e424b3
Filed pursuant to Rule 424(b)(3)
Registration Statement No. 333-129310
PROSPECTUS AND CONSENT SOLICITATION STATEMENT
Amended Offer to Exchange Notes Issued by Fidelity National
Financial, Inc.
and
Solicitation of Consents to Amend the Related Indenture
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Aggregate | |
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Principal | |
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Amount | |
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Description of Existing Notes |
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CUSIP No. | |
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Description of New Notes |
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250,000,000 |
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7.30% Fidelity National Financial notes due 2011 |
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7.30% Fidelity National Title Group notes due 2011 |
$ |
250,000,000 |
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5.25% Fidelity National Financial notes due 2013 |
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316326ad9 |
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5.25% Fidelity National Title Group notes due 2013 |
Fidelity National Title Group, Inc. offers to exchange any
and all of the outstanding notes listed above of its parent
corporation, Fidelity National Financial, Inc., for its newly
issued notes with the same principal amounts, interest rates,
redemption terms and payment and maturity dates. The new notes
will provide for accrued interest from the last date for which
interest was paid on your Fidelity National Financial notes.
As amended, the exchange offers will expire at midnight, New
York City time, on January 13, 2006, unless extended. You
may withdraw notes that you previously tendered and revoke the
consents with respect thereto at any time before that time but
not thereafter.
As a holder of Fidelity National Financial notes, you may give
your consent to the proposed amendments to the indenture only by
tendering your notes in the exchange offers. By so tendering,
you will be deemed to consent to the amendment of the indenture.
We describe the proposed amendments to the indenture in this
prospectus and consent solicitation statement under The
Proposed Amendments and the conditions to the exchange
offers under The Exchange Offers Conditions to
the Exchange Offers and Consent Solicitations.
The exchange offers have been amended to change the covenants
and events of default that apply to the new Fidelity National
Title notes to more closely conform to those originally
applicable to the Fidelity National Financial notes. We have
also eliminated a requested waiver of past defaults under the
Fidelity National Financial indenture. Finally, we hereby waive
the condition of the exchange offers that we receive valid
consents sufficient to effect the amendments of the FNF
indenture described above.
If you would like to tender your Fidelity National Financial
notes in the exchange offers, you may do so through DTCs
Automated Tender Offer Program (ATOP) or by following the
instructions that appear later in this prospectus and consent
solicitation statement and in the related Letter of Transmittal
and Consent. If you tender through ATOP, you do not need to
complete the Letter of Transmittal and Consent. If you hold your
Fidelity National Financial notes through a broker or other
nominee, only that broker or nominee can tender your Fidelity
National Financial notes. In that case, you must instruct your
broker or nominee if you want to tender your Fidelity National
Financial notes.
If your notes have already been validly tendered, you need take
no further action. We will deem all notes validly tendered using
the prior form of the Letter of Transmittal and Consent to have
been validly tendered using the form accompanying this
prospectus and consent solicitation statement.
We do not intend to list the Fidelity National Title Group
notes to be issued in these exchange offers on any national
securities exchange or to seek approval for quotation through
any automated quotation system.
As you review this prospectus and consent solicitation
statement, you should carefully consider the matters described
in Risk Factors beginning on page 12.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved these securities, or
determined if this prospectus and consent solicitation statement
is truthful or complete. Any representation to the contrary is a
criminal offense.
None of Fidelity National Title Group, Fidelity National
Financial, the exchange and information agent, the trustee under
the Fidelity National Financial indenture, the trustee under the
Fidelity National Title Group indenture or the dealer
manager makes any recommendation as to whether or not holders of
Fidelity National Financial notes should exchange their
securities in the exchange offers and consent to the proposed
amendments to the Fidelity National Financial indenture.
The Dealer Manager for the Exchange Offers and Consent
Solicitations is:
LEHMAN BROTHERS
Dated January 9, 2006
ABOUT THIS PROSPECTUS
This prospectus and consent solicitation statement has been
prepared for the purpose of describing the changes to the
exchange offers and consent solicitations referred to on the
cover hereof. The only changes in this prospectus and consent
solicitation statement from the prospectus and consent
solicitation statement dated December 8, 2005, are in the
sections titled Incorporation of Certain Documents by
Reference, Prospectus and Consent Solicitation
Summary Summary of the Exchange Offers and
Summary Description of our New Notes,
The Exchange Offers, The Proposed
Amendments, Description of our Notes and
Description of Differences Between the FNT Notes and the
FNF Notes.
TABLE OF CONTENTS
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F-1 |
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WHERE YOU CAN FIND MORE INFORMATION
Our parent company, Fidelity National Financial, Inc., is
subject to the informational reporting requirements of the
Securities Exchange Act of 1934 and therefore must file proxy
statements, periodic reports and other information with the
Securities and Exchange Commission. We similarly became subject
to the information and periodic reporting requirements of the
Securities Exchange Act of 1934 following the effectiveness on
September 29, 2005 of our registration statement in
connection with the public distribution of our common stock and,
as such, we will file periodic reports, proxy statements and
other information with the Securities and Exchange Commission.
The public may read and copy any documents filed by us or
Fidelity National Financial, Inc. at the Securities and Exchange
Commissions Public Reference Room at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Information on the operation of the
Public Reference Room may be obtained by calling the Securities
and Exchange Commission at
1-800-SEC-0330. Such
filings and information are also available to the public on the
Internet through the Securities and Exchange Commissions
website at http://www.sec.gov.
i
This prospectus and consent solicitation statement is part of a
registration statement Fidelity National Title Group, Inc.
has filed with the Securities and Exchange Commission relating
to the notes to be issued in the exchange offers. As permitted
by the rules of the Securities and Exchange Commission, this
prospectus and consent solicitation statement does not contain
all of the information included in the registration statement
and the accompanying exhibits. You may refer to the registration
statement and exhibits for more information about us and our
securities. The registration statement, exhibits and schedules
are available at the Securities and Exchange Commissions
public reference room and through its website.
You should rely only on the information contained or
incorporated by reference in this prospectus and consent
solicitation statement. We have not authorized any person
(including any dealer, salesman or broker) to provide
information or to make any representations other than that
provided in this prospectus and consent solicitation statement
and, if given or made, that information or representation must
not be relied upon as having been authorized by us, Fidelity
National Financial, Inc., the dealer manager or any agent or
dealer. We are not making an offer of our notes in any state
where the offer is not permitted. You should not assume that the
information in this prospectus and consent solicitation
statement is accurate as of any date other than the date on the
cover page or that any information contained in any document we
have incorporated by reference is accurate as of any date other
than the date of the document incorporated by reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Securities and Exchange Commission allows us to incorporate
certain information by reference into this prospectus and
consent solicitation statement, which means we can disclose
important information to you by referring you to another
document already filed with the SEC. The information we
incorporate by reference is an important part of this prospectus
and consent solicitation statement, and later information
Fidelity National Financial, Inc. files with the Securities and
Exchange Commission will automatically update and supersede this
information. We incorporate by reference the documents listed
below and any future filings made by Fidelity National
Financial, Inc. with the Securities and Exchange Commission
under Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 until the exchange offers contemplated by
this registration statement are consummated. The documents
incorporated by reference are:
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Annual Report on
Form 10-K of
Fidelity National Financial, Inc. for the year ended
December 31, 2004; |
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Quarterly Report on
Form 10-Q of
Fidelity National Financial, Inc. for the quarter ended
March 31, 2005; |
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Quarterly Report on
Form 10-Q of
Fidelity National Financial, Inc. for the quarter ended
June 30, 2005; |
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Quarterly Report on Form 10-Q of Fidelity National
Financial, Inc. for the quarter ended September 30,
2005; and |
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Current Reports on
Forms 8-K of
Fidelity National Financial, Inc. as filed with the SEC on
January 31, 2005, February 3, 2005, March 14,
2005, March 15, 2005, April 11, 2005, May 17,
2005, July 6, 2005, August 1, 2005, August 25,
2005, September 20, 2005, October 21, 2005,
October 31, 2005 and December 30, 2005. |
Any information about Fidelity National Financial, Inc. that is
incorporated by reference in this prospectus and consent
solicitation statement may be obtained from the Securities and
Exchange Commission as described in Where You Can Find
More Information. Any such information filed with the
Securities and Exchange Commission (other than exhibits to those
filings, unless we have specifically incorporated the exhibits
by reference into this filing) is also available without charge
upon written request to Corporate Secretary, Fidelity National
Title Group, Inc., 601 Riverside Avenue, Jacksonville,
Florida 32204, or by calling (904) 854-8100. In order to
ensure timely delivery of these documents, your request must be
received by January 9, 2006 or five business days before
the expiration of these exchange offers, as may be extended,
whichever is later.
ii
PROSPECTUS AND CONSENT SOLICITATION SUMMARY
This summary highlights some of the information about FNT
contained elsewhere in this prospectus and consent solicitation
statement and may not contain all of the information that may be
important to you. In this prospectus and consent solicitation
statement, FNT, we, and our
refer to Fidelity National Title Group, Inc. and its
subsidiaries, unless the context suggests otherwise. References
to FNF are to Fidelity National Financial, Inc.
References to dollars or $ are to the
lawful currency of the United States of America, unless the
context otherwise requires. You should read the following
summary together with the entire prospectus and consent
solicitation statement, including the more detailed information
in our financial statements and related notes appearing
elsewhere in this prospectus and consent solicitation statement.
You should carefully consider, among other things, the matters
discussed in Risk Factors.
Company 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 30.5% of
all title insurance policies issued nationally during 2004, as
measured by premiums per the Demotech Performance of
Title Insurance Companies 2005 Edition. Our title
business consists of providing title insurance and escrow and
other title-related products and services arising from the real
estate closing process. Our operations are conducted on a direct
basis through our own employees who act as title and escrow
agents and through independent agents. In addition to our
independent agents, our customers are lenders, mortgage brokers,
attorneys, real estate agents, home builders and commercial real
estate developers.
The Exchange Offers
Subject to the terms and conditions in this prospectus and
consent solicitation statement, FNT offers to exchange
(i) any and all of the outstanding 7.30% notes due
2011 of FNF for its newly issued 7.30% notes due 2011 and
(ii) any and all of the outstanding 5.25% notes due
2013 of FNF for its newly issued 5.25% notes due 2013. The
new notes will have the same principal amounts, interest rates,
redemption terms and payment and maturity dates as the FNF notes
you currently hold. Interest on our new notes will accrue from
the last date for which interest was paid on the FNF notes for
which they are exchanged.
Concurrently with making the exchange offers, we are soliciting
consents from the holders of the outstanding FNF notes to amend
the indenture pursuant to which the FNF notes were issued to
remove many of the covenants, restrictive provisions and events
of default of FNF. The consent of the holders representing a
majority of the aggregate principal amount of each series of FNF
notes outstanding will be required in order to effect the
amendments to the indenture with respect to each series. The
consent solicitations are described more fully under The
Exchange Offers The Consent Solicitations and
the proposed amendments are described in more detail under
The Proposed Amendments.
Competitive Strengths
We believe that our competitive strengths include the following:
Leading title insurance company. We are the largest title
insurance company in the United States and the leading provider
of title insurance and escrow services for real estate
transactions. We have approximately 1,500 locations throughout
the United States providing our title insurance services.
Established relationships with our customers. We have
strong relationships with the customers who use our title
services. We also benefit from strong brand recognition in our
five FNT title brands that allows us to access a broader client
base than if we operated under a single consolidated brand and
provides our customers with a choice among FNT brands.
Strong value proposition for our customers. We provide
our customers with services that support their ability to
effectively close real estate transactions. We help make the
real estate closing more efficient for our customers by offering
a single point of access to a broad platform of title-related
products and resources necessary to close real estate
transactions.
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Proven management team. The managers of our operating
businesses have successfully built our title business over an
extended period of time. Our managers have demonstrated their
leadership ability during numerous acquisitions through which we
have grown and throughout a number of business cycles and
significant periods of industry change.
Competitive cost structure. We have been able to maintain
competitive operating margins and we believe that, when compared
to other industry competitors, our management structure has
fewer layers of managers, which allows us to operate with lower
overhead costs.
Commercial title insurance. Our network of agents,
attorneys, underwriters and closers that service the commercial
real estate markets is one of the largest in the industry. Our
commercial network combined with our financial strength makes
our title insurance operations attractive to large national
lenders.
Corporate principles. A cornerstone of our management
philosophy and operating success is the five fundamental
precepts upon which FNF was founded:
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Bias for action |
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Autonomy and entrepreneurship |
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Employee ownership |
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Minimal bureaucracy |
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Close customer relationships |
Strategy
Our strategy in the title insurance business is to maximize
operating profits by increasing our market share and managing
operating expenses throughout the real estate business cycle. To
accomplish our goals, we intend to:
Continue to operate each of our five title brands
independently. We believe that in order to maintain and
strengthen our title insurance customer base, we must leave the
Fidelity National Title, Chicago Title, Ticor Title, Security
Union Title and Alamo Title brands intact and operate these
brands independently.
Consistently deliver superior customer service. We
believe customer service and consistent product delivery are the
most important factors in attracting and retaining customers.
Our goal is to continue to improve the experience of our
customers in all aspects of our business.
Manage our operations successfully through business
cycles. We operate in a cyclical business and our ability to
diversify our revenue base within our core title insurance
business and manage the duration of our investments may allow us
to better operate in this cyclical business. Maintaining a broad
geographic revenue base, utilizing both direct and independent
agency operations and pursuing both residential and commercial
title insurance business help diversify our title insurance
revenues.
Continue to improve our products and technology. As a
national provider of real estate transaction products and
services, we participate in an industry that is subject to
significant change, frequent new product and service
introductions and evolving industry standards. We believe that
our future success will depend in part on our ability to
anticipate industry changes and offer products and services that
meet evolving industry standards.
Maintain values supporting our strategy. We believe that
continuing to focus on and support our long-established
corporate culture will reinforce and support our business
strategy. Our goal is to foster and support a corporate culture
where our agents and employees seek to operate independently and
profitably at the local level while forming close customer
relationships by meeting customer needs and improving customer
service.
Effectively manage costs based on economic factors. We
believe that our focus on our operating margins is essential to
our continued success in the title insurance business.
Regardless of the business cycle
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in which we may be operating, we seek to continue to evaluate
and manage our cost structure and make appropriate adjustments
where economic conditions dictate to help us to better maintain
our operating margins.
Challenges
We face challenges in maintaining our strengths and implementing
our strategies, including but not limited to the following:
Further downgrades in our ratings could negatively affect our
business. After FNF announced the distribution of our shares
to FNF stockholders, A.M. Best Company, Inc. (A.M.
Best) downgraded the financial strength ratings of our
principal insurance subsidiaries to A- (Excellent).
As the ratings of our insurance subsidiaries have significant
influence on our business, a future downgrade could have a
material adverse effect on our results of operations.
As a holding company, we are dependent on our subsidiaries to
supply us with cash to make payments on our debt obligations,
including the notes we are offering in these exchange
offers. As a holding company, we are dependent on
distributions from our subsidiaries, and our ability to pay our
debt service obligations on our notes may be adversely affected
if distributions from our subsidiaries are materially impaired.
Our title insurance subsidiaries must comply with state and
federal laws requiring them to maintain minimum amounts of
working capital, surplus and reserves and placing restrictions
on the amount of dividends that they can distribute to us.
Changes in real estate activity may adversely affect our
performance. While our title insurance revenues have
benefited in recent years from record lows in mortgage interest
rates and record highs in both volume and average price of
residential real estate, if any of these trends change we may
experience a decline in our revenues.
We will be controlled by FNF as long as it owns a majority of
the voting power of our common stock. While FNF controls us,
FNF will control decisions relating to the direction of our
business, financing and our ability to raise capital. In
addition, FNF will be able to elect all of our directors and
determine the outcome of any actions requiring stockholder
approval.
We face competition in our title business from traditional
title insurers and from new entrants with alternative
products. The competitors in our principal markets include
larger companies 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.
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.
We and our subsidiaries are subject to extensive regulation
by state insurance authorities in each state in which we
operate. The regulations imposed by state insurance
authorities may affect our ability to increase or maintain rate
levels and may impose conditions on our operations.
For additional challenges and risks relating to our business and
the exchange offer, see Risk Factors.
The Distribution
We were incorporated on May 24, 2005 as a wholly-owned
subsidiary of FNF. On October 17, 2005, FNF distributed
shares of our Class A Common Stock representing 17.5% of
the outstanding shares of our common stock on a pro rata basis
to the holders of FNF common stock, a transaction we refer to as
the distribution. The shares that were distributed
represent 100% of the outstanding shares of our Class A
Common Stock. FNF currently owns 100% of our outstanding
Class B Common Stock, representing 82.5% of the outstanding
shares of our common stock. The Class B Common Stock
entitles its holder to ten votes per share and the Class A
Common Stock entitles its holders to one vote per share. As a
result, FNF currently holds 97.9% of all voting power of our
common stock. The foregoing percentages do not include
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shares of Class A Common Stock that were granted as
restricted stock to our employees and directors in connection
with the distribution, which also constitute outstanding shares,
nor any shares of Class A Common Stock underlying any stock
options we similarly granted. FNF also currently owns other
operating businesses, including its majority-owned subsidiary,
Fidelity National Information Services, Inc. (FIS),
and its wholly-owned subsidiary Fidelity National Insurance
Company (FNIC). On September 14, 2005, FIS
entered into a merger agreement with Certegy Inc.
(Certegy), a publicly-traded company which provides
credit, debit, check risk management and cash access services.
Upon the completion of such merger, FNF would own approximately
51% of the combined public company. Our Class A Common
Stock is listed on the New York Stock Exchange under the symbol
FNT.
In connection with the distribution, we entered into a number of
agreements with FNF and certain of its other subsidiaries. We
also issued $500 million of notes to FNF. These notes,
which we refer to as the mirror notes, have terms
that mirror the FNF notes we seek to acquire in the exchange
offers. The mirror notes also provide that we may redeem them in
whole or in part at any time by delivering to FNF the
corresponding FNF notes in an aggregate principal amount equal
to the principal amount of the mirror notes to be redeemed.
Also in connection with the distribution, we agreed with FNF to
conduct, upon its request, one or more exchange offers to
exchange our newly issued notes for outstanding FNF notes, and
to deliver to FNF all FNF notes obtained in any such exchange
offers in redemption of an equal aggregate principal amount of
the corresponding mirror notes. FNF requested that we conduct
exchange offers with respect to the outstanding FNF notes
described in this prospectus and consent solicitation statement
in order to reduce FNFs outstanding debt obligations.
Accordingly, we are conducting the exchange offers described
herein and we intend to deliver to FNF all FNF notes obtained in
the exchange offers in redemption of an equal aggregate
principal amount of the corresponding mirror notes.
Company History
The predecessors of FNT have primarily been title insurance
companies, some of which have been in operation since the late
1800s. Many of these title insurance companies have been
acquired in the last two decades. During the 1990s, FNF acquired
Alamo Title, Nations Title Inc., Western Title Company
of Washington and First Title Corp. In 2000, FNF completed
the acquisition of Chicago Title Corp., and in 2004, FNF
acquired American Pioneer Title Insurance Company, which
now operates under our Ticor Title brand. Our businesses have
historically been operated as wholly-owned subsidiaries of FNF.
Our principal executive offices are located at 601 Riverside
Avenue, Jacksonville, Florida 32204, and our telephone number is
(904) 854-8100.
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Summary of the Exchange Offers
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Securities Offered |
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Up to $500,000,000 of FNT notes in two series: (i) up to
$250,000,000 of 7.30% FNT notes due August 15, 2011
and (ii) up to $250,000,000 of 5.25% FNT notes due
March 15, 2013. |
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The Exchange Offers |
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We are offering to exchange outstanding FNF notes for our new
notes that have been registered under the Securities Act of
1933. For each $1,000 principal amount of FNF notes, we are
offering to exchange $1,000 in principal amount of new FNT
notes. The new FNT notes being offered will also have the same
interest rates, redemption terms and payment and maturity dates
as the FNF notes being exchanged, and will provide for accrued
interest from the last date for which interest was paid on the
FNF notes being exchanged. |
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Expiration of the Exchange Offers |
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The exchange offers will expire at midnight, New York City time,
on January 13, 2006, unless we decide to extend the
exchange offers. We refer to this specified time as the
initial expiration time. |
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Tenders; Withdrawals |
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You may withdraw tendered FNF notes and revoke consents with
respect thereto at any time prior to the initial expiration time
described above, but not thereafter. A valid withdrawal of
tendered FNF notes will also constitute the revocation of the
related consent to the proposed amendments to the indenture. You
may only revoke your consent by validly withdrawing the tendered
FNF notes prior to the initial expiration time. You may not
withdraw tendered FNF Notes or revoke consents with respect
thereto after the initial expiration time, even if we otherwise
extend the expiration of the exchange offers. If for any reason
tendered notes are not accepted for exchange, they will be
returned promptly after the expiration or termination of the
applicable exchange offer. |
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Conditions to the Exchange Offers |
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The exchange offers are subject to the condition that they do
not violate applicable law or any applicable interpretation of
the staff of the Securities and Exchange Commission. They are
also subject to other conditions. There is no guarantee that
these conditions will be satisfied and we have the option to
waive these or any other conditions, except that we may not
waive the conditions that the exchange offers do not violate
applicable law or any applicable interpretation of the staff of
the Securities and Exchange Commission. For information about
the conditions to our obligation to complete the exchange
offers, see The Exchange Offers Conditions to
the Exchange Offers and Consent Solicitations. |
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Federal Income Tax Considerations |
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If you exchange your FNF notes for FNT notes in the exchange
offers, you will recognize gain or loss for U.S. federal
income tax purposes. The amount of such gain or loss generally
will equal the difference between the issue price of the FNT
notes you receive and your tax basis in the FNF notes you
exchange. The issue price of FNT notes you receive in exchange
for FNF notes should be the fair market value of the notes on
the date of the exchange (assuming that they are publicly
traded as defined in the applicable Treasury Regulations),
reduced by the amount of |
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accrued unpaid interest on the FNF notes you exchange. For a
summary of the material U.S. federal income tax
consequences of the exchange offers, see United States
Federal Income Tax Considerations. |
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Consent Solicitation |
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We are soliciting consents from the holders of the outstanding
FNF notes to amend the indenture pursuant to which the FNF notes
were issued to eliminate many of the covenants, restrictive
provisions and events of default of FNF under the indenture. As
a holder of FNF notes, you may give your consent to the proposed
amendments to the indenture only by tendering your FNF notes in
the exchange offers. By so tendering, you will be deemed to have
given consent to the proposed amendments. |
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The Proposed Amendments |
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If adopted, the proposed amendments to the FNF indenture would
eliminate, among other things, the limitations on FNFs
ability to enter into a merger, consolidation or asset sale;
FNFs covenant to preserve its corporate existence and its
rights and franchises; FNFs covenant to maintain, and
cause its subsidiaries to maintain, insurance covering risks
associated with its business; limitations on FNFs ability
to incur new secured debt without equally and ratably securing
the FNF notes; FNFs covenant to maintain books and records
of account and to comply with laws relating to its business; and
FNFs covenant to pay taxes. The proposed amendments would
also, if adopted, eliminate as an event of default FNFs
defaults under other debt instruments as specified in the FNF
indenture, FNFs bankruptcy or dissolution and any event of
default specified in the notes of each series issued pursuant to
the FNF indenture. FNF plans to enter into a supplemental
indenture that will give effect to these amendments. However,
the effectiveness of these amendments with respect to a
particular series of FNF notes will be subject to the
consummation of the exchange offer with respect to that series,
and the condition that we receive, prior to the expiration of
such exchange offer, consents sufficient to amend the indenture
with respect to that series, and that such consents have not
been revoked or withdrawn prior to the initial expiration time.
Our receipt of the requisite number of consents in advance of
the expiration of the relevant exchange offer will not result in
any change in the terms of such exchange offer and holders will
continue to be able to withdraw their FNF notes and thereby
revoke their consents until the initial expiration time. |
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Exchange Date |
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We will accept all outstanding FNF notes that you have properly
tendered when all conditions of the exchange offer relating to
the FNF notes you tendered are satisfied or waived. The
registered FNT notes will be delivered promptly after we accept
the outstanding FNF notes. |
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Exchange Agent |
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D.F. King & Co., Inc. |
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Information Agent |
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D.F. King & Co., Inc. |
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Procedures for Tendering Outstanding Notes |
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If you hold FNF notes of either series and wish to have those
notes exchanged for FNT notes of the corresponding series, you |
6
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|
|
|
must validly tender or cause the valid tender of your FNF notes
using the procedures described in this prospectus and consent
solicitation statement and in the accompanying Letter of
Transmittal and Consent. The procedures by which you may tender
or cause to be tendered FNF notes will depend upon the manner in
which you hold the FNF notes, as described below under the
heading The Exchange Offers Procedures for
Tendering FNF Notes and Delivering Consents. |
|
|
|
If your notes have already been validly tendered, you need take
no further action. We will deem all notes validly tendered using
the prior form of the Letter of Transmittal and Consent to have
been validly tendered using the form accompanying this
prospectus and consent solicitation statement. |
|
Use of Proceeds |
|
Because this is not an offering for cash, there will be no cash
proceeds to FNT from the exchange. |
|
Consequences of Not Tendering Your FNF Notes |
|
Any outstanding FNF notes that are not tendered to us or are not
accepted for exchange will remain outstanding and will continue
to accrue interest in accordance with, and will otherwise be
entitled to all the rights and privileges under, the indenture
pursuant to which they were issued. However, if the exchange
offers are consummated and the proposed amendments to the
indenture are effected, the amendments will also apply to all
FNF notes not acquired in the exchange offers and those notes
will no longer have the benefit of the protection of the
covenants, restrictive provisions and events of default
eliminated by the amendments. Also, the trading market for FNF
notes not exchanged in the exchange offers will become more
limited and could for all practical purposes cease to exist, and
that could adversely affect the liquidity, market price and
price volatility of the FNF notes. |
7
Summary Description of Our New Notes
|
|
|
Notes Offered |
|
Up to $250,000,000 of 7.30% FNT notes due August 15,
2011. |
|
Yield and Interest |
|
Our 7.30% notes due 2011 will bear interest at the rate of
7.30% per annum. We will pay interest semiannually on
February 15 and August 15 of each year. Interest on our notes
will begin accruing from the last date for which interest was
paid on the FNF notes for which they were exchanged. |
|
Ranking |
|
Our 7.30% notes due 2011 will be our senior unsecured
obligations. They will be exclusively our obligations and,
because our principal assets are the stock of our subsidiaries,
all existing and future liabilities of our subsidiaries will be
effectively senior to our notes. As of September 30, 2005,
our subsidiaries had debt obligations of approximately
$157.1 million to creditors other than us and had total
liabilities of approximately $3,607.5 million. Moreover,
there will be no limitations under the new indenture on the
amount of indebtedness we may incur. We recently entered into a
$400 million, 5-year unsecured credit facility, under which
we have recently borrowed $150 million. As of
September 30, 2005, FNT (not including its subsidiaries)
had $500 million of outstanding debt ranking equally with
the new notes (consisting of $500 million principal amount
of the mirror notes we issued to FNF in connection with the
distribution of our shares to the public, which mirror notes
will be redeemed to the extent the exchange offers are
successful). On October 24, 2005, we borrowed
$150 million under our new credit facility and used the
funds to repay a $150 million intercompany note issued by
one of our subsidiaries to FNF in August 2005. |
|
Optional Redemption |
|
We have the option to redeem the notes, in whole at any time or
in part from time to time, at the make whole
redemption price determined as set forth in this prospectus and
consent solicitation statement under Description of Our
Notes Optional Redemption, plus accrued and
unpaid interest to the date of redemption. |
|
Covenants |
|
The new indenture governing our notes contains covenants that,
subject to exceptions, limit our ability to: |
|
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incur liens to secure debt; |
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|
merge or consolidate with another company; and |
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|
transfer or sell substantially all of our assets. |
|
|
|
For more details, see the section of this prospectus and consent
solicitation statement entitled Description of Our
Notes. |
|
Sinking Fund |
|
Our 7.30% notes due 2011 will not be entitled to the
benefit of any sinking fund. |
|
|
|
Notes Offered |
|
Up to $250,000,000 of 5.25% FNT notes due March 15,
2013. |
8
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|
Yield and Interest |
|
Our 5.25% notes due 2013 will bear interest at the rate of
5.25% per annum. We will pay interest semiannually on March
15 and September 15 of each year. Interest on our notes will
begin accruing from the last date for which interest was paid on
the FNF notes for which they were exchanged. |
|
Ranking |
|
Our 5.25% notes due 2013 will be our senior unsecured
obligations. They will be exclusively our obligations and,
because our principal assets are the stock of our subsidiaries,
all existing and future liabilities of our subsidiaries will be
effectively senior to our notes. |
|
Optional Redemption |
|
We have the option to redeem the notes, in whole at any time or
in part from time to time, at the make whole
redemption price determined as set forth in this prospectus and
consent solicitation statement under Description of Our
Notes Optional Redemption, plus accrued and
unpaid interest to the date of redemption. |
|
Covenants |
|
The new indenture governing our notes contains covenants that,
subject to exceptions, limit our ability to: |
|
|
|
incur liens to secure debt; |
|
|
|
merge or consolidate with another company; and |
|
|
|
transfer or sell substantially all of our assets. |
|
|
|
For more details, see the section of this prospectus and consent
solicitation statement entitled Description of Our
Notes. |
|
Sinking Fund |
|
Our 5.25% notes due 2013 will not be entitled to the
benefit of any sinking fund. |
9
Summary Historical Financial Information for FNT
The following table sets forth our summary historical financial
information. The summary historical financial information as of
December 31, 2004 and 2003 and for each of the years in the
three-year period ended December 31, 2004 has been derived
from our combined financial statements and related notes, which
have been audited by KPMG LLP, an independent registered public
accounting firm. The audited combined financial statements as of
December 31, 2004 and 2003 and for each of the years in the
three-year period ended December 31, 2004 are included
elsewhere in this prospectus and consent solicitation statement.
The summary historical financial information as of
September 30, 2005 and for the nine months ended
September 30, 2005 and 2004 has been derived from our
unaudited condensed combined financial statements, which are
included elsewhere in this prospectus and consent solicitation
statement. You should read this financial information in
conjunction with the audited and unaudited combined financial
statements included elsewhere in this prospectus and consent
solicitation statement and the information under
Managements Discussion and Analysis of Financial
Condition and Results of Operations. Our historical
combined financial information has been prepared from the
historical results of the operations transferred to us and gives
effect to allocations of certain corporate expenses to and from
FNF. Our summary historical combined financial information may
not be indicative of our future performance and does not
necessarily reflect what our financial position and results of
operations would have been had we operated as a stand-alone
entity during the periods presented. Our results of interim
periods are not necessarily indicative of results for the entire
year.
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005(1) | |
|
2004(1) | |
|
2004(1) | |
|
2003(1) | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
STATEMENT OF EARNINGS DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total title premiums
|
|
$ |
3,726,891 |
|
|
$ |
3,601,517 |
|
|
$ |
4,718,217 |
|
|
$ |
4,700,750 |
|
|
$ |
3,547,727 |
|
Escrow and other title-related fees
|
|
|
868,375 |
|
|
|
779,910 |
|
|
|
1,039,835 |
|
|
|
1,058,729 |
|
|
|
790,787 |
|
Other income
|
|
|
134,052 |
|
|
|
97,451 |
|
|
|
131,361 |
|
|
|
211,236 |
|
|
|
128,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
4,729,318 |
|
|
|
4,478,878 |
|
|
|
5,889,413 |
|
|
|
5,970,715 |
|
|
|
4,467,330 |
|
Total expenses
|
|
|
4,065,921 |
|
|
|
3,825,918 |
|
|
|
5,006,486 |
|
|
|
4,878,795 |
|
|
|
3,697,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
|
663,397 |
|
|
|
652,960 |
|
|
|
882,927 |
|
|
|
1,091,920 |
|
|
|
769,364 |
|
Income tax expense
|
|
|
248,774 |
|
|
|
238,983 |
|
|
|
323,598 |
|
|
|
407,736 |
|
|
|
276,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before minority interest
|
|
|
414,623 |
|
|
|
413,977 |
|
|
|
559,329 |
|
|
|
684,184 |
|
|
|
492,394 |
|
Minority interest
|
|
|
1,992 |
|
|
|
809 |
|
|
|
1,165 |
|
|
|
859 |
|
|
|
624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
412,631 |
|
|
$ |
413,168 |
|
|
$ |
558,164 |
|
|
$ |
683,325 |
|
|
$ |
491,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited proforma net earnings per share basic and
diluted
|
|
$ |
2.38 |
|
|
$ |
2.38 |
|
|
$ |
3.22 |
|
|
|
|
|
|
|
|
|
|
Unaudited proforma weighted average shares
outstanding basic and diluted(2)
|
|
|
173,520 |
|
|
|
173,520 |
|
|
|
172,951 |
|
|
|
|
|
|
|
|
|
10
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As of | |
|
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September 30, | |
|
|
2005 | |
|
|
| |
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|
(In thousands) | |
BALANCE SHEET DATA
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
528,323 |
|
Total assets
|
|
|
6,008,951 |
|
Total long-term debt
|
|
|
657,076 |
|
Minority interest
|
|
|
4,801 |
|
Total equity
|
|
|
2,396,669 |
|
|
|
(1) |
Effective January 1, 2003, we adopted the fair value
recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, using the
prospective method of adoption in accordance with
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, and as
a result recorded stock compensation expense of
$3.4 million and $3.0 million for the years ended
December 31, 2004 and 2003, respectively, and
$5.4 million and $2.0 million for the nine months
ended September 30, 2005 and 2004, respectively. |
|
(2) |
Unaudited proforma net earnings per share is calculated using
the number of outstanding shares of FNF as of September 30,
2005 because upon completion of the distribution the number of
our outstanding shares of common stock was equal to the number
of FNF shares outstanding on the record date for the
distribution. |
RATIOS OF EARNINGS TO FIXED CHARGES
Ratio of our Earnings to our Fixed Charges
Our ratio of earnings to fixed charges for each of the periods
shown is as follows:
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|
Nine Months | |
|
Years Ended December 31, | |
|
|
Ended | |
|
| |
|
|
September 30, 2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Ratio of earnings to fixed charges
|
|
|
10.9 |
|
|
|
11.0 |
|
|
|
14.5 |
|
|
|
11.7 |
|
|
|
8.0 |
|
|
|
4.6 |
|
In calculating the ratio of earnings to fixed charges, earnings
are the sum of earnings before income taxes and minority
interest plus fixed charges. Fixed charges are the sum of
(i) interest on indebtedness and amortization of debt
discount and debt issuance costs and (ii) an interest
factor attributable to rentals.
Ratio of FNFs Earnings to its Fixed Charges
FNFs ratio of earnings to fixed charges for each of the
periods shown is as follows:
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|
Nine Months | |
|
Years Ended December 31, | |
|
|
Ended | |
|
| |
|
|
September 30, 2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Ratio of earnings to fixed charges
|
|
|
5.4 |
|
|
|
8.2 |
|
|
|
11.0 |
|
|
|
8.8 |
|
|
|
5.7 |
|
|
|
8.6 |
|
In calculating the ratio of earnings to fixed charges, earnings
are the sum of earnings before income taxes and minority
interest plus fixed charges. Fixed charges are the sum of
(i) interest on indebtedness and amortization of debt
discount and debt issuance costs and (ii) an interest
factor attributable to rentals.
11
RISK FACTORS
Before agreeing to accept our new notes in exchange for the
FNF notes you currently hold, you should carefully consider the
risks described below, in addition to the other information
presented in or incorporated by reference into this prospectus
and consent solicitation statement. These risks could materially
affect our business, results of operations or financial
condition and could cause you to lose all or part of your
investment.
Risks Relating to the Exchange
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|
|
We are a holding company that has no operations and
depends on distributions from our subsidiaries for cash. Our
holding company structure results in structural subordination
and may affect our ability to make payments on our notes. |
Our notes are exclusively our obligations and are not
obligations of our subsidiaries. We are a holding company whose
primary assets are the securities of our operating subsidiaries.
Our ability to pay debt service on our notes and our other
obligations and to pay dividends is dependent on the ability of
our subsidiaries to pay dividends or repay funds to us. Our
subsidiaries are not obligated to make funds available to us for
payment on the notes or otherwise. If our operating subsidiaries
are not able to pay dividends or repay funds to us, we may not
be able to meet our obligations.
Our title 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. During the remainder of 2005,
our title insurance subsidiaries can pay dividends or make
distributions to us of approximately $89.1 million without
prior regulatory approval.
Furthermore, our notes will be effectively junior to all
existing and future liabilities and obligations of our
subsidiaries because, as a shareholder of our subsidiaries, we
will be subject to the prior claims of creditors of our
subsidiaries, except to the extent that we ourselves have a
claim against those subsidiaries as a creditor. As of
September 30, 2005, our subsidiaries had debt obligations
of approximately $157.1 million to creditors other than us
and had total liabilities of $3,607.5 million. Moreover,
there will be no limitations under our new indenture on the
amount of indebtedness we may incur. As of September 30,
2005, we had $500 million of outstanding debt obligations
(not including the debt of our subsidiaries). On
October 24, 2005, we borrowed $150 million under our
new credit facility and used the funds to repay a
$150 million intercompany note issued by one of our
subsidiaries to FNF in August 2005. Our insurance subsidiaries
are subject to limitations under state law on the amount of
dividends and other payments they may make to us, which may
adversely affect the amount of funds we have available to pay
interest and principal on our notes.
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|
The FNF notes will be structurally subordinated to our
notes and FNF may have limited sources of cash flow, which could
adversely affect their value. |
Because we are a subsidiary of FNF, any FNF notes not exchanged
in the exchange offers will be structurally subordinated to debt
and other obligations of our company (including our notes
offered hereby) as well as of our subsidiaries. We have issued
$500 million of notes to FNF which have terms that mirror
the FNF notes we seek to acquire in the exchange offers. While
these mirror notes are intended to provide FNF a source of cash
flow from which to fund the debt service on any FNF notes not
exchanged in the exchange offers, FNF is not required to use
payments it receives from us on the mirror notes to service the
FNF notes, and FNF has other cash needs that could consume the
cash it receives from the mirror notes.
FNF conducts its operations through its subsidiaries, which
include FIS and FNIC in addition to us. However, at present, FIS
is highly leveraged and FNIC is a smaller, growing operation
and, as a result, it will likely be difficult under current
circumstances for either of them to be a significant source of
cash to FNF. FIS has recently entered into a merger agreement
with Certegy, a public company. The merger would, upon
completion, result in FNF owning approximately 51% of the
combined company.
Although the merger with Certegy would result in the combined
company having a lower degree of leverage than FIS alone, the
combined company would still have substantial leverage and would
have its own
12
needs for cash and accordingly may be unable to provide
significant cash flow to FNF. Certegy and FIS currently expect
that following the merger the combined company will continue
paying quarterly dividends of $0.05 per share. However,
upon completion of the merger, Certegy will become a co-borrower
under FISs senior credit facilities. These facilities
contain covenants limiting the amount of dividends the combined
company can pay on its common stock to $60 million per
year, plus certain other amounts, except that dividends on the
common stock may not be paid if any event of default under the
facilities shall have occurred or be continuing or would result
from such payment. Any dividends it does pay would also be paid
to the stockholders of the combined company other than FNF.
Moreover, there can be no assurance that the merger between FIS
and Certegy will be consummated.
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|
If the exchange offers are not consummated, the debt
ratings of the outstanding FNF notes may be downgraded to below
investment grade. |
The FNF notes being sought in the exchange offers are currently
assigned ratings by each of Standard and Poors, a division
of The McGraw-Hill Companies, Inc. (S&P),
Moodys Corporation (Moodys) and Fitch
Ratings, Inc. (Fitch). Each series of outstanding
FNF notes has been assigned a BBB-rating by each of S&P and
Fitch, and a Baa3 rating by Moodys.
On October 14, 2005, Moodys issued a press release
announcing that it was leaving its ratings of the outstanding
FNF notes on review for possible downgrade based on the
uncertainty regarding their ultimate status. The release
indicated that, if the exchange offers described in this
prospectus and consent solicitation statement were not
consummated and the FNF notes continued to represent outstanding
debt obligations of FNF, Moodys would likely downgrade the
FNF notes to Ba1. Moodys currently rates FNFs senior
unsecured credit facility Ba1. The Moodys Ba1 rating is
the eleventh highest of the twenty-one ratings that Moodys
assigns and indicates that, in the opinion of Moodys, the
obligations represented by the securities have speculative
elements and are subject to substantial credit risk. The
Moodys Ba1 rating is considered below investment
grade. Such a downgrade would likely have a negative
effect on the value and marketability of your FNF notes.
Further, there can be no assurance that Moodys would not
downgrade any FNF notes not tendered in the exchange offers even
if a majority of the outstanding FNF notes have otherwise been
tendered and exchanged and a minority of the FNF notes remain
outstanding.
The ratings described above reflect the opinions of the rating
agencies on the creditworthiness of FNF with respect to the
specific financial obligations represented by the outstanding
FNF notes. They are not recommendations to buy, sell or hold
such securities, nor are they recommendations to tender or
refuse to tender your FNF notes in the exchange offers. The
ratings are subject to revision or withdrawal at any time by the
assigning rating agencies. Each rating should be evaluated
independently of any other rating. For a more detailed
description of the debt ratings assigned to the outstanding FNF
notes, including the relative standing of each such rating
within its assigning agencys overall classification
systems, see Business FNFs Long Term Debt
Ratings.
|
|
|
The proposed amendments to the indenture pursuant to which
the FNF notes were issued will, if adopted, afford reduced
protection to remaining holders of FNF notes. |
If the proposed amendments to the indenture are adopted, the
covenants and some other terms of the FNF notes will be less
restrictive and will afford reduced protection to holders of
those securities compared to the covenants and other provisions
currently contained in the indenture, as amended by the
officers certificates that set the terms of each series of
outstanding FNF notes. The proposed amendments to the indenture
would, among other things:
|
|
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|
|
eliminate most of the restrictive covenants in the indenture; |
|
|
|
eliminate restrictions on the ability of FNF to consolidate,
merge or sell all or substantially all of its assets; and |
|
|
|
eliminate certain events of default of FNF under the indenture. |
13
If the proposed amendments are adopted, each non-exchanging
holder of FNF notes will be bound by the proposed amendments
even though that holder did not consent to them. The elimination
or modification of the covenants and other provisions in the
indenture contemplated by the proposed amendments would, among
other things, permit FNF to take actions that could increase the
credit risk associated with the FNF notes, and might adversely
affect the liquidity or marketability of the FNF notes or
otherwise be adverse to the interests of the holders of the FNF
notes. See The Proposed Amendments.
|
|
|
The liquidity of the FNF notes that are not exchanged will
be reduced. |
The current trading market for the FNF notes is limited. The
trading market for unexchanged FNF notes will become more
limited and could for all practical purposes cease to exist due
to the reduction in the amount of the FNF notes outstanding upon
consummation of the exchange offers. Holders of FNF notes not
exchanged may attempt to obtain quotations for their unexchanged
FNF notes from their brokers; however, there can be no assurance
that any trading market will exist for the unexchanged FNF notes
following consummation of the exchange offers. A more limited
trading market might adversely affect the liquidity, market
price and price volatility of these securities. If a market for
unexchanged FNF notes exists or develops, these securities may
trade at a discount to the price at which the securities would
trade if the amount outstanding were not reduced, depending on
prevailing interest rates, the market for similar securities and
other factors. However, there can be no assurance that an active
market in the unexchanged FNF notes will exist, develop or be
maintained or as to the prices at which the unexchanged FNF
notes may be traded.
|
|
|
FNFs management has articulated an ongoing strategy
to seek growth through acquisitions in lines of business that
will not necessarily be limited to its traditional areas of
focus. Such acquisitions may affect FNFs credit and
ability to repay the FNF notes. |
Following the announcement of the distribution, FNFs
management made public statements indicating that following the
distribution FNF would seek to operate as a true holding company
with the flexibility to make acquisitions in lines of business
that are not directly tied to or synergistic with FNFs
title, financial processing or specialty insurance lines of
business. There can be no guarantee that FNF will not enter into
transactions or make acquisitions that will cause it to incur
additional debt, increase its exposure to market and other risks
and cause its credit or financial strength ratings to decline.
At the same time, there can be no assurance that one or more
transactions FNF engages in will not improve its
creditworthiness. Therefore, by deciding not to exchange, a
holder of FNF notes would be subject to the unknown risks or
benefits of FNFs new strategic direction.
|
|
|
A public market does not currently exist for our notes
offered in the exchange offers, and a market may not develop or
be sustained. |
We do not plan to list our notes offered under this prospectus
and consent solicitation statement on any national securities
exchange or to seek approval for quotation through any automated
quotation system. Our notes will represent new securities for
which no market currently exists. There can be no assurance that
an active trading market for our notes will develop or, if a
market develops, that it will be liquid or sustainable.
Risks Relating to Our Business
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If adverse changes in the levels of real estate activity
occur, our revenues will decline. |
Title insurance revenue is closely related to the level of real
estate activity which includes sales and mortgage refinancing.
The levels of real estate activity are primarily affected by the
average price of real estate sales, the availability of funds to
finance purchases and mortgage interest rates. We have found
that residential real estate activity generally decreases in the
following situations:
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when mortgage interest rates are high or increasing; |
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when the mortgage funding supply is limited; and |
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when the United States economy is weak. |
14
While prevailing mortgage interest rates have declined to record
lows in recent years and both the volume and the average price
of residential real estate transactions have experienced record
highs, these trends may not continue. If either the level of
real estate activity or the average price of real estate sales
decline it could adversely affect our title insurance revenues.
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Because we are dependent upon California for over
twenty-two percent of our title insurance premiums, our business
may be adversely affected by regulatory conditions in
California. |
California is the largest source of revenue for the title
insurance industry and in 2004, California-based premiums
accounted for 49.2% of premiums earned by our direct operations
and 2.6% of our agency premium revenues. In the aggregate,
California accounted for 22.4% of our total title insurance
premiums for 2004. A significant part of our revenues and
profitability are therefore subject to our operations in
California and to the prevailing regulatory conditions in
California. Adverse regulatory developments in California, which
could include reductions in the maximum rates permitted to be
charged, inadequate rate increases or more fundamental changes
in the design or implementation of the California title
insurance regulatory framework, could have a material adverse
effect on our results of operations and financial condition.
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Our subsidiaries engage in insurance-related businesses
and must comply with additional regulations. These regulations
may impede, or impose burdensome conditions on, our rate
increases or other actions that we might seek 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:
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licensing requirements; |
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trade and marketing practices; |
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accounting and financing practices; |
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capital and surplus requirements; |
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the amount of dividends and other payments made by insurance
subsidiaries; |
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investment practices; |
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rate schedules; |
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deposits of securities for the benefit of policyholders; |
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establishing reserves; and |
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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. 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
Regulation.
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Regulatory investigations of the insurance industry may
lead to fines, settlements, new regulation or legal uncertainty,
which could negatively affect our results of operations. |
We get inquiries and requests for information from state
insurance departments, attorneys general and other regulatory
agencies from time to time about various matters relating to our
business. Sometimes these take the form of civil investigative
subpoenas. We attempt to cooperate with all such inquiries. From
time to time, we are assessed fines for violations of
regulations or other matters or enter into settlements with such
authorities which require us to pay money or take other actions.
In the fall of 2004, the California Department of Insurance
began an investigation into reinsurance practices in the title
insurance industry and in February 2005 FNF was issued a
subpoena to provide
15
information to the California Department of Insurance as part of
its investigation. This investigation paralleled similar
inquiries of the National Association of Insurance
Commissioners, which began earlier in 2004. The investigations
have focused on arrangements in which title insurers would write
title insurance generated by realtors, developers and lenders
and cede a portion of the premiums to a reinsurance company
affiliate of the entity that generated the business.
We recently negotiated a settlement with the California
Department of Insurance with respect to that departments
inquiry into these arrangements, which we refer to as captive
reinsurance arrangements. Under the terms of the settlement, we
will refund approximately $7.7 million to those consumers
whose California property was subject to a captive reinsurance
arrangement and we will pay a penalty of $5.6 million. We
also recently entered into similar settlements with 15 other
states, in which we agreed to refund a total of approximately
$2 million to policyholders. Other state insurance
departments and attorneys general and the U.S. Department
of Housing and Urban Development (HUD) also have
made formal or informal inquiries of us regarding these matters.
We have been cooperating and intend to continue to cooperate
with the other ongoing investigations. We have discontinued all
captive reinsurance arrangements. The total amount of premiums
we ceded to reinsurers was approximately $10 million over
the existence of these agreements. The remaining investigations
are continuing and we are currently unable to give any assurance
regarding their consequences for the industry or for us.
Additionally, we have received inquiries from regulators about
our business involvement with title insurance agencies
affiliated with builders, realtors and other traditional sources
of title insurance business, some of which we have participated
in forming as joint ventures with our company. These inquiries
have focused on whether the placement of title insurance with us
through these affiliated agencies is proper or an improper form
of referral payment. Like most other title insurers, we
participate in these affiliated business arrangements in a
number of states. We recently entered into a settlement with the
Florida Department of Financial Services under which we agreed
to refund approximately $3 million in premiums received
though these types of agencies in Florida and pay a fine of
$1 million. The other pending inquiries are at an early
stage and as a result we can give no assurance as to their
likely outcome.
Finally, since 2004 our subsidiaries have received civil
subpoenas and other inquiries from the New York State Attorney
General, requesting information about our arrangements with
agents and customers and other matters relating to, among other
things, rate calculation practices, use of blended rates in
multi-state transactions, rebates and referral fees. These
inquiries are at an early stage and as a result we can give no
assurance as to their likely outcome.
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State regulation of the rates we charge for title
insurance could adversely affect our results of
operations. |
Our subsidiaries are subject to extensive rate regulation by the
applicable state agencies in the jurisdictions in which we
operate. Title insurance rates are regulated differently in the
various states in which we operate, with some states requiring
our subsidiaries to file rates before such rates become
effective and some states promulgating the rates to be charged
by our subsidiaries. In almost all states in which we operate,
our rates must not be excessive, inadequate or unfairly
discriminatory.
The California Department of Insurance has recently announced
its intent to examine levels of pricing and competition in the
title insurance industry in California, with a view to
determining whether prices are too high and if so, implementing
rate reductions. New York and Colorado insurance regulators have
also announced similar inquiries and other states could follow.
At this stage, we are unable to predict what the outcome will be
of this or any similar review.
State regulators may use their rate-regulation oversight
authority to take steps to cause us to reduce our rates, or
block our attempts to increase our rates. Such actions by
regulators could adversely affect our operating results.
16
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If the rating agencies further downgrade our company our
results of operations and competitive position in the industry
may suffer. |
Ratings have always been an important factor in establishing the
competitive position of insurance companies. Our insurance
companies are rated by S&P, Moodys, Fitch, A.M. Best
and Demotech, Inc. (Demotech). Ratings reflect the
opinion of a rating agency with regard to an insurance
companys or insurance holding companys financial
strength, operating performance, and ability to meet its
obligations to policyholders and are not evaluations directed to
investors. In connection with the announcement of the
restructuring and distribution, S&P placed our A- financial
strength rating on CreditWatch negative, Moodys affirmed
our A3 financial strength rating although the rating outlook was
changed to negative and Fitch placed our financial strength
rating on Rating Watch Negative. In addition, A.M. Best
downgraded the financial strength ratings of our principal
insurance subsidiaries to A-. After the announcement of the
merger between FIS and Certegy, S&P revised its CreditWatch
to positive from negative, Moodys changed its rating
outlook to stable from negative and Fitch revised its rating
watch to stable from negative. Our ratings are likely to
continue to be affected in the future by credit events that may
occur with respect to FNF and its other operations. Our ratings
are subject to continued 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.
The relative position of each of our ratings among the ratings
assigned by each rating agency is as follows:
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the seventh highest rating of twenty-one ratings for S&P; |
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the seventh highest rating of twenty-one ratings for
Moodys; |
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the seventh highest rating of twenty-four ratings for Fitch; |
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the fourth highest rating of fifteen ratings for A.M.
Best; and |
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the first and second highest ratings of five ratings for
Demotech. |
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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, the top five title insurance companies accounted for
90.2% of net premiums collected in 2004. Over 40 independent
title insurance companies accounted for the remaining 9.8% 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 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.
From time to time, we adjust the rates we charge in a particular
state as a result of competitive conditions in that state. For
example, in response to recent rate reductions by certain of our
competitors, we recently filed for an adjustment of our rate
structure in California for refinancings. This change could have
an adverse impact on our results of operations, although its
ultimate impact will depend, among other things, on the volume
and mix of our future refinancing business in that state.
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Our historical financial information may not be
representative of our results as a consolidated, stand-alone
company and may not be a reliable indicator of our future
results. |
Our historical financial statements may not be indicative of our
future performance as a consolidated, stand-alone company. We
were incorporated on May 24, 2005 in anticipation of the
distribution of shares of our Class A Common Stock to FNF
stockholders. On September 26, 2005, FNF contributed to us
the various
17
FNF subsidiaries that conduct our business. Our historical
financial statements reflect assets, liabilities, revenues and
expenses directly attributable to our operations. Accordingly,
they exclude certain of our expenses that have been allocated to
other operations of FNF and of FIS, and they reflect an
allocation to us of a portion of the compensation of certain
senior officers and other personnel of FNF who, following the
distribution, are no longer our employees but who have
historically provided services to us. These allocations are
expected to in general continue under the corporate services
agreements we entered into in connection with the distribution.
Further, our financial statements reflect transactions with
related parties, which were not negotiated on an arms-length
basis. Our historical financial statements presented in this
prospectus and consent solicitation statement do not reflect the
debt or interest expense we might have incurred if we had been a
stand-alone entity. In addition, we will incur other expenses,
not reflected in our historical financial statements, as a
result of being a separate publicly traded company. As a result
of these and other factors, our historical financial statements
do not necessarily reflect what our financial position and
results of operations would have been if we had been operated as
a stand-alone public entity during the periods covered, and may
not be indicative of future results of operations or financial
position.
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We will be controlled by FNF as long as it owns a majority
of the voting power of our common stock, which could make it
more difficult for us to raise capital. |
As long as FNF continues to hold a majority of the voting power
of our outstanding stock, FNF will be able to elect all of our
directors and determine the outcome of all corporate actions
requiring stockholder approval. FNF currently owns 100% of our
Class B Common Stock, representing approximately 82.5% of
our outstanding common stock, and 97.9% of all voting power of
our outstanding common stock. In order to consolidate the
results of our operations for tax purposes and to get favorable
tax treatment of dividends paid by us, FNF is generally required
to own at least 80% of our outstanding common stock and as a
result FNF may be unlikely to decrease its ownership below 80%.
The Class B Common Stock entitles FNF to ten votes per
share on all matters submitted to stockholders until converted
to Class A Common Stock.
While it controls us, FNF will control decisions with respect to:
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our business direction and policies, including the election and
removal of our directors; |
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mergers or other business combinations involving us; |
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the acquisition or disposition of assets by us; |
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our issuance of stock; |
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our payment of dividends; |
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our financing; and |
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amendments to our certificate of incorporation and bylaws. |
We have agreed that, without FNFs consent, we will not
issue any shares of our stock if as a result FNF would no longer
be able to consolidate our results for tax purposes, receive
favorable treatment with respect to dividends paid by us or, if
it so desired, distribute the remainder of its FNT stock to its
stockholders in a tax-free distribution. These limits will
generally enable FNF to continue to own at least 80% of our
outstanding common stock. Among other things, this control could
make it more difficult for us to raise capital by selling stock
or to use our stock as currency in acquisitions.
