
(1,016,501 |
) |
|
|
(1,031,305 |
) |
|
|
(59,516 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash used in investing activities
|
|
|
(1,756,133 |
) |
|
|
(1,255,217 |
) |
|
|
(723,175 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Borrowings
|
|
|
911,710 |
|
|
|
130,269 |
|
|
|
26,037 |
|
| |
Net proceeds from issuance of notes
|
|
|
— |
|
|
|
248,118 |
|
|
|
— |
|
| |
Debt service payments
|
|
|
(229,367 |
) |
|
|
(226,450 |
) |
|
|
(104,993 |
) |
| |
Debt issuance costs
|
|
|
(1,400 |
) |
|
|
(4,273 |
) |
|
|
— |
|
| |
Dividends paid
|
|
|
(136,079 |
) |
|
|
(94,566 |
) |
|
|
(38,485 |
) |
| |
Exercise of stock options
|
|
|
76,899 |
|
|
|
38,012 |
|
|
|
50,350 |
|
| |
Purchases of treasury stock
|
|
|
(128,723 |
) |
|
|
(45,436 |
) |
|
|
(61,210 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash provided by (used in) financing activities
|
|
|
493,040 |
|
|
|
45,674 |
|
|
|
(128,301 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net (decrease) increase in cash and cash equivalents, excluding
pledged cash related to secured trust deposits
|
|
|
(92,491 |
) |
|
|
40,964 |
|
|
|
12,836 |
|
| |
Cash and cash equivalents, excluding pledged cash related to
secured trust deposits, at beginning of year
|
|
|
228,513 |
|
|
|
187,549 |
|
|
|
174,713 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents, excluding pledged cash related to
secured trust deposits, at end of year
|
|
$ |
136,022 |
|
|
$ |
228,513 |
|
|
$ |
187,549 |
|
| |
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
67
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies
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.
Fidelity National Financial, Inc., through its principal
subsidiaries (collectively, the “Company”), is the
largest title insurance and diversified real estate information
services and solutions 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.
The Company’s title insurance and specialty insurance
segments make up the Company’s insurance underwriting
businesses, while the Company’s financial institution
software and services, lender outsourcing solutions and
information services segments make up the technology solutions,
processing and information-based services businesses of the
Company’s subsidiary Fidelity National Information
Services, Inc. (“FIS”).
The Company has six reporting segments:
|
|
|
| |
• |
Title Insurance. The title insurance segment
consists of the Company’s title insurance underwriters and
our wholly-owned title insurance agencies. The title segment
provides core title insurance and escrow and other title related
services including collection and trust activities,
trustee’s sales guarantees, recordings and reconveyances. |
| |
| |
• |
Specialty Insurance. The specialty insurance segment,
consisting of our various non-title insurance subsidiaries,
issues flood, home warranty, homeowners, automobile and personal
lines insurance policies. |
| |
| |
• |
Financial Institution Software and Services. The
financial institution software and services segment consists
primarily of the operations of Fidelity Information Services,
Inc. (“FI”), which was acquired on April 1, 2003
(Note B) and subsequent acquisitions of WebTone, Aurum,
Sanchez and InterCept. This segment focuses on two primary
markets, financial institution processing and mortgage loan
processing. |
| |
| |
• |
Lender Outsourcing Solutions. The lender outsourcing
solutions segment includes our loan facilitation services, which
consist of centralized, customized title agency and closing
services, which the Company offers to first mortgage, refinance,
home equity and sub-prime lenders, and our default management
services, which include foreclosure posting and publishing
services, loan portfolio services, field services and property
management. These services allow the Company’s customers to
outsource the business processes necessary to take a loan and
the underlying real estate securing the loan though the default
and foreclosure process. |
| |
| |
• |
Information Services. The information services segment
offers real estate-related information services. Included in the
information services we provide are property appraisal and
valuation services, property records information, real estate
tax services, borrower credit and flood zone information and
certification and multiple listing software and services. |
| |
| |
• |
Corporate and Other. The corporate and other segment
consists of the operations of the parent holding company,
certain other unallocated corporate overhead expenses, the
operations of the Company’s wholly-owned equipment-leasing
subsidiary and other small operations. |
68
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company’s principal title insurance 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, essentially title agencies, consist of Fidelity
National Title Company, Fidelity National
Title Company of California, Chicago Title Company and
Ticor Title of California, formerly American Title Company,
which was acquired in connection with the Company’s
acquisition of ANFI, Inc. (See Note B).
The Company includes the accounts of its wholly-owned real
estate information services subsidiary, Fidelity National
Information Solutions, Inc. (“FNIS”), which was a
majority-owned public subsidiary of the Company (NASDAQ: FNIS)
until September 30, 2003. FNIS was formerly VISTA
Information Solutions, Inc. (“Vista”), which merged
with the Company’s majority-owned information services
subsidiary, Micro General Corporation (“Micro
General”), on July 9, 2002 (see Note B).
|
|
|
Principles of Consolidation and Basis of
Presentation |
The accompanying Consolidated Financial Statements include the
accounts of the Company and its wholly-owned and majority-owned
subsidiaries. All intercompany profits, transactions and
balances have been eliminated. The Company’s investments in
non-majority-owned partnerships and affiliates are accounted for
on the equity method until such time that they become wholly-or
majority owned.
Fixed maturity securities are purchased to support the
investment strategies of the Company, which are developed based
on 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
retrospectively.
Equity securities are considered to be available for sale and
carried at fair value as of the balance sheet dates. Fair values
are based on quoted market prices.
Other long-term investments consist primarily of equity
investments accounted for under the equity method of accounting.
Short-term investments, which consist primarily of securities
purchased under agreements to resell, commercial paper and money
market instruments, which have an original maturity of one year
or less, are carried at amortized cost, which approximates fair
value.
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.
69
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Cash and Cash Equivalents |
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.
|
|
|
Fair Value of Financial Instruments |
The fair values of financial instruments presented in the
applicable notes to the Company’s Consolidated Financial
Statements are estimates of the fair values at a specific point
in time using available market information and appropriate
valuation methodologies. These estimates are subjective in
nature and involve uncertainties and significant judgment in the
interpretation of current market data. Therefore, the fair
values presented are not 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.
|
|
|
Trade and Notes Receivables |
The carrying values reported in the Consolidated Balance Sheets
for trade and notes receivables approximate their fair value.
Included in trade receivables at December 31, 2004 and 2003
are unbilled receivables totaling $77.4 million and
$61.6 million, respectively. Notes receivable at
December 31, 2004 and 2003 include $474 thousand and
$911 thousand, respectively, of notes from related parties.
Goodwill represents the excess of cost over fair value of
identifiable net assets acquired and assumed in a business
combination. SFAS No. 142, Goodwill and Intangible
Assets (“SFAS No. 142”) requires that
intangible assets with estimable lives be amortized over their
respective estimated useful lives to their estimated residual
values and reviewed for impairment in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets(SFAS No. 144). SFAS No. 144 also
provides that goodwill and other intangible assets with
indefinite useful lives 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. The Company
measures for impairment on an annual basis.
As required by SFAS No. 142, the Company has completed its
annual goodwill impairment test in the fourth quarter of 2004 on
its reporting units, using a September 30, 2004 measurement
date, 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.
The Company has other intangible assets which consist primarily
of customer relationships and are generally recorded in
connection with acquisitions at their fair value. Customer
relationships are amortized over their estimated useful lives
using an accelerated method which takes into consideration
expected customer attrition rates over a ten-year period.
Contractual relationships are generally amortized over their
contractual life.
During 2004 and 2003, in accordance with SFAS No. 144,
the Company determined that the carrying value of certain of its
intangible assets, software and license fees may not be
recoverable and recorded an expense of $6.3 million and
$7.9 million, respectively, relating to the impairment of
these assets. Such expenses are included in other operating
expenses in the Consolidated Statements of Earnings for the
years ended December 31, 2004 and 2003.
70
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Capitalized software includes software acquired in business
acquisitions, purchased software and internally developed
capitalized software. Purchased software is recorded at cost and
amortized using the straight-line method over a 3-year period
and software acquired in a business acquisition is recorded at
its fair value upon acquisition and amortized using
straight-line and accelerated methods over its estimated useful
life, generally 5 to 10 years. Capitalized computer
software development costs are accounted for in accordance with
either SFAS No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed
(SFAS No. 86), or with SOP No. 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use. After the technological feasibility of the
software has been established (for SFAS No. 86 software),
or at the beginning of application development (for SOP
No. 98-1 software), software development costs, which
include salaries and related payroll costs and costs of
independent contractors incurred during development, are
capitalized. Research and development costs incurred prior to
the establishment of technological feasibility (for SFAS
No. 86 software), or prior to application development (for
SOP No. 98-1 software), of a product are expensed as
incurred and are not significant. The cost of internally
developed computer software is amortized on a product-by-product
basis commencing on the date of general release of the products
(for SFAS No. 86 software) for internally developed
software and the date of purchase for purchased software (for
SOP No. 98-1 software). The capitalized cost of internally
developed capitalized software (for SOP No. 98-1 software)
is amortized on a straight-line basis over its estimated useful
life, generally ten years. Software development costs (for SFAS
No. 86 software) are amortized using the greater of
(1) the straight-line method over its estimated useful
life, which ranges from three to seven years or (2) the
ratio of current revenues to total anticipated revenue over its
useful life.
At December 31, 2004 and December 31, 2003,
capitalized software costs were $581.1 million, less
accumulated amortization of $140.3 million and
$344.0 million, less accumulated amortization of
$53.9 million, respectively. The increase in capitalized
software costs is due to the Company’s acquisitions in 2004
and 2003 (see Note B). Amortization expense relating to
computer software was $85.9 million, $39.6 million and
$13.7 million for the years ended 2004, 2003 and 2002,
respectively.
Title plants are recorded at the cost incurred to construct or
obtain and organize historical title information to the point it
can be used to perform title searches. Costs incurred to
maintain, update and operate title plants are expensed as
incurred. Title plants are not amortized as they are considered
to have an indefinite life if maintained. Sales of title plants
are reported at the amount received net of the adjusted costs of
the title plant sold. Sales of title plant copies are reported
at the amount received. No cost is allocated to the sale of
copies of title plants unless the carrying value of the title
plant is diminished or impaired.
Property and equipment are recorded at cost, less depreciation.
Depreciation is computed primarily using the straight-line
method based on the estimated useful lives of the related
assets: thirty years for buildings and three to seven years for
furniture, fixtures and computer equipment. Leasehold
improvements are amortized on a straight-line basis over the
lesser of the term of the applicable lease or the estimated
useful lives of such assets.
The Company’s reserve for claim losses includes known
claims for title and specialty insurance 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 incurred but not reported are
established at the time premium revenue is recognized based
71
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
on historical loss experience and other factors, including
industry trends, claim loss history, current legal environment,
geographic considerations and type of policy written.
The reserve for claim losses also includes reserves for losses
arising from the escrow, closing and disbursement functions due
to fraud or operational error.
If a loss is related to a policy issued by an independent agent,
the Company may proceed against the independent agent pursuant
to the terms of the agency agreement. In any event, the Company
may proceed against third parties who are responsible for any
loss under the title insurance policy under rights of
subrogation. See Note J.
In the state of Illinois, a trust company is permitted to
commingle and invest customers’ assets with those of the
Company, pending completion of real estate transactions.
Accordingly, the Company’s Consolidated Balance Sheets
reflects a secured trust deposit liability of
$735.3 million and $671.9 million at December 31,
2004 and 2003, respectively, representing customers’ assets
held by us and corresponding assets including cash and
investments pledged as security for those trust balances.
The Company recognizes deferred tax assets and liabilities for
temporary differences between the financial reporting basis and
the tax basis of the Company’s assets and liabilities and
expected benefits of utilizing net operating loss and credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The impact on deferred taxes of changes
in tax rates and laws, if any, are applied to the years during
which temporary differences are expected to be settled and
reflected in the financial statements in the period enacted.
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.
Title Insurance Segment. Direct title insurance
premiums and escrow and other title related fees are recognized
as revenue at the time of closing of the related transaction as
the earnings process is considered complete. Agency title
insurance premiums are recognized as revenue when policies are
reported to the Company and are recorded as revenue on a gross
basis (before the deduction of agent commissions). In addition,
the Company accrues for unreported agency title insurance
premiums based on historical reporting patterns of its agents
and current trends.
Specialty Insurance Segment. Revenues from home warranty
and personal lines insurance policies are recognized over the
life of the policy, which is one year. Revenues and commissions
related to the sale of flood insurance are recognized when the
policy is reported.
72
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Financial Institution Software and Services. In this
segment, the Company recognizes revenues relating to bank
processing services and mortgage processing services along with
software licensing and software related services. Several of the
Company’s contracts include a software license and one or
more of the following services: data processing, development,
implementation, conversion, training, programming, maintenance
and application management. In some cases, these services are
offered in combination with one another and in other cases the
Company offers them individually. Revenues from bank and
mortgage processing services are typically volume-based
depending on factors such as the estimated number of accounts,
transactions processed and computer resources utilized.
The substantial majority of the revenues in this segment are
from outsourced data processing and application management
arrangements. Revenues from these arrangements are recognized as
services are performed in accordance with SEC Staff Accounting
Bulletin No. 104 (SAB No. 104),
“Revenue Recognition” and related interpretations.
SAB No. 104 sets forth guidance as to when revenue is
realized or realizable and earned when all of the following
criteria are met: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services have been
rendered; (3) the seller’s price to the buyer is fixed
and determinable; and (4) collectability is reasonably
assured. Revenue and deferred costs related to implementation,
conversion and programming services associated with the
Company’s data processing and application management
agreements are deferred during the implementation phase and
subsequently recognized using the straight-line method over the
term of the related agreement. At each reporting period, the
Company evaluates these deferred costs for impairment.
In the event that the Company’s arrangements with its
customers include more than one product or service, the Company
determines whether the individual elements can be recognized
separately in accordance with Financial Accounting Standards
Board (FASB) Emerging Issues Task Force No. 00-21
(EITF 00-21), “Revenue Arrangements with Multiple
Deliverables.” EITF 00-21 addresses the determination
of whether an arrangement involving more than one deliverable
contains more than one unit of accounting and how the
arrangement consideration should be measured and allocated to
the separate units of accounting. If all of the products and
services are software related products and services as
determined under American Institute of Certified Public
Accountants’ Statement of Position 97-2 (SOP
NO. 97-2), entitled Software Revenue Recognition,
and SOP 98-9, entitled Modification of SOP
NO. 97-2, Software Revenue Recognition, with Respect to
Certain Transactions, the Company applies these
pronouncements and related interpretations to determine the
appropriate units of accounting and how the arrangement
consideration should be measured and allocated to the separate
units.
The Company recognizes software license and maintenance fees as
well as associated development, implementation, training,
conversion and programming fees in accordance with SOP
NO. 97-2 and SOP NO. 98-9. Initial license fees are
recognized when a contract exists, the fee is fixed or
determinable, software delivery has occurred and collection of
the receivable is deemed probable, provided that vendor-specific
objective evidence, or VSOE, has been established for each
element or for the undelivered elements. The Company determines
the fair value of each element or the undelivered elements in
multi-element software arrangements based on VSOE. If the
arrangement is subject to accounting under SOP NO. 97-2,
VSOE for each element is based on the price charged when the
same element is sold separately. If evidence of fair value of
all undelivered elements exists but evidence does not exist for
one or more delivered elements, then revenue is recognized using
the residual method. Under the residual method, the fair value
of the undelivered elements is deferred and the remaining
portion of the arrangement fee is recognized as revenue. If
evidence of fair value does not exist for one or more
undelivered elements of a contract, then all revenue is deferred
until all elements are delivered or fair value is determined for
all remaining undelivered elements. Revenue from maintenance and
support is recognized ratably over the term of the agreement.
The Company records deferred revenue for maintenance amounts
invoiced prior to revenue recognition.
73
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
With respect to a small percentage of revenues, the Company uses
contract accounting, as required by SOP NO. 97-2, when the
arrangement with the customer includes significant
customization, modification, or production of software. For
elements accounted for under contract accounting, revenue is
recognized in accordance with SOP 81-1, Accounting for
Performance of Construction Type and Certain Production-Type
Contracts, using the percentage-of-completion method since
reasonably dependable estimates of revenues and contract hours
applicable to various elements of a contract can be made.
Revenues in excess of billings on these agreements are recorded
as unbilled receivables and is included in accounts receivable.
Billings in excess of revenue recognized on these agreements are
recorded as deferred revenue until revenue recognition criteria
are met. Changes in estimates for revenues, costs and profits
are recognized in the period in which they are determinable.
When the Company’s estimate indicates that the entire
contract will be performed at a loss, a provision for the entire
loss is recorded in that accounting period.
Lender Outsourcing Solutions. In this segment, the
Company recognizes revenues from loan facilitation services and
default management services. Loan facilitation services of
centralized title agency and closing services for various types
of lenders. Revenues relating to centralized title agency and
closing services are recognized at the time of closing of the
related real estate transaction. Ancillary service fees are
recognized when the service is provided. Default management
services consist of services provided to assist customers
through the default and foreclosure process, including property
preservation and maintenance services (such as lock changes,
window replacement, debris removal and lawn service), posting
and publication of foreclosure and auction notices, title
searches, document preparation and recording services, and
referrals for legal and property brokerage services. Revenue
derived from these services is recognized as the services are
performed in accordance with SAB No. 104 as described
above.
Information Services. In this segment, the Company
records revenue from providing data or data-related services.
These services principally include appraisal and valuation
services, property records information, real estate tax
services, borrower credit and flood zone information and
multiple listing software and services. Revenue derived from
these services is recognized as the services are performed in
accordance with SAB No. 104 as described above.
The Company’s flood and tax units provide various services
including life-of-loan monitoring services. Revenue for
life-of-loan services is deferred and recognized ratably over
the estimated average life of the loan service period, which is
determined based on the Company’s historical experience.
The Company evaluates its historical experience on a periodic
basis, and adjusts the estimated life of the loan service period
prospectively. Revenue derived from software and service
arrangements is recognized in accordance with SOP No. 97-2.
Revenues from other services in this segment are recognized as
the services are performed in accordance with
SAB No. 104 as described above.
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, warrants and restricted stock, which have been treated
as common share equivalents for purposes of calculating diluted
earnings per share.
74
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table presents the computation of basic and
diluted earnings per share:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Basic and diluted earnings
|
|
$ |
740,962 |
|
|
$ |
861,820 |
|
|
$ |
531,717 |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the year, basic basis
|
|
|
171,014 |
|
|
|
148,275 |
|
|
|
131,135 |
|
|
Plus: Common stock equivalent shares assumed from conversion of
options
|
|
|
4,986 |
|
|
|
4,896 |
|
|
|
4,736 |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the year, diluted
basis
|
|
|
176,000 |
|
|
|
153,171 |
|
|
|
135,871 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
4.33 |
|
|
$ |
5.81 |
|
|
$ |
4.05 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
4.21 |
|
|
$ |
5.63 |
|
|
$ |
3.91 |
|
| |
|
|
|
|
|
|
|
|
|
Options to purchase 1,419,052 shares, 1,759,782 shares
and 93,665 shares of the Company’s common stock for
the years ended December 31, 2004, 2003 and 2002,
respectively, were not included in the computation of diluted
earnings per share because they were anti-dilutive.
|
|
|
Stock-Based Compensation Plans |
Prior to 2003, the Company accounted for its stock-based
compensation 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 had
been reflected in net earnings.
During 2003, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards
No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”), for
stock-based employee compensation, effective as of the beginning
of 2003. Under the fair value method of accounting, compensation
cost is measured based on the fair value of the award at the
grant date and recognized over the service period. The Company
has elected to use the prospective method of transition, as
permitted by Statement of Financial Accounting Standards
No. 148, “Accounting for Stock-Based
Compensation — Transition and Disclosure”
(“SFAS No. 148”). Under this method,
stock-based employee compensation cost is recognized from the
beginning of 2003 as if the fair value method of accounting had
been used to account for all employee awards granted, modified,
or settled in years beginning after December 31, 2002.
Prior year financial statements were not restated.
75
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to all
outstanding and unvested awards in each period (see Note M):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Net earnings, as reported
|
|
$ |
740,962 |
|
|
$ |
861,820 |
|
|
$ |
531,717 |
|
|
Add: Stock-based compensation expense included in reported net
earnings, net of related tax effects
|
|
|
13,522 |
|
|
|
5,906 |
|
|
|
— |
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards, net of
related tax effects
|
|
|
(15,227 |
) |
|
|
(14,484 |
) |
|
|
(13,509 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings
|
|
$ |
739,257 |
|
|
$ |
853,242 |
|
|
$ |
518,208 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic — as reported
|
|
$ |
4.33 |
|
|
$ |
5.81 |
|
|
$ |
4.05 |
|
| |
Basic — pro forma
|
|
$ |
4.32 |
|
|
$ |
5.75 |
|
|
$ |
3.95 |
|
| |
Diluted — as reported
|
|
$ |
4.21 |
|
|
$ |
5.63 |
|
|
$ |
3.91 |
|
| |
Diluted — pro forma
|
|
$ |
4.19 |
|
|
$ |
5.55 |
|
|
$ |
3.81 |
|
|
|
|
Derivative Financial Instruments |
The Company accounts for derivative financial instruments in
accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, as amended. The
Company does not currently engage in any hedging activities and
thus records all derivative financial instruments at fair value
in the Consolidated Balance Sheet and all changes in fair value
are recognized in realized gains and losses in the Consolidated
Statement of Earnings. During 2004, the Company’s
derivative financial instruments are limited to an investment in
warrants to purchase common stock of Covansys Corporation
(Covansys), an equity investee of the Company, and certain put
and call options relating to the minority interest in certain
majority-owned subsidiaries. The Company did not have any
derivative activity during 2003 or 2002.
|
|
|
Foreign Currency Translation |
The functional currency for the foreign operations of the
Company is either the U.S. Dollar or the local currency.
For foreign operations where the local currency is the
functional currency, the translation of foreign currencies into
U.S. dollars is performed for balance sheet accounts using
exchange rates in effect at the balance sheet date and for
revenue and expense accounts using a weighted average exchange
rate during the period. The unrealized gains and losses
resulting from the translation are included in accumulated other
comprehensive earnings in the Consolidated Statement of
Stockholders’ Equity and are excluded from net earnings.
Gains or losses resulting from foreign currency transactions are
included in realized gains and losses and are insignificant in
2004, 2003 and 2002.
|
|
|
Share and Per Share Restatement |
On January 27, 2004, the Company declared a 10% stock
dividend to stockholders of record on February 12, 2004,
payable on February 26, 2004. On April 22, 2003, the
Company declared a five-for-four (5:4) stock split payable
May 23, 2003 to stockholders of record on May 9, 2003.
On April 24, 2002, the Company declared a 10% stock
dividend to stockholders of record on May 9, 2002, payable
on May 23, 2002. The fair value of the additional shares of
common stock issued in connection with the 10% stock dividends
was
76
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
credited to additional paid-in capital and a like amount charged
to retained earnings during 2004 and 2002. 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
split and the stock dividends.
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.
|
|
|
Certain Reclassifications |
Certain reclassifications have been made in the 2003 and 2002
Consolidated Financial Statements to conform to the
classifications used in 2004.