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We could have conflicts with entities remaining with FNF
after the distribution, and the chairman of our board of
directors is also both the chief executive officer and chairman
of the board of directors of FNF and FIS. |
Conflicts may arise between entities remaining with FNF and us
as a result of our ongoing agreements and the nature of our
respective businesses. We will seek to manage any potential
conflicts through our agreements with FNF and other FNF entities
and through oversight by independent members of our board of
directors. However, there can be no assurances that such
measures will be effective or that we will be able to resolve
all potential conflicts with entities remaining with FNF, and
even if we do, the resolution may be less favorable to us than
if we were dealing with an unaffiliated third party.
18
Some of our executive officers and directors own substantial
amounts of FNF and FIS stock and options because of their
relationships with FNF and FIS prior to the distribution. Such
ownership could create or appear to create potential conflicts
of interest involving fiduciary duties when directors and
officers are faced with decisions that could have different
implications for our company and FNF or FIS.
Mr. Foley is the chairman of our board of directors and
will continue to be the chief executive officer and chairman of
the board of directors of FNF and chief executive officer and
chairman of the board of directors of FIS following the
distribution. If the merger between FIS and Certegy is
consummated, Mr. Foley will become chairman of the board of
Certegy and will relinquish his roles at FIS. As an officer and
director of multiple companies, he has obligations to us as well
as FNF and FIS and may have conflicts of interest with respect
to matters potentially or actually involving or affecting us.
Matters that could give rise to conflicts include, among other
things:
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our past and ongoing relationships with FNF and other entities
of FNF, including tax matters, employee benefits,
indemnification, and other matters; |
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the quality and pricing of services that we have agreed to
provide to entities remaining with FNF or that those entities
have agreed to provide to us; and |
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sales or distributions by FNF of all or part of its ownership
interest in us. |
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Provisions of our certificate of incorporation may prevent
us from receiving the benefit of certain corporate
opportunities. |
Because FNF and FIS may engage in the same activities in which
we engage, there is a risk that we may be in direct competition
with FNF and FIS over business activities and corporate
opportunities. To address these potential conflicts, we have
adopted a corporate opportunity policy that has been
incorporated into our certificate of incorporation. Among other
things, this policy provides that FNF has no duty not to compete
with us or to provide us with corporate opportunities of which
it becomes aware. The policy also limits the situations in which
one of our directors or officers, if also a director or officer
of FNF, must offer corporate opportunities to us of which such
individual becomes aware. These provisions may limit the
corporate opportunities of which we are made aware or which are
offered to us. See Certain Relationships and Related
Transactions Provisions of our Certificate of
Incorporation Relating to Corporate Opportunities.
Moreover, our ability to take advantage of certain corporate
opportunities may be limited by FNFs voting control over
us.
THE EXCHANGE OFFERS
Subject to the terms and conditions in this prospectus and
consent solicitation statement, FNT offers to exchange
(i) any and all of the outstanding 7.30% notes due
2011 of FNF for its newly issued 7.30% notes due 2011 and
(ii) any and all of the outstanding 5.25% notes due
2013 of FNF for its newly issued 5.25% notes due 2013.
The expiration of each of the exchange offers is midnight, New
York City time, on January 13, 2006, unless we extend it.
We may extend the expiration date of both offers together or
each offer individually by giving oral or written notice of such
extension by means of a press release or other public
announcement no later than 9:00 a.m., New York City time,
on the next business day after the previously scheduled
expiration date. During any such extension, all outstanding FNF
notes previously tendered will remain subject to the applicable
exchange offer and we may accept them for exchange. Holders who
have tendered their FNF notes will not, however, be able to
withdraw their tendered notes or revoke their consent with
respect thereto after the initial expiration time, even if we
extend the exchange offers. Any outstanding notes that we do not
accept for exchange for any reason will be promptly returned to
you without cost after the expiration or termination of the
applicable exchange offer.
None of FNT, FNF, the exchange and information agent, the
trustee under the FNF indenture, the trustee under the FNT
indenture or the dealer manager makes any recommendation as to
whether or not holders of FNF notes should exchange their
securities in the exchange offers and consent to the proposed
amendments to the FNF indenture.
19
Terms of the Exchange Offers
We expressly reserve the right to amend either or both exchange
offers. We also reserve the right to refuse to exchange any
outstanding notes tendered, and to decide not to consummate
either or both exchange offers if any of the conditions to the
exchange offers are not met. The conditions to the exchange
offers are described more fully under
Conditions to the Exchange Offers.
We are offering to holders of the FNF notes of the series listed
on the cover of this prospectus and consent solicitation
statement the opportunity to exchange their FNF notes for our
new notes in an aggregate principal amount equal to the
aggregate principal amount of the FNF notes validly tendered and
not validly withdrawn. Our new notes will have the same interest
rates, redemption terms and payment and maturity dates as the
FNF notes for which they are exchanged. Interest on our new
notes will be deemed to accrue from the last date for which
interest was paid on the FNF notes for which they are exchanged.
At the time of the exchange, you will not receive a payment for
accrued interest on the FNF notes you exchange.
Holders of FNF notes must tender the FNF notes in integral
multiples of $1,000. New notes will be issued in minimum
denominations of $1,000 and integral multiples of $1,000 in
excess thereof.
The Consent Solicitations
Concurrently with making the exchange offers, we are soliciting
consents from the holders of the outstanding FNF notes to amend
the indenture pursuant to which the FNF notes were issued to
remove many of the covenants, restrictive provisions and events
of default of FNF. The proposed amendments are described in more
detail under The Proposed Amendments. The consent of
the holders of a majority of the aggregate principal amount of
each series of FNF notes outstanding will be required in order
to effectuate the amendments to the indenture with respect to
that series. If the amendments are approved and effected with
respect to a series, they will be binding on all holders of FNF
notes of that series, including those who do not give their
consent to the amendment and do not tender their FNF notes in
these exchange offers. If for any reason the exchange offer with
respect to a series of FNF notes is not completed, the
amendments to the indenture will not become effective with
respect to that series and that series of FNF notes will be
subject to the same terms and conditions as existed before the
exchange offers were made.
If you tender your FNF notes in the exchange offers you will be
deemed to consent to the amendments to the indenture and if you
give consent to amend the indenture you must tender your FNF
notes. Tendered FNF notes may be withdrawn and consents revoked
before the initial expiration time, but FNF notes may not be
withdrawn and consents may not be revoked at or after the
initial expiration time, even if we otherwise extend the
exchange offers beyond the initial expiration time. Consents
given in connection with the tender of any FNF notes cannot be
revoked without withdrawing the FNF notes, and FNF notes cannot
be withdrawn without also revoking the consent related to those
notes. Our receipt of the requisite number of consents in
advance of the expiration of the relevant exchange offer will
not result in any change in the terms of such exchange offer and
holders will continue to be able to withdraw their FNF notes and
thereby revoke their consents until the initial expiration time.
Conditions to the Exchange Offers and Consent
Solicitations
Our obligations to consummate either or both exchange offers are
subject to the conditions described in this section, all of
which must be satisfied or waived (if waivable) on or before the
expiration of the applicable exchange offer.
Our obligations in each exchange offer originally were subject
to the condition that we receive, before the expiration of the
applicable exchange offer, sufficient consents to amend the
indenture pursuant to which the FNF notes were issued to
eliminate most of the covenants, restrictive provisions and
events of default of FNF thereunder with respect to each series
of FNF notes. However, we hereby waive that condition.
Our obligations in each exchange offer are subject to the
conditions that the exchange offers do not violate applicable
law or any applicable interpretation of the staff of the
Securities and Exchange Commission
20
and that the following statements are true as of the
commencement of the exchange offers and remain true until the
consummation of the exchanges:
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In our reasonable judgment, (i) no action or event has occurred
or been threatened in writing (including a default under an
agreement, indenture or other instrument or obligation to which
we or one of our affiliates is a party or by which it is bound),
(ii) no action or proceeding is pending or has been threatened
in writing before or by any court, governmental, regulatory or
administrative agency or instrumentality, or by any other person
and (iii) no statute, rule, regulation, judgment, order, stay,
decree or injunction has been promulgated, enacted, entered,
enforced or deemed applicable to the exchange offers, the
exchange of FNF notes under the exchange offers, the consent
solicitations or the proposed amendments, by any court or
governmental, regulatory or administrative agency, authority or
tribunal, which in any case: |
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challenges the exchange offers, the exchange of FNF notes under
the exchange offers, the consent solicitations or the proposed
amendments or might prohibit, prevent, restrict or delay
consummation of, or might otherwise adversely affect in any
material manner, the exchange offers, the exchange of FNF notes
under the exchange offers, the consent solicitations or the
proposed amendments; |
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in our reasonable judgment could materially affect our or our
subsidiaries business, condition (financial or otherwise),
income, operations, properties, assets, liabilities or
prospects, taken as a whole; |
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would materially impair the ability of the exchange offers, the
exchange of FNF notes under the exchange offers, the consent
solicitations or the proposed amendments to result in the
removal of the restrictions and other provisions under the FNF
indenture as contemplated by the proposed amendments, the
elimination of FNFs direct obligations under any FNF notes
acquired in the exchange offers or the avoidance of a downgrade
in the debt ratings of FNF by Moodys Investors Service; or |
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might be material to holders of FNF notes in deciding whether to
accept the exchange offers and give their consents; |
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2) |
None of the following has occurred: |
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any general suspension of or limitation on trading in securities
on any United States or European national securities exchange or
in the over-the-counter
market (whether or not mandatory); |
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any material adverse change in the market values of the FNF
notes; |
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a material impairment in the general trading market for debt
securities; |
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a declaration of a banking moratorium or any suspension of
payments in respect of banks by federal or state authorities in
the United States (whether or not mandatory); |
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a commencement or escalation of a war, armed hostilities,
terrorist act or other national or international crisis relating
to the United States, any limitation (whether or not mandatory)
by any governmental authority on, or other event having a
reasonable likelihood of affecting, the extension of credit by
banks or other lending institutions in the United States, or any
material adverse change in United States securities or financial
markets generally; or |
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in the case of any of the foregoing existing at the time of the
commencement of the exchange offers, a material acceleration or
worsening thereof; and |
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3) |
The trustee of the FNF notes (as described in the FNF indenture)
has executed and delivered a supplemental indenture relating to
the proposed amendments and has not objected in any respect to,
or taken any action that could in our reasonable judgment
adversely affect, the consummation of any of the exchange
offers, the exchange of FNF notes under the exchange offers, the
consent solicitations or our ability to effect the proposed
amendments, nor has the trustee of the FNF notes taken any
action that challenges the validity or effectiveness of the
procedures used to solicit consents (including the form thereof)
or in making the exchange offers, the exchange of the FNF notes
under the exchange offers or the consent solicitations. |
21
Finally, our obligation to consummate each exchange is
conditioned on our concurrent completion of the other exchange.
All of these conditions are for our sole benefit and may be
waived, in whole or in part and with respect to the exchange
offers for either or both series of FNF notes, in our sole
discretion, except that we may not waive the conditions that the
exchange offers do not violate applicable law or any applicable
interpretation of the staff of the Securities and Exchange
Commission. Any determination we make concerning these events,
developments or circumstances will be conclusive and binding. If
any of these conditions are not satisfied with respect to a
particular series of FNF notes, at any time before or
concurrently with the consummation of the exchange offer or
consent solicitation with respect to that series, we may:
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a) |
terminate the exchange offer and the consent solicitation with
respect to that series of FNF notes and return all tendered FNF
notes of that series to the holders thereof (whether or not we
terminate the exchange offer and consent solicitations with
respect to the other series of FNF notes); |
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modify, extend or otherwise amend the exchange offer and consent
solicitation with respect to that series of FNF notes (whether
or not we modify, extend or otherwise amend the exchange offer
and consent solicitation with respect to the other series of FNF
notes) and retain all tendered FNF notes of that series and
consents until the expiration date, as extended, of such
exchange offer and consent solicitation, subject, however, to
the withdrawal rights of holders (See
Withdrawal of Tenders and Revocation of
Corresponding Consents); or |
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waive the unsatisfied conditions with respect to such exchange
offer and consent solicitation and accept all FNF notes of that
series tendered and not previously withdrawn (whether or not we
waive these conditions for the exchange offer and consent
solicitation with respect to the other series of FNF notes). |
If our waiver of any of the conditions would constitute a
material change in either or both exchange offers, we will
disclose that change through a supplement to this prospectus and
consent solicitation statement that will be distributed to each
registered holder of outstanding FNF notes. In addition, we will
extend the applicable exchange offer for a period of five to ten
business days, depending upon the significance of the waiver and
the manner of disclosure to the registered holders of the
outstanding FNF notes, if the exchange offer would otherwise
expire during such period.
Procedures for Tendering FNF Notes and Delivering Consents
If you hold FNF notes of either series and wish to have those
notes exchanged for FNT notes of the corresponding series, you
must validly tender or cause the valid tender of your FNF notes
using the procedures described in this prospectus and consent
solicitation statement and in the accompanying Letter of
Transmittal and Consent. The proper tender of FNF notes will
constitute an automatic consent to the proposed amendments to
the FNF indenture, as described in this prospectus and consent
solicitation statement under The Proposed Amendments.
The procedures by which you may tender or cause to be tendered
FNF notes will depend upon the manner in which you hold the FNF
notes, as described below.
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Tender of FNF Notes held through a Nominee |
If you are a beneficial owner of FNF notes that are held of
record by a custodian bank, depositary, broker, trust company or
other nominee, and you wish to tender FNF notes in either of the
exchange offers, you should contact the record holder promptly
and instruct the record holder to tender the FNF notes and
deliver a consent on your behalf using one of the procedures
described below.
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Tender of FNF Notes with DTC and Book-Entry
Transfer |
Pursuant to authority granted by The Depository Trust Company
(DTC), if you are a DTC participant that has FNF
notes credited to your DTC account and thereby held of record by
DTCs nominee, you may directly tender your FNF notes and
deliver a consent as if you were the record holder. Accordingly,
22
references herein to record holders include DTC participants
with FNF notes credited to their accounts. The exchange agent
has established accounts with respect to the FNF notes at DTC
for purposes of the exchange offers. Any DTC participant may
tender FNF notes and deliver a consent to the proposed
amendments to the FNF indenture by effecting a book-entry
transfer of the FNF notes to be tendered in the exchange offers
into the account of the exchange agent at DTC and either, before
the applicable exchange offer expires:
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electronically transmitting its acceptance of the exchange offer
through DTCs Automated Tender Offer Program
(ATOP) procedures for transfer or |
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completing and signing the Letter of Transmittal and Consent
according to the instructions and delivering it, together with
any signature guarantees and other required documents, to the
exchange agent at its address on the back cover page of this
prospectus and consent solicitation statement. |
If ATOP procedures are followed, DTC will verify each acceptance
transmitted to it, execute a book-entry delivery to the exchange
agents account at DTC and send an agents message to
the exchange agent. An agents message is a
message, transmitted by DTC to and received by the exchange
agent and forming part of a book-entry confirmation, which
states that DTC has received an express acknowledgement from a
DTC participant tendering FNF notes that the participant has
received and agrees to be bound by the terms of the Letter of
Transmittal and Consent and that FNT and FNF may enforce the
agreement against the participant. DTC participants following
this procedure should allow sufficient time for completion of
the ATOP procedures prior to the expiration date of the exchange
offers.
The Letter of Transmittal and Consent (or facsimile thereof),
with any required signature guarantees, or (in the case of
book-entry transfer) an agents message in lieu of the
Letter of Transmittal and Consent, and any other required
documents, must be transmitted to and received by the applicable
exchange agent prior to the expiration date of the applicable
exchange offer at its address set forth on the back cover page
of this prospectus and consent solicitation statement. Delivery
of such documents to DTC does not constitute delivery to the
exchange agent.
If your FNF Notes have
already been Tendered
If your notes have already been validly tendered, you need take
no further action. We will deem all notes validly tendered using
the prior form of the Letter of Transmittal and Consent to have
been validly tendered using the form accompanying this
prospectus and consent solicitation statement. Further, we will
deem any agreement to be bound by the terms of the Letter of
Transmittal and Consent that is or has been received by
agents message to be an agreement to be bound by the form
thereof accompanying this prospectus and consent solicitation
statement.
Proper Execution and Delivery of the Letter of Transmittal
and Consent
If you wish to participate in either or both exchange offers and
consent solicitations, delivery of your FNF notes and other
required documents are your responsibility. Delivery is not
complete until the required items are actually received by the
exchange agent. If you mail these items, we recommend that you
use registered mail properly insured with return receipt
requested, and mail the required items sufficiently in advance
of the expiration date with respect to the applicable exchange
offer to allow sufficient time to ensure timely delivery.
Signatures on the Letter of Transmittal and Consent must be
guaranteed by a firm that is a participant in the Security
Transfer Agents Medallion Program or the Stock Exchange
Medallion Program (generally a member of a registered national
securities exchange, a member of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company
having an office in the United States) (an Eligible
Institution), unless (i) the Letter of Transmittal
and Consent is signed by the holder of the FNF notes tendered
therewith and the FNT notes or any FNF notes not tendered or not
accepted for exchange are to be issued directly to such holder
or (ii) such FNF notes are tendered for the account of an
Eligible Institution.
If tendered notes are registered to a person who did not sign
the Letter of Transmittal and Consent, they must be endorsed by,
or be accompanied by a written instrument of transfer duly
executed by, the registered holder with the signature guaranteed
by an Eligible Institution and appropriate powers of attorney,
signed
23
exactly as the name of the registered holder appears on the
outstanding notes. All questions of adequacy of the form of the
writing will be determined by us in our sole discretion.
If the Letter of Transmittal and Consent or any outstanding
notes or powers of attorney are signed by trustees, executors,
administrators, guardians,
attorneys-in-fact,
officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when
signing, and unless waived by us, submit evidence satisfactory
to us of their authority to so act with the Letter of
Transmittal and Consent.
Acceptance of Outstanding Notes for Exchange; Delivery of New
Notes
Upon satisfaction or waiver of the conditions to the exchange
offer for a particular series, we will promptly issue our notes
in exchange for all outstanding FNF notes of such series
properly tendered. We will be deemed to have accepted properly
tendered notes for exchange if or when we give oral or written
notice of acceptance to the exchange agent, with written
confirmation of any oral notice to follow promptly.
If any tendered notes are not accepted for any reason or if
outstanding notes are submitted for a greater principal amount
than the holder desired to exchange, the unaccepted or
non-exchanged portion of FNF notes will be returned without
expense to the tendering holder (or, in the case of FNF notes
tendered by book-entry transfer into the exchange agents
account at the book-entry transfer facility pursuant to the
book-entry procedures described above, the unaccepted,
non-exchanged or unsold FNF notes will be credited to an account
maintained with such book-entry transfer facility) promptly
after the expiration or termination of the applicable exchange
offer.
Withdrawal of Tenders and Revocation of Corresponding
Consents
Tenders of FNF notes in connection with any of the exchange
offers may be withdrawn at any time prior to the initial
expiration time. Tenders of FNF notes may not be withdrawn at
any time after the initial expiration time, even if we otherwise
extend the exchange offers. The valid withdrawal of tendered FNF
notes prior to the initial expiration time will be deemed to be
a concurrent revocation of the consent to the proposed
amendments to the FNF indenture. You may only revoke a consent
by validly withdrawing the related FNF notes prior to the
initial expiration time. Tenders of notes made after the initial
expiration time may not be withdrawn. Beneficial owners desiring
to withdraw FNF notes previously tendered should contact the DTC
participant through which they hold their FNF notes. In order to
withdraw FNF notes previously tendered, a DTC participant may,
prior to the expiration of the applicable exchange offer with
respect to those notes, withdraw its instruction previously
transmitted through ATOP by delivering to the exchange agent by
mail, hand delivery or facsimile transmission, notice of
withdrawal of such instruction.
Any such notice of withdrawal must:
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(i) |
specify the name of the depositor having tendered the
outstanding note to be withdrawn; |
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(ii) |
include a statement that the depositor is withdrawing its
election to have the outstanding note exchanged, and identify
the outstanding note to be withdrawn (including the principal
amount of the outstanding note); |
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(iii) |
specify the name in which such outstanding note is registered,
if different from that of the withdrawing holder; and |
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(iv) |
state that the consent to amend the indenture under which the
note was issued is revoked. |
We will determine all questions as to the validity, form and
eligibility (including time of receipt) for such withdrawal
notices. Our determination will be final and binding on all
parties. Any outstanding notes so withdrawn will be considered
not to have been validly tendered for purposes of the exchange
offers and no new notes will be issued with respect thereto.
Properly withdrawn FNF notes, however, may be re-tendered by
following the procedures described above at any time prior to
the expiration of the applicable exchange offer.
24
Miscellaneous
All questions as to the validity, form, eligibility (including
time of receipt) and acceptance for exchange of any tender of
FNF notes in connection with the exchange offers will be
determined by us, in our sole discretion, and our determination
will be final and binding. We reserve the absolute right to
reject any or all tenders not in proper form or the acceptance
for exchange of which may, in the opinion of our counsel, be
unlawful.
We also reserve the absolute right to waive any defect or
irregularity in the tender of any FNF notes in either exchange
offer, and our interpretation of the terms and conditions of
each exchange offer (including the instructions in the Letter of
Transmittal and Consent) will be final and binding on all
parties. None of FNT, FNF, the exchange and information agent,
the dealer manager or any other person will be under any duty to
give notification of any defects or irregularities in tenders or
incur any liability for failure to give any such notification.
Tenders of FNF notes involving any irregularities will not be
deemed to have been made until those irregularities have been
cured or waived. FNF notes received by the exchange agent in
connection with any exchange offer that are not validly tendered
and as to which the irregularities have not been cured or waived
will be returned by the exchange agent to the DTC participant
who delivered those FNF notes by crediting an account maintained
at DTC designated by that DTC participant promptly after the
expiration date of the applicable exchange offer or the
withdrawal or termination of the applicable exchange offer.
Exchange Agent
D.F. King & Co., Inc. has been appointed the
exchange agent for the exchange offers and consent
solicitations. Letters of Transmittal and Consents and all
correspondence in connection with the exchange offers should be
sent or delivered by each holder of FNF notes, or a beneficial
owners custodian bank, depositary, broker, trust company
or other nominee, to the exchange agent at the address and
telephone numbers set forth on the back cover page of this
prospectus and consent solicitation statement. FNT will pay the
exchange agent reasonable and customary fees for its services
and will reimburse it for its reasonable,
out-of-pocket expenses
in connection therewith.
Information Agent
D.F. King & Co., Inc. has been appointed the
information agent for the exchange offers and consent
solicitations, and will receive customary compensation for its
services. Questions concerning tender procedures and requests
for additional copies of this prospectus and consent
solicitation statement or the Letter of Transmittal and Consent
should be directed to the information agent at the address and
telephone numbers set forth on the back cover page of this
prospectus and consent solicitation statement. Holders of FNF
notes may also contact their custodian bank, depositary, broker,
trust company or other nominee for assistance concerning the
exchange offers.
Dealer Manager
FNT has retained Lehman Brothers Inc. to act as dealer manager
in connection with the exchange offers and consent solicitations
and will pay to the dealer manager for soliciting tenders in the
exchange offers a fixed fee in a customary amount conditioned
upon completion of the exchange offers. FNT will also reimburse
the dealer manager for certain expenses. The obligations of the
dealer manager to perform this function are subject to certain
conditions.
FNT has agreed to indemnify the dealer manager against certain
liabilities, including liabilities under the federal securities
laws. Questions regarding the terms of the exchange offers or
the consent solicitations may be directed to the dealer manager
at the address and telephone numbers set forth on the back cover
page of this prospectus and consent solicitation statement. From
time to time, the dealer manager has provided and may in the
future provide investment banking, commercial banking and other
services for FNT and FNF. The dealer manager, in the ordinary
course of its business, may make markets in our securities and
those of FNF, including the FNT notes and the FNF notes. As a
result, from time to time, the dealer manager may own certain of
our securities or those of FNF, including the FNT notes and the
FNF notes.
25
Other Fees and Expenses
We will pay the expenses of soliciting tenders of the FNF notes.
The principal solicitation is being made by mail; however,
additional solicitations may be made by facsimile transmission,
telephone or in person by the dealer manager and the information
agent, as well as by our officers and other employees and those
of our affiliates.
Tendering holders of FNF notes will not be required to pay any
fee or commission to the dealer manager. However, if a tendering
holder handles the transaction through its broker, dealer,
commercial bank, trust company or other institution, that holder
may be required to pay brokerage fees or commissions.
Effect of Tender
Any tender by a holder of FNF notes that is not withdrawn prior
to the expiration of the applicable exchange offer will
constitute a binding agreement between the holder and us, upon
the terms and subject to the conditions of the exchange offers.
The acceptance of an exchange offer by a tendering holder of FNF
notes will constitute the agreement by that holder to deliver
good and marketable title to the tendered FNF notes, free and
clear of all liens, charges, claims, encumbrances, interests and
restrictions of any kind. The successful completion of either or
both exchange offers may adversely affect the liquidity and
market price of any remaining FNF notes not tendered in the
exchange.
Absence of Dissenters Rights
Holders of the FNF notes do not have any appraisal or
dissenters rights in connection with the exchange offers
and consent solicitations under New York law or the law of any
other state or under the terms of the FNF notes or the FNF
indenture.
Accounting Treatment for Exchange Offers
We will account for the exchange offers as an exchange of debt
under United States generally accepted accounting principles.
The notes to be issued in the exchange offers will be recorded
at the same carrying value as the FNF notes for which they will
be exchanged. Accordingly, we will recognize no gain or loss for
accounting purposes upon the consummation of the exchange
offers. We will amortize a portion of the expenses of the
exchange offers over the term of the notes issued in the
exchange offers. After consummation of the exchange offers, we
intend to deliver to FNF all FNF notes obtained in the exchange
offers in redemption of an aggregate principal amount of the
corresponding mirror notes. As such, the consummation of the
exchange offers will have no effect on the outstanding principal
amount of our debt.
THE PROPOSED AMENDMENTS
We are soliciting the consent of the holders of the FNF notes to
(1) eliminate most of the covenants, (2) eliminate the
restrictions on FNFs ability to consolidate, merge or sell
all or substantially all of its assets and (3) eliminate
certain events of default under the FNF indenture, as amended by
the officers certificates that set the terms of each
series of outstanding FNF notes. The descriptions of the
amendments to the FNF indenture set forth below do not purport
to be complete and are qualified in their entirety by reference
to the full and complete terms contained in the indenture, the
officers certificates that set the terms of each series of
outstanding FNF notes at the times of their issuance and the
form of supplemental indenture, which are available from the
information agent upon request and have also been filed as
exhibits to the registration statement of which this prospectus
and consent solicitation statement forms a part. A revised
version of the supplemental indenture will be filed with the SEC
by FNT on or about the date of this prospectus and consent
solicitation statement as an exhibit to a current report on
Form 8-K, and may
also be obtained from the information agent upon request. See
Where You Can Find More Information for information
as to how you can obtain a copy of the indenture and
supplemental indenture from the Securities and Exchange
Commission.
Holders who tender their FNF notes in exchange for our notes are
obligated to consent to the proposed amendments. Holders who do
not consent to the proposed amendments will nonetheless be
subject to the amended FNF indenture if enough consents are
received and the indenture is accordingly amended. Holders
26
of FNF notes should therefore consider the effect the proposed
amendments will have on their positions if they do not tender
their notes in the exchange offers.
The proposed amendments to the FNF indenture will be effected
with respect to either or both series of FNF notes by the
execution of a supplemental indenture that is expected to be
executed before the expiration of the exchange offers, but the
effectiveness of which will be subject to the consummation of
the applicable exchange offer and the condition that, prior to
the expiration of such exchange offer, we receive consents
sufficient to amend the FNF indenture with respect to that
exchange offer and that such consents shall not have been
revoked or withdrawn prior to the initial expiration time.
The proposed amendments would delete in their entirety the
following covenants from the FNF indenture:
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Sections 7.1 (Consolidation, Merger or Sale of Assets
Permitted) and 7.2 (Successor Person Substituted for
Company), which limit FNFs ability to enter into a
merger, consolidation or asset sale; |
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Section 9.4 (Corporate Existence) where FNF
covenants to preserve its corporate existence and its rights and
franchises; |
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Section 9.5 (Insurance) where FNF covenants to
maintain and cause its subsidiaries to maintain insurance
covering risks associated with its businesses; |
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Section 9.8 (Limitation on Liens), as amended
by the officers certificate dated March 11, 2003 with
respect to the 5.25% FNF notes due 2013 and by the
officers certificate dated August 20, 2001 with
respect to the 7.30% FNF notes due 2011, which limits FNFs
ability to incur debt or other obligations; |
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Section 9.9 (Books of Record and Account; Compliance
with Law) where FNF covenants to keep and cause its
subsidiaries to keep books of record and account and comply with
laws related to its businesses; and |
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Section 9.10 (Taxes) where FNF covenants to pay
and cause its subsidiaries to pay applicable taxes and
governmental charges. |
We are not aware of any default or event of default under the
FNF indenture as a result of failing to comply with the terms of
the covenants identified above and under the amended exchange
offers are not requesting any waiver thereof.
We are requesting to delete clauses (4), (5), (6) and (7)
from the definition of Event of Default in
Section 5.1 of the FNF indenture (in the case of
clause (4), as amended by the officers certificate
dated March 11, 2003 with respect to the 5.25% FNF notes
due 2013 and by the officers certificate dated
August 20, 2001 with respect to the 7.30% FNF notes due
2011). These clauses provide, respectively, that each of the
following constitutes an event of default:
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a default under any debt of FNF or under any instrument under
which such debt may be issued or secured, which results in such
debt in an aggregate principal amount in excess of
$20 million becoming due and payable prior to the date it
otherwise would have, and such acceleration not having been
cured or rescinded or such debt not having been paid within
10 days after notice to FNF as specified in the
indenture; and |
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a commencement by FNF of a voluntary case or proceeding under
applicable bankruptcy law, its consent to the entry of an order
for relief against it in an involuntary case or proceeding or to
the commencement of any bankruptcy or insolvency case or
proceeding against it, its consent to the appointment of a
custodian of it or for all or substantially all of its property
or its making a general assignment for the benefit of its
creditors; |
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an order or decree under any bankruptcy law that remains in
effect for 60 days and that is for relief against FNF in an
involuntary case, appoints a custodian of FNF or for all or
substantially all of its property, orders the winding up or
liquidation of FNF, adjudges FNF a bankrupt or insolvent or
approves as properly filed a petition seeking reorganization of
FNF; and |
27
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any event of default specified in the notes of each series
issued pursuant to the indenture. |
As noted above, in connection with the issuance of each series
of FNF notes, Sections 5.1(4) and 9.8 of the FNF indenture
were amended by replacing them in their entirety with provisions
set forth in the officers certificates that established
the terms of the FNF notes of each series. The original
provisions of those sections of the FNF indenture will not
become effective as a result of the deletion of the amended
provisions. Instead, the supplemental indenture will provide
that, as amended, each of those sections of the FNF indenture
will read Intentionally omitted.
In conjunction with the amendments identified above, we are
proposing to delete the following defined terms from the FNF
indenture, which are used only in the provisions being deleted
by the supplemental indenture or in provisions previously
deleted by the officers certificates referred to above:
Bankruptcy Law, Consolidated Net Tangible
Assets, Excluded Debt, Restricted
Subsidiary and Secured Debt.
These amendments to the FNF indenture will modify the rights of
holders of the FNF notes and will override any conflicting
provisions set forth in the FNF notes themselves.
Notwithstanding anything to the contrary set forth in the FNF
notes, following the effectiveness of the supplemental
indenture, the only Events of Default with respect to the FNF
notes will be those set forth in clauses (1), (2) and
(3) of the FNF indenture.
FORWARD-LOOKING STATEMENTS
Some of the statements under Prospectus Summary,
Risk Factors, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Business and elsewhere in this prospectus and
consent solicitation statement include forward-looking
statements which reflect our current views with respect to
future events and financial performance. These statements
include forward-looking statements both with respect to us
specifically and the businesses in which we are engaged
generally. Statements that include the words expect,
intend, plan, believe,
project, anticipate, will
and similar statements of a future or forward-looking nature
identify forward-looking statements for purposes of the federal
securities laws or otherwise.
All forward-looking statements address matters that involve
risks and uncertainties. Accordingly, there are or will be
important factors that could cause actual results to differ
materially from those indicated in these statements. These
factors include:
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adverse changes in real estate activity; |
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regulatory conditions in California; |
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regulation by state insurance authorities; |
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regulatory investigations involving title insurance; |
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rate regulation by state authorities; |
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downgrades by our rating agencies; |
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dependence upon our subsidiaries for dividend payments; |
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competition from traditional title insurers and new
entrants; and |
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other factors described under Risk Factors. |
We undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of new
information, future developments or otherwise.
USE OF PROCEEDS
Because this is not an offering for cash, there will be no cash
proceeds to FNT from the exchange offers. We intend to deliver
any FNF notes we receive in the exchange offers to FNF in
redemption of an equal principal amount of the corresponding
mirror notes previously issued by us to FNF.
28
CAPITALIZATION OF FNT
The following table describes our cash and cash equivalents and
capitalization as of September 30, 2005. The information
presented below should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our combined
financial statements and the related notes included elsewhere in
this prospectus and consent solicitation statement.
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As of September 30, 2005 | |
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(In thousands) | |
Cash and cash equivalents
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$ |
528,323 |
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Total long-term debt
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$ |
657,076 |
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Stockholders equity
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2,396,669 |
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Total capitalization
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$ |
3,053,745 |
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The information set forth in the table:
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excludes shares of common stock granted as restricted stock
under our omnibus incentive plan as of the completion of the
distribution; |
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excludes options to purchase shares of common stock granted
under our omnibus incentive plan as of the completion of the
distribution; the total number of such restricted shares and
options granted in connection with the distribution was
2,984,000 shares, of which 485,000 shares of
restricted stock were granted to our top five most highly paid
executive officers and our directors; and |
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excludes shares of common stock available for future issuance
under our omnibus incentive plan. For a description of this plan
and of the foregoing grants, see Management
Omnibus Incentive Plan. |
In addition, our long-term debt as set forth above includes
$500 million principal amount of our mirror notes issued to
FNF in connection with the distribution, which mirror notes we
will redeem, to the extent the exchange offers are successful,
by delivering FNF Notes we obtain to FNF.
29
SELECTED HISTORICAL FINANCIAL INFORMATION
Selected Historical Financial Information for FNT
The following table sets forth our selected historical financial
information. The selected historical financial information as of
December 31, 2004 and 2003 and for each of the years in the
three-year period ended December 31, 2004 has been derived
from our combined financial statements and related notes, which
have been audited by KPMG LLP, an independent registered public
accounting firm. The audited combined financial statements as of
December 31, 2004 and 2003 and for each of the years in the
three-year period ended December 31, 2004 are included
elsewhere in this prospectus and consent solicitation statement.
The selected historical financial information as of
September 30, 2004 and December 31, 2002 and as of and
for the years ended December 31, 2001 and 2000 has been
derived from our unaudited combined financial statements not
appearing herein. The selected historical financial information
as of September 30, 2005 and for the nine months ended
September 30, 2005 and 2004 has been derived from our
unaudited condensed combined financial statements, which are
included elsewhere in this prospectus and consent solicitation
statement. You should read this financial information in
conjunction with the audited and unaudited combined financial
statements included elsewhere in this prospectus and consent
solicitation statement and the information under
Managements Discussion and Analysis of Financial
Condition and Results of Operations. Our selected
historical financial information has been prepared from the
historical results of the operations transferred to us and gives
effect to allocations of certain corporate expenses to and from
FNF. Our selected historical financial information may not be
indicative of our future performance and does not necessarily
reflect what our financial position and results of operations
would have been had we operated as a stand-alone entity during
the periods presented. Our results of interim periods are not
necessarily indicative of results for the entire year.
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Nine Months Ended | |
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September 30, | |
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Year Ended December 31, | |
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2005(2) | |
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2004(2) | |
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2003(2) | |
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2002 | |
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2001(1)(3) | |
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2000(1) | |
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(In thousands, except per share data) | |
Statement of Earnings Data
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Direct title insurance premium
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$ |
1,643,574 |
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|
$ |
1,491,375 |
|
|
$ |
2,003,447 |
|
|
$ |
2,105,317 |
|
|
$ |
1,557,769 |
|
|
$ |
1,252,656 |
|
|
$ |
786,588 |
|
Agency title insurance premiums
|
|
|
2,083,317 |
|
|
|
2,110,142 |
|
|
|
2,714,770 |
|
|
|
2,595,433 |
|
|
|
1,989,958 |
|
|
|
1,441,416 |
|
|
|
1,159,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total title premiums
|
|
|
3,726,891 |
|
|
|
3,601,517 |
|
|
|
4,718,217 |
|
|
|
4,700,750 |
|
|
|
3,547,727 |
|
|
|
2,694,072 |
|
|
|
1,945,793 |
|
Escrow and other title related fees
|
|
|
868,375 |
|
|
|
779,910 |
|
|
|
1,039,835 |
|
|
|
1,058,729 |
|
|
|
790,787 |
|
|
|
656,739 |
|
|
|
496,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total title and escrow
|
|
|
4,595,266 |
|
|
|
4,381,427 |
|
|
|
5,758,052 |
|
|
|
5,759,479 |
|
|
|
4,338,514 |
|
|
|
3,350,811 |
|
|
|
2,442,228 |
|
Interest and investment income
|
|
|
77,066 |
|
|
|
45,549 |
|
|
|
64,885 |
|
|
|
56,708 |
|
|
|
72,305 |
|
|
|
88,232 |
|
|
|
80,407 |
|
Realized gains and losses, net
|
|
|
25,505 |
|
|
|
17,595 |
|
|
|
22,948 |
|
|
|
101,839 |
|
|
|
584 |
|
|
|
946 |
|
|
|
4,605 |
|
Other income
|
|
|
31,481 |
|
|
|
34,307 |
|
|
|
43,528 |
|
|
|
52,689 |
|
|
|
55,927 |
|
|
|
50,476 |
|
|
|
27,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
4,729,318 |
|
|
|
4,478,878 |
|
|
|
5,889,413 |
|
|
|
5,970,715 |
|
|
|
4,467,330 |
|
|
|
3,490,465 |
|
|
|
2,554,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
|
1,415,928 |
|
|
|
1,267,871 |
|
|
|
1,680,805 |
|
|
|
1,692,895 |
|
|
|
1,260,070 |
|
|
|
1,036,236 |
|
|
|
765,319 |
|
Other operating expenses
|
|
|
699,844 |
|
|
|
640,290 |
|
|
|
849,554 |
|
|
|
817,597 |
|
|
|
633,193 |
|
|
|
558,263 |
|
|
|
457,476 |
|
Agent commissions
|
|
|
1,617,260 |
|
|
|
1,651,066 |
|
|
|
2,117,122 |
|
|
|
2,035,810 |
|
|
|
1,567,112 |
|
|
|
1,131,892 |
|
|
|
906,043 |
|
Depreciation and amortization
|
|
|
73,207 |
|
|
|
69,100 |
|
|
|
95,718 |
|
|
|
79,077 |
|
|
|
53,042 |
|
|
|
100,225 |
|
|
|
88,033 |
|
Provision for claim losses
|
|
|
254,289 |
|
|
|
194,505 |
|
|
|
259,402 |
|
|
|
248,834 |
|
|
|
175,963 |
|
|
|
134,527 |
|
|
|
97,161 |
|
Interest expense(4)
|
|
|
5,393 |
|
|
|
3,086 |
|
|
|
3,885 |
|
|
|
4,582 |
|
|
|
8,586 |
|
|
|
15,695 |
|
|
|
15,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,065,921 |
|
|
|
3,825,918 |
|
|
|
5,006,486 |
|
|
|
4,878,795 |
|
|
|
3,697,966 |
|
|
|
2,976,838 |
|
|
|
2,329,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
|
663,397 |
|
|
|
652,960 |
|
|
|
882,927 |
|
|
|
1,091,920 |
|
|
|
769,364 |
|
|
|
513,627 |
|
|
|
225,182 |
|
Income tax expense(4)
|
|
|
248,774 |
|
|
|
238,983 |
|
|
|
323,598 |
|
|
|
407,736 |
|
|
|
276,970 |
|
|
|
205,965 |
|
|
|
97,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before minority interest
|
|
|
414,623 |
|
|
|
413,977 |
|
|
|
559,329 |
|
|
|
684,184 |
|
|
|
492,394 |
|
|
|
307,662 |
|
|
|
128,129 |
|
Minority interest
|
|
|
1,992 |
|
|
|
809 |
|
|
|
1,165 |
|
|
|
859 |
|
|
|
624 |
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings(4)
|
|
|
412,631 |
|
|
|
413,168 |
|
|
$ |
558,164 |
|
|
$ |
683,325 |
|
|
$ |
491,770 |
|
|
$ |
301,953 |
|
|
$ |
128,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited proforma net earnings per share basic and
diluted
|
|
$ |
2.38 |
|
|
$ |
2.38 |
|
|
$ |
3.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited proforma weighted average shares
outstanding basic and diluted(5)
|
|
|
173,520 |
|
|
|
173,520 |
|
|
|
172,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
(1) |
Effective January 1, 2002, we adopted
SFAS No. 142 Goodwill and Other Intangible
Assets and as a result, have ceased to amortize goodwill.
Goodwill amortization in 2001 and 2000 was $33.2 million
and $47.5 million, respectively. |
|
(2) |
Effective January 1, 2003, we adopted the fair value
recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, using the
prospective method of adoption in accordance with
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, and as
a result recorded stock compensation expense of
$3.4 million and $3.0 million for the years ended
December 31, 2004 and 2003, respectively, and
$5.4 million and $2.0 million for the nine months
ended September 30, 2005 and 2004, respectively. |
|
(3) |
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). |
|
(4) |
Assuming that (i) the issuance of $500 million
principal amount of FNT notes in the exchange offers and the
delivery of the FNF notes we receive in the exchange offers to
FNF in full redemption of the mirror notes and (ii) the
dividend in August 2005 of a $150 million principal amount
promissory note to FNF by one of our insurance subsidiaries, had
each occurred as of January 1, 2004, our pro forma interest
expense, income tax expense and net earnings for the year ended
December 31, 2004 would have been $38,576, $310,879 and
$536,192, respectively, and for the nine months ended
September 30, 2005 would have been $30,149, $239,490 and
$393,887, respectively. The foregoing does not give effect to
our refinancing of the $150 million principal amount
intercompany note with proceeds of a borrowing under our new
credit facility. See Capitalization of FNT for
information with respect to our pro forma balance sheet as of
September 30, 2005 giving effect to the foregoing items. |
|
(5) |
Unaudited proforma net earnings per share is calculated using
the number of outstanding shares of FNF as of September 30,
2005 because upon completion of the distribution the number of
our outstanding shares of common stock was equal to the number
of FNF shares outstanding on the record date for the
distribution. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Nine | |
|
|
|
|
|
|
|
|
|
|
|
|
Months Ended | |
|
|
|
|
September 30, | |
|
As of or for the Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance sheet data (at end of period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$ |
3,344,811 |
|
|
$ |
2,973,806 |
|
|
$ |
2,819,489 |
|
|
$ |
2,510,182 |
|
|
$ |
2,337,472 |
|
|
$ |
1,705,267 |
|
|
$ |
1,579,790 |
|
Cash and cash equivalents
|
|
|
528,323 |
|
|
|
359,149 |
|
|
|
268,414 |
|
|
|
395,857 |
|
|
|
433,379 |
|
|
|
491,709 |
|
|
|
214,398 |
|
Total assets
|
|
|
6,008,951 |
|
|
|
5,295,421 |
|
|
|
5,074,091 |
|
|
|
4,782,664 |
|
|
|
4,494,716 |
|
|
|
3,848,300 |
|
|
|
3,542,307 |
|
Notes payable
|
|
|
657,076 |
|
|
|
29,422 |
|
|
|
22,390 |
|
|
|
54,259 |
|
|
|
107,874 |
|
|
|
176,116 |
|
|
|
148,858 |
|
Reserve for claim losses
|
|
|
1,025,718 |
|
|
|
983,343 |
|
|
|
980,746 |
|
|
|
932,439 |
|
|
|
887,973 |
|
|
|
881,053 |
|
|
|
907,292 |
|
Minority interests
|
|
|
4,801 |
|
|
|
3,911 |
|
|
|
3,951 |
|
|
|
2,488 |
|
|
|
1,098 |
|
|
|
239 |
|
|
|
204 |
|
Equity
|
|
|
2,396,669 |
|
|
|
2,583,499 |
|
|
|
2,676,756 |
|
|
|
2,469,186 |
|
|
|
2,234,484 |
|
|
|
1,741,387 |
|
|
|
1,593,509 |
|
Other non-financial data:
(unaudited) (in whole numbers)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operations orders opened(1)
|
|
|
2,398,900 |
|
|
|
2,445,700 |
|
|
|
3,142,945 |
|
|
|
3,771,393 |
|
|
|
2,953,797 |
|
|
|
2,496,597 |
|
|
|
1,267,407 |
|
Direct operations orders closed(1)
|
|
|
1,651,800 |
|
|
|
1,708,100 |
|
|
|
2,249,792 |
|
|
|
2,916,201 |
|
|
|
2,141,680 |
|
|
|
1,685,147 |
|
|
|
911,349 |
|
Fee per closed file(1)
|
|
$ |
1,469 |
|
|
$ |
1,301 |
|
|
$ |
1,324 |
|
|
$ |
1,081 |
|
|
$ |
1,099 |
|
|
$ |
1,120 |
|
|
$ |
1,387 |
|
|
|
(1) |
These measures are used by management to judge productivity and
are a measure of transaction volume for our direct title
businesses. An order is opened when we receive a customer order
and is closed when the related real estate transaction closes,
which typically takes 45-60 days from the opening of an
order. |
31
Selected Historical Financial Information for FNF
The following table sets forth selected historical financial
information for FNF. The selected historical financial
information as of December 31, 2004 and 2003 and for each
of the years in the three-year period ended December 31,
2004 has been derived from FNFs consolidated financial
statements and related notes, which have been audited by KPMG
LLP, an independent registered public accounting firm.
FNFs audited consolidated financial statements as of
December 31, 2004 and 2003 and for each of the years in the
three-year period ended December 31, 2004 are included in
its Annual Report on
Form 10-K for the
year ended December 31, 2004, which is incorporated by
reference in this prospectus and consent solicitation statement.
The selected historical financial information as of
December 31, 2002 and as of and for the years ended
December 31, 2001 and 2000 has been derived from FNFs
audited consolidated financial statements not incorporated by
reference herein, and the selected historical financial
information as of September 30, 2004 has been derived from
FNFs unaudited consolidated financial statements not
incorporated by reference herein. The selected historical
financial information as of September 30, 2005 and for the
nine months ended September 30, 2005 and 2004 has been
derived from FNFs unaudited consolidated financial
statements, which are included in its quarterly report on
Form 10-Q for the
period ended September 30, 2005, which is incorporated by
reference in this prospectus and consent solicitation statement.
You should read this financial information in conjunction with
the audited and unaudited consolidated financial statements
included in the foregoing reports incorporated by reference in
this prospectus and consent solicitation statement and the
information under Managements Discussion and
Analysis of Financial Condition and Results of Operations
in such reports. FNFs results of interim periods are not
necessarily indicative of results for the entire year.
As a result of the distribution of shares of our Class A
Common Stock to the stockholders of FNF, FNFs minority
interest expense and the minority interests reflected on its
balance sheet will increase in future periods, reflecting the
public minority interest in our company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004(1) | |
|
2003(2) | |
|
2002 | |
|
2001(3)(4) | |
|
2000(5) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share and other data) | |
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
7,237,056 |
|
|
$ |
6,200,935 |
|
|
$ |
8,296,002 |
|
|
$ |
7,715,215 |
|
|
$ |
5,082,640 |
|
|
$ |
3,874,107 |
|
|
$ |
2,741,994 |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
|
2,396,243 |
|
|
|
2,058,441 |
|
|
|
2,786,297 |
|
|
|
2,465,026 |
|
|
|
1,476,430 |
|
|
|
1,187,177 |
|
|
|
845,349 |
|
|
|
Other operating expenses
|
|
|
1,586,345 |
|
|
|
1,394,214 |
|
|
|
1,967,350 |
|
|
|
1,699,797 |
|
|
|
1,019,992 |
|
|
|
829,433 |
|
|
|
624,087 |
|
|
|
Agent commissions
|
|
|
1,558,547 |
|
|
|
1,584,579 |
|
|
|
2,028,926 |
|
|
|
1,823,241 |
|
|
|
1,521,573 |
|
|
|
1,098,328 |
|
|
|
884,498 |
|
|
|
Provision for claim losses
|
|
|
333,320 |
|
|
|
230,689 |
|
|
|
282,124 |
|
|
|
263,409 |
|
|
|
179,292 |
|
|
|
134,724 |
|
|
|
97,322 |
|
|
|
Goodwill amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,155 |
|
|
|
35,003 |
|
|
|
Interest expense
|
|
|
120,001 |
|
|
|
30,493 |
|
|
|
47,214 |
|
|
|
43,103 |
|
|
|
34,053 |
|
|
|
46,569 |
|
|
|
59,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,994,456 |
|
|
|
5,298,416 |
|
|
|
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
|
|
|
1,242,600 |
|
|
|
902,519 |
|
|
|
1,184,091 |
|
|
|
1,420,639 |
|
|
|
851,300 |
|
|
|
523,721 |
|
|
|
196,361 |
|
|
Income tax expense
|
|
|
354,577 |
|
|
|
333,932 |
|
|
|
438,114 |
|
|
|
539,843 |
|
|
|
306,468 |
|
|
|
209,488 |
|
|
|
86,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before minority interest and cumulative effect of a
change in accounting principle
|
|
|
888,023 |
|
|
|
568,587 |
|
|
|
745,977 |
|
|
|
880,796 |
|
|
|
544,832 |
|
|
|
314,233 |
|
|
|
109,737 |
|
|
Minority interest
|
|
|
39,081 |
|
|
|
2,491 |
|
|
|
5,015 |
|
|
|
18,976 |
|
|
|
13,115 |
|
|
|
3,048 |
|
|
|
1,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before cumulative effect of a change in accounting
principle
|
|
|
848,942 |
|
|
|
566,096 |
|
|
|
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
|
|
$ |
848,942 |
|
|
$ |
566,096 |
|
|
$ |
740,962 |
|
|
$ |
861,820 |
|
|
$ |
531,717 |
|
|
$ |
305,476 |
|
|
$ |
108,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004(1) | |
|
2003(2) | |
|
2002 | |
|
2001(3)(4) | |
|
2000(5) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share and other data) | |
|
Basic earnings per share
|
|
|
4.92 |
|
|
|
3.33 |
|
|
|
4.33 |
|
|
|
5.81 |
|
|
|
4.05 |
|
|
|
2.36 |
|
|
|
1.11 |
|
|
Weighted average shares outstanding, basic
|
|
|
172,686 |
|
|
|
170,187 |
|
|
|
171,014 |
|
|
|
148,275 |
|
|
|
131,135 |
|
|
|
129,316 |
|
|
|
97,863 |
|
|
Diluted net earnings per share
|
|
|
4.79 |
|
|
|
3.23 |
|
|
|
4.21 |
|
|
|
5.63 |
|
|
|
3.91 |
|
|
|
2.29 |
|
|
|
1.07 |
|
|
Weighted average shares outstanding, diluted
|
|
|
177,254 |
|
|
|
175,287 |
|
|
|
176,000 |
|
|
|
153,171 |
|
|
|
135,871 |
|
|
|
133,189 |
|
|
|
101,383 |
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(6)
|
|
$ |
4,336,688 |
|
|
$ |
3,388,108 |
|
|
$ |
3,346,276 |
|
|
$ |
2,689,817 |
|
|
$ |
2,565,815 |
|
|
$ |
1,823,512 |
|
|
$ |
1,685,331 |
|
|
Cash and cash equivalents(7)
|
|
|
637,977 |
|
|
|
442,656 |
|
|
|
331,222 |
|
|
|
459,655 |
|
|
|
482,600 |
|
|
|
542,620 |
|
|
|
262,955 |
|
|
Total assets
|
|
|
10,909,779 |
|
|
|
8,998,300 |
|
|
|
9,270,535 |
|
|
|
7,263,175 |
|
|
|
5,245,951 |
|
|
|
4,415,998 |
|
|
|
3,833,985 |
|
|
Notes payable
|
|
|
3,114,003 |
|
|
|
995,391 |
|
|
|
1,370,556 |
|
|
|
659,186 |
|
|
|
493,458 |
|
|
|
565,690 |
|
|
|
791,430 |
|
|
Reserve for claim losses
|
|
|
1,061,321 |
|
|
|
996,765 |
|
|
|
998,170 |
|
|
|
943,704 |
|
|
|
888,784 |
|
|
|
881,089 |
|
|
|
907,482 |
|
|
Minority interests and preferred stock of subsidiary
|
|
|
185,243 |
|
|
|
19,373 |
|
|
|
18,874 |
|
|
|
14,835 |
|
|
|
131,797 |
|
|
|
47,166 |
|
|
|
5,592 |
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orders opened by direct title operations
|
|
|
2,843,600 |
|
|
|
2,854,700 |
|
|
|
3,680,200 |
|
|
|
4,820,700 |
|
|
|
3,228,300 |
|
|
|
2,635,200 |
|
|
|
1,352,000 |
|
|
Orders closed by direct title operations
|
|
|
1,891,100 |
|
|
|
2,019,700 |
|
|
|
2,636,300 |
|
|
|
3,694,000 |
|
|
|
2,290,300 |
|
|
|
1,700,600 |
|
|
|
971,000 |
|
|
Provisions for claim losses to title insurance premiums
|
|
|
6.8 |
% |
|
|
5.4 |
% |
|
|
5.5 |
% |
|
|
5.4 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
|
Title related revenue(8):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage direct operations
|
|
|
44.1 |
% |
|
|
41.4 |
% |
|
|
54.8 |
% |
|
|
59.7 |
% |
|
|
55.3 |
% |
|
|
59.0 |
% |
|
|
52.8 |
% |
|
Percentage agency operations
|
|
|
55.9 |
% |
|
|
58.6 |
% |
|
|
45.2 |
% |
|
|
40.3 |
% |
|
|
44.7 |
% |
|
|
41.0 |
% |
|
|
47.2 |
% |
|
|
(1) |
FNFs financial results for the year ended
December 31, 2004 include the results of various entities
acquired on various dates during 2004. |
|
(2) |
FNFs financial results for the year ended
December 31, 2003 include the results of Fidelity
Information Services, Inc. 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. |
|
(3) |
FNFs 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, an entity that was purchased in 1998 (formerly known as
Granite), and the wholesale international long
distance business at Micro General Corporation. |
|
(4) |
During 2001, FNF 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) |
FNFs 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. |
|
(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) |
Includes title insurance premiums and escrow and other title
related fees. |
33
Selected Historical Financial Information for Certegy
As previously discussed, on September 14, 2005 FNFs
subsidiary FIS agreed to merge with Certegy. The following
summary financial information has been obtained from
Certegys quarterly report on
Form 10-Q for the
period ended September 30, 2005, and its current report on
Form 8-K filed on
October 12, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003(1) | |
|
2002(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Results of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
821,255 |
|
|
$ |
757,664 |
|
|
$ |
1,039,506 |
|
|
$ |
921,734 |
|
|
$ |
906,791 |
|
|
Operating expenses(2)(3)(4)
|
|
|
697,808 |
|
|
|
645,612 |
|
|
|
871,010 |
|
|
|
783,550 |
|
|
|
773,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
123,447 |
|
|
|
112,052 |
|
|
|
168,496 |
|
|
|
138,184 |
|
|
|
132,946 |
|
|
Other income, net
|
|
|
1,412 |
|
|
|
599 |
|
|
|
1,207 |
|
|
|
2,339 |
|
|
|
1,119 |
|
|
Interest expense(5)
|
|
|
(9,677 |
) |
|
|
(9,388 |
) |
|
|
(12,914 |
) |
|
|
(7,950 |
) |
|
|
(7,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle
|
|
|
115,182 |
|
|
|
103,263 |
|
|
|
156,789 |
|
|
|
132,573 |
|
|
|
126,945 |
|
|
Provision for income taxes
|
|
|
(45,969 |
) |
|
|
(39,188 |
) |
|
|
(59,111 |
) |
|
|
(50,429 |
) |
|
|
(50,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before cumulative effect of a
change in accounting principle
|
|
|
69,213 |
|
|
|
64,075 |
|
|
|
97,678 |
|
|
|
82,144 |
|
|
|
76,714 |
|
|
Income from discontinued operations, net of tax
|
|
|
24,796 |
|
|
|
4,133 |
|
|
|
5,934 |
|
|
|
3,897 |
|
|
|
2,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting
principle, net of tax
|
|
|
94,009 |
|
|
|
68,208 |
|
|
|
103,612 |
|
|
|
86,041 |
|
|
|
79,640 |
|
|
Cumulative effect of a change in accounting principle, net of
tax(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
94,009 |
|
|
$ |
68,208 |
|
|
$ |
103,612 |
|
|
$ |
84,706 |
|
|
$ |
79,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$ |
38,352 |
|
|
$ |
34,643 |
|
|
$ |
47,449 |
|
|
$ |
42,030 |
|
|
$ |
39,050 |
|
|
Capital expenditures
|
|
$ |
42,883 |
|
|
$ |
28,482 |
|
|
$ |
40,908 |
|
|
$ |
43,747 |
|
|
$ |
48,961 |
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
934,094 |
|
|
$ |
863,620 |
|
|
$ |
922,209 |
|
|
$ |
785,356 |
|
|
$ |
702,141 |
|
|
Long-term debt
|
|
$ |
225,864 |
|
|
$ |
287,165 |
|
|
$ |
273,968 |
|
|
$ |
222,399 |
|
|
$ |
214,200 |
|
|
Total shareholders equity
|
|
$ |
421,947 |
|
|
$ |
249,711 |
|
|
$ |
307,287 |
|
|
$ |
266,751 |
|
|
$ |
202,392 |
|
|
|
(1) |
Certegys financial results for the years ended
December 31, 2003 and 2002 include other charges of
$12.2 million ($7.7 million after-tax) in each year.
The other charges in 2003 include $9.6 million of early
termination costs associated with a U.S. data processing
contract, $2.7 million of charges related to the downsizing
of Certegys Brazilian card operation, and
$(0.1) million of market value recoveries on Certegys
collateral assignment in life insurance policies, net of
severance charges. The other charges in 2002 include an
impairment write-off of $4.2 million for the remaining
intangible asset value assigned to an acquired customer contract
in Certegys Brazilian card operation, due to the loss of
the customer; a $4.0 million charge for the settlement of a
class action lawsuit, net of insurance proceeds; and
$4.0 million of severance charges and market value losses
on Certegys collateral assignment in life insurance
policies. |
34
|
|
(2) |
Effective January 1, 2005, Certegy adopted the fair value
recognition provisions of SFAS No. 123 (revised 2004),
Share-Based Payment, using the modified
retrospective method, restating all prior periods, and as a
result recorded stock compensation expense of
$11.2 million, $10.0 million, $14.2 million, and
$5.1 million for the years ended December 31, 2004,
2003, 2002, and 2001, respectively, and $4.4 million and
$8.7 million for the nine months ended September 30,
2005 and 2004, respectively. |
|
(3) |
General corporate expense was $26.6 million,
$22.7 million, $25.3 million, $14.0 million, and
$7.8 million, respectively, for the years ended
December 31, 2004, 2003, 2002, 2001, and 2000, and
$28.4 million and $20.0 million for the nine months
ended September 30, 2005 and 2004, respectively. |
|
(4) |
Certegy adopted SFAS No. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002, which
ceased the amortization of goodwill. Adoption of the
non-amortization provisions of SFAS No. 142 as of
January 1, 2000, would have increased net income for the
years ended December 31, 2001 and 2000, respectively, by
$7.3 million and $6.8 million, which is net of
$1.3 million and $1.2 million of income taxes. |
|
(5) |
In conjunction with Certegys spin-off from Equifax in July
2001, Certegy made a cash payment to Equifax of
$275 million to reflect Certegys share of
Equifaxs pre-distribution debt used to establish
Certegys initial capitalization. This was funded through
$400 million of unsecured revolving credit facilities
Certegy obtained in July 2001. Interest expense for periods
prior to the spin-off principally consist of interest paid on a
line of credit held by Certegys Brazilian card business
and interest charged by Equifax on overnight funds borrowed on
Certegys behalf. |
|
(6) |
The cumulative effect of accounting change expense of
$1.3 million in 2003 reflects the adoption of certain
provisions of Financial Accounting Standards Board
Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research
Bulletin No. 51, on December 31, 2003
related to the synthetic lease on Certegys St. Petersburg,
Florida operations facility. |
Upon completion of the merger, FNF will own approximately 51% of
the common stock of Certegy. FNF expects to consolidate the
results of operations of Certegy following completion of the
transaction and record minority interest expense for the portion
of Certegy that FNF does not own. FNF expects that it will apply
purchase accounting with respect to this transaction, although
the purchase accounting for this transaction will not be finally
determined until after it has closed.
35
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS OF FNT
The following discussion should be read in conjunction with the
combined financial statements and the notes thereto and selected
historical financial information included elsewhere in this
prospectus and consent solicitation statement. The discussion
below contains forward-looking statements that are based upon
our current expectations and are subject to uncertainty and
changes in circumstances. Our actual results may differ
materially from these expectations due to changes in global,
political, economic, business, competitive and market factors,
many of which are beyond our control. See Forward-Looking
Statements.
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 30.5% of
all title insurance policies issued nationally during 2004, as
measured by premiums. Our title business consists of providing
title insurance and escrow and other title-related products and
services arising from the real estate closing process. Our
operations are conducted on a direct basis through our own
employees who act as title and escrow agents and through
independent agents. In addition to our independent agents, our
customers are lenders, mortgage brokers, attorneys, real estate
agents, home builders and commercial real estate developers. We
do not focus our marketing efforts on the homeowner.
Our Historical Financial Information
We were incorporated in Delaware on May 24, 2005 in
connection with a restructuring of our title insurance
operations as described in this prospectus and consent
solicitation statement. On September 26, 2005, FNF
contributed to us the subsidiaries relating to our business and
operations. The distribution was completed on October 17,
2005.
Our historical financial statements include assets, liabilities,
revenues and expenses directly attributable to our operations.
Our historical financial statements reflect allocations of
certain of our corporate expenses to FNF and FIS. These expenses
have been allocated to FNF and FIS on a basis that management
considers to reflect most fairly or reasonably the utilization
of the services provided to or the benefit obtained by those
businesses. These expense allocations to FNF and FIS reflect an
allocation to us of a portion of the compensation of certain
senior officers and other personnel of FNF who will not be our
employees after the distribution but who historically provided
services to us. Our historical financial statements do not
reflect the debt or interest expense we might have incurred if
we had been a stand-alone entity. In addition, we will incur
other expenses, not reflected in our historical financial
statements, as a result of being a separate publicly traded
company. As a result, our historical financial statements do not
necessarily reflect what our financial position or results of
operations would have been if we had been operated as a
stand-alone public entity during the periods covered, and may
not be indicative of our future results of operations or
financial position.
FIS was established as a separate subsidiary of FNF in
connection with a restructuring that was effective as of
November 1, 2004 and prior to that time, FISs
businesses were either subsidiaries of FNF, or were operated as
divisions of certain companies that will be our subsidiaries.
Historical references to FIS in this prospectus and consent
solicitation statement include assets, liabilities, revenues and
expenses directly attributable to FISs operations,
including where those operations were conducted as a division of
one of our subsidiaries.
Related Party Transactions
Our historical financial statements reflect transactions with
other businesses and operations of FNF that were not transferred
to us, including those being conducted with FIS.
36
A detail of related party items included in revenues is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Agency title premiums earned
|
|
$ |
106.3 |
|
|
$ |
284.9 |
|
|
$ |
53.0 |
|
Rental income earned
|
|
|
8.4 |
|
|
|
7.3 |
|
|
|
6.7 |
|
Interest revenue
|
|
|
1.0 |
|
|
|
0.7 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
115.7 |
|
|
$ |
292.9 |
|
|
$ |
60.2 |
|
A detail of related party items included in operating expenses
is as follows: |
|
Agency title commissions
|
|
$ |
93.6 |
|
|
$ |
250.7 |
|
|
$ |
46.7 |
|
Data processing costs
|
|
|
56.6 |
|
|
|
12.4 |
|
|
|
|
|
Data processing costs allocated
|
|
|
|
|
|
|
(5.4 |
) |
|
|
(5.8 |
) |
Corporate services allocated
|
|
|
(84.5 |
) |
|
|
(48.7 |
) |
|
|
(28.6 |
) |
Title insurance information expense
|
|
|
28.6 |
|
|
|
28.2 |
|
|
|
24.3 |
|
Other real-estate related information
|
|
$ |
9.9 |
|
|
$ |
11.4 |
|
|
$ |
3.7 |
|
Software expense
|
|
|
5.8 |
|
|
|
2.6 |
|
|
|
1.3 |
|
Rental expense
|
|
|
2.8 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$ |
112.8 |
|
|
$ |
251.7 |
|
|
$ |
41.6 |
|
|
|
|
|
|
|
|
|
|
|
Total pretax impact of related party activity
|
|
$ |
2.9 |
|
|
$ |
41.2 |
|
|
$ |
18.6 |
|
|
|
|
|
|
|
|
|
|
|
Included as a reduction of our expenses for all periods are
amounts allocated to FNF and FIS relating to the provision by us
of corporate services to FNF and to FIS and its subsidiaries.
These corporate services include accounting, internal audit and
treasury, payroll, human resources, tax, legal, purchasing, risk
management, mergers and acquisitions and general management. For
the years ended December 31, 2004, 2003 and 2002, our
expenses were reduced by $9.4 million, $9.2 million
and $7.0 million, respectively, related to the provision of
these corporate services by us to FNF and its subsidiaries other
than FIS and its subsidiaries. For the years ended
December 31, 2004, 2003 and 2002, our expenses were reduced
by $75.1 million, $39.5 million and
$21.6 million, respectively, related to the provision of
corporate services by us to FIS and its subsidiaries.
We also do business with the lender outsourcing solutions
segment of FIS, which includes title agency functions whereby an
FIS subsidiary acts as the title agent in the issuance of title
insurance policies by a title insurance underwriter owned by us
and in connection with certain trustee sales guarantees, a form
of title insurance issued as part of the foreclosure process. As
a result, our title insurance subsidiaries pay commissions on
title insurance policies sold through FIS. For 2004, 2003, and
2002, these FIS operations generated $106.3 million,
$284.9 million and $53.0 million of revenues for us,
which we reflect as agency title premium. We paid FIS
commissions at the rate of 88% of premiums generated, equal to
$93.6 million, $250.7 million and $46.7 million
for 2004, 2003 and 2002 respectively.
We also historically have leased equipment to a subsidiary of
FIS. Revenue relating to these leases was $8.4 million,
$7.3 million and $6.7 million in 2004, 2003 and 2002,
respectively. The title plant assets of several of our title
insurance subsidiaries are managed or maintained by a subsidiary
of FIS. The underlying title plant information and software
continues to be owned by each of our title insurance
underwriters, but FIS manages and updates the information in
return for either (i) a cash management fee or
(ii) the right to sell that information to title insurers,
including title insurance underwriters that we own and other
third party customers. In most cases, FIS is responsible for
keeping the title plant assets current and fully functioning,
for which we pay a fee to FIS based on our use of, or access to,
the title plant. For 2004, 2003 and 2002, our expenses to FIS
under these arrangements were $28.9 million,
$28.2 million and $24.3 million, respectively. In
addition, since November 2004, each applicable title insurance
underwriter in turn receives a royalty on sales of access to its
title plant assets. For the year ended December 31, 2004,
the revenues from these title plant royalties were
$0.3 million. Prior to 2004, there was no royalty agreement
in place, but if it had been,
37
we would have earned approximately $2.9 million and
$2.7 million in additional revenue from FIS for 2003 and
2002, respectively. In addition, we have entered into agreements
with FIS that permit FIS and certain of its subsidiaries to
access and use (but not to re-sell) the starters databases and
back plant databases of our title insurance subsidiaries.
Starters databases are our databases of previously issued title
policies and back plant databases contain historical records
relating to title that are not regularly updated. Each of our
applicable title insurance subsidiaries receives a fee for any
access to or use of its starters and back plant databases by
FIS. We also do business with additional entities within the
information services segment of FIS that provide real estate
information to our operations. We recorded expenses of
$9.9 million, $11.4 million and $3.7 million in
2004, 2003 and 2002, respectively.
Included in our expenses for 2004 and 2003 are amounts paid to a
subsidiary of FIS for the provision by FIS to us of IT
infrastructure support, data center management and related IT
support services. For 2004 and 2003, the amounts included in our
expenses to FIS for these services were $56.6 million and
$12.4 million respectively. Prior to September 2003, we
performed these services ourselves and provided them to FIS.
During 2003 and 2002, we received payments from FIS of
$5.4 million and $5.8 million relating to these
services that offset our other operating expenses. In addition,
we incurred software expenses relating to an agreement with a
subsidiary of FIS that amounted to $5.8 million,
$2.6 million and $1.3 million in 2004, 2003 and 2002,
respectively.
Our financial statements for 2004 and 2003 reflect allocations
for a lease of office space to us for our corporate headquarters
and business operations.
We believe the amounts earned by us or charged to us under each
of the foregoing arrangements are fair and reasonable. Although
the commission rate paid on the title insurance premiums written
by the FIS title agencies was set without negotiation, we
believe it is consistent with the average rate that would be
available to a third party title agent given the amount and the
geographic distribution of the business produced and the low
risk of loss profile of the business placed. In connection with
the title plant management and maintenance services provided by
FIS, we believe that the fees charged to us by FIS are at
approximately the same rates that FIS and other similar vendors
charge unaffiliated title insurers. The IT infrastructure
support and data center management services provided to us by
FIS are priced within the range of prices that FIS offers to its
unaffiliated third party customers for the same types of
services. However, the amounts we earned or were charged under
these arrangements were not negotiated at arms length, and
may not represent the terms that we might have obtained from an
unrelated third party.
Amounts due from FNF to us as of December 31, 2004 and
December 31, 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In millions) | |
Notes receivable from FNF
|
|
$ |
22.8 |
|
|
$ |
26.6 |
|
Taxes due from FNF
|
|
|
63.6 |
|
|
|
44.1 |
|
We have notes receivable from FNF relating to loans by our title
underwriters to FNF. These notes amounted to $22.8 million
and $26.6 million at December 31, 2004 and 2003,
respectively. As of December 31, 2004, these notes bear
interest at 2.66%. We earned interest revenue of
$1.0 million, $0.7 million and $0.5 million
relating to these notes during 2004, 2003 and 2002, respectively.
We are included in FNFs consolidated tax returns and thus
any income tax liability or receivable is due to/from FNF. As of
December 31, 2004 and 2003, we have recorded a receivable
from FNF relating to overpayment of taxes of $63.6 million
and $44.1 million, respectively.
Certain of the foregoing related party arrangements are set
forth in existing agreements between us and FNF or FIS that will
remain in effect for specified periods following the
distribution. For a description of these agreements, see
Certain Relationships and Related Transactions
Historical Related-Party Transactions. Other items
described above in respect of which amounts have been allocated
to or by us are the subject of agreements entered into by us
with related parties shortly prior to the time of the
distribution.
38
These new agreements and certain other agreements we entered
into in connection with the distribution are described in
Our Arrangements with FNF.
In connection with the distribution, we issued two
$250 million intercompany notes payable to FNF, with terms
that mirror FNFs existing $250 million 7.30% public
notes due in August 2011 and $250 million 5.25% public
notes due in March 2013. Proceeds from the issuance of the 7.30%
FNF notes due 2011 were used by FNF to repay debt incurred in
connection with the acquisition of our subsidiary, Chicago
Title, and the proceeds from the 5.25% FNF notes due 2013 were
used for general corporate purposes. We intend to deliver any
FNF notes we receive in the exchange offers to FNF in redemption
of an equal principal amount of the corresponding mirror notes.
See Liquidity and Capital Resources.
Recent Developments
On March 22, 2004, we acquired American Pioneer
Title Insurance Company (APTIC) for
$115.2 million in cash. APTIC is a title insurance
underwriter licensed in 45 states with significant agency
operations and computerized title plant assets in the state of
Florida. APTIC now operates under our Ticor Title brand.
On August 1, 2005, we acquired Service Link, L.P.
(Service Link), a national provider of centralized
mortgage and residential real estate title and closing services
to major financial institutions and institutional lenders. The
acquisition price was approximately $110 million in cash.
Business Trends and Conditions
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 are countercyclical to 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 most of 2004, the ten-year
treasury bond yield 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. Notwithstanding the
increase in interest rates, home prices appreciated strongly in
many markets in 2004, benefiting our revenues. Year to date in
2005, refinance activity has been lower than in 2004, but real
estate activity continues at a high rate and the appreciation of
home prices remains high. The decreased refinance activity is
evidenced by the Mortgage Bankers Associations
(MBA) statistics showing that approximately 43.5% of
new loan
39
originations in the first nine months of 2005 were refinance
transactions as compared with approximately 45.7% in the first
nine months of 2004. In July 2005 the ten-year treasury rate
moved above 4.25%, but the MBAs Mortgage Finance Forecast
estimates a $2.738 trillion mortgage origination market for
2005, which would be a 6% increase from 2004.
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.
Critical Accounting Estimates
The accounting estimates described below are those we consider
critical in preparing our Combined Financial Statements.
Management is required to make estimates and assumptions that
can affect the reported amounts of assets and liabilities and
disclosures with respect to contingent assets and liabilities at
the date of the Combined 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 Combined Financial Statements for a
more detailed description of the significant accounting policies
that have been followed in preparing our Combined Financial
Statements.
Reserve for Claim Losses. Title companies issue two types
of policies since both the buyer and lender in real estate
transactions want to know that their interest in the property is
insured against certain title defects outlined in the policy. An
owners policy insures the purchaser for as long as he or
she owns the property (as well as against warranty claims
arising out of the sale of the property by such owner) and a
lenders policy insures the priority of the lenders
security interest over the claims that other parties may have in
the property. The maximum amount of liability under a title
insurance policy is generally the face amount of the policy plus
the cost of defending the insureds title against an
adverse claim. While most non-title forms of insurance,
including property and casualty, provide for the assumption of
risk of loss arising out of unforeseen future events, title
insurance serves to protect the policyholder from risk of loss
from events that predated the issuance of the policy.
Unlike many other forms of insurance, title insurance requires
only a one-time premium for continuous coverage until another
policy is warranted due to changes in property circumstances
arising from refinance, resale, additional liens, or other
events. Unless we issue the subsequent policy, we receive no
notice that our exposure under our policy has ended and as a
result we are unable to track the actual terminations of our
exposures.
Our reserve for claim losses includes reserves for known claims
(PLR) as well as for losses that have been incurred
but not yet reported to us (IBNR), net of
recoupments. Each known claim is reserved for based on our
review of the estimated amount of the claim and the costs
required to settle the claim. Reserves for claims that are IBNR
are estimates that are established at the time the premium
revenue is recognized and are based upon historical experience
and other factors, including industry trends, claim loss
history, legal environment, geographic considerations, and the
types of policies written. We also reserve for losses arising
from escrow, closing and disbursement functions, due to fraud or
operational error.
The table below summarizes our reserves for known claims and
incurred but not reported claims.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
|
As of | |
|
|
|
|
December 31, | |
|
|
|
December 31, | |
|
|
|
|
2004 | |
|
% | |
|
2003 | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
PLR
|
|
$ |
223,202 |
|
|
|
22.8% |
|
|
$ |
207,909 |
|
|
|
22.3% |
|
IBNR
|
|
|
757,544 |
|
|
|
77.2% |
|
|
|
724,530 |
|
|
|
77.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reserve
|
|
$ |
980,746 |
|
|
|
100.0% |
|
|
$ |
932,439 |
|
|
|
100.0% |
|
40
Although most claims against title insurance policies are
reported relatively soon after the policy has been issued,
claims may be reported many years later. By their nature, claims
are often complex, vary greatly in dollar amounts and are
affected by economic and market conditions and the legal
environment existing at the time of settlement of the claims.
Estimating future title loss payments is difficult because of
the complex nature of title claims, the long periods of time
over which claims are paid, significantly varying dollar amounts
of individual claims and other factors.
We continually update loss reserve estimates by utilizing both
internal and external resources. Management performs a detailed
study of loss reserves based upon the latest available
information at the end of each quarter and year. In addition, an
independent actuarial consulting firm assists us in analyzing
our historic loss experience and developing statistical models
to project ultimate loss expectancy. The actuaries prepare a
formal analysis of our reserves at December 31 each year.
Management examines both the quantitative data provided by the
actuaries and qualitative information derived from internal
sources such as our legal, claims, and underwriting departments
to ultimately arrive at our best reserve estimate. Regardless of
technique, all methods involve significant judgment and
assumptions. Management strives to improve its loss reserve
estimation process by enhancing its ability to analyze loss
development patterns and we continually look for ways to
identify new trends to reduce the uncertainty of our loss
exposure. However, adjustments may be required as experience
develops unexpectedly, new information becomes known, new loss
patterns emerge, or as other contributing factors are considered
and incorporated into the analysis.
Predicting ultimate loss exposure is predicated on evaluating
past experience and adjusting for changes in current development
and trends. Our external actuaries work includes two
principal steps. First, they use an actuarial technique known as
the loss development method to calculate loss development
factors for the Company. The loss development factors forecast
ultimate losses for each policy year based on historic emergence
patterns of the Company. Older policy year experience is applied
to newer policy years to project future development. When new
trends surface, the loss development factors are adjusted to
incorporate the more recent development phenomena. Changes in
homeownership patterns, increased property turnover rates, and a
boom in refinance transactions all are examples of current
events that reduce the tail exposure of the loss pattern and
warrant these adjustments.
In the second step, the loss development factors calculated in
the first step are used to determine the portion of ultimate
loss already reported. The percentage of ultimate losses not yet
reported is then applied to the expected losses, which are
estimated as the product of written premium and an expected loss
ratio. The expected loss ratios are derived from an econometric
model of the title insurance industry incorporating various
economic variables including interest rates as well as industry
related developments such as title plant automation and
defalcations, which are misappropriations of funds from escrow
accounts, to arrive at an expected loss ratio for each policy
year.
Using the above approach, our actuaries develop a single point
estimate, rather than a range of reserves or a set of point
estimates. As of December 31, 2004, their estimate of
insured but not reported losses, combined with our reserves for
known claims, totaled $1,000.1 million, slightly above our
carried reserves at that date.
41
The table below presents our loss development experience for the
past three years. As can be seen in the table, the variability
in loss estimates over the past three years has ranged from
favorable development in an amount equal to 0.9% of title
premiums to adverse development of 0.2% of title premiums with
the average being favorable development of 0.3% over the three
year period. Assuming that variability of potential reserve
estimates is + or -0.3%, the effect on pretax earnings would be
as presented in the last line of the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Beginning Balance
|
|
$ |
932,439 |
|
|
$ |
887,973 |
|
|
$ |
881,053 |
|
|
Reserve Assumed
|
|
|
38,597 |
|
|
|
4,203 |
|
|
|
|
|
|
Claims Loss provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
275,982 |
|
|
|
237,919 |
|
|
|
207,290 |
|
|
|
Prior year
|
|
|
(16,580 |
) |
|
|
10,915 |
|
|
|
(31,327 |
) |
|
|
Total provision
|
|
|
259,402 |
|
|
|
248,834 |
|
|
|
175,963 |
|
Claims paid, net of recoupment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(19,095 |
) |
|
|
(11,591 |
) |
|
|
(10,058 |
) |
|
|
Prior year
|
|
|
(230,597 |
) |
|
|
(196,980 |
) |
|
|
(158,985 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total paid, net of recoupments
|
|
|
(249,692 |
) |
|
|
(208,571 |
) |
|
|
(169,043 |
) |
Ending Balance
|
|
$ |
980,746 |
|
|
$ |
932,439 |
|
|
$ |
887,973 |
|
|
|
|
|
|
|
|
|
|
|
Title Premiums
|
|
$ |
4,718,217 |
|
|
$ |
4,700,750 |
|
|
$ |
3,547,727 |
|
Provision for claim losses as a percentage of title insurance
premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
5.8 |
% |
|
|
5.1 |
% |
|
|
5.8 |
% |
|
|
Prior year
|
|
|
(0.3 |
)% |
|
|
0.2 |
% |
|
|
(0.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
Total Provision
|
|
|
5.5 |
% |
|
|
5.3 |
% |
|
|
5.0 |
% |
Sensitivity Analysis (.30% Loss Ratio Change)(1):
Ultimate Reserve Estimate +/-
|
|
$ |
14,155 |
|
|
$ |
14,102 |
|
|
$ |
10,643 |
|
|
|
(1) |
0.3% has been selected as an example; actual variability could
be greater or less. |
Our analysis of our reserves as of December 31, 2004
demonstrates managements continued efforts to improve its
loss reserve estimate. For the first time, a separate analysis
of mega claims (defined as claims with incurred amounts greater
than $500,000) was performed. Prior to this analysis these large
claims have influenced the loss development factors used in both
actuarial methods by creating a multiplicative effect for newer
policy years loss projections. The mega claims are handled
by specific attorneys and may have different emergence patterns
that must be projected in isolation from the other claims.
In addition, adjustments were made to reflect the reduced tail
exposure of fairly recent policy years due to unprecedented
refinancing activity and property turnover rates. Our hypothesis
supported by recent data is that a lower percentage of policies
from prior years remain in force due to the substantial turnover
in property mortgages. Furthermore, it is our belief that
refinance transactions develop differently than resale
transactions in that there appears to be an acceleration of
claim activity as claims are reported more quickly. As a result,
we have incorporated the effect of these assumptions on our loss
projections.
The point estimate provided by our independent actuaries,
combined with our known claim reserves, aggregated
$1,000.1 million at December 31, 2004, as compared
with our carried reserve of $980.7 million, a difference of
$19.4 million, or 1.9%. Different professional judgment in
two critical assumptions was the primary driver of the
difference between the independent actuarys estimate and
our carried reserve level; different weight given to a separate
projection of individually significant losses (losses greater
than $500,000) and adjustments based on recent experience to
realize emerging changes in refinance versus home sale activity.
In the independent actuaries estimate only one half of the
effect of projecting significant losses
42
separately was taken into consideration; whereas, our management
applied full weight to such analysis. Additionally, the
independent actuaries estimate placed less weight on the
effects of refinancings in the 2002-2004 policy years, some of
the largest refinance years in history; whereas our management
placed moderately greater weights on the effects of refinancing
assumptions in such years.
In our reserve setting process, our independent actuaries
fulfill a function, which is to provide information that is part
of the overall mix of information that our management uses to
set our reserves, but by no means do they provide a definitive
evaluation. While there can be no assurance as to the precision
of loss reserve estimates, as shown in the table above, our
development on prior years loss reserves over the past
three years has generally been favorable, averaging 0.3% of
carried reserves, using the reserve setting processes described
above.
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. Investments are selected
for analysis whenever an unrealized loss is greater than a
certain threshold that we determine based on the size of our
portfolio. Fixed maturity investments that have unrealized
losses caused by interest rate movements are not at risk as we
have the ability and intent to hold them to maturity. Unrealized
losses on investments in equity securities and fixed maturity
instruments that are susceptible to credit related declines are
evaluated based on the aforementioned factors. Currently
available market data is considered and estimates are made as to
the duration and prospects for recovery, and the ability to
retain the investment until such recovery takes place. These
estimates are revisited quarterly and any material degradation
in the prospect for recovery will be considered in the other
than temporary impairment analysis. We believe that continuous
monitoring and analysis has allowed for the proper recognition
of other than temporary impairments over the past three year
period. Any change in estimate in this area will have an impact
on the results of operations of the period in which a charge is
taken. During 2004, 2003 and 2002, we recorded other than
temporary impairments totaling $6.6 million,
$0.0 million and $30.4 million, respectively.
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
$959.6 million and $920.3 million, respectively. The
majority of our goodwill as of December 31, 2004 and 2003
relates to our Chicago Title acquisition. 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. While we believe
that our estimates of future cash flows are reasonable, these
estimates are not guarantees of future performance and are
subject to risks and uncertainties that may cause actual results
to differ from what is assumed in these impairment tests. In
evaluating the recoverability of goodwill, we perform an annual
goodwill impairment test based on an analysis of the discounted
future cash flows generated by the underlying assets. We have
completed our annual goodwill impairment tests in each of the
past three years and have determined that we have a fair value
in excess of our 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 fair value and determination of the
recoverability of goodwill which may result in charges against
earnings and a reduction in the carrying value of our goodwill.
Long-Lived Assets. We review long-lived assets, primarily
computer software, property and equipment and other intangibles,
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. We have not recorded
any material impairment charges in the past three years. 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 estimated with certainty,
similar to our goodwill analysis.
43
Revenue Recognition. 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, whereas premium
revenues from agency operations and agency commissions include
an accrual based on estimates using historical information of
the volume of transactions that have closed in a particular
period for which premiums have not yet been reported to us. The
accrual for agency premiums is necessary because of the lag
between the closing of these transactions and the reporting of
these policies to us by the agent. In the second quarter of
2005, we began to compile data that illustrated the correlation
of direct and agency premiums. Prior to the end of the quarter
we determined that we had gathered sufficient data and concluded
that we should enhance our lag accrual methodology to utilize
the additional data. Accordingly, we refined our method of
estimation for accruing agency title revenues and commissions to
take into account trends in direct premiums in addition to the
historical information about agency premiums and commissions
previously considered. This refinement resulted in our recording
approximately $50.0 million in additional agency revenue in
the second quarter of 2005 than we would have under our prior
method. After related accruals for commissions and other
associated expenses, the impact on net earnings of this change
was approximately $2.0 million. We are likely to continue
to have changes to our accrual for agency revenue in the future,
but as demonstrated by this second quarter adjustment, the
impact on net earnings of changes in these accruals is very
small, equal to approximately four percent of the change in
revenues.
|
|
|
Comparisons of Nine Months ended September 30, 2005
and 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(in thousands) | |
Revenue:
|
|
|
|
|
|
|
|
|
|
Direct title insurance premiums
|
|
$ |
1,643,574 |
|
|
$ |
1,491,375 |
|
|
Agency title insurance premiums
|
|
|
2,083,317 |
|
|
|
2,110,142 |
|
|
Escrow and other title related fees
|
|
|
868,375 |
|
|
|
779,910 |
|
|
Interest and investment income
|
|
|
77,066 |
|
|
|
45,549 |
|
|
Realized gains and losses, net
|
|
|
25,505 |
|
|
|
17,595 |
|
|
Other income
|
|
|
31,481 |
|
|
|
34,307 |
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
4,729,318 |
|
|
|
4,478,878 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
|
1,415,928 |
|
|
|
1,267,871 |
|
|
Other operating expenses
|
|
|
699,844 |
|
|
|
640,290 |
|
|
Agent commissions
|
|
|
1,617,260 |
|
|
|
1,651,066 |
|
|
Depreciation and amortization
|
|
|
73,207 |
|
|
|
69,100 |
|
|
Provision for claim losses
|
|
|
254,289 |
|
|
|
194,505 |
|
|
Interest expense
|
|
|
5,393 |
|
|
|
3,086 |
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,065,921 |
|
|
|
3,825,918 |
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
|
663,397 |
|
|
|
652,960 |
|
Income tax expense
|
|
|
248,774 |
|
|
|
238,983 |
|
|
|
|
|
|
|
|
Earnings before minority interest
|
|
|
414,623 |
|
|
|
413,977 |
|
Minority interest
|
|
|
1,992 |
|
|
|
809 |
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
412,631 |
|
|
$ |
413,168 |
|
|
|
|
|
|
|
|
Total revenues for the first nine months of 2005 increased
$250.4 million, or 5.6% to $4,729.3 million.
44
Total title insurance premiums for the nine month periods were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, | |
|
|
| |
|
|
2005 | |
|
% | |
|
2004 | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Title premiums from direct operations
|
|
$ |
1,643,574 |
|
|
|
44.1% |
|
|
$ |
1,491,375 |
|
|
|
41.4% |
|
Title premiums from agency operations
|
|
|
2,083,317 |
|
|
|
55.9% |
|
|
|
2,110,142 |
|
|
|
58.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,726,891 |
|
|
|
100.0% |
|
|
$ |
3,601,517 |
|
|
|
100.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title insurance premiums increased 3.5% to $3,727 million
in the nine months ended September 30, 2005 compared to
2004. The increase was made up of a $152.2 million or 10.2%
increase in direct premiums and a $26.8 million or 1.3%
decrease in premiums from agency operations. The increased level
of direct title premiums is the result of an increase in the
average fee per file as compared with the prior year, partially
offset by a decrease in closed order levels during the current
year. The decrease in closed order levels reflects a weaker
refinance market, offset by a strong, stable purchase market.
The increase in fee per file is the result of the stronger
purchase market in 2005 as compared to 2004, as purchase
transactions typically have higher fees, as well as the
appreciation of home prices over the past year. The decrease in
agency revenues relates to the fact that the first nine months
of 2004 benefited from the continued strong refinance volumes of
2003, which were at an all time high, while in the first nine
months of 2005 there was a weaker refinance environment. The
2004 period included $95.6 million in revenue from
FISs title agency business, which benefited from
refinancings, while the 2005 period only included
$69.7 million in revenue from FISs title agency
business. During the second quarter of 2005, we re-evaluated our
method of estimation for accruing agency title revenues and
commissions and refined the method which resulted in our
recording approximately $50 million in additional agency
revenue in the second quarter of 2005 than we would have under
our prior method. The impact on net earnings of this adjustment
was approximately $2 million. A change in agency premiums
has a much smaller effect on profitability than the same change
in direct premiums would have because our margins as a
percentage of premiums for agency business are significantly
lower than the margins realized from our direct operations due
to commissions paid to our agents and other costs related to
agency business.
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 have fluctuated
in a pattern generally consistent with the fluctuation in direct
title insurance premiums and order counts through the third
quarter of 2005 and 2004. Escrow and other title related fees
were $868.4 million and $779.9 million for the first
nine months of 2005 and 2004, respectively.
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 was
$77.1 million and $45.5 million for the nine months
ended September 30, 2005 and 2004, an increase of
$31.5 million, or 69.2%. The increase in interest and
investment income in the first nine months of 2005 is due
primarily to an increase in the short-term investment and fixed
income asset base during the current year periods compared to
the prior year and the increasing interest rate environment.
Net realized gains for the nine months ended September 30,
2005 were $25.5 million compared with net realized gains of
$17.6 million for the prior year. The increase was
primarily the result of capital gains realized on a number of
securities sold through the third quarter of 2005, which were
offset by charges of approximately $6.9 million relating to
the other than temporary impairment of two investments. The
prior year also included other than temporary impairment charges
of approximately $6.2 million.
Personnel costs include base salaries, commissions, benefits and
bonuses paid to employees and are one of our most significant
operating expenses. Personnel costs totaled
$1,415.9 million and $1,267.9 million for the nine
months ended September 30, 2005 and 2004, respectively.
Personnel costs as a percentage of total revenues from direct
title premiums and escrow and other fees were 56.4% in the first
nine months of 2005 compared to 55.8% for the corresponding
period of 2004. Personnel costs have increased in the current
45
period primarily due to a recent trend in salary increases
relating to increased competition for top employees and the
strong real estate environment.
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, professional services, advertising
expenses, general insurance and trade and notes receivable
allowances. Other operating expenses totaled $699.8 million
and $640.3 million for the first nine months of 2005 and
2004, respectively.
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
premiums and agent commissions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, | |
|
|
| |
|
|
2005 | |
|
% | |
|
2004 | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Agent premiums
|
|
$ |
2,083,317 |
|
|
|
100.0% |
|
|
$ |
2,110,142 |
|
|
|
100.0% |
|
Agent commissions
|
|
|
1,617,260 |
|
|
|
77.6% |
|
|
|
1,651,066 |
|
|
|
78.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$ |
466,057 |
|
|
|
22.4% |
|
|
$ |
459,076 |
|
|
|
21.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net margin from agency title insurance premiums in the 2005 nine
month period compared with 2004 increased as a percentage of
total agency premiums due to the Company writing a higher
percentage of policies in states where we pay lower commission
rates.
Depreciation and amortization was $73.2 million in the nine
month period of 2005 as compared to $69.1 million in the
2004 nine month period.
The provision for claim losses includes an estimate of
anticipated title and title related claims and escrow losses.
The estimate of anticipated title and title related claims is
accrued as a percentage of title premium revenue based on our
historical loss experience and other relevant factors. We
monitor our claims loss experience on a continual basis and
adjust the provision for claim losses accordingly. The claim
loss provision for title insurance was $254.3 million for
the first nine months of 2005 as compared to $194.5 million
in 2004. Our claim loss provision as a percentage of total title
premiums was 6.8% and 5.4% in the nine months ended
September 30, 2005 and 2004, respectively. The increase is
attributable to higher than expected loss development,
especially for individually significant claims, and a return to
a more normalized environment with the volume of resale
transactions exceeding the refinance transactions.
Interest expense was $5.4 million and $3.1 million for
the first nine months of 2005 and 2004, respectively. The
increase of $2.3 million relates primarily to an increase
in average borrowings as compared to the prior year including
the $650 million in notes due FNF as of September 30,
2005.
Income tax expense as a percentage of earnings before income
taxes was 37.5% and 36.6% for the first nine months of 2005 and
2004, respectively. 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.
Net earnings were $412.6 million and $413.2 million
for the first nine months of 2005 and 2004, respectively.
46
|
|
|
Comparisons of Years ended December 31, 2004, 2003
and 2002 |
The
following table presents certain financial data for the years
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Direct title insurance premiums
|
|
$ |
2,003,447 |
|
|
$ |
2,105,317 |
|
|
$ |
1,557,769 |
|
Agency title insurance premiums
|
|
|
2,714,770 |
|
|
|
2,595,433 |
|
|
|
1,989,958 |
|
|
|
|
|
|
|
|
|
|
|
|
Total title premiums
|
|
|
4,718,217 |
|
|
|
4,700,750 |
|
|
|
3,547,727 |
|
Escrow and other title-related fees
|
|
|
1,039,835 |
|
|
|
1,058,729 |
|
|
|
790,787 |
|
Interest and investment income
|
|
|
64,885 |
|
|
|
56,708 |
|
|
|
72,305 |
|
Realized gains and losses, net
|
|
|
22,948 |
|
|
|
101,839 |
|
|
|
584 |
|
Other income
|
|
|
43,528 |
|
|
|
52,689 |
|
|
|
55,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,889,413 |
|
|
|
5,970,715 |
|
|
|
4,467,330 |
|
|
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
|
1,680,805 |
|
|
|
1,692,895 |
|
|
|
1,260,070 |
|
Other operating expenses
|
|
|
849,554 |
|
|
|
817,597 |
|
|
|
633,193 |
|
Agent commissions
|
|
|
2,117,122 |
|
|
|
2,035,810 |
|
|
|
1,567,112 |
|
Depreciation and amortization
|
|
|
95,718 |
|
|
|
79,077 |
|
|
|
53,042 |
|
Provision for claim losses
|
|
|
259,402 |
|
|
|
248,834 |
|
|
|
175,963 |
|
Interest expense
|
|
|
3,885 |
|
|
|
4,582 |
|
|
|
8,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,006,486 |
|
|
|
4,878,795 |
|
|
|
3,697,966 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
|
882,927 |
|
|
|
1,091,920 |
|
|
|
769,364 |
|
Income tax expense
|
|
|
323,598 |
|
|
|
407,736 |
|
|
|
276,970 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before minority interest
|
|
|
559,329 |
|
|
|
684,184 |
|
|
|
492,394 |
|
Minority interest
|
|
|
1,165 |
|
|
|
859 |
|
|
|
624 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
558,164 |
|
|
$ |
683,325 |
|
|
$ |
491,770 |
|
|
|
|
|
|
|
|
|
|
|
Orders opened by direct title operations
|
|
|
3,142,945 |
|
|
|
3,771,393 |
|
|
|
2,953,797 |
|
Orders closed by direct title operations
|
|
|
2,249,792 |
|
|
|
2,916,201 |
|
|
|
2,141,680 |
|
Total revenue in 2004 decreased $81.3 million to
$5,889.4 million, a decrease of 1.4% compared to 2003.
Total revenue in 2003 increased $1,503.4 million, or 33.7%
to $5,970.7 million from $4,467.3 million in 2002.
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, increased realized
gains on investments also contributed to increased revenue in
2003 compared to 2002.
Title insurance premiums were $4,718.2 million in 2004,
$4,700.8 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 average fee per file in our direct operations was
$1,324, $1,081 and $1,099 in 2004, 2003 and 2002, respectively.
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,
47
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 | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Direct
|
|
$ |
2,003,447 |
|
|
|
42.5 |
% |
|
$ |
2,105,317 |
|
|
|
44.8 |
% |
|
$ |
1,557,769 |
|
|
|
43.9 |
% |
Agency
|
|
|
2,714,770 |
|
|
|
57.5 |
|
|
|
2,595,433 |
|
|
|
55.2 |
|
|
|
1,989,958 |
|
|
|
56.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total title insurance premiums
|
|
$ |
4,718,217 |
|
|
|
100.0 |
% |
|
$ |
4,700,750 |
|
|
|
100.0 |
% |
|
$ |
3,547,727 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2004, our mix of direct and agency title premiums changed,
with agency premiums increasing to 57.5% of total premiums
compared with 55.2% in 2003. Agency premiums increased in 2004
by $119.3 million, which was primarily attributed to an
increase in agency premiums of $193.5 million due to our
acquisition of APTIC in March 2004 that was offset by a decrease
in the amount of agency revenue provided by FISs title
agency operations. 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, Inc.
(ANFI) in March 2003, and the inclusion of
ANFIs title insurance premiums as direct title insurance
premiums in 2003. In 2002, ANFIs title insurance premiums
were included in agency title insurance premiums. Agency
revenues from FIS title agency businesses were
$106.3 million, $284.9 million and $53.0 million
in 2004, 2003 and 2002, respectively.
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 $1,039.8 million,
$1,058.7 million and $790.8 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 $64.9 million compared with $56.7 million in 2003
and $72.3 million in 2002. Average invested assets in 2004
increased 14.8% to $3,226.2 million, from
$2,811.5 million in 2003. The tax equivalent yield in 2004,
excluding realized gains and losses, was 2.7% as compared with
2.5% in 2003 and 3.3% in 2002. Interest and investment income
decreased $15.6 million, or 21.6% in 2003 to
$56.7 million from $72.3 million in 2002.
Net realized gains and losses for 2004, 2003 and 2002 were
$22.9 million, $101.8 million and $0.6 million,
respectively. Net realized gains in 2003 includes a
$51.7 million realized gain as a result of IAC InterActive
Corp.s acquisition of Lending Tree Inc. and the subsequent
sale of our IAC Interactive Corp. common stock and a realized
gain of $21.8 million on the sale of New Century Financial
Corporation common stock.
Net realized gains in 2002 included a $0.1 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 $2.6 million loss 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 $5.1 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
real-estate related businesses that are not directly
title-related. Other income was $43.5 million in 2004,
$52.7 million in 2003 and $55.9 million in 2002.
48
Our operating expenses consist primarily of personnel costs and
other operating expenses, which are incurred as orders are
received and processed and agent commissions which are incurred
as revenue is recognized. Title insurance premiums, escrow and
other title-related fees are generally recognized as income at
the time the underlying transaction closes. As a result, direct
operations 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. 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.
Personnel costs include base salaries, commissions, benefits and
bonuses paid to employees, and are one of our most significant
operating expenses. Personnel costs totaled
$1,680.8 million, $1,692.9 million and
$1,260.1 million for the years ended December 31,
2004, 2003 and 2002, respectively. Personnel costs, as a
percentage of direct title insurance premiums and escrow and
other title-related fees, were 55.2% in 2004, compared with
53.5% in 2003 and 53.7% 2002. The increase in personnel costs as
a percentage of total revenue in 2004 is attributable to the lag
in reducing personnel to the appropriate level based on
activity. In addition, as a result of adopting
SFAS No. 123 during 2003, included in personnel costs
for 2004 and 2003 is approximately $5.4 million and
$4.9 million in stock compensation expense, respectively.
Other operating expenses consist primarily of facilities
expenses, title plant-related changes, 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, professional services, advertising
expenses, general insurance, and trade and notes receivable
allowances. Other operating expenses totaled
$849.6 million, $817.6 million and $633.2 million
for the years ended December 31, 2004, 2003 and 2002,
respectively. Other operating expenses increased as a percentage
of direct title insurance premiums and escrow and other
title-related fees to 27.9% in 2004 from 25.8% in 2003, which
decreased from 27.0% in 2002. The increase in other operating
expenses as a percentage of total direct title premiums and
escrow and other fees in 2004 is consistent with the increase in
personnel costs as a percentage of total direct title premiums
and escrow and other fees.
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 | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Agent title premiums
|
|
$ |
2,714,770 |
|
|
|
100.0 |
% |
|
$ |
2,595,433 |
|
|
|
100.0 |
% |
|
$ |
1,989,958 |
|
|
|
100.0 |
% |
Agent commissions
|
|
|
2,117,122 |
|
|
|
78.0 |
|
|
|
2,035,810 |
|
|
|
78.4 |
|
|
|
1,567,112 |
|
|
|
78.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net margin
|
|
$ |
597,648 |
|
|
|
22.0 |
% |
|
$ |
559,623 |
|
|
|
21.6 |
% |
|
$ |
422,846 |
|
|
|
21.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
49
A summary of the reserve for claim losses is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Beginning balance
|
|
$ |
932,439 |
|
|
$ |
887,973 |
|
|
$ |
881,053 |
|
|
Reserves assumed(1)
|
|
|
38,597 |
|
|
|
4,203 |
|
|
|
|
|
|
Claim loss provision related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
275,982 |
|
|
|
237,919 |
|
|
|
207,290 |
|
|
|
Prior years
|
|
|
(16,580 |
) |
|
|
10,915 |
|
|
|
(31,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total claim loss provision
|
|
|
259,402 |
|
|
|
248,834 |
|
|
|
175,963 |
|
|
Claims paid, net of recoupments related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(19,095 |
) |
|
|
(11,591 |
) |
|
|
(10,058 |
) |
|
|
Prior years
|
|
|
(230,597 |
) |
|
|
(196,980 |
) |
|
|
(158,985 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total claims paid, net of recoupments
|
|
|
(249,692 |
) |
|
|
(208,571 |
) |
|
|
(169,043 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$ |
980,746 |
|
|
$ |
932,439 |
|
|
$ |
887,973 |
|
|
|
|
|
|
|
|
|
|
|
Provision for claim losses as a percentage of title insurance
premiums only
|
|
|
5.5 |
% |
|
|
5.3 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
We assumed APTICs outstanding reserve for claim losses in
connection with its acquisition in 2004. We assumed ANFIs
outstanding reserve for claim losses in connection with its
acquisition in 2003. |
The title loss provision in 2004 reflects a higher estimated
loss for the 2004 policy year offset in part by a favorable
adjustment from previous policy years. 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 $3.9 million, $4.6 million and
$8.6 million, respectively.
Income tax expense as a percentage of earnings before income
taxes for 2004, 2003 and 2002 was 36.6%, 37.3%, 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
underwriting income versus investment income. The increase in
2003 as compared with 2002 is primarily due to an increase in
state income tax rates.
Selected Quarterly Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
1,314,932 |
|
|
$ |
1,601,316 |
|
|
$ |
1,562,630 |
|
|
$ |
1,410,535 |
|
Earnings before income taxes and minority interest
|
|
|
171,740 |
|
|
|
266,272 |
|
|
|
214,948 |
|
|
|
229,967 |
|
Net earnings
|
|
|
108,958 |
|
|
|
168,288 |
|
|
|
135,923 |
|
|
|
144,995 |
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
1,219,346 |
|
|
$ |
1,518,656 |
|
|
$ |
1,713,943 |
|
|
$ |
1,518,770 |
|
Earnings before income taxes and minority interest
|
|
|
198,943 |
|
|
|
317,259 |
|
|
|
341,591 |
|
|
|
234,125 |
|
Net earnings
|
|
|
124,338 |
|
|
|
198,201 |
|
|
|
213,739 |
|
|
|
147,046 |
|
50
Liquidity and Capital Resources
Our cash requirements include operating expenses, taxes,
payments of interest and principal on our debt, capital
expenditures, business acquisitions and dividends on our common
stock. We intend to pay an annual dividend of $1.00 on each
share of our common stock, payable quarterly, or an aggregate of
approximately $173.5 million per year, based on the number
of shares we had outstanding as of the distribution. 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 and existing credit facilities. Our
short-term and long-term liquidity requirements are monitored
regularly to ensure that we can meet our cash requirements. We
forecast the daily needs of all of our subsidiaries and
periodically review their short-term and long-term projected
sources and uses of funds, as well as the asset, liability,
investment and cash flow assumptions underlying these
projections.
Our insurance subsidiaries generate cash from premiums earned
and their respective investment portfolios and these funds are
adequate to satisfy the payments of claims and other
liabilities. Due to the magnitude of our investment portfolio in
relation to our claim loss reserves, we do not specifically
match durations of our investments to the cash outflows required
to pay claims, but do manage outflows on a shorter time frame.
Our two significant sources of internally generated funds are
dividends and other payments from our subsidiaries. As a holding
company, we will receive cash from our subsidiaries in the form
of dividends and as reimbursement for operating and other
administrative expenses we incur. The reimbursements will be
paid 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. See Business
Regulation. As of December 31, 2004,
$1,731.3 million of our net assets were restricted from
dividend payments without prior approval from the relevant
departments of insurance. During the remainder of 2005, our
first tier title subsidiaries can pay or make distributions to
us of approximately $89.1 million without prior regulatory
approval. Our underwritten title companies collect revenue and
pay operating expenses. However, they are not regulated to the
same extent as our insurance subsidiaries.
In July 2005 one of our insurance subsidiaries paid a cash
dividend to FNF in the amount of $145 million. This
dividend required prior regulatory approval, which was obtained.
In August 2005 one of our subsidiaries that is not subject to
regulatory limitations on dividend payments paid a dividend to
FNF in the form of a promissory note having a principal amount
of $150 million.
Our capital expenditures relate primarily to fixed assets and
were $70.6 million, $80.4 million and
$64.1 million in 2004, 2003 and 2002, respectively. We do
not expect future capital expenditures to increase significantly.
In connection with the distribution we issued two
$250 million intercompany notes payable to FNF, with terms
that mirror the two series of FNF notes being sought in
these exchange offers. Proceeds from the issuance of the 7.30%
FNF notes due 2011 were used by FNF to repay debt incurred
in connection with the acquisition of our subsidiary, Chicago
Title, and the proceeds from the 5.25% FNF notes due 2013
were used for general corporate purposes. Interest on each
mirror note accrues from the last date on which interest on the
corresponding FNF notes was paid and at the same rate. The
mirror notes mature on the maturity dates of the corresponding
FNF notes. Upon any acceleration of maturity of the
FNF notes, whether upon redemption or an event of default
of the FNF notes, we must repay the corresponding mirror
note. We intend to deliver any FNF notes we receive in the
exchange offers to FNF in redemption of an equal principal
amount of the corresponding mirror notes.
51
On October 17, 2005, we entered into a credit agreement
with Bank of America, N.A. as administrative agent and swing
line lender, and certain agents and other lenders party thereto.
The credit agreement provides for a $400 million unsecured
revolving credit facility maturing on the fifth anniversary of
the closing date. The credit agreement provides for a revolving
credit facility which allows us to borrow, repay and re-borrow
amounts from time to time until its maturity. Voluntary
prepayment of the revolving credit facility under the credit
agreement is permitted at any time without fee upon proper
notice and subject to a minimum dollar requirement. Revolving
loans under the credit facility bear interest at a variable rate
based on either: (i) the higher of (a) a rate per
annum equal to one-half of one percent in excess of the Federal
Reserves Federal Funds rate, or (b) Bank of
Americas prime rate; or (ii) a rate per
annum equal to the British Bankers Association LIBOR rate plus a
margin of between 0.35% and 1.25%, depending on our then current
public debt credit rating from the rating agencies. On
October 24, 2005, we borrowed $150 million under the
credit facility at a rate per annum equal to LIBOR + 0.625% and
used the funds to repay a $150 million intercompany note
issued by one of our subsidiaries to FNF in August 2005.
The credit agreement contains 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 limitations on restricted payments and
transactions with affiliates. The credit agreement requires us
to maintain investment grade debt ratings, certain financial
ratios related to liquidity and statutory surplus and certain
levels of capitalization. The credit agreement includes
customary events of default for facilities of this type (with
customary grace periods, as applicable) and provides that, upon
the occurrence of an event of default, the interest rate on all
outstanding obligations will be increased and payments of all
outstanding loans may be accelerated and/or the lenders
commitments may be terminated. In addition, upon the occurrence
of certain insolvency or bankruptcy related events of default,
all amounts payable under the credit agreement shall
automatically become immediately due and payable, and the
lenders commitments will automatically terminate.
Subject to certain limited exceptions, we may not issue
additional shares of stock without consent of FNF, which it may
be unwilling to give because of the resulting tax consequences.
See Our Arrangements with FNF Separation
Agreement.
Our long-term contractual obligations generally include our
long-term debt and operating lease payments on certain of our
property and equipment. As of December 31, 2004, our
required payments relating to our long-term contractual
obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Notes payable
|
|
$ |
22,390 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
22,390 |
|
Operating lease payments
|
|
|
109,380 |
|
|
|
94,805 |
|
|
|
75,338 |
|
|
|
51,216 |
|
|
|
28,933 |
|
|
|
19,699 |
|
|
|
379,371 |
|
Reserve for claim losses
|
|
|
181,617 |
|
|
|
147,037 |
|
|
|
115,761 |
|
|
|
86,806 |
|
|
|
63,108 |
|
|
|
386,417 |
|
|
|
980,746 |
|
Pension and postretirement obligations
|
|
|
12,309 |
|
|
|
12,287 |
|
|
|
12,575 |
|
|
|
12,811 |
|
|
|
12,777 |
|
|
|
108,936 |
|
|
|
171,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
325,696 |
|
|
$ |
254,129 |
|
|
$ |
203,674 |
|
|
$ |
150,833 |
|
|
$ |
104,818 |
|
|
$ |
515,052 |
|
|
$ |
1,554,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004 we had reserves for claim losses of
$980.7 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
52
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, that can substantially and unexpectedly cause increases
in both the amount and timing of estimated title insurance loss
payments; |
|
|
|
loss cost trends whereby increases or 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. |
Off-Balance Sheet Arrangements
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
Combined 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.
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 FNTs financial
statements. During 2003, we 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. We 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 first quarter
of 2006. Since we adopted SFAS No. 123 in 2003, the
impact of recording additional expense in 2006 under
SFAS No. 123R relating to options granted prior to
January 1, 2003 is not significant.
Market Risks
Market risk refers to the risk that a change in the level of one
or more market factors, such as interest rates or equity prices,
will result in losses for financial instruments that we hold or
arrangements to which we are a party.
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.