The results of operations and financial position of the entities
acquired during any year are included in the Consolidated
Financial Statements from and after the date of acquisition. The
Company generally employs an outside third party valuation firm
to value the identifiable intangible and tangible assets and
liabilities of each of its acquisitions. Based on this valuation
any differences between the fair value of the indentifiable
assets and liabilities and the purchase price paid is recorded
as goodwill.
|
|
|
ALLTEL Information Services, Inc. |
On January 28, 2003, the Company entered into a stock
purchase agreement with ALLTEL Corporation, Inc., a Delaware
corporation (“ALLTEL”), to acquire from ALLTEL its
financial services division, ALLTEL Information Services, Inc.
(“AIS”). On April 1, 2003, the Company closed the
acquisition and subsequently renamed the division Fidelity
Information Services (“FI”). FI is one of the largest
providers of information-based technology solutions and
processing services to the mortgage and financial services
industries.
The Company acquired FI for approximately $1,069.6 million
(including the payment for certain working capital adjustments
and estimated transaction costs), consisting of
$794.6 million in cash and $275.0 million of the
Company’s common stock. The Company funded the cash portion
of the purchase price through the issuance of
$250.0 million aggregate principal amount of
5.25% notes due March 15, 2013 (See Note H), and
$544.6 million in available cash. The stock portion of the
purchase price resulted in the issuance of
11,206,692 shares of the Company’s common stock to
ALLTEL.
In connection with the closing of the acquisition, the Company
entered into a stockholder’s agreement, a non-competition
agreement and certain transition agreements with ALLTEL. The
stockholder’s agreement: (1) restricted the sale by
ALLTEL of the Company’s common stock received in the
transaction for a period of one year unless the Company
consented to such sale or transfer or certain events set forth
in the stockholder’s agreement with ALLTEL and the Company
occur prior to the expiration of the one-year lock-up,
(2) grants ALLTEL the right to designate one nominee to the
Company’s Board of Directors, so long as it continues to
hold at least 50% of the shares of the Company’s common
stock received in the transaction, and (3) grants ALLTEL
certain registration rights with respect to the Company’s
common stock it receives in the transaction. The non-competition
agreement prohibits, with certain exceptions, ALLTEL and its
affiliates
77
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
from engaging in the business relating to the assets acquired by
the Company for a period of two years after the transaction.
The Company allocated the purchase price as follows:
$450.7 million to goodwill; $348.0 million to other
intangible assets, namely acquired customer relationship
intangibles; and $95.0 million to capitalized software
based on studies and valuations that are finalized. The Company
is amortizing the other intangible assets using an accelerated
method which takes into consideration expected customer
attrition rates over a 10-year period. The acquired software is
amortized over a seven-year period using an accelerated method
that contemplates the period of expected economic benefit and
future enhancements to the underlying software. Under the terms
of the stock purchase agreement, the Company made a joint
election with ALLTEL to treat the acquisition as a sale of
assets in accordance with Section 338 (h) (10) of
the Internal Revenue Code, which resulted in the revaluation of
the assets acquired to fair value. As such, the fair value
assignable to the historical assets, as well as intangible
assets and goodwill, will be deductible for federal and state
income tax purposes.
The assets acquired and liabilities assumed in the FIS
acquisition were as follows (dollars in thousands):
| |
|
|
|
|
|
|
Tangible and amortizable intangible assets acquired at fair value
|
|
$ |
741,960 |
|
|
Goodwill
|
|
|
450,743 |
|
|
Liabilities assumed at fair value
|
|
|
(123,082 |
) |
| |
|
|
|
| |
Total purchase price
|
|
$ |
1,069,621 |
|
| |
|
|
|
On November 8, 2004, the Company acquired all of the
outstanding stock of InterCept, Inc. (“InterCept”) for
$18.90 per share. The total purchase price was
approximately $419.4 million and was paid by
$407.3 million of cash with the remaining purchase price
relating to the issuance of Company options for vested InterCept
options. InterCept provides both outsourced and in-house, fully
integrated core banking solutions for community banks, including
loan and deposit processing and general ledger and financial
accounting operations. InterCept also operates significant item
processing and check imaging operations, providing imaging for
customer statements, clearing and settlement, reconciliation and
automated exception processing in both outsourced and in-house
relationships for customers.
The assets acquired and liabilities assumed in the InterCept
acquisition were as follows (dollars in thousands):
| |
|
|
|
|
|
|
Tangible and amortizable intangible assets acquired at fair value
|
|
$ |
191,437 |
|
|
Goodwill
|
|
|
291,525 |
|
|
Liabilities assumed at fair value
|
|
|
(63,603 |
) |
| |
|
|
|
| |
Total purchase price
|
|
$ |
419,359 |
|
| |
|
|
|
On March 11, 2004, FNF acquired Aurum Technology, Inc.
(Aurum) for $306.4 million, comprised of
$185.0 million in cash and the issuance of
3,144,390 shares of FNF’s common stock valued using
closing prices two days before and after the valuation date,
which was $121.4 million. Aurum is a provider of outsourced
and in-house information technology solutions for the community
bank and credit union markets.
78
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The assets acquired and liabilities assumed in the Aurum
acquisition were as follows (dollars in thousands):
| |
|
|
|
|
|
|
Tangible and amortizable intangible assets acquired at fair value
|
|
$ |
112,561 |
|
|
Goodwill
|
|
|
252,115 |
|
|
Liabilities assumed at fair value
|
|
|
(58,307 |
) |
| |
|
|
|
| |
Total purchase price
|
|
$ |
306,369 |
|
| |
|
|
|
|
|
|
Sanchez Computer Associates, Inc. |
On April 14, 2004, FNF acquired Sanchez Computer
Associates, Inc. (Sanchez) for $183.7 million, comprised of
$88.1 million in cash and the issuance of
2,267,290 shares of FNF’s common stock valued using
closing prices two days before and after the valuation date,
which was approximately $88.1 million with the remaining
purchase price of $7.5 million relating to the issuance of
the Company’s stock options for vested Sanchez stock
options. Sanchez develops and markets scalable and integrated
software and services that provide banking, customer
integration, outsourcing and wealth management solutions to
financial institutions in several countries. Sanchez’
primary application offering is Sanchez
Profiletm,
a real-time, multi- currency, strategic core banking deposit and
loan processing system that can be utilized on both an
outsourced and in-house basis.
The assets acquired and liabilities assumed in the Sanchez
acquisition were as follows (dollars in thousands):
| |
|
|
|
|
|
|
Tangible and amortizable intangible assets acquired at fair value
|
|
$ |
80,425 |
|
|
Goodwill
|
|
|
125,314 |
|
|
Liabilities assumed at fair value
|
|
|
(22,069 |
) |
| |
|
|
|
| |
Total purchase price
|
|
$ |
183,670 |
|
| |
|
|
|
On September 30, 2004, FNF acquired a 74.9% interest in
KORDOBA Gesellschaft fur Bankensoftware mbH & Co. KG,
Munich, or Kordoba, a provider of core processing software and
outsourcing solutions to the German banking market, from Siemens
Business Services GmbH & Co. OHG (Siemans). The
acquisition price was $123.6 million in cash. The Company
recorded the Kordoba acquisition based on its proportional share
of the fair value of the assets and liabilities assumed on the
purchase date.
The assets acquired and liabilities assumed in the Kordoba
acquisition were as follows (dollars in thousands):
| |
|
|
|
|
|
|
Tangible and amortizable intangible assets acquired at fair value
|
|
$ |
122,663 |
|
|
Goodwill
|
|
|
105,582 |
|
|
Liabilities assumed at fair value
|
|
|
(104,661 |
) |
| |
|
|
|
| |
Total purchase price
|
|
$ |
123,584 |
|
| |
|
|
|
|
|
|
American Pioneer Title Insurance Company |
On March 22, 2004, the Company acquired American Pioneer
Title Insurance Company (“APTIC”) for
$115.2 million in cash, subject to certain equity
adjustments. APTIC is a 45-state licensed title insurance
underwriter with significant agency operations and computerized
title plant assets in the state of Florida. APTIC operates under
the Company’s Ticor Title brand.
79
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The assets acquired and liabilities assumed in the APTIC
acquisition were as follows (dollars in thousands):
| |
|
|
|
|
|
|
Tangible and amortizable intangible assets acquired at fair value
|
|
$ |
125,346 |
|
|
Goodwill
|
|
|
34,505 |
|
|
Liabilities assumed at fair value
|
|
|
(44,663 |
) |
| |
|
|
|
| |
Total purchase price
|
|
$ |
115,188 |
|
| |
|
|
|
|
|
|
Fidelity National Information Solutions, Inc. |
On September 30, 2003, the Company acquired the outstanding
minority interest of FNIS, its majority-owned real estate
information services public subsidiary that provides property
data and real-estate related services, whereby FNIS became a
wholly-owned subsidiary of the Company. In the acquisition, each
share of FNIS common stock (other than FNIS common stock the
Company already owned) was exchanged for 0.83 shares of the
Company’s common stock. The Company issued
14,292,858 shares of its common stock to FNIS stockholders
in the acquisition. The Company has allocated
$154.8 million of the purchase price to goodwill and
$88.9 million of the purchase price to other intangible
assets and capitalized software based on studies and valuations
that are finalized.
The acquisition of the minority interest of FNIS on
September 30, 2003 allowed the Company to further
capitalize on the significant technology resources of FI, which
the Company acquired on April 1, 2003, by combining all
technology resources within one integrated organization. The
Company’s data center activities have historically been
managed by FNIS. However, with the acquisition of the minority
interest of FNIS, the Company has migrated substantially all of
its data center activities from FNIS to the existing FI
platforms as of September 30, 2003.
The assets acquired and liabilities assumed in the FNIS minority
interest acquisition were as follows (dollars in thousands):
| |
|
|
|
|
|
|
Tangible and amortizable intangible assets acquired at fair value
|
|
$ |
88,896 |
|
|
Goodwill
|
|
|
154,831 |
|
|
Liabilities assumed at fair value
|
|
|
— |
|
| |
|
|
|
| |
Total purchase price
|
|
$ |
243,727 |
|
| |
|
|
|
Selected unaudited pro forma combined results of operations for
the years ended December 31, 2004 and 2003, assuming the
above acquisitions had occurred as of January 1, 2003, and
using actual general and administrative expenses prior to the
acquisition, are set forth below:
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004(a) | |
|
2003(a) | |
| |
|
| |
|
| |
|
Total revenue
|
|
$ |
8,668,885 |
|
|
$ |
8,712,941 |
|
|
Net earnings
|
|
$ |
723,936 |
|
|
$ |
863,458 |
|
|
Basic earnings per share
|
|
$ |
4.19 |
|
|
$ |
5.15 |
|
|
Diluted earnings per share
|
|
$ |
4.07 |
|
|
$ |
4.99 |
|
|
|
| (a) |
Impact of full year 2004 for Kordoba is approximately
$93.2 million and $15.5 million in total revenue and
net earnings, respectively and comparable information is not
available for 2003 that is in conformity with U.S. generally
accepted accounting principles. |
80
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Other Transactions:
On December 13, 2004, the Company acquired ClearParSM, LLC
(“ClearPar”), a provider of a web-based commercial
loan settlement system servicing the primary syndication and
secondary loan trading markets. The acquisition price was
$24.5 million in cash.
On September 15, 2004, FNF acquired 11 million shares
of common stock and warrants to purchase 4 million
additional shares of Covansys Corporation (Covansys), a publicly
traded U.S.-based provider of application management and
offshore outsourcing services with India based operations for
$121.0 million in cash. FNF subsequently contributed the
common stock and warrants to the Company which resulted in the
Company owning approximately 29% of the common stock of
Covansys. The Company will account for the investment in common
stock using the equity method of accounting and will account for
the warrants under SFAS No. 133. Under
SFAS No. 133, the investment in warrants are
considered derivative instruments and have been recorded at a
fair value of approximately $23.5 million on the date of
acquisition. The Company has also recorded a gain of
$16.2 million on the increase in fair value of the warrants
through December 31, 2004 which is reflected in the
Consolidated Statement of Earnings in realized gains and losses.
The Company also entered into a master service provider
agreement with Covansys which requires the Company to purchase a
minimum of $150 million in services over a five year period
expiring June 30, 2009 or be subject to certain penalties
if certain spending thresholds are not met. The Company is
subject to penalties aggregating $8.0 million in the event
that certain annual thresholds are not met and a final penalty
equal to 6.67% of the unmet commitment.
On July 2, 2004, the Company acquired 100% of Geotrac, Inc.
(“Geotrac”), a flood zone monitoring services provider
for $40 million in cash.
On April 7, 2004, the Company acquired Bankware, a provider
of check imaging solutions for financial institutions for
$47.7 million in cash.
|
|
|
Hansen Quality Loan Services, LLC |
On February 27, 2004, the Company acquired an additional
44% interest in Hansen Quality Loan Services, LLC
(“Hansen”) that it did not already own for
$33.7 million, consisting of $25.2 million in cash and
$8.5 million of the Company’s common stock. The stock
portion of the purchase price resulted in the issuance of
220,396 shares of the Company’s common stock, which is
restricted from sale to the public. Hansen provides collateral
risk assessment and valuation services for real estate mortgage
financing. On March 26, 2004, we acquired the remaining 1%
interest in Hansen for $.3 million in cash.
On October 9, 2003, the Company acquired LandCanada, a
provider of title insurance and related mortgage document
production in Canada, for $17.6 million in cash.
81
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
WebTone Technologies, Inc. |
On September 2, 2003, the Company acquired WebTone
Technologies, Inc. (“WebTone”) for $88.7 million
in cash. WebTone is the developer of the TouchPoint® suite
of customer interactive management solutions for financial
services organizations.
|
|
|
Omaha Property and Casualty Insurance Company |
On May 2, 2003, the Company acquired the flood insurance
business of Mutual of Omaha’s subsidiary, Omaha Property
and Casualty Insurance Company (“OPAC”), for
$18.0 million in cash. This acquisition, along with the
Bankers Insurance Group acquisition (described below) expands
the Company’s presence in the flood insurance business.
On March 31, 2003, the Company acquired Key
Title Company (“Key Title”) for
$22.5 million in cash. Key Title operates in 12 counties in
the state of Oregon.
On March 26, 2003, the Company merged with ANFI, Inc.
(“ANFI”), which is predominately a California
underwritten title company, and ANFI became a wholly-owned
subsidiary of the Company. In the merger, each share of ANFI
common stock (other than ANFI common stock the Company already
owned) was exchanged for 0.454 shares of the Company’s
common stock. The Company issued 5,183,103 shares of its
common stock to the ANFI stockholders in the merger.
Lenders Service, Inc.
On February 10, 2003, the Company acquired Lenders Service,
Inc., a Delaware corporation (“LSI”), for
$77.3 million in cash. LSI is a provider of appraisal,
title and closing services to residential mortgage originators.
Bankers Insurance
Group
On January 9, 2003, the Company acquired certain assets of
Bankers Insurance Group (“Bankers”) for
$41.6 million in cash. The assets include the right to
issue new and renewal flood insurance policies underwritten by
Bankers and its subsidiaries, Bankers Insurance Company, Bankers
Security Insurance Company and First Community Insurance Company
(“FCIC”). As part of the transaction, the Company also
acquired FCIC, a fifty-state licensed insurance carrier, to act
as the underwriter for the policies. FCIC has been subsequently
renamed Fidelity National Property and Casualty Insurance
Company.
Acquisition of Micro General
Corporation by FNIS
On July 9, 2002, FNIS acquired Micro General, the
Company’s majority-owned public subsidiary, through a
tender offer and subsequent short-form merger. Under the terms
of the tender offer and merger, each share of Micro General
common stock was exchanged for 0.696 shares of FNIS common
stock. FNIS issued approximately 12.9 million shares of
common stock to Micro General stockholders. In the
Company’s Consolidated Financial Statements, this
transaction is accounted for in accordance with
SFAS No. 141 and FASB Technical Bulletin 85-5.
Accordingly, FNIS’s acquisition of the minority
stockholders’ interest in Micro General (the
“noncontrolled equity interest”) was recognized by the
Company as the acquisition of shares from a minority interest,
which is accounted for by the purchase method under
SFAS No. 141. FNIS’s acquisition of the
Company’s interest in Micro General (the “controlled
equity interest”) is not considered a business combination
and, therefore, the Company recognized the related assets and
liabilities transferred
82
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
from the controlled equity interest in Micro General to FNIS at
their historical carrying values. The market price per share of
FNIS common stock that was issued to Micro General minority
stockholders in this transaction exceeded the Company’s
carrying amount per share of FNIS common stock, resulting in an
increase of $100.4 million to the Company’s
consolidated equity and an increase in net assets, the majority
of which was goodwill.
Homebuilders Financial
Network, Inc.
On May 23, 2002, the Company acquired a 75% interest in
Homebuilders Financial Network, Inc., a provider of outsource
mortgage loan fulfillment services to homebuilders, for
approximately $21.0 million in cash.
The carrying amounts and fair values of the Company’s fixed
maturity securities at December 31, 2004 and 2003 are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
|
|
Gross | |
|
Gross | |
|
|
| |
|
Carrying | |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Fair | |
| |
|
Value | |
|
Cost | |
|
Gains | |
|
Losses | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Fixed maturity investments (available for sale):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. government and agencies
|
|
$ |
765,483 |
|
|
$ |
767,675 |
|
|
$ |
1,177 |
|
|
$ |
(3,369 |
) |
|
$ |
765,483 |
|
| |
States and political subdivisions
|
|
|
1,048,958 |
|
|
|
1,039,740 |
|
|
|
12,386 |
|
|
|
(3,168 |
) |
|
|
1,048,958 |
|
| |
Corporate debt securities
|
|
|
423,073 |
|
|
|
427,531 |
|
|
|
323 |
|
|
|
(4,781 |
) |
|
|
423,073 |
|
| |
Foreign government bonds
|
|
|
4,189 |
|
|
|
4,178 |
|
|
|
11 |
|
|
|
— |
|
|
|
4,189 |
|
| |
Mortgage-backed securities
|
|
|
90,528 |
|
|
|
90,353 |
|
|
|
372 |
|
|
|
(197 |
) |
|
|
90,528 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
2,332,231 |
|
|
$ |
2,329,477 |
|
|
$ |
14,269 |
|
|
$ |
(11,515 |
) |
|
$ |
2,332,231 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2003 | |
| |
|
| |
| |
|
|
|
Gross | |
|
Gross | |
|
|
| |
|
Carrying | |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Fair | |
| |
|
Value | |
|
Cost | |
|
Gains | |
|
Losses | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Fixed maturity investments (available for sale):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. government and agencies
|
|
$ |
522,376 |
|
|
$ |
515,149 |
|
|
$ |
7,339 |
|
|
$ |
(112 |
) |
|
$ |
522,376 |
|
| |
States and political subdivisions
|
|
|
561,337 |
|
|
|
541,080 |
|
|
|
20,448 |
|
|
|
(191 |
) |
|
|
561,337 |
|
| |
Corporate debt securities
|
|
|
544,218 |
|
|
|
543,276 |
|
|
|
2,178 |
|
|
|
(1,236 |
) |
|
|
544,218 |
|
| |
Foreign government bonds
|
|
|
3,536 |
|
|
|
3,522 |
|
|
|
14 |
|
|
|
— |
|
|
|
3,536 |
|
| |
Mortgage-backed securities
|
|
|
64,767 |
|
|
|
63,400 |
|
|
|
1,367 |
|
|
|
— |
|
|
|
64,767 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,696,234 |
|
|
$ |
1,666,427 |
|
|
$ |
31,346 |
|
|
$ |
(1,539 |
) |
|
$ |
1,696,234 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The change in unrealized gains (losses) on fixed maturities for
the years ended December 31, 2004, 2003, and 2002 was
$(27.1) million, $(22.4) million and
$27.3 million, respectively.
The following table presents certain information regarding
contractual maturities of the Company’s fixed maturity
securities at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
Amortized | |
|
% of | |
|
Fair | |
|
% of | |
| Maturity |
|
Cost | |
|
Total | |
|
Value | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
One year or less
|
|
$ |
357,956 |
|
|
|
15.4 |
% |
|
$ |
358,246 |
|
|
|
15.3 |
% |
|
After one year through five years
|
|
|
1,171,776 |
|
|
|
50.3 |
|
|
|
1,172,345 |
|
|
|
50.3 |
|
|
After five years through ten years
|
|
|
435,776 |
|
|
|
18.7 |
|
|
|
437,316 |
|
|
|
18.8 |
|
|
After ten years
|
|
|
273,616 |
|
|
|
11.7 |
|
|
|
273,796 |
|
|
|
11.7 |
|
|
Mortgage-backed securities
|
|
|
90,353 |
|
|
|
3.9 |
|
|
|
90,528 |
|
|
|
3.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
2,329,477 |
|
|
|
100.0 |
% |
|
$ |
2,332,231 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to call
|
|
$ |
274,437 |
|
|
|
11.8 |
% |
|
$ |
276,970 |
|
|
|
11.9 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities valued at approximately
$86.6 million and $79.8 million were on deposit with
various governmental authorities at December 31, 2004 and
2003, respectively, as required by law.
Expected maturities may differ from contractual maturities
because certain borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
Equity securities at December 31, 2004 and 2003 consist of
investments in various industry groups as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
|
|
Fair | |
|
|
|
Fair | |
| |
|
Cost | |
|
Value | |
|
Cost | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
(Dollars in thousands) | |
|
|
|
Banks, trust and insurance companies
|
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
1 |
|
|
$ |
5 |
|
|
Industrial, miscellaneous and all other
|
|
|
128,779 |
|
|
|
135,460 |
|
|
|
57,917 |
|
|
|
70,613 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
128,780 |
|
|
$ |
135,465 |
|
|
$ |
57,918 |
|
|
$ |
70,618 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The carrying value of the Company’s investment in equity
securities is fair value. As of December 31, 2004, gross
unrealized gains and gross unrealized losses on equity
securities were $10.2 million and $3.5 million,
respectively. Gross unrealized gains and gross unrealized losses
on equity securities were $13.0 million and
$0.3 million, respectively, as of December 31, 2003.
The change in unrealized gains (losses) on equity securities for
the years ended December 31, 2004, 2003 and 2002 was
$(6.0) million, $0.5 million and $9.0 million,
respectively.
84
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Interest and investment income consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Cash and cash equivalents
|
|
$ |
3,262 |
|
|
$ |
2,002 |
|
|
$ |
1,691 |
|
|
Fixed maturity securities
|
|
|
58,960 |
|
|
|
47,335 |
|
|
|
57,017 |
|
|
Equity securities
|
|
|
474 |
|
|
|
1,774 |
|
|
|
1,662 |
|
|
Short-term investments
|
|
|
6,735 |
|
|
|
7,500 |
|
|
|
11,637 |
|
|
Notes receivable
|
|
|
1,443 |
|
|
|
1,734 |
|
|
|
2,570 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
70,874 |
|
|
$ |
60,345 |
|
|
$ |
74,577 |
|
| |
|
|
|
|
|
|
|
|
|
Net realized gains amounted to $37.0 million,
$106.4 million and $15.5 million for the years ended
December 31, 2004, 2003 and 2002, respectively. Included in
2004 were gains related to the Company’s investment in
Covansys warrants of $16.2 million. Included in
2003 net realized gains is a $51.7 million realized
gain as a result of InterActive Corp’s acquisition of
Lending Tree Inc. and the subsequent sale of the Company’s
InterActive Corp common stock and a realized gain of
$25.0 million on the sale of New Century Financial
Corporation common stock. Included in 2002 net realized
gains are other-than-temporary impairment losses of
$11.3 million recorded on CKE Restaurants, Inc. during the
fourth quarter of 2002 and $3.3 million recorded on MCI
WorldCom bonds in the second quarter of 2002.
During the years ended December 31, 2004, 2003 and 2002,
gross realized gains on sales of fixed maturity securities
considered available for sale were $8.9 million,
$18.5 million and $26.1 million, respectively; and
gross realized losses were $0.2 million, $2.2 million
and $7.7 million, respectively. Gross proceeds from the
sale of fixed maturity securities considered available for sale
amounted to $2,305.8 million, $1,451.7 million and
$776.9 million during the years ended December 31,
2004, 2003 and 2002, respectively.
During the years ended December 31, 2004, 2003 and 2002,
gross realized gains on sales of equity securities considered
available for sale were $65.8 million, $104.1 million
and $26.6 million, respectively; and gross realized losses
were $52.3 million, $8.1 million and
$53.9 million, respectively. Gross proceeds from the sale
of equity securities amounted to $723.9 million,
$793.4 million and $351.4 million during the years
ended December 31, 2004, 2003 and 2002, respectively.
Gross unrealized losses on investment securities and the fair
value of the related securities, aggregated by investment
category and length of time that individual securities have been
in a continuous unrealized loss position at December 31,
2004 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than 12 Months | |
|
12 Months or Longer | |
|
Total | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Unrealized | |
|
|
|
Unrealized | |
|
|
|
Unrealized | |
| |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
U.S. government and agencies
|
|
$ |
651,669 |
|
|
$ |
(3,102 |
) |
|
$ |
46,279 |
|
|
$ |
(267 |
) |
|
$ |
697,948 |
|
|
$ |
(3,369 |
) |
|
States and political subdivisions
|
|
|
309,881 |
|
|
|
(2,678 |
) |
|
|
41,718 |
|
|
|
(490 |
) |
|
|
351,599 |
|
|
|
(3,168 |
) |
|
Mortgage-backed securities
|
|
|
26,384 |
|
|
|
(197 |
) |
|
|
— |
|
|
|
— |
|
|
|
26,384 |
|
|
|
(197 |
) |
|
Corporate debt securities
|
|
|
267,984 |
|
|
|
(2,845 |
) |
|
|
129,251 |
|
|
|
(1,936 |
) |
|
|
397,235 |
|
|
|
(4,781 |
) |
|
Equity securities
|
|
|
75,442 |
|
|
|
(2,179 |
) |
|
|
28,887 |
|
|
|
(1,332 |
) |
|
|
104,329 |
|
|
|
(3,511 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total temporary impaired securities
|
|
$ |
1,331,360 |
|
|
$ |
(11,001 |
) |
|
$ |
246,135 |
|
|
$ |
(4,025 |
) |
|
$ |
1,577,495 |
|
|
$ |
(15,026 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During 2004, the Company incurred an impairment charge relating
to one investment that it determined to be other than
temporarily impaired, which resulted in a charge of
$8.0 million. Unrealized losses relating to
U.S. government, state and political subdivisions and
corporate securities were caused by interest rate increases.
Since the decline in fair value of these investments is
attributable to changes in interest rates and not credit
quality, and the Company has the intent and ability to hold
these securities, the Company does not consider these
investments other-than-temporarily impaired.
|
|
| D. |
Property and Equipment |
Property and equipment consists of the following:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Land
|
|
$ |
14,582 |
|
|
$ |
15,487 |
|
| |
Buildings
|
|
|
110,603 |
|
|
|
89,893 |
|
| |
Leasehold improvements
|
|
|
88,120 |
|
|
|
69,958 |
|
| |
Furniture, fixtures and equipment
|
|
|
544,676 |
|
|
|
389,954 |
|
| |
|
|
|
|
|
|
| |
|
|
757,981 |
|
|
|
565,292 |
|
| |
Accumulated depreciation and amortization
|
|
|
(372,979 |
) |
|
|
(247,479 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
385,002 |
|
|
$ |
317,813 |
|
| |
|
|
|
|
|
|
Goodwill consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Financial | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Institution | |
|
Lender | |
|
|
|
|
|
Corporate | |
|
|
| |
|
Title and | |
|
Software and | |
|
Outsourcing | |
|
Information | |
|
Specialty | |
|
and | |
|
|
| |
|
Escrow | |
|
Services | |
|
Solutions | |
|
Services | |
|
Insurance | |
|
Other | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Balance, December 31, 2002
|
|
$ |
806,918 |
|
|
$ |
39,424 |
|
|
$ |
28,369 |
|
|
$ |
109,265 |
|
|
$ |
7,944 |
|
|
$ |
4,693 |
|
|
$ |
996,613 |
|
|
Goodwill acquired during the year
|
|
|
110,548 |
|
|
|
521,273 |
|
|
|
57,464 |
|
|
|
227,501 |
|
|
|
10,225 |
|
|
|
2,854 |
|
|
|
929,865 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
917,466 |
|
|
|
560,697 |
|
|
|
85,833 |
|
|
|
336,766 |
|
|
$ |
18,169 |
|
|
$ |
7,547 |
|
|
|
1,926,478 |
|
|
Goodwill acquired during the year
|
|
|
39,615 |
|
|
|
793,875 |
|
|
|
(3,564 |
) |
|
|
42,374 |
|
|
|
4,500 |
|
|
|
(5,029 |
) |
|
|
871,771 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
957,081 |
|
|
$ |
1,354,572 |
|
|
$ |
82,269 |
|
|
$ |
379,140 |
|
|
$ |
22,669 |
|
|
$ |
2,518 |
|
|
$ |
2,798,249 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| F. |
Other Intangible Assets |
Other intangible assets consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Customer relationships
|
|
$ |
654,069 |
|
|
$ |
428,008 |
|
|
Contracts
|
|
|
165,905 |
|
|
|
127,428 |
|
|
Other
|
|
|
56,424 |
|
|
|
54,642 |
|
| |
|
|
|
|
|
|
| |
|
|
876,398 |
|
|
|
610,078 |
|
|
Accumulated amortization
|
|
|
(204,213 |
) |
|
|
(80,138 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
672,185 |
|
|
$ |
529,940 |
|
| |
|
|
|
|
|
|
86
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Amortization expense for amortizing intangible assets was
$124.1 million, $115.4 million and $6.1 million
for the years ended December 31, 2004, 2003 and 2002,
respectively, and is amortized over a period of 5 to
20 years. Estimated amortization expense for the next five
years is $134.8 million in 2005, $118.5 million in
2006, $100.7 million in 2007, $83.7 million in 2008
and $61.4 million in 2009.
|
|
| G. |
Accounts Payable and Accrued Liabilities |
Accounts payable and accrued liabilities consist of the
following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Salaries and incentives
|
|
$ |
268,483 |
|
|
$ |
233,649 |
|
|
Accrued benefits
|
|
|
247,939 |
|
|
|
193,257 |
|
|
Trade accounts payable
|
|
|
80,647 |
|
|
|
128,808 |
|
|
Accrued recording fees and transfer taxes
|
|
|
49,207 |
|
|
|
53,276 |
|
|
Accrued premium taxes
|
|
|
29,740 |
|
|
|
37,832 |
|
|
Other accrued liabilities
|
|
|
272,866 |
|
|
|
168,355 |
|
| |
|
|
|
|
|
|
| |
|
$ |
948,882 |
|
|
$ |
815,177 |
|
| |
|
|
|
|
|
|
Notes payable consist of the following:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Syndicated credit agreement, unsecured, interest due quarterly
at LIBOR plus 0.50% (2.92% at December 31, 2004), unused
portion of $300,000 at December 31, 2004
|
|
$ |
400,000 |
|
|
$ |
75,000 |
|
| |
Syndicated credit agreement, unsecured, interest due quarterly
at LIBOR plus 0.50% (2.92% at December 31, 2004), unused
portion of $90,000 at December 31, 2004
|
|
|
410,000 |
|
|
|
— |
|
| |
Unsecured notes, net of discount, interest payable semi-annually
at 7.30%, due August 2011
|
|
|
249,337 |
|
|
|
249,236 |
|
| |
Unsecured notes net of discount, interest payable semi-annually
at 5.25%, due March 2013
|
|
|
248,462 |
|
|
|
248,274 |
|
| |
Other promissory notes with various interest rates and maturities
|
|
|
62,757 |
|
|
|
86,676 |
|
| |
|
|
|
|
|
|
| |
|
$ |
1,370,556 |
|
|
$ |
659,186 |
|
| |
|
|
|
|
|
|
The carrying value of the Company’s notes payable,
excluding lease-backed notes payable, was approximately
$35.0 million lower than its estimated fair value at
December 31, 2004. At December 31, 2003, the carrying
value of the Company’s outstanding notes payable, excluding
lease-backed notes, was approximately $31.4 million lower
than its estimated fair value. The fair value of the
Company’s unsecured notes payable is based on established
market prices for the securities on December 31, 2004 and
2003. The fair value of the Company’s remaining fixed rate
and variable rate notes payable is estimated using discounted
cash flow analyses based on current market interest rates and
comparison of interest rates being paid to the Company’s
current incremental borrowing rates for similar types of
borrowing arrangements.
87
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On November 8, 2004, the Company through one of its
subsidiaries, entered into a new credit agreement providing for
a $500.0 million, 5-year revolving credit facility due
November 8, 2009. The facility provides an option to
increase the size of the credit facility an additional
$100.0 million. The new credit agreement bears interest at
a variable rate based on leverage and is unsecured. The current
interest rate under the new credit agreement is LIBOR plus
0.50%. In addition, the Company will pay a 0.15% commitment fee
on the entire facility. On November 8, 2004 the Company
drew down approximately $410 million to fund the
acquisition of InterCept. On March 9, 2005, the Company
paid down this facility and terminated the agreement (see
Note R).
During 2003, the Company entered into a credit agreement
providing for a $700.0 million, 5-year revolving credit
facility due November 4, 2008. The credit agreement bears
interest at a variable rate based on the debt ratings assigned
to the Company by certain independent agencies, and is
unsecured. The current interest rate under the new credit
agreement is LIBOR plus 0.50%. In addition, the Company pays a
0.15% facility fee on the entire facility.
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, 2004.
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
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 under our prior credit agreement.
On March 11, 2003, the Company issued $250.0 million
aggregate principal amount of 5.25% notes, which are
unsecured. The notes were priced at 99.247% of par to yield
5.433% annual interest. As such, the Company recorded a discount
of $1.9 million, which is netted against the
$250.0 million aggregate principal amount of notes. The
discount is amortized to interest expense over 10 years,
the term of the notes. The Company received net proceeds of
approximately $246.2 million, after expenses, which was
used to pay a portion of the $1,069.6 million purchase
price for FIS. See Note B. Interest is payable semiannually
and the notes are due in March 2013.
Principal maturities at December 31, 2004, are as follows
(dollars in thousands):
| |
|
|
|
|
|
2005
|
|
$ |
35,861 |
|
|
2006
|
|
|
10,000 |
|
|
2007
|
|
|
16,514 |
|
|
2008
|
|
|
400,298 |
|
|
2009
|
|
|
410,084 |
|
|
Thereafter
|
|
|
497,799 |
|
| |
|
|
|
| |
|
$ |
1,370,556 |
|
| |
|
|
|
88
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Income tax expense consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Current
|
|
$ |
427,623 |
|
|
$ |
449,172 |
|
|
$ |
266,913 |
|
|
Deferred
|
|
|
10,491 |
|
|
|
90,671 |
|
|
|
39,555 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
438,114 |
|
|
$ |
539,843 |
|
|
$ |
306,468 |
|
| |
|
|
|
|
|
|
|
|
|
Total income tax expense for the years ended December 31
was allocated as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Statement of earnings
|
|
$ |
438,114 |
|
|
$ |
539,843 |
|
|
$ |
306,468 |
|
| |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized foreign currency translation gains
|
|
|
741 |
|
|
|
(326 |
) |
|
|
972 |
|
|
Minimum pension liability adjustment
|
|
|
(6,909 |
) |
|
|
(6,401 |
) |
|
|
(10,170 |
) |
|
Unrealized gains on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during the year
|
|
|
5,720 |
|
|
|
37,223 |
|
|
|
11,045 |
|
|
Reclassification adjustment for realized (gains) losses included
net earnings
|
|
|
(17,770 |
) |
|
|
(45,034 |
) |
|
|
3,522 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) allocated to other
comprehensive income
|
|
|
(18,218 |
) |
|
|
(14,538 |
) |
|
|
5,369 |
|
|
Additional paid-in capital (exercise of stock options)
|
|
|
(36,085 |
) |
|
|
(18,914 |
) |
|
|
(21,329 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total income taxes
|
|
$ |
383,811 |
|
|
$ |
506,391 |
|
|
$ |
290,508 |
|
| |
|
|
|
|
|
|
|
|
|
A reconciliation of the federal statutory rate to the
Company’s effective tax rate is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Federal statutory rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
Federal benefit of state taxes
|
|
|
(1.2 |
) |
|
|
(1.2 |
) |
|
|
(0.9 |
) |
|
Tax exempt interest income
|
|
|
(0.8 |
) |
|
|
(0.5 |
) |
|
|
(0.8 |
) |
|
State income taxes
|
|
|
3.5 |
|
|
|
3.4 |
|
|
|
2.6 |
|
|
Non-deductible expenses
|
|
|
0.5 |
|
|
|
0.9 |
|
|
|
0.2 |
|
|
Foreign taxes, net of credit
|
|
|
— |
|
|
|
0.2 |
|
|
|
— |
|
|
Other
|
|
|
— |
|
|
|
0.2 |
|
|
|
(0.1 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
37.0 |
% |
|
|
38.0 |
% |
|
|
36.0 |
% |
| |
|
|
|
|
|
|
|
|
|
89
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The significant components of deferred tax assets and
liabilities at December 31, 2004 and 2003 consist of the
following:
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
| |
Employee benefit accruals
|
|
$ |
99,725 |
|
|
$ |
56,802 |
|
| |
Net operating loss carryforward
|
|
|
54,159 |
|
|
|
17,004 |
|
| |
Deferred revenue
|
|
|
31,991 |
|
|
|
23,199 |
|
| |
Pension
|
|
|
24,850 |
|
|
|
25,461 |
|
| |
Accrued liabilities
|
|
|
16,006 |
|
|
|
14,432 |
|
| |
State income taxes
|
|
|
11,777 |
|
|
|
15,165 |
|
| |
Other
|
|
|
5,706 |
|
|
|
15,801 |
|
| |
Lease accounting
|
|
|
130 |
|
|
|
4,074 |
|
| |
Insurance reserve discounting
|
|
|
— |
|
|
|
25,443 |
|
| |
|
|
|
|
|
|
| |
|
|
244,344 |
|
|
|
197,381 |
|
| |
Less: Valuation allowance
|
|
|
(3,036 |
) |
|
|
(2,845 |
) |
| |
|
|
|
|
|
|
| |
|
|
Total deferred tax assets
|
|
|
241,308 |
|
|
|
194,536 |
|
| |
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
| |
Amortization of goodwill and intangible assets
|
|
|
(148,596 |
) |
|
|
(113,162 |
) |
| |
Title plant
|
|
|
(59,285 |
) |
|
|
(54,758 |
) |
| |
Other
|
|
|
(54,764 |
) |
|
|
(75,407 |
) |
| |
Depreciation
|
|
|
(48,659 |
) |
|
|
(21,463 |
) |
| |
Insurance reserve discounting
|
|
|
(20,522 |
) |
|
|
— |
|
| |
Investment securities
|
|
|
(7,677 |
) |
|
|
(8,810 |
) |
| |
Bad debts
|
|
|
(4,972 |
) |
|
|
(5,160 |
) |
| |
|
|
|
|
|
|
| |
|
|
Total deferred tax liabilities
|
|
|
(344,475 |
) |
|
|
(278,760 |
) |
| |
|
|
|
|
|
|
| |
|
Net deferred tax liability
|
|
$ |
(103,167 |
) |
|
$ |
(84,224 |
) |
| |
|
|
|
|
|
|
Management believes that based on its historical pattern of
taxable income, the Company will produce sufficient income in
the future to realize its net deferred tax assets or realization
of its deferred tax assets will coincide with the turnaround in
its deferred tax liabilities. A valuation allowance will be
established for any portion of a deferred tax asset that
management believes may not be realized. Adjustments to the
valuation allowance will be made if there is a change in
management’s assessment of the amount of deferred tax asset
that is realizable.
At December 31, 2004 and December 31, 2003, the
Company has a net operating loss carryforward of
$146.1 million and $45.2 million and a foreign tax
credit carryforward of $2.1 million and $2.8 million,
respectively. There is a full valuation against the foreign tax
credit carryovers for each year. The net operating losses expire
between 2019 and 2024 and the foreign tax credits expire between
2005 and 2008.
Tax benefits of $36.1 million, $18.9 million and
$21.3 million associated with the exercise of employee
stock options and the vesting of restricted stock grants were
allocated to stockholders’ equity for the years ended
December 31, 2004, 2003 and 2002, respectively.
90
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of January 1, 2005 the Internal Revenue Service has
selected the Company to participate in a new pilot program
(Compliance Audit Program or CAP) that is a real-time audit for
2005 and future years. The Internal Revenue Service is also
currently examining the Company’s tax returns for years
2003 and 2002. Management believes the ultimate resolution of
this examination will not result in a material adverse effect to
the Company’s financial position or results of operations.
|
|
| J. |
Summary of Reserve for Claim Losses |
A summary of the reserve for claim losses for title and
specialty insurance follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Beginning balance
|
|
$ |
943,704 |
|
|
$ |
888,784 |
|
|
$ |
881,089 |
|
| |
Reserves assumed(1)
|
|
|
38,597 |
|
|
|
8,622 |
|
|
|
— |
|
| |
Claim loss provision related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Current year
|
|
|
299,142 |
|
|
|
249,320 |
|
|
|
209,134 |
|
| |
|
Prior years
|
|
|
(17,018 |
) |
|
|
14,089 |
|
|
|
(29,842 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total claim loss provision
|
|
|
282,124 |
|
|
|
263,409 |
|
|
|
179,292 |
|
| |
Claims paid, net of recoupments related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Current year
|
|
|
(30,894 |
) |
|
|
(16,246 |
) |
|
|
(11,137 |
) |
| |
|
Prior years
|
|
|
(235,361 |
) |
|
|
(200,865 |
) |
|
|
(160,460 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total claims paid, net of recoupments
|
|
|
(266,255 |
) |
|
|
(217,111 |
) |
|
|
(171,597 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$ |
998,170 |
|
|
$ |
943,704 |
|
|
$ |
888,784 |
|
| |
|
|
|
|
|
|
|
|
|
|
Provision for claim losses as a percentage of title and
specialty insurance premiums
|
|
|
5.9 |
% |
|
|
5.6 |
% |
|
|
5.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
Ending balance claim losses reserve for title insurance only
|
|
$ |
987,076 |
|
|
$ |
940,217 |
|
|
$ |
887,973 |
|
| |
|
|
|
|
|
|
|
|
|
|
Provision for claim losses as a percentage of title insurance
premiums only
|
|
|
5.5 |
% |
|
|
5.4 |
% |
|
|
5.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
The Company assumed APTIC’s outstanding reserve for claim
losses in connection with its acquisition in 2004. The Company
assumed LSI’s and ANFI’s outstanding reserve for claim
losses in connection with their acquisitions in 2003. |
The title loss provision in the current year reflects a higher
estimated loss for the 2004 policy year offset in part by a
favorable adjustment from previous policy years. Consistent with
2002, the favorable adjustment was attributable to lower than
expected payment levels on previous issue years that included
periods of increased resale activity as well as a high
proportion of refinance business. As a result, title policies
issued in previous years have been replaced by the more recently
issued policies, therefore generally terminating much of the
loss exposure on the previously issued policies. The unfavorable
development during 2003 reflects the higher than expected
payment levels on previously issued policies.
|
|
| K. |
Commitments and Contingencies |
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
91
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 has entered into various employment agreements with
officers of the Company. These agreements provide for a
specified salary to be paid to the officers and include
incentive compensation arrangements. The agreements contain
non-compete provisions. The terms of the agreements range from
three to five years and normally contain extension provisions.
In the ordinary course of business, the Company is involved in
various pending and threatened litigation matters related to its
operations, some of which include claims for punitive or
exemplary damages which the Company accrued for if the Company
believes the amount to be estimable and probable. The Company
believes that no actions, other than those listed below, depart
from customary litigation incidental to its business and that
the resolution of all pending and threatened litigation will not
have a material effect on its results of operations, financial
position or liquidity.
The Company was named in five class action lawsuits alleging
irregularities and violations of law in connection with title
and escrow practices. The Company, along with the State of
California, plaintiff in the lead case, successfully resolved
our differences concerning representations made during the
settlement process. A stipulated amendment to the previously
entered stipulated final judgment was filed with the court
resulting in a final resolution of this lawsuit. Pursuant to
agreements with counsel and the parties to two of the cases
filed by private parties their suits will also be settled. The
process to secure court approval for those settlements has
begun. The remaining two lawsuits have been stayed pending final
disposition of the settled lawsuits. The Company believes that
the two stayed lawsuits will be dismissed or settled upon the
final disposition of the three settled lawsuits.
Several class actions are pending alleging improper rates were
charged for title insurance. Four class action cases were filed
in New York and have been consolidated for further proceedings.
The cases allege that the named defendant companies failed to
provide notice of premium discounts to consumers refinancing
their mortgages, and failed to give discounts in refinancing
transactions in violation of the filed rates. The actions seek
refunds of the premiums charged and punitive damages. These
actions were settled in the fall of 2004, and the court has
granted preliminary approval of the settlement. A similar suit
in Minnesota was also settled. Similar allegations have been
made in class actions filed in Ohio, Pennsylvania, and Florida.
Recently, the court refused to certify a class in one of the
Ohio actions. Two class actions, one in California and one in
Michigan allege the company violated the Real Estate Settlement
Procedures Act (“RESPA”) and state law by giving
favorable discounts or rates to builders and developers. The
actions seek refunds of the premiums charged and additional
damages. The Company intends to vigorously defend these actions.
Several class actions are pending alleging that the Company
imposed improper charges in closing real estate transactions. A
class action pending in New Jersey alleges the company has
charged twice for fees to record satisfactions of mortgages, and
charged for satisfactions that were not recorded. This case has
been settled and the court has granted tentative approval of the
settlement. Class actions making similar allegations were
recently filed in Tennessee, Arkansas and New York. Two other
class actions pending in Indiana allege that the Company
overcharged recording fees. The Company intends to vigorously
defend the pending actions.
A class action in Arkansas alleges that the issuance of title
commitments, policies and actions taken in aid of clearing title
by title companies is the unauthorized practice of law. This
case was dismissed by the trial court for lack of jurisdiction
reasoning the dispute could only be brought before the Arkansas
Committee on the Unauthorized Practice of Law. The Arkansas
Supreme Court recently reversed the holding of the trial court
asserting that the trial court had concurrent jurisdiction, and
remanded the matter back to the trial court. The Company will
continue to vigorously defend this action. Two class actions
were recently filed in
92
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Georgia alleging that we were complicit with lenders in denying
borrowers their right to representation of counsel at the
closing of their consumer loans, and engaged in the unauthorized
practice of law. One of those cases was settled, and the Company
intends to vigorously defend the other.
A class action is pending in California alleging that the
Company violated the Telephone Consumer Protection Act by
sending unsolicited facsimile advertising. Plaintiffs seek
statutory damages. A class was certified in April 2004. The
Company intends to vigorously defend this action.
A threatened regulatory enforcement action initiated by the
Office of the Comptroller of Currency of the U.S. Treasury
Department in conjunction with the Office of Thrift Supervision
of the U.S. Treasury Department, the U.S. Department
of Housing and Urban Development and the Texas Department of
Insurance based on alleged violations of the Real Estate
Settlement Procedures Act (“RESPA”) has been settled
by payment of a civil fine and an agreement to change certain
policies and procedures.