53
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 41.1% 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:
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|
|
An approximate $58.1 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. |
|
|
|
An approximate $23.0 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. |
|
|
|
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. |
INDUSTRY BACKGROUND
Title Insurance Policies
Generally, real estate buyers and mortgage lenders purchase
title insurance to insure good and marketable title to real
estate. A brief generalized description of the process of
issuing a title insurance policy is as follows:
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|
The customer, typically a real estate salesperson or broker,
escrow agent, attorney or lender, places an order for a title
policy. |
|
|
|
Company personnel note the specifics of the title policy order
and place a request with the title company or its agents for a
preliminary report or commitment. |
|
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|
After the relevant historical data on the property is compiled,
the title officer prepares a preliminary report that documents
the current status of title to the property, any exclusions,
exceptions and/or limitations that the title company might
include in the policy, and specific issues that need to be
addressed and resolved by the parties to the transaction before
the title policy will be issued. |
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|
The preliminary report is circulated to all the parties for
satisfaction of any specific issues. |
|
|
|
After the specific issues identified in the preliminary report
are satisfied, an escrow agent closes the transaction in
accordance with the instructions of the parties and the title
companys conditions. |
|
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|
Once the transaction is closed and all monies have been
released, the title company issues a title insurance policy. |
In a real estate transaction financed with a mortgage, virtually
all real property mortgage lenders require their borrowers to
obtain a title insurance policy at the time a mortgage loan is
made. This lenders policy insures the lender against any
defect affecting the priority of the mortgage in an amount equal
to the
54
outstanding balance of the related mortgage loan. An
owners policy is typically also issued, insuring the buyer
against defects in title in an amount equal to the purchase
price. On a refinancing transaction, only a lenders policy
is generally purchased because ownership of the property has not
changed. In the case of an all-cash real estate purchase, no
lenders policy is issued but typically an owners
title policy is issued.
Title insurance premiums paid in connection with a title
insurance policy are based on (and typically a percentage of)
either the amount of the mortgage loan or the purchase price of
the property insured. Title insurance premiums are due in full
at the closing of the real estate transaction. The lenders
policy generally terminates upon the refinancing or resale of
the property.
The amount of the insured risk or face amount of
insurance under a title insurance policy is generally equal to
either the amount of the loan secured by the property or the
purchase price of the property (subject to adjustment if the
policy includes inflation adjustment provisions). The title
insurer is also responsible for the cost of defending the
insured title against covered claims. The insurers actual
exposure at any given time, however, generally is less than the
total face amount of policies outstanding because the coverage
of a lenders policy is reduced and eventually terminated
as a result of payment of the mortgage loan. Because of these
factors, the total liability of a title underwriter on
outstanding policies cannot be precisely determined.
Title insurance companies typically issue title insurance
policies directly through branch offices or through title
agencies which are subsidiaries of the title insurance company,
and indirectly through independent third party agencies
unaffiliated with the title insurance company. Where the policy
is issued through a branch or wholly-owned subsidiary agency
operation, the title company typically performs or directs the
search, and the premiums collected are retained by the title
company. Where the policy is issued through an independent
agent, the agent generally performs the search (in some areas
searches are performed by approved attorneys), examines the
title, collects the premium and retains a majority of the
premium. The remainder of the premium is remitted to the title
company as compensation, part of which is for bearing the risk
of loss in the event a claim is made under the policy. The
percentage of the premium retained by an agent varies from
region to region and is sometimes regulated by the states. The
title company is obligated to pay title claims in accordance
with the terms of its policies, regardless of whether the title
company issues policies through its direct operations or through
independent agents.
Prior to issuing policies, title insurers and their agents
attempt to reduce the risk of future claim losses by accurately
performing searches and examinations. A title companys
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 made in the title search and examination process and
from hidden defects such as fraud, forgery, incapacity, or
missing heirs of the property.
Residential real estate business results from the construction,
sale, resale and refinancing of residential properties, while
commercial real estate business results from similar activities
with respect to properties with a business or commercial use.
Commercial real estate title insurance policies insure title to
commercial real property, and generally involve higher coverage
amounts and yield higher premiums. The volume of residential
real estate transaction volume is primarily affected by
macroeconomic and seasonal factors while commercial real estate
transactions are affected primarily by fluctuations in local
supply and demand conditions for commercial space.
Product Market
The title insurance market in the United States is large and has
grown in the last 10 years. According to Demotech, total
operating income for the entire U.S. title insurance
industry grew from $4.8 billion in 1995 to
$15.5 billion in 2004. 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 and prices for new and existing
homes, as well as the refinancing of previously issued mortgages.
Most real estate transactions consummated in the
U.S. require the use of title insurance by a lending
institution before a transaction can be completed. Generally,
revenues from title insurance policies are directly
55
correlated with the value of the property underlying the title
policy, and appreciation in the overall value of the real estate
market helps drive growth in total industry revenues. Industry
revenues are also driven by changes 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, the top
five title insurance companies accounted for 90.2% of net
premiums collected in 2004. Over 40 independent title insurance
companies accounted for the remaining 9.8% of net premiums
collected in 2004. 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
FNFs acquisition of Chicago Title in March 2000.
Consolidation has created opportunities for increased financial
and operating efficiencies for the industrys largest
participants and should continue to drive profitability and
market share in the industry.
Trends and Opportunities
Title insurance companies today face significant challenges
resulting from consolidation among traditional title companies
and new entrants, technological innovation and evolving customer
preferences and behavior. As a result of these challenges, we
believe that the title insurance industry is experiencing or
will be subject to the following significant trends:
|
|
|
|
|
Title insurance companies remain subject to consolidation within
the industry. This creates the potential for an increased
customer base and continued economies of scale. |
|
|
|
In order to achieve lower costs, title insurance companies may
increasingly outsource search and examination functions of the
title process. |
|
|
|
If mortgage interest rates begin to rise, the volume and average
value of real estate related transactions may decline and affect
revenue. |
56
BUSINESS
Company 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 30.5% of
all title insurance policies issued nationally during 2004, as
measured by premiums. Our title business consists of providing
title insurance and escrow and other title-related products and
services arising from the real estate closing process. Our
operations are conducted on a direct basis through our own
employees who act as title and escrow agents and through
independent agents. In addition to our independent agents, our
customers are lenders, mortgage brokers, attorneys, real estate
agents, home builders and commercial real estate developers. We
do not focus our marketing efforts on the homeowner.
History
The predecessors to FNT have primarily been title insurance
companies, some of which have been in operation since the late
1800s. Many of these title insurance companies have been
acquired in the last two decades. In 1984, FNF acquired a
controlling interest in Fidelity National Title Insurance
Company. During the 1990s, FNF acquired Alamo Title, Nations
Title Inc., Western Title Company of Washington and
First Title Corp. In 2000, FNF completed the acquisition of
Chicago Title Corp., creating the largest title insurance
organization in the world, and in 2004, FNF acquired American
Pioneer Title Insurance Company, which now operates under
our Ticor Title brand. Chicago Title had previously acquired
Security Union Title in 1987 and Ticor Title Insurance
Company in 1991. Our businesses have historically been operated
as wholly-owned subsidiaries of FNF.
Competitive Strengths
We believe that our competitive strengths include the following:
Leading title insurance company. We are the largest title
insurance company in the United States and a leading provider of
title insurance and escrow services for real estate
transactions. We currently have the leading market share for
title insurance in California, New York, Texas and Florida,
which are the four largest markets for title insurance in the
United States, which account for approximately 48% of all title
insurance business in the United States. We have approximately
1,500 locations throughout the United States providing our title
insurance services.
Established relationships with our customers. We have
strong relationships with the customers who use our title
services. Our agent distribution network, which includes over
9,500 agents, is among the largest in the United States. We also
benefit from strong brand recognition in our five FNT title
brands that allows us to access a broader client base than if we
operated under a single consolidated brand and provides our
customers with a choice among FNT brands.
Strong value proposition for our customers. We provide
our customers with title insurance and escrow and other closing
services that support their ability to effectively close real
estate transactions. We help make the real estate closing more
efficient for our customers by offering a single point of access
to a broad platform of title-related products and resources
necessary to close real estate transactions.
Proven management team. The managers of our operating
businesses have successfully built our title business over an
extended period of time, resulting in our business attaining the
size, scope and presence in the industry that it has today. Our
managers have demonstrated their leadership ability during
numerous acquisitions through which we have grown and throughout
a number of business cycles and significant periods of industry
change.
Competitive cost structure. We have been able to maintain
competitive operating margins in part by monitoring our
businesses in a disciplined manner through continual evaluation
and management of our cost structure. When compared to other
industry competitors, we also believe that our management
structure has fewer layers of managers which allows us to
operate with lower overhead costs.
57
Commercial title insurance. While residential title
insurance comprises the majority of our business, we believe we
are the largest provider of commercial real estate title
insurance in the United States. Our network of agents,
attorneys, underwriters and closers that service the commercial
real estate markets is one of the largest in the industry. Our
commercial network combined with our financial strength makes
our title insurance operations attractive to large national
lenders who require the underwriting and issuing of larger
commercial title policies.
Corporate principles. A cornerstone of our management
philosophy and operating success is the five fundamental
precepts upon which FNF was founded:
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Bias for action |
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|
Autonomy and entrepreneurship |
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|
Employee ownership |
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|
|
Minimal bureaucracy |
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|
|
Close customer relationships |
These five precepts are emphasized to our employees from the
first day of employment and are integral to many of our
strategies described below.
Strategy
Our strategy in the title insurance business is to maximize
operating profits by increasing our market share and managing
operating expenses throughout the real estate business cycle. To
accomplish our goals, we intend to:
Continue to operate each of our five title brands
independently. We believe that in order to maintain and
strengthen our title insurance customer base, we must leave the
Fidelity National Title, Chicago Title, Ticor Title, Security
Union Title and Alamo Title brands intact and operate these
brands independently. In most of our largest markets, we operate
two, and in a few cases, three brands. This approach allows us
to continue to attract customers who identify with one brand
over another and allows us to utilize a broader base of local
agents and local operations than we would have with a single
consolidated brand.
Consistently deliver superior customer service. We
believe customer service and consistent product delivery are the
most important factors in attracting and retaining customers.
Our ability to provide superior customer service and provide
consistent product delivery requires continued focus on
providing high quality service and products at competitive
prices. Our goal is to continue to improve the experience of our
customers in all aspects of our business.
Manage our operations successfully through business
cycles. We operate in a cyclical business and our ability to
diversify our revenue base within our core title insurance
business and manage the duration of our investments may allow us
to better operate in this cyclical business. Maintaining a broad
geographic revenue base, utilizing both direct and independent
agency operations and pursuing both residential and commercial
title insurance business help diversify our title insurance
revenues. Maintaining shorter durations on our investment
portfolio allows us to increase our investment revenue in a
rising interest rate environment, which may offset some of the
decline in premiums and service revenues we would expect in such
an environment. For a more detailed discussion of our investment
strategies, see Investment Policies and
Investment Portfolio.
Continue to improve our products and technology. As a
national provider of real estate transaction products and
services, we participate in an industry that is subject to
significant change, frequent new product and service
introductions and evolving industry standards. We believe that
our future success will depend in part on our ability to
anticipate industry changes and offer products and services that
meet evolving industry standards. In connection with our service
offerings, we are currently upgrading our operating system to
improve the process of ordering title services and improve the
delivery of our products to our customers.
58
Maintain values supporting our strategy. We believe that
continuing to focus on and support our long-established
corporate culture will reinforce and support our business
strategy. Our goal is to foster and support a corporate culture
where our agents and employees seek to operate independently and
profitably at the local level while forming close customer
relationships by meeting customer needs and improving customer
service. Utilizing a relatively flat managerial structure and
providing our employees with a sense of individual ownership
supports this goal.
Effectively manage costs based on economic factors. We
believe that our focus on our operating margins is essential to
our continued success in the title insurance business.
Regardless of the business cycle in which we may be operating,
we seek to continue to evaluate and manage our cost structure
and make appropriate adjustments where economic conditions
dictate. This continual focus on our cost structure helps us to
better maintain our operating margins.
Title Insurance
We provide title insurance services through our direct
operations and through independent title insurance agents who
issue title policies on behalf of our title insurance companies.
Our title insurance companies determine the terms and conditions
upon which they will insure title to the real property according
to their underwriting standards, policies and procedures.
Direct Operations. In our direct operations, the title
insurer issues the title insurance policy and retains the entire
premium paid in connection with the transaction. 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 independent
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 closing services. |
We have approximately 1,500 offices throughout the
U.S. primarily providing residential real estate title
insurance. Our commercial real estate title insurance business
is operated almost exclusively through our direct operations. We
maintain direct operations for our commercial title insurance
business in all the major real estate markets including New
York, Los Angeles, Chicago, Atlanta, Dallas, Philadelphia,
Phoenix, Seattle and Houston.
Agency Operations. In our agency operations, the search
and examination function is performed by an independent agent or
the agent may purchase the search and examination from us. In
either case, the agent is responsible to ensure that the search
and examination is completed. 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 is made under the title insurance
policy. Independent agents may select among several title
underwriters based upon their relationship with the underwriter,
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 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 sets forth the agents liability to us for
policy losses attributable to the agents errors. An 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 agents 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.
59
Fees and Premiums. One means of analyzing our business is
by examining the level of premiums generated by direct and
agency operations. The following table presents the percentages
of our title insurance premiums generated by direct and agency
operations:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
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|
Nine Months Ended September 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
(In thousands) | |
Direct
|
|
$ |
1,643,574 |
|
|
|
44.1% |
|
|
$ |
1,491,375 |
|
|
|
41.4% |
|
|
$ |
2,003,447 |
|
|
|
42.5% |
|
|
$ |
2,105,317 |
|
|
|
44.8% |
|
|
$ |
1,557,769 |
|
|
|
43.9% |
|
Agency
|
|
|
2,083,317 |
|
|
|
55.9% |
|
|
|
2,110,142 |
|
|
|
58.6% |
|
|
|
2,714,770 |
|
|
|
57.5% |
|
|
|
2,595,433 |
|
|
|
55.2% |
|
|
|
1,989,958 |
|
|
|
56.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total title insurance premiums
|
|
$ |
3,726,891 |
|
|
|
100.0% |
|
|
$ |
3,601,517 |
|
|
|
100.0% |
|
|
$ |
4,718,217 |
|
|
|
100.0% |
|
|
$ |
4,700,750 |
|
|
|
100.0% |
|
|
$ |
3,547,727 |
|
|
|
100.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
The premium for title insurance is due in full when the real
estate transaction is closed. We recognize title insurance
premium revenues from direct operations upon the closing of the
transaction, whereas premium revenues from agency operations
include an accrual based on estimates of the volume of
transactions that have closed in a particular period for which
premiums have not yet been reported to us. The accrual for
agency premiums is necessary because of the lag between the
closing of these transactions and the reporting of these
policies to us by the agent and is based on estimates utilizing
historical information.
Geographic Operations. Our direct operations are divided
into approximately 228 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 over 9,500 agents, primarily in
those areas in which agents are the more prevalent title
insurance provider.
The following table sets forth the approximate dollar and
percentage volumes of our title insurance premium revenue by
state.
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|
|
|
|
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|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
California
|
|
$ |
1,055,296 |
|
|
|
22.4% |
|
|
$ |
1,183,643 |
|
|
|
25.2% |
|
|
$ |
895,698 |
|
|
|
25.2% |
|
Texas
|
|
|
514,417 |
|
|
|
10.9% |
|
|
|
527,583 |
|
|
|
11.2% |
|
|
|
429,740 |
|
|
|
12.1% |
|
Florida
|
|
|
483,860 |
|
|
|
10.3% |
|
|
|
310,545 |
|
|
|
6.6% |
|
|
|
215,367 |
|
|
|
6.1% |
|
New York
|
|
|
400,827 |
|
|
|
8.5% |
|
|
|
378,341 |
|
|
|
8.0% |
|
|
|
295,636 |
|
|
|
8.3% |
|
Illinois
|
|
|
202,277 |
|
|
|
4.3% |
|
|
|
222,534 |
|
|
|
4.7% |
|
|
|
173,651 |
|
|
|
4.9% |
|
All others
|
|
|
2,061,540 |
|
|
|
43.6% |
|
|
|
2,078,104 |
|
|
|
44.3% |
|
|
|
1,537,635 |
|
|
|
43.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
4,718,217 |
|
|
|
100.0% |
|
|
$ |
4,700,750 |
|
|
|
100.0% |
|
|
$ |
3,547,727 |
|
|
|
100.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
The following table sets forth the approximate dollar and
percentage volumes of title insurance premium for the industry
for 2004 by state according to Demotech.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, 2004 | |
|
|
| |
|
|
Amount | |
|
% | |
|
|
| |
|
| |
|
|
(In thousands) | |
California
|
|
$ |
3,068,170 |
|
|
|
19.8% |
|
Florida
|
|
|
1,804,513 |
|
|
|
11.6% |
|
Texas
|
|
|
1,491,295 |
|
|
|
9.6% |
|
New York
|
|
|
1,146,752 |
|
|
|
7.4% |
|
Pennsylvania
|
|
|
592,232 |
|
|
|
3.8% |
|
All others
|
|
|
7,431,878 |
|
|
|
47.8% |
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
15,534,840 |
|
|
|
100.0% |
|
|
|
|
|
|
|
|
Escrow and Other Title-Related Services
In addition to fees for underwriting title insurance policies,
we derive a significant amount of our revenues from escrow and
other title-related services, including closing services. The
escrow and other services provided by us include all of those
typically required in connection with residential and commercial
real estate purchase and refinance activities. Escrow and other
title-related fees represented approximately 18.4% of our
revenues in the first nine months of 2005 and 17.7% of our
revenues for 2004. Escrow and other title-related fees are
primarily generated by our direct title operations and increases
or decreases in the amount of revenue we receive from these
services are closely related to increases or decreases in
revenues from our direct title operations.
Sales and Marketing
We market and distribute our title and escrow products and
services to customers in the residential and commercial market
sectors of the real estate industry through customer
solicitation by sales personnel. Although in many instances the
individual homeowner is the beneficiary of a title insurance
policy, we do not focus our marketing efforts on the homeowner.
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
who order title insurance policies for their clients. 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.
Reinsurance and Coinsurance
In a limited number of situations we limit our maximum loss
exposure by reinsuring certain risks with other title insurers
under agent fidelity, excess of loss and case-by-case
reinsurance agreements. We also earn a small amount of
additional income, which is reflected in our direct premiums, by
assuming reinsurance for certain risks of other title insurers.
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.
We also use coinsurance in our commercial title business to
provide coverage in amounts greater than we would be willing or
able to provide individually. In coinsurance transactions, each
individual underwriting
61
company issues a separate policy and assumes a portion of the
overall total risk. As a coinsurer we are only liable for the
portion of the risk we assumed.
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 generally the face amount of the policy plus the cost of
defending the insureds title against an adverse claim.
Reserves for claim losses are established based upon known
claims, as well as losses incurred but not yet reported to us
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.
Although most claims against title insurance policies are
reported relatively soon after the policy has been issued,
claims may be reported many years later. By their nature, claims
are often complex, vary greatly in dollar amounts and are
affected by economic and market conditions and the legal
environment existing at the time of settlement of the claims.
Estimating future title loss payments is difficult because of
the complex nature of title claims, the long periods of time
over which claims are paid, significantly varying dollar amounts
of individual claims and other factors.
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. We take an aggressive stance
in pursuing claims against independent agents for losses that
arise from fraud, misrepresentation, deceptive trade practices
or other wrongful acts commonly referred to as bad
faith.
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. 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.
Investment Policies and Investment Portfolio
Our investment policy is designed to maintain a high quality
portfolio, maximize income and minimize interest rate risk. 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 statutory unearned premium
reserves. We manage our investment portfolio and do not utilize
third party investment managers.
As of December 31, 2004 and 2003, the carrying amount,
which approximates the fair value, of total investments was
$2,174.8 million and $1,615.7 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.
62
The following table presents certain information regarding the
investment ratings of our fixed maturity portfolio at
December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
Amortized | |
|
|
|
Amortized | |
|
|
Ratings(1) |
|
Cost | |
|
% of Total | |
|
Fair Value | |
|
% of Total | |
|
Cost | |
|
% of Total | |
|
Fair Value | |
|
% of Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
AAA
|
|
$ |
1,373,836 |
|
|
|
63.3 |
% |
|
$ |
1,376,727 |
|
|
|
63.3 |
% |
|
$ |
1,023,385 |
|
|
|
64.5 |
% |
|
$ |
1,041,271 |
|
|
|
64.4 |
% |
AA
|
|
|
329,417 |
|
|
|
15.2 |
|
|
|
332,761 |
|
|
|
15.3 |
|
|
|
262,152 |
|
|
|
16.5 |
|
|
|
270,912 |
|
|
|
16.8 |
|
A
|
|
|
280,004 |
|
|
|
12.9 |
|
|
|
277,556 |
|
|
|
12.8 |
|
|
|
201,408 |
|
|
|
12.7 |
|
|
|
202,429 |
|
|
|
12.5 |
|
BBB
|
|
|
60,067 |
|
|
|
2.7 |
|
|
|
59,252 |
|
|
|
2.7 |
|
|
|
45,981 |
|
|
|
2.9 |
|
|
|
45,943 |
|
|
|
2.8 |
|
Other
|
|
|
128,362 |
|
|
|
5.9 |
|
|
|
128,521 |
|
|
|
5.9 |
|
|
|
53,640 |
|
|
|
3.4 |
|
|
|
55,149 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,171,686 |
|
|
|
100.0 |
% |
|
$ |
2,174,817 |
|
|
|
100.0 |
% |
|
$ |
1,586,566 |
|
|
|
100.0 |
% |
|
$ |
1,615,704 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Ratings as assigned by S&Ps Ratings Group and
Moodys. |
The following table presents certain information regarding
contractual maturities of our fixed maturity securities at
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
|
| |
|
|
Amortized | |
|
|
Maturity |
|
Cost | |
|
% of Total | |
|
Fair Value | |
|
% of Total | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
One year or less
|
|
$ |
342,855 |
|
|
|
15.8 |
% |
|
$ |
343,171 |
|
|
|
15.8 |
% |
After one year through five years
|
|
|
1,083,385 |
|
|
|
49.9 |
|
|
|
1,084,365 |
|
|
|
49.9 |
|
After five years through ten years
|
|
|
405,776 |
|
|
|
18.7 |
|
|
|
407,356 |
|
|
|
18.7 |
|
After ten years
|
|
|
256,359 |
|
|
|
11.8 |
|
|
|
256,429 |
|
|
|
11.8 |
|
Mortgage-backed securities
|
|
|
83,311 |
|
|
|
3.8 |
|
|
|
83,496 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,171,686 |
|
|
|
100.0 |
% |
|
$ |
2,174,817 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to call
|
|
$ |
261,289 |
|
|
|
12.0 |
% |
|
$ |
263,741 |
|
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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
$261.3 million and a fair value of $263.7 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
Cost | |
|
Fair Value | |
|
Cost | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Banks, trust and insurance companies
|
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
1 |
|
|
$ |
5 |
|
Industrial, miscellaneous and all other
|
|
|
108,573 |
|
|
|
115,065 |
|
|
|
54,400 |
|
|
|
65,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,574 |
|
|
|
115,070 |
|
|
|
54,401 |
|
|
|
65,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net investment income(1)
|
|
$ |
86,120 |
|
|
$ |
70,940 |
|
|
$ |
85,405 |
|
Average invested assets
|
|
|
3,226,243 |
|
|
|
2,811,408 |
|
|
|
2,576,321 |
|
|
|
|
|
|
|
|
|
|
|
Effective return on average invested assets
|
|
|
2.7 |
% |
|
|
2.5 |
% |
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Net investment income as reported in our Combined Statements of
Earnings has been adjusted in the presentation above to provide
the tax equivalent yield on tax exempt investments. |
Other long-term investments as of December 31, 2004
amounted to $21.2 million and consisted primarily of equity
investments.
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. As of December 31, 2004 short-term investments
amounted to $508.4 million.
Technology
To meet the changing business and technology needs of our
customers, we continually invest in our applications 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.
Competition
The title insurance industry is highly competitive. According to
Demotech, the top five title insurance companies accounted for
90.2% of net premiums collected in 2004. Over 40 independent
title insurance companies accounted for the remaining 9.8% 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.
The title insurance industry has also experienced periods of
consolidation. We expect that, from time to time, we may
evaluate opportunities for the acquisition of books of business
or of title insurance companies or other complementary
businesses as a going concern, for business combinations with
other concerns and for the provision of insurance related
advisory services to third parties. There can be no assurance,
however, that any suitable business opportunity will arise.
64
Employees
As of May 31, 2005, we had approximately 18,900 employees.
We believe our employee relations are satisfactory. None of our
employees are subject to collective bargaining agreements.
Infrastructure and Facilities
The majority of our offices are leased from third parties. We
own the remaining offices. As of December 31, 2004, we
leased office space as follows:
|
|
|
|
|
|
|
Number of | |
|
|
Locations | |
|
|
| |
California
|
|
|
529 |
|
Arizona
|
|
|
147 |
|
Texas
|
|
|
136 |
|
Illinois
|
|
|
100 |
|
Florida
|
|
|
98 |
|
Oregon and Washington
|
|
|
73 |
|
Michigan
|
|
|
39 |
|
Nevada
|
|
|
35 |
|
New York and Ohio
|
|
|
33 |
|
Indiana
|
|
|
31 |
|
North Carolina
|
|
|
29 |
|
Colorado
|
|
|
20 |
|
New Jersey
|
|
|
18 |
|
Pennsylvania
|
|
|
15 |
|
Kansas
|
|
|
13 |
|
Hawaii, Missouri, and Tennessee
|
|
|
12 |
|
Wisconsin
|
|
|
11 |
|
Minnesota
|
|
|
10 |
|
Virginia
|
|
|
9 |
|
Connecticut
|
|
|
8 |
|
Massachusetts
|
|
|
6 |
|
Canada, District of Columbia, Maine, New Hampshire, and Oklahoma
|
|
|
7 |
|
Georgia, Louisiana, Maryland, Montana, and South Carolina
|
|
|
5 |
|
Alabama and New Mexico
|
|
|
4 |
|
Delaware, Idaho, Kentucky, Mississippi, Rhode Island and Utah
|
|
|
1 |
|
We believe our properties are adequate for our business as
presently conducted.
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. We believe that no actions, other than those
listed below, depart from customary litigation incidental to our
business. As background to the disclosure below, please note the
following:
|
|
|
|
|
These matters raise difficult and complicated factual and legal
issues and are subject to many uncertainties and complexities,
including but not limited to the underlying facts of each
matter, novel legal issues, variations between jurisdictions in
which matters are being litigated, differences in applicable
laws and judicial interpretations, the length of time before
many of these matters might be resolved by settlement or through
litigation and, in some cases, the timing of their resolutions
relative |
65
|
|
|
|
|
to other similar cases brought against other companies, the fact
that many of these matters are putative class actions in which a
class has not been certified and in which the purported class
may not be clearly defined, the fact that many of these matters
involve multi-state class actions in which the applicable law
for the claims at issue is in dispute and therefore unclear, and
the current challenging legal environment faced by large
corporations and insurance companies. |
|
|
|
In these matters, plaintiffs seek a variety of remedies
including equitable relief in the form of injunctive and other
remedies and monetary relief in the form of compensatory
damages. In most cases, the monetary damages sought include
punitive or treble damages. Often more specific information
beyond the type of relief sought is not available because
plaintiffs have not requested more specific relief in their
court pleadings. In general, the dollar amount of damages sought
is not specified. In those cases where plaintiffs have made a
specific statement with regard to monetary damages, they often
specify damages just below a jurisdictional limit regardless of
the facts of the case. This represents the maximum they can seek
without risking removal from state court to federal court. In
our experience, monetary demands in plaintiffs court
pleadings bear little relation to the ultimate loss, if any, we
may experience. |
|
|
|
For the reasons specified above, it is not possible to make
meaningful estimates of the amount or range of loss that could
result from these matters at this time. We review these matters
on an on-going basis and follow the provisions of
SFAS No. 5, Accounting for Contingencies
when making accrual and disclosure decisions. When assessing
reasonably possible and probable outcomes, we base our decision
on our assessment of the ultimate outcome following all appeals. |
|
|
|
In the opinion of our management, while some of these matters
may be material to our operating results for any particular
period if an unfavorable outcome results, none will have a
material adverse effect on our overall financial condition. |
Several class actions are pending alleging improper premiums
were charged for title insurance in Ohio (Dubin v. Security
Union Title Insurance Company, filed on March 12,
2003, in the Court of Common Pleas, Cuyahoga County, Ohio and
Markowitz v. Chicago Title Insurance Company, filed on
February 4, 2004 in the Court of Common Pleas, Cuyahoga
County, Ohio), Pennsylvania (Patterson v. Fidelity National
Title Insurance Company of New York, filed on
October 27, 2003 in the Court of Common Pleas of Allegheny
County, Pennsylvania) and Florida (Thula v. American
Pioneer, filed on September 24, 2004 in the Circuit Court
of Seventeenth Judicial Circuit, Broward County;
Figueroa v. Fidelity, filed on April 20, 2004 in the
Circuit Court of 11th Judicial Circuit, Dade County;
Grosso v. Fidelity National Title Insurance Company of
New York, filed on August 31, 2004 in the Circuit Court of
the Seventeenth Judicial Circuit, Broward County;
Chereskin v. Fidelity National Title Insurance Company
of New York, filed on September 21, 2004 in the Circuit
Court, Fourth Judicial Circuit, Nassau County; and
Turner v. Chicago Title Insurance Company, filed
September 20, 2004 in the Circuit Court, Fourth Judicial
District, in and for Nassau County, Florida). 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. Recently, the
courts order denying class certification in one of the
Ohio actions was reversed and the case was remanded to the trial
court for further proceedings. We intend to vigorously defend
these actions.
A class action in California (Lane v. Chicago
Title Insurance Company, filed on November 4, 1999 in
the Superior Court of the State of California, County of
San Francisco) alleges we violated the Real Estate
Settlement Procedures Act (RESPA) and state law by
giving favorable discounts or rates to builders and developers
for escrow fees and requiring purchasers to use Chicago
Title Insurance Company for escrow services. The actions
seek refunds of the premiums charged and additional damages. We
intend to continue to vigorously defend the California action.
A purported shareholder derivative action (McCabe v. Fidelity
National Financial, Inc., et al.) was filed on
February 11, 2005 in the U.S. District Court, Middle
District of Florida, Jacksonville Division alleging that
FNFs directors and certain executive officers breached
their fiduciary and other duties, and exposed FNF to potential
fines, penalties and suits in the future, by permitting so
called contingent commissions to
66
obtain business. FNF and its directors and executive officers
named as defendants filed Motions to Dismiss the action on
June 3, 2005. The plaintiff abandoned his original
complaint and responded to the motions by filing an amended
Complaint on July 13, 2005, and FNF, along with its
directors and executive officers named as defendants, must
respond to the amended Complaint by August 29, 2005. The
amended complaint repeats the allegations of the original
complaint and adds allegations about captive
reinsurance programs, which we continue to believe were
lawful. These captive reinsurance programs are the
subject of investigations by several state departments of
insurance and attorney generals. We have agreed to indemnify FNF
in connection with this matter under the separation agreement to
be entered into in connection with the distribution and we
intend to vigorously defend this action.
None of the cases described above includes a statement as to the
dollar amount of damages demanded. Instead, each of the cases
includes a demand for damages in an amount to be proved at
trial. Two of the cases, Dubin and Markowitz, state that
the damages per class member are less than the jurisdictional
limit for removal to federal court.
Several state departments of insurance and attorneys general and
HUD are investigating so called captive reinsurance
programs whereby some of our title insurance underwriters
reinsured policies through reinsurance companies owned or
affiliated with brokers, builders or bankers. Some investigating
agencies claim these programs unlawfully compensated customers
for the referral of title insurance business. Although we
believed and continue to believe the programs were lawful, the
programs have been discontinued. We recently negotiated a
settlement with the California Department of Insurance with
respect to that departments inquiry into captive
reinsurance programs in the title insurance industry. Under the
terms of the settlement, we will refund approximately
$7.7 million to those consumers whose California property
was subject to a captive reinsurance arrangement and will also
pay a penalty of $5.6 million. As part of the settlement,
we have denied any wrongdoing. We also recently entered into
similar settlements in 15 other states, in which we agreed to
refund approximately $2 million to policyholders. We
continue to cooperate with other investigating authorities, and
no actions have been filed by the authorities against us or our
underwriters with respect to these matters.
Regulation
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 $1,176.6 million. In addition to statutory
unearned premium reserves, each of our insurance subsidiaries
maintains surplus funds for policyholder protection and business
operations.
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.
Under the statutes governing insurance holding companies in most
states, insurers may not enter into various transactions,
including certain sales, reinsurance agreements and service or
management contracts with their affiliates unless the regulator
of the insurers state of domicile has received notice at
least 30 days
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prior to the intended effective date of such transaction and has
not objected in such period or has approved the transaction
within the 30 day period.
As a holding company with no significant business operations of
our own, we depend on dividends or other distributions from our
subsidiaries as the principal source of cash to meet our
obligations, including the payment of interest on, and repayment
of, principal of any debt obligations. The payment of dividends
or other distributions to us by our U.S. insurance
subsidiaries is regulated by the insurance laws and regulations
of their respective states of domicile. In general, an insurance
company subsidiary may not pay an extraordinary
dividend or distribution unless the applicable insurance
regulator has received notice of the intended payment at least
30 days prior to payment and has not objected in such
period or has approved the payment within the
30-day period. In
general, an extraordinary dividend or distribution
is defined by these laws and regulations as a dividend or
distribution that, together with other dividends and
distributions made within the preceding 12 months, exceeds
the greater of:
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The laws and regulations of some of these jurisdictions also
prohibit an insurer from declaring or paying a dividend except
out of its earned surplus or require the insurer to obtain
regulatory approval before it may do so. During the remainder of
2005, our title insurance subsidiaries can pay dividends or make
distributions to us of approximately $89.1 million without
prior regulatory approval. In addition, insurance regulators may
prohibit the payment of ordinary dividends or other payments by
our insurance subsidiaries to us (such as a payment under a tax
sharing agreement or for employee or other services) if they
determine that such payment could be adverse to our
policyholders.
As a condition to continued authority to underwrite policies in
the states in which our subsidiaries conduct their business,
they are required to pay certain fees and file information
regarding their officers, directors and financial condition.
Pursuant to statutory requirements of the various states in
which our 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
$0.4 million 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 were in compliance with their respective minimum net
worth requirements at December 31, 2004.
We get inquiries and requests for information from state
insurance departments, attorneys general and other regulatory
agencies from time to time about various matters relating to our
business. Sometimes these take the form of civil investigative
subpoenas. We attempt to cooperate with all such inquiries. From
time to time, we are assessed fines for violations of
regulations or other matters or enter into settlements with such
authorities which require us to pay money or take other actions.
Since 2004 our subsidiaries received civil subpoenas and other
inquiries from the New York State Attorney General, requesting
information about our arrangements with agents and customers and
other matters relating to, among other things, rate calculation
practices, use of blended rates in multi-state transactions,
rebates and referral fees. We have been cooperating and intend
to continue to cooperate with these inquiries. These inquiries
are at an early stage and as a result we can give no assurance
as to their likely outcome.
In the fall of 2004, the California Department of Insurance
began an investigation into reinsurance practices in the title
insurance industry and in February 2005, FNF was issued a
subpoena to provide information to the California Department of
Insurance as a part of its investigation. This investigation
paralleled the inquiries of the National Association of
Insurance Commissioners, which began earlier in 2004. The
investigations have focused on arrangements in which title
insurers would write title insurance generated
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by realtors, developers and lenders and cede a portion of the
premiums to a reinsurance company affiliate of the entity that
generated the business.
We recently negotiated a settlement with the California
Department of Insurance with respect to that departments
inquiry into these captive reinsurance arrangements. Under the
terms of the settlement we will refund approximately
$7.7 million to those consumers whose California property
was subject to a captive reinsurance arrangement and we will pay
a penalty of $5.6 million. We also recently entered into
similar settlements with 15 other states, in which we agreed to
refund a total of approximately $2 million to
policyholders. Other state insurance departments and attorneys
general and HUD also have made formal or informal inquiries to
us regarding these matters.
We have been cooperating and intend to continue to cooperate
with the other ongoing investigations. We have discontinued all
captive reinsurance arrangements. The total amount of premiums
we ceded to reinsurers was approximately $10 million over
the existence of these agreements. The remaining investigations
are continuing and we are currently unable to give any assurance
regarding their consequences for the industry or for us.
Additionally, we have received inquiries from regulators about
our business involvement with title insurance agencies
affiliated with builders, realtors and other traditional sources
of title insurance business, some of which we have participated
in forming as joint ventures with our company. These inquiries
have focused on whether the placement of title insurance with us
through these affiliated agencies is proper or an improper form
of referral payment. Like most other title insurers, we
participate in these affiliated business arrangements in a
number of states. We recently entered into a settlement with the
Florida Department of Financial Services under which we agreed
to refund approximately $3 million in premiums received
though these types of agencies in Florida and pay a fine of
$1 million. The other pending inquiries are at an early
stage and as a result we can give no assurance as to their
likely outcome.
Our subsidiaries are subject to extensive rate regulation by the
applicable state agencies in the jurisdictions in which we
operate. Title insurance rates are regulated differently in the
various states in which we operate, with some states requiring
our subsidiaries to file rates before such rates become
effective and some states promulgating the rates to be charged
by our subsidiaries. In almost all states in which we operate,
our rates must not be excessive, inadequate or unfairly
discriminatory.
The California Department of Insurance has recently announced
its intent to examine levels of pricing and competition in the
title insurance industry in California, with a view to
determining whether prices are too high and if so, implementing
rate reductions. New York and Colorado insurance regulators have
also announced similar inquiries and other states could follow.
At this stage, we are unable to predict what the outcome will be
of this or any similar review.
Before a person can acquire control of a U.S. insurance
company, prior written approval must be obtained from the
insurance commissioner of the state where the domestic insurer
is domiciled. Prior to granting approval of an application to
acquire control of a domestic insurer, the state insurance
commissioner will consider such factors as the financial
strength of the applicant, the integrity and management of the
applicants board of directors and executive officers, the
acquirors plans for the insurers board of directors
and executive officers, the acquirors plans for the future
operations of the domestic insurer and any anti-competitive
results that may arise from the consummation of the acquisition
of control. Generally, state statutes provide that control over
a domestic insurer is presumed to exist if any person, directly
or indirectly, owns, controls, holds with the power to vote, or
holds proxies representing, 10% or more of the voting securities
of the domestic insurer. Because a person acquiring 10% or more
of our common shares would indirectly control the same
percentage of the stock of our title insurance subsidiaries, the
insurance change of control laws would likely apply to such a
transaction.
The NAIC has adopted an instruction requiring an annual
certification of reserve adequacy by a qualified actuary.
Because all of the states in which our title insurance
subsidiaries are domiciled require adherence to NAIC filing
procedures, each such subsidiary, unless it qualifies for an
exemption, must file an actuarial opinion with respect to the
adequacy of its reserves.
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We are not aware of any current material non-compliance with any
of the foregoing rules and regulations nor are we aware of
material non-compliance with regard to any such rules or
regulations within the past three years.
Since we are governed by both state and federal governments and
the applicable insurance laws are constantly subject to change,
it is not possible to predict the potential effects of any laws
or regulations that may become more restrictive in the future or
if new restrictive laws will be enacted.
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. The insurer financial
strength/stability ratings of our principal title insurance
subsidiaries are listed below, and an explanation of each rating
follows:
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Alamo Title Insurance
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A- |
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A3 |
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A- |
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A- |
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Chicago Title Insurance Co.
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A- |
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A3 |
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A- |
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A- |
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Chicago Title Insurance Co. of Oregon
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A- |
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A3 |
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A- |
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A- |
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Fidelity National Title Insurance Co.
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A- |
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A3 |
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A- |
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A- |
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Ticor Title Insurance Co.
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A- |
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A3 |
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A- |
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A- |
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Security Union Title Insurance Co.
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A- |
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A3 |
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A- |
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The ratings of S&P, Moodys, A.M. Best, Fitch and
Demotech described above are not designed to be, and do not
serve as, measures of protection or valuation offered to
participants in this exchange offer or holders of our notes.
These financial strength ratings should not be relied on when
making a decision as to whether to tender your FNF notes in the
exchange offer or otherwise purchase our debt securities. In
connection with the announcement of the distribution and the
increased financial leverage that will result, S&P placed
the A- financial strength rating on CreditWatch
negative, Moodys affirmed the A3 financial
strength rating although the rating outlook was changed to
negative and Fitch placed the financial strength rating on
Rating Watch Negative. In addition, A.M. Best downgraded
the financial strength ratings of our principal insurance
subsidiaries to A-. After the announcement of the
merger between FIS and Certegy, S&P revised its CreditWatch
to positive from negative, Moodys changed its rating
outlook to stable from negative and Fitch revised its rating
watch to stable from negative. Our ratings are likely to
continue to be affected in the future by credit events that may
occur with respect to FNF and its other operations.
S&P states that any rating above BBB means that, in its
opinion, the insurer is highly likely to have the ability to
meet its financial obligations. An A- rating is the
seventh highest of S&Ps twenty-one ratings which range
from AAA to R with a plus (+) or
minus (-) showing relative standing within a rating
category.
Moodys states that insurance companies rated
A3 offer good financial security. The A3
rating is the seventh highest rating of Moodys twenty-one
ratings that range from Aaa to C with
numeric modifiers used to refer to the ranking within the group,
with 1 being the highest and 3 being the lowest.
Fitch states that its A- (Strong) rating is assigned
to those companies that are viewed as possessing strong capacity
to meet policyholder and contract obligations. The A-
(Strong) rating is the seventh
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highest rating of Fitchs twenty-four ratings that range
from AAA to D. The symbol plus (+)
or minus (-) may be appended to a rating to indicate its
relative position within a rating category, except that such
symbols are not appended to ratings in the AAA
category or to the ratings below the CCC category.
A.M. Best states that its A- (Excellent) rating is
assigned to those companies that have, in its opinion, an
excellent ability to meet their ongoing obligations to
policyholders. The A- (Excellent) rating is the
fourth highest rating of A.M. Bests fifteen ratings that
range from A++ to F.
Demotech rates the financial stability of title underwriters.
Demotech states that its ratings of A (A double
prime) and A (A prime) reflect its
opinion that, regardless of the severity of a general economic
downturn or deterioration in the insurance cycle, the insurers
assigned either of those ratings possess Unsurpassed
financial stability related to maintaining positive surplus as
regards policyholders. The A (A double prime)
and A (A prime) ratings are the first and
second highest ratings of Demotechs five ratings.
FNFs Long Term Debt Ratings
The FNF notes being sought in the exchange offers are currently
assigned the following ratings by S&P, Moodys and
Fitch:
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7.30% FNF notes due 2011
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BBB- |
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Baa3 |
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5.25% FNF notes due 2013
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BBB- |
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The ratings described in this section reflect the opinions of
the rating agencies on the creditworthiness of FNF with respect
to the specific financial obligations represented by the
outstanding FNF notes. They are not recommendations to buy, sell
or hold such securities, nor are they recommendations to tender
or refuse to tender your FNF notes in the exchange offers. The
ratings are subject to revision or withdrawal at any time by the
assigning rating agencies. Each rating should be evaluated
independently of any other rating.
S&P states that a BBB- rating means that, in its
opinion, the obligation represented by the security exhibits
adequate protection parameters, but that adverse economic
conditions and changing circumstances are more likely (as
compared with higher rated obligations) to lead to a weakened
capacity of the obligor to meet its financial commitment on the
obligation. The BBB- rating is the tenth highest of
the twenty-two ratings assigned by S&P, which range from
AAA to D with a plus (+) or minus (-)
showing relative standing within a rating category.
Moodys states that a Baa3 rating means that,
in its opinion, the obligation represented by the security is
subject to moderate credit risk. Securities that receive the
Baa3 rating are considered medium-grade and as such may possess
certain speculative characteristics. The Baa3 rating
is the tenth highest of the twenty-one ratings assigned by
Moodys, which range from Aaa to C
with numeric modifiers used to refer to the relative ranking
within the group, with 1 being the highest and 3 being the
lowest.
On October 14, 2005, Moodys issued a press release
announcing that it was leaving its ratings of the outstanding
FNF notes on review for possible downgrade based on the
uncertainty regarding their ultimate status. The release
indicated that, if the exchange offers described in this
prospectus and consent solicitation statement were not
consummated and the FNF notes continued to represent outstanding
debt obligations of
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FNF, Moodys would likely downgrade the FNF notes to
Ba1. Moodys currently rates FNFs senior
unsecured credit facility Ba1. The Moodys
Ba1 rating is the eleventh highest of the twenty-one
ratings that Moodys assigns and indicates that, in the
opinion of Moodys, the obligations represented by the
securities have speculative elements and are subject to
substantial credit risk. The Moodys Ba1 rating
is considered below investment grade. Such a
downgrade would likely have a negative effect on the value and
marketability of your FNF notes. Further, there can be no
assurance that Moodys would not downgrade any FNF notes
not tendered in the exchange offers even if a majority of the
outstanding FNF notes have otherwise been tendered and exchanged
and a minority of the FNF notes remain outstanding.
Fitch states that a BBB- rating means that, in its
opinion, the obligation represented by the security is of good
credit quality and that there is currently an expectation of low
credit risk. The capacity for payment of financial commitments
represented by a security which has received a BBB-
rating is considered adequate, but adverse changes in
circumstances and economic conditions are more likely (as
compared with higher rated obligations) to impair this capacity.
The BBB- rating is the lowest investment grade
category and is the tenth highest of the twenty-three ratings
assigned by Fitch, which range from AAA to
D with a plus (+) or minus (-) showing relative
status within a rating category.
MANAGEMENT
Directors and Executive Officers
Set forth below is certain information concerning our directors
and executive officers. All ages are as of October 31, 2005.
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William P. Foley, II
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Chairman of the Board |
Raymond R. Quirk
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Chief Executive Officer |
Christopher Abbinante
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President, Eastern Operations |
Roger S. Jewkes
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President, Western Operations |
Erika Meinhardt
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President, National Agency Operations |
Anthony J. Park
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Chief Financial Officer |
William G. Bone
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Director |
Willie M. Davis
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Director |
John F. Farrell, Jr.
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Director |
Philip G. Heasley
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Director |
William A. Imparato
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Director |
Donald M. Koll
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Director |
General William Lyon
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Director |
Frank P. Willey
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The following sets forth certain biographical information with
respect to our executive officers and directors listed above.
William P. Foley, II is the Chairman of our board of
directors. He is also the Chief Executive Officer and Chairman
of the board of directors of FNF, and has served in those
capacities since FNFs formation in 1984. Mr. Foley is
also the Chief Executive Officer and Chairman of the board of
directors for FIS, and has served in those capacities since
2004. If the merger between FIS and Certegy is consummated,
Mr. Foley will become Chairman of the Board of Certegy and
will relinquish his roles at FIS. He also served as President of
FNF from 1984 until December 31, 1994. Mr. Foley also
is currently serving as Chairman of the board of directors of
CKE Restaurants, Inc.
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Raymond R. Quirk is our Chief Executive Officer. Prior to
his position as Chief Executive Officer, he was President of FNF
from January 2003 to the present. Since he joined FNF in 1985,
Mr. Quirk has also served in numerous executive and
management positions, including Executive Vice President,
Co-Chief Operating
Officer, and Divisional and Regional Manager with
responsibilities governing direct and agency operations
nationally.
Christopher Abbinante is our President, Eastern
Operations. Prior to his appointment as President, Eastern
Operations, Mr. Abbinante has served as an Executive Vice
President and a
Co-Chief Operating
Officer of FNF since January 2002. Mr. Abbinante joined FNF
in 2000 in connection with FNFs acquisition of Chicago
Title Corporation. Prior to joining FNF, Mr. Abbinante
served as a Senior Vice President of Chicago
Title Insurance Company from 1976 to 2000.
Roger S. Jewkes is our President, Western Operations.
Prior to his appointment as President, Western Operations,
Mr. Jewkes has served as a Division Manager for FNF from
May 2003 to present and as a Regional Manager with FNF from May
2001 to 2003. In his role as a Division Manager, Mr. Jewkes
was responsible for FNFs direct title operations in
California, Arizona, Colorado, Nevada and New Mexico.
Mr. Jewkes has held various other operational management
positions with FNF since he joined the company through an
acquisition in 1987.
Erika Meinhardt is our President, National Agency
Operations. Prior to her appointment as President, National
Agency Operations, she has served as Executive Vice President
and Division Manager for FNF since 2002, with responsibility for
direct and agency operations in the Southeast and Northeast.
Ms. Meinhardt has held various other positions with FNF and
its subsidiary companies since 1983.
Anthony J. Park is our Chief Financial Officer. Prior to
his appointment as our Chief Financial Officer, Mr. Park
has served as the Chief Accounting Officer of FNF since March
2000. In his role as Chief Accounting Officer of FNF,
Mr. Park had primary responsibility for all aspects of the
corporate accounting function and production of the consolidated
financial statements. Mr. Park has previously held the
titles of Controller and Assistant Controller of FNF since he
joined FNF in 1991.
William G. Bone. Mr. Bone founded Sunrise Company in
1963 and has served as its Chairman of the Board and Chief
Executive Officer for more than the past five years.
Willie D. Davis. Mr. Davis has served as the
President and a director of All-Pro Broadcasting, Inc., a
holding company that operates several radio stations, since
1976. Mr. Davis currently also serves on the Board of
Directors of Checkers
Drive-In Restaurants,
Inc., Sara Lee Corporation, Dow Chemical Company, MGM, Inc., MGM
Grand, Inc., Alliance Bank, Johnson Controls, Inc., Bassett
Furniture Industries, Incorporated and Strong Fund.
John F. Farrell, Jr. Mr. Farrell is Chairman of
Automatic Service Company and has been for more than
10 years. From 1985 through 1997 he was Chairman and Chief
Executive Officer of North American Mortgage Company.
Mr. Farrell was Chairman of Integrated Acquisition
Corporation from 1984 through 1989. He was a partner with
Oppenheimer and Company from 1972 through 1981.
Philip G. Heasley. Mr. Heasley has been Chief
Executive Officer and President of Transaction Systems
Architects, Inc. since May 1, 2005. Mr. Heasley is
also Chairman and Chief Executive Officer of Paypower LLC and
has been since 2003. From 2000 to 2003, he was Chairman and
Chief Executive Officer of First USA Bank, the credit card
subsidiary of Bank One. Prior to joining First USA,
Mr. Heasley spent 13 years in executive positions at
U.S. Bancorp, including six years as Vice Chairman and the
last two years as President and Chief Operating Officer. Before
joining U.S. Bancorp, Mr. Heasley spent 13 years
at Citicorp, including three years as President and Chief
Operating Officer of Diners Club, Inc. Mr. Heasley
currently serves as Chairman of the Board of Visa USA and as a
director of Visa International, Fair Isaac Corporation and Ohio
Casualty Corporation.
William A. Imparato. Mr. Imparato is currently a
Partner in Beus Gilbert PLLC and the Managing Member of
Tri-Vista Partners, LLC, and has been for more than five years.
From June 1990 to December 1993, Mr. Imparato was President
of FNFs wholly-owned real estate subsidiary Manchester
Development
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Corporation. From July 1980 to March 2000 he was a partner in
Park West Development Company, a real estate development firm
headquartered in Phoenix, Arizona. In March 2000,
Mr. Imparato started a new real estate development firm,
Tri-Vista Partners LLC, headquartered in Scottsdale, Arizona.
Donald M. Koll. Mr. Koll is Chairman of the Board
and Chief Executive Officer of The Koll Company and has been
since its formation on March 26, 1962.
General William Lyon. General Lyon is Chairman of the
Board and Chief Executive Officer of William Lyon Homes, Inc.
and affiliated companies, which are headquartered in Newport
Beach, California, and has been for more than five years. In
1989, General Lyon formed Air/ Lyon, Inc., which included
Elsinore Service Corp. and Martin Aviation at John Wayne
Airport. He has been Chairman of the Board of The William Lyon
Company since 1985.
Frank P. Willey. Mr. Willey was the Vice Chairman of
the Board of FNF and has been a director since the formation of
FNF in 1984. Mr. Willey served as FNFs President from
January 1, 1995 through March 20, 2000. Prior to that,
he served as an Executive Vice President and General Counsel of
FNF from its formation until December 31, 1994.
Mr. Willey also has served in various capacities with
subsidiaries and affiliates of FNF since joining FNF in 1984.
Presently, Mr. Willey also serves as a director of CKE
Restaurants, Inc.
Composition of the Board of Directors
Our directors are divided into three classes of approximately
equal size the members of which serve for staggered three-year
terms. At each annual meeting of stockholders, directors will be
elected to succeed the class of directors whose term has
expired. Class Is term will expire at the 2006 annual
meeting, Class IIs term will expire at the 2007
annual meeting and Class IIIs term will expire at the
2008 annual meeting. Our director nominees will be allocated to
classes upon their election to the board.
Committees of the Board of Directors
The standing committees of our board of directors include the
audit committee, the nominating and corporate governance
committee, and the compensation committee. These committees are
described below. Our board of directors may also establish
various other committees to assist it in its responsibilities.
Audit committee. This committee is primarily concerned
with the accuracy and effectiveness of the audits of our
financial statements by our internal audit staff and by our
independent auditors. This committee is responsible for
assisting the boards oversight of:
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|
|
the quality and integrity of our financial statements and
related disclosure; |
|
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|
our compliance with legal and regulatory requirements; |
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the independent auditors qualifications and
independence; and |
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the performance of our internal audit function and independent
auditor. |
The rules of the NYSE require that each issuer have an audit
committee of at least three members, and that one independent
director (as defined in those rules) be appointed to the audit
committee at the time of listing, one within 90 days after
listing and the third within one year after listing. We expect
to appoint at least one independent director to our audit
committee effective as of our listing. We intend to appoint
additional independent directors to serve on our board and the
audit committee as soon as practicable, but in any event within
the time periods prescribed by the listing rules.
Nominating and corporate governance committee. This
committees responsibilities will include the selection of
potential candidates for our board of directors and the
development and annual review of our governance principles.
74
Compensation committee. This committee has two primary
responsibilities:
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|
|
|
|
to monitor our management resources, structure, succession
planning, development and selection process as well as the
performance of key executives; |
|
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|
to review and approve executive compensation and broad-based and
incentive compensation plans. |
The rules of the NYSE will require our compensation and
nominating and corporate governance committees to consist of at
least three independent directors following the date that FNF no
longer owns more than 50% of our common stock. We intend to
appoint independent directors (as defined in the applicable
rules) to serve on the compensation committee and the nominating
and corporate governance committee as soon as practicable, but
in any event within the time period prescribed by the listing
rules.
Director Compensation
Directors who also are our officers do not receive any
compensation for acting as directors, except for reimbursement
of reasonable expenses, if any, incurred in attending board
meetings. Directors who are not our employees receive:
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|
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|
|
an annual retainer of $30,000; |
|
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|
a per meeting fee of $1,500 for each board meeting attended; |
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an annual retainer of $5,000 for service on any board committee
(except audit) or a $7,500 annual retainer if chair of any
committee (except audit); |
|
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|
an annual retainer of $7,500 for service on the audit committee
or a $10,000 annual retainer if chair of the audit committee; |
|
|
|
a per meeting fee of $1,000 for each committee meeting attended
(except audit which has a per meeting fee of $2,000); and |
|
|
|
expenses of attending board and committee meetings. |
In addition, each non-employee director serving as of the time
of the distribution was granted 5,000 shares of our
Class A Common Stock as restricted stock concurrent with
the completion of the distribution. The restricted shares will
vest in four equal annual installments, provided the recipient
remains on the board through the vesting dates. Vesting will be
accelerated upon a change in control or upon termination of
service on the board due to death or disability or if we
terminate the recipients service on the board without
cause. The restricted shares will have the same voting and
dividend rights as other outstanding shares of our Class A
Common Stock, but will be non-transferable and subject to
forfeiture unless and until vested.