In the fall of 2004, the California Department of Insurance
began its investigation into reinsurance practices in the title
insurance industry. This investigation paralleled the inquiries
of the National Association of Insurance Commissioners, which
has been looking into this topic for approximately one year.
Other state insurance departments also have made formal or
informal inquiries to us regarding these matters. The Company
has been cooperating and intends to continue to cooperate with
these investigations. The Company has discontinued all
reinsurance agreements of the type the investigations cover. The
amount of premiums the Company ceded to reinsurers has been
approximately $10 million over the existence of these
agreements. These investigations are at an early stage and as a
result the Company is unable to give any absolute assurance
regarding their consequences for the industry or for it.
The California Department of Insurance also announced its intent
to examine levels of pricing and competition in the title
insurance industry in California. Other states could follow with
similar inquiries. At this stage, we are unable to predict what
the outcome will be of this or any similar review.
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 $8.8 billion
at December 31, 2004. 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, 2004 and 2003 related to these arrangements.
The Company leases certain of its premises and equipment under
leases which expire at various dates. Several of these
agreements include escalation clauses and provide for purchases
and renewal options for periods ranging from one to five years.
Future minimum operating lease payments are as follows (dollars
in thousands):
| |
|
|
|
|
|
|
2005
|
|
$ |
162,292 |
|
|
2006
|
|
|
133,761 |
|
|
2007
|
|
|
104,622 |
|
|
2008
|
|
|
71,644 |
|
|
2009
|
|
|
44,173 |
|
|
Thereafter
|
|
|
55,990 |
|
| |
|
|
|
| |
Total future minimum operating lease payments
|
|
$ |
572,482 |
|
| |
|
|
|
93
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Rent expense incurred under operating leases during the years
ended December 31, 2004, 2003 and 2002, was
$197.3 million, $165.9 million and
$126.0 million, respectively.
On June 29, 2004, the Company entered into an off-balance
sheet financing arrangement (commonly referred to as a
“synthetic lease”). The owner/lessor in this
arrangement acquired land and various real property improvements
associated with new construction of an office building in
Jacksonville, Florida that will be part of the Company’s
corporate campus and headquarters. The lease expires on
September 28, 2011, with renewal subject to consent of the
lessor and the lenders. The lessor is a third-party limited
liability company. The synthetic lease facility provides for
amounts up to $75.0 million. As of December 31, 2004,
approximately $10.0 million had been drawn on the facility
to finance land costs and related fees and expenses. The leases
include guarantees by us for a substantial portion of the
financing, and options to purchase the facilities at the
outstanding lease balance; the maximum guarantee is 86.5% of the
outstanding lease balance. The guarantee becomes effective if
the Company declines to purchase the facilities at the end of
the lease and also declines to renew the lease. The lessor
financed the acquisition of the facilities through funding
provided by third-party financial institutions. The Company has
no affiliation or relationship with the lessor or any of its
employees, directors or affiliates, and its transactions with
the lessor are limited to the operating lease agreements and the
associated rent expense that will be included in other operating
expenses in the Consolidated Statements of Earnings after the
end of the construction period.
The Company does not believe the lessor is a variable interest
entity, as defined in FASB Interpretation No. 46R,
“Consolidation of Variable Interest Entities”
(“FIN 46”). In addition, the Company has verified
that even if the lessor was determined to be a variable interest
entity, the Company would not have to consolidate the lessor nor
the assets and liabilities associated with the assets leased to
the Company. This is because the assets leased by the Company
will not exceed 50% of the total fair value of the lessor’s
assets excluding any assets that should be excluded from such
calculation under FIN 46, nor did the lessor finance 95% or
more of the leased balance with non-recourse debt, target equity
or similar funding.
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
Consolidated Balance Sheets. 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 various banks. There were
no investments or loans outstanding as of December 31, 2004
or December 31, 2003 related to these arrangements.
|
|
| L. |
Regulation and Stockholders’ Equity |
Our insurance subsidiaries, including underwriters, underwritten
title companies and independent agents, are subject to extensive
regulation under applicable state laws. Each of the insurance
underwriters is 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.
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,
2004,
94
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the combined statutory unearned premium reserve required and
reported for the Company’s title insurance subsidiaries was
$1,180.6 million.
The insurance commissioners of their respective states of
domicile regulate the Company’s title insurance
subsidiaries. Regulatory examinations usually occur at
three-year intervals, and certain of these examinations are
currently ongoing.
The Company’s 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. As of
December 31, 2004, $1,731.3 million of the
Company’s net assets are restricted from dividend payments
without prior approval from the Departments of Insurance. During
2005, the Company’s title insurance subsidiaries can pay or
make distributions to the Company of approximately
$209.8 million.
The combined statutory capital and surplus of the Company’s
title insurance subsidiaries was $892.6 million,
$879.0 million and $612.6 million as of
December 31, 2004, 2003 and 2002, respectively. The
combined statutory earnings of the Company’s title
insurance subsidiaries were $369.5 million,
$480.0 million and $162.6 million for the years ended
December 31, 2004, 2003 and 2002, respectively.
As a condition to continued authority to underwrite policies in
the states in which the Company’s title insurance
subsidiaries conduct their business, they are required to pay
certain fees and file information regarding their officers,
directors and financial condition. In addition, the
Company’s escrow and trust business is subject to
regulation by various state banking authorities.
Pursuant to statutory requirements of the various states in
which the Company’s title insurance subsidiaries are
domiciled, they must maintain certain levels of minimum capital
and surplus. Each of the Company’s title underwriters has
complied with the minimum statutory requirements as of
December 31, 2004.
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,
$3.0 million and $400 thousand is required for Fidelity
National Title Company, Fidelity National
Title Company of California, Chicago Title Company and
Ticor Title Company of California, respectively. The
Company is in compliance with all of its respective minimum net
worth requirements at December 31, 2004.
On April 24, 2001, the Company’s Board of Directors
authorized the Company to purchase up to 8,318,750 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
repurchased in 2001 a total of 1,512,500 shares of common
stock for $22.9 million, at an average price of
$15.15 per share. In May 2002, the Company retired those
1,512,500 shares held as treasury stock.
On April 24, 2002, the Company’s Board of Directors
approved a three-year stock repurchase program. Purchases were
made by the Company from time to time in the open market, in
block purchases or in privately negotiated transactions. From
May 15, 2002, through December 31, 2002, the Company
repurchased a total of 2,798,358 shares of common stock for
$61.2 million, or an average price of $21.87. The amount
repurchased includes 604,546 shares of common stock
purchased from certain of the Company’s officers and
directors during the third quarter of 2002, of which
228,181 shares were accepted as full payment for certain
notes receivable, including accrued interest. In December 2002,
the Company retired 774,908 of these shares held as treasury
stock, totaling $14.3 million. For the year ended
December 31, 2003, the Company repurchased
1,775,400 shares of common stock for $45.4 million, or
an average price of $25.60. In the fourth quarter of 2003, the
Company retired 989,450 of these shares held as treasury stock,
totaling $27.3 million. As
95
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
a result of the increased cash dividend per share, the Company
decided to suspend this stock repurchase program effective
July 23, 2003; however, effective December 18, 2003,
the stock repurchase program was reinstated. From
January 1, 2004 through December 31, 2004, the Company
repurchased a total of 430,500 shares of common stock for
$16.5 million, or an average price of $38.33. Additionally,
on December 13, 2004, we entered into an agreement to
repurchase 2,530,346 shares of Company common stock
from Willis Stein & Partners (“Willis Stein”)
and J.P. Morgan Chase, as escrow agent for the former
stockholder of Aurum. We acquired Aurum in March 2004. The
purchase price per share of $44.35 was a discount to the closing
price of the Company’s common stock on December 13,
2004.
On January 27, 2004, the Company’s Board of Directors
declared a 10% stock dividend to stockholders of record as of
February 12, 2004, payable on February 26, 2004. On
April 22, 2003, the Company’s Board of Directors
declared a five-for-four (5:4) stock split payable May 23,
2003, to stockholders of record as of May 9, 2003. On
April 24, 2002, the Company’s Board of Directors
declared a 10% stock dividend to stockholders of record as of
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 10% 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
has been retroactively adjusted to reflect the stock split and
stock dividends.
|
|
| M. |
Employee Benefit Plans |
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, 2004, 2003 and 2002, 1,413,950,
1,315,065 and 980,837 shares, respectively, were purchased
and allocated to employees, based upon their contributions, at
an average price of $37.86, $27.46 and $20.57 per share,
respectively. The Company contributed $16.5 million or the
equivalent of 438,264 shares for the year ended
December 31, 2004; $9.2 million or the equivalent of
336,234 shares for the year ended December 31, 2003
and $7.5 million or the equivalent of 366,765 shares
for the year ended December 31, 2002 in accordance with the
employer’s matching contribution.
|
|
|
401(k) Profit Savings Plan |
The Company offers its employees the opportunity to participate
in the Fidelity National Financial, Inc. 401(k) Profit Sharing
Plan (“401(k) Plan”), a qualified voluntary
contributory savings plan, which is available to substantially
all Fidelity employees. Eligible employees may contribute up to
40% of their pretax annual compensation, up to the amount
allowed pursuant to the Internal Revenue Code. The Company
matches 50% of each dollar of employee contribution up to
six percent of the employee’s total compensation. The
Company’s cost for the 401(k) Plan for the years ended
December 31, 2004, 2003 and 2002 was $23.9 million,
$22.3 million and $17.5 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
96
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
at not less than the fair market value on the date of grant. A
total of 212,695 stock options were outstanding as of
December 31, 2004. No further awards may be granted 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 560,058 stock options were outstanding
as of December 31, 2004. No further awards may be granted
under this plan.
The Company’s 1993 Stock Plan (“1993 Plan”)
expired in June 2003. Options generally had a term of
10 years from the date of grant and were exercisable
subject to the terms and conditions set by the Board of
Directors. The per share option price was determined at the date
of grant, provided that the price for incentive stock options
shall not be less than 100% of their market value or award stock
shares. A total of 594,787 stock options were outstanding as of
December 31, 2004. No further awards may be granted under
this plan.
In connection with the 1998 acquisition of FNF Capital, Inc.
(formerly known as “Granite”), which was accounted for
as a pooling-of-interests, the Company assumed 1,140,855 options
outstanding under Granite’s existing stock option plan
(“Granite Plan”), of which 36,050 stock
options were outstanding as of December 31, 2004. 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 with a term not to exceed 10 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 with a term not to exceed 10 years.
During 1998, stockholders approved the adoption of the 1998
Stock Incentive Plan (“1998 Plan”). The 1998 Plan
authorizes up to 9,985,828 shares of common stock, plus an
additional 366,025 shares of common stock on the date of
each annual meeting of the stockholders of the Company, for
issuance under the terms of the 1998 Plan. As of
December 31, 2004, there were 6,309,405 options
outstanding under this plan. The 1998 Plan provides for grants
of “incentive stock options” as defined in
Section 422 of the Internal Revenue Code of 1986, as
amended, non-qualified stock options and rights to purchase
shares of common stock (“Purchase Rights”). The term
of options may not exceed 10 years from the date of grant
(five years in the case of a person who owns or is deemed to own
more than 10% of the total combined voting power of all
classes of stock of the Company), and the right to exercise such
options shall vest equally over three years. The option exercise
price for each share granted pursuant to an incentive stock
option may not be less than 100% of the fair market value
of a share of common stock at the time such option is granted
(110% of fair market value in the case of an incentive stock
option granted to a person who owns more than 10% of the
combined voting power of all classes of stock of the Company).
There is no minimum purchase price for shares of common stock
purchased pursuant to a Purchase Right, and any such purchase
price shall be determined by the Board of Directors.
In connection with the merger of Chicago Title, the Company
assumed the options outstanding under Chicago Title’s
existing stock option plans: the 1998 Long-Term Incentive Plan
and the Director’s Stock Option Plan. Pursuant to the terms
of the merger, options under these plans, totaling 5,304,456,
became fully vested on March 20, 2000. The options granted
in accordance with these two plans generally have a term of five
to 10 years. As of December 31, 2004, there were
400,638 options outstanding under these plans.
In 2001, stockholders approved the adoption of the 2001 Stock
Incentive Plan (“2001 Plan”). The 2001 Plan authorized
up to 4,026,275 shares of common stock, plus an additional
332,750 shares of common stock on the date of each annual
meeting of stockholders of the Company, for issuance under the
terms of the 2001 Plan. As of December 31, 2004, there were
1,117,757 options outstanding under this plan. The 2001
Plan provides for grants of “incentive stock options”
as defined in Section 422 of the Internal Revenue Code of
1986, as amended, nonqualified stock options, rights to purchase
shares of common stock and deferred shares.
97
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The term of options may not exceed 10 years from the date
of grant (five years in the case of an incentive stock option
granted to a person who owns or is deemed to own more
than 10% of the total combined voting power of all classes
of stock of the Company), and are exercisable subject to the
terms and conditions set by the Board of Directors. The option
exercise price for each share granted pursuant to an incentive
stock option may not be less than 100% of the fair market value
of a share of common stock at the time such option is granted
(110% of fair value in the case of an incentive stock option
granted to a person who owns more than 10% of the combined
voting power of all classes of stock of the Company). The option
exercise price for each share granted pursuant to a nonqualified
stock option may be less than the fair value of the common stock
at the date of grant to reflect the application of the
optionee’s deferred bonus, if applicable. The
2001 Plan allows for exercise prices with a fixed discount
from the quoted market price. Options were granted in 2003 at an
exercise price of $15.36 to key employees of the Company who
applied deferred bonuses expensed in 2002 amounting to
$4.6 million to the exercise price. Pursuant to the terms
of the 2001 Plan, there are no future exercise price decreases
to options granted under this Plan in 2003 and beyond. In 2002,
options were granted at an exercise price of $11.41 to key
employees of the Company who applied deferred bonuses expensed
in 2001 amounting to $5.7 million to the exercise price.
The exercise price of these options decreases approximately
$.35 per year through 2007 and $.22 per year from 2008
through 2013, at which time the exercise price will be $8.33.
The Company recorded compensation expense relating to the
exercise price decrease in the 1991 and 2001 Plans of $73, $370
and $829, for the years ended December 31, 2004, 2003 and
2002, respectively.
In 2003, the Company issued to its non-employee Directors and to
certain of its employees, rights to
purchase 879,450 shares of restricted common stock
(“Restricted Shares”) of the Company, pursuant to the
2001 Plan. A portion of the Restricted Shares vest over a
five-year period and a portion of the Restricted Shares vest
over a four-year period, of which one-fifth vested immediately
on the date of grant. The Company recorded compensation expense
of $3.3 million and unearned compensation expense of
$23.0 million in connection with the issuance of Restricted
Stock in 2003. The Company recorded compensation expense of
$5.4 million in 2004 in connection with these shares. The
Company used 769,450 shares of its common stock held as
treasury shares and 110,000 newly issued common shares for the
sale of Restricted Shares to its employees.
In connection with the acquisition of ANFI, the Company assumed
988,389 options outstanding under ANFI’s existing option
plans: the American National Financial, Inc. 1999 Stock Option
Plan and the American National Financial, Inc. 1998 Stock
Incentive Plan. The options granted under these plans generally
had a term of 10 years. As of December 31, 2004, there
were 436,963 options outstanding under these plans.
In connection with the acquisition of FNIS, the Company assumed
2,585,387 options outstanding under FNIS’ existing option
plans: the Fidelity National Information Solutions 2001 Stock
Incentive Plan, the Vista Information Solutions, Inc. 1999 Stock
Option Plan, the Micro General Corporation 1999 Stock Incentive
Plan and the Micro General Corporation 1998 Stock Incentive
Plan. The options granted under these plans generally had a term
of 10 years. As of December 31, 2004, there were
1,067,967 options outstanding under these plans.
In connection with the acquisition of Sanchez, the Company
assumed 1,024,588 options outstanding under Sanchez’ 1995
Stock Incentive Plan. The option granted under this plan
generally had a term of 8 years. As of December 31,
2004, there were 708,222 options outstanding under this
plan.
In connection with the acquisition of InterCept, the Company
assumed 1,708,155 options outstanding under InterCept’s
existing option plans — 2002 InterCept Stock Option
Plan, 1996 InterCept Stock Option Plan, 1994 InterCept Option
Plan and the Boggs InterCept Stock Option Plan. The options
granted under these plans were fully vested prior to the
acquisition and the majority of them had a remaining term of
90 days which expired on February 7, 2005. As of
December 31, 2004, there were 1,284,613 options outstanding
under this plan.
98
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In 2004, stockholders approved the Fidelity National Financial
2004 Omnibus Incentive Plan (the “2004 Plan”). The
2004 Plan authorized up to 12,500,000 shares, plus the
number of shares subject to prior plan awards that are
outstanding as of the effective date of the 2004 Plan and that
are deemed not delivered under the prior plans because of
certain conditions. As of December 31, 2004, there were
1,566,250 options outstanding under this plan. The options
granted under this plan have a life of 8 years and vest
over a three year period. The 2004 Plan provides for the grant
of stock options, stock appreciation rights, restricted stock,
restricted stock units and performance shares, performance
units, other stock-based awards and dividend equivalents.
Transactions under all stock option plans, including stock
options granted by the Company’s Board of Directors which
are outside of the Company’s stock option plans, are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted Average | |
|
|
| |
|
Shares | |
|
Exercise Price | |
|
Exercisable | |
| |
|
| |
|
| |
|
| |
|
Balance, December 31, 2001
|
|
|
15,142,196 |
|
|
$ |
9.72 |
|
|
|
12,198,960 |
|
| |
Granted
|
|
|
3,007,064 |
|
|
|
16.58 |
|
|
|
|
|
| |
Exercised
|
|
|
(4,799,845 |
) |
|
|
8.68 |
|
|
|
|
|
| |
Cancelled
|
|
|
(27,919 |
) |
|
|
14.92 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
13,321,496 |
|
|
$ |
11.67 |
|
|
|
10,332,022 |
|
| |
Options assumed in ANFI acquisition
|
|
|
988,389 |
|
|
|
5.53 |
|
|
|
|
|
| |
Options assumed in FNIS acquisition
|
|
|
2,585,387 |
|
|
|
17.11 |
|
|
|
|
|
| |
Granted
|
|
|
624,328 |
|
|
|
17.18 |
|
|
|
|
|
| |
Exercised
|
|
|
(3,459,189 |
) |
|
|
10.37 |
|
|
|
|
|
| |
Cancelled
|
|
|
(301,983 |
) |
|
|
11.30 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
13,758,428 |
|
|
$ |
12.84 |
|
|
|
11,247,929 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Options assumed in Sanchez acquisition
|
|
|
1,024,588 |
|
|
|
41.69 |
|
|
|
|
|
| |
Options assumed in InterCept acquisition
|
|
|
1,708,155 |
|
|
|
41.73 |
|
|
|
|
|
| |
Granted
|
|
|
4,381,490 |
|
|
|
37.04 |
|
|
|
|
|
| |
Exercised
|
|
|
(5,039,608 |
) |
|
|
14.22 |
|
|
|
|
|
| |
Cancelled
|
|
|
(310,422 |
) |
|
|
12.78 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
15,522,631 |
|
|
$ |
23.76 |
|
|
|
10,538,213 |
|
| |
|
|
|
|
|
|
|
|
|
99
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information related to stock
options outstanding and exercisable as of December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2004 | |
| | |
| Options Outstanding | |
|
Options Exercisable | |
| | |
|
| |
| |
|
Weighted | |
|
|
|
|
| |
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
| |
|
Remaining | |
|
Average | |
|
|
|
Average | |
| |
|
Number of | |
|
Contractual | |
|
Exercise | |
|
Number of | |
|
Exercise | |
| Range of Exercise Prices |
|
Shares | |
|
Life | |
|
Price | |
|
Shares | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$ .02 — 6.27
|
|
|
1,553,903 |
|
|
|
2.98 |
|
|
$ |
4.90 |
|
|
|
1,553,903 |
|
|
$ |
4.90 |
|
|
6.28 — 10.71
|
|
|
2,178,869 |
|
|
|
5.30 |
|
|
|
8.51 |
|
|
|
2,159,362 |
|
|
|
8.51 |
|
| |
10.72 — 13.70
|
|
|
1,389,994 |
|
|
|
6.13 |
|
|
|
12.68 |
|
|
|
1,320,139 |
|
|
|
12.70 |
|
| |
13.73 — 14.43
|
|
|
1,176,739 |
|
|
|
6.28 |
|
|
|
14.04 |
|
|
|
1,167,386 |
|
|
|
14.04 |
|
| |
14.44 — 16.36
|
|
|
1,410,710 |
|
|
|
5.20 |
|
|
|
15.44 |
|
|
|
1,410,076 |
|
|
|
15.44 |
|
| |
16.37 — 25.24
|
|
|
1,586,843 |
|
|
|
7.13 |
|
|
|
21.87 |
|
|
|
1,118,612 |
|
|
|
21.38 |
|
| |
25.25 — 36.60
|
|
|
2,224,704 |
|
|
|
6.93 |
|
|
|
35.25 |
|
|
|
455,758 |
|
|
|
30.02 |
|
| |
36.61 — 37.32
|
|
|
2,574,251 |
|
|
|
8.05 |
|
|
|
37.32 |
|
|
|
6,751 |
|
|
|
37.17 |
|
| |
37.33 — 84.11
|
|
|
1,362,349 |
|
|
|
1.18 |
|
|
|
50.35 |
|
|
|
1,281,957 |
|
|
|
51.03 |
|
| |
93.04 — 253.32
|
|
|
64,269 |
|
|
|
2.31 |
|
|
|
110.65 |
|
|
|
64,269 |
|
|
|
110.65 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ .02 — 253.32
|
|
|
15,522,631 |
|
|
|
5.71 |
|
|
$ |
23.64 |
|
|
|
10,538,213 |
|
|
$ |
18.15 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the third quarter of 2003, the Company accounted for
its stock option 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 these 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 had
been reflected in net earnings.
During the third quarter of 2003, the Company adopted the fair
value recognition provisions of Statement of Financial
Accounting Standards No. 123, “Accounting for
Stock-Based Compensation”
(“SFAS No. 123”), for stock-based employee
compensation, effective as of the beginning of 2003. Under the
fair value method of accounting, compensation cost is measured
based on the fair value of the award at the grant date and
recognized over the service period. The Company has elected to
use the prospective method of transition, as permitted by
Statement of Financial Accounting Standards No. 148,
“Accounting for Stock-Based Compensation —
Transition and Disclosure”
(“SFAS No. 148”). Under this method,
stock-based employee compensation cost is recognized from the
beginning of 2003 as if the fair value method of accounting had
been used to account for all employee awards granted, modified,
or settled in years beginning after December 31, 2002.
Prior year financial statements were not restated. Net income,
as a result of the adoption of SFAS 123, for the year ended
December 31, 2004 and 2003 reflect an expense of
$21.8 million and $6.2 million, respectively, which is
included in personnel costs in the reported financial results.
In December 2004, the FASB issued Statement 123R “Share
Based Payment” (See Note Q).
Pro forma information regarding net earnings and earnings per
share is required by SFAS 123, and has been determined as
if the Company had accounted for all of its employee stock
options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using
a Black-Scholes option-pricing model with the following weighted
average assumptions. The risk free interest rates used in the
calculation are the rate that corresponds to the weighted
average expected life of an option. The risk free interest rate
used for options granted during 2004, 2003 and 2002 was 3.2%,
2.0% and 2.0%, respectively. A volatility factor for the
expected market price of the common stock of 34%, 43% and 44%
were
100
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
used for options granted in 2004, 2003 and 2002, respectively.
The expected dividend yield used for 2004, 2003 and 2002 was
2.5%, 1.4% and 1.3%, respectively. A weighted average expected
life of 3.8 years, 3.5 years and 3.25 years was
used for 2004, 2003 and 2002, respectively. The weighted average
fair value of each option granted during 2004, 2003 and 2002 was
$10.71, $10.57 and $6.39, respectively.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized into expense over the options’
vesting period. The following table illustrates the effect on
net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to
all outstanding and unvested awards in each period:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Net earnings, as reported
|
|
$ |
740,962 |
|
|
$ |
861,820 |
|
|
$ |
531,717 |
|
|
Add: Stock-based compensation expense included in reported net
earnings, net of related tax effects
|
|
|
13,522 |
|
|
|
5,906 |
|
|
|
— |
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards, net of
related tax effects
|
|
|
(15,227 |
) |
|
|
(14,484 |
) |
|
|
(13,509 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings
|
|
$ |
739,257 |
|
|
$ |
853,242 |
|
|
$ |
518,208 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic — as reported
|
|
$ |
4.33 |
|
|
$ |
5.81 |
|
|
$ |
4.05 |
|
| |
Basic — pro forma
|
|
$ |
4.32 |
|
|
$ |
5.75 |
|
|
$ |
3.95 |
|
| |
Diluted — as reported
|
|
$ |
4.21 |
|
|
$ |
5.63 |
|
|
$ |
3.91 |
|
| |
Diluted — pro forma
|
|
$ |
4.19 |
|
|
$ |
5.55 |
|
|
$ |
3.81 |
|
In connection with the Chicago Title merger, the Company assumed
Chicago Title’s noncontributory defined benefit pension
plan (the “Pension Plan”).
The Pension Plan covered 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 and 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.
In 2004, the Company also assumed pension plans relating to its
acquisition of Kordoba. These plans cover benefits for retirees
in Germany and amount to a liability of approximately
$18.0 million at December 31, 2004 and results are
included within the following disclosures for the period from
September 30, 2004 (the acquisition date of Kordoba)
through December 31, 2004.
101
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table sets forth the funded status of the Pension
Plan as of December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Change in Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net benefit obligation at beginning of year
|
|
$ |
131,984 |
|
|
$ |
111,132 |
|
|
$ |
103,268 |
|
| |
Benefit obligation acquired
|
|
|
15,171 |
|
|
|
— |
|
|
|
— |
|
| |
Service cost
|
|
|
243 |
|
|
|
— |
|
|
|
— |
|
| |
Interest cost
|
|
|
8,849 |
|
|
|
8,104 |
|
|
|
7,582 |
|
| |
Actuarial loss
|
|
|
23,261 |
|
|
|
20,676 |
|
|
|
16,085 |
|
| |
Gross benefits paid
|
|
|
(11,297 |
) |
|
|
(7,928 |
) |
|
|
(15,803 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net benefit obligation at end of year
|
|
$ |
168,211 |
|
|
$ |
131,984 |
|
|
$ |
111,132 |
|
| |
|
|
|
|
|
|
|
|
|
|
Change in Pension Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of plan assets at beginning of year
|
|
$ |
77,700 |
|
|
$ |
66,232 |
|
|
$ |
76,019 |
|
| |
Actual return on plan assets
|
|
|
2,811 |
|
|
|
7,196 |
|
|
|
(7,595 |
) |
| |
Employer contributions
|
|
|
18,000 |
|
|
|
12,200 |
|
|
|
13,611 |
|
| |
Gross benefits paid
|
|
|
(11,297 |
) |
|
|
(7,928 |
) |
|
|
(15,803 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Fair value of plan assets at end of year
|
|
$ |
87,214 |
|
|
$ |
77,700 |
|
|
$ |
66,232 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Funded status at end of year
|
|
$ |
(80,997 |
) |
|
$ |
(54,284 |
) |
|
$ |
(44,900 |
) |
| |
Unrecognized net actuarial loss
|
|
|
80,261 |
|
|
|
61,588 |
|
|
|
45,173 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net amount recognized at end of year
|
|
$ |
(736 |
) |
|
$ |
7,304 |
|
|
$ |
273 |
|
| |
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation (ABO) is the same as the
projected benefit obligation (PBO) due to the pension plan being
frozen as of December 31, 2000.
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 December 31.
The net pension liability included in accounts payable and
accrued liabilities as of December 31, 2004 and 2003 is
$81.0 million and $54.2 million, respectively. The net
pension liability at December 31, 2004 and 2003 includes
the additional minimum pension liability adjustment of
$18.7 million and $16.4 million, respectively, which
was recorded as a net of tax charge of $11.8 million and
$10.0 million to accumulated other comprehensive earnings
(loss) in 2004 and 2003 in accordance with SFAS No. 87.
102
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of net periodic (income) expense included in the
results of operations for 2004, 2003 and 2002 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Service cost(a)
|
|
$ |
243 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Interest cost
|
|
|
8,849 |
|
|
|
8,104 |
|
|
|
7,582 |
|
|
Expected return on assets
|
|
|
(7,570 |
) |
|
|
(7,128 |
) |
|
|
(7,639 |
) |
|
Amortization of actuarial loss
|
|
|
7,015 |
|
|
|
4,193 |
|
|
|
634 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total net periodic (income) expense
|
|
$ |
8,537 |
|
|
$ |
5,169 |
|
|
$ |
577 |
|
| |
|
|
|
|
|
|
|
|
|
|
One time charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Settlement charge
|
|
|
— |
|
|
|
— |
|
|
|
4,604 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total net expense
|
|
$ |
8,537 |
|
|
$ |
5,169 |
|
|
$ |
5,181 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
Relates to Kordoba pension plan activity from September 30,
2004 to December 31, 2004. |
Weighted-average assumptions used to determine benefit
obligations at December 31, are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Discount rate
|
|
|
5.75 |
% |
|
|
6.25 |
% |
|
Rate of compensation increase
|
|
|
N/A |
(a) |
|
|
N/A |
(a) |
Weighted-average assumptions used to determine net expense for
years ended December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Discount rate
|
|
|
6.25 |
% |
|
|
6.75 |
% |
|
|
7.25 |
% |
|
Expected return on plan assets
|
|
|
8.5 |
% |
|
|
8.5 |
% |
|
|
9.0 |
% |
|
Rate of compensation increase
|
|
|
N/A |
(a) |
|
|
N/A |
(a) |
|
|
N/A |
(a) |
|
|
| (a) |
Rate of compensation increase is not applicable due to the
pension being frozen at December 31, 2000. |
Pension Plan Assets
The expected long term rate of return on plan assets was 8.5% in
2004 and 2003, derived using the plan’s asset mix,
historical returns by asset category, expectations for future
capital market performance, and the fund’s past experience.
Both the plan’s investment policy and the expected
long-term rate of return assumption are reviewed periodically.
The Company’s strategy is to focus on a one to three-year
investment horizon, maintaining equity securities at 50-55% of
total assets while maintaining an average duration in debt
securities, extending that duration as interest rates rise and
maintaining cash funds at appropriate levels relating to the
current economic environment.
103
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company’s pension plan asset allocation at
December 31, 2004 and 2003 and target allocation for 2005
are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Percentage of | |
| |
|
Target Allocation | |
|
Plan Assets | |
| |
|
| |
|
| |
| Asset Category |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Equity securities
|
|
|
50-55 |
% |
|
|
— |
|
|
|
58.7 |
% |
|
Debt securities
|
|
|
15-25 |
|
|
|
— |
|
|
|
18.8 |
|
|
Insurance annuities
|
|
|
10-20 |
|
|
|
— |
|
|
|
13.9 |
|
|
Other (Cash)
|
|
|
5-25 |
% |
|
|
100.0 |
%(b) |
|
|
8.6 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
| (b) |
Investments were all cash at December 31, 2004 as the
Company was in the process of transferring the assets from one
investment manager to another. |
The Company does not hold any investments in its own equity
securities within its pension plan assets.
Pension Plan Cash
Flows
Plan Contributions
The Company’s funding policy is to contribute annually at
least the minimum required contribution under the Employee
Retirement Income Security Act (ERISA). Contributions are
intended to provide not only for benefits accrued to date, but
also for those expected to be earned in the future. In 2004 and
2003, the Company made contributions of $18.0 million and
$12.2 million, respectively. Due to regulatory
requirements, the Company is not required to make a contribution
to the pension plan in 2005. The Company has not yet determined
if a voluntary contribution to the plan will be made in 2005.
A detail of actual and expected benefit payments is as follows
(in thousands):
| |
|
|
|
|
|
Actual Benefit Payments
|
|
|
|
|
|
2003
|
|
$ |
7,928 |
|
|
2004
|
|
|
11,927 |
|
|
Expected Future Payments
|
|
|
|
|
|
2005
|
|
$ |
10,471 |
|
|
2006
|
|
|
10,455 |
|
|
2007
|
|
|
10,546 |
|
|
2008
|
|
|
10,814 |
|
|
2009
|
|
|
10,906 |
|
|
2010-2014
|
|
|
57,475 |
|
The Company assumed certain health care and life insurance
benefits for retired Chicago Title employees in connection with
the Chicago Title merger. Beginning on January 1, 2001,
these benefits were offered to all employees who meet specific
eligibility requirements. The costs of these benefit plans are
accrued during the periods the employees render service.
104
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company is both self-insured and fully insured for its
postretirement health care and life insurance benefit plans, and
the plans are not funded. The health care plans provide for
insurance benefits after retirement and are generally
contributory, with contributions adjusted annually.
Postretirement life insurance benefits are contributory, with
coverage amounts declining with increases in a retiree’s
age.
The accrued cost of the accumulated postretirement benefit
obligation included in the Company’s Consolidated Balance
Sheets at December 31, 2004, 2003 and 2002 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Change in Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net benefit obligation at beginning of year
|
|
$ |
22,684 |
|
|
$ |
22,757 |
|
|
$ |
22,405 |
|
| |
Service cost
|
|
|
205 |
|
|
|
221 |
|
|
|
247 |
|
| |
Interest cost
|
|
|
1,281 |
|
|
|
1,405 |
|
|
|
1,546 |
|
| |
Plan participants’ contributions
|
|
|
1,513 |
|
|
|
1,646 |
|
|
|
1,643 |
|
| |
Plan amendments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Actuarial (gain) loss
|
|
|
(348 |
) |
|
|
537 |
|
|
|
360 |
|
| |
Gross benefits paid
|
|
|
(3,895 |
) |
|
|
(3,882 |
) |
|
|
(3,444 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net benefit obligation at end of year
|
|
$ |
21,440 |
|
|
$ |
22,684 |
|
|
$ |
22,757 |
|
| |
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of plan assets at beginning of year
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Employer contributions
|
|
|
2,382 |
|
|
|
2,236 |
|
|
|
1,801 |
|
| |
Plan participants’ contributions
|
|
|
1,513 |
|
|
|
1,646 |
|
|
|
1,643 |
|
| |
Gross benefits paid
|
|
|
(3,895 |
) |
|
|
(3,882 |
) |
|
|
(3,444 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Fair value of plan assets at end of year
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Funded status at end of year
|
|
$ |
(21,440 |
) |
|
$ |
(22,684 |
) |
|
$ |
(22,757 |
) |
| |
Unrecognized net actuarial loss
|
|
|
4,533 |
|
|
|
5,212 |
|
|
|
4,950 |
|
| |
Unrecognized prior service cost
|
|
|
(1,610 |
) |
|
|
(4,315 |
) |
|
|
(7,019 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net accrued cost of accumulated postretirement benefit
obligation included in accounts payable and accrued liabilities
|
|
$ |
(18,517 |
) |
|
$ |
(21,787 |
) |
|
$ |
(24,826 |
) |
| |
|
|
|
|
|
|
|
|
|
In December 2003, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (“the Act”) became law in
the United States. The Act introduces a prescription drug
benefit under Medicare as well as a federal subsidy to sponsors
of retiree health care plans that provide a benefit that is at
least actuarially equivalent to the Medicare benefit. The
Company has elected to recognize the effects of the Act in
measures of the benefit obligation and cost.
Under Statement of Financial Accounting Standards No. 106,
“Accounting for Postretirement Benefits Other Than
Pensions,” 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 December 31.
105
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company’s postretirement health care and life insurance
costs included in the results of operations for 2004, 2003 and
2002 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Service cost
|
|
$ |
205 |
|
|
$ |
221 |
|
|
$ |
247 |
|
|
Interest cost
|
|
|
1,281 |
|
|
|
1,405 |
|
|
|
1,546 |
|
|
Amortization of prior service cost
|
|
|
(2,704 |
) |
|
|
(2,704 |
) |
|
|
(2,704 |
) |
|
Amortization of actuarial loss
|
|
|
330 |
|
|
|
274 |
|
|
|
330 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total net periodic (income) expense
|
|
$ |
(888 |
) |
|
$ |
(804 |
) |
|
$ |
(581 |
) |
| |
|
|
|
|
|
|
|
|
|
|
One time charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Curtailment charge (credit)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total net benefit (income) expense
|
|
$ |
(888 |
) |
|
$ |
(804 |
) |
|
$ |
(581 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefit Assumptions |
Weighted-average assumptions used to determine benefit
obligations at December 31 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Discount rate
|
|
|
5.75 |
% |
|
|
6.25 |
% |
|
Health care cost trend rate assumed for next year
|
|
|
9 |
% |
|
|
10 |
% |
|
Rate that the cost trend rate gradually declines to
|
|
|
5 |
% |
|
|
5 |
% |
|
Year that the rate reaches the rate it is assumed to remain at
|
|
|
2009 |
|
|
|
2009 |
|
Weighted-average assumptions used to determine net expense for
years ended December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Discount rate
|
|
|
6.25 |
% |
|
|
6.75 |
% |
|
|
7.25 |
% |
|
Health care cost trend rate assumed for next year
|
|
|
10 |
% |
|
|
11 |
% |
|
|
12 |
% |
|
Rate that the cost trend rate gradually declines to
|
|
|
5 |
% |
|
|
5 |
% |
|
|
5 |
% |
|
Year that the rate reaches the rate it is assumed to remain at
|
|
|
2009 |
|
|
|
2009 |
|
|
|
2009 |
|
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend
rates would have the following effects:
| |
|
|
|
|
|
|
|
|
| |
|
One-Percentage-Point | |
|
One-Percentage-Point | |
| |
|
Increase | |
|
Decrease | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Effect on total of service and interest cost
|
|
$ |
87 |
|
|
$ |
(79 |
) |
|
Effect on postretirement benefit obligation
|
|
$ |
1,156 |
|
|
$ |
(1,047 |
) |
106
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Postretirement Cash Flows |
A detail of actual and expected benefit payments is as follows
(in thousands):
| |
|
|
|
|
|
Benefit Payments
|
|
|
|
|
|
2003
|
|
$ |
2,236 |
|
|
2004
|
|
|
1,513 |
|
|
Expected Future Payments
|
|
|
|
|
|
2005
|
|
$ |
2,145 |
|
|
2006
|
|
|
2,328 |
|
|
2007
|
|
|
2,481 |
|
|
2008
|
|
|
2,579 |
|
|
2009
|
|
|
2,598 |
|
|
2010-2014
|
|
|
11,446 |
|
|
|
| N. |
Supplementary Cash Flow Information |
The following supplemental cash flow information is provided
with respect to interest and tax payments, as well as certain
non-cash investing and financing activities.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Cash paid during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest
|
|
$ |
47,108 |
|
|
$ |
39,477 |
|
|
$ |
33,325 |
|
| |
Income taxes
|
|
|
394,900 |
|
|
|
436,900 |
|
|
|
220,000 |
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Dividends declared and unpaid
|
|
|
— |
|
|
|
— |
|
|
|
11,718 |
|
| |
Fair value of shares issued in connection with acquisitions
|
|
|
237,480 |
|
|
|
834,714 |
|
|
|
— |
|
| |
Capital transactions of investees and less than 100% owned
subsidiaries
|
|
|
— |
|
|
|
5,704 |
|
|
|
8,318 |
|
| |
Issuance of restricted stock
|
|
|
192 |
|
|
|
26,292 |
|
|
|
— |
|
|
Liabilities assumed in connection with acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of assets acquired
|
|
$ |
1,610,754 |
|
|
$ |
2,214,273 |
|
|
$ |
286,371 |
|
| |
|
Less: Total purchase price
|
|
|
1,302,317 |
|
|
|
1,935,448 |
|
|
|
199,373 |
|
| |
Liabilities assumed
|
|
$ |
308,437 |
|
|
$ |
278,825 |
|
|
$ |
86,998 |
|
|
|
| O. |
Financial Instruments with Off-Balance Sheet Risk and
Concentration of Risk |
In the normal course of business the Company and certain of its
subsidiaries enter into off-balance sheet credit risk associated
with certain aspects of its title insurance business and other
activities.
The Company generates a significant amount of title insurance
premiums in California and Texas. In 2004, 2003 and 2002,
California and Texas accounted for 22.3% and 10.9%, 25.0% and
11.1% and 25.2% and 12.1% of total title premiums, respectively.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash
equivalents, short-term investments, lease receivables, residual
interests in securitizations and trade receivables.
107
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
Concentrations of credit risk with respect to trade receivables
are limited because a large number of geographically diverse
customers make up the Company’s customer base, thus
spreading the trade receivables credit risk. The Company
controls credit risk through monitoring procedures.
During 2004, subsequent to year end, the Company restructured
its business segments to more accurately reflect a change in the
Company’s current operating structure. All previously
reported segment information has been restated to be consistent
with the current presentation.
Summarized financial information concerning the Company’s
reportable segments is shown in the following table.