75
Executive Compensation
The following table sets forth the compensation paid or awarded
to our chief executive officer and our other executive officers
who, based on salary and bonus compensation from FNF and its
subsidiaries, were the most highly compensated for the year
ended December 31, 2004. All information set forth in this
table reflects compensation earned by these individuals for
services with FNF and its subsidiaries.
Summary Compensation Table
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Annual Compensation | |
|
Long-term Compensation | |
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| |
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| |
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Restricted | |
|
Securities | |
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|
Other Annual | |
|
Stock | |
|
Underlying | |
|
All Other | |
|
|
Fiscal | |
|
Salary(1) | |
|
Bonus(2) | |
|
Compensation(3) | |
|
Units(4) | |
|
Options(5) | |
|
Compensation(6) | |
Name and Title |
|
Year | |
|
($) | |
|
($) | |
|
($) | |
|
($) | |
|
(#) | |
|
($) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Raymond R. Quirk
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|
2004 |
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606,250 |
|
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1,210,227 |
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7,304 |
|
|
|
|
|
|
|
150,000 |
|
|
|
28,956 |
|
|
Chief Executive Officer |
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|
2003 |
|
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594,529 |
|
|
|
1,557,123 |
|
|
|
89,148 |
|
|
|
1,156,050 |
|
|
|
8,250 |
|
|
|
23,644 |
|
|
|
|
|
2002 |
|
|
|
418,764 |
|
|
|
837,500 |
|
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|
6,000 |
|
|
|
|
|
|
|
129,421 |
|
|
|
23,019 |
|
Christopher Abbinante
|
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|
2004 |
|
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475,000 |
|
|
|
879,344 |
|
|
|
6,000 |
|
|
|
|
|
|
|
106,400 |
|
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|
25,876 |
|
|
President, Eastern Operations |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Roger S. Jewkes
|
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|
2004 |
|
|
|
469,059 |
|
|
|
707,175 |
|
|
|
6,000 |
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|
|
|
|
|
|
93,100 |
|
|
|
23,627 |
|
|
President, Western Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erika Meinhardt
|
|
|
2004 |
|
|
|
341,668 |
|
|
|
683,333 |
|
|
|
8,781 |
|
|
|
|
|
|
|
106,400 |
|
|
|
28,434 |
|
|
President, National Agency Operations |
|
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|
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|
|
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|
|
|
|
|
|
|
|
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|
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Anthony J. Park
|
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2004 |
|
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|
250,001 |
|
|
|
175,000 |
|
|
|
|
|
|
|
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26,600 |
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23,419 |
|
|
Chief Financial Officer |
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(1) |
Amounts shown for the indicated fiscal year include amounts
deferred at the election of the named executive officer pursuant
to FNFs 401(k) plan. |
|
(2) |
Bonuses were awarded during the year following the year to which
the bonuses relate, based on an evaluation by the Compensation
Committee of the Board of Directors. Amounts shown for
Mr. Quirk for the 2002 fiscal year include cash bonus
amounts earned and deferred at his election and utilized to
reduce the exercise price of stock options granted to him during
the subsequent fiscal year pursuant to the 1991 and 2001 Stock
Option Plans. The bonus amount applied to reduce the exercise
price of stock option grants awarded to Mr. Quirk and
included in this column for 2002, the most recent year for which
the options were granted, was $75,000. |
|
(3) |
Amounts shown for Mr. Quirk include (i) $83,148
reimbursed during 2003 for the payment of taxes in connection
with the restricted stock grant; (ii) the cost of an FNF
provided automobile of $6,000 in 2004, 2003 and 2002; and
(iii) personal use of an FNF aircraft by Mr. Quirk of
$1,304 in 2004. |
|
(4) |
Pursuant to the 2001 Plan, FNF granted a right to Mr. Quirk
to purchase shares of restricted common stock on
November 18, 2003. The restricted shares granted vest over
a four year period, of which one-fifth vested immediately on the
date of grant. Dividends are paid by FNF on the restricted stock
granted. The number and aggregate value of Mr. Quirks
restricted stock holdings as of December 31, 2004 were
23,100 shares and $1,054,977, respectively. |
|
(5) |
The number of securities underlying options has been adjusted to
reflect all dividends and stock splits. |
|
(6) |
Amounts shown for fiscal 2004 consist of the following:
(i) Mr. Quirk: no FNF contribution to 401(k) Plan, FNF
paid life insurance premiums $3,070 and FNF
contribution to Employee Stock Purchase Program
$25,886; (ii) Mr. Abbinante: FNF contribution to
401(k) Plan $6,150, FNF paid life insurance
premiums $1,642 and FNF contribution to Employee
Stock Purchase Program $18,084;
(iii) Mr. Jewkes: FNF contribution to
401(k) Plan $6,150, FNF paid life insurance
premiums $1,071 and FNF contribution to Employee
Stock Purchase Program $16,406; (iv) Ms.
Meinhardt: FNF contribution to 401(k) Plan
$6,150, FNF paid life insurance premiums $1,971 and
FNF contribution to Employee Stock Purchase Program
$20,312; and (v) Mr. Park: FNF contribution to
401(k) Plan |
76
|
|
|
$6,150, FNF paid life insurance premiums $81 and FNF
contribution to Employee Stock Purchase Program
$17,187. |
Stock Ownership Guidelines
In order to help demonstrate the alignment of the personal
interests of our officers and directors with the interests of
our stockholders, we have established the following stock
ownership guidelines, as multiples of the officers base
salary or the directors annual retainer from FNT, that
must be held by our officers or directors:
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Position |
|
Multiple |
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|
|
Chief Executive Officer
|
|
5x Base Salary |
Other Officers (direct reports to the CEO or Section 16
Reporting Persons)
|
|
2x Base Salary |
Members of the Board
|
|
2x Annual Retainer |
The number of shares of our stock that must be held is
determined by multiplying the officers annual base salary
(or in the case of a non-employee director, such directors
annual retainer) by the applicable multiple shown above, and
dividing the result by the highest closing price of our stock
during the immediately preceding 24 months. Compliance will
be monitored by the compensation committee of our board of
directors once a year and not on a running basis. In order to
meet this stock ownership requirement, an officer or director
may count all shares of our stock beneficially owned by such
officer or director, including stock held in a 401(k) plan, our
employee stock purchase plan, stock units held in any deferral
plan, any restricted shares, restricted stock units and vested
options. Each officer or director must attain ownership of the
required stock ownership level within five years after first
becoming subject to these guidelines, provided, that if an
individual becomes subject to a greater ownership requirement
due to a promotion or increase in base salary, such individual
is expected to meet the higher ownership requirement within
three years.
Stock Ownership of Directors and Executive Officers
Those officers and directors who owned shares of FNF common
stock as of the record date of the distribution were treated on
the same terms as any other holders of FNF common stock and
received shares of our common stock in the distribution in
respect of any shares of FNF common stock that they held.
FNF stock options and restricted stock held by our
employees and directors were also affected in connection with
the separation. See Treatment of
FNF Stock Options and Restricted Shares.
77
The following table sets forth the number of shares of FNF
common stock beneficially owned on October 31, 2005 by each
of our directors, each of the executive officers named in the
summary compensation table below, and all of our directors and
executive officers as a group. Beneficial ownership is
determined in accordance with the rules of the Securities and
Exchange Commission and includes voting or investment power with
respect to the securities. The number of shares of common stock
outstanding used in calculating the percentage for each listed
person includes the shares of common stock underlying options
held by that person that are exercisable within 60 days of
October 31, 2005 but excludes shares of common stock
underlying options held by any other person.
Shares of FNF Common Stock
|
|
|
|
|
|
|
|
|
Name |
|
Beneficially Owned(1) | |
|
Percent of Class | |
|
|
| |
|
| |
William P. Foley, II
|
|
|
10,461,486 |
|
|
|
5.87 |
% |
Willie D. Davis
|
|
|
98,694 |
|
|
|
* |
|
John F. Farrell, Jr.
|
|
|
84,164 |
|
|
|
* |
|
Philip G. Heasley
|
|
|
42,517 |
|
|
|
* |
|
William A. Imparato
|
|
|
148,171 |
|
|
|
* |
|
Donald M. Koll
|
|
|
218,140 |
|
|
|
* |
|
General William Lyon
|
|
|
179,425 |
|
|
|
* |
|
Frank P. Willey
|
|
|
1,576,614 |
|
|
|
* |
|
Raymond R. Quirk
|
|
|
730,263 |
|
|
|
* |
|
Christopher Abbinante
|
|
|
133,329 |
|
|
|
* |
|
Roger S. Jewkes
|
|
|
89,075 |
|
|
|
* |
|
Erika Meinhardt
|
|
|
93,415 |
|
|
|
* |
|
Anthony J. Park
|
|
|
117,669 |
(2) |
|
|
* |
|
William G. Bone
|
|
|
0 |
|
|
|
0.00 |
% |
All directors and executive officers as a group (persons)
|
|
|
13,972,962 |
|
|
|
7.77 |
% |
|
|
* |
Indicates less than 1% of FNF outstanding common stock. |
|
|
(1) |
Shares beneficially owned include: (a) shares
of FNF common stock owned by the individual, (b) FNF
restricted stock granted to the individual
(Mr. Foley 165,000; Messrs. Davis,
Farrell, Heasley, Imparato, Koll, Lyon 3,300;
Mr. Willey 13,200; Mr. Quirk
23,100; Mr. Abbinante 13,200;
Mr. Jewkes 8,800;
Ms. Meinhardt 13,200; and
Mr. Park 3,080), (c) FNF options that
are exercisable within 60 days and (d) shares of
FNF common stock held in the individuals 401(k) and
ESPP accounts. |
|
(2) |
Included in this amount are 1,601 shares of FNF common
stock held by Mr. Parks spouse. |
78
FNF currently owns 100% of our Class B Common Stock,
representing 82.5% of the outstanding shares of our common
stock. The following table sets forth the number of shares of
our Class A Common Stock beneficially owned on October 31,
2005 by each of our directors, each of the executive officers
named in the summary compensation table below, and all of our
directors and executive officers as a group. Beneficial
ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or
investment power with respect to the securities. The number of
shares of common stock outstanding used in calculating the
percentage for each listed person includes the shares of common
stock underlying options held by that person that are
exercisable within 60 days of October 31, 2005 but
excludes shares of common stock underlying options held by any
other person.
Shares of FNT Common Stock
|
|
|
|
|
|
|
|
|
Name |
|
Beneficially Owned(1) | |
|
Percent of Class | |
|
|
| |
|
| |
William P. Foley, II
|
|
|
1,125,560 |
|
|
|
* |
|
Willie D. Davis
|
|
|
5,962 |
|
|
|
* |
|
John F. Farrell, Jr.
|
|
|
6,763 |
|
|
|
* |
|
Philip G. Heasley
|
|
|
10,452 |
|
|
|
* |
|
William A. Imparato
|
|
|
6,696 |
|
|
|
* |
|
Donald M. Koll
|
|
|
5,962 |
|
|
|
* |
|
General William Lyon
|
|
|
8,626 |
|
|
|
* |
|
Frank P. Willey
|
|
|
269,947 |
|
|
|
* |
|
Raymond R. Quirk
|
|
|
154,271 |
|
|
|
* |
|
Christopher Abbinante
|
|
|
69,383 |
|
|
|
* |
|
Roger S. Jewkes
|
|
|
64,260 |
|
|
|
* |
|
Erika Meinhardt
|
|
|
69,142 |
|
|
|
* |
|
Anthony J. Park
|
|
|
39,307(2 |
) |
|
|
* |
|
William G. Bone
|
|
|
0 |
|
|
|
0.00 |
|
All directors and executive officers as a group (persons)
|
|
|
1,883,623 |
|
|
|
1.08 |
% |
|
|
* |
Indicates less than 1% of FNT outstanding Class A Common Stock. |
|
|
(1) |
Shares beneficially owned include: (a) shares
of FNT Class A Common Stock owned by the individual,
(b) FNT restricted stock granted to individuals in
connection with the distribution (Messrs. Foley and
Quirk 120,000; Messrs. Abbinante and Jewkes and
Ms. Meinhardt 60,000; and
Mr. Park 30,000; Messrs. Davis, Farrell,
Heasley, Imparato, Koll, Lyon and Willey 5,000),
(c) FNT options that are exercisable within 60 days
and (d) shares of FNT common stock held in the
individuals 401(k) and ESPP accounts. |
|
(2) |
Included in this amount are 276 shares of FNT Class A
Common Stock held by Mr. Parks spouse. |
79
Option Grants
The following table provides information as to options to
acquire FNF common stock granted to the named executive officers
during 2004 pursuant to either FNFs Amended and Restated
1998 Stock Incentive Plan (the 1998 Plan)
or FNFs 2004 Omnibus Incentive Plan.
FNF Option Grants in Last Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Grants | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
Percentage | |
|
|
|
Potential Realizable Value at | |
|
|
Number of | |
|
of Total | |
|
|
|
Assumed Annual Rates of | |
|
|
Securities | |
|
Options | |
|
|
|
Stock Price Appreciation for | |
|
|
Underlying | |
|
Granted to | |
|
|
|
Option Term(3) | |
|
|
Options | |
|
Employees | |
|
Exercise or | |
|
|
|
| |
|
|
Granted | |
|
in Fiscal | |
|
Base Price | |
|
Expiration | |
|
5% | |
|
10% | |
Name |
|
(#) | |
|
Year | |
|
($/share) | |
|
Date | |
|
($) | |
|
($) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Raymond R. Quirk
|
|
|
150,000 |
|
|
|
3.4 |
% |
|
$ |
36.60 |
(1) |
|
|
10/15/12 |
|
|
$ |
4,204,200 |
|
|
$ |
8,465,765 |
|
Christopher Abbinante
|
|
|
106,400 |
|
|
|
1.8 |
% |
|
$ |
28.06 |
(2) |
|
|
9/10/12 |
|
|
$ |
1,425,491 |
|
|
$ |
3,414,299 |
|
Roger S. Jewkes
|
|
|
93,100 |
|
|
|
1.6 |
% |
|
$ |
28.06 |
(2) |
|
|
9/10/12 |
|
|
$ |
1,247,305 |
|
|
$ |
2,987,511 |
|
Erika Meinhardt
|
|
|
106,400 |
|
|
|
1.8 |
% |
|
$ |
28.06 |
(2) |
|
|
9/10/12 |
|
|
$ |
1,425,491 |
|
|
$ |
3,414,299 |
|
Anthony J. Park
|
|
|
26,600 |
|
|
|
0.5 |
% |
|
$ |
28.06 |
(2) |
|
|
9/10/12 |
|
|
$ |
356,373 |
|
|
$ |
853,574 |
|
|
|
(1) |
The stock options shown in the table above were granted to the
named executive officers on October 15, 2004 (subject to
stockholder approval of FNFs 2004 Omnibus Incentive Plan
on December 16, 2004) at an exercise price of $36.60, the
fair market value of FNFs Common Stock on the date of
grant. All such options were granted under FNFs 2004
Omnibus Incentive Plan and vest in three equal annual
installments beginning on the first anniversary of the date of
grant. Vesting is accelerated upon a change in control of FNF
occurring more than one year after grant. |
|
(2) |
The stock options shown in the table above were granted to the
named executive officers on September 10, 2004 at an
exercise price of $37.32, the fair market value of FNFs
common stock on the date of grant. The exercise price of, and
the number of shares underlying, the stock options were
subsequently adjusted pursuant to the anti-dilution provisions
of the 1998 plan to account for the payment of a special
$10 per share cash dividend by FNF on March 28, 2005.
All of such options were granted under FNFs 1998 Plan and
vest in three equal annual installments beginning on the first
anniversary of the date of grant. Vesting is accelerated upon a
change in control of FNF occurring more than one year after the
date of grant. |
|
(3) |
These are assumed rates of appreciation, and are not intended to
forecast future appreciation of FNFs common stock. |
80
The following table summarizes information regarding exercises
of FNF stock options by the named executive officers during 2004
and unexercised FNF options held by them as of December 31,
2004.
Aggregated FNF Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of | |
|
|
|
|
Shares | |
|
|
|
Securities Underlying | |
|
Value of Unexercised | |
|
|
Acquired | |
|
|
|
Unexercised Options | |
|
In-the-Money Options at | |
|
|
on | |
|
Value | |
|
at December 31, 2004 | |
|
December 31, 2004(1)($) | |
|
|
Exercise | |
|
Realized | |
|
| |
|
| |
Name |
|
(#) | |
|
($) | |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable | |
|
|
| |
|
| |
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| |
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| |
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| |
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| |
Raymond R. Quirk
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$ |
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498,827 |
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177,152 |
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|
$ |
11,940,537 |
|
|
$ |
1,854,020 |
|
Christopher Abbinante
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|
92,355 |
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|
$ |
2,004,540 |
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15,246 |
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|
127,457 |
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|
$ |
246,628 |
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|
$ |
1,062,823 |
|
Roger S. Jewkes
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$ |
|
|
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|
27,145 |
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|
98,013 |
|
|
$ |
573,718 |
|
|
$ |
663,409 |
|
Erika Meinhardt
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|
3,300 |
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|
$ |
85,511 |
|
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|
133,336 |
|
|
|
115,546 |
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|
$ |
3,328,553 |
|
|
$ |
815,981 |
|
Anthony J. Park
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|
|
|
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|
$ |
|
|
|
|
90,005 |
|
|
|
29,039 |
|
|
$ |
2,564,087 |
|
|
$ |
206,454 |
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|
(1) |
In accordance with the rules of the Securities and Exchange
Commission, values are calculated by subtracting the exercise
price from the fair market value of the underlying common stock.
For purposes of this table, the fair market value is deemed to
be $45.67, the closing price of the common stock of FNF reported
by the NYSE on December 31, 2004. |
Treatment of FNF Stock Options and Restricted Shares
In connection with the distribution, FNF stock options and
restricted stock held by our employees and directors were
affected as follows:
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stock options: FNF stock options were equitably adjusted to
reflect the impact of the distribution. Holders of FNF stock
options continue to hold such options, as adjusted, pursuant to
the terms and conditions of their individual award
agreements; and |
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restricted stock: holders of FNF restricted stock received
unrestricted FNT shares in the distribution in the same
proportion as other FNF stockholders. Such holders continue to
hold FNF restricted stock pursuant to the terms and conditions
of their individual award agreements. |
Omnibus Incentive Plan
In connection with the distribution, we established a 2005
Omnibus Incentive Plan, or omnibus plan. The omnibus plan
permits us to grant the following types of awards:
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nonqualified stock options; |
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incentive stock options within the meaning of
section 422 of the Internal |
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Revenue Code; |
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stock appreciation rights; |
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restricted stock; |
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restricted stock units; |
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performance shares; |
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performance units; and |
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other cash and stock-based awards. |
Recipients of awards under the omnibus plan may also be awarded
dividends and dividend equivalents in connection with their
awards.
81
The following is a description of the omnibus plan and the
awards that may be made in connection with and after the
distribution.
Effective date and term. The omnibus plan became
effective on September 26, 2005, and authorizes the
granting of awards for up to 10 years.
Administration. The omnibus plan may be administered by
our compensation committee or another committee selected by our
board of directors, any of which we refer to as the committee.
In addition, our board of directors may serve as the committee
until our compensation committee or another committee is
selected, and FNFs compensation committee may serve as the
committee prior to the distribution. The committee will be able
to select the individuals who will receive awards; determine the
size and types of awards; determine the terms and conditions of
awards; construe and interpret the omnibus plan and any award
agreement or other instrument entered into under the omnibus
plan; establish, amend and waive rules and regulations for the
administration of the omnibus plan; and amend awards. The
committees determinations and interpretations under the
omnibus plan will be binding on all interested parties. The
committee will be empowered to delegate its administrative
duties and powers as it may deem advisable, to the extent
permitted by law.
Eligibility. Incentive stock options may be granted only
to our employees and employees of our parent and our
subsidiaries. Other awards may be granted to employees,
directors, consultants and advisors of ours and of our parent
and subsidiaries.
Number of shares available for issuance. Subject to
adjustment as described below, 8,000,000 shares of our
common stock may be issued in connection with awards granted
under the omnibus plan. The maximum number of shares that may be
issued under the omnibus plan in connection with
full-value awards (awards other than
(1) options, (2) stock appreciation rights or
(3) other awards for which the participant pays the grant
date intrinsic value) is 8,000,000 shares. If settlement of
a full-value award results in the delivery of shares in excess
of the above limit, the aggregate number of shares available for
awards other than full-value awards will be reduced by
3 shares for each excess share delivered.
We may grant replacement awards in connection with mergers,
acquisitions or other business transactions in which we engage
in the future. These replacement awards will be treated as
granted under the omnibus plan.
If an award under the omnibus plan is canceled, forfeited,
terminates or is settled in cash, the shares related to that
award will not be treated as having been delivered under the
omnibus plan. In addition, subject to limitations intended to
comply with the NYSE listing standards, shares that we hold back
or that are tendered or returned by an award holder to cover the
exercise price of an option or the tax withholding obligations
relating to an award shall be considered shares not issued in
connection with an award.
Annual award limits. The omnibus plan also contains
annual award limitations. These provisions are designed so that
compensation resulting from awards can qualify as tax deductible
performance-based compensation under section 162(m) of the
Internal Revenue Code before and after the 162(m) transition
period described below. These limitations only apply to awards
or related dividends or dividend equivalents intended to qualify
as performance-based compensation. The maximum number of our
shares with respect to which stock options or stock appreciation
rights may be granted to any participant in any fiscal year is
4,000,000 shares. The maximum number of our shares of
restricted stock that may be granted to any participant in any
fiscal year is 2,000,000 shares. The maximum number of our
shares with respect to which restricted stock units may be
granted to any participant in any fiscal year is
2,000,000 shares. The maximum number of our shares with
respect to which performance shares may be granted to any
participant in any fiscal year is 2,000,000 shares. The
maximum amount of compensation that may be paid with respect to
performance units or other cash or stock-based awards awarded to
any participant in any fiscal year is $25 million or a
number of shares having a fair market value not in excess of
that amount. The maximum dividend or dividend equivalent that
may be paid to any one participant in any one fiscal year is
$2 million.
Adjustments. In the event of any merger, reorganization,
consolidation, recapitalization, liquidation, stock dividend,
split-up, distribution, stock split, reverse stock split, share
combination, share exchange,
82
extraordinary dividend, or any change in the corporate structure
affecting our common stock, such adjustment will be made to the
number and kind of shares that may be delivered under the
omnibus plan, the annual award limits, the number and kind of
shares subject to outstanding awards, the exercise price, grant
price or other price of shares subject to outstanding awards,
any performance conditions relating to our common stock, the
market price of our common stock, or per-share results, and
other terms and conditions of outstanding awards, as may be
determined to be appropriate and equitable by the committee to
prevent dilution or enlargement of rights.
Awards. Following is a general description of the types
of awards that may be delivered under the omnibus plan. Terms
and conditions of awards will be determined on a grant-by-grant
basis by the committee, subject to limitations contained in the
omnibus plan.
Stock options. A participant granted a stock option will
be entitled to purchase a specified number of shares of our
common stock during a specified term at a fixed price. Except
for replacement options and options that are adjusted by the
committee in connection with adjustments, as described above,
the per share purchase price of shares subject to options
granted under the omnibus plan may not be less than 100% of the
fair market value of our common stock on the date the option is
granted. No option granted under the omnibus plan may have a
term of more than 10 years. The committee may also award
dividend equivalent payments in connection with such awards.
Stock appreciation rights. A participant granted a stock
appreciation right will be entitled to receive the excess of the
fair market value (calculated as of the exercise date) of a
share of our common stock over the grant price of the stock
appreciation right in cash, our shares of common stock or a
combination of cash and shares. Except for replacement stock
appreciation rights and stock appreciation rights adjusted by
the committee in connection with adjustments, as described
above, the grant price of a stock appreciation right granted
under the omnibus plan may not be less than 100% of the fair
market value of our common stock on the date the option is
granted, and no stock appreciation right granted under the
omnibus plan may have a term of more than 10 years. The
committee may also award dividend equivalent payments in
connection with such awards.
Restricted stock. Restricted stock is an award that is
non-transferable and subject to a substantial risk of forfeiture
until vesting conditions, which can be related to continued
service or other conditions established by the committee, are
satisfied. Prior to vesting, holders of restricted stock may
receive dividends and voting rights. If the vesting condition is
not satisfied, the participant forfeits the shares.
Restricted stock units and performance shares. Restricted
stock units and performance shares represent a right to receive
a share of common stock, an equivalent amount of cash, or a
combination of shares and cash, as the committee may determine,
if vesting conditions are satisfied. Except for replacement
restricted stock units and performance shares and restricted
stock units and performance shares adjusted by the committee in
connection with adjustments, as described above, the initial
value of a restricted stock unit or performance share granted
under the omnibus plan may not be less than 100% of the fair
market value of our common stock on the date the award is
granted. The committee may also award dividend equivalent
payments in connection with such awards. Restricted stock units
may contain vesting conditions based on continued service or
other conditions established by the committee. Performance
shares will contain vesting conditions based on attainment of
performance goals established by the committee in addition to
service conditions.
Performance units. Performance units are awards that
entitle a participant to receive shares of common stock, cash or
a combination of shares and cash if certain performance
conditions are satisfied. The amount received depends upon the
value of the performance units and the number of performance
units earned, each of which is determined by the committee. The
committee may also award dividend equivalent payments in
connection with such awards.
Other cash and stock-based awards. Other cash and
stock-based awards are awards other than those described above,
the terms and conditions of which are determined by the
committee. These awards may include, without limitation, the
grant of shares of our common stock based on attainment of
performance goals established by the committee, the payment of
shares as a bonus or in lieu of cash based on attainment
83
of performance goals established by the committee, and the
payment of shares in lieu of cash under an incentive or bonus
program. Payment under or settlement of any such awards shall be
made in such manner and at such times as the committee may
determine.
Dividend equivalents. Dividend equivalents granted to
participants will represent a right to receive payments
equivalent to dividends or interest with respect to a specified
number of shares.
Performance-based compensation. The committee may specify
that the attainment of the general performance measures set
forth below may determine the degree of granting, vesting and/or
payout with respect to awards (including any related dividends
or dividend equivalents) that the committee intends will qualify
as performance-based compensation under section 162(m) of
the Internal Revenue Code. The performance goals to be used for
such awards must be chosen from among the following performance
measure(s): earnings per share, economic value created, market
share (actual or targeted growth), net income (before or after
taxes), operating income, adjusted net income after capital
charge, return on assets (actual or targeted growth), return on
capital (actual or targeted growth), return on equity (actual or
targeted growth), return on investment (actual or targeted
growth), revenue (actual or targeted growth), cash flow,
operating margin, share price, share price growth, total
stockholder return, and strategic business criteria, consisting
of one or more objectives based on meeting specified market
penetration goals, productivity measures, geographic business
expansion goals, cost targets, customer satisfaction or employee
satisfaction goals, goals relating to merger synergies,
management of employment practices and employee benefits, or
supervision of litigation and information technology, and goals
relating to acquisitions or divestitures of subsidiaries,
affiliates or joint ventures. The targeted level or levels of
performance with respect to such performance measures may be
established at such levels and on such terms as the committee
may determine, in its discretion, including in absolute terms,
as a goal relative to performance in prior periods, or as a goal
compared to the performance of one or more comparable companies
or an index covering multiple companies. Awards (including any
related dividends or dividend equivalents) that are not intended
to qualify as performance-based compensation may be based on
these or such other performance measures as the committee may
determine.
Change in control. The omnibus plan provides that, except
as otherwise provided in a participants award agreement,
upon the occurrence of a change in control, unless otherwise
specifically prohibited under applicable laws or by the rules
and regulations of any governing governmental agencies or
national securities exchanges, any and all outstanding options
and stock appreciation rights granted under the omnibus plan
will become immediately exercisable, any restriction imposed on
restricted stock, restricted stock units and other awards
granted under the omnibus plan will lapse, and any and all
performance shares, performance units and other awards granted
under the omnibus plan with performance conditions will be
deemed earned at the target level, or, if no target level is
specified, the maximum level.
For purposes of the omnibus plan, the term change in
control is defined as the occurrence of any of the
following events:
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an acquisition immediately after which any person, group or
entity possesses direct or indirect beneficial ownership (within
the meaning of
Rule 13d-3 under
the Exchange Act) of 25% or more of either our outstanding
common stock or our outstanding voting securities, provided
that, after the acquisition, the acquirers beneficial
ownership percentage exceeds FNFs, and excluding any
acquisition directly from us, by us, by FNF or by any of our
employee benefit plans and certain other acquisitions; |
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during any period of two consecutive years, the individuals who,
as of the beginning of such period, constitute our board, or
incumbent board, cease to constitute at least a majority of the
board, provided that any individual who becomes a member of our
board subsequent to the beginning of such period and whose
election or nomination was approved by at least two thirds of
the members of the incumbent board will be considered as though
he or she were a member of the incumbent board; |
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the consummation of a reorganization, merger, share exchange or
consolidation or sale or other disposition of all or
substantially all of our assets unless (a) our stockholders
immediately before the |
84
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transaction continue to have beneficial ownership of 50% or more
of the outstanding shares of our common stock and the combined
voting power of our then outstanding voting securities resulting
from the transaction in substantially the same proportions as
their ownership immediately prior to the transaction of our
common stock and outstanding voting securities; (b) no
person (other than us, our parent organization (or the parent
organization of the resulting corporation), an employee benefit
plan sponsored by us or the resulting corporation, or any entity
controlled by us or the resulting corporation) has beneficial
ownership of 25% or more of the outstanding common stock of the
resulting corporation or the combined voting power of the
resulting corporations outstanding voting securities; and
(c) individuals who were members of the incumbent board
continue to constitute a majority of the members of the board of
directors of the resulting corporation; or |
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our stockholders approve a plan or proposal for the complete
liquidation or dissolution of our company. |
Notwithstanding the foregoing requirements, the distribution was
not deemed to constitute a change in control for purposes of the
omnibus plan.
In addition, as long as FNF owns more than 50% of our common
stock or voting securities, a change in control of FNF will also
be considered a change in control for purposes of the omnibus
plan. For this purpose, whether a change in control of FNF has
occurred is determined in the same manner as described above,
except that if the change in control is the result of an
acquisition of FNFs outstanding common stock or
outstanding voting securities, more than 50% of FNFs
common stock or voting securities must be acquired before a
change in control will be deemed to have occurred.
Deferrals. The committee may permit the deferral of
vesting or settlement of an award and may authorize crediting of
dividends or interest or their equivalents in connection with
any such deferral. Any such deferral and crediting will be
subject to the terms and conditions established by the committee
and any terms and conditions of the plan or arrangement under
which the deferral is made.
Transferability. Awards generally will be
non-transferable except upon the death of a participant,
although the committee may permit a participant to transfer
awards (for example, to family members or trusts for family
members) subject to such conditions as the committee may
establish.
Amendment and termination. The omnibus plan may be
amended or terminated by our board of directors at any time,
subject to certain limitations, and the awards granted under the
plan may be amended or terminated by the committee at any time,
provided that no such action may, without a participants
written consent, adversely affect in any material way any
previously granted award. No amendment that would require
stockholder approval under applicable law may become effective
without stockholder approval.
Tax withholding. We may deduct or withhold, or require a
participant to remit, an amount sufficient to satisfy federal,
state, local, domestic or foreign taxes required by law or
regulation to be withheld with respect to any taxable event
arising as a result of the omnibus plan. The committee may
require or permit participants to elect that the withholding
requirement be satisfied, in whole or in part, by having us
withhold, or by tendering to us, shares of our common stock
having a fair market value equal to the withholding obligation.
Certain limitations on deductibility of executive
compensation. With some exceptions, section 162(m) of
the Internal Revenue Code limits a publicly held companys
ability to deduct compensation paid to its chief executive
officer and the next four most highly compensated officers to
the extent such compensation exceeds $1 million per
executive per taxable year. Compensation paid to employees will
not be subject to that deduction limit if it is considered
performance-based compensation within the meaning of
section 162(m) of the Internal Revenue Code. Compensation
to be paid to employees under the omnibus plan is generally
intended to be qualified performance-based compensation;
however, we reserve the right to grant awards that do not
qualify as performance-based compensation when we determine that
such compliance is not desirable. A special transition rule
applies under section 162(m) when a company that is part of
an affiliated group of companies with a publicly-traded parent
company becomes a separate publicly-traded company. Under this
transition rule, compensation paid and awards of stock options,
stock appreciation rights or restricted stock
85
granted under the omnibus plan during a transition period may
qualify as performance-based compensation if certain conditions
are met. The transition period ends on the first regularly
scheduled meeting of our shareholders that occurs more than
12 months after the date of the distribution. Compensation
attributable to awards granted after the transition period ends
will only be able to qualify as performance-based compensation
if shareholders approve certain material terms of the plan at,
or before, that meeting.
Awards in connection with the distribution. In connection
with the distribution, we granted to our executive officers,
employees and directors shares of our Class A Common Stock
as restricted stock. Messrs. Foley, Quirk, Abbinante,
Jewkes and Park and Ms. Meinhardt were granted 120,000,
120,000, 60,000, 60,000, 30,000 and 60,000 restricted shares
respectively. Mr. Bone was not a director at the time of the
distribution and did not receive any shares of restricted stock
at that time. Each non-employee director received a grant of
5,000 shares of our Class A Common Stock as restricted
stock. The restricted shares will vest in four equal annual
installments, provided the recipient remains employed, or on the
board, as applicable, through the vesting dates. Vesting will be
accelerated upon a change in control or upon termination of
employment, or service on the board, due to death or disability
or if we terminate the recipients employment or service on
the board without cause. The restricted shares have the same
voting and dividend rights as other outstanding shares of our
Class A Common Stock, but are non-transferable and subject
to forfeiture unless and until vested. We also granted options
to purchase shares of our Class A Common Stock in
connection with the distribution to certain of our other
employees. The total number of restricted stock and option
grants to all personnel was 2,984,000 shares.
It may be necessary to amend the omnibus plan and outstanding
awards under the omnibus plan to comply with section 409A
of the Internal Revenue Code, a new tax law applicable to
deferred compensation arrangements. We will make any such
amendments within the time period permitted for such amendments.
In the interim, we will administer the plans and awards made
under the plans in accordance with existing guidance relating to
section 409A whether or not the omnibus plan or award
agreement provides otherwise.
Employee Stock Purchase Plan
In connection with the distribution, we have established an
Employee Stock Purchase Plan (ESPP). Participation
in the ESPP will begin as soon as administratively practicable
following the distribution. The ESPP will provide an incentive
for employees to work toward and invest in our growth and will
assist us in attracting and retaining quality personnel.
Eligibility. All of our regular employees may participate
in the ESPP provided such employees average at least twenty
hours per week and have been employed continuously during the
last ninety days.
Description. Pursuant to the ESPP, eligible employees may
voluntarily purchase, at current market prices, shares of our
common stock through payroll deductions and through matching
contributions, if any, on their behalf. Employees may contribute
an amount between 3% and 15% of their base salary towards the
purchase of our common stock under the ESPP. At the end of each
calendar quarter, we will make a matching contribution to the
account of each participant who has been continuously employed
by us for the last four calendar quarters. For most employees,
matching contributions are equal to one-third of the amount
contributed during the quarter that is one year earlier than the
quarter in which the matching contribution is made; for
officers, directors and certain senior employees, the matching
contribution is one-half of such amount. We will pay the
brokerage commissions attributable to the purchase of our common
stock under the ESPP.
Number of shares available for issuance. The maximum
number of shares of common stock that will be available for sale
under the ESPP will be 10 million (subject to adjustment in
the event of a stock split, stock dividend, spin-off,
recapitalization, reorganization, or similar transaction).
86
OUR ARRANGEMENTS WITH FNF
Overview
Historically, FNF and its subsidiaries have provided a variety
of services to us, and we have provided various services to FNF
and its subsidiaries. These existing arrangements are described
below under Certain Relationships and Related
Transactions Historical Related-Party
Transactions.
Below is a summary description of various agreements we entered
into with FNF and its subsidiaries in connection with the
distribution. This description summarizes the material terms of
these agreements, but is not complete. You should review the
full text of these agreements, which have previously been filed
with the Securities and Exchange Commission. For information as
to how you can obtain a copy of any such agreement filed with
the Securities and Exchange Commission, see Where You Can
Find More Information.
Our Arrangements with FNF
The agreements we entered into with FNF in connection with the
distribution include:
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the separation agreement; |
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corporate services agreements; |
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the mirror notes; |
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a tax matters agreement; |
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an employee matters agreement; |
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a registration rights agreement; |
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an intellectual property cross license agreement; |
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a sublease agreement; and |
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an assignment, assumption and novation agreement. |
The agreements we entered into with FIS are discussed separately
below under Our Arrangements with FIS.
We entered into a separation agreement with FNF which governs
certain aspects of our relationship with FNF following the
distribution.
No Representations and Warranties. The separation
agreement provides that FNF will make no representation or
warranty as to the condition or quality of any subsidiary
contributed to us as part of the restructuring of FNF in
connection with the distribution or any other matters relating
to our businesses. We have no recourse against FNF if the
transfer of any subsidiary to us is defective in any manner. We
agree to bear the economic and legal risks that any conveyance
was insufficient to vest in us good title, free and clear of any
security interest, and that any necessary consents or approvals
are not obtained or that any requirements of laws or judgments
are not complied with.
Access to Financial and Other Information. Under the
separation agreement, following the distribution, we and FNF
will be obligated to provide each other access to certain
information, subject to confidentiality obligations and other
restrictions. So long as FNF is required to consolidate our
results of operations and financial position or to account for
its investment in our company on the equity method of
accounting, we will provide to FNF and its independent auditors,
at no charge, all financial information and other data that FNF
requires in order to timely prepare its financial statements and
reports or filings with governmental authorities or to issue its
earnings releases, including copies of all quarterly and annual
historical financial information and other reports and documents
we intend to file with the Securities and Exchange Commission
87
prior to these filings (as well as final copies upon filing),
and copies of our budgets and financial projections as well as
access to the responsible company personnel so that FNF and its
independent auditors may conduct their audits relating to our
financial statements. We also agreed that, so long as FNF is
required to consolidate our results of operations and financial
position or account for its investment in our company on the
equity method of accounting, we will use our reasonable efforts
to enable our independent auditors to complete their audit of
our financial statements in a timely manner so as to permit the
timely filing of FNFs financial statements. In addition,
we and FNF will use commercially reasonable efforts to make
reasonably available to each other our respective past and
present directors, officers, other employees and agents as
witnesses in any legal, administrative or other proceedings in
which the other party may become involved. We and FNF will each
retain all proprietary information within each companys
respective possession relating to the other partys
respective businesses for an agreed period of time and, prior to
destroying the information, each of us must give the other
notice and an opportunity to take possession of the information,
if necessary or appropriate to the conduct of the respective
businesses. We and FNF each agreed to hold in strict confidence
all information concerning or belonging to the other for an
agreed period of time.
Exchange of Other Information. The separation agreement
also provides for other arrangements with respect to the mutual
sharing between us and FNF of information that is requested in
connection with any bona fide business purpose.
Indemnification. We will indemnify, hold harmless and
defend FNF, each of its affiliates and each of their respective
directors, officers and employees from and against all
liabilities relating to, arising out of or resulting from:
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the ownership or operation of the assets or properties, or the
operations or conduct, of the entities transferred to us in
connection with the distribution, whether arising before or
after the distribution (including any liabilities arising under
the McCabe case referred to under
Business Legal Proceedings); |
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any guarantee, indemnification obligation, surety bond or other
credit support arrangement by FNF or any of its affiliates for
our benefit; |
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any breach by us or any of our affiliates of the separation
agreement, any of the other transaction documents, any other
agreement to which we or our affiliates are a party, our
certificate of incorporation or by-laws or any law or regulation; |
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any untrue statement of, or omission to state, a material fact
in FNFs public filings to the extent it was as a result of
information that we furnished to FNF or which FNF incorporated
by reference from our public filings, if that statement or
omission was made or occurred after the distribution; and |
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any untrue statement of, or omission to state, a material fact
in any registration statement or prospectus we may prepare or
any of our other public filings, except to the extent the
statement was made or omitted in reliance upon information
provided to us by FNF expressly for use in any registration
statement or prospectus or other public filing or information
relating to and provided by any underwriter expressly for use in
any registration statement or prospectus. |
FNF will indemnify, hold harmless and defend us, each of our
affiliates and each of our and their respective directors,
officers and employees from and against all liabilities relating
to, arising out of or resulting from:
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the ownership or operation of the assets or properties, and the
operations or conduct, of FNF or any of its affiliates (other
than us and our subsidiaries), whether arising before or after
the distribution; |
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any guarantee, indemnification obligation, surety bond or other
credit support arrangement by us or any of our affiliates for
the benefit of FNF; |
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any breach by FNF or any of its affiliates of the separation
agreement or certain of the other transaction documents, any
other agreement to which FNF or its affiliates are a party,
FNFs certificate of incorporation or bylaws, or any law or
regulation; |
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any untrue statement of, or omission to state, a material fact
in our public filings to the extent it was as a result of
information that FNF furnished to us or which we incorporated by
reference from FNFs public filings; |
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any untrue statement of, or omission to state, a material fact
contained in any registration statement or prospectus we may
prepare, but only to the extent the untrue statement or omission
was made or omitted in reliance upon information provided by FNF
expressly for use in any registration statement or
prospectus; and |
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any action or liability arising as a result of the distribution. |
The separation agreement also specifies procedures with respect
to claims subject to indemnification and related matters and
provides for contribution in the event that indemnification is
not available to an indemnified party. All indemnification
amounts will be reduced by any insurance proceeds and other
offsetting amounts recovered by the party entitled to
indemnification.
Covenants and Other Provisions. The separation agreement
also contains covenants between FNF and us with respect to
various matters, including mutual confidentiality of our and
FNFs information, and litigation and settlement
cooperation between us and FNF on pending or future litigation
matters. In addition, we agreed that, so long as FNF
beneficially owns or controls 50% or more of the total voting
power of our outstanding stock, we will not, without FNFs
prior consent:
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take any action or enter into any agreement that would cause FNF
to violate any law, agreement or judgment; |
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take any action that limits FNFs ability to freely sell,
transfer, pledge or otherwise dispose of our stock or limits the
rights of any transferee of FNF as a holder of our common
stock; or |
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enter into any agreement that binds or purports to bind FNF. |
In addition, we agreed that we will not issue any shares of our
capital stock or any rights, warrants or options to acquire our
capital stock, if after giving effect to the issuances and
considering all of the shares of our capital stock which may be
acquired under the rights, warrants and options outstanding on
the date of the issuance, FNF would not be eligible to
consolidate our results of operations for tax purposes, would
not receive favorable tax treatment of dividends paid by us or
would not be able, if it so desired, to distribute the rest of
our stock it holds to its stockholders in a tax-free
distribution. These limits will generally enable FNF to continue
to own at least 80% of our outstanding common stock.
Expenses of the Distribution. In general, the separation
agreement provides that we will pay all costs incurred in
connection with the distribution.
Dispute Resolution Procedures. The separation agreement
provides that neither party will commence any court action to
resolve any dispute or claim arising out of or relating to the
separation agreement. Instead, any dispute that is not resolved
in the normal course of business will be submitted to senior
executives of each business entity involved in the dispute for
resolution. If the dispute is not resolved by negotiation within
30 days, either party may submit the dispute to mediation.
If the dispute is not resolved by mediation within 30 days
of the selection of a mediator, either party may submit the
dispute to binding arbitration before an arbitrator. Both
parties will be permitted to seek injunctive or interim relief
in the event of any actual or threatened breach of the
provisions of the separation agreement relating to
confidentiality. If an arbitral tribunal has not been appointed,
both parties may seek injunctive or interim relief from any
court with jurisdiction over the matter.
Termination. The separation agreement can be terminated
only by the mutual consent of both parties.
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FNF Corporate Services Agreements |
We entered into a corporate services agreement with FNF under
which we will provide corporate and other support services to
FNF. The corporate services agreement governs the provision by
us to FNF of these corporate support services, which may include:
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treasury, cash management and related services; |
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accounting, billing and financial transaction support; |
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tax services; |
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corporate, legal and related services; |
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risk management and corporate insurance; |
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payroll and human resources and employee benefits administration; |
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information technology, network systems, data processing and
related services; |
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purchasing and procurement; |
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travel; and |
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other general administrative and management functions. |
We also entered into a separate corporate services agreement
with FNF, under which it will provide us senior management
consulting services, including time and attention of its chief
executive officer, chief financial officer, other senior
officers, legal department and mergers and acquisitions staff.
We also agreed to provide each other additional services that we
and FNF may identify during the term of the agreements.
Provision of Services. Under the terms of the corporate
services agreements, each party will render these services under
the oversight, supervision, and approval of the other, acting
through its respective board of directors and officers. FNF and
we will each have the right to purchase goods or services and
realize other benefits and rights under the other partys
agreements with third-party vendors to the extent allowed by
those vendor agreements, during the term of the agreement.
Pricing and Payment Terms. The pricing for the services
to be provided by us to FNF, and by FNF to us, under the
corporate services agreements is on a cost-only basis, with each
party in effect reimbursing the other for the costs and expenses
incurred in providing these corporate services to the other
party. Under the corporate service agreement for corporate
services to be provided by us to FNF, our costs and expenses
will be determined and reimbursed by FNF as follows:
(i) all out of pocket expenses and costs incurred by us on
FNFs behalf will be fully reimbursed, and (ii) all of
our staff and employee costs and expenses associated with
performing services under the corporate services agreement,
including compensation paid to our employees performing these
corporate services as well as general overhead associated with
these employees and their functions, will be allocated based on
the percentage of time that our employees spend on providing
corporate services to FNF under the corporate services
agreement. FNFs costs and expenses incurred in providing
corporate services to us will be similarly determined and
reimbursed. These costs and expenses will be invoiced by each
party to the other on a monthly basis in arrears. Payments are
expected to be made in cash within thirty days after invoicing.
For the year ended December 31, 2004, our expenses were
reduced by $9.4 million related to the provision of these
services by us to FNF and its subsidiaries (other than FIS). In
addition, for 2004 our expenses included $3.2 million of
costs associated with persons who will be FNF executives after
the distribution but for whose time we will be charged after the
distribution under the corporate services agreement pursuant to
which FNF will provide services to us. While the exact amounts
to be paid by FNF to us, and by us to FNF, under the corporate
services agreements are dependent upon the amount of services
actually provided in any given year, we do not anticipate that
the level of services to be provided, or the total amounts to be
paid by each entity to the other for services during the 2005
fiscal year, will differ materially
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from the total amounts recorded during the 2004 fiscal year for
these corporate services. See Certain Relationships and
Related Transactions Historical Related-Party
Transactions Corporate Services.
Duration and Effect of Termination. The corporate
services agreements will continue in effect as to each service
covered by the agreements until the party receiving the services
notifies the other party, in accordance with the terms and
conditions set forth in the agreements and subject to certain
limitations, that the service is no longer requested. However,
if FNF ceases to own 50% or more of our voting stock or ceases
to have 50% or more of the voting control for the election of
our directors, then the corporate services agreements will
terminate after six months. In addition, services to be provided
to any subsidiary terminate on the date that the entity ceases
to be a subsidiary of the party receiving the services. Under
the corporate services agreements, if the party providing the
services receives notice that the party receiving services would
like to terminate a particular service, and the providing party
believes in good faith that, notwithstanding its reasonable
commercial efforts, the termination will have a material adverse
impact on the other services being provided, then the party
providing services can dispute the termination, with the dispute
being resolved through the dispute resolution generally
applicable to the agreements. When the agreements are
terminated, FNF and we would arrange for alternate suppliers or
hire additional employees for all the services important to our
respective businesses. However, if we have to replicate
facilities, services, or employees that we are not using full
time, our costs could increase.
Liability and Indemnification. The corporate services
agreements provide that the provider of services will not be
liable to the receiving party for or in connection with any
services rendered or for any actions or inactions taken by a
provider in connection with the provision of services, except to
the extent of liabilities resulting from the providers
gross negligence, willful misconduct, improper use or disclosure
of customer information or violations of law and except for
liabilities that arise out of intellectual property
infringement. Additionally, the receiving party will indemnify
the provider of services for any losses arising from the
provision of services, provided that the amount of any losses
will be reduced by the amount of the losses caused by the
providers negligence, willful misconduct, violation of
law, or breach of the agreement.
Dispute Resolution Procedures. The corporate services
agreements provide dispute resolution procedures that reflect
the parties desire for friendly collaboration and amicable
resolution of disagreements. In the event of a dispute, the
matter is referred to the president (or similar position) of
each of the divisions implicated for resolution within
15 days. If the division presidents of the parties are
unable to resolve the dispute, the matter is referred to the
presidents of FNF and our company for final resolution within
15 days. If the matter remains unresolved, then either
party may submit the matter to arbitration. The dispute
resolution procedures do not preclude either party from pursuing
immediate injunctive relief in the event of any actual or
threatened breach of confidentiality or infringement of
intellectual property.
In connection with the distribution, we issued two
$250 million intercompany notes payable to FNF, with terms
that mirror FNFs existing $250 million 7.30% public
notes due in August 2011 and $250 million 5.25% public
notes due in March 2013. We intend to deliver any FNF notes we
receive in the exchange offers to FNF in redemption of an equal
principal amount of the corresponding mirror notes. See
Liquidity and Capital Resources.
In connection with the distribution, we and FNF entered into a
tax matters agreement, which governs the respective rights,
responsibilities, and obligations of FNF and us after this
offering with respect to tax liabilities and refunds, tax
attributes, tax contests and other matters regarding income
taxes, taxes other than income taxes and related tax returns.
The tax matters agreement governs these tax matters as they
apply to us and to all of our subsidiaries other than our
subsidiaries that are the title insurance companies. Our title
insurance companies are parties to various tax sharing
agreements with FNF. See Certain Relationships and Related
Transactions Historical Related Party
Transactions Tax Sharing Agreements.
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Allocation of Tax Liability. The tax matters agreement
provides for the allocation and payment of taxes for periods
during which we and FNF are included in the same consolidated
group for federal income tax purposes or the same consolidated,
combined or unitary returns for state tax purposes, the
allocation of responsibility for the filing of tax returns, the
conduct of tax audits and the handling of tax controversies, and
various related matters. The tax matters agreement became
effective on the date of distribution and is effective until the
occurrence of any of the following: (i) written mutual
agreement of the parties to terminate the agreement;
(ii) FNF is no longer the parent company of FNT; or
(iii) FNF does not file a consolidated tax return. Under
the tax matters agreement, FNF is primarily responsible for
preparing and filing any tax return with respect to the FNF
affiliated group for U.S. federal income tax purposes and
with respect to any consolidated, combined or unitary group of
which FNF or any of its subsidiaries is the filing parent for
U.S. state or local income tax purposes. We are generally
responsible for preparing and filing any federal tax returns
that include only us and our subsidiaries and any
U.S. state and local tax returns for which we or any of our
subsidiaries is the filing parent. For periods during which we
are included in FNFs consolidated federal income tax
returns or state consolidated, combined, or unitary tax returns,
we generally will be required to pay an amount of income tax
equal to the amount we would have paid had we filed tax returns
as a separate entity. We are responsible for our own separate
tax liabilities that are not determined on a consolidated or
combined basis. We will also be responsible in the future for
any increases of consolidated tax liability of FNF that are
attributable to us and will be entitled to refunds for
reductions of tax liabilities attributable to us for prior
periods. We will be included in FNFs consolidated group
for federal income tax purposes so long as FNF beneficially owns
at least 80% of the total voting power and value of our
outstanding common stock. Each corporation that is a member of a
consolidated group during any portion of the groups tax
year is severally liable for the federal income tax liability of
the group for that year. While the tax matters agreement
allocates tax liabilities between FNF and us, we could be liable
in the event federal tax liability allocated to FNF is incurred
but not paid by FNF or any other member of FNFs
consolidated group for FNFs tax years that include these
periods. In this event, we would be entitled to indemnification
by FNF under the tax matters agreement.
Tax Disputes and Contests. Generally, for periods in
which we are included in FNFs consolidated federal income
tax return, or state consolidated, combined, or unitary tax
returns, we will control tax contests to the extent the
underlying tax liabilities would be allocated to us under the
tax matters agreement, and FNF will control all tax contests to
the extent the underlying tax liabilities would be allocated to
FNF under the tax matters agreement. We generally have authority
to control tax contests with respect to tax returns that include
only our subsidiaries and us. Disputes arising between us and
FNF related to matters covered by the tax matters agreement are
subject to resolution though specific dispute resolutions
provisions described in the tax matters agreement.
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Employee Matters Agreement |
Historically, our employees have participated in various health,
welfare, and retirement plans and programs sponsored by FNF.
After the distribution, our employees will continue to
participate in these FNF-sponsored plans through the operation
of the employee matters agreement.
Specifically, under the employee matters agreement, our
employees will continue to be eligible (subject to generally
applicable plan limitations and eligibility conditions) to
participate in FNFs 401(k) plan and its health,
dental, disability, and other welfare benefit plans. Our
employees will administer the FNF plans. Our employees
participation in FNFs plans will continue until it is
determined that it would be beneficial for us to establish
separate plans for our employees.
Under the employee matters agreement, as long as our employees
participate in FNFs plans, we will be required to
contribute to the plans the cost of our employees
participation in such plans. Such costs will include, for
example, payment of 401(k) matching contributions for our
employees and payment of the employer portion of the cost of
health, dental, disability and other welfare benefits provided
to our employees. Since our employees administer the plans, we
will not be charged an administrative expense for participation.
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Our contributions to FNFs plans for our employees during
the 2004 fiscal year were $108.2 million. The contributions
we will be required to make to FNFs plans in future years
under the employee matters agreement depends on factors that we
cannot predict with certainty at this point, such as the level
of employee participation and the costs of providing health,
dental and other benefits. Nevertheless, we do not anticipate
that the contributions we will be required to make to the plans
under the employee matters agreement will differ materially from
the total amount we contributed for the 2004 fiscal year.
To the extent our employees hold FNF stock-based incentives,
such as FNF stock options or restricted stock, related
accounting charges under SFAS 123 or SFAS 123R will be
allocated to us by treating any such accounting charges that are
recognized by FNF as FNF contributions to our capital.
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Registration Rights Agreement |
Because FNF did not divest itself of all of its shares of our
common stock as part of the distribution, FNF is not able to
freely sell our shares without registration under the Securities
Act of 1933 (Securities Act) or a valid exemption
therefrom. Accordingly, we have entered into a registration
rights agreement with FNF requiring us, under certain
circumstances, to register our shares beneficially owned by FNF.
These registration rights became effective at the time of the
distribution.
Demand Registration Rights. Under the registration rights
agreement, FNF has the right to require us to register for offer
and sale all or a portion of our shares beneficially owned by
FNF, which we refer to as a demand registration. The maximum
number of demand registrations that we are required to effect is
two per year and the number of shares to be registered in each
demand registration must have an aggregate expected offering
price of at least $25 million.
Piggy-Back Registration Rights. In addition, FNF has the
right, subject to certain conditions, which it may exercise at
any time, to include its shares in any registration of common
stock that we may make in the future, commonly referred to as a
piggy-back registration right, if our registration would permit
the inclusion.
Terms of Offering. FNF has the right to designate the
terms of each offering effected pursuant to a demand
registration, which may take any form, including a shelf
registration, a convertible registration or an exchange
registration. We have agreed to cooperate fully in connection
with any registration for FNFs benefit and with any
offering FNF makes under the registration rights agreement. We
have also agreed to pay for the costs and expenses related to
shares sold by FNF in connection with any registration covered
by the agreement, except that FNF will be responsible for any
applicable registration or filing fees with respect to the
shares being sold by FNF. The registration rights of FNF are
transferable by FNF for an indefinite term. In addition, the
registration rights agreement contains indemnification and
contribution provisions with respect to information included in
any registration statement, prospectus or related documents.