As of and for the year ended December 31, 2004 (dollars in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Financial | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Institution | |
|
Lender | |
|
|
|
|
|
|
|
|
|
|
| |
|
Title | |
|
Software and | |
|
Outsourcing | |
|
Information | |
|
Specialty | |
|
Corporate | |
|
|
|
|
| |
|
Insurance | |
|
Services | |
|
Solutions | |
|
Services | |
|
Insurance | |
|
and Other | |
|
Eliminations | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Title premiums
|
|
$ |
4,717,454 |
|
|
$ |
— |
|
|
$ |
128,221 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(106,347 |
) |
|
$ |
4,739,328 |
|
|
Other revenues
|
|
|
1,042,243 |
|
|
|
1,269,766 |
|
|
|
322,194 |
|
|
|
633,757 |
|
|
|
239,256 |
|
|
|
48,668 |
|
|
|
(107,045 |
) |
|
|
3,448,839 |
|
|
Intersegment revenue
|
|
|
— |
|
|
|
(62,441 |
) |
|
|
(106,347 |
) |
|
|
(44,604 |
) |
|
|
— |
|
|
|
— |
|
|
|
213,392 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$ |
5,759,697 |
|
|
$ |
1,207,325 |
|
|
$ |
344,068 |
|
|
$ |
589,153 |
|
|
$ |
239,256 |
|
|
$ |
48,668 |
|
|
$ |
— |
|
|
$ |
8,188,167 |
|
|
Interest and investment income, including realized gains and
(losses)
|
|
|
81,817 |
|
|
|
16,678 |
|
|
|
733 |
|
|
|
(3,628 |
) |
|
|
3,564 |
|
|
|
8,671 |
|
|
|
— |
|
|
|
107,835 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
5,841,514 |
|
|
$ |
1,224,003 |
|
|
$ |
344,801 |
|
|
$ |
585,525 |
|
|
$ |
242,820 |
|
|
$ |
57,339 |
|
|
$ |
— |
|
|
$ |
8,296,002 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
95,463 |
|
|
|
175,389 |
|
|
|
9,650 |
|
|
|
53,973 |
|
|
|
3,259 |
|
|
|
700 |
|
|
|
— |
|
|
|
338,434 |
|
|
Interest expense
|
|
|
1,033 |
|
|
|
4,244 |
|
|
|
27 |
|
|
|
222 |
|
|
|
4 |
|
|
|
41,684 |
|
|
|
— |
|
|
|
47,214 |
|
|
Earnings (loss) before income tax and minority interest
|
|
|
862,491 |
|
|
|
177,792 |
|
|
|
99,501 |
|
|
|
112,823 |
|
|
|
31,552 |
|
|
|
(100,068 |
) |
|
|
— |
|
|
|
1,184,091 |
|
|
Income tax expense
|
|
|
319,122 |
|
|
|
65,783 |
|
|
|
36,815 |
|
|
|
41,745 |
|
|
|
11,674 |
|
|
|
(37,025 |
) |
|
|
— |
|
|
|
438,114 |
|
|
Minority interest
|
|
|
1,343 |
|
|
|
1,303 |
|
|
|
1,995 |
|
|
|
374 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,015 |
|
|
Net earnings (loss)
|
|
$ |
542,026 |
|
|
$ |
110,706 |
|
|
$ |
60,691 |
|
|
$ |
70,704 |
|
|
$ |
19,878 |
|
|
$ |
(63,043 |
) |
|
|
— |
|
|
|
740,962 |
|
|
Assets
|
|
|
4,923,922 |
|
|
|
2,887,843 |
|
|
|
356,730 |
|
|
|
698,276 |
|
|
|
201,140 |
|
|
|
202,624 |
|
|
|
— |
|
|
|
9,270,535 |
|
|
Goodwill
|
|
|
957,081 |
|
|
|
1,354,572 |
|
|
|
82,269 |
|
|
|
379,140 |
|
|
|
22,669 |
|
|
|
2,518 |
|
|
|
— |
|
|
|
2,798,249 |
|
108
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of and for the year ended December 31, 2003 (dollars in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Financial | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Institution | |
|
Lender | |
|
|
|
|
|
|
|
|
|
|
| |
|
Title | |
|
Software and | |
|
Outsourcing | |
|
Information | |
|
Specialty | |
|
Corporate | |
|
|
|
|
| |
|
Insurance | |
|
Services | |
|
Solutions | |
|
Services | |
|
Insurance | |
|
and Other | |
|
Eliminations | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Title premiums
|
|
$ |
4,700,748 |
|
|
$ |
— |
|
|
$ |
288,190 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(250,687 |
) |
|
|
4,738,251 |
|
|
Other revenues
|
|
|
1,056,448 |
|
|
|
701,246 |
|
|
|
316,211 |
|
|
|
598,008 |
|
|
|
135,231 |
|
|
|
56,794 |
|
|
|
(53,704 |
) |
|
|
2,810,234 |
|
|
Intersegment revenue
|
|
|
— |
|
|
|
(14,806 |
) |
|
|
(250,687 |
) |
|
|
(38,898 |
) |
|
|
— |
|
|
|
— |
|
|
|
304,391 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$ |
5,757,196 |
|
|
$ |
686,440 |
|
|
$ |
353,714 |
|
|
$ |
559,110 |
|
|
$ |
135,231 |
|
|
$ |
56,794 |
|
|
$ |
— |
|
|
$ |
7,548,485 |
|
|
Interest and investment income, including realized gains and
(losses)
|
|
|
156,748 |
|
|
|
(243 |
) |
|
|
951 |
|
|
|
1,985 |
|
|
|
2,192 |
|
|
|
5,097 |
|
|
|
— |
|
|
|
166,730 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
5,913,944 |
|
|
$ |
686,197 |
|
|
$ |
354,665 |
|
|
$ |
561,095 |
|
|
$ |
137,423 |
|
|
$ |
61,891 |
|
|
$ |
— |
|
|
$ |
7,715,215 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
77,842 |
|
|
|
101,577 |
|
|
|
13,645 |
|
|
|
30,582 |
|
|
|
3,186 |
|
|
|
1,105 |
|
|
|
— |
|
|
|
227,937 |
|
|
Interest expense
|
|
|
1,113 |
|
|
|
12 |
|
|
|
(33 |
) |
|
|
1,590 |
|
|
|
— |
|
|
|
40,421 |
|
|
|
— |
|
|
|
43,103 |
|
|
Earnings (loss) before income tax and minority interest
|
|
|
1,071,244 |
|
|
|
110,801 |
|
|
|
200,454 |
|
|
|
101,330 |
|
|
|
15,232 |
|
|
|
(78,422 |
) |
|
|
— |
|
|
|
1,420,639 |
|
|
Income tax expense
|
|
|
407,073 |
|
|
|
42,104 |
|
|
|
76,173 |
|
|
|
38,505 |
|
|
|
5,788 |
|
|
|
(29,800 |
) |
|
|
— |
|
|
|
539,843 |
|
|
Minority Interest
|
|
|
869 |
|
|
|
— |
|
|
|
2,659 |
|
|
|
15,448 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,976 |
|
|
Net earnings (loss)
|
|
$ |
663,302 |
|
|
$ |
68,697 |
|
|
$ |
121,622 |
|
|
$ |
47,377 |
|
|
$ |
9,444 |
|
|
$ |
(48,622 |
) |
|
|
— |
|
|
|
861,820 |
|
|
Assets
|
|
|
4,708,223 |
|
|
|
1,388,895 |
|
|
|
331,674 |
|
|
|
513,901 |
|
|
|
135,478 |
|
|
|
185,004 |
|
|
|
— |
|
|
|
7,263,175 |
|
|
Goodwill
|
|
|
917,466 |
|
|
|
560,697 |
|
|
|
85,833 |
|
|
|
336,766 |
|
|
|
18,169 |
|
|
|
7,547 |
|
|
|
— |
|
|
|
1,926,478 |
|
109
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of and for the year ended December 31, 2002 (dollars in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Financial | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Institution | |
|
Lender | |
|
|
|
|
|
|
|
|
|
|
| |
|
Title | |
|
Software and | |
|
Outsourcing | |
|
Information | |
|
Specialty | |
|
Corporate | |
|
|
|
|
| |
|
Insurance | |
|
Services | |
|
Solutions | |
|
Services | |
|
Insurance | |
|
and Other | |
|
Eliminations | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Title premiums
|
|
$ |
3,547,729 |
|
|
$ |
— |
|
|
$ |
46,658 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(46,658 |
) |
|
|
3,547,729 |
|
|
Other revenues
|
|
|
789,730 |
|
|
|
3,922 |
|
|
|
167,492 |
|
|
|
404,571 |
|
|
|
46,061 |
|
|
|
59,687 |
|
|
|
(26,588 |
) |
|
|
1,444,875 |
|
|
Intersegment revenue
|
|
|
— |
|
|
|
— |
|
|
|
(46,658 |
) |
|
|
(26,588 |
) |
|
|
— |
|
|
|
— |
|
|
|
73,246 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$ |
4,337,459 |
|
|
$ |
3,922 |
|
|
$ |
167,492 |
|
|
$ |
377,983 |
|
|
$ |
46,061 |
|
|
$ |
59,687 |
|
|
$ |
— |
|
|
$ |
4,992,604 |
|
|
Interest and investment income, including net realized gains
|
|
|
72,635 |
|
|
|
2 |
|
|
|
529 |
|
|
|
176 |
|
|
|
1,507 |
|
|
|
15,187 |
|
|
|
— |
|
|
|
90,036 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
4,410,094 |
|
|
$ |
3,924 |
|
|
$ |
168,021 |
|
|
$ |
378,159 |
|
|
$ |
47,568 |
|
|
$ |
74,874 |
|
|
$ |
— |
|
|
$ |
5,082,640 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
53,880 |
|
|
|
620 |
|
|
|
2,679 |
|
|
|
15,972 |
|
|
|
— |
|
|
|
1,012 |
|
|
|
— |
|
|
|
74,163 |
|
|
Interest expense
|
|
|
1,335 |
|
|
|
8 |
|
|
|
174 |
|
|
|
806 |
|
|
|
1 |
|
|
|
31,729 |
|
|
|
— |
|
|
|
34,053 |
|
|
Earnings (loss) before income tax and minority interest
|
|
|
760,765 |
|
|
|
1,945 |
|
|
|
53,801 |
|
|
|
66,110 |
|
|
|
5,080 |
|
|
|
(36,401 |
) |
|
|
— |
|
|
|
851,300 |
|
|
Income tax expense
|
|
|
272,065 |
|
|
|
739 |
|
|
|
20,444 |
|
|
|
25,122 |
|
|
|
1,930 |
|
|
|
(13,832 |
) |
|
|
— |
|
|
|
306,468 |
|
|
Minority interest
|
|
|
2,240 |
|
|
|
— |
|
|
|
1,962 |
|
|
|
8,913 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13,115 |
|
|
Net earnings (loss)
|
|
$ |
486,460 |
|
|
$ |
1,206 |
|
|
$ |
31,395 |
|
|
$ |
32,075 |
|
|
$ |
3,150 |
|
|
$ |
(22,569 |
) |
|
|
— |
|
|
|
531,717 |
|
|
Assets
|
|
|
4,266,810 |
|
|
|
62,373 |
|
|
|
139,963 |
|
|
|
314,756 |
|
|
|
65,198 |
|
|
|
396,851 |
|
|
|
— |
|
|
|
5,245,951 |
|
|
Goodwill
|
|
|
806,918 |
|
|
|
39,424 |
|
|
|
28,369 |
|
|
|
109,265 |
|
|
|
7,944 |
|
|
|
4,693 |
|
|
|
— |
|
|
|
996,613 |
|
The activities of the reportable segments include the following:
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. Included in the title insurance
segment for the year ended December 31, 2003 are
$26.3 million in pre-tax expenses relating to the migration
of data center operations from FNIS to FIS and
$11.3 million related to the relocation of the
Company’s corporate headquarters to Jacksonville, Florida
pursuant to SFAS No. 146, and $2.0 million in
asset impairment charges pursuant to SFAS No. 144. See
Notes A and B. In addition, the title insurance segment for
2003 includes a realized gain of $51.7 million as a result
of InterActive Corp’s acquisition of Lending Tree Inc. and
the subsequent sale of the Company’s InterActive Corp
common stock and a realized gain of $25.0 million on the
sale of New Century Financial Corporation common stock.
|
|
|
Financial Institution Software and Services |
The Financial Institution Software and Services segment focuses
on two primary markets, financial institution processing and
mortgage loan processing. The primary applications are software
applications that function as the underlying infrastructure of a
financial institution’s processing environment. These
applications include core bank processing software, which banks
use to maintain the primary records of their customer accounts,
and core mortgage processing software, which banks use to
process and service mortgage loans. This segment also provides a
number of complementary applications and services that interact
directly with the
110
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
core processing applications, including applications that
facilitate interactions between the segment’s financial
institution customers and their clients.
|
|
|
Lender Outsourcing Solutions |
The Lender Outsourcing Solutions segment offers customized
outsourced business process and information solutions to
national lenders and loan servicers. This business provides loan
facilitation services, which allows customers to outsource their
title and closing requirements in accordance with pre-selected
criteria, regardless of the geographic location of the borrower
or property. Depending on customer requirements, the Company
performs these services both in the traditional manner involving
many manual steps, and through more automated processes, which
significantly reduce the time required to complete the task. The
Company also provides default management services, which allow
customers to outsource the business processes necessary to take
a loan and the underlying real estate securing the loan through
the default and foreclosure process. The Company utilizes its
own resources and networks established with independent
contractors to provide outsourcing solutions. Included in the
lender outsourcing solutions segment for the year ended
December 31, 2003 is $2.7 million of pre-tax expenses
relating to asset impairment charges pursuant to
SFAS No. 144. See Notes A.
In the Information Services segment, the Company operates a real
estate-related information services business. The Company’s
real estate-related information services are utilized by
mortgage lenders, investors and real estate professionals to
complete residential real estate transactions throughout the
U.S. The Company offers a comprehensive suite of
applications and services spanning the entire home purchase and
ownership life cycle, from purchase through closing, refinancing
and resale. Included in the information services segment for the
years ended December 31, 2004 and 2003 is $6.3 million
and $3.2 million, respectively of pre-tax expenses relating
to asset impairment charges pursuant to SFAS No. 144.
See Notes A.
This segment, consisting of various non-title insurance
subsidiaries, issues flood, home warranty and homeowners
insurance policies.
The corporate segment consists of the operations of the parent
holding company, the parent holding company of FIS, certain
other unallocated corporate overhead expenses, smaller entities
that do not fit in our other segment classifications including
the Company’s leasing operations, as well as the issuance
and repayment of corporate debt obligations. Included in this
segment for 2004, 2003 and 2002, respectively, were pretax
charges of $75.1 million, $39.5 million and
$21.6 million for the parent holding company of FIS.
Included in the Corporate and other segment for the year ended
December 31, 2003 is $1.6 million in pre-tax expenses
relating to the relocation of the Company’s Corporate
headquarters to Jacksonville, Florida, pursuant to
SFAS No. 146.
|
|
| Q. |
Recent Accounting Pronouncements |
In December 2004, the FASB issued FASB Statement No. 123R
(“SFAS No. 123R”), “Share-Based
Payment”, which requires that compensation cost relating to
share-based payments be recognized in the Company’s
financial statements. The Company is preparing to implement this
standard effective July 1, 2005. During 2003, the Company
adopted the fair value recognition provision of Statement of
Financial Accounting Standards No. 123, “Accounting
for Stock-Based Compensation”
(“SFAS No. 123”), for stock-based employee
compensation, effective as of the beginning of 2003. The Company
had elected to use the
111
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
prospective method of transition, as permitted by Statement of
Financial Accounting Standards No. 148, “Accounting
for Stock-Based Compensation — Transition and
Disclosure” (“SFAS No. 148”). Under
this method, stock-based employee compensation cost is
recognized from the beginning of 2003 as if the fair value
method of accounting had been used to account for all employee
awards granted, modified, or settled in years beginning after
December 31, 2002. SFAS No. 123R does not allow
for the prospective method, but requires the recording of
expense relating to the vesting of all unvested options
beginning in the third quarter of 2005. Since the Company
adopted SFAS No. 123 in 2003, the impact of recording
additional expense in 2005 under SFAS No. 123R
relating to options granted prior to January 1, 2003 will
not be significant.
|
|
|
Recapitalization of FIS and Minority Interest Sale |
The recapitalization of FIS was accomplished through
$2.8 billion in borrowings under new senior credit
facilities consisting of an $800 million Term Loan A
facility, a $2.0 billion Term Loan B facility
(collectively, the “Term Loan Facilities”) and a
$400 million revolving credit facility
(“Revolver”). FIS fully drew upon the entire
$2.8 billion in Term Loan Facilities to consummate the
recapitalization while the Revolver remained undrawn at the
closing of the recapitalization. The current interest rate on
both the Term Loan Facilities and the Revolver is LIBOR
+1.75%. Bank of America, JP Morgan Chase, Wachovia Bank,
Deutsche Bank and Bear Stearns lead a consortium of lenders
providing the new senior credit facilities.
The minority equity interest sale was accomplished through FIS
selling an approximately 25 percent minority equity
interest in the common stock of FIS to an investment group led
by Thomas H. Lee Partners (“THL”) and Texas Pacific
Group (“TPG”). FIS issued a total of 50 million
shares of the common stock of FIS to the investment group for a
total purchase price of $500 million. A new Board of
Directors has been created at FIS, with William P.
Foley, II, current Chairman and Chief Executive Officer of
FNF, serving as Chairman and Chief Executive Officer of FIS. FNF
has appointed four additional members to the FIS Board of
Directors, while each of THL and TPG have appointed two new
directors.
The following steps were undertaken to consummate the FIS
recapitalization plan and the minority equity interest sale in
FIS. On March 8, 2005, FIS issued a $2.7 billion note
to FNF as payment of the dividend. On March 9, 2005, FIS
borrowed $2.8 billion under its new senior credit
facilities. FIS then paid FNF $2.7 billion, plus interest,
to repay the $2.7 billion note issued on March 8,
2005. FNF used $400 million of these funds to repay all
outstanding principal and interest on its bank debt. The
remainder will be used to fund the $10 per share dividend and
for general corporate purposes at FNF, which may include
acquisitions. The minority equity interest sale in FIS was then
closed through the payment of $500 million from the
investment group led by THL and TPG to FIS. FIS then repaid
approximately $410 million outstanding under its current
credit facility. Finally, FIS paid all expenses related to the
transactions. These expenses totaled $80.4 million,
consisting of $33.2 million in bank fees and
$47.2 million in fees relating to the minority interest
sale, including placement fees payable to the investors. All
remaining proceeds will be utilized for other general corporate
purposes at FIS.
On March 9, 2005, the Company also announced that its Board
of Directors formally declared a $10 per share special cash
dividend that is payable on March 28, 2005 to stockholders
of record as of March 21, 2005. Because of the magnitude of
the special cash dividend, the New York Stock Exchange has
determined that the ex-dividend date will be March 29,
2005, the business day following the payable date for the
special cash dividend.
112
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table shows the pro forma effects on the
consolidated balance sheet as of December 31, 2004 of the
recapitalization, minority interest sale, related debt
repayments and special cash dividend (the
“Transactions” as if they had occurred on that date.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Historical | |
|
|
|
Pro Forma | |
| |
|
December 31, | |
|
Pro Forma | |
|
December 31, | |
| |
|
2004 | |
|
Adjustments | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Pro forma Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Investments
|
|
$ |
3,346,276 |
|
|
$ |
— |
|
|
$ |
3,346,276 |
|
| |
Cash and cash equivalents
|
|
|
331,222 |
|
|
|
683,998 |
(a) |
|
|
1,015,220 |
|
| |
Goodwill
|
|
|
2,798,249 |
|
|
|
— |
|
|
|
2,798,249 |
|
| |
Other assets
|
|
|
2,794,788 |
|
|
|
33,200 |
|
|
|
2,827,988 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
9,270,535 |
|
|
$ |
717,198 |
|
|
$ |
9,987,733 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Accounts payable and accrued liabilities
|
|
$ |
948,882 |
|
|
$ |
— |
|
|
$ |
948,882 |
|
| |
Notes payable
|
|
|
1,370,556 |
|
|
|
1,990,000 |
(b) |
|
|
3,360,556 |
|
| |
Reserve for claim losses
|
|
|
998,170 |
|
|
|
— |
|
|
|
998,170 |
|
| |
Other liabilities
|
|
|
1,233,962 |
|
|
|
116,118 |
|
|
|
1,350,080 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
4,551,570 |
|
|
|
2,106,118 |
|
|
|
6,657,688 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Minority interest
|
|
|
18,874 |
|
|
|
138,924 |
(c) |
|
|
157,798 |
|
| |
Stockholders’ equity
|
|
|
4,700,091 |
|
|
|
(1,527,844 |
)(d) |
|
|
3,172,247 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total liabilities and equity
|
|
$ |
9,270,535 |
|
|
$ |
717,198 |
|
|
$ |
9,987,733 |
|
| |
|
|
|
|
|
|
|
|
|
The pro forma adjustments in the above table include the
following:
|
|
|
|
(a) |
|
An increase in cash and cash equivalents of $684.0 million
relating to an inflow of $2,800.0 million from the Term
Loan Facilities and $500.0 million from the sale of a 25%
minority interest in FIS, less transaction costs of
$80.4 million, repayments of $810.0 million under
outstanding credit facilities as of December 31, 2004 and
an assumed dividend payout of $1,725.6 million based on
outstanding shares at December 31, 2004. |
| |
|
(b) |
|
An increase in notes payable of $1,990.0 million relating
to the $2,800 million from the Term Loan Facilities less
the repayment of $810.0 million in credit facilities that
were outstanding as of December 31, 2004. |
| |
|
(c) |
|
An increase in minority interest of $138.9 million relating
to the sale of 25% of FIS. |
| |
|
(d) |
|
A decrease in equity of $1,527.8 million relating to the
payment of the $1,725.6 million assumed dividend offset by
an assumed gain of $197.7 million on the sale of the 25%
minority interest in FIS. |
113
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table shows the pro forma effects on the
Consolidated Statement of Earnings of the Transactions as if
they had occurred on January 1, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Historical | |
|
|
|
Pro forma | |
| |
|
December 31, | |
|
Pro forma | |
|
December 31, | |
| |
|
2004 | |
|
Adjustments | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Proforma Statement of Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenue
|
|
$ |
8,296,002 |
|
|
$ |
— |
|
|
$ |
8,296,002 |
|
| |
Operating expenses
|
|
|
7,064,697 |
|
|
|
— |
|
|
|
7,064,697 |
|
| |
Interest expense
|
|
|
47,214 |
|
|
|
91,100 |
(a) |
|
|
138,314 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
7,111,911 |
|
|
|
91,100 |
|
|
|
7,203,011 |
|
| |
Earnings before income taxes and minority interest
|
|
|
1,184,091 |
|
|
|
(91,100 |
) |
|
|
1,092,991 |
|
| |
Income tax expense (benefit)
|
|
|
438,114 |
|
|
|
(33,707 |
) |
|
|
404,407 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Earnings before minority interest
|
|
|
745,977 |
|
|
|
(57,393 |
) |
|
|
688,584 |
|
| |
Minority interest
|
|
|
5,015 |
|
|
|
32,278 |
(b) |
|
|
37,293 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net Earnings
|
|
$ |
740,962 |
|
|
$ |
(89,671 |
) |
|
$ |
651,291 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Basic net earnings per share
|
|
$ |
4.33 |
|
|
|
|
|
|
$ |
3.81 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted net earnings per share
|
|
$ |
4.21 |
|
|
|
|
|
|
$ |
3.70 |
|
| |
|
|
|
|
|
|
|
|
|
The proforma adjustments in the above table include the
following:
|
|
| (a) |
An increase in interest expense of $91.1 million which
includes $94.8 million in additional interest expense
relating to the Term Loan Facilities offset by savings of
$3.7 million assuming that the proceeds paid off the
balances outstanding on the Company’s credit facilities as
of January 1, 2004. |
| |
| (b) |
An increase in minority interest expense of $32.3 million
relating to calculating a 25% minority interest expense on the
results of FIS for 2004. |
114
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
| Item 9A. |
Controls and Procedures |
As of the end of the year covered by this report, the Company
carried out an evaluation, under the supervision and with the
participation of its principal executive officer and principal
financial officer, of the effectiveness of the design and
operation of its disclosure controls and procedures. Based on
this evaluation, the Company’s principal executive officer
and principal financial officer concluded that its disclosure
controls and procedures are effective to provide reasonable
assurance that its disclosure controls and procedures will
timely alert them to material information required to be
included in the Company’s periodic SEC reports.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act Rules 13a-15(f). Under the
supervision and with the participation of our management,
including our principal executive officer and principal
financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting.
Management has adopted the framework in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Based on our evaluation under this framework, our management
concluded that our internal control over financial reporting was
effective as of December 31, 2004. Our management’s
assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 has been
audited by KPMG LLP, an independent registered public accounting
firm, as stated in their report which is included herein.
|
|
| Item 9B. |
Other Information |
None.
115
PART III
Items 10, 11 and 13.
Within 120 days after the close of its fiscal year, the
Company intends to file with the Securities and Exchange
Commission a definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 as
amended, which will include the election of directors, the
report of the compensation committee on annual compensation,
certain relationships and related transactions and other matters.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The following table provides information regarding securities
authorized for issuance under the Company’s equity
compensation plans, as of December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Number of Securities | |
| |
|
|
|
|
|
Remaining Available | |
| |
|
|
|
|
|
for Future Issuance | |
| |
|
Number of Securities | |
|
|
|
Under Equity | |
| |
|
to be Issued Upon | |
|
Weighted-Average | |
|
Compensation Plans | |
| |
|
Exercise of | |
|
Exercise Price of | |
|
(Excluding | |
| |
|
Outstanding Options, | |
|
Outstanding Options, | |
|
Securities Reflected | |
| |
|
Warrants and Rights | |
|
Warrants and Rights | |
|
in Column (a)) | |
| |
|
(a) | |
|
(b) | |
|
(c) | |
| |
|
| |
|
| |
|
| |
|
Equity compensation plans approved by security holders
|
|
|
14,250,778 |
|
|
$ |
25.13 |
|
|
|
10,933,750 |
|
|
Equity compensation plans not approved by security holders(1)
|
|
|
1,271,853 |
|
|
|
8.38 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
15,522,631 |
|
|
$ |
23.76 |
|
|
|
10,933,750 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
The equity compensation plans not approved by security holders
represent options granted outside of the Company’s stock
option plans pursuant to various agreements approved by the
Board of Directors of the Company. The options were granted with
an exercise price equal to the market value of the underlying
stock as of the date of grant, and have terms of 10 to
12 years. Additional information regarding these options is
included in Note M of Notes to Consolidated Financial
Statements, incorporated herein by reference. |
Within 120 days after the close of its fiscal year, the
Company intends to file with the Securities and Exchange
Commission a definitive proxy statement pursuant to
Regulation 14A of the Securities Act of 1934 as amended,
which will include information regarding beneficial ownership of
principal shareholders, directors and management.
|
|
| Item 14. |
Principal Accounting Fees and Services |
Within 120 days after the close of its fiscal year, the
Company intends to file with the Securities and Exchange
Commission a definitive proxy statement pursuant to
Regulation 14A of the Securities Act of 1934 as amended,
which will include information regarding accounting fees and
services.
116
PART IV
|
|
| Item 15. |
Exhibits, Financial Statement Schedules and Reports on
Form 8-K |
(a)(1) Financial Statements. The following is a list
of the Consolidated Financial Statements of Fidelity National
Financial, Inc. and its subsidiaries included in Item 8 of
Part II:
|
|
| |
Report of Independent Registered Public Accounting Firm on
Effectiveness of Internal |
| |
| |
Control over Financial Reporting |
| |
| |
Report of Independent Registered Public Accounting Firm on
Financial Statements |
| |
| |
Consolidated Balance Sheets as of December 31, 2004 and 2003 |
| |
| |
Consolidated Statements of Earnings for the years ended
December 31, 2004, 2003 and 2002 |
| |
| |
Consolidated Statements of Comprehensive Earnings for the years
ended December 31, 2004, 2003 and 2002 |
| |
| |
Consolidated Statements of Stockholders’ Equity for the
years ended December 31, 2004, 2003 and 2002 |
| |
| |
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 |
| |
| |
Notes to Consolidated Financial Statements |
(a)(2) Financial Statement Schedules. The following
is a list of financial statement schedules filed as part of this
annual report on Form 10-K:
|
|
| |
Schedule II: Fidelity National Financial, Inc. (Parent
Company Financial Statements) |
| |
| |
Schedule V: Valuation and Qualifying Accounts |
All other schedules are omitted because they are not applicable
or not required, or because the required information is included
in the Consolidated Financial Statements or notes thereto.