Timing of Demand Registrations. We are not required to
undertake a demand registration within 90 days of the
effective date of a previous demand registration, other than a
demand registration that was effected as a shelf registration.
In addition, we generally have the right (which may be exercised
once in any 12-month
period) to postpone the filing or effectiveness of any demand
registration for up to 90 days, if we determine that the
registration would be reasonably expected to have a material
adverse effect on any then-active proposals to engage in certain
material transactions or would otherwise disadvantage us through
premature disclosure of pending developments.
Duration. The registration rights under the registration
rights agreement will remain in effect with respect to our
shares until: (i) the shares have been sold pursuant to an
effective registration statement under the Securities Act;
(ii) the shares have been sold to the public pursuant to
Rule 144 under the Securities Act (or any successor
provision); (iii) the shares have been otherwise
transferred, new certificates for them not bearing a legend
restricting further transfer have been delivered by us, and
subsequent public distribution of the shares does not require
registration or qualification under the Securities Act or any
similar state law; (iv) the shares have ceased to be
outstanding; or (v) in the case of shares held by a
transferee of FNF, when the shares become eligible for sale
pursuant to Rule 144(k) under the Securities Act (or any
successor provision).
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Intellectual Property Cross License Agreement |
Historically, we and our subsidiaries were permitted, as
subsidiaries of FNF, to utilize various trademarks, copyrights,
trade secrets and know-how, patents and other intellectual
property owned by FNF and its other subsidiaries but used by us
in the conduct of our title insurance business. Likewise, FNF
and its other subsidiaries were permitted to utilize various
trademarks, copyrights, trade secrets and know-how, patents and
other intellectual property owned by us and our subsidiaries but
used by them in the conduct of their business. The intellectual
property cross license agreement permits each entity to continue
to have access to those items of intellectual property that it
does not own, but utilizes in the conduct of its business, so
that each group can continue to grow and develop its respective
businesses and markets after the distribution. This agreement
governs the respective responsibilities and obligations between
us and FNF with respect to the applicable intellectual property.
The intellectual property licensed by FNF to us will include the
use of the name Fidelity National and the logo
widely used by our company and our subsidiaries.
Terms of the Cross License. The intellectual property
licensed by or to us, and by or to FNF, relates to a variety of
aspects of the title insurance and other lines of business in
which we and FNF and our respective subsidiaries are engaged.
With respect to each item of intellectual property licensed, the
party that owns the intellectual property as of the date of the
distribution will continue to own the item, but will grant a
broad license for use of the intellectual property item to the
other party without giving up any ownership rights. Subject to
certain limitations and early termination events (limited to
bankruptcy, insolvency and the like, or if FNF ceases to own 50%
or more of our voting stock or ceases to have 50% or more of the
voting control for the election of our directors), the licenses
are perpetual, irrevocable, and non-terminable. In addition, as
to each item of intellectual property, the license to any
subsidiary terminates on the date that the entity ceases to be a
subsidiary of the party receiving the benefit of the license.
The licenses are also non-exclusive and allow the licensing
party to fully utilize its intellectual property, including the
granting of licenses to third parties.
Pricing and Payment Terms. Given the nature of the
intellectual property to be licensed and the historical
relationship between the parties, we and FNF have determined
that the licenses to each party should be royalty-free with the
consideration for each partys license of its intellectual
property being the receipt of a license of the others
intellectual property. As a result, no payments will be made to
us or received by us under the intellectual property cross
license agreement.
We have entered into a sublease agreement pursuant to which we
sublease to FNF a portion of the space that we are leasing from
a subsidiary of FIS. See Our Arrangements with
FIS Lease Agreement. The sublease arrangement
with FNF will continue until December 31, 2007, which is
the date on which our lease with the FIS subsidiary expires by
its terms.
Pricing and Payment Terms. Pursuant to the sublease
agreement, FNF is obligated to pay rent for approximately
7,000 square feet on terms and at rental rates that mirror
our obligations under our lease agreement with the FIS
subsidiary. This includes both the base rent amount as well as
the additional rent required under our lease. If FNF fails to
pay timely, a default rate applies. FNF is also responsible for
the entire cost of any services or materials provided
exclusively to FNF in connection with the sublease or the use of
the space.
Assignment, Assumption and Novation Agreement
In order to assume the rights and obligations of FNF under
certain agreements that were previously entered into by FNF on
behalf of the title insurance companies, we have entered into an
assignment, assumption and novation agreement with FNF. The
agreements to be assigned to, and assumed by, us under the
assignment, assumption and novation agreement were entered into
by FNF with FIS (or one or more of its subsidiaries). FIS and
its relevant subsidiaries consented to this assignment and
assumption arrangement and also agreed to enter into a novation
of each of these agreements with us. See Our
Arrangements with FIS for more specific information
regarding the agreements to be novated. The consideration for
our assumption of the obligations under the novated agreements
is the assumption and assignment to us of all
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rights and interests under these agreements and no other
consideration will be paid under the assignment, assumption and
novation agreement.
Our Arrangements with FIS
The agreements we entered into with FIS and its subsidiaries
include:
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corporate services agreements; |
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the starter repository and back plant access agreements; |
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the license and services agreement; |
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a lease agreement; |
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a master information technology agreement; and |
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a software license agreement for SoftPro software. |
These agreements are described below. In connection with the
merger between FIS and Certegy, the parties have agreed to
mutually review the following agreements to identify
relationships that should be considered for modification by
mutual agreement of the parties for purposes of effecting the
integration of FIS and Certegy, and to enter into such amendment
agreements as they shall mutually agree to effect the same.
Further, the parties have agreed that the merger in general will
not constitute an event that triggers a right of termination
under these agreements.
FIS Corporate Services Agreements
Through an assignment of FNFs rights and obligations under
a corporate services agreement between FNF and FIS and a
novation of that agreement, we entered into a corporate services
agreement with FIS under which we will provide corporate and
other support services to FIS. The corporate services agreement
governs the provision by us to FIS of these corporate support
services, which may include:
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treasury, cash management and related services; |
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accounting, billing and financial transaction support; |
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tax services; |
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corporate, legal and related services; |
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risk management and corporate insurance; |
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payroll and human resources and employee benefits administration; |
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information technology, network systems, data processing and
related services; |
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purchasing and procurement; |
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travel; and |
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other general administrative and management functions. |
Through an assignment of FNFs rights and obligations under
a reverse corporate services agreement between FNF
and FIS and a novation of that agreement, we will also enter
into a separate corporate services agreement with FIS, under
which it will provide us with access to legal services and
access to a mainframe computer system.
We also agreed to provide additional services that we and FIS
may identify during the term of the agreement.
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Provision of Services and Allocation of Costs. Under the
corporate services agreement, each party will render services
under the oversight, supervision, and approval of the other
party, acting through its board of directors and officers. FIS
and we each have the right to purchase goods or services and
realize other benefits and rights under the other partys
agreements with third-party vendors to the extent allowed by
those vendor agreements, during the term of the agreements.
Pricing and Payment Terms. The pricing for the services
to be provided by us to FIS, and by FIS to us, under the
corporate services agreements is on a cost-only basis, with each
party in effect reimbursing the other for the costs and expenses
incurred in providing these corporate services to the other
party subject to the limitation described below. Under the
corporate service agreement for corporate services to be
provided by us to FIS, our costs and expenses will be determined
and reimbursed by FIS as follows: (i) all out of pocket
expenses and costs incurred by us on FISs behalf will be
fully reimbursed, and (ii) all of our staff and employee
costs and expenses associated with performing services under the
corporate services agreement, including compensation paid to our
employees performing these corporate services as well as general
overhead associated with these employees and their functions,
will be allocated based on the percentage of time that our
employees spend on providing corporate services to FIS under the
corporate services agreement. FISs costs and expenses
incurred in providing corporate services to us will be similarly
determined and reimbursed. In the case of the agreement for
corporate services to be provided by us to FIS, the total amount
(with some exclusions) payable under the corporate services
agreement cannot exceed $50 million during the 2005 fiscal
year, with incremental increases to this maximum amount in
future fiscal years. We are not entitled to be reimbursed for
any portion of our annual costs that exceeds this
$50 million limit, as increased from year to year. The
costs and expenses under the corporate services agreements will
be invoiced by each party to the other on a monthly basis in
arrears, and payments are expected to be made in cash within
thirty days after invoicing.
During 2004 our expenses were reduced by $75.1 million
related to the provision of these corporate services by us to
FIS and our expenses were increased by $78,000 related to the
provision of these corporate services from FIS to us. The exact
amounts to be paid by FIS to us, and by us to FIS, under the
corporate services agreements are dependent upon the amount of
services actually provided in any given year. However, because
the 2004 aggregate amount paid by FIS included some
extraordinary charges we anticipate that the aggregate amount
payable by FIS to us during the 2005 fiscal year pursuant to the
corporate services agreement will not exceed the
$50 million maximum amount provided in the corporate
services agreement. See Certain Relationships and Related
Transactions Historical Related Party
Transactions Corporate Services.
Duration and Effect of Termination. The corporate
services agreements continue in effect as to each service
covered by the agreements until the party receiving the services
notifies the other party, in accordance with the terms and
conditions set forth in the agreements and subject to certain
limitations, that the service is no longer requested. However,
the corporate services agreements will terminate after six
months from the occurrence of certain specified material events,
such as a change of control of FIS, or the completion of an
initial public offering of stock by FIS or its subsidiaries. In
addition, services to be provided to any subsidiary will
terminate on the date that the entity ceases to be a subsidiary
of the party receiving the services. Under the corporate
services agreements, if the party providing the services
receives notice that the party receiving services would like to
terminate a particular service, and the providing party believes
in good faith that, notwithstanding its reasonable commercial
efforts, the termination will have a material adverse impact on
the other services being provided, then the party providing
services can dispute the termination, with the dispute being
resolved through the dispute resolution generally applicable to
the agreement. Further, in the event that the party receiving
the services is unable to complete its transition efforts prior
to the termination date established for any particular corporate
service, the party receiving the services can extend the
termination date for up to 30 additional days.
If the announced merger between FIS and Certegy is consummated,
the corporate services agreements will be amended to permit
either party to terminate either agreement six months after the
effective date of the merger if the parties have not previously
agreed to continue such agreement after such period.
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Liability and Indemnification. The corporate services
agreements provide that the provider of services will not be
liable to the receiving party for or in connection with any
services rendered or for any actions or inactions taken by a
provider in connection with the provision of services, except to
the extent of liabilities resulting from the providers
gross negligence, willful misconduct, improper use or disclosure
of customer information or violations of law and except for
liabilities that arise out of intellectual property
infringement. Additionally, the receiving party will indemnify
the provider of services for any losses arising from the
provision of services, provided that the amount of any losses
will be reduced by the amount of the losses caused by the
providers negligence, willful misconduct, violation of
law, or breach of the agreement.
Dispute Resolution Procedures. The agreements provide
dispute resolution procedures that reflect the parties
desire for friendly collaboration and amicable resolution of
disagreements. In the event of a dispute, the matter is referred
to the president (or similar position) of each of the divisions
implicated for resolution within 15 days. If the division
presidents of the parties are unable to resolve the dispute, the
matter is referred to the presidents of FIS and our company for
final resolution within 15 days. If the matter remains
unresolved, then either party may submit the matter to
arbitration. The dispute resolution procedures do not preclude
either party from pursuing immediate injunctive relief in the
event of any actual or threatened breach of confidentiality or
infringement of intellectual property.
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FNF Starter Repository and Back Plant Access
Agreements |
Through an assignment by FNF to us of its rights and obligations
under agreements between FNF and FIS and a novation of those
agreements, we entered into agreements with FIS whereby certain
FIS subsidiaries are able to access and use certain title
records owned by our title company subsidiaries. The FIS
subsidiaries covered by the agreement will be granted access to
(i) the database of previously issued title policies (the
starter repository), and (ii) certain other
physical title records and information (the back
plant) and will be permitted to use the retrieved
information solely in connection with the issuance of title
insurance products that FIS offers as part of its business. The
FIS subsidiaries that are covered by the agreement may create
proprietary means of technical access to the starter repository,
but this does not apply to the back plant since the back plant
consists of physical documents and records that cannot be
accessed electronically. Our applicable title company
subsidiaries retain ownership of the starter repository, the
back plant and all related programs, databases, and materials.
FIS will pay fees to us for the access to the starter repository
and the back plant and will reimburse our subsidiaries for
payment of certain taxes and government charges. FIS will also
indemnify us for third party claims arising from any errors or
omissions in the starter repository and the back plant or the
provision of access under the agreements. In addition, FIS is
responsible for costs incurred as a result of unauthorized
access to the database and records. With regard to dispute
resolution, if either FIS or we institutes an action against the
other party for breach, such other party has the option, within
30 days of the notice of such action, to institute an
arbitration proceeding and stay the other action.
Duration and Termination. Each of the starter repository
agreement and the back plant agreement are effective as of
March 4, 2005 for a ten year period, with automatic
renewal, and may be terminated by mutual agreement of the
parties or upon five years prior written notice, except in
the case of a default in performance, in which case the
agreement may be terminated immediately if the default is not
cured within 30 days after notice (with provisions that
permit an extension of the
30-day cure period
under certain circumstances). In addition, each of these
agreements may be terminated in the event of a change of control
of either FIS or us.
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License and Services Agreement |
Through an assignment by FNF to us of its rights and obligations
under a license and services agreement between FNF and FIS, and
a novation of that agreement, we entered into a license and
services agreement with FIS. This agreement provides for us to
conduct business on behalf of FISs subsidiaries that
operate as title agents through its LSI entities in certain
limited jurisdictions in which the LSI entities otherwise lack
ready access to title plants, and pay to the LSI entities the
associated revenues, with the LSI entities bearing the related
costs. This arrangement was entered into by FNF when FIS was
established and the LSI
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businesses, which operated as divisions of our title insurers,
were transferred to FIS. The agreement calls for us to license
from FIS the use of certain proprietary business processes and
related documentation in certain geographic areas. In addition,
the agreement provides for FIS to provide us with oversight and
advice in connection with the implementation of these business
processes, including responsibility by FIS for maintaining the
computer hardware, software systems, telephone and communication
equipment as well as sales support services. In exchange for
these business processes and documentation and oversight and
advisory services, we will pay fees to FIS equal to the
aggregate earnings generated through or as a result of these
proprietary business processes and documentation. Fees are
billed monthly based on presentation of an invoice schedule
showing the revenues generated during the prior month. FIS will
retain ownership of the proprietary business processes and
documentation and is responsible for defending any claims
brought by third parties against us for infringement based upon
the business processes licensed to us under the license and
services agreement. We are responsible for defending any claims
brought by third parties against FIS for infringement based upon
any services we undertake that relate to the license and
services agreement but are outside the agreements
permitted scope. FIS and we each agree to indemnify each other
for property damage arising out of any negligence, breach of
statutory duty, omission or default in performing our respective
obligations under the license and services agreement. With
regard to dispute resolution, the agreement includes procedures
by which the parties can attempt to resolve disputes amicably,
but if those disputes cannot be resolved timely, then
arbitration proceedings can be instituted.
Duration and Termination. Subject to certain early
termination provisions, the license and services agreement will
continue in effect until either (i) FIS acquires its own
direct access to title plants in the relevant geographic area or
(ii) we build or otherwise acquire title plants for the
relevant geographic area and provide access thereto to FIS on
terms acceptable to FIS. The license and services agreement may
also be terminated as to all or a portion of the relevant
geographic area by mutual agreement of the parties or upon five
years prior written notice, except in the case of a
default in performance, in which case the agreement may be
terminated immediately if the default is not cured within
30 days after notice (with provisions that permit an
extension of the 30-day
cure period under certain circumstances). The license and
services agreement may also be terminated in the event of a
change of control of either FIS or us.
Through an assignment of FNFs rights and obligations under
a lease agreement between FNF and a subsidiary of FIS, and a
novation of that agreement, we entered into a lease agreement
pursuant to which we will lease from a subsidiary of FIS certain
portions of FIS Jacksonville, Florida headquarters
building. This lease arrangement will continue until
December 31, 2007. Lease terms will be commensurate with
those found in the local real estate market.
Pricing and Payment Terms. Under the lease, FNT is
obligated to pay base rent for approximately 121,000 square
feet at an annual rate of $23.05 per rentable square foot,
in equal monthly installments paid in advance on the first day
of each calendar month. If FNT fails to pay timely, a default
rate applies. In addition to paying base rent, for each calendar
year commencing with calendar year 2005, FNT will be obligated
to pay, as additional rent, FNTs share of the
landlords reasonable estimate of operating expenses for
the entire facility that are in excess of the operating expenses
(subject to certain exclusions) applicable to the 2005 base
year. FNT is also liable to the landlord for its entire cost of
providing any services or materials exclusively to FNT. FNT does
not anticipate requesting any exclusive services from the
landlord, in its capacity as landlord, during calendar years
2006 or 2007.
The amount allocated to us for office space costs at the FIS
Jacksonville, Florida headquarters building for the portion of
the buildings utilized by us and our subsidiaries during 2004
was $2.8 million. While the exact amount of rent to be paid
by us under the lease agreement is dependent upon the aggregate
excess operating costs incurred for the entire facility, we do
not anticipate that the total amount to be paid by us under the
lease agreement during the 2005 fiscal year will differ
materially from the total amount allocated to us during the 2004
fiscal year for the office space at the Jacksonville, Florida
building utilized by us and our subsidiaries.
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Master Information Technology Services Agreement |
Through an assignment by FNF to us of its rights and obligations
under a master information technology services agreement between
FNF and FIS and a novation of that agreement, we entered into a
master services agreement with FIS, pursuant to which FIS and
its subsidiaries will provide various services to FNT and its
affiliates, most of which services are similar in nature to the
services that FIS has historically provided to us and to FNF,
such as IT infrastructure support, data center management and
software sales. Moreover, under the master services agreement,
we have designated certain services as high priority critical
services required for our business. These include: managed
operations, network, email/messaging, network routing,
technology center infrastructure, active directory and domains,
systems perimeter security, data security, disaster recovery and
business continuity. FIS has agreed to use reasonable best
efforts to provide these core services without interruption
throughout the term of the master services agreement, except for
scheduled maintenance.
Terms of Provision. The master information technology
services agreement sets forth the specific services to be
provided and provides for statements of work and amendment as
necessary. FIS may provide the services itself or through one or
more subcontractors that are approved by us, but it is fully
responsible for compliance by each subcontractor with the terms
of the master information technology services agreement.
The master information technology services agreement includes,
as part of the agreement, various base services agreements, each
of which includes a specific description of the service to be
performed as well as the terms, conditions, responsibilities and
delivery schedules that apply to a particular service. Any new
terms, conditions, responsibilities and delivery schedules that
may be agreed to by the parties during the term of the agreement
will be added as part of one of the base services agreements or
the master information technology services agreement itself. We
can also request services that are not specified in the
agreement. These additional services will be provided on terms
that we propose to FIS and, if we can agree on the terms, a new
statement of work or amendment will be executed. In addition, if
requested by us, FIS will continue to provide, for an
appropriate fee, services to us that are not specifically
included in the master information technology services agreement
if those services were provided to us by FIS or its
subcontractors in the past.
The master information technology services agreement provides
for specified levels of service for each of the services to be
provided, including any additional services that FIS agrees to
perform pursuant to amendments to the agreement or additional
statements of work. If FIS fails to provide service in
accordance with the applicable service levels, then FIS is
required to correct its failure as promptly as possible (and in
any event, within five days of the failure recognition) at no
cost to us. FIS is also required to use reasonable efforts to
continuously improve the quality and efficiency of its
performance. If either FIS or we find that the level of service
for any particular service is inappropriate, ineffective or
irrelevant, then the parties may review the service level and,
upon agreement, adjust the level of service accordingly. We are
permitted to audit FISs operations, procedures, policies
and service levels as they apply to the services under the
agreement. In addition, at least every year during the term of
the master information technology services agreement, FIS will
conduct a customer satisfaction survey.
FIS may provide the services under the master information
technology services agreement from one or more of its technology
centers or other data centers that it designates within the
United States. FIS must also maintain and enforce safety and
security procedures that are at least equal to industry
standards and are as rigorous as those in effect on the
effective date of the agreement. The agreement contains
provisions regarding privacy and confidentiality and requires
each of the parties to use at least the same standard of care in
the protection of confidential information of the other party as
it uses in the protection of its own confidential or proprietary
information.
Pricing and Payment Terms. Under the master information
technology services agreement, we are obligated to pay FIS for
the services that we and our subsidiaries utilize, calculated
under a specific and comprehensive pricing schedule negotiated
on an arms-length basis. Although the pricing includes some
minimum usage charges, most of the service charges are based on
volume and actual usage, specifically related to the particular
service and support provided by FIS and the complexity of the
technical analysis and
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technology support provided by FIS. The amount included in our
expenses for information technology services received from FIS
during the 2004 fiscal year was $56.6 million. While the
exact amounts to be paid by us to FIS under the master
information technology services agreement are dependent upon the
actual usage and volume of services performed by FIS for us, we
do not anticipate that the total amount to be paid by us to FIS
under the master information technology services agreement
during the 2005 fiscal year will differ materially from the
amounts paid by us to FIS during the 2004 fiscal year for these
information technology services. See Certain Relationships
and Related Transactions Historical Related-Party
Transactions IT Services.
Duration and Effect of Termination. The master
information technology services agreement is effective for a
term of five years unless earlier terminated in accordance with
its terms. We have the right to renew the agreement for a single
one-year period or a single two-year period, by providing a
written notice of our intent to renew at least six months prior
to the expiration date. Upon receipt of a renewal notice, the
parties will begin discussions regarding the terms and
conditions that will apply for the renewal period, and if the
parties have not reached agreement on the terms by the time the
renewal period commences, then the agreement will be renewed for
only one year on the terms as in effect at the expiration of the
initial term. We may also terminate the master information
technology services agreement or any particular statement of
work or base services agreement on six months prior
written notice. In addition, if either party fails to perform
its obligations under the master information technology services
agreement, the other party may terminate after the expiration of
certain cure periods. We may also terminate the agreement if
there is a change in our ownership or control, as more fully
defined by the terms of the services agreement.
Dispute Resolution Procedures. Disputes, controversies
and claims under the master information technology services
agreement will be referred to a management committee that
includes representatives from both parties. If the management
committee is unable to resolve the issue, the agreement sets
forth a procedure by which the issue is referred to and reviewed
by increasingly senior members of our management and FISs
management. If our senior management cannot resolve the issues
with FISs senior management, then the dispute is referred
to an independent arbitrator for resolution. However, we are
required to continue to provide services during the period of
any dispute or dispute resolution process.
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SoftPro Software License Agreement |
Through an assignment by FNF to us of its rights and obligations
under a software license agreement between FNF and a subsidiary
of FIS, and a novation of that agreement, we entered into a
software license agreement pursuant to which we license from a
subsidiary of FIS, for the benefit of our title insurance
subsidiaries, the use of certain proprietary software, related
documentation, and object code for a package of software
programs and products known as SoftPro. The SoftPro
software is a related series of software programs and products
that have historically been used, and will continue to be used,
in various locations by a number of our title insurance
subsidiaries, including Chicago Title, Fidelity National Title,
and Ticor Title. In addition to the use license, under this
agreement, upon the occurrence of certain events, such as the
bankruptcy of the FIS subsidiary, a breach of a material
covenant, or the subsidiarys notification to us that it
has ceased to provide maintenance or support for SoftPro, then
subject to certain conditions, we will also receive the SoftPro
source code for purposes of integration, maintenance,
modification and enhancement. We will also receive the SoftPro
source code if the FIS subsidiary fails to fulfill our requests
for development or integration services or we cannot reach
agreement on the commercial terms for that development. We will
pay fees to the FIS subsidiary for the use of the SoftPro
software based on the number of workstations and the actual
number of SoftPro software programs and products used in each
location. Fees are billed monthly based on presentation of an
invoice. During the term of the agreement, the FIS subsidiary
will retain ownership of SoftPro and is responsible for
defending any claims brought by third parties against us for
infringement based upon the software. The FIS subsidiary and we
each agree to indemnify each other for property damage arising
out of any negligence, breach of statutory duty, omission or
default in performing our respective obligations under the
software license agreement. With regard to dispute resolution,
the agreement includes procedures by which the parties can
attempt to resolve disputes amicably, but if those disputes
cannot be resolved timely, then arbitration proceedings can be
instituted.
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Duration and Termination. While the SoftPro software
license agreement is perpetual, we can terminate the license on
not less than 90 days prior notice. In addition, if we
disclose any of the SoftPro software, or a material part of the
documentation related thereto, to a competitor of FIS, then if
we fail to discontinue the unauthorized disclosure after a
30-day cure period,
SoftPro may terminate the license as to the portion of the
SoftPro software that we so disclosed on 30 days notice. In
that event, FIS would also retain the right to pursue other
remedies, including claims for damages for the unauthorized
disclosure.
Our expenses for the SoftPro license were $5.8 million,
$2.6 million and $1.3 million in 2004, 2003 and 2002,
respectively.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Historical Related-Party Transactions
Our results for 2004 and 2003 include allocations to FNF and FIS
relating to the provision by us of corporate services to FNF and
to FIS and its subsidiaries. These corporate services include
accounting, internal audit and treasury, payroll, human
resources, tax, legal, purchasing, risk management, travel,
mergers & acquisitions, and general management. For the
years ended December 31, 2004, 2003 and 2002, our expenses
were reduced by $9.4 million, $9.2 million and
$7.0 million, respectively, related to the provision of
these corporate services by us to FNF and its subsidiaries
(other than FIS and its subsidiaries). For the years ended
December 31, 2004, 2003 and 2002, our expenses were reduced
by $75.1 million, $39.5 million and
$21.6 million, respectively, related to the provision of
these corporate services by us to FIS and its subsidiaries. As
described in Our Arrangements with FNF, prior to the
distribution we entered into agreements with FNF and FIS
relating to the provision of corporate services following the
distribution.
Included in our expenses for 2004 and 2003 are amounts paid to a
subsidiary of FIS for the provision by FIS to us of IT
infrastructure support, data center management and related IT
support services. For 2004 and 2003, the amounts included in our
expenses to FIS for these services were $56.6 million and
$12.4 million respectively. Prior to September 2003,
we performed these services ourselves and provided them to FIS.
During 2003 and 2002, we received payments from FIS of
$5.4 million and $5.8 million relating to these
services that offset our other operating expenses. As described
in Our Arrangements with FNF, prior to the
distribution we entered into an agreement with FIS relating to
the provision of these IT-related services following the
distribution.
Included in our expenses for 2004 and 2003 are $2.8 million
and $0.5 million, respectively, of rent expense paid to FIS
for our corporate headquarters. We entered into a lease
agreement with FIS covering our rental of this space following
the distribution. See Our Arrangements with
FNF Our Arrangements with FIS
We also do business with additional entities within the
information services segment of FIS that provide real estate
information to our operations. We recorded expenses of
$9.9 million, $11.4 million and $3.7 million in
2004, 2003 and 2002, respectively.
In connection with the transactions that established FIS, our
subsidiaries, Chicago Title Insurance Company (CTI),
a Missouri-domiciled title insurer, and Fidelity National Title
Insurance Company (FNTIC), a California-domiciled
title insurer, each entered into separate issuing agency
contracts with five
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subsidiaries of FIS. Under these issuing agency contracts, the
FIS subsidiaries act as title agents for CTI and FNTIC in
various jurisdictions.
Under the issuing agency contracts, the title agency
appointments of the FIS subsidiaries are not exclusive and CTI
and FNTIC each retain the ability to appoint other title agents
and to issue title insurance directly. In addition, the issuance
of all title insurance for which the FIS subsidiaries are the
agents is subject to the terms set forth in the issuing agency
contracts. We believe that rates, duties, liability and
indemnification provisions comport with the terms and conditions
generally applicable in similar arrangements between
non-affiliated parties in the title industry.
Subject to certain early termination provisions for cause, each
of these agreements may be terminated upon five years
prior written notice, which notice may not be given until after
the fifth anniversary of the effective date of the agreement
(thus effectively resulting in a minimum ten year term). The
issuing agency contracts were entered into by our subsidiaries
between July 22, 2004 and February 24, 2005.
Prior to entering into these issuing agency contracts, these
agency operations were conducted as divisions of certain of our
title insurers. Our financial statements reflect amounts earned
by and charged to us as a result of these arrangements. For the
years ended December 31, 2004, 2003 and 2002, our financial
statements reflect $106.3 million, $284.9 million and
$53.0 million, respectively, of agency title premiums
generated by these operations, and related commissions paid of
$93.6 million, $250.7 million and $46.7 million,
respectively, representing a commission rate of 88% of premiums
earned.
Our subsidiary CTI is a party to a transitional cost sharing
agreement effective as of March 4, 2005 with certain
subsidiaries of FIS that are engaged in the lenders services
business, including providing appraisal, title and closing
services to residential mortgage originators and providing
automated loan servicing (the lenders services
business). Pursuant to this cost sharing agreement, CTI
agrees to share certain costs and facilities relating to these
lenders services businesses with various FIS subsidiaries. The
costs shared include costs of the employees performing the
services related to these businesses as well as the costs and
expenses related to various facilities such as data processing,
equipment, business property and communication equipment. The
cost sharing agreement will terminate (i) as to all
parties, upon the transfer of a particular company that is not
part of our company from FNF to FIS, which transfer is
contingent upon receipt of certain regulatory approvals, or
(ii) as to CTI, at such time as various subsidiaries of FIS
obtain the licenses necessary to enable them to operate all
aspects of the lenders services business.
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Agreements relating to Title Information |
We are party to several agreements with subsidiaries of FIS that
relate to the maintenance or management of our title plants and
the use of those title plants. These agreements are described
below.
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Title Plant Maintenance Agreement and Master
Title Plant Access Agreement |
Certain of our title insurance company subsidiaries have entered
into a title plant maintenance agreement with Property Insight,
LLC (Property Insight), a subsidiary of FIS. In
connection therewith, one of our subsidiaries has also entered
into a master title plant access agreement with Property Insight.
Pursuant to the title plant maintenance agreement, Property
Insight manages certain title plant assets of these title
insurance company subsidiaries. These management services
include keeping the title plant assets current and functioning
on a daily basis. Property Insights management services
also include updating, compiling, extracting, manipulating,
purging, storing and processing title plant data so that the
title plant database is current, accurate and accessible,
through an efficient and organized access system. In performing
these functions, Property Insight may make use of the software
systems licensed to it from these subsidiaries, but it may also
utilize proprietary systems, software, technologies and
methodologies that have been developed, or will be developed, by
Property Insight. We have no ownership or other right or title
to these proprietary systems and methodologies (except in
certain limited circumstances in the event of a termination
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of a title plant maintenance agreement, as a result of a default
by, or termination by, Property Insight). Property Insight may
also use these proprietary systems and methodologies in the
title plant management services it may provide to other third
party customers. In exchange for its management services,
Property Insight has perpetual, irrevocable, transferable and
nonexclusive worldwide licensed access to the title plants owned
by these subsidiaries, together with certain software relating
thereto, and it is able to sell this title plant access to third
party customers and earn all revenue generated from the use of
those assets by third party customers. In addition, Property
Insight earns fees from providing access to updated and
organized title plant databases to our subsidiaries through the
master title plant access agreement described below. In
consideration for the licensed access to the title plants and
related software, Property Insight must pay a royalty to each of
our title insurance company subsidiaries who are parties to the
title plant maintenance agreement, in an amount equal to 2.5% to
3.75% of the revenues generated from the licensed access to the
title plants and related software that the title insurance
company subsidiary owns.
Pursuant to the master title plant access agreement, our
subsidiaries have access to all title plants to which Property
Insight has access or right to access, including the title
plants owned by certain of our subsidiaries. In consideration
for this access and use, our subsidiaries pay access fees to
Property Insight.
Under the title plant maintenance agreement, Property Insight
has no liability to our subsidiaries who are parties to the
title plant maintenance agreement for any error in the
information provided in the performance of its services, except
in the event of Property Insights gross negligence or
willful misconduct. Property Insight accepts no liability under
the master title plant access agreement for any errors in the
title plant information.
The title plant maintenance agreement is effective for a ten
year period, with automatic renewal, and may be terminated by
mutual agreement of the parties or upon five years prior
written notice, except in the case of a default in performance,
in which case the agreement may be terminated immediately if the
default is not cured within 30 days after notice (with
provisions that permit an extension of the
30-day cure period
under certain circumstances). In addition, the title plant
maintenance agreement may be terminated in the event of a change
of control of either Property Insight or our subsidiaries who
are parties to the title plant maintenance agreement. So long as
Property Insight does not cause the termination of a title plant
maintenance agreement (either through notice of termination or
by defaulting on its obligations or otherwise), Property Insight
will retain a copy of the title plant database and related
software as well as the right to use the software and sell
access to the title plant database to third party customers. The
termination provisions of the master title plant access
agreement are in general similar to those of the title plant
maintenance agreement.
The foregoing agreements became effective on March 4, 2005.
Prior to that time, Property Insight was a division of our
company. When FIS was established, the assets, liabilities and
operations of Property Insight were transferred to FIS. For
2004, 2003 and 2002, our payments to FIS under these
arrangements were $28.9 million, $28.2 million and
$24.3 million, respectively. For 2004 revenues from the
royalty payable by FIS were $2.8 million. For the nine
months ended September 30, 2005, the revenues from the
royalty payable by FIS were $2.2 million.
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Title Plant Management Agreement |
We have entered into a management agreement effective as of
May 17, 2005 with Property Insight, pursuant to which
Property Insight manages title plant assets for one of our
subsidiaries, Ticor Title Insurance Company of Florida
(Ticor-FL). These management services include
overseeing and supervising the title plant maintenance process
(such as updating and purging), but do not include full
responsibility for keeping the title plant assets current and
functioning on a daily basis. Ticor-FL maintains all ownership
rights over the title plants and its proprietary systems and
methodologies used in the title plant maintenance process. Under
this agreement, Property Insights use of these proprietary
systems and methodologies and access to Ticor-FLs title
plants is limited to use and access necessary to perform its
management obligations under the agreement. Property Insight is
paid a management fee equal to 20% of the actual costs incurred
by Ticor-FL for maintaining its title plants.
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Under the title plant management agreement, Property Insight has
no liability to Ticor-FL in the performance of its services,
except in the event of Property Insights gross negligence
or willful misconduct.
The title plant management agreement is effective for a ten year
period, with automatic renewal, and may be terminated by mutual
agreement of the parties or upon five years prior written
notice, except in the case of a default in performance, in which
case the agreement may be terminated immediately if the default
is not cured within 30 days after notice (with provisions
that permit an extension of the
30-day cure period
under certain circumstances). In addition, the title plant
management agreement may be terminated in the event of a change
of control of either Property Insight or Ticor-FL.
FNF and each of our title insurance subsidiaries are parties to
one or more of four tax sharing agreements and one tax
allocation agreement, which govern the respective rights,
responsibilities, and obligations of FNF and those subsidiaries
with respect to tax liabilities and refunds, tax attributes,
other matters regarding income taxes and related tax returns.
These tax sharing agreements have been in effect for varying
periods of time prior to the distribution and have been filed
with the respective insurance regulators of the title insurance
subsidiaries.
Allocation of Tax Liability. The tax sharing agreements
generally provide for the allocation and payment of taxes for
periods during which the respective title insurance subsidiaries
and FNF are included in the same consolidated group for federal
income tax purposes or the same consolidated, combined or
unitary returns for state tax purposes. For periods during which
the respective title insurance subsidiaries are included in
FNFs consolidated federal income tax returns or state
consolidated, combined, or unitary tax returns, each of the
title insurance subsidiaries generally is required to pay an
amount of income tax equal to the amount it would have paid had
it filed tax returns as a separate entity. Each title insurance
subsidiary is also responsible in the future for any increases
of consolidated tax liability of FNF that are attributable to
the title insurance subsidiary and will be entitled to refunds
for reductions of tax liabilities attributable to it for prior
periods. Each title insurance subsidiary will be included in
FNFs consolidated group for federal income tax purposes so
long as FNF beneficially owns, directly or indirectly, at least
80% of the total voting power and value of the title insurance
subsidiarys outstanding common stock. Each corporation
that is a member of a consolidated group during any portion of
the groups tax year is severally liable for the federal
income tax liability of the group for that year. As a result,
the title insurance subsidiaries could be liable in the event
federal tax liability allocated to FNF is incurred but not paid
by FNF or any other member of FNFs consolidated group for
FNFs tax years that include these periods.
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Software License Agreements |
Certain FIS subsidiaries have licensed proprietary software and
provide maintenance services to certain of our subsidiaries for
annual fees under individual license agreements. The three
software license agreements, for OTS/ OTS Gold, SIMON and TEAM
software, all provide our subsidiaries with worldwide
nonexclusive, perpetual, irrevocable right to use certain
software and documentation. Fees for these licenses are charged
on varying bases, including in the case of OTS/ OTS Gold, a flat
annual fee, and in the case of SIMON and TEAM, a monthly fee
based on the number of servers or the number of users utilizing
the licensed software. The terms of the licenses are perpetual
and may be terminated by our subsidiaries upon ninety days
written notice, disclosure of software or documentation to
competitors or if an entity is no longer a subsidiary of FIS.
Our expenses for these items in 2004, 2003 and 2002 were
insubstantial and not material, either individually or in the
aggregate.
We previously leased certain business equipment to FIS. Our
revenues from these leases were $8.4 million,
$7.3 million and $6.7 million in 2004, 2003 and 2002,
respectively. All of the equipment covered by these leases was
purchased by FIS for $19.4 million on June 1, 2005,
and the leases were terminated.
104
We are parties to two master loan agreements under which our
title insurance subsidiaries have made certain loans to FNF.
These loans are evidenced by notes that amounted to
$22.8 million at December 31, 2004. The notes amortize
in equal principal amounts annually with final maturity in 2009
and 2010 and bear interest at a variable rate that at
December 31, 2004 was equal to 2.66%. We have no commitment
to make further loans under this arrangement.
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Cross Conveyance and Joint Ownership and Development
Agreements |
One of our subsidiaries is a party to a cross conveyance and
joint ownership agreement with an FIS subsidiary whereby the
parties have conveyed their respective interests in certain
proprietary software, known as eLender, such that
both parties are the joint owners of the software. The parties
have also entered into a development agreement to further
develop the jointly owned software. Pursuant to this agreement,
through March 31, 2006, our subsidiary pays
$500,000 per month to the FIS subsidiary for development
services, including maintenance by the FIS subsidiary for the
developed software. Each party will own an undivided half
interest in the developed software. This agreement expires on
March 31, 2006, but may be terminated prior to that time by
mutual agreement or in the event of a breach that remains
uncured for more than 30 days (subject to extension in
certain circumstances).
One of our subsidiaries is also a party to a joint development
agreement with an FIS subsidiary whereby the FIS subsidiary
provides development services for proprietary software, known as
Titlepoint, to be used in connection with the title
plants owned by our title insurance subsidiaries. Pursuant to
this agreement, our subsidiary pays fees and expenses to the FIS
subsidiary for development services per our specifications. The
fees are charged on an hourly rate basis but cannot exceed an
aggregate of $7,130,000 for the entire development project. Upon
delivery by the FIS subsidiary of software that meets acceptance
criteria, both parties will jointly own the developed software.
This agreement expires forty-five days after acceptance of the
agreed upon software release, but may be terminated prior to
that time by mutual agreement or in the event of a breach that
remains uncured for more than 30 days (subject to extension
in certain circumstances).
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Provisions of our Certificate of Incorporation Relating to
Corporate Opportunities |
Certificate of Incorporation. To address situations in
which officers or directors have conflicting duties to
affiliated corporations, Section 122(17) of the Delaware
General Corporation Law allows a corporation to renounce, in its
certificate of incorporation or by action of its board of
directors, any interest or expectancy of the corporation in
specified classes or categories of business opportunities. As
such, and in order to address potential conflicts of interest
between us and FNF and its subsidiaries (Fidelity),
our certificate of incorporation contains provisions regulating
and defining, to the fullest extent permitted by law, the
conduct of our affairs as they may involve Fidelity and its
officers and directors.
Our certificate of incorporation provides that, subject to any
written agreement to the contrary, Fidelity will have no duty to
refrain from engaging in the same or similar activities or lines
of business as us, and, except as set forth in our certificate
of incorporation, neither Fidelity nor its officers or directors
will be liable to us or our stockholders for any breach of any
fiduciary duty due to any such activities of Fidelity. In the
event that Fidelity acquires knowledge of a potential
transaction or matter which may be a corporate opportunity for
both Fidelity and us, Fidelity, to the fullest extent permitted
by law, will have no duty to communicate or offer the corporate
opportunity to us and will, to the fullest extent permitted by
law, not be liable to us or our stockholders for breach of any
fiduciary duty by reason of the fact that Fidelity pursues or
acquires that corporate opportunity for itself, directs it to
another person or does not communicate information regarding it
to us.
Our certificate of incorporation further provides that if one of
our directors or officers who is also a director or officer of
Fidelity acquires knowledge of a potential transaction or matter
that may be a corporate opportunity for both Fidelity and us,
the director or officer will have satisfied his or her fiduciary
duty to us
105
and our stockholders with respect to that corporate opportunity
if he or she acts in a manner consistent with the following
policy:
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a corporate opportunity offered to any person who is an officer
of ours and who is also a director but not an officer of
Fidelity, will belong to us unless the opportunity is expressly
offered to that person in a capacity other than such
persons capacity as one of our officers, in which case it
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a corporate opportunity offered to any person who is a director
but not an officer of ours, and who is also a director or
officer of Fidelity, will belong to us only if that opportunity
is expressly offered to that person in that persons
capacity as one of our directors; and |
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a corporate opportunity offered to any person who is an officer
of both Fidelity and us will belong to us only if that
opportunity is expressly offered to that person in that
persons capacity as one of our officers. |
Notwithstanding these provisions, our certificate of
incorporation does not prohibit us from pursuing any corporate
opportunity of which we become aware.
These provisions in our certificate of incorporation will no
longer be effective on the date that (i) Fidelity ceases to
beneficially own our common stock representing at least 20% of
the total voting power of all classes of our outstanding capital
stock entitled to vote generally in the election of directors
and (ii) none of our directors or officers are also
directors or officers of Fidelity.
If our certificate of incorporation did not include provisions
setting forth the circumstances under which opportunities will
belong to us and regulating the conduct of our directors and
officers in situations where their duties to us and Fidelity
conflict, the actions of our directors and officers in each such
situation would be subject to the fact-specific analysis of the
corporate opportunity doctrine as articulated under Delaware
law. Under Delaware law, a director of a corporation may take a
corporate opportunity, or divert it to another corporation in
which that director has an interest, if (i) the opportunity
is presented to the director or officer in his or her individual
capacity, (ii) the opportunity is not essential to the
corporation, (iii) the corporation holds no interest or
expectancy in the opportunity and (iv) the director or
officer has not wrongfully employed the resources of the
corporation in pursuing or exploiting the opportunity. Based on
Section 122(17) of the Delaware General Corporation Law, we
do not believe the corporate opportunity guidelines set forth in
our certificate of incorporation conflict with Delaware law. If,
however, a conflict were to arise between the provisions of our
certificate of incorporation and Delaware law, Delaware law
would control.
106
DESCRIPTION OF OUR NOTES
The FNT notes will be issued under an indenture, dated as of
December 8, 2005, between FNT and The Bank of New York
Trust Company, N.A., as trustee, as amended by a supplemental
indenture dated as of January 6, 2005. The indenture and
the FNT notes will be governed by the laws of the State of New
York.
The following summary sets forth certain general terms of the
FNT notes and is subject to the detailed provisions of the
indenture. Capitalized terms that are used and not otherwise
defined in this summary shall have the meanings assigned to them
in the indenture. A copy of the FNT indenture may be obtained
from the information agent and is also filed as an exhibit to
the registration statement of which this prospectus and consent
solicitation statement is a part. The form of the supplemental
indenture will be filed with the SEC by FNT on or about the date
of this prospectus and consent solicitation statement as an
exhibit to a current report on
Form 8-K, and may
also be obtained from the information agent upon request. See
Where You Can Find More Information for information
as to how you can obtain a copy of the FNT indenture and the
supplemental indenture from the SEC. The description of the FNT
indenture below and elsewhere in this prospectus refers to the
FNT indenture as amended by the supplemental indenture.
General
The FNT notes will be issued only in book-entry form in
denominations of $1,000 and integral multiples thereof. The
aggregate principal amount of each series of FNT notes will be
$250 million. The FNT 5.25% notes will mature on
March 15, 2013 and will bear interest at the rate of
5.25% per annum. Interest will be payable semiannually on
each March 15 and September 15, commencing on
March 15, 2006, to the persons in whose names the notes are
registered at the close of business on the March 1 or
September 1 next preceding such interest payment date,
except that interest payable on March 15, 2013, shall be
payable to the persons to whom principal is payable on such
date. The FNT 7.30% notes will mature on August 15,
2011 and will bear interest at the rate of 7.30% per annum.
Interest will be payable semiannually on each February 15
and August 15, commencing February 15, 2006, to the
persons in whose names the notes are registered at the close of
business on the February 1 or August 1 next preceding
such interest payment date, except that interest payable on
August 15, 2011, shall be payable to the persons to whom
principal is payable on such date. Interest will be computed on
the basis of a 360-day
year of twelve 30-day
months. The notes are not redeemable by the holders of the notes
prior to maturity.
For so long as the notes are registered in the name of the
Depositary or its nominee, we will pay the principal and
interest due on the notes to the Depositary for payment to its
participants for subsequent disbursement to the beneficial
owners.
The notes will not contain provisions designed to require us to
redeem the notes, reset the interest rate or take other actions
in respect of a change in control, highly leveraged transaction,
change in credit rating or other similar occurrences involving
us that may adversely affect the holders of the notes.
Ranking
The notes will be unsecured general obligations of ours and will
rank equally with all of our other unsubordinated, unsecured
indebtedness from time to time outstanding. There will be no
limitations under the indenture on the amount of indebtedness
which may rank equally with the notes or on the amount of
indebtedness that may be incurred by us. We have recently
entered into a $400 million,
5-year revolving credit
facility which bears interest at a variable rate based on the
debt ratings assigned to us by certain independent agencies, and
is unsecured. As of September 30, 2005, FNT (not including
its subsidiaries) had $500 million of outstanding debt
ranking equally with the new notes (consisting of
$500 million principal amount of the mirror notes we issued
to FNF in connection with the distribution of our shares to the
public, which mirror notes will be redeemed to the extent the
exchange offers are successful). Furthermore, the notes will be
effectively junior to all existing and future liabilities and
obligations of our subsidiaries because, as a shareholder of our
subsidiaries, our rights with respect to their assets will be
subject to the prior claims of creditors of our subsidiaries,
except to the extent that we ourselves have a claim against
those subsidiaries as a creditor. As of September 30, 2005,
our subsidiaries had debt obligations of approximately
$157.1 million
107
to creditors other than us and had total liabilities of
approximately $3,607.5 million. On October 24, 2005,
we borrowed $150 million under our new credit facility and
used the funds to repay a $150 million intercompany note
issued by one of our subsidiaries to FNF in August 2005. Our
insurance subsidiaries are subject to limitations under state
law on the amount of dividends and other payments they may make
to us, which may adversely affect the amount of funds we have to
pay interest and principal on our notes. See Risk
Factors We are a holding company that has no
operations and depends on distributions from our subsidiaries
for cash. Our holding company structure results in structural
subordination and may affect our ability to make payments on our
notes.
Optional Redemption
Each series of FNT notes will be redeemable, at our option, at
any time in whole, or from time to time in part, at a price
equal to the greater of:
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100% of the principal amount of the notes to be
redeemed; and |
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the sum of the present values of the remaining scheduled
payments on the notes to be redeemed, consisting of principal
and interest, exclusive of interest accrued to the date of
redemption, discounted to the date of redemption on a semiannual
basis (assuming a
360-day year consisting
of twelve 30-day
months) at the applicable Treasury Yield plus 30 basis
points; in each case, plus accrued interest to the date of
redemption. |
The notes called for redemption become due on the date fixed for
redemption. Notices of redemption will be mailed by first-class
mail at least 30 but not more than 60 days before the
redemption date to each holder of notes to be redeemed at its
registered address. The notice of redemption for the notes will
state the amount to be redeemed. On and after the redemption
date, interest will cease to accrue on any notes that are
redeemed. If less than all the notes are redeemed at any time,
the trustee will select notes for redemption on a pro rata basis
or by any other method the trustee deems fair and appropriate.
For purposes of determining the optional redemption price, the
following definitions are applicable:
Comparable Treasury Issue means the United States
Treasury security selected by an Independent Investment Banker
as having a maturity comparable to the remaining term of the
series of notes to be redeemed that would be utilized, at the
time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of
comparable maturity to the remaining term of the notes.
Comparable Treasury Price means, with respect to any
redemption date:
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the average of the bid and the asked prices for the Comparable
Treasury Issue, expressed as a percentage of its principal
amount, at 4:00 p.m. on the third business day preceding
that redemption date, as set forth on Telerate
Page 500, or such other page as may replace Telerate
Page 500; or |
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if Telerate Page 500, or any successor page, is not
displayed or does not contain bid and/or asked prices for the
Comparable Treasury Issue at that time, the average of the
Reference Treasury Dealer Quotations obtained by the trustee for
that redemption date, after excluding the highest and lowest of
such Reference Treasury Dealer Quotations, or, if the trustee is
unable to obtain at least four such Reference Treasury Dealer
Quotations, the average of all Reference Treasury Dealer
Quotations obtained by the trustee. |
Independent Investment Banker means Lehman Brothers
Inc. and any successors or, if it is unwilling or unable to
select the applicable Comparable Treasury Issue, an independent
investment banking institution of national standing appointed by
the trustee and reasonably acceptable to us.
Reference Treasury Dealer means Lehman Brothers Inc.
and any successors and four other primary U.S. government
securities dealers in New York City selected by the Independent
Investment Banker (each, a Primary Treasury Dealer).
If any of the foregoing ceases to be a Primary Treasury Dealer,
we will substitute another Primary Treasury Dealer in its place.
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Reference Treasury Dealer Quotations means, with
respect to each Reference Treasury Dealer and any redemption
date for the series of notes to be redeemed, an average, as
determined by the trustee, of the bid and asked prices for the
Comparable Treasury Issue for the series of notes to be
redeemed, expressed in each case as a percentage of its
principal amount, quoted in writing to the trustee by the
Reference Treasury Dealer at 5:00 p.m., New York City time,
on the third business day preceding the redemption date.
Treasury Yield means, with respect to any redemption
date applicable to the notes, the rate per annum equal to the
semiannual equivalent yield to maturity, computed as of the
third business day immediately preceding the redemption date, of
the Comparable Treasury Issue, assuming a price for the
Comparable Treasury Issue, expressed as a percentage of its
principal amount, equal to the applicable Comparable Treasury
Price for the redemption date.
Except as set forth above, we may not redeem the notes prior to
maturity, and the notes will not be entitled to the benefit of
any sinking fund.
Limitation on Liens
The indenture limits our ability to incur debt which is secured
by a lien or other encumbrance on our property. In particular,
neither we nor our subsidiaries (excluding FNF Capital, Inc.,
Fidelity Asset Management, Inc. and Micro General Corporation
and their respective subsidiaries) may incur, assume or
guarantee any debt that is secured by any lien or other
encumbrance upon any property belonging to us or such
subsidiaries, whether owned at the date of the indenture or
acquired after that date, without effectively securing the notes
equally and ratably with that debt. However, this limitation
does not apply to:
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any lien created under our existing credit agreement, or any
debt agreement that refinances or replaces such facility, up to
an aggregate principal amount of $400 million; |
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liens for taxes or other government charges which are not
delinquent, remain payable without penalty, or are being
contested in good faith; |
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carriers, warehousemens, mechanics,
landlords, repairmens or other similar liens arising
in the ordinary course of business which are not delinquent,
remain payable without penalty, or are being contested in good
faith; |
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liens existing on August 20, 2001, which is the date of the FNF
indenture; |
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liens consisting of pledges or deposits of cash or securities
made by any insurance subsidiary as a condition to obtaining or
maintaining any insurance licenses; |
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judgment liens (other than those arising as a result of claims
under insurance, reinsurance and similar contracts), if the
enforcement of the lien is effectively stayed or fully covered
by insurance and all such liens in the aggregate at any time do
not exceed $20,000,000; |
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liens on property subject to, and securing obligations in
respect of, certain capital leases; |
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liens securing certain short-term obligations, and liens on
property which is the subject of, and securing obligations
incurred in the ordinary course of business in connection with,
Section 1031 exchanges under federal tax law or
relocation service transactions; |
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liens arising as a result of claims under insurance, reinsurance
and similar contracts in the ordinary course of business; |
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liens securing indebtedness of insurance subsidiaries incurred
in connection with the settlement of claim losses in the
ordinary course of business; |
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liens on assets of certain subsidiaries acquired after
August 20, 2001, so long as the liens and the debt secured
by the liens existed prior to the acquisition, were not created
in contemplation of the acquisition, and are not expanded to
cover other property; |
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liens securing intercompany debt; |
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so long as no event of default exists under the indenture, other
liens securing obligations in an aggregate amount not to exceed
$20,000,000; and |
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any extension, renewal or replacement of the foregoing. |
Events of Default
An event of default, with respect to each series of
the notes, means any of the following:
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failure to pay interest on any note for 30 days after the
payment is due; |
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failure to pay the principal of, or any premium on, any note
when due; |
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failure to perform any other covenant in the indenture that
applies to the notes for 60 days after we have received
written notice of the failure to perform in the manner specified
in the indenture; |
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our default in the payment when due of any of our debt in an
amount exceeding $20,000,000 or acceleration of any of that debt
in excess of that amount under the terms of the instrument under
which it was issued, if that default in payment is not cured or
that acceleration is not annulled within 10 days after
written notice; or |
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certain events of bankruptcy, insolvency or reorganization. |
If an event of default under the notes of either series occurs
and continues, the trustee or the holders of at least 25% in
aggregate principal amount of the outstanding notes of that
series may declare the entire principal of all the notes of that
series to be due and payable immediately. If such a declaration
occurs, the holders of a majority of the aggregate principal
amount of the notes of such series can, subject to certain
conditions, rescind the declaration.
The holder of any note will not have any right to institute any
proceeding with respect to the indenture or remedies thereunder,
unless:
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(1) the holder previously gives the trustee written notice
of an event of default; |
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(2) the holders of not less than 25% in principal amount of
the outstanding notes of such series shall have also made such
written request to the trustee and offered the trustee
satisfactory indemnity to institute such proceeding as
trustee; and |
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(3) the trustee for 60 days shall have failed to
institute such proceeding. |
However, the right of any holder of a note to institute suit for
enforcement of any payment of principal, premium, if any, and
interest on such note on or after the applicable due date may
not be impaired or affected without such holders consent.
The indenture requires us to file an officers certificate
with the trustee each year that states that certain defaults do
not exist under the terms of the indenture. The trustee shall
give notice to the holders of any default within 90 days
after it occurs, unless earlier cured, but the trustee may
withhold notice of a payment default if and so long as it
considers such withholding of notice to be in the interests of
the holders.