(a)(3) The following exhibits are incorporated by reference
or are set forth on pages to this Form 10-K:
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
3.1 |
|
|
Amended and Restated Certificate of Incorporation of Registrant,
incorporated by reference from Quarterly Report on
Form 10-Q for the quarterly period ending
September 30, 2003 |
| |
3.2 |
|
|
Restated Bylaws of Registrant, incorporated by reference from
Form S-4, Registration No. 333-103067 |
| |
4.1 |
|
|
7.30% Note due August 15, 2011 of Fidelity National
Financial, Inc. in the principal amount of $250,000,000 dated
August 20, 2001, incorporated by reference from Current
Report on Form 8-K, dated August 23, 2001 |
| |
4.2 |
|
|
Indenture by and between Fidelity National Financial, Inc. and
The Bank of New York dated as of August 20, 2001,
incorporated by reference from Current Report on Form 8-K
dated August 23, 2001 |
| |
4.3 |
|
|
5.25% Note due March 15, 2013 of Fidelity National
Financial, Inc. in the principal amount of $250,000,000 dated
March 11, 2003, incorporated by reference from Current
Report on Form 8-K dated March 6, 2003 |
| |
10.4 |
|
|
Fidelity National Financial, Inc. 1987 Stock Option Plan,
incorporated by reference from Form S-1, Registration
No. 33-11321* |
| |
10.4.1 |
|
|
Fidelity National Financial, Inc. Amended and Restated 1987
Stock Option Plan approved by the stockholders of the Company on
December 16, 2004, incorporated by reference from the
Company’s Definitive Proxy Statement on Schedule 14A,
filed on November 15, 2004.* |
| |
10.5 |
|
|
Fidelity National Financial, Inc. 1987 Employee Stock Purchase
Plan, incorporated by reference from Form S-1, Registration
No. 33-11321* |
117
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
10.5.1 |
|
|
Amendments to Fidelity National Financial, Inc. 1987 Employee
Stock Purchase Plan approved by the stockholders of the Company
on March 24, 1989, incorporated by reference from
Form S-8, Registration No. 33-15027* |
| |
10.5.2 |
|
|
Amendments to Fidelity National Financial, Inc. 1987 Employee
Stock Purchase Plan, incorporated by reference from
Form S-8, Registration No. 33-45709* |
| |
10.5.3 |
|
|
Amendments to Fidelity National Financial, Inc. 1987 Employee
Stock Purchase Plan approved by the stockholders of the Company
on June 15, 1993, incorporated by reference from
Form S-8, Registration No. 33-64836* |
| |
10.5.4 |
|
|
Amendments to Fidelity National Financial, Inc. 1987 Employee
Stock Purchase Plan approved by the stockholders of the Company
on June 20, 1995, incorporated by reference from
Form S-8, Registration No. 33-61983* |
| |
10.6 |
|
|
Fidelity National Financial, Inc. 401(k) Profit Sharing Defined
Contribution Plan and Trust adopted January 1, 1990,
incorporated by reference from Form 10-K filed
January 29, 1991* |
| |
10.6.1 |
|
|
Amendments to Fidelity National Financial, Inc. 401(k) Profit
Sharing Plan, incorporated by reference from Form S-8,
Registration No. 33-56514* |
| |
10.6.2 |
|
|
The Fidelity National Financial Group 401(k) Profit Sharing
Plan, incorporated by reference from Form S-8, Registration
No. 333-83054* |
| |
10.7 |
|
|
Fidelity National Financial, Inc. 1991 Stock Option Plan,
approved by the stockholders of the Company on July 15,
1992, incorporated by reference from Form S-8, Registration
No. 33-45272* |
| |
10.7.1 |
|
|
Amendments to Fidelity National Financial, Inc. 1991 Stock
Option Plan approved by the stockholders of the Company on
June 15, 1993, incorporated by reference from
Form S-8, Registration No. 33-64834* |
| |
10.7.2 |
|
|
Amendment to Fidelity National Financial, Inc. 1991 Stock Plan,
approved by the stockholders of the Company on June 14,
1994, incorporated by reference from Form S-8, Registration
No. 33-83026* |
| |
10.7.3 |
|
|
Amendment to Fidelity National Financial, Inc. 1991 Stock Option
Plan and the 1998 Stock Option Plan, approved by the
stockholders of the Company on June 17, 1998, incorporated
by reference from Form S-8, Registration No. 333-61111* |
| |
10.8 |
|
|
1996 Omnibus Stock Option Plan (Granite), incorporated by
reference from Form S-8, Registration No. 333-48411* |
| |
10.9 |
|
|
Two Stock Option Agreements and Amended Stock Award Agreement
(Alamo), incorporated by reference from Form S-8,
Registration No. 333-64229* |
| |
10.35 |
|
|
Fidelity National Financial, Inc. 1993 Stock Plan, approved by
stockholders of the Company on June 14, 1994, incorporated
by reference from Form S-8, Registration No. 33-83026* |
| |
10.60 |
|
|
Agreement and Plan of Merger, dated as of August 1, 1999,
by and between Fidelity National Financial, Inc. and Chicago
Title Corporation and amended as of October 13, 1999,
incorporated by reference from Form S-4, Registration
No. 333-89163 |
| |
10.61 |
|
|
Credit Agreement, dated as of November 4, 2003, among
Fidelity National Financial, Inc. and various Financial
Institutions, incorporated by reference from Quarterly Report on
Form 10-Q for the quarterly period ending
September 30, 2003 |
| |
10.61.1 |
|
|
First Amendment to Credit Agreement, dated April 9, 2004,
among Fidelity National Financial, Inc. and various Financial
Institutions, incorporated by reference from Quarterly Report on
Form 10-Q for the quarterly period ending March 31,
2004. |
| |
10.61.2 |
|
|
Third Amendment to Credit Agreement, dated March 9, 2005,
among Fidelity National Financial, Inc. and various Financial
Institutions, incorporated by reference from Current Report on
Form 8-K dated March 9, 2005. |
| |
10.62 |
|
|
Granite Financial, Inc. Omnibus Stock Plan of 1996, Amended and
Restated as of April 24, 1997 and June 14, 1997,
incorporated by reference from Form S-8, Registration
No. 333-48111* |
| |
10.63 |
|
|
Fidelity National Financial, Inc., 1998 Stock Incentive Plan,
approved by the stockholders of the Company on June 17,
1998, incorporated by reference from Form S-8, Registration
No. 333-61111* |
118
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
10.64 |
|
|
Chicago Title Corporation 1998 Long-Term Incentive Plan and
Chicago Title Corporation Directors Stock Option Plan,
incorporated by reference from Form S-8, Registration
No. 333-32806* |
| |
10.65 |
|
|
Amendment to Fidelity National Financial, Inc. 1991 Stock Option
Plan, approved by the stockholders of the Company on
June 12, 2000, incorporated by reference from
Form S-8, Registration No. 333-52744* |
| |
10.66 |
|
|
Amendment to Fidelity National Financial, Inc. 1998 Stock
Incentive Plan, approved by the stockholders of the Company on
June 12, 2000, incorporated by reference from
Form S-8, Registration No. 333-52744* |
| |
10.67 |
|
|
Underwriting Agreement, dated January 24, 2001, by and
among Fidelity National Financial, Inc., and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Bear Stearns & Co., Inc., Lehman
Brothers Inc. and U.S. Bancorp Piper Jaffray Inc., as
representatives of the underwriters named therein, incorporated
by reference from the Annual Report on Form 10-K for the
fiscal year ending December 31, 2000 |
| |
10.68 |
|
|
Fidelity National Financial, Inc. Second Amended and Restated
1998 Stock Incentive Plan, approved by the Company’s
stockholders on December 16, 2004 and incorporated by
reference from the Company’s Definitive Proxy Statement on
Schedule 14A filed on November 15, 2004 |
| |
10.69 |
|
|
Fidelity National Financial, Inc. Second Amended and Restated
2001 Stock Inventive Plan, approved by the Company’s
stockholders on December 16 2004 and incorporated by
reference from the Company’s Definitive Proxy Statement on
Schedule 14A filed on November 15, 2004 |
| |
10.70 |
|
|
Fidelity National Financial, Inc. Employee Stock Purchase Plan,
as Amended and Restated as of April 24, 2001, incorporated
by reference from Quarterly Report on Form 10-Q for the
quarterly period ending June 30, 2001* |
| |
10.71 |
|
|
Employment Agreement by and between Fidelity National Financial,
Inc. and Brent B. Bickett on of November 11, 2004,
incorporated by reference from Current Report on Form 8-K
dated November 11, 2004 |
| |
10.72 |
|
|
Employment Agreement by and between Fidelity National Financial,
Inc. and Raymond R. Quirk as of March 20, 2003,
incorporated by reference from Quarterly Report on
Form 10-Q for the quarterly period ending March 31,
2003* |
| |
10.73 |
|
|
Employment Agreement by and between Fidelity National Financial,
Inc. and Ernest D. Smith as of March 20, 2003, incorporated
by reference from Quarterly Report on Forma 10-Q for the
quarterly period ending March 31, 2003* |
| |
10.74 |
|
|
Employment Agreement by and between Fidelity National Financial,
Inc. and Alan L. Stinson as of March 22, 2001, incorporated
by reference from Quarterly Report on Form 10-Q for the
quarterly period ending June 30, 2001* |
| |
10.75 |
|
|
Employment Agreement by and between Fidelity National Financial,
Inc. and Peter T. Sadowski as of July 18, 2003*
incorporated by reference from the Annual Report on
Form 10-K for the fiscal year ending December 31, 2003 |
| |
10.76 |
|
|
Underwriting Agreement by and among Fidelity National Financial,
Inc. and Lehman Brothers Inc., Banc of America Securities LLC
and Bear Stearns & Co., Inc. dated August 13,
2001, incorporated by reference from Current Report on
Form 8-K dated August 23, 2001 |
| |
10.77 |
|
|
Stock Purchase Agreement, dated as January 28, 2003, by and
between Fidelity National Financial, Inc. and ALLTEL
Corporation, incorporated by reference from Current Report on
Form 8-K, dated January 29, 2003 |
| |
10.78 |
|
|
Agreement and Plan of Merger, dated as of January 9, 2003,
by and among Fidelity National Financial, Inc., ANFI, Inc. and
ANFI Merger Sub, Inc., as amended by the First Amendment to
Agreement and Plan of Merger, dated as of February 21,
2003, incorporated by reference from Form S-4/A,
Registration No. 333-103067 |
| |
10.79 |
|
|
Underwriting Agreement by and among Fidelity National Financial,
Inc., Lehman Brothers, Inc., Banc of America Securities LLC and
Bear, Stearns & Co. Inc., dated March 6, 2003,
incorporated by reference from Current Report on Form 8-K
dated March 6, 2003 |
119
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
10.80 |
|
|
American National Financial, Inc. 1999 Stock Option Plan and
American National Financial, Inc., 1998 Stock Incentive Plan,
incorporated by reference from Form S-8, Registration
No. 03-000756 |
| |
10.81 |
|
|
Agreement and Plan of Merger, by and among Fidelity National
Financial, Inc., FNIS Acquisition Corp., Chicago Title and Trust
Company, Inc., solely for the purpose of Section 5.19, and
Fidelity National Information Solutions, Inc., dated as of
July 11, 2003, incorporated by reference from
Form S-4, Registration No. 03-000863 |
| |
10.82 |
|
|
Fidelity National Information Solutions 2001 Stock Incentive
Plan, Vista Information Solutions, Inc., 1999 Stock Option Plan,
Micro General Corporation 1999 Stock Incentive Plan and Micro
General Corporation 1998 Stock Incentive Plan, incorporated by
reference from Form S-8, Registration No. 333-109415 |
| |
10.83 |
|
|
Credit Agreement, dated as of March 9, 2005, among Fidelity
National Information Services, Inc, Fidelity National
Information Solutions, Inc., Fidelity National Tax Service, Inc.
and various Financial Institutions, incorporated by reference
from Current Report on Form 8-K dated March 9, 2005. |
| |
10.84 |
|
|
Fidelity National Information Services, Inc. 2005 Stock
Incentive Plan (filed herewith) |
| |
10.85 |
|
|
Sanchez Computer Associates, Inc. Amended and Restated 1995
Equity Compensation Plan, incorporated by reference from
Form S-8 Registration No. 333-114482. |
| |
10.86 |
|
|
InterCept Group Inc. Amended and Restated 1996 Stock Option
Plan, Provesa, Inc. 1994 Stock Option Plan, InterCept, Inc. 2002
Stock Option Plan and InterCept, Inc. G. Lynn Boggs 2002 Stock
Option Plan, incorporated by reference from Form S-8
Registration No. 333-120720. |
| |
10.87 |
|
|
Fidelity National Financial Inc. 2004 Omnibus Incentive Plan,
approved by the stockholders of the Company on December 16,
2004 and incorporated by reference from the Company’s
Definitive Proxy Statement on Schedule 14A filed on
November 15, 2004. |
| |
21 |
|
|
List of Subsidiaries |
| |
23 |
|
|
Consent of Registered Independent Accounting Firm |
| |
31.1 |
|
|
Certification by Chief Executive Officer of pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
31.2 |
|
|
Certification by Chief Financial Officer of pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
32.1 |
|
|
Certification by Chief Executive Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. Section 1350 |
| |
32.2 |
|
|
Certification by Chief Financial Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. Section 1350 |
|
|
| * |
A management or compensatory plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 15(c)
of Form 10-K. |
(b) Reports on Form 8-K.
A Current Report on Form 8-K, under Item 1.01 and 9.01
dated October 15, 2004, was filed during the fourth quarter
of 2004 to file a Form of Option Grant as a material definitive
agreement.
A Current Report on Form 8-K, under Item 2.02 and 9.01
dated October 21, 2004, was filed during the fourth quarter
of 2004 to announce our operating results for the three and nine
month periods ended September 30, 2004.
A Current Report on Form 8-K, under Item 1.01, 2.01,
2.03 and 9.01 dated November 8, 2004, was filed during the
fourth quarter of 2004 to announce the closing of the InterCept
acquisition and to file a new credit agreement.
A Current Report on Form 8-K, under Item 1.01 and 9.01
dated November 11, 2004, was filed during the fourth
quarter of 2004 to file an employment agreement with Brent B.
Bickett.
120
A Current Report on Form 8-K, under Item 2.02 and 9.01
dated November 23, 2004, was filed during the fourth
quarter of 2004 to restate the prior year and first quarters
results in the Company new business segment format.
A Current Report on Form 8-K, under Item 8.01 and 9.01
dated December 8, 2004, was filed during the fourth quarter
of 2004 to file a press release announcing a plan to
recapitalize Fidelity National Information Services, Inc. and a
planned special dividend to FNF’s shareholders.
A Current Report on Form 8-K, under Item 8.01 and 9.01
dated December 14, 2004, was filed during the fourth
quarter of 2004 to announce the repurchase of
2,530,346 shares from Willis Stein Partners and
J.P. Morgan Chase.
A Current Report on Form 8-K, under Item 1.01 and 9.01
dated December 22, 2004, was filed during the fourth
quarter of 2004 to file the Fidelity National Financial, Inc.
2004 Omnibus Incentive Plan.
A Current Report on Form 8-K, under Item 1.01, 3.02,
8.01 and 9.01 dated December 23, 2004, was filed during the
fourth quarter of 2004 to file the definitive stock purchase
agreement dated December 23, 2004 between Fidelity National
Information Services, Inc., certain affiliates of Thomas H. Lee
Partners, L.P. and certain affiliates of Texas Pacific Group.
121
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
| |
Fidelity National
Financial, Inc.
|
|
|
| |
|
| |
William P. Foley, II |
| |
Chief Executive Officer |
Date: March 16, 2005
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ William P. Foley
William
P. Foley, II |
|
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer) |
|
March 16, 2005 |
| |
/s/ Frank P. Willey
Frank
P. Willey |
|
Vice Chairman and Director |
|
March 16, 2005 |
| |
/s/ Alan L. Stinson
Alan
L. Stinson |
|
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer) |
|
March 16, 2005 |
| |
/s/ Terry Christensen
Terry
Christensen |
|
Director |
|
March 16, 2005 |
| |
/s/ Willie D. Davis
Willie
D. Davis |
|
Director |
|
March 16, 2005 |
| |
/s/ John F. Farrell,
Jr.
John
F. Farrell, Jr. |
|
Director |
|
March 16, 2005 |
| |
/s/ Thomas M. Hagerty
Thomas
M. Hagerty |
|
Director |
|
March 16, 2005 |
| |
/s/ Phillip G. Heasley
Phillip
G. Heasley |
|
Director |
|
March 16, 2005 |
| |
/s/ William A. Imparato
William
A. Imparato |
|
Director |
|
March 16, 2005 |
122
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ Donald M. Koll
Donald
M. Koll |
|
Director |
|
March 16, 2005 |
| |
/s/ Daniel D. (Ron)
Lane
Daniel
D. (Ron) Lane |
|
Director |
|
March 16, 2005 |
| |
/s/ General William
Lyon
General
William Lyon |
|
Director |
|
March 16, 2005 |
| |
/s/ Cary H. Thompson
Cary
H. Thompson |
|
Director |
|
March 16, 2005 |
123
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Fidelity National Financial, Inc.:
Under date of March 16, 2005, we reported on the
Consolidated Balance Sheets of Fidelity National Financial, Inc.
and subsidiaries as of December 31, 2004 and 2003, and the
related Consolidated Statements of Earnings, Comprehensive
Earnings, Stockholders’ Equity and Cash Flows for each of
the years in the three-year period ended December 31, 2004
which are included in the Annual Report on Form 10-K. In
connection with our audits of the aforementioned Consolidated
Financial Statements, we also audited the related financial
statement schedules as listed under Item 15(a)2. These
financial statement schedules are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statement schedules based on our
audits.
In our opinion, such schedules, when considered in relation to
the basic Consolidated Financial Statements taken as a whole,
present fairly, in all material respects, the information set
forth therein.
The Consolidated Financial Statements for 2002 were prepared
using Accounting Principles Board (APB) Opinion
No. 25, “Accounting for Stock Issued to
Employees,” to record stock-based employee compensation. As
discussed in Note M to the Consolidated Financial
Statements, effective January 1, 2003, the Company adopted
the fair value recognition provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation,” to record
stock-based employee compensation, applying the prospective
method of adoption in accordance with SFAS No. 148,
“Accounting for Stock-Based Compensation —
Transition and Disclosure.”
KPMG LLP
Jacksonville, Florida
March 16, 2005
124
SCHEDULE II
FIDELITY NATIONAL FINANCIAL, INC.
(Parent Company)
BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands, except share | |
| |
|
and per share data) | |
|
ASSETS |
|
Cash
|
|
$ |
— |
|
|
$ |
— |
|
|
Investment securities available for sale, at fair value
|
|
|
35,594 |
|
|
|
38,967 |
|
|
Accounts receivable from subsidiaries
|
|
|
72,141 |
|
|
|
— |
|
|
Leases receivable, net
|
|
|
— |
|
|
|
683 |
|
|
Notes receivable, net (related party — $463 in 2004
and $911 in 2003)
|
|
|
(233 |
) |
|
|
1,652 |
|
|
Investment in subsidiaries
|
|
|
5,617,237 |
|
|
|
4,546,976 |
|
|
Property and equipment, net
|
|
|
1,122 |
|
|
|
1,097 |
|
|
Prepaid expenses and other assets
|
|
|
18,505 |
|
|
|
5,217 |
|
|
Other intangibles
|
|
|
6,868 |
|
|
|
5,691 |
|
|
Deferred tax asset
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
$ |
5,751,234 |
|
|
$ |
4,600,283 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable and accrued liabilities
|
|
$ |
49,488 |
|
|
$ |
50,234 |
|
| |
Notes payable
|
|
|
897,799 |
|
|
|
572,510 |
|
| |
Accounts payable to subsidiaries
|
|
|
— |
|
|
|
13,225 |
|
| |
Deferred income taxes
|
|
|
103,167 |
|
|
|
84,224 |
|
| |
Income taxes payable
|
|
|
689 |
|
|
|
6,731 |
|
| |
|
|
|
|
|
|
| |
|
|
1,051,143 |
|
|
|
726,924 |
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
| |
Preferred stock, $.0001 par value; authorized
3,000,000 shares; issued and outstanding none
|
|
|
|
|
|
|
|
|
| |
Common stock, $.0001 par value; authorized,
250,000,000 shares as of December 31, 2004 and as of
December 31, 2003; issued 178,321,790 as of
December 31, 2004 and 167,650,280 as of December 31,
2003
|
|
|
18 |
|
|
|
17 |
|
| |
Additional paid-in capital
|
|
|
3,424,261 |
|
|
|
2,453,841 |
|
| |
Retained earnings
|
|
|
1,515,215 |
|
|
|
1,517,494 |
|
| |
|
|
|
|
|
|
| |
|
|
4,939,494 |
|
|
|
3,971,352 |
|
| |
Accumulated other comprehensive loss
|
|
|
(27,353 |
) |
|
|
(9,891 |
) |
| |
Unearned compensation
|
|
|
(18,437 |
) |
|
|
(23,017 |
) |
| |
Less treasury stock, 5,765,846 shares as of
December 31, 2004 and 2,809,400 shares as of
December 31, 2003, at cost
|
|
|
(193,613 |
) |
|
|
(65,085 |
) |
| |
|
|
|
|
|
|
| |
|
|
4,700,091 |
|
|
|
3,873,359 |
|
| |
|
|
|
|
|
|
| |
|
$ |
5,751,234 |
|
|
$ |
4,600,283 |
|
| |
|
|
|
|
|
|
See Notes to Financial Statements —
See Accompanying Report of Registered Independent Public
Accounting Firm
125
SCHEDULE II
FIDELITY NATIONAL FINANCIAL, INC.
(Parent Company)
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other fees and revenue
|
|
$ |
318 |
|
|
$ |
353 |
|
|
$ |
278 |
|
| |
Interest and investment income
|
|
|
7,852 |
|
|
|
4,382 |
|
|
|
14,746 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
8,170 |
|
|
|
4,735 |
|
|
|
15,024 |
|
| |
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other operating expenses
|
|
|
4,501 |
|
|
|
20,077 |
|
|
|
6,678 |
|
| |
Interest expense
|
|
|
37,528 |
|
|
|
35,911 |
|
|
|
24,217 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
42,029 |
|
|
|
55,988 |
|
|
|
30,895 |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit and equity in earnings of
subsidiaries
|
|
|
(33,859 |
) |
|
|
(51,253 |
) |
|
|
(15,871 |
) |
|
Income tax benefit
|
|
|
(12,528 |
) |
|
|
(19,476 |
) |
|
|
(6,348 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Loss before equity in earnings of subsidiaries
|
|
|
(21,331 |
) |
|
|
(31,777 |
) |
|
|
(9,523 |
) |
|
Equity in earnings of subsidiaries
|
|
|
767,308 |
|
|
|
912,573 |
|
|
|
554,355 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings before minority interest
|
|
|
745,977 |
|
|
|
880,796 |
|
|
|
544,832 |
|
|
Minority interest
|
|
|
5,015 |
|
|
|
18,976 |
|
|
|
13,115 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
740,962 |
|
|
$ |
861,820 |
|
|
$ |
531,717 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
4.33 |
|
|
$ |
5.81 |
|
|
$ |
4.05 |
|
|
Weighted average shares outstanding, basic basis
|
|
|
171,014 |
|
|
|
148,275 |
|
|
|
131,135 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
4.21 |
|
|
$ |
5.63 |
|
|
$ |
3.91 |
|
|
Weighted average shares outstanding, diluted basis
|
|
|
176,000 |
|
|
|
153,171 |
|
|
|
135,871 |
|
| |
|
|
|
|
|
|
|
|
|
|
Retained earnings, beginning of year
|
|
$ |
1,517,494 |
|
|
$ |
738,522 |
|
|
$ |
498,073 |
|
| |
Dividends declared
|
|
|
(136,079 |
) |
|
|
(82,848 |
) |
|
|
(41,607 |
) |
| |
Effect of 10% stock dividend
|
|
|
(607,162 |
) |
|
|
— |
|
|
|
(249,661 |
) |
| |
Net earnings
|
|
|
740,962 |
|
|
|
861,820 |
|
|
|
531,717 |
|
| |
|
|
|
|
|
|
|
|
|
|
Retained earnings, end of year
|
|
$ |
1,515,215 |
|
|
$ |
1,517,494 |
|
|
$ |
738,522 |
|
| |
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements —
See Accompanying Report of Registered Independent Public
Accounting Firm
126
SCHEDULE II
FIDELITY NATIONAL FINANCIAL, INC.