Other than its duties in the case of a default, the trustee is
not obligated to exercise any of its rights or powers under the
indenture at the request, order or direction of any holders,
unless the holders offer the trustee indemnification reasonably
satisfactory to it. If such reasonable indemnification is
provided, then, subject to certain other rights of the trustee,
the holders of a majority in principal amount of the outstanding
notes of either series may, with respect to the notes of such
series, direct the time, method and place of conducting any
proceeding for any remedy available to the trustee, or
exercising any trust or power conferred upon the trustee. In any
event, the trustee may refuse to follow any direction that
conflicts with any rule of law or the indenture. The trustee
under the FNT indenture is a wholly-owned subsidiary of The Bank
of New York, Inc., which serves as the trustee under the
FNF indenture, but there is otherwise no material relationship
between either trustee and FNF, FNT or any of their subsidiaries
or affiliates.
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Consolidation, Merger or Sale
The indenture generally permits a consolidation or merger
between us and another corporation. It also permits the sale or
transfer by us of all or substantially all of our assets. These
transactions are permitted if:
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the resulting or acquiring corporation (if other than us)
assumes all of our responsibilities and liabilities under the
indenture, including the payment of all amounts due on the notes
and performance of the covenants in the indenture; and |
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immediately after the transaction, no event of default exists. |
If we consolidate or merge with or into any other corporation or
sell all or substantially all of our assets according to the
terms and conditions of the indenture, the resulting or
acquiring corporation will be substituted for us under the
indenture with the same effect as if it had been an original
party to the indenture. As a result, such successor corporation
may exercise our rights and powers under the indenture, in our
name or its own name, and we will be released from all our
liabilities and obligations under the indenture and under the
notes.
Modification and Waiver
Under the indenture, certain of our rights and obligations and
certain of the rights of holders of the notes of either series
may be modified or amended with the consent of the holders of a
majority in aggregate principal amount of the notes of each
series affected by the modification or amendment. The following
modifications and amendments will not be effective against any
holder without its consent:
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a change in the stated maturity date of any payment of principal
or interest; |
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a reduction in the amount of interest or principal due on the
notes or a change in the currency in which any payment on the
notes is payable; |
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a change in the place of payment of the notes; |
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a limitation of a holders right to sue us for the
enforcement of payments due on the notes; or |
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a modification of any of the foregoing requirements or a
reduction in the percentage of outstanding notes required to
waive compliance with certain provisions of the indenture or to
waive certain defaults under the indenture. |
Under the indenture, the holders of a majority in aggregate
principal amount of the outstanding notes of any series may, on
behalf of all holders of that series:
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waive compliance by us with certain restrictive covenants of the
indenture; and |
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waive any past default under the indenture, except a default in
the payment of the principal of, or any premium or interest on,
any note of that series, or a default under any provision of the
indenture which itself cannot be modified or amended without the
consent of the holders of each outstanding note of that series. |
Legal Defeasance and Covenant Defeasance
The notes are subject to the legal defeasance and covenant
defeasance provisions of the indenture. These defeasance
provisions enable us to terminate our obligation to pay the
notes or to comply with certain covenants in the indenture, if
we deposit with the trustee, in trust, sufficient
U.S. dollars or government obligations to pay the
principal, interest, any premium and any other sums due on the
notes on the dates such payments are due under the indenture and
the terms of the notes. As used above, government
obligations means:
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securities of the United States of America; or |
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securities of government agencies backed by the full faith and
credit of the United States of America. |
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In the event that we deposit funds in trust and discharge our
obligations under the notes of either series pursuant to the
legal defeasance provisions of the indenture, then:
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the indenture will no longer apply to the notes (except for
certain obligations to compensate, reimburse and indemnify the
trustee, to register the transfer and exchange of notes, to
replace lost, stolen or mutilated notes and to maintain paying
agencies and the trust funds); and |
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holders of notes of such series can only look to the trust fund
for payment of principal, any premium and interest on the notes. |
In the event that we deposit funds in trust and discharge our
obligations under the notes of either series pursuant to the
covenant defeasance provisions of the indenture, then certain
events otherwise constituting events of default under the
indenture (not including non-payment, bankruptcy, receivership
and insolvency events) will no longer constitute events of
defaults with respect to the notes of such series.
In order to exercise either legal defeasance or covenant
defeasance:
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in the case of legal defeasance, we must deliver to the trustee
an opinion of counsel confirming that (a) the Internal
Revenue Service has published or issued to us a ruling that the
legal defeasance will not have any federal income tax
consequences to the holders or (b) there has been a change
in the federal income tax law to that effect; |
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in the case of covenant defeasance, we must deliver to the
trustee an opinion of counsel confirming that the covenant
defeasance will not have any federal income tax consequences to
the holders; |
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no event of default may have occurred and be continuing (other
than an event of default resulting from the borrowing of funds
used to make the deposit); and |
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the defeasance will not result in the breach of the indenture or
any of our material agreements. |
Book-Entry Delivery and Form
The notes initially will be issued in book-entry form and
represented by one or more global notes for each series. The
global notes will be deposited with, or on behalf of, The
Depository Trust Company (DTC), New York, New York,
as Depositary, and registered in the name of Cede &
Co., the nominee of DTC. Unless and until it is exchanged for
individual certificates evidencing notes under the limited
circumstances described below, a global note may not be
transferred except as a whole by the Depositary to its nominee
or by the nominee to the Depositary, or by the Depositary or its
nominee to a successor Depositary or to a nominee of the
successor Depositary.
DTC has advised us that it is:
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a limited-purpose trust company organized under the New York
Banking Law; |
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a banking organization within the meaning of the New
York Banking Law; |
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a member of the Federal Reserve System; |
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a clearing corporation within the meaning of the New
York Uniform Commercial Code; and |
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a clearing agency registered pursuant to the
provisions of Section 17A of the Exchange Act. |
DTC holds securities that its participants deposit with DTC. DTC
also facilitates the settlement among its participants of
securities transactions, including transfers and pledges, in
deposited securities through electronic computerized book-entry
changes in participants accounts, which eliminates the
need for physical movement of securities certificates.
Direct participants in DTC include securities
brokers and dealers, including underwriters, banks, trust
companies, clearing corporations and other organizations. DTC is
owned by a number of its direct participants and by The New York
Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the
DTC system is also available to others, which we sometimes refer
to as indirect participants, that clear transactions
through or
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maintain a custodial relationship with a direct participant
either directly or indirectly. The rules applicable to DTC and
its participants are on file with the SEC.
Purchases of notes within the DTC system must be made by or
through direct participants, which will receive a credit for
those notes on DTCs records. The ownership interest of the
actual purchaser of a note, which we sometimes refer to as
beneficial owner, is in turn recorded on the direct
and indirect participants records. Beneficial owners of
notes will not receive written confirmation from DTC of their
purchases. However, beneficial owners are expected to receive
written confirmations providing details of their transactions,
as well as periodic statements of their holdings, from the
direct or indirect participants through which they purchased
notes. Transfers of ownership interests in global notes are to
be accomplished by entries made on the books of participants
acting on behalf of beneficial owners. Beneficial owners will
not receive certificates representing their ownership interests
in the global notes except under the limited circumstances
described below.
To facilitate subsequent transfers, all global notes deposited
with DTC will be registered in the name of DTCs nominee,
Cede & Co. The deposit of notes with DTC and their
registration in the name of Cede & Co. will not change
the beneficial ownership of the notes. DTC will generally have
no knowledge of the actual beneficial owners of the notes.
DTCs records reflect only the identity of the direct
participants to whose accounts notes are credited, which may or
may not be the beneficial owners. The participants are
responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants
and by direct participants and indirect participants to
beneficial owners will be governed by arrangements among them,
subject to any legal requirements in effect from time to time.
Redemption notices will be sent to DTC or its nominee. If less
than all of the notes are being redeemed, DTC will determine the
amount of the interest of each direct participant in the notes
to be redeemed in accordance with DTCs procedures.
In any case where a vote may be required with respect to the
notes, neither DTC nor Cede & Co. will give consents
for or vote the global notes. Under its usual procedures, DTC
will mail an omnibus proxy to us as soon as possible after the
record date. The omnibus proxy assigns the consenting or voting
rights of Cede & Co. to those direct participants to
whose accounts the notes are credited on the record date
identified in a listing attached to the omnibus proxy.
Principal and interest payments on the notes will be made to
Cede & Co., as nominee of DTC. DTCs practice is
to credit direct participants accounts on the relevant
payment date, unless DTC has reason to believe that it will not
receive payment on the payment date. Payments by direct and
indirect participants to beneficial owners will be governed by
standing instructions and customary practices, as is the case
with securities held for the account of customers in bearer form
or registered in street name. Those payments will be
the responsibility of participants and not of DTC or us, subject
to any legal requirements in effect from time to time. Payment
of principal and interest to Cede & Co. is our
responsibility, disbursement of payments to direct participants
is the responsibility of DTC, and disbursements of payments to
the beneficial owners is the responsibility of direct and
indirect participants.
Except under the limited circumstances described below,
purchasers of notes will not be entitled to have notes
registered in their names and will not receive physical delivery
of notes. Accordingly, each beneficial owner must rely on the
procedures of DTC and its participants to exercise any rights
under the notes and the indenture.
The laws of some jurisdictions may require that some purchasers
of securities take physical delivery of securities in definitive
form. Those laws may impair the ability to transfer or pledge
beneficial interests in the notes.
DTC is under no obligation to provide its services as Depositary
for the notes and may discontinue providing its services at any
time. Neither we nor the trustee will have any responsibility
for the performance by DTC or its direct participants or
indirect participants under the rules and procedures governing
DTC.
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As noted above, beneficial owners of notes generally will not
receive certificates representing their ownership interests in
the notes. However, we will prepare and deliver certificates for
the notes representing beneficial interests in the global notes
if:
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DTC notifies us that it is unwilling or unable to continue as
Depositary for the global notes, or DTC ceases to be a clearing
agency registered under the Exchange Act at a time when it is
required to be registered, and a successor Depositary is not
appointed within 90 days of the notification to us or of
our becoming aware of DTCs ceasing to be so registered, as
the case may be; |
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we determine, in our sole discretion, not to have the notes
represented by one or more global notes; or |
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an event of default under the indenture has occurred and is
continuing with respect to the notes. |
Any beneficial interest in a global note that is exchangeable
under the circumstances described in the preceding sentence will
be exchangeable for notes in definitive certificated form
registered in the names that the Depositary directs. We expect
that these directions will be based upon directions received by
the Depositary from its participants with respect to ownership
of beneficial interests in the global notes.
We obtained the information in this section and elsewhere in
this prospectus and consent solicitation statement concerning
DTC and DTCs book-entry system from and in reliance on
sources that we believe to be reliable.
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DESCRIPTION OF DIFFERENCES BETWEEN THE FNT NOTES AND THE
FNF NOTES
The following is a summary comparison of the material terms of
the FNF notes and of the FNT notes. The FNT notes will be issued
under an indenture which will be substantially the same as the
indenture under which the FNF notes were issued except for the
terms described below. This summary does not purport to be
complete and is qualified in its entirety by reference to the
FNF indenture, the officers certificates that set the
terms of and amended the FNF indenture with respect to each
series of outstanding FNF notes and the FNT indenture, including
the supplemental indenture thereto. Copies of the indentures and
the officers certificates may be obtained from the
information agent and are also filed as exhibits to the
registration statement of which this prospectus and consent
solicitation statement is a part. The form of the supplemental
indenture will be filed with the SEC by FNT on or about the date
of this prospectus and consent solicitation statement as an
exhibit to a current report on
Form 8-K, and may
also be obtained from the information agent upon request. See
Where You Can Find More Information for information
as to how you can obtain copies of the indentures from the
Securities and Exchange Commission.
The description below of the FNF notes reflects those notes and
the related indenture as currently in effect, before any changes
that would result from the consent solicitation.
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The FNF Notes |
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The FNT Notes |
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Limitation on Liens
As modified by the officers certificates referred to
above with respect to each series of FNF notes, the FNF
indenture provides that FNF will not, and will not permit any
restricted subsidiary to, incur, assume or guarantee any debt
(as defined in the FNF indenture) secured by a lien on any part
of its property, whether owned at the time of the issuance of
the relevant series of FNF notes or acquired thereafter, unless
FNF provides, concurrently with or prior to the incurrence,
assumption or guarantee of such secured debt, that the FNF notes
shall be secured equally and ratably with such secured debt.
However, these provisions do not apply to debt secured by the
following liens:
liens created under the credit agreement, dated as
of February 10, 2000, by and among FNF and various
financial institutions, or any document executed and delivered
pursuant to or in accordance with the requirements thereof;
liens for taxes, fees, assessments or other
governmental charges which are not delinquent or remain payable
without penalty, or to the extent that non-payment thereof is
being contested in good faith and by proper proceedings, if FNF
or the applicable restricted subsidiary has maintained adequate
reserves (in the good faith judgment of the management of FNF)
with respect thereto in accordance with GAAP;
carriers, warehousemens,
mechanics, landlords, materialmens,
repairmens or other similar liens arising in the ordinary
course of business which are |
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Limitation on Liens
The FNT indenture will provide that FNT will not, and will
not permit any restricted subsidiary to, incur, assume or
guarantee any debt (as defined in the FNT indenture) secured by
a lien on any part of its property, whether owned at the time of
the issuance of the FNT notes or acquired thereafter, unless FNT
provides, concurrently with or prior to the incurrence,
assumption or guarantee of such secured debt, that the FNT notes
shall be secured equally and ratably with such secured debt.
However, these provisions do not apply to debt secured by the
following liens (excluded debt):
liens under FNTs new credit facility, or under
any debt agreement or instrument that refinances or replaces
such facility, with the aggregate principal amount constituting
excluded debt under this exception not to exceed
$400 million;
liens for taxes, fees, assessments or other
governmental charges which are not delinquent or remain payable
without penalty, or to the extent that non-payment thereof is
being contested in good faith and by proper proceedings, if FNT
or the applicable restricted subsidiary has maintained adequate
reserves (in the good faith judgment of the management of FNT)
with respect thereto in accordance with GAAP;
carriers, warehousemens,
mechanics, landlords, materialmens, repairmens
or other similar liens arising in the ordinary course of
business which are not delinquent or remain payable without
penalty or which are being contested in good faith by appropriate |
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The FNF Notes |
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The FNT Notes |
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not delinquent or remain payable without penalty or which are
being contested in good faith by appropriate proceedings
diligently prosecuted;
liens existing on August 20, 2001;
liens consisting of pledges or deposits of cash or
securities made by any restricted subsidiary in the insurance
business as a condition to obtaining or maintaining any licenses
issued to it by, or to satisfy the requirements of, any
administrative or governmental body of the state of domicile of
such restricted subsidiary responsible for the regulation
thereof;
liens consisting of judgment or judicial attachment
liens (other than arising as a result of claims under or related
to insurance contracts or policies, retrocession agreements or
reinsurance agreements); provided that the enforcement of such
liens is effectively stayed or fully covered by insurance and
all such liens in the aggregate at any time outstanding for FNF
and its restricted subsidiaries do not exceed $20,000,000;
liens on assets subject to, and securing obligations
in respect of, leases that, in conformity with GAAP, are, or are
required to be, accounted for as capital leases on the
applicable balance sheet, which are entered into in the ordinary
course of business and are non-recourse to FNF or its restricted
subsidiaries, and other such leases in an aggregate amount not
to exceed $15,000,000 at any one time outstanding;
liens securing obligations permitted under certain
sections of the previously described credit agreement, to the
extent such liens are identified and permitted under such
sections;
liens arising as a result of claims under or related
to insurance contracts or policies, reinsurance agreements or
retrocession agreements in the ordinary course of business, or
securing debt of restricted subsidiaries in the insurance
business incurred or assumed in connection with the settlement
of claim losses in the ordinary course of business of such
restricted subsidiaries;
liens on assets of entities that become restricted
subsidiaries after August 20, 2001 securing the debt of
such entity, which liens and debt previously existed and were
not created in contemplation of such acquisition, and which
liens are not spread to cover any other property;
liens on assets of FNF or its restricted subsidiaries
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proceedings diligently prosecuted;
liens existing on August 20, 2001;
liens consisting of pledges or deposits of cash or
securities made by any restricted subsidiary in the insurance
business as a condition to obtaining or maintaining any licenses
issued to it by, or to satisfy the requirements of, any
administrative or governmental body of the state of domicile of
such restricted subsidiary responsible for the regulation
thereof;
liens consisting of judgment or judicial attachment
liens (other than arising as a result of claims under or related
to insurance contracts or policies, retrocession agreements or
reinsurance agreements); provided that the enforcement of such
liens is effectively stayed or fully covered by insurance and
all such liens in the aggregate at any time outstanding for FNT
and its restricted subsidiaries do not exceed $20,000,000;
liens on assets subject to, and securing obligations
in respect of, leases that, in conformity with GAAP, are, or are
required to be, accounted for as capital leases on the
applicable balance sheet, which are entered into in the ordinary
course of business and are non- recourse to FNT or its
restricted subsidiaries, and other such leases in an aggregate
amount not to exceed $15,000,000 at any one time outstanding;
liens securing obligations permitted under certain
sections of the previously described FNT credit agreement, to
the extent such liens are identified and permitted under such
sections;
liens arising as a result of claims under or related
to insurance contracts or policies, reinsurance agreements or
retrocession agreements in the ordinary course of business, or
securing debt of restricted subsidiaries in the insurance
business incurred or assumed in connection with the settlement
of claim losses in the ordinary course of business of such
restricted subsidiaries;
liens on assets of entities that become restricted
subsidiaries after August 20, 2001 securing the debt of
such entity, which liens and debt previously existed and were
not created in contemplation of such acquisition, and which
liens are not spread to cover any other property;
liens on assets of FNT or its restricted
subsidiaries securing debt owed to FNT or a restricted
subsidiary;
so long as no default or event of default has
occurred |
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The FNF Notes |
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The FNT Notes |
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securing debt owed to FNF or a restricted subsidiary;
so long as no default or event of default has
occurred and is continuing, other liens securing obligations in
an aggregate amount not exceeding $20,000,000; and
any extension, renewal or replacement of the
foregoing; provided that the liens are not spread to cover any
additional debt or property (other than a substitution of like
property).
Under the FNF indenture as amended by the officers
certificates, a restricted subsidiary means all
subsidiaries of FNF except FNF Capital, Inc., Fidelity Asset
Management, Inc., Micro General Corporation, Fidelity National
Information Solutions, Inc., any of their respective
subsidiaries, and any Excluded Subsidiary as defined
under the credit agreement described above.
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and is continuing, other liens securing obligations in an
aggregate amount not exceeding $20,000,000; and
any extension, renewal or replacement of the
foregoing; provided that the liens are not spread to cover any
additional debt or property (other than a substitution of like
property).
Under the FNT indenture, a restricted subsidiary
means all subsidiaries of FNT except FNF Capital, Inc., Fidelity
Asset Management, Inc., Micro General Corporation, and any of
their respective subsidiaries. |
Other Covenants
The FNF indenture also provides:
FNF and its subsidiaries will carry insurance in amounts and
covering such risks as are consistent with coverages carried by
similarly situated corporations;
FNF and its subsidiaries will keep proper books of record and
account, to be examined at least annually by independent public
accountants; and
FNF and its subsidiaries shall comply with all applicable laws
and regulations, noncompliance with which would have a material
adverse effect on them, taken as a whole. |
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Other Covenants
There will be comparable covenants in the FNT indenture. |
Events of Default
As amended by the officers certificates, the FNF
indenture provides that each of the following will be events of
default:
default in the payment of interest on any FNF note
when due, which continues for a period of 30 days;
default in the payment of the principal of (or
premium, if any, on) any FNF note when due;
default in the performance of any covenant of FNF in
the indenture, which continues for a period of 60 days
after notice to FNF as specified in the FNF indenture;
default under any debt of FNF or under any
instrument under which such debt may be issued or secured, which
results in such debt in an aggregate principal amount in excess
of $20 million becoming due and payable prior to the date
it otherwise would have, and such |
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Events of Default
The FNT indenture will contain comparable events of default
with respect to FNT and the FNT notes and indenture. |
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The FNF Notes |
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The FNT Notes |
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acceleration not having been cured or rescinded or such debt not
having been paid within 10 days after notice to FNF as
specified in the indenture; and
specified events of bankruptcy, insolvency or
reorganization with respect to FNF.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal
income tax consequences of the exchange offers and of the
ownership and disposition of FNT notes after the exchange
offers. The statements below, insofar as they purport to
summarize matters of U.S. federal income tax law relating to the
exchange offers and consent solicitation and of the ownership of
the FNT 2011 notes and of the FNT 2013 notes, constitute the
legal opinion of LeBoeuf, Lamb, Greene & MacRae LLP, special
tax counsel to FNT. Such legal opinion does not include any
accounting matters, factual determinations, or statements
concerning FNTs beliefs or conclusions or concerning the
positions FNT may take. Further, such legal opinion relies upon
and is premised on the accuracy of factual statements and
representations made by FNT and is subject to the
qualifications, assumptions, and limitations set forth in this
summary.
This summary is based on the U.S. Internal Revenue Code of
1986, as amended (the Code), on the Treasury
Regulations promulgated thereunder, and on judicial and
administrative interpretations thereof, all as in effect on the
date of this prospectus and all of which are subject to change
(possibly on a retroactive basis). No rulings or determinations
of the Internal Revenue Service or any other authorities have
been sought or secured with respect to the U.S. federal
income tax consequences of the exchange offers and of the
ownership and disposition of FNT notes after the exchange
offers, and the discussion below is not binding on the Internal
Revenue Service or such other authorities. No assurance can be
given that the Internal Revenue Service will not assert, or that
a court will not sustain, a position different from any position
discussed herein.
This summary does not address all of the U.S. federal
income tax consequences of the exchange offers that may be
relevant to the particular circumstances of a holder of FNF
notes, and it does not address the effect of any foreign, state
or local tax law on a holder. In addition, this summary does not
address the tax consequences for any holder other than a
U.S. Holder or a
non-U.S. Holder,
each as defined below.
This summary is not intended to be, and should not be construed
to be, legal or tax advice to any particular holder. Holders are
advised to consult their own tax advisers to determine the
particular tax consequences of the exchange offers and of
holding or disposing of FNT notes.
Tax Consequences to Holders Who Do Not Participate in the
Exchange Offers
The exchange offers should not be a taxable event for
U.S. federal income tax purposes for a holder who does not
exchange FNF notes for FNT notes in connection with the exchange
offers. Holders of FNF notes who do not participate in the
exchange offers should recognize income in respect of FNF notes
at the same time and in the same manner as they would have
recognized such income had the exchange offers not occurred.
Tax Consequences to U.S. Holders Who Participate in the
Exchange Offers
The discussion under this heading, Tax Consequences to
U.S. Holders who Participate in the Exchange Offers,
assumes that each holder of FNF notes is a U.S. Holder.
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Definition of U.S. Holder. For purposes of the
United States Federal Income Tax Considerations summarized in
this prospectus, a U.S. Holder is a beneficial
owner of FNF notes that is a citizen or resident of the U.S., a
corporation or other entity taxable as a corporation, in either
case organized in or under the laws of the U.S. or any
state or political subdivision thereof, or an estate or trust
that is subject to U.S. federal income taxation without
regard to the source of its income. A U.S. Holder does not
include, and this summary does not address the tax consequences
to, certain persons subject to special provisions of
U.S. federal income tax law, such as tax-exempt
organizations, qualified retirement plans, financial
institutions, insurance companies, partnerships, real estate
investment trusts, regulated investment companies,
broker-dealers, persons who hold FNF notes as part of a
straddle, a hedge, a constructive sale or a conversion
transaction, holders of FNF notes whose functional currency is
other than the U.S. dollar, persons who do not hold the
FNF notes as capital assets, or pass-through entities and
investors therein.
Taxation of the Exchange of FNT Notes for FNF Notes. If
you tender your FNF notes in connection with the exchange
offers, you generally will recognize gain or loss equal to the
difference between the issue price of FNT notes you receive and
your tax basis in FNF notes you exchange. This gain or loss
generally will be capital gain or loss, except for gain, if any,
attributable to accrued market discount. Assuming that the notes
subject to the exchange offers are treated as publicly traded
within the meaning of the applicable Treasury Regulations, the
issue price of FNT notes you receive in exchange for FNF notes
should be the fair market value of such notes on the issue date,
reduced by the amount of accrued unpaid interest on the FNF
notes you exchange. Although the applicable Treasury Regulations
are unclear in many respects and consequently are subject to
varying interpretations, FNT believes that the requisite public
trading will exist and FNT intends to take that position for all
relevant reporting and other purposes.
A holder that is subject to gain recognition under the rules
discussed above and that purchased for less than their principal
amount the FNF notes being exchanged may recognize ordinary
income rather than capital gain under the market discount rules.
Under those rules, unless the holder has made an election to
include market discount in income as it accrues, any gain
recognized by the holder will be treated as ordinary income to
the extent of any market discount that has accrued on the FNF
notes the holder exchanges during the period the holder owned
those notes. Market discount on a note generally equals the
excess, if any, of (i) the unpaid principal balance of the
note at the time it is acquired by the holder, over
(ii) the holders tax basis in the note immediately
after its acquisition (subject to a de minimis exception
pursuant to which market discount is considered to be zero if it
is less than 0.25 percent of the unpaid principal balance
of the note multiplied by the number of complete years to
maturity from the date of acquisition). In general, market
discount is treated as accruing over the term of the note on a
straight-line basis unless the holder elects to accrue the
discount on a constant-yield basis.
Taxation of Interest. At the time of the exchange, you
will recognize ordinary interest income in an amount equal to
the accrued unpaid interest on the FNF notes that you have not
previously included in income. Generally, you will be required
to include interest received on an FNT note as ordinary income
at the time it accrues or at the time it is received, in
accordance with your regular method of accounting for
U.S. federal income tax purposes. The interest you
recognize as income on the first payment of stated interest on
the FNT notes will be reduced by the amount of accrued unpaid
interest on your FNF notes when you exchange them for FNT notes.
Original Issue Discount or Amortizable Bond Premium. If
the face amount of any FNT note you receive in the exchange
offers exceeds the issue price of such note (and if such note
does not qualify for a de minimis exception discussed
below), such excess will constitute original issue discount. You
must include such original issue discount in income as ordinary
income as it accrues on the basis of a constant yield to
maturity, regardless of whether you receive cash representing
such income. Your basis in your FNT notes will increase by the
amount of the original issue discount includible in your gross
income as it accrues. The excess will qualify for a de
minimis exception if it is less than 0.25 percent of
the face amount of such note, multiplied by the number of
complete years to maturity. Because FNT intends to determine the
issue price of FNT notes by reference to the fair market value
of such notes on the issue date of the FNT notes pursuant to the
exchange offers, FNT cannot know before the exchange date
whether any FNT note you receive will have original issue
discount. If the FNT 5.25% notes due 2013 have the same
value on the exchange date as recent
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estimates of the value of the FNF 2013 notes, those notes would
have a discount that does not qualify for the de minimis
exception and they therefore would have an original issue
discount.
If the issue price of a FNT note exceeds its face amount, you
will be considered to have purchased such security with
amortizable bond premium equal in amount to such
excess. You may elect to amortize such premium by offsetting
against the interest otherwise required to be included in income
in respect of such FNT note during any taxable year, with the
allocable portion of such premium determined under the constant
yield method over the remaining term. In such case, your basis
in such FNT note will be reduced by the amount of note premium
offset against interest. Because FNT intends to determine the
issue price of FNT notes by reference to the fair market value
of such notes on the issue date of the FNT notes pursuant to the
exchange offers, FNT cannot know before the exchange date
whether any FNT note you receive will have amortizable bond
premium. If the FNT 7.30% notes due 2011 have the same
value on the exchange date as recent estimates of the value of
the FNF 7.30% notes due 2011, those notes would have
amortizable bond premium.
The rules concerning discounts and premiums are complex, and you
should consult your tax adviser to determine how, and to what
extent, any discount or premium should be taken into account for
U.S. federal income tax purposes and to determine the
desirability, mechanics and consequences of making any elections
in connection therewith.
Sale, Exchange or Retirement of FNT Notes. With certain
exceptions, upon the sale, exchange, or retirement of an FNT
note you receive in the exchange, you will recognize gain or
loss equal to the difference between the proceeds you receive in
the transaction and your adjusted tax basis in the FNT notes
that you transfer. Your adjusted tax basis in an FNT note
generally will equal your cost for such security, which will be
the issue price of the note, increased by any accrued original
issue discount, and decreased by any amortized bond premium,
during your holding period of the note. Gain or loss realized on
the sale, exchange or retirement of an FNT note generally will
be capital gain or loss and will be long-term capital gain or
loss if such security is held for more than one year; payments
for accrued interest not previously included in income will be
treated as ordinary income.
Tax Consequences to
non-U.S. Holders
that Participate in the Exchange Offers
The discussion under this heading, Tax Consequences to
non-U.S. Holders
who Participate in the Exchange Offers, assumes that each
holder of notes is a
non-U.S. Holder.
Definition of
non-U.S. Holders.
For purposes of the United States Federal Income Tax
Considerations summarized in this prospectus, a
non-U.S. Holder
is a beneficial owner of FNF notes who is an individual,
corporation, estate or trust other than an individual who is a
citizen or resident of the U.S.; a corporation (or an entity
taxed as a corporation for U.S. federal income tax
purposes) created or organized in the U.S. or under the
laws of the U.S. or any subdivision thereof; an estate the
income of which is includible in gross income for
U.S. federal income tax purposes regardless of its source;
or a trust if a court within the U.S. is able to exercise
primary supervision over the administration of the trust and one
or more U.S. persons have the authority to control all
substantial decisions of the trust; or a person who does not
hold the FNT notes as a capital asset.
Taxation of the Exchange of FNT Notes for FNF Notes. You
generally will not be subject to U.S. federal income or
withholding tax on gain realized on the exchange of FNF notes
for FNT notes pursuant to the exchange offers unless:
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you are an individual present in the U.S. for 183 days
or more in the year of such exchange and either: |
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you have a tax home in the U.S. and certain other
requirements are met; or |
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the gain from the exchange is attributable to an office or other
fixed place of business maintained by you in the U.S.; |
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you are an individual subject to tax pursuant to certain
provisions of U.S. federal income tax law applicable to
certain expatriates; or |
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the gain is effectively connected with the conduct of a
U.S. trade or business. See Income
Effectively Connected with U.S. Trade or Business. |
However, to the extent that the fair market value of FNT notes
represents accrued unpaid interest on the FNF notes, you will be
required to establish an exemption from U.S. federal income
tax. See Taxation of Interest for a
discussion of the requirements of the exemption.
Taxation of Interest. The payment of interest on FNT
notes to you by FNT or by any paying agent of FNTs will
not be subject to U.S. federal income or withholding tax,
provided that the interest is not effectively connected with a
U.S. trade or business of yours and provided that:
|
|
|
|
|
you do not actually or constructively own 10% or more of the
total combined voting power of all classes of the FNT shares; |
|
|
|
you are not a controlled foreign corporation that is related to
FNT within the meaning of the Internal Revenue Code; and |
|
|
|
the U.S. payor does not have actual knowledge or reason to
know that you are a U.S. person and either: |
|
|
|
|
|
the beneficial owner of the FNT note certifies to the applicable
payor or its agent, under penalties of perjury, that it is not a
U.S. Holder and provides its name and address on IRS
Form W-8BEN, or a suitable substitute, form; or |
|
|
|
a financial institution (including a securities clearing
organization, bank or other financial institution that holds
customers securities in the ordinary course of its trade
or business) holds the FNT note and certifies under penalties of
perjury that it has received a Form W-8BEN (or a suitable
substitute form) either from the beneficial owner or from a
financial institution between it and the beneficial owner and
furnishes the payor with a copy thereof; or the U.S. Payor
otherwise possesses documentation upon which it may rely to
treat the payment as made to a
non-U.S. person,
in accordance with U.S. Treasury regulations. |
If the interest paid to you on FNT notes is effectively
connected with a U.S. trade or business of yours, see
Income Effectively Connected with
U.S. Trade or Business.
Payments made that are attributable to original issue discount
generally will be treated in the same manner as payments of
interest, as just described.
Gain on Disposition of the FNT Notes. You generally will
not be subject to U.S. federal income or withholding tax on
gain realized on the sale, exchange or redemption of FNT notes
unless:
|
|
|
|
|
you are an individual present in the U.S. for 183 days
or more in the year of such sale, exchange or redemption and
either: |
|
|
|
|
|
you have a tax home in the U.S. and other
requirements are met; or |
|
|
|
the gain from the disposition is attributable to an office or
other fixed place of business maintained by you in the U.S.; |
|
|
|
|
|
you are an individual subject to tax pursuant to certain
provisions of U.S. federal income tax law applicable to
certain expatriates; or |
|
|
|
the gain is effectively connected with your conduct of a
U.S. trade or business. See Income
Effectively Connected with U.S. Trade or Business. |
However, to the extent that disposition proceeds represent
either interest accruing between interest payment dates or
original issue discount accruing while you held the FNT note,
you may be required to establish an exemption from
U.S. federal income and withholding tax. See
Taxation of Interest.
Income Effectively Connected with U.S. Trade or
Business. Except to the extent otherwise provided under an
applicable tax treaty, you generally will be taxed in the same
manner as a U.S. Holder with respect to income or gain on
an FNF note or on an FNT note if such income or gain is
effectively connected with a U.S. trade or business of
yours. Effectively connected income received, or gain realized,
by a corporate
non-U.S. Holder
also may, under certain circumstances, be subject to an
additional branch profits tax at a
121
30% rate (or, if applicable, a lower treaty rate), subject to
certain adjustments. This effectively connected income or gain
will not be subject to withholding tax if the holder delivers
the appropriate form, currently an IRS Form W-8ECI, to the
payor.
Backup Withholding and Information Reporting
U.S. Holders. Interest payments made on, or the
proceeds of the sale or other disposition of, FNT notes may be
subject to information reporting and U.S. federal backup
withholding tax (currently at the rate of 28%) if the recipient
of those payments fails to supply an accurate taxpayer
identification number or otherwise fails to comply with
applicable U.S. information reporting or certification
requirements. Information reporting and backup withholding also
may apply with respect to the holders of FNF notes who
participate in the exchange. Any amount withheld from a payment
to a U.S. Holder under the backup withholding rules is
allowable as a credit against the holders
U.S. federal income tax, provided that the required
information is furnished to the Internal Revenue Service.
Non-U.S. Holders.
In general, backup withholding and information reporting will
not apply to interest payments made on, or the proceeds of the
sale or other disposition of, the FNT notes, or in connection
with the exchange of FNF notes pursuant to the exchange offers,
if the holder establishes by providing a certificate or, in some
cases, by providing other evidence, that the holder is not a
U.S. person. Additional exemptions are available for
certain payments made outside the
U.S. Non-U.S. Holders
of FNT notes or of FNF notes are urged to consult their tax
advisers regarding the application of information reporting and
backup withholding in their particular situations, the
availability of exemptions, and the procedure for obtaining such
an exemption, if available. Any amount withheld from a payment
to a
non-U.S. Holder
under the backup withholding rules will be allowable as a credit
against the holders U.S. federal income tax, provided
that the required information is furnished to the Internal
Revenue Service.
LEGAL MATTERS
Certain legal matters in connection with the exchange offer will
be passed upon for us by LeBoeuf, Lamb, Greene & MacRae
LLP.
EXPERTS
The combined financial statements and schedules of Fidelity
National Title Group, Inc. and its subsidiaries, as of
December 31, 2004, and 2003, and for each of the years in
the three-year period ended December 31, 2004, have been
included herein in reliance upon the reports of KPMG LLP,
independent registered public accounting firm, appearing
elsewhere herein, and upon the authority of said firm as experts
in accounting and auditing. The audit report on the combined
financial statements refers to the adoption, effective
January 1, 2003, of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation, related to stock-based employee compensation.
The consolidated financial statements and schedules of Fidelity
National Financial, Inc. as of December 31, 2004 and 2003,
and for each of the years in the three-year period ended
December 31, 2004, and managements assessment of the
effectiveness of internal control over financial reporting as of
December 31, 2004 have been incorporated by reference
herein in reliance upon the reports of KPMG LLP, independent
registered public accounting firm, incorporated by reference
herein, and upon the authority of said firm as experts in
accounting and auditing. The audit reports on the consolidated
financial statements and schedules refer to the adoption,
effective January 1, 2003, of Statement of Financial
Accounting Standards No. 123, Accounting for
Stock-Based Compensation, related to stock-based employee
compensation.
122
INDEX TO FINANCIAL STATEMENTS
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
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Page | |
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-6 |
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F-7 |
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F-34 |
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F-35 |
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F-36 |
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F-37 |
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F-38 |
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F-39 |
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Fidelity National Title Group, Inc.:
We have audited the accompanying Combined Balance Sheets of
Fidelity National Title Group, Inc. and subsidiaries as of
December 31, 2004 and 2003, and the related Combined
Statements of Earnings, Equity and Comprehensive Earnings and
Cash Flows for each of the years in the three-year period ended
December 31, 2004. These Combined Financial Statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these Combined
Financial Statements based on our audits.
We conducted our audits 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 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 Combined Financial Statements referred to
above present fairly, in all material respects, the financial
position of Fidelity National Title Group, 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 Combined 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 A
to the Combined 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.
/s/ KPMG LLP
Jacksonville, Florida
August 16, 2005, except for Note A,
which is as of September 26, 2005
F-2
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
COMBINED BALANCE SHEETS
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As of December 31, | |
|
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| |
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2004 | |
|
2003 | |
|
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| |
|
| |
|
|
(In thousands) | |
ASSETS |
Investments:
|
|
|
|
|
|
|
|
|
|
Fixed maturities available for sale, at fair value, at
December 31, 2004 and 2003 includes $265,639 and $262,193,
respectively, of pledged fixed maturity securities related to
secured trust deposits
|
|
$ |
2,174,817 |
|
|
$ |
1,615,704 |
|
|
Equity securities, at fair value
|
|
|
115,070 |
|
|
|
65,407 |
|
|
Other long-term investments
|
|
|
21,219 |
|
|
|
17,596 |
|
|
Short-term investments, at December 31, 2004 and 2003
includes $280,351 and $185,956, respectively, of pledged
short-term investments related to secured trust deposits
|
|
|
508,383 |
|
|
|
811,475 |
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
2,819,489 |
|
|
|
2,510,182 |
|
Cash and cash equivalents, at December 31, 2004 and 2003
includes $195,200 and $231,142, respectively, of pledged cash
related to secured trust deposits
|
|
|
268,414 |
|
|
|
395,857 |
|
Trade receivables, net of allowance of $11,792 in 2004 and
$12,833 in 2003
|
|
|
145,447 |
|
|
|
132,579 |
|
Notes receivable, net of allowance of $1,740 in 2004 and $1,555
in 2003 and includes notes from related parties of $22,800 in
2004 and $26,598 in 2003
|
|
|
39,196 |
|
|
|
41,358 |
|
Goodwill
|
|
|
959,600 |
|
|
|
920,278 |
|
Prepaid expenses and other assets
|
|
|
311,730 |
|
|
|
296,942 |
|
Title plants
|
|
|
301,610 |
|
|
|
280,024 |
|
Property and equipment, net
|
|
|
164,916 |
|
|
|
161,368 |
|
Due from FNF
|
|
|
63,689 |
|
|
|
44,076 |
|
|
|
|
|
|
|
|
|
|
$ |
5,074,091 |
|
|
$ |
4,782,664 |
|
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|
LIABILITIES AND EQUITY |
Liabilities:
|
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|
|
|
|
|
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Accounts payable and accrued liabilities
|
|
$ |
603,705 |
|
|
$ |
591,535 |
|
|
Notes payable
|
|
|
22,390 |
|
|
|
54,259 |
|
|
Reserve for claim losses
|
|
|
980,746 |
|
|
|
932,439 |
|
|
Secured trust deposits
|
|
|
735,295 |
|
|
|
671,882 |
|
|
Deferred tax liabilities
|
|
|
51,248 |
|
|
|
60,875 |
|
|
|
|
|
|
|
|
|
|
|
2,393,384 |
|
|
|
2,310,990 |
|
|
Minority interests
|
|
|
3,951 |
|
|
|
2,488 |
|
Equity:
|
|
|
|
|
|
|
|
|
|
Investment by FNF
|
|
|
2,719,056 |
|
|
|
2,481,038 |
|
|
Accumulated other comprehensive loss
|
|
|
(42,300 |
) |
|
|
(11,852 |
) |
|
|
|
|
|
|
|
|
|
|
2,676,756 |
|
|
|
2,469,186 |
|
|
|
|
|
|
|
|
|
|
$ |
5,074,091 |
|
|
$ |
4,782,664 |
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements.
F-3
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF EARNINGS
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Year Ended December 31, | |
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2004 | |
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2003 | |
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2002 | |
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| |
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| |
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(In thousands) | |
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct title insurance premiums
|
|
$ |
2,003,447 |
|
|
$ |
2,105,317 |
|
|
$ |
1,557,769 |
|
|
Agency title insurance premiums, includes $106.3 million,
$284.9 million and $53.0 million of premiums from
related parties in 2004, 2003 and 2002, respectively (see
Note A)
|
|
|
2,714,770 |
|
|
|
2,595,433 |
|
|
|
1,989,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total title premiums
|
|
|
4,718,217 |
|
|
|
4,700,750 |
|
|
|
3,547,727 |
|
|
Escrow and other title related fees, includes $8.4 million,
$7.3 million and $6.7 million of revenue from related
parties in 2004, 2003 and 2002, respectively (see Note A)
|
|
|
1,039,835 |
|
|
|
1,058,729 |
|
|
|
790,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total title and escrow
|
|
|
5,758,052 |
|
|
|
5,759,479 |
|
|
|
4,338,514 |
|
|
Interest and investment income, includes $1.0 million,
$0.7 million and $0.5 million of interest revenue from
related parties in 2004, 2003 and 2002, respectively (see
Note A)
|
|
|
64,885 |
|
|
|
56,708 |
|
|
|
72,305 |
|
|
Realized gains and losses, net
|
|
|
22,948 |
|
|
|
101,839 |
|
|
|
584 |
|
|
Other income
|
|
|
43,528 |
|
|
|
52,689 |
|
|
|
55,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,889,413 |
|
|
|
5,970,715 |
|
|
|
4,467,330 |
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs, excludes $34.5 million, $14.8 million
and $9.9 million of personnel costs allocated to related
parties in 2004, 2003 and 2002, respectively (see Note A)
|
|
|
1,680,805 |
|
|
|
1,692,895 |
|
|
|
1,260,070 |
|
|
Other operating expenses, includes $53.8 million,
$15.8 million and $4.9 million of other operating
expenses from related parties net of amounts allocated to
related parties in 2004, 2003 and 2002, respectively (see
Note A)
|
|
|
849,554 |
|
|
|
817,597 |
|
|
|
633,193 |
|
|
Agent commissions, includes agent commissions of
$93.6 million, $250.7 million and $46.7 million
paid to related parties in 2004, 2003 and 2002, respectively
(see Note A)
|
|
|
2,117,122 |
|
|
|
2,035,810 |
|
|
|
1,567,112 |
|
|
Depreciation and amortization
|
|
|
95,718 |
|
|
|
79,077 |
|
|
|
53,042 |
|
|
Provision for claim losses
|
|
|
259,402 |
|
|
|
248,834 |
|
|
|
175,963 |
|
|
Interest expense
|
|
|
3,885 |
|
|
|
4,582 |
|
|
|
8,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,006,486 |
|
|
|
4,878,795 |
|
|
|
3,697,966 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
|
882,927 |
|
|
|
1,091,920 |
|
|
|
769,364 |
|
|
Income tax expense
|
|
|
323,598 |
|
|
|
407,736 |
|
|
|
276,970 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before minority interest
|
|
|
559,329 |
|
|
|
684,184 |
|
|
|
492,394 |
|
|
Minority interest
|
|
|
1,165 |
|
|
|
859 |
|
|
|
624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
558,164 |
|
|
$ |
683,325 |
|
|
$ |
491,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited proforma net earnings per share basic and
diluted
|
|
$ |
3.22 |
|
|
|
|
|
|
|
|
|
|
|
Unaudited proforma weighted average shares outstanding
basic and diluted
|
|
|
172,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements.
F-4
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF EQUITY AND COMPREHENSIVE EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other | |
|
|
|
|
|
|
Investment by | |
|
Comprehensive | |
|
|
|
Comprehensive | |
|
|
FNF | |
|
Earnings (Loss) | |
|
Total Equity | |
|
Earnings (Loss) | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance, December 31, 2001
|
|
$ |
1,740,917 |
|
|
$ |
470 |
|
|
$ |
1,741,387 |
|
|
$ |
|
|
|
Other comprehensive loss-minimum pension liability
adjustment net of tax
|
|
|
|
|
|
|
(15,871 |
) |
|
|
(15,871 |
) |
|
|
(15,871 |
) |
|
Other comprehensive earnings-unrealized gain on
investments net of tax
|
|
|
|
|
|
|
26,882 |
|
|
|
26,882 |
|
|
|
26,882 |
|
|
Net contribution of capital
|
|
|
144,016 |
|
|
|
|
|
|
|
144,016 |
|
|
|
|
|
|
Dividend to FNF
|
|
|
(153,700 |
) |
|
|
|
|
|
|
(153,700 |
) |
|
|
|
|
|
Net earnings
|
|
|
491,770 |
|
|
|
|
|
|
|
491,770 |
|
|
|
491,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
2,223,003 |
|
|
|
11,481 |
|
|
|
2,234,484 |
|
|
|
502,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss-minimum pension liability
adjustment net of tax
|
|
|
|
|
|
|
(9,988 |
) |
|
|
(9,988 |
) |
|
|
(9,988 |
) |
|
Other comprehensive earnings-unrealized loss on
investments net of tax
|
|
|
|
|
|
|
(13,345 |
) |
|
|
(13,345 |
) |
|
|
(13,345 |
) |
|
Net distribution of capital
|
|
|
(16,390 |
) |
|
|
|
|
|
|
(16,390 |
) |
|
|
|
|
|
Dividend to FNF
|
|
|
(408,900 |
) |
|
|
|
|
|
|
(408,900 |
) |
|
|
|
|
|
Net earnings
|
|
|
683,325 |
|
|
|
|
|
|
|
683,325 |
|
|
|
683,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
2,481,038 |
|
|
|
(11,852 |
) |
|
|
2,469,186 |
|
|
|
659,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss-minimum pension liability
adjustment net of tax
|
|
|
|
|
|
|
(11,764 |
) |
|
|
(11,764 |
) |
|
|
(11,764 |
) |
|
Other comprehensive earnings-unrealized loss on
investments net of tax
|
|
|
|
|
|
|
(18,684 |
) |
|
|
(18,684 |
) |
|
|
(18,684 |
) |
|
Net contribution of capital
|
|
|
117,854 |
|
|
|
|
|
|
|
117,854 |
|
|
|
|
|
|
Dividend to FNF
|
|
|
(438,000 |
) |
|
|
|
|
|
|
(438,000 |
) |
|
|
|
|
|
Net earnings
|
|
|
558,164 |
|
|
|
|
|
|
|
558,164 |
|
|
|
558,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
2,719,056 |
|
|
|
(42,300 |
) |
|
$ |
2,676,756 |
|
|
$ |
527,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements.
F-5
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
558,164 |
|
|
$ |
683,325 |
|
|
$ |
491,770 |
|
|
Adjustment to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
95,718 |
|
|
|
79,077 |
|
|
|
53,042 |
|
|
|
Net increase in reserve for claim losses
|
|
|
6,088 |
|
|
|
38,158 |
|
|
|
6,920 |
|
|
|
Gain on sales of investments and other assets
|
|
|
(22,948 |
) |
|
|
(101,839 |
) |
|
|
(584 |
) |
|
|
Stock-based compensation cost
|
|
|
5,418 |
|
|
|
4,864 |
|
|
|
|
|
Changes in assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease (increase) in secured trust deposits
|
|
|
1,514 |
|
|
|
11,647 |
|
|
|
(5,129 |
) |
|
|
Net increase in trade receivables
|
|
|
(11,241 |
) |
|
|
(7,630 |
) |
|
|
(35,000 |
) |
|
|
Net decrease in prepaid expenses and other assets
|
|
|
18,295 |
|
|
|
58,829 |
|
|
|
105,916 |
|
|
|
Net (decrease) increase in accounts payable, accrued liabilities
and minority interests
|
|
|
(12,309 |
) |
|
|
62,735 |
|
|
|
112,437 |
|
|
|
Net increase in income taxes
|
|
|
7,099 |
|
|
|
23,462 |
|
|
|
21,928 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
645,798 |
|
|
|
852,628 |
|
|
|
751,300 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of investment securities available for sale
|
|
|
2,579,401 |
|
|
|
1,849,862 |
|
|
|
1,061,356 |
|
|
Proceeds from maturities of investment securities available for
sale
|
|
|
204,783 |
|
|
|
318,302 |
|
|
|
161,538 |
|
|
Proceeds from sales of real estate, property and equipment
|
|
|
5,620 |
|
|
|
5,141 |
|
|
|
2,765 |
|
|
Collections of notes receivable
|
|
|
7,788 |
|
|
|
15,480 |
|
|
|
22,764 |
|
|
Additions to title plants
|
|
|
(6,533 |
) |
|
|
(1,105 |
) |
|
|
(569 |
) |
|
Additions to property and equipment
|
|
|
(70,636 |
) |
|
|
(80,418 |
) |
|
|
(64,093 |
) |
|
Additions to capitalized software
|
|
|
(415 |
) |
|
|
(16,133 |
) |
|
|
(35,048 |
) |
|
Additions to notes receivable
|
|
|
(5,414 |
) |
|
|
(3,665 |
) |
|
|
|
|
|
Purchases of investment securities available for sale
|
|
|
(3,244,321 |
) |
|
|
(2,184,319 |
) |
|
|
(1,387,840 |
) |
|
Net proceeds (purchases) of short-term investment activities
|
|
|
277,736 |
|
|
|
(76,192 |
) |
|
|
(288,788 |
) |
|
Acquisition of businesses, net of cash acquired
|
|
|
(115,712 |
) |
|
|
(8,352 |
) |
|
|
10,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(367,703 |
) |
|
|
(181,399 |
) |
|
|
(517,282 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
132 |
|
|
|
238 |
|
|
|
21,063 |
|
|
Debt service payments
|
|
|
(33,367 |
) |
|
|
(56,062 |
) |
|
|
(89,365 |
) |
|
Net contribution from (distribution to) parent
|
|
|
101,639 |
|
|
|
(180,118 |
) |
|
|
2,510 |
|
|
Dividends paid
|
|
|
(438,000 |
) |
|
|
(408,900 |
) |
|
|
(153,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(369,596 |
) |
|
|
(644,842 |
) |
|
|
(219,492 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents, excluding
pledged cash related to secured trust deposits
|
|
|
(91,501 |
) |
|
|
26,387 |
|
|
|
14,526 |
|
|
Cash and cash equivalents, excluding pledged cash related to
secured trust deposits, at beginning of year
|
|
|
164,715 |
|
|
|
138,328 |
|
|
|
123,802 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, excluding pledged cash related to
secured trust deposits, at end of year
|
|
$ |
73,214 |
|
|
$ |
164,715 |
|
|
$ |
138,328 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements.
F-6
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
|
|
A. |
Summary of Significant Accounting Policies |
The following describes the significant accounting policies of
Fidelity National Title Group, Inc. (FNT) and
its subsidiaries (collectively, the Company) which
have been followed in preparing the accompanying Combined
Financial Statements.
Description of
Business
On September 26, 2005, Fidelity National Financial, Inc.
(FNF) declared a dividend to its stockholders of record as of
October 6, 2005 which will result in a distribution of
17.5% of its interest in FNT which represents the title
insurance segment of FNF.
FNT is currently a wholly-owned subsidiary of FNF. On
September 26, 2005 FNF received all regulatory approvals
required to contribute to FNT, all of the legal entities that
are combined for presentation in these historical financial
statements. FNF will distribute to its current stockholders
0.175 shares of FNT Class A common stock for each
share of FNF common stock held on the record date and FNF will
beneficially own 100% of the FNT Class B common stock
representing 82.5% of the Companys outstanding common
stock. FNT Class B common stock will have ten votes per
share while FNT Class A common stock will have one vote per
share. Based on FNF having approximately 173 million
outstanding shares, there will be approximately
30.3 million Class A common shares outstanding and
142.7 million Class B common shares outstanding.
Following the distribution FNF will control 97.9% of the voting
rights of FNT.
Prior to the distribution the Company intends to issue two
$250 million intercompany notes payable to FNF, with terms
that mirror FNFs existing $250 million 7.30% public
debentures due in August 2011 and $250 million 5.25% public
debentures due in March 2013. Proceeds from the issuance of the
2011 public debentures were used by FNF to repay debt incurred
in connection with the acquisition of the Companys
subsidiary, Chicago Title, and the proceeds from the 2013 public
debentures were used for general corporate purposes. Following
the issuance of the intercompany notes, the Company may make an
exchange offer in which the Company would offer to exchange the
outstanding FNF notes for notes the Company would issue having
substantially the same terms and deliver the FNF notes received
to FNF to reduce the debt under the intercompany notes. The
Company also plans to enter into a credit agreement in the
amount of between $300 million and $400 million. The
Company currently anticipates that prior to the distribution it
would borrow $150 million under this facility and pay it to
FNF in satisfaction of a $150 million intercompany note
issued by one of the Companys subsidiaries to FNF in
August 2005. FNF also currently owns other operating businesses,
including Fidelity National Information Services, Inc.
(FIS), which provides software and servicing
solutions for the financial services and real estate industries,
and Fidelity National Insurance Company (FNIC),
which operates various specialty lines of insurance, including
flood, homeowners, automobile and certain niche personal lines.
Fidelity National Title Group, Inc., through its principal
subsidiaries, is the largest title insurance company in the
United States. The Companys title insurance
underwriters Fidelity National Title, Chicago Title,
Ticor Title, Security Union Title and Alamo Title
together issue all of the Companys title insurance
policies in 49 states, the District of Columbia, Guam,
Puerto Rico, the U.S. Virgin Islands, and in Canada and
Mexico. The Company operates its business through a single
segment, title and escrow, and does not generate significant
revenue from outside the United States. Although the Company
earns title premiums on residential and commercial sale and
refinance real estate transactions, the Company does not
separately track its revenues from these various types of
transactions.
Principles of Consolidation
and Basis of Presentation
The accompanying Combined Financial Statements include those
assets, liabilities, revenues and expenses directly attributable
to the Companys operations and allocations of certain FNF
corporate assets, liabilities and expenses to the Company. These
amounts have been allocated to the Company on a basis that is
considered by management to reflect most fairly the utilization
of services provided to or the benefit
F-7
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
obtained by the Company. Management believes the methods used to
allocate these amounts are reasonable. All intercompany profits,
transactions and balances between the combined entities have
been eliminated. The Companys investments in
non-majority-owned partnerships and affiliates are accounted for
on the equity method. The Company records minority interest
liabilities related to minority shareholders interest in
consolidated affiliates. All dollars presented herein are in
thousands of dollars unless otherwise noted.
Unaudited proforma net
earnings per share
Unaudited proforma net earnings per share is calculated using
the number of outstanding shares of FNF as of June 30, 2005
because upon completion of the distribution the number of our
outstanding shares of common stock will equal the number of FNF
shares outstanding on the date of distribution.
Transactions with Related
Parties
The Companys historical financial statements reflect
transactions with FNF and those being conducted by another FNF
subsidiary, Fidelity National Information Services, Inc.
(FIS).
A detail of related party items included in revenues is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Agency title premiums earned
|
|
$ |
106.3 |
|
|
$ |
284.9 |
|
|
$ |
53.0 |
|
Rental income earned
|
|
|
8.4 |
|
|
|
7.3 |
|
|
|
6.7 |
|
Interest revenue
|
|
|
1.0 |
|
|
|
0.7 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
115.7 |
|
|
$ |
292.9 |
|
|
$ |
60.2 |
|
A detail of related party items included in operating expenses
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency title commissions
|
|
$ |
93.6 |
|
|
$ |
250.7 |
|
|
$ |
46.7 |
|
Data processing costs
|
|
|
56.6 |
|
|
|
12.4 |
|
|
|
|
|
Data processing costs allocated
|
|
|
|
|
|
|
(5.4 |
) |
|
|
(5.8 |
) |
Corporate services allocated
|
|
|
(84.5 |
) |
|
|
(48.7 |
) |
|
|
(28.6 |
) |
Title insurance information expense
|
|
|
28.6 |
|
|
|
28.2 |
|
|
|
24.3 |
|
Other real-estate related information
|
|
$ |
9.9 |
|
|
$ |
11.4 |
|
|
$ |
3.7 |
|
Software expense
|
|
|
5.8 |
|
|
|
2.6 |
|
|
|
1.3 |
|
Rental expense
|
|
|
2.8 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$ |
112.8 |
|
|
$ |
251.7 |
|
|
$ |
41.6 |
|
|
|
|
|
|
|
|
|
|
|
Total pretax impact of related party activity
|
|
$ |
2.9 |
|
|
$ |
41.2 |
|
|
$ |
18.6 |
|
|
|
|
|
|
|
|
|
|
|
Included as a reduction of expenses for all periods are payments
from FNF and FIS relating to the provision by FNT of corporate
services to FNF and to FIS and its subsidiaries. These corporate
services include accounting, internal audit and treasury,
payroll, human resources, tax, legal, purchasing, risk
management, mergers & acquisitions and general
management. For the years ended December 31, 2004, 2003 and
2002, our expenses were reduced by $9.4 million,
$9.2 million and $7.0 million, respectively, related
to the provision of corporate services by the Company to FNF and
its subsidiaries (other than FIS and its subsidiaries). For the
years ended December 31, 2004, 2003 and 2002, our expenses
were reduced by $75.1 million, $39.5 million and
$21.6 million, respectively, related to the provision of
corporate services by us to FIS and its subsidiaries.
The Company does business with the lender outsourcing solutions
segment of FIS, which includes title agency functions whereby an
FIS subsidiary acts as the title agent in the issuance of title
insurance policies by a title insurance underwriter owned by the
Company and in connection with certain trustee sales
F-8
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
guarantees, a form of title insurance issued as part of the
foreclosure process. As a result, the Companys title
insurance subsidiaries pay commissions on title insurance
policies sold through FIS. For 2004, 2003 and 2002 these FIS
operations generated $106.3 million, $284.9 million
and $53.0 million of revenues for the Company, which the
Company records as agency title premiums. The Company paid FIS
commissions at the rate of 88% of premiums generated, equal to
$93.6 million, $250.7 million and $46.7 million
for 2004, 2003 and 2002, respectively.
The Company also has historically leased equipment to a
subsidiary of FIS. Revenue relating to these leases was
$8.4 million, $7.3 million and $6.7 million in
2004, 2003 and 2002, respectively.
The title plant assets of several of the Companys title
insurance subsidiaries are managed or maintained by a subsidiary
of FIS. The underlying title plant information and software
continues to be owned by each of the Companys title
insurance underwriters, but FIS manages and updates the
information in return for either (i) a cash management fee
or (ii) the right to sell that information to title
insurers, including title insurance underwriters that the
Company owns and other third party customers. In most cases, FIS
is responsible for keeping the title plant assets current and
fully functioning, for which the Company pays a fee to FIS based
on the Companys use of, or access to, the title plant. For
2004, 2003 and 2002 the Companys payments to FIS under
these arrangements were $28.9 million, $28.2 million
and $24.3 million, respectively. In addition, since
November 2004, each applicable title insurance underwriter in
turn has received a royalty on sales of access to its title
plant assets. For the year ended December 31, 2004, the
revenues from these title plant royalties were
$0.3 million. The Company has also entered into agreements
with FIS that permit FIS and certain of its subsidiaries to
access and use (but not to re-sell) the starters databases and
back plant databases of the Companys title insurance
subsidiaries. Starters databases are the Companys
databases of previously issued title policies and back plant
databases contain historical records relating to title that are
not regularly updated. Each of the Companys applicable
title insurance subsidiaries receives a fee for any access to or
use of its starters and back plant databases by FIS. The Company
also does business with additional entities within the
information services segment of FIS that provide real estate
information to the Companys operations. The Company
recorded expenses of $9.9 million, $11.4 million and
$3.7 million in 2004, 2003 and 2002, respectively.
Included in the Companys expenses for 2004 and 2003 are
amounts paid to a subsidiary of FIS for the provision by FIS to
FNT of IT infrastructure support, data center management and
related IT support services. For 2004 and 2003, the amounts
included in the Companys expenses to FIS for these
services were $56.6 million and $12.4 million,
respectively. Prior to September 2003, the Company performed
these services itself and provided them to FIS. During 2003 and
2002, FNT received payments from FIS of $5.4 million and
$5.8 million relating to these services that offset the
Companys other operating expenses. In addition, we
incurred software expenses relating to an agreement with a
subsidiary of FIS that amounted to expense of $5.8 million,
$2.6 million, and $1.3 million in 2004, 2003, and
2002, respectively.
The Company believes the amounts earned by the Company or
charged to the Company under each of the foregoing arrangements
are fair and reasonable. Although the commission rate paid on
the title insurance premiums written by the FIS title agencies
was set without negotiation, the Company believes the
commissions earned are consistent with the average rate that
would be available to a third party title agent given the amount
and the geographic distribution of the business produced and the
low risk of loss profile of the business placed. In connection
with the title plant management and maintenance services
provided by FIS, the Company believe that the fees charged to
the Company by FIS are at approximately the same rates that FIS
and other similar vendors charge unaffiliated title insurers.
The IT infrastructure support and data center management
services provided to the Company by FIS is priced within the
range of prices that FIS offers to its unaffiliated third party
customers for the same types of services. However, the amounts
the Company earned or were charged under these arrangements were
not negotiated at arms-length, and may not represent the
terms that the Company might have obtained from an unrelated
third party.
F-9
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
Amounts Due from FNF are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31 | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In millions) | |
Notes receivable from FNF
|
|
$ |
22.8 |
|
|
$ |
26.6 |
|
Taxes due from FNF
|
|
|
63.6 |
|
|
|
44.1 |
|
The Company has notes receivable from FNF relating to agreements
between its title underwriters and FNF. These notes amounted to
$22.8 million and $26.6 million at December 31,
2004 and 2003, respectively. As of December 31, 2004, these
notes bear interest at 2.66%. The Company earned interest
revenue of $1.0 million, $0.7 million and
$0.5 million relating to these notes during 2004, 2003 and
2002, respectively. All other intercompany payables and
receivables relating to transactions between the Company and FNF
and its other subsidiaries are considered contributed to capital
in these historical financial statements. These transactions
consist of receivables and payables arising through intercompany
transactions in the normal course of business, such as those
noted above.
The Company is included in FNFs consolidated tax returns
and thus any income tax liability or receivable is due to/from
FNF. As of December 31, 2004 and 2003, the Company had
recorded a receivable from FNF relating to overpayment of taxes
of $63.6 million and $44.1 million, respectively.
Our financial statements for 2004 and 2003 reflect allocations
for a lease of office space to us for our corporate headquarters
and business operations. In connection with the distribution, we
will enter into a lease with FIS, pursuant to which FIS will
lease office space to us for our corporate headquarters and
business operations.
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
Companys 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 purchased 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
are 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
F-10
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
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.
|
|
|
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 Combined 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 Companys Combined 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 Combined Balance Sheets for
trade and notes receivables approximate their fair value.
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. 142 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 completed
annual goodwill impairment tests in the fourth quarter of each
respective year using a September 30 measurement date, and
has determined fair value were in excess of carrying value.
Accordingly, no goodwill impairments have been recorded.
The Company has other intangible assets which consist primarily
of customer relationships and trademarks which 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. Trademarks are considered intangible assets
with indefinite lives and are reviewed for impairment at least
annually in accordance with SFAS No. 142.
At December 31, 2004 and December 31, 2003, included
in prepaid and other assets on the combined balance sheets were
other intangible assets of $61.5 million, less accumulated
amortization of $22.7 million, and $39.5 million, less
accumulated amortization of $8.1 million, respectively.
Amortization expense relating to other intangible assets was
$13.0 million, $1.9 million and $0.7 million for
the years ended 2004, 2003 and 2002, respectively.
F-11
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED 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 three-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 three to seven years. Capitalized computer
software development costs are accounted for in accordance with
SOP No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. At the
beginning of application development, 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 application development, 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 when ready for use for internally developed software and
the date of purchase for purchased software. The capitalized
cost of internally developed capitalized software is amortized
on a straight-line basis over its estimated useful life,
generally seven years.
At December 31, 2004 and December 31, 2003, included
in prepaid and other assets on the combined balance sheets were
capitalized software costs of $101.0 million, less
accumulated amortization of $23.7 million, and
$93.3 million, less accumulated amortization of
$7.7 million, respectively. Amortization expense relating
to computer software was $17.2 million, $14.4 million
and $2.5 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 accumulated
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 Companys reserve for claim losses includes known
claims for title 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 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
F-12
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
against third parties who are responsible for any loss under the
title insurance policy under rights of subrogation.
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 Companys Combined 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 Companys operating results have been historically
included in FNFs Consolidated U.S. Federal and State
income tax returns. The provision for income taxes in the
Combined Statements of Earnings is made at rates consistent with
what the Company would have paid as a stand-alone taxable
entity. The Company recognizes deferred tax assets and
liabilities for temporary differences between the financial
reporting basis and the tax basis of the Companys 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 a limited number of situations, the Company limits its
maximum loss exposure by reinsuring certain risks with other
insurers. The Company also earns a small amount of additional
income, which is reflected in the Companys direct
premiums, 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.
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, whereas premium revenues from agency
operations and agency commissions include an accrual based on
estimates of the volume of transactions that have closed in a
particular period for which premiums have not yet been reported
to us. The accrual for agency premiums is necessary because of
the lag between the closing of these transactions and the
reporting of these policies to us by the agent.
|
|
|
Stock-Based Compensation Plans |
Certain FNT employees are participants in FNFs stock-based
compensation plans, which provide for the granting of incentive
and nonqualified stock options, restricted stock and other
stock-based incentive awards for officers and key employees. The
amounts below are based on allocation of FNFs stock
compensation expense relating to awards given to FNT employees
during the historical period.
F-13
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
The Company accounts for stock-based compensation using the fair
value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation (SFAS No. 123) 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. The Company has
provided for stock compensation expense of $5.4 million and
$4.9 million for the years ended December 31, 2004 and
2003, respectively, which is included in personnel costs in the
Combined Statements of Earnings, as a result of the adoption of
SFAS No. 148.
The following table illustrates the effect on net earnings for
the years ended December 31, 2004, 2003 and 2002 as if the
Company had applied the fair value recognition provisions of
SFAS No. 123 to all awards held by FNT employees who are
plan participants (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net earnings, as reported
|
|
$ |
558,164 |
|
|
$ |
683,325 |
|
|
$ |
491,770 |
|
Add: Stock-based compensation expense included in reported net
earnings, net of related tax effects
|
|
|
3,360 |
|
|
|
3,016 |
|
|
|
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards, net of
related tax effects
|
|
|
(4,268 |
) |
|
|
(8,124 |
) |
|
|
(12,071 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings
|
|
$ |
557,256 |
|
|
$ |
678,217 |
|
|
$ |
479,699 |
|
|
|
|
|
|
|
|
|
|
|
The preparation of these Combined 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 Combined Financial Statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. Acquisitions
The results of operations and financial position of the entities
acquired during any year are included in the Combined 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 identifiable assets
and liabilities and the purchase price paid is recorded as
goodwill. Proforma disclosures for acquisitions is considered
immaterial to the results of operations for 2004, 2003, and 2002.
|
|
|
American Pioneer Title Insurance Company |
On March 22, 2004, FNF 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.
F-14
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
APTIC operates under the Companys Ticor Title brand. The
Company recorded approximately $34.5 million in goodwill
and approximately $10.6 in other amortizable intangible assets
relating to this transaction.
On October 9, 2003, FNF acquired LandCanada, a provider of
title insurance and related mortgage document production in
Canada, for $17.6 million in cash. The Company recorded
approximately $8.7 million in goodwill relating to this
transaction.
On March 31, 2003, FNF acquired Key Title Company
(Key Title) for $22.5 million in cash. Key
Title operates in 12 counties in the state of Oregon. The
Company recorded approximately $2.0 million in goodwill
relating to this transaction.
ANFI, Inc.
On March 26, 2003, FNF merged with ANFI, Inc.
(ANFI), which is predominately a California
underwritten title company, and ANFI became a wholly-owned
subsidiary of FNF. In the merger, each share of ANFI common
stock (other than ANFI common stock FNF already owned) was
exchanged for 0.454 shares of the Companys common
stock. FNF issued 5,183,103 shares of its common stock
worth approximately $136.7 million to the ANFI stockholders
in the merger, net of cash acquired. The Company recorded
approximately $83.6 million in goodwill and
$33.1 million in other amortizable intangible assets
relating to this transaction.
Acquisition of Micro General
Corporation
On July 9, 2002, FNF acquired the shares it did not already
own of Micro General, the Companys majority-owned public
subsidiary, through the issuance of stock of a separate publicly
traded majority-owned subsidiary of FNF. The value of these
shares was approximately $140.4 million.
C. Investments
The carrying amounts and fair values of the Companys fixed
maturity securities at December 31, 2004 and 2003 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
|
| |
|
|
|
|
Gross | |
|
Gross | |
|
|
|
|
Carrying | |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
|
|
|
Value | |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Fixed maturity investments (available for sale):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$ |
707,007 |
|
|
$ |
708,885 |
|
|
$ |
1,058 |
|
|
$ |
(2,936 |
) |
|
$ |
707,007 |
|
|
States and political subdivisions
|
|
|
991,696 |
|
|
|
982,794 |
|
|
|
11,975 |
|
|
|
(3,073 |
) |
|
|
991,696 |
|
|
Corporate debt securities
|
|
|
388,429 |
|
|
|
392,518 |
|
|
|
320 |
|
|
|
(4,409 |
) |
|
|
388,429 |
|
|
Foreign government bonds
|
|
|
4,189 |
|
|
|
4,178 |
|
|
|
11 |
|
|
|
|
|
|
|
4,189 |
|
|
Mortgage-backed securities
|
|
|
83,496 |
|
|
|
83,311 |
|
|
|
354 |
|
|
|
(169 |
) |
|
|
83,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,174,817 |
|
|
$ |
2,171,686 |
|
|
$ |
13,718 |
|
|
$ |
(10,587 |
) |
|
$ |
2,174,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003 | |
|
|
| |
|
|
|
|
Gross | |
|
Gross | |
|
|
|
|
Carrying | |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
|
|
|
Value | |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Fixed maturity investments (available for sale):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$ |
495,665 |
|
|
$ |
488,694 |
|
|
$ |
7,082 |
|
|
$ |
(111 |
) |
|
$ |
495,665 |
|
|
States and political subdivisions
|
|
|
787,385 |
|
|
|
767,459 |
|
|
|
20,091 |
|
|
|
(165 |
) |
|
|
787,385 |
|
|
Corporate debt securities
|
|
|
269,555 |
|
|
|
268,596 |
|
|
|
2,091 |
|
|
|
(1,132 |
) |
|
|
269,555 |
|
|
Foreign government bonds
|
|
|
3,535 |
|
|
|
3,522 |
|
|
|
13 |
|
|
|
|
|
|
|
3,535 |
|
|
Mortgage-backed securities
|
|
|
59,564 |
|
|
|
58,294 |
|
|
|
1,271 |
|
|
|
(1 |
) |
|
|
59,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,615,704 |
|
|
$ |
1,586,565 |
|
|
$ |
30,548 |
|
|
$ |
(1,409 |
) |
|
$ |
1,615,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in unrealized gains (losses) on fixed maturities for
the years ended December 31, 2004, 2003, and 2002 was
$(26.1) million, $(20.6) million and
$25.6 million, respectively.
The following table presents certain information regarding
contractual maturities of the Companys fixed maturity
securities at December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
|
| |
|
|
Amortized | |
|
|
Maturity |
|
Cost | |
|
% of Total | |
|
Fair Value | |
|
% of Total | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
One year or less
|
|
$ |
342,855 |
|
|
|
15.8 |
% |
|
$ |
343,171 |
|
|
|
15.8 |
% |
After one year through five years
|
|
|
1,083,385 |
|
|
|
49.9 |
|
|
|
1,084,365 |
|
|
|
49.9 |
|
After five years through ten years
|
|
|
405,776 |
|
|
|
18.7 |
|
|
|
407,356 |
|
|
|
18.7 |
|
After ten years
|
|
|
256,359 |
|
|
|
11.8 |
|
|
|
256,429 |
|
|
|
11.8 |
|
Mortgage-backed securities
|
|
|
83,311 |
|
|
|
3.8 |
|
|
|
83,496 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,171,686 |
|
|
|
100.0 |
% |
|
$ |
2,174,817 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to call
|
|
$ |
261,289 |
|
|
|
12.0 |
% |
|
$ |
263,741 |
|
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities valued at approximately
$71.9 million and $64.6 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 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Banks, trust and insurance companies
|
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
1 |
|
|
$ |
5 |
|
Industrial, miscellaneous and all other
|
|
|
108,573 |
|
|
|
115,065 |
|
|
|
54,400 |
|
|
|
65,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
108,574 |
|
|
$ |
115,070 |
|
|
$ |
54,401 |
|
|
$ |
65,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
The carrying value of the Companys investment in equity
securities is fair value. As of December 31, 2004, gross
unrealized gains and gross unrealized losses on equity
securities were $9.8 million and $3.3 million,
respectively. Gross unrealized gains and gross unrealized losses
on equity securities were $11.3 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
$(4.5) million, $(0.8) million and $16.0 million,
respectively.
Interest and investment income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash and cash equivalents
|
|
$ |
1,909 |
|
|
$ |
1,513 |
|
|
$ |
1,332 |
|
Fixed maturity securities
|
|
|
55,817 |
|
|
|
45,973 |
|
|
|
55,502 |
|
Equity securities
|
|
|
(44 |
) |
|
|
1,749 |
|
|
|
1,635 |
|
Short-term investments
|
|
|
5,435 |
|
|
|
5,594 |
|
|
|
10,624 |
|
Notes receivable
|
|
|
1,768 |
|
|
|
1,879 |
|
|
|
3,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
64,885 |
|
|
$ |
56,708 |
|
|
$ |
72,305 |
|
|
|
|
|
|
|
|
|
|
|
Net realized gains amounted to $22.9 million,
$101.8 million and $0.5 million for the years ended
December 31, 2004, 2003 and 2002, respectively. Included in
2003 net realized gains is a $51.7 million realized
gain as a result of InterActive Corps acquisition of
Lending Tree Inc. and the subsequent sale of the Companys
InterActive Corp common stock and a realized gain of
$21.8 million on the sale of New Century Financial
Corporation common stock. Included in 2002 net realized
gains are other-than-temporary impairment losses of
$5.1 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 $8.6 million,
$17.6 million and $26.1 million, respectively; and
gross realized losses were $0.3 million, $2.2 million
and $7.7 million, respectively. Gross proceeds from the
sale of fixed maturity securities considered available for sale
amounted to $2,063.5 million, $724.4 million and
$1,434.1 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 $30.6 million, $98.9 million
and $18.5 million, respectively; and gross realized losses
were $23.4 million, $7.8 million and
$49.9 million, respectively. Gross proceeds from the sale
of equity securities amounted to $622.9 million,
$760.9 million and $342.7 million during the years
ended December 31, 2004, 2003 and 2002, respectively.
F-17
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
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 | |
2004 |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
U.S. government and agencies
|
|
$ |
576,655 |
|
|
$ |
(2,725 |
) |
|
$ |
40,517 |
|
|
$ |
(211 |
) |
|
$ |
617,172 |
|
|
$ |
(2,936 |
) |
States and political subdivisions
|
|
|
286,222 |
|
|
|
(2,609 |
) |
|
|
39,019 |
|
|
|
(462 |
) |
|
|
325,241 |
|
|
|
(3,071 |
) |
Mortgage-backed securities
|
|
|
22,309 |
|
|
|
(170 |
) |
|
|
|
|
|
|
|
|
|
|
22,309 |
|
|
|
(170 |
) |
Corporate debt securities
|
|
|
242,147 |
|
|
|
(2,615 |
) |
|
|
114,808 |
|
|
|
(1,794 |
) |
|
|
356,955 |
|
|
|
(4,409 |
) |
Equity securities
|
|
|
64,739 |
|
|
|
(1,998 |
) |
|
|
33,554 |
|
|
|
(1,332 |
) |
|
|
98,293 |
|
|
|
(3,330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporary impaired securities
|
|
$ |
1,192,072 |
|
|
$ |
(10,117 |
) |
|
$ |
227,898 |
|
|
$ |
(3,799 |
) |
|
$ |
1,419,970 |
|
|
$ |
(13,916 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months | |
|
12 Months or Longer | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
|
Unrealized | |
|
|
|
Unrealized | |
|
|
|
Unrealized | |
2003 |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
U.S. government and agencies
|
|
$ |
81,137 |
|
|
$ |
(111 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
81,137 |
|
|
$ |
(111 |
) |
States and political subdivisions
|
|
|
40,258 |
|
|
|
(165 |
) |
|
|
|
|
|
|
|
|
|
|
40,258 |
|
|
|
(165 |
) |
Mortgage-backed securities
|
|
|
2,782 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
2,782 |
|
|
|
(1 |
) |
Corporate debt securities
|
|
|
121,096 |
|
|
|
(1,121 |
) |
|
|
2,712 |
|
|
|
(11 |
) |
|
|
123,808 |
|
|
|
(1,132 |
) |
Equity securities
|
|
|
33,196 |
|
|
|
(273 |
) |
|
|
|
|
|
|
(73 |
) |
|
|
33,196 |
|
|
|
(346 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporary impaired securities
|
|
$ |
278,469 |
|
|
$ |
(1,671 |
) |
|
$ |
2,712 |
|
|
$ |
(84 |
) |
|
$ |
281,181 |
|
|
$ |
(1,755 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2004, the Company incurred an impairment charge relating
to two investments that it determined to be other than
temporarily impaired, which resulted in a charge of
$6.8 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.
F-18
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
|
|
D. |
Property and Equipment |
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Land
|
|
$ |
3,968 |
|
|
$ |
4,904 |
|
Buildings
|
|
|
22,726 |
|
|
|
26,399 |
|
Leasehold improvements
|
|
|
71,475 |
|
|
|
66,042 |
|
Furniture, fixtures and equipment
|
|
|
348,229 |
|
|
|
301,152 |
|
|
|
|
|
|
|
|
|
|
|
446,398 |
|
|
|
398,497 |
|
Accumulated depreciation and amortization
|
|
|
(281,482 |
) |
|
|
(237,129 |
) |
|
|
|
|
|
|
|
|
|
$ |
164,916 |
|
|
$ |
161,368 |
|
|
|
|
|
|
|
|
Goodwill consists of the following:
|
|
|
|
|
Balance, December 31, 2002
|
|
$ |
811,611 |
|
Goodwill acquired during the year
|
|
|
108,667 |
|
|
|
|
|
Balance, December 31, 2003
|
|
|
920,278 |
|
Goodwill acquired during the year
|
|
|
39,322 |
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
959,600 |
|
|
|
|
|
|
|
F. |
Accounts Payable and Accrued Liabilities |
Accounts payable and accrued liabilities consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(Dollars in thousands) | |
Salaries and incentives
|
|
$ |
186,057 |
|
|
$ |
164,620 |
|
Accrued benefits
|
|
|
218,121 |
|
|
|
165,127 |
|
Trade accounts payable
|
|
|
33,958 |
|
|
|
80,968 |
|
Accrued recording fees and transfer taxes
|
|
|
48,827 |
|
|
|
54,045 |
|
Accrued premium taxes
|
|
|
24,343 |
|
|
|
34,008 |
|
Other accrued liabilities
|
|
|
92,399 |
|
|
|
92,767 |
|
|
|
|
|
|
|
|
|
|
$ |
603,705 |
|
|
$ |
591,535 |
|
|
|
|
|
|
|
|
Notes payable were $22.4 million and $54.3 million at
December 31, 2004 and 2003, respectively. The majority of
these outstanding notes are lease-backed and other notes,
secured by security interests in certain leases and underlying
equipment with interest due monthly at various fixed interest
rates ranging from 5.65% to 9.0%, due at various dates in 2005.
F-19
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Current
|
|
$ |
298,737 |
|
|
$ |
311,435 |
|
|
$ |
266,996 |
|
Deferred
|
|
|
24,861 |
|
|
|
96,301 |
|
|
|
9,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
323,598 |
|
|
$ |
407,736 |
|
|
$ |
276,970 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense for the years ended December 31
was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Statement of earnings
|
|
$ |
323,598 |
|
|
$ |
407,736 |
|
|
$ |
276,970 |
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
(6,909 |
) |
|
|
(6,401 |
) |
|
|
(10,170 |
) |
Unrealized gains on investment securities, net
|
|
|
(10,786 |
) |
|
|
(7,939 |
) |
|
|
15,121 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) allocated to other
comprehensive income
|
|
|
(17,695 |
) |
|
|
(14,340 |
) |
|
|
4,951 |
|
|
|
|
|
|
|
|
|
|
|
Total income taxes
|
|
$ |
305,903 |
|
|
$ |
393,396 |
|
|
$ |
281,921 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the federal statutory rate to the
Companys 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
|
|
|
(0.8 |
) |
|
|
(0.9 |
) |
|
|
(0.9 |
) |
Tax exempt interest income
|
|
|
(1.0 |
) |
|
|
(0.6 |
) |
|
|
(0.9 |
) |
State income taxes
|
|
|
2.3 |
|
|
|
2.5 |
|
|
|
2.6 |
|
Non-deductible expenses
|
|
|
0.6 |
|
|
|
0.5 |
|
|
|
0.1 |
|
Other
|
|
|
0.5 |
|
|
|
0.8 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36.6 |
% |
|
|
37.3 |
% |
|
|
36.0 |
% |
|
|
|
|
|
|
|
|
|
|
The significant components of deferred tax assets and
liabilities at December 31, 2004 and 2003 consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
Employee benefit accruals
|
|
$ |
68,278 |
|
|
$ |
43,011 |
|
|
Pension
|
|
|
24,318 |
|
|
|
25,294 |
|
|
Accrued liabilities
|
|
|
8,474 |
|
|
|
10,480 |
|
|
State income taxes
|
|
|
10,793 |
|
|
|
12,915 |
|
|
Other
|
|
|
8,777 |
|
|
|
12,031 |
|
|
Lease accounting
|
|
|
|
|
|
|
3,223 |
|
|
Insurance reserve basis differences
|
|
|
|
|
|
|
22,051 |
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
120,640 |
|
|
|
129,005 |
|
|
|
|
|
|
|
|
F-20
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
|
Amortization of goodwill and intangible assets
|
|
|
(27,040 |
) |
|
|
(62,697 |
) |
|
Title plant
|
|
|
(58,141 |
) |
|
|
(54,641 |
) |
|
Other
|
|
|
(18,973 |
) |
|
|
(32,698 |
) |
|
Depreciation
|
|
|
(22,083 |
) |
|
|
(20,143 |
) |
|
Insurance reserve basis differences
|
|
|
(26,589 |
) |
|
|
|
|
|
Investment securities
|
|
|
(8,395 |
) |
|
|
(10,665 |
) |
|
Bad debts
|
|
|
(10,667 |
) |
|
|
(9,036 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(171,888 |
) |
|
|
(189,880 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$ |
(51,248 |
) |
|
$ |
(60,875 |
) |
|
|
|
|
|
|
|
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 the
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
managements assessment of the amount of deferred tax asset
that is realizable.
As of January 1, 2005 the Internal Revenue Service has
selected FNF 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 FNFs 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
Companys financial position or results of operations.
|
|
I. |
Summary of Reserve for Claim Losses |
A summary of the reserve for claim losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Beginning balance
|
|
$ |
932,439 |
|
|
$ |
887,973 |
|
|
$ |
881,053 |
|
|
Reserves assumed(1)
|
|
|
38,597 |
|
|
|
4,203 |
|
|
|
|
|
|
Claim loss provision related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
275,982 |
|
|
|
237,919 |
|
|
|
207,290 |
|
|
|
Prior years
|
|
|
(16,580 |
) |
|
|
10,915 |
|
|
|
(31,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total claim loss provision
|
|
|
259,402 |
|
|
|
248,834 |
|
|
|
175,963 |
|
|
Claims paid, net of recoupments related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(19,095 |
) |
|
|
(11,591 |
) |
|
|
(10,058 |
) |
|
|
Prior years
|
|
|
(230,597 |
) |
|
|
(196,980 |
) |
|
|
(158,985 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total claims paid, net of recoupments
|
|
|
(249,692 |
) |
|
|
(208,571 |
) |
|
|
(169,043 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$ |
980,746 |
|
|
$ |
932,439 |
|
|
$ |
887,973 |
|
|
|
|
|
|
|
|
|
|
|
Provision for claim losses as a percentage of title premiums
|
|
|
5.5 |
% |
|
|
5.3 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
F-21
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
|
|
(1) |
The Company assumed APTICs outstanding reserve for claim
losses in connection with its acquisition in 2004. The Company
assumed ANFIs outstanding reserve for claim losses in
connection with its acquisition 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.
|
|
J. |
Commitments and Contingencies |
The Companys title insurance underwriting subsidiaries
are, in the ordinary course of business, subject to claims made
under, and from
time-to-time are named
as defendants in legal proceedings relating to, policies of
insurance they have issued or other services performed on behalf
of insured policyholders and other customers. The Company
believes that the reserves reflected in its Combined 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.
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. The Company believes that no actions, other
than those listed below, depart from customary litigation
incidental to its business. As background to the disclosure
below, please note the following:
|
|
|
|
|
These matters raise difficult and complicated factual and legal
issues and are subject to many uncertainties and complexities,
including but not limited to the underlying facts of each
matter, novel legal issues, variations between jurisdictions in
which matters are being litigated, differences in applicable
laws and judicial interpretations, the length of time before
many of these matters might be resolved by settlement or through
litigation and, in some cases, the timing of their resolutions
relative to other similar cases brought against other companies,
the fact that many of these matters are putative class actions
in which a class has not been certified and in which the
purported class may not be clearly defined, the fact that many
of these matters involve multi-state class actions in which the
applicable law for the claims at issue is in dispute and
therefore unclear, and the current challenging legal environment
faced by large corporations and insurance companies. |
|
|
|
In these matters, plaintiffs seek a variety of remedies
including equitable relief in the form of injunctive and other
remedies and monetary relief in the form of compensatory
damages. In most cases, the monetary damages sought include
punitive or treble damages. Often more specific information
beyond the type of relief sought is not available because
plaintiffs have not requested more specific relief in their
court pleadings. In general, the dollar amount of damages sought
is not specified. In those cases where plaintiffs have made a
specific statement with regard to monetary damages, they often
specify damages just below a jurisdictional limit regardless of
the facts of the case. This represents the maximum they can seek
without risking removal from state court to federal court. In
our experience, monetary demands in plaintiffs court
pleadings bear little relation to the ultimate loss, if any, we
may experience. |
|
|
|
For the reasons specified above, it is not possible to make
meaningful estimates of the amount or range of loss that could
result from these matters at this time. The Company reviews
these matters on an on-going basis and follow the provisions of
SFAS No. 5, Accounting for Contingencies
when |
F-22
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
making accrual and disclosure decisions. When assessing
reasonably possible and probable outcomes, the Company bases its
decision on its assessment of the ultimate outcome following all
appeals. |
|
|
|
In the opinion of the Companys management, while some of
these matters may be material to the Companys operating
results for any particular period if an unfavorable outcome
results, none will have a material adverse effect on its overall
financial condition. |
Several class actions are pending in Ohio, Pennsylvania and
Florida alleging improper premiums were charged for title
insurance. 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. Recently the courts order denying class
certification in one of the Ohio actions was reversed and the
case was remanded to the trial court for further proceedings.
The Company intends to vigorously defend the actions.
A class action in California alleges that the Company violated
the Real Estate Settlement Procedures Act (RESPA)
and state law by giving favorable discounts or rates to builders
and developers for escrow fees and requiring purchasers to use
Chicago Title Insurance Company for escrow services. The action
seeks refunds of the premiums charged and additional damages.
The Company intends to vigorously defend this action.
A shareholder derivative action was filed in Florida on
February 11, 2005 alleging that the Companys
directors and certain executive officers breached their
fiduciary and other duties, and exposed the Company to potential
fines, penalties and suits in the future, by permitting so
called contingent commissions to obtain business. The Company
and the directors and executive officers named as defendants
filed Motions to Dismiss the action on June 3, 2005. The
plaintiff abandoned his original complaint and responded to the
motions by filing an amended Complaint on July 13, 2005,
and the Company, along with the directors and executive officers
named as defendants, must respond to the amended Complaint by
August 29, 2005. The amended complaint repeats the
allegations of the original complaint and adds allegations about
captive reinsurance programs, which the Company
continues to believe were lawful. These captive
reinsurance programs are the subject of investigations by
several state departments of insurance and attorney generals.
The Company intends to vigorously defend this action.
None of the cases described above includes a statement as to the
dollar amount of damages demanded. Instead, each of the cases
includes a demand in an amount to be proved at trial. Two of the
cases, Dubin and Markowitz, state that the damages
per class member are less than the jurisdictional limit for
removal to federal court.
Several state departments of insurance and attorney generals are
investigating so called captive reinsurance programs
whereby some of the Companys title insurance underwriters
reinsured policies through reinsurance companies owned or
affiliated with brokers, builders or bankers. Some investigating
agencies claim these programs unlawfully compensated customers
for the referral of title insurance business. Although the
Company believed and continues to believe the programs were
lawful, the programs have been discontinued. The Company
recently negotiated a settlement with the California Department
of Insurance with respect to that departments inquiry into
captive reinsurance programs in the title insurance industry.
Under the terms of the settlement, the Company will refund
approximately $7.7 million to those consumers whose
California property was subject to a captive reinsurance
arrangement and will also pay a penalty of $5.6 million. As
part of the settlement, the Company denied any wrongdoing. The
Company continues to cooperate with other investigating
authorities, and no other actions have been filed by the
authorities against the Company or its underwriters.
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
F-23
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
and have not been included in the accompanying Combined Balance
Sheets. The Company has a contingent liability relating to
proper disposition of these balances for our customers, which
amounted to $6.6 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
|
|
$ |
109,380 |
|
2006
|
|
|
94,805 |
|
2007
|
|
|
75,338 |
|
2008
|
|
|
51,216 |
|
2009
|
|
|
28,933 |
|
Thereafter
|
|
|
19,699 |
|
|
|
|
|
|
Total future minimum operating lease payments
|
|
$ |
379,371 |
|
|
|
|
|
Rent expense incurred under operating leases during the years
ended December 31, 2004, 2003 and 2002, was
$140.8 million, $127.3 million and
$105.7 million, respectively.
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; prescribing
accounting principles and financial practices; establishing
reserve and capital and surplus as regards policyholders
(capital and surplus) requirements; defining
suitable investments and approving rate schedules.
Pursuant to statutory accounting requirements of the various
states in which the Companys 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, the combined statutory unearned premium reserve required
and reported for the Companys title insurance subsidiaries
was $1,176.6 million.
The insurance commissioners of their respective states of
domicile regulate the Companys title insurance
subsidiaries. Regulatory examinations usually occur at
three-year intervals, and certain of these examinations are
currently ongoing.
The Companys 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,
F-24
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
$1,731.3 million of the Companys net assets are
restricted from dividend payments without prior approval from
the Departments of Insurance. During 2005, the Companys
title insurance subsidiaries can pay or make distributions to
the Company of approximately $207.5 million, without prior
approval.
The combined statutory capital and surplus of the Companys
title insurance subsidiaries was $887.2 million,
$872.3 million and $612.6 million as of
December 31, 2004, 2003 and 2002, respectively. The
combined statutory earnings of the Companys title
insurance subsidiaries were $371.0 million,
$477.9 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 Companys title insurance
subsidiaries conduct their business, the subsidiaries are
required to pay certain fees and file information regarding
their officers, directors and financial condition. In addition,
the Companys escrow and trust business is subject to
regulation by various state banking authorities.
Pursuant to statutory requirements of the various states in
which the Companys title insurance subsidiaries are
domiciled, they must maintain certain levels of minimum capital
and surplus. Each of the Companys title underwriters has
complied with the minimum statutory requirements as of
December 31, 2004.
The Companys 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 $0.4 million 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.
|
|
L. |
Employee Benefit Plans |
The Companys employees participate in the Fidelity
National Financial, Inc. 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 FNFs 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. Shares
purchased are allocated to employees, based upon their
contributions. The Company contributes varying matching amounts
as specified in the ESPP. The Company recorded
$8.6 million, $11.5 million, and $7.9 million,
respectively, for the years ended December 31, 2004, 2003
and 2002 relating to the participation of the FNT employees in
the ESPP.
|
|
|
401(k) Profit Savings Plan |
The Companys employees are covered by a qualified 401(k)
plan sponsored by FNF. Eligible employees may contribute up to
40% of their pretax annual compensation, up to the amount
allowed pursuant to the Internal Revenue Code. FNF generally
matches 50% of each dollar of employee contribution up to 6% of
the employees total eligible compensation. The Company
recorded $20.1 million, $19.0 million, and
$15.3 million, respectively, for the years ended
December 31, 2004, 2003 and 2002 relating to the
participation of FNT employees in the 401(k) plan.
Certain Company employees are participants in FNFs
stock-based compensation plans, which provide for the granting
of incentive and nonqualified stock options, restricted stock
and other stock-based incentive awards for officers and key
employees. Grants of incentive and nonqualified stock options
under these plans
F-25
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
have generally provided that options shall vest equally over
three years and generally expire ten years after their original
date of grant. 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. However, certain of these
plans allow for the option exercise price for each share granted
pursuant to a nonqualified stock option to be less than the fair
market value of the common stock on the date of grant to reflect
the application of the optionees deferred bonus, if
applicable.
In 2003, FNF issued to certain Company employees rights to
purchase shares of restricted common stock (Restricted Shares).
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 stock-based compensation expense of
$2.6 million and $1.6 million in connection with the
issuance of Restricted Shares to FNT employees for the years
ended December 31, 2004 and 2003 which was based on an
allocation of compensation expense to the Company for personnel
who provided services to the Company.
The Company follows 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.
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. The
Company was allocated stock-based compensation expense of
$5.4 million and $4.9 million for the years ended
December 31, 2004 and 2003 which is included in personnel
costs in the Combined Statements of Earnings, as a result of the
adoption of SFAS No. 123.
Pro forma information regarding net earnings and earnings per
share is required by SFAS No. 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 FNF 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 rates that
correspond to the weighted average expected life of an option.
The risk free interest rate used for options granted during the
years ended December 31, 2004, 2003 and 2002 was 3.2%, 2.0%
and 2.0%, respectively. A volatility factor for the expected
market price of FNF common stock of 34%, 43% and 44% was used
for options granted for the years ended December 31, 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.
Other disclosures required by SFAS No. 123 have not
been provided because the SFAS No. 123 pro forma
expense disclosures were prepared based upon an allocation
methodology that allocates to the Company expenses associated
with portions of individual awards, rather than entire awards.
Pension Plans
In connection with the Chicago Title merger, the Company assumed
Chicago Titles noncontributory defined benefit pension
plan (the Pension Plan).
The Pension Plan covered certain Chicago Title employees. Plan
benefits are based on years of service and the employees
average monthly compensation in the highest 60 consecutive
calendar months during the 120 months ending at retirement
or termination. 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.
F-26
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED 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 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Change in Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of year
|
|
$ |
131,984 |
|
|
$ |
111,132 |
|
|
$ |
103,268 |
|
|
Service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
8,650 |
|
|
|
8,104 |
|
|
|
7,582 |
|
|
Actuarial loss
|
|
|
20,918 |
|
|
|
20,676 |
|
|
|
16,085 |
|
|
Gross benefits paid
|
|
|
(11,297 |
) |
|
|
(7,928 |
) |
|
|
(15,803 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at end of year
|
|
$ |
150,255 |
|
|
$ |
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
|
|
$ |
(63,041 |
) |
|
$ |
(54,284 |
) |
|
$ |
(44,900 |
) |
|
Unrecognized net actuarial loss
|
|
|
80,261 |
|
|
|
61,588 |
|
|
|
45,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized at end of year
|
|
$ |
17,220 |
|
|
$ |
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 Companys measurement date
is December 31.
The net pension liability included in accounts payable and
accrued liabilities as of December 31, 2004 and 2003 is
$63.0 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.
F-27
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED 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 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Service cost
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest cost
|
|
|
8,650 |
|
|
|
8,104 |
|
|
|
7,582 |
|
Expected return on assets
|
|
|
(7,570 |
) |
|
|
(7,128 |
) |
|
|
(7,639 |
) |
Amortization of actuarial loss
|
|
|
7,004 |
|
|
|
4,193 |
|
|
|
634 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic (income) expense
|
|
$ |
8,084 |
|
|
$ |
5,169 |
|
|
$ |
577 |
|
|
|
|
|
|
|
|
|
|
|
One time charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement charge
|
|
|
|
|
|
|
|
|
|
|
4,604 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net expense
|
|
$ |
8,084 |
|
|
$ |
5,169 |
|
|
$ |
5,181 |
|
|
|
|
|
|
|
|
|
|
|
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 plans asset mix,
historical returns by asset category, expectations for future
capital market performance, and the funds past experience.
Both the plans investment policy and the expected
long-term rate of return assumption are reviewed periodically.
The Companys 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.
F-28
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
The Companys pension plan asset allocation at
December 31, 2004 and 2003 and target allocation for 2005
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target | |
|
Percentage of | |
|
|
Allocation | |
|
Plan Assets | |
|
|
| |
|
| |
Asset Category |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Equity securities
|
|
|
5055 |
% |
|
|
|
|
|
|
58.7 |
% |
Debt securities
|
|
|
1525 |
|
|
|
|
|
|
|
18.8 |
|
Insurance annuities
|
|
|
1020 |
|
|
|
|
|
|
|
13.9 |
|
Other (Cash)
|
|
|
525 |
% |
|
|
100.0 |
%(a) |
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
(a) |
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.
The Companys 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
|
|
$ |
10,164 |
|
2006
|
|
|
9,959 |
|
2007
|
|
|
10,094 |
|
2008
|
|
|
10,232 |
|
2009
|
|
|
10,179 |
|
20102014
|
|
|
51,614 |
|
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.
F-29
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED 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 retirees
age.
The accrued cost of the accumulated postretirement benefit
obligation included in the Companys Combined Balance
Sheets at December 31, 2004, 2003 and 2002 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(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 Companys measurement date is December 31.
F-30
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
The Companys postretirement health care and life insurance
costs included in the results of operations for 2004, 2003 and
2002 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(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 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Effect on total of service and interest cost
|
|
$ |
87 |
|
|
$ |
(79 |
) |
Effect on postretirement benefit obligation
|
|
$ |
1,156 |
|
|
$ |
(1,047 |
) |
F-31
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED 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 |
|
|
|
M. |
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 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash paid during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
3,934 |
|
|
$ |
4,725 |
|
|
$ |
12,822 |
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$ |
162,245 |
|
|
$ |
217,132 |
|
|
$ |
129,841 |
|
|
Less: Liabilities assumed
|
|
|
46,533 |
|
|
|
48,543 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
115,712 |
|
|
|
168,589 |
|
|
|
129,812 |
|
|
Less: Cash purchase price, net of cash acquired
|
|
|
115,712 |
|
|
|
8,352 |
|
|
|
(10,633 |
) |
|
|
|
|
|
|
|
|
|
|
|
Non-cash purchase price
|
|
$ |
|
|
|
$ |
160,237 |
|
|
$ |
140,445 |
|
|
|
|
|
|
|
|
|
|
|
|
Other non-cash contributions of capital primarily stock option
allocation
|
|
$ |
4,276 |
|
|
$ |
3,491 |
|
|
$ |
1,061 |
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash contribution of capital
|
|
$ |
4,276 |
|
|
$ |
163,728 |
|
|
$ |
141,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
N. |
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, Texas and Florida. In 2004, 2003 and
2002, California, Texas and Florida accounted for 22.4%, 10.9%
and 10.3%, 25.2%, 11.2% and 6.6% and 25.2%, 12.1% and 6.1% 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.
F-32
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED 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 Companys customer base, thus
spreading the trade receivables credit risk. The Company
controls credit risk through monitoring procedures.
|
|
O. |
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 Companys
financial statements. 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 first quarter of 2006. Since the
Company adopted SFAS No. 123 in 2003, the impact of
recording additional expense in 2006 under SFAS No. 123R
relating to options granted prior to January 1, 2003 will
not be significant. SFAS No. 123R will be effective for the
Company January 1, 2006.
F-33
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED COMBINED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
(In thousands, except share and | |
|
|
per share data) | |
ASSETS |
Investments:
|
|
|
|
|
|
|
|
|
|
Fixed maturities available for sale, at fair value, at
September 30, 2005 includes $310,860 and $143,901 of
pledged fixed maturities related to secured trust deposits and
the securities lending program, respectively, and at
December 31, 2004 includes $265,639 of pledged fixed
maturity securities related to secured trust deposits
|
|
$ |
2,440,306 |
|
|
$ |
2,174,817 |
|
|
Equity securities, at fair value at September 30, 2005
includes $2,331 of pledged equities related to the securities
lending program
|
|
|
142,387 |
|
|
|
115,070 |
|
|
Other long-term investments
|
|
|
22,609 |
|
|
|
21,219 |
|
|
Short-term investments, at fair value, at September 30,
2005 includes $398,422 and at December 31, 2004 includes
$280,351 of pledged short-term investments related to secured
trust deposits
|
|
|
739,509 |
|
|
|
508,383 |
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
3,344,811 |
|
|
|
2,819,489 |
|
Cash and cash equivalents, at September 30, 2005 includes
$301,794 and $151,322 of pledged cash related to secured trust
deposits and the securities lending program, respectively, and
at December 31, 2004 includes $195,200 of pledged cash
related to secured trust deposits
|
|
|
528,323 |
|
|
|
268,414 |
|
Trade receivables, net of allowance of $12,705 in 2005 and
$11,792 in 2004
|
|
|
211,023 |
|
|
|
145,447 |
|
Notes receivable, net of allowance of $1,466 at
September 30, 2005 and $1,740 at December 31, 2004.
Balances include notes from related parties of $22,800 at
September 30, 2005 and December 31, 2004
|
|
|
37,735 |
|
|
|
39,196 |
|
Goodwill
|
|
|
1,074,017 |
|
|
|
959,600 |
|
Prepaid expenses and other assets
|
|
|
349,903 |
|
|
|
311,730 |
|
Title plants
|
|
|
304,885 |
|
|
|
301,610 |
|
Property and equipment, net
|
|
|
158,254 |
|
|
|
164,916 |
|
Due from FNF
|
|
|
|
|
|
|
63,689 |
|
|
|
|
|
|
|
|
|
|
$ |
6,008,951 |
|
|
$ |
5,074,091 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$ |
833,289 |
|
|
$ |
603,705 |
|
|
Notes payable, including $650.0 million of notes payable to
FNF at September 30, 2005
|
|
|
657,076 |
|
|
|
22,390 |
|
|
Reserve for claim losses
|
|
|
1,025,718 |
|
|
|
980,746 |
|
|
Secured trust deposits
|
|
|
1,004,122 |
|
|
|
735,295 |
|
|
Deferred tax liabilities
|
|
|
77,536 |
|
|
|
51,248 |
|
|
Due to FNF
|
|
|
9,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,607,481 |
|
|
|
2,393,384 |
|
|
Minority interests
|
|
|
4,801 |
|
|
|
3,951 |
|
Equity:
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(72,107 |
) |
|
|
(42,300 |
) |
|
Investment by FNF
|
|
|
2,468,776 |
|
|
|
2,719,056 |
|
|
|
|
|
|
|
|
|
|
|
2,396,669 |
|
|
|
2,676,756 |
|
|
|
|
|
|
|
|
|
|
$ |
6,008,951 |
|
|
$ |
5,074,091 |
|
|
|
|
|
|
|
|
See Notes to Condensed Combined Financial Statements.
F-34
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENTS OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, | |
|
|
except per share data) | |
|
|
(Unaudited) | |
Revenue:
|
|
|
|
|
|
|
|
|
|
Direct title insurance premiums
|
|
$ |
1,643,574 |
|
|
$ |
1,491,375 |
|
|
Agency title insurance premiums
|
|
|
2,083,317 |
|
|
|
2,110,142 |
|
|
Escrow and other title related fees
|
|
|
868,375 |
|
|
|
779,910 |
|
|
Interest and investment income
|
|
|
77,066 |
|
|
|
45,549 |
|
|
Realized gains and losses, net
|
|
|
25,505 |
|
|
|
17,595 |
|
|
Other income
|
|
|
31,481 |
|
|
|
34,307 |
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
4,729,318 |
|
|
|
4,478,878 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
|
1,415,928 |
|
|
|
1,267,871 |
|
|
Other operating expenses
|
|
|
699,844 |
|
|
|
640,290 |
|
|
Agent commissions
|
|
|
1,617,260 |
|
|
|
1,651,066 |
|
|
Depreciation and amortization
|
|
|
73,207 |
|
|
|
69,100 |
|
|
Provision for claim losses
|
|
|
254,289 |
|
|
|
194,505 |
|
|
Interest expense
|
|
|
5,393 |
|
|
|
3,086 |
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,065,921 |
|
|
|
3,825,918 |
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
|
663,397 |
|
|
|
652,960 |
|
Income tax expense
|
|
|
248,774 |
|
|
|
238,983 |
|
|
|
|
|
|
|
|
Earnings before minority interest
|
|
|
414,623 |
|
|
|
413,977 |
|
Minority interest
|
|
|
1,992 |
|
|
|
809 |
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
412,631 |
|
|
$ |
413,168 |
|
|
|
|
|
|
|
|
Pro forma basic and diluted earnings per share
|
|
$ |
2.38 |
|
|
$ |
2.38 |
|
|
|
|
|
|
|
|
Pro forma weighted average shares outstanding, basic and diluted
|
|
|
173,520 |
|
|
|
173,520 |
|
|
|
|
|
|
|
|
See Notes to Condensed Combined Financial Statements.
F-35
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENTS OF COMPREHENSIVE EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
(Unaudited) | |
Net earnings
|
|
$ |
412,631 |
|
|
$ |
413,168 |
|
Other comprehensive earnings (loss):
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investments and other financial instruments,
net(1)
|
|
|
(23,989 |
) |
|
|
(22,701 |
) |
|
Reclassification adjustments for (gains) losses included in
net earnings(2)
|
|
|
(5,818 |
) |
|
|
(7,480 |
) |
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(29,807 |
) |
|
|
(30,181 |
) |
|
|
|
|
|
|
|
Comprehensive earnings
|
|
$ |
382,824 |
|
|
$ |
382,987 |
|
|
|
|
|
|
|
|
|
|
(1) |
Net of income tax (benefit) expense of $(14.2) million and
$(13.9) million for the nine months ended
September 30, 2005 and 2004, respectively. |
|
(2) |
Net of income tax (benefit) expense of $3.6 million and
$4.6 million for the nine months ended September 30,
2005 and 2004, respectively. |
See Notes to Condensed Combined Financial Statements.
F-36
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENT OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other | |
|
|
|
|
Investment | |
|
Comprehensive | |
|
|
|
|
by FNF | |
|
Earnings (Loss) | |
|
Total Equity | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
(Unaudited) | |
Balance, December 31, 2004
|
|
$ |
2,719,056 |
|
|
$ |
(42,300 |
) |
|
$ |
2,676,756 |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss unrealized loss on
investments and other financial instruments
|
|
|
|
|
|
|
(29,807 |
) |
|
|
(29,807 |
) |
|
Net contribution of capital
|
|
|
144,664 |
|
|
|
|
|
|
|
144,664 |
|
|
Dividend to FNF
|
|
|
(807,575 |
) |
|
|
|
|
|
|
(807,575 |
) |
|
Net earnings
|
|
|
412,631 |
|
|
|
|
|
|
|
412,631 |
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005
|
|
$ |
2,468,776 |
|
|
$ |
(72,107 |
) |
|
$ |
2,396,669 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Combined Financial Statements.
F-37
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
(Unaudited) | |
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
412,631 |
|
|
$ |
413,168 |
|
|
Reconciliation of net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
73,207 |
|
|
|
69,100 |
|
|
|
Net increase in reserve for claim losses
|
|
|
43,925 |
|
|
|
16,746 |
|
|
|
Gain on sales of assets
|
|
|
(25,505 |
) |
|
|
(17,595 |
) |
|
|
Minority interest
|
|
|
1,992 |
|
|
|
809 |
|
|
Change in assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Net increase in trade receivables
|
|
|
(63,312 |
) |
|
|
(20,443 |
) |
|
|
Net increase in prepaid expenses and other assets
|
|
|
(3,182 |
) |
|
|
6,331 |
|
|
|
Net increase (decrease) in accounts payable, accrued liabilities
|
|
|
9,739 |
|
|
|
(94,440 |
) |
|
|
Net increase in income taxes
|
|
|
145,335 |
|
|
|
293,132 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
594,830 |
|
|
|
666,808 |
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of investment securities available for sale
|
|
|
1,883,026 |
|
|
|
1,767,471 |
|
|
Proceeds from maturities of investment securities available for
sale
|
|
|
262,008 |
|
|
|
144,457 |
|
|
Proceeds from sale of assets
|
|
|
40,831 |
|
|
|
4,440 |
|
|
Cash received as collateral on loaned securities, net
|
|
|
3,026 |
|
|
|
|
|
|
Collections of notes receivable
|
|
|
9,180 |
|
|
|
3,049 |
|
|
Additions to title plants
|
|
|
(4,065 |
) |
|
|
(6,414 |
) |
|
Additions to property and equipment
|
|
|
(69,925 |
) |
|
|
(52,320 |
) |
|
Additions to capitalized software
|
|
|
(4,316 |
) |
|
|
(385 |
) |
|
Purchases of investment securities available for sale
|
|
|
(2,154,842 |
) |
|
|
(2,449,912 |
) |
|
Net proceeds (purchases) of short-term investment securities
|
|
|
(232,280 |
) |
|
|
251,477 |
|
|
Issuance of notes receivable
|
|
|
(7,868 |
) |
|
|
(4,680 |
) |
|
Acquisitions of businesses, net of cash acquired
|
|
|
(135,438 |
) |
|
|
(110,812 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(410,663 |
) |
|
|
(453,629 |
) |
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
$ |
650,174 |
|
|
$ |
132 |
|
|
Debt service payments
|
|
|
(18,115 |
) |
|
|
(26,065 |
) |
|
Dividends paid
|
|
|
(807,575 |
) |
|
|
(159,600 |
) |
|
Contribution from (distribution to) FNF
|
|
|
144,664 |
|
|
|
(133,083 |
) |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(30,852 |
) |
|
|
(318,616 |
) |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents, excluding
pledged cash related to secured trust deposits
|
|
|
153,315 |
|
|
|
(105,437 |
) |
|
Cash and cash equivalents, excluding pledged cash related to
secured trust deposits at beginning of period
|
|
|
73,214 |
|
|
|
164,715 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, excluding pledged cash related to
secured trust deposits at end of period
|
|
$ |
226,529 |
|
|
$ |
59,278 |
|
|
|
|
|
|
|
|
See Notes to Condensed Combined Financial Statements.
F-38
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
Note A Basis of Financial Statements
The unaudited condensed combined financial information included
in this report includes the accounts of Fidelity National
Title Group, Inc