(Parent Company)
STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net earnings
|
|
$ |
740,962 |
|
|
$ |
861,820 |
|
|
$ |
531,717 |
|
| |
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amortization of debt issuance costs
|
|
|
(888 |
) |
|
|
1,813 |
|
|
|
1,413 |
|
| |
|
Provision for losses on notes receivable
|
|
|
— |
|
|
|
465 |
|
|
|
240 |
|
| |
|
Equity in earnings of subsidiaries
|
|
|
(767,308 |
) |
|
|
(912,573 |
) |
|
|
(554,355 |
) |
| |
|
Gain on sales of investments
|
|
|
(5,125 |
) |
|
|
(5,080 |
) |
|
|
(889 |
) |
| |
|
Stock-based compensation cost
|
|
|
21,450 |
|
|
|
9,526 |
|
|
|
— |
|
| |
|
Tax benefit associated with the exercise of stock options
|
|
|
36,085 |
|
|
|
18,914 |
|
|
|
21,329 |
|
| |
|
Net (decrease) increase in income taxes
|
|
|
(6,716 |
) |
|
|
54,105 |
|
|
|
47,235 |
|
| |
|
Net (increase) decrease in prepaid expenses and other assets
|
|
|
(13,288 |
) |
|
|
1,685 |
|
|
|
(2,053 |
) |
| |
|
Net (decrease) increase in accounts payable and accrued
liabilities
|
|
|
(687 |
) |
|
|
19,251 |
|
|
|
(17,679 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by operating activities
|
|
|
4,485 |
|
|
|
49,926 |
|
|
|
26,958 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Proceeds from sales of investments
|
|
|
101,069 |
|
|
|
32,541 |
|
|
|
33,564 |
|
| |
Purchases of investments
|
|
|
(122,082 |
) |
|
|
(40,551 |
) |
|
|
(44,522 |
) |
| |
Net (purchases) proceeds from short-term investing
activities
|
|
|
(2,442 |
) |
|
|
114,899 |
|
|
|
(84,558 |
) |
| |
Proceeds (purchases) of property and equipment
|
|
|
(25 |
) |
|
|
(406 |
) |
|
|
6,500 |
|
| |
Collections of notes receivable
|
|
|
500 |
|
|
|
1,150 |
|
|
|
6,401 |
|
| |
Additions to investment in subsidiaries
|
|
|
(492,149 |
) |
|
|
(729,746 |
) |
|
|
(12,533 |
) |
| |
Capital transactions of majority-owned subsidiaries
|
|
|
— |
|
|
|
7,648 |
|
|
|
(8,694 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash used in investing activities
|
|
|
(515,129 |
) |
|
|
(614,465 |
) |
|
|
(103,842 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Borrowings
|
|
|
485,000 |
|
|
|
100,000 |
|
|
|
— |
|
| |
Net proceeds from issuance of notes
|
|
|
— |
|
|
|
248,118 |
|
|
|
— |
|
| |
Debt service payments
|
|
|
(160,000 |
) |
|
|
(145,350 |
) |
|
|
(14,651 |
) |
| |
Dividends paid
|
|
|
(136,079 |
) |
|
|
(94,566 |
) |
|
|
(38,485 |
) |
| |
Purchases of treasury stock
|
|
|
(128,723 |
) |
|
|
(45,436 |
) |
|
|
(61,210 |
) |
| |
Exercise of stock options
|
|
|
76,899 |
|
|
|
38,012 |
|
|
|
50,350 |
|
| |
Net borrowings and dividends from subsidiaries
|
|
|
373,548 |
|
|
|
458,208 |
|
|
|
137,214 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by financing activities
|
|
|
510,645 |
|
|
|
558,986 |
|
|
|
73,218 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net decrease in cash and cash equivalents
|
|
|
— |
|
|
|
(5,553 |
) |
|
|
(3,666 |
) |
| |
Cash and cash equivalents at beginning of year
|
|
|
— |
|
|
|
5,553 |
|
|
|
9,219 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents at end of year
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,553 |
|
| |
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements —
See Accompanying Report of Registered Independent Public
Accounting Firm
127
SCHEDULE II
FIDELITY NATIONAL FINANCIAL, INC.
(Parent Company)
|
|
| A. |
Summary of Significant Accounting Policies |
Fidelity National Financial, Inc. (the “Company”)
transacts substantially all of its business through its
subsidiaries. The Parent Company Financial Statements should be
read in connection with the aforementioned Consolidated
Financial Statements and Notes thereto included elsewhere herein.
Notes payable consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Syndicated credit agreement, unsecured, interest due quarterly
at LIBOR plus 0.50% (2.92% at December 31, 2004), unused
portion of $300,000 at December 31, 2004
|
|
$ |
400,000 |
|
|
$ |
75,000 |
|
|
Unsecured notes, net of discount, interest payable semi-annually
at 7.3%, due August 2011
|
|
|
249,337 |
|
|
|
249,236 |
|
|
Unsecured notes, net of discount, interest payable semi-annually
at 5.25%, due March 2013
|
|
|
248,462 |
|
|
|
248,274 |
|
| |
|
|
|
|
|
|
| |
|
$ |
897,799 |
|
|
$ |
572,510 |
|
| |
|
|
|
|
|
|
Principal maturities at December 31, 2004, are as follows
(dollars in thousands):
| |
|
|
|
|
|
2005
|
|
$ |
— |
|
|
2006
|
|
|
— |
|
|
2007
|
|
|
— |
|
|
2008
|
|
|
— |
|
|
2009
|
|
|
400,000 |
|
|
Thereafter
|
|
|
497,799 |
|
| |
|
|
|
| |
|
$ |
897,799 |
|
| |
|
|
|
In the normal course of business the Company enters into
off-balance sheet credit risk in the form of guarantees. As of
December 31, 2004, subsidiary debt in the amount of
$1.4 million was guaranteed by the Company.
128
|
|
| C. |
Supplemental Cash Flow Information |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Cash paid during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest
|
|
$ |
47,108 |
|
|
$ |
27,254 |
|
|
$ |
22,244 |
|
| |
Income taxes
|
|
$ |
394,900 |
|
|
$ |
436,900 |
|
|
$ |
220,000 |
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Dividends declared and unpaid
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,718 |
|
| |
Fair value of shares issued in connection with acquisitions
|
|
$ |
237,480 |
|
|
$ |
834,714 |
|
|
$ |
— |
|
| |
Capital transactions of investees and less than 100% owned
subsidiaries
|
|
$ |
— |
|
|
$ |
5,704 |
|
|
$ |
8,318 |
|
| |
Issuance of restricted stock
|
|
$ |
192 |
|
|
$ |
26,292 |
|
|
$ |
— |
|
|
|
| D. |
Cash Dividends Received |
The Company has received cash dividends from subsidiaries and
affiliates of $445.2 million, $421.4 million and
$165.2 million in 2004, 2003 and 2002, respectively.
129
SCHEDULE V
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Column B | |
|
Column C | |
|
Column D | |
|
Column E | |
| |
|
| |
|
| |
|
| |
|
| |
| Column A |
|
|
|
Additions | |
|
|
|
|
| |
|
|
|
| |
|
|
|
|
| |
|
Balance at | |
|
Charge to | |
|
|
|
|
|
Balance at | |
| |
|
Beginning | |
|
Costs and | |
|
Other | |
|
Deduction | |
|
End of | |
| Description |
|
of Period | |
|
Expenses | |
|
(Described) | |
|
(Described) | |
|
Period | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reserve for claim losses
|
|
$ |
943,704 |
|
|
$ |
282,124 |
|
|
$ |
38,597 |
(5) |
|
$ |
266,255 |
(1) |
|
$ |
998,170 |
|
| |
Allowance on trade and notes receivables
|
|
|
39,048 |
|
|
|
1,209 |
|
|
|
— |
|
|
|
4,348 |
(2) |
|
|
35,909 |
|
| |
Amortization of intangible assets
|
|
|
80,138 |
|
|
|
124,075 |
|
|
|
— |
|
|
|
— |
|
|
|
204,213 |
|
|
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reserve for claim losses
|
|
$ |
888,784 |
|
|
$ |
263,409 |
|
|
$ |
8,622 |
(4) |
|
$ |
217,111 |
(1) |
|
$ |
943,704 |
|
| |
Allowance on trade and notes receivables
|
|
|
23,240 |
|
|
|
19,510 |
|
|
|
— |
|
|
|
3,702 |
(2) |
|
|
39,048 |
|
| |
Amortization of intangible assets
|
|
|
9,710 |
|
|
|
71,182 |
|
|
|
— |
|
|
|
754 |
(3) |
|
|
80,138 |
|
|
Year ended December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reserve for claim losses
|
|
$ |
881,089 |
|
|
$ |
179,292 |
|
|
$ |
— |
|
|
$ |
171,597 |
(1) |
|
$ |
888,784 |
|
| |
Allowance on trade and notes receivables
|
|
|
31,852 |
|
|
|
8,033 |
|
|
|
— |
|
|
|
16,645 |
(2) |
|
|
23,240 |
|
| |
|
Amortization of intangible assets
|
|
|
3,763 |
|
|
|
6,113 |
|
|
|
— |
|
|
|
166 |
(3) |
|
|
9,710 |
|
|
|
| (1) |
Represents payments of claim losses, net of recoupments. |
| |
| (2) |
Represents uncollectible accounts written-off, change in reserve
due to reevaluation of specific items and change in reserve due
to sale of certain assets. |
| |
| (3) |
Represents intangible assets written-off. |
| |
| (4) |
Represents reserve for claim losses assumed in connection with
the Company’s acquisitions of LSI and ANFI in 2003. |
| |
| (5) |
Represents reserve for claim losses assumed in connection with
the Company’s acquisitions of APTIC in 2004. |
130
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
3.1 |
|
|
Amended and Restated Certificate of Incorporation of Registrant,
incorporated by reference from Quarterly Report on
Form 10-Q for the quarterly period ending
September 30, 2003 |
| |
3.2 |
|
|
Restated Bylaws of Registrant, incorporated by reference from
Form S-4, Registration No. 333-103067 |
| |
4.1 |
|
|
7.30% Note due August 15, 2011 of Fidelity National
Financial, Inc. in the principal amount of $250,000,000 dated
August 20, 2001, incorporated by reference from Current
Report on Form 8-K, dated August 23, 2001 |
| |
4.2 |
|
|
Indenture by and between Fidelity National Financial, Inc. and
The Bank of New York dated as of August 20, 2001,
incorporated by reference from Current Report on Form 8-K
dated August 23, 2001 |
| |
4.3 |
|
|
5.25% Note due March 15, 2013 of Fidelity National
Financial, Inc. in the principal amount of $250,000,000 dated
March 11, 2003, incorporated by reference from Current
Report on Form 8-K dated March 6, 2003 |
| |
10.4 |
|
|
Fidelity National Financial, Inc. 1987 Stock Option Plan,
incorporated by reference from Form S-1, Registration
No. 33-11321* |
| |
10.4.1 |
|
|
Fidelity National Financial, Inc. Amended and Restated 1987
Stock Option Plan approved by the stockholders of the Company on
December 16, 2004, incorporated by reference from the
Company’s Definitive Proxy Statement on Schedule 14A,
filed on November 15, 2004.* |
| |
10.5 |
|
|
Fidelity National Financial, Inc. 1987 Employee Stock Purchase
Plan, incorporated by reference from Form S-1, Registration
No. 33-11321* |
| |
10.5.1 |
|
|
Amendments to Fidelity National Financial, Inc. 1987 Employee
Stock Purchase Plan approved by the stockholders of the Company
on March 24, 1989, incorporated by reference from
Form S-8, Registration No. 33-15027* |
| |
10.5.2 |
|
|
Amendments to Fidelity National Financial, Inc. 1987 Employee
Stock Purchase Plan, incorporated by reference from
Form S-8, Registration No. 33-45709* |
| |
10.5.3 |
|
|
Amendments to Fidelity National Financial, Inc. 1987 Employee
Stock Purchase Plan approved by the stockholders of the Company
on June 15, 1993, incorporated by reference from
Form S-8, Registration No. 33-64836* |
| |
10.5.4 |
|
|
Amendments to Fidelity National Financial, Inc. 1987 Employee
Stock Purchase Plan approved by the stockholders of the Company
on June 20, 1995, incorporated by reference from
Form S-8, Registration No. 33-61983* |
| |
10.6 |
|
|
Fidelity National Financial, Inc. 401(k) Profit Sharing Defined
Contribution Plan and Trust adopted January 1, 1990,
incorporated by reference from Form 10-K filed
January 29, 1991* |
| |
10.6.1 |
|
|
Amendments to Fidelity National Financial, Inc. 401(k) Profit
Sharing Plan, incorporated by reference from Form S-8,
Registration No. 33-56514* |
| |
10.6.2 |
|
|
The Fidelity National Financial Group 401(k) Profit Sharing
Plan, incorporated by reference from Form S-8, Registration
No. 333-83054* |
| |
10.7 |
|
|
Fidelity National Financial, Inc. 1991 Stock Option Plan,
approved by the stockholders of the Company on July 15,
1992, incorporated by reference from Form S-8, Registration
No. 33-45272* |
| |
10.7.1 |
|
|
Amendments to Fidelity National Financial, Inc. 1991 Stock
Option Plan approved by the stockholders of the Company on
June 15, 1993, incorporated by reference from
Form S-8, Registration No. 33-64834* |
| |
10.7.2 |
|
|
Amendment to Fidelity National Financial, Inc. 1991 Stock Plan,
approved by the stockholders of the Company on June 14,
1994, incorporated by reference from Form S-8, Registration
No. 33-83026* |
131
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
10.7.3 |
|
|
Amendment to Fidelity National Financial, Inc. 1991 Stock Option
Plan and the 1998 Stock Option Plan, approved by the
stockholders of the Company on June 17, 1998, incorporated
by reference from Form S-8, Registration No. 333-61111* |
| |
10.8 |
|
|
1996 Omnibus Stock Option Plan (Granite), incorporated by
reference from Form S-8, Registration No. 333-48411* |
| |
10.9 |
|
|
Two Stock Option Agreements and Amended Stock Award Agreement
(Alamo), incorporated by reference from Form S-8,
Registration No. 333-64229* |
| |
10.35 |
|
|
Fidelity National Financial, Inc. 1993 Stock Plan, approved by
stockholders of the Company on June 14, 1994, incorporated
by reference from Form S-8, Registration No. 33-83026* |
| |
10.60 |
|
|
Agreement and Plan of Merger, dated as of August 1, 1999,
by and between Fidelity National Financial, Inc. and Chicago
Title Corporation and amended as of October 13, 1999,
incorporated by reference from Form S-4, Registration
No. 333-89163 |
| |
10.61 |
|
|
Credit Agreement, dated as of November 4, 2003, among
Fidelity National Financial, Inc. and various Financial
Institutions, incorporated by reference from Quarterly Report on
Form 10-Q for the quarterly period ending
September 30, 2003 |
| |
10.61.1 |
|
|
First Amendment to Credit Agreement, dated April 9, 2004,
among Fidelity National Financial, Inc. and various Financial
Institutions, incorporated by reference from Quarterly Report on
Form 10-Q for the quarterly period ending March 31,
2004. |
| |
10.61.2 |
|
|
Third Amendment to Credit Agreement, dated March 9, 2005,
among Fidelity National Financial, Inc. and various Financial
Institutions, incorporated by reference from Current Report on
Form 8-K dated March 9, 2005. |
| |
10.62 |
|
|
Granite Financial, Inc. Omnibus Stock Plan of 1996, Amended and
Restated as of April 24, 1997 and June 14, 1997,
incorporated by reference from Form S-8, Registration
No. 333-48111* |
| |
10.63 |
|
|
Fidelity National Financial, Inc., 1998 Stock Incentive Plan,
approved by the stockholders of the Company on June 17,
1998, incorporated by reference from Form S-8, Registration
No. 333-61111* |
| |
10.64 |
|
|
Chicago Title Corporation 1998 Long-Term Incentive Plan and
Chicago Title Corporation Directors Stock Option Plan,
incorporated by reference from Form S-8, Registration
No. 333-32806* |
| |
10.65 |
|
|
Amendment to Fidelity National Financial, Inc. 1991 Stock Option
Plan, approved by the stockholders of the Company on
June 12, 2000, incorporated by reference from
Form S-8, Registration No. 333-52744* |
| |
10.66 |
|
|
Amendment to Fidelity National Financial, Inc. 1998 Stock
Incentive Plan, approved by the stockholders of the Company on
June 12, 2000, incorporated by reference from
Form S-8, Registration No. 333-52744* |
| |
10.67 |
|
|
Underwriting Agreement, dated January 24, 2001, by and
among Fidelity National Financial, Inc., and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Bear Stearns & Co., Inc., Lehman
Brothers Inc. and U.S. Bancorp Piper Jaffray Inc., as
representatives of the underwriters named therein, incorporated
by reference from the Annual Report on Form 10-K for the
fiscal year ending December 31, 2000 |
| |
10.68 |
|
|
Fidelity National Financial, Inc. Second Amended and Restated
1998 Stock Incentive Plan, approved by the Company’s
stockholders on December 16, 2004 and incorporated by
reference from the Company’s Definitive Proxy Statement on
Schedule 14A filed on November 15, 2004 |
| |
10.69 |
|
|
Fidelity National Financial, Inc. Second Amended and Restated
2001 Stock Inventive Plan, approved by the Company’s
stockholders on December 16 2004 and incorporated by
reference from the Company’s Definitive Proxy Statement on
Schedule 14A filed on November 15, 2004 |
| |
10.70 |
|
|
Fidelity National Financial, Inc. Employee Stock Purchase Plan,
as Amended and Restated as of April 24, 2001, incorporated
by reference from Quarterly Report on Form 10-Q for the
quarterly period ending June 30, 2001* |
132
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|
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|
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| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
10.71 |
|
|
Employment Agreement by and between Fidelity National Financial,
Inc. and Brent B. Bickett on of November 11, 2004,
incorporated by reference from Current Report on Form 8-K
dated November 11, 2004 |
| |
10.72 |
|
|
Employment Agreement by and between Fidelity National Financial,
Inc. and Raymond R. Quirk as of March 20, 2003,
incorporated by reference from Quarterly Report on
Form 10-Q for the quarterly period ending March 31,
2003* |
| |
10.73 |
|
|
Employment Agreement by and between Fidelity National Financial,
Inc. and Ernest D. Smith as of March 20, 2003, incorporated
by reference from Quarterly Report on Forma 10-Q for the
quarterly period ending March 31, 2003* |
| |
10.74 |
|
|
Employment Agreement by and between Fidelity National Financial,
Inc. and Alan L. Stinson as of March 22, 2001, incorporated
by reference from Quarterly Report on Form 10-Q for the
quarterly period ending June 30, 2001* |
| |
10.75 |
|
|
Employment Agreement by and between Fidelity National Financial,
Inc. and Peter T. Sadowski as of July 18, 2003*
incorporated by reference from the Annual Report on
Form 10-K for the fiscal year ending December 31, 2003 |
| |
10.76 |
|
|
Underwriting Agreement by and among Fidelity National Financial,
Inc. and Lehman Brothers Inc., Banc of America Securities LLC
and Bear Stearns & Co., Inc. dated August 13,
2001, incorporated by reference from Current Report on
Form 8-K dated August 23, 2001 |
| |
10.77 |
|
|
Stock Purchase Agreement, dated as January 28, 2003, by and
between Fidelity National Financial, Inc. and ALLTEL
Corporation, incorporated by reference from Current Report on
Form 8-K, dated January 29, 2003 |
| |
10.78 |
|
|
Agreement and Plan of Merger, dated as of January 9, 2003,
by and among Fidelity National Financial, Inc., ANFI, Inc. and
ANFI Merger Sub, Inc., as amended by the First Amendment to
Agreement and Plan of Merger, dated as of February 21,
2003, incorporated by reference from Form S-4/A,
Registration No. 333-103067 |
| |
10.79 |
|
|
Underwriting Agreement by and among Fidelity National Financial,
Inc., Lehman Brothers, Inc., Banc of America Securities LLC and
Bear, Stearns & Co. Inc., dated March 6, 2003,
incorporated by reference from Current Report on Form 8-K
dated March 6, 2003 |
| |
10.80 |
|
|
American National Financial, Inc. 1999 Stock Option Plan and
American National Financial, Inc., 1998 Stock Incentive Plan,
incorporated by reference from Form S-8, Registration
No. 03-000756 |
| |
10.81 |
|
|
Agreement and Plan of Merger, by and among Fidelity National
Financial, Inc., FNIS Acquisition Corp., Chicago Title and Trust
Company, Inc., solely for the purpose of Section 5.19, and
Fidelity National Information Solutions, Inc., dated as of
July 11, 2003, incorporated by reference from
Form S-4, Registration No. 03-000863 |
| |
10.82 |
|
|
Fidelity National Information Solutions 2001 Stock Incentive
Plan, Vista Information Solutions, Inc., 1999 Stock Option Plan,
Micro General Corporation 1999 Stock Incentive Plan and Micro
General Corporation 1998 Stock Incentive Plan, incorporated by
reference from Form S-8, Registration No. 333-109415 |
| |
10.83 |
|
|
Credit Agreement, dated as of March 9, 2005, among Fidelity
National Information Services, Inc, Fidelity National
Information Solutions, Inc., Fidelity National Tax Service, Inc.
and various Financial Institutions, incorporated by reference
from Current Report on Form 8-K dated March 9, 2005. |
| |
10.84 |
|
|
Fidelity National Information Services, Inc. 2005 Stock
Incentive Plan (filed herewith) |
| |
10.85 |
|
|
Sanchez Computer Associates, Inc. Amended and Restated 1995
Equity Compensation Plan, incorporated by reference from
Form S-8 Registration No. 333-114482. |
133
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
10.86 |
|
|
InterCept Group Inc. Amended and Restated 1996 Stock Option
Plan, Provesa, Inc. 1994 Stock Option Plan, InterCept, Inc. 2002
Stock Option Plan and InterCept, Inc. G. Lynn Boggs 2002 Stock
Option Plan, incorporated by reference from Form S-8
Registration No. 333-120720. |
| |
10.87 |
|
|
Fidelity National Financial Inc. 2004 Omnibus Incentive Plan,
approved by the stockholders of the Company on December 16,
2004 and incorporated by reference from the Company’s
Definitive Proxy Statement on Schedule 14A filed on
November 15, 2004. |
| |
21 |
|
|
List of Subsidiaries |
| |
23 |
|
|
Consent of Registered Independent Accounting Firm |
| |
31.1 |
|
|
Certification by Chief Executive Officer of pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
31.2 |
|
|
Certification by Chief Financial Officer of pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
32.1 |
|
|
Certification by Chief Executive Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. Section 1350 |
| |
32.2 |
|
|
Certification by Chief Financial Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. Section 1350 |
|
|
| * |
A management or compensatory plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 15(c)
of Form 10-K. |
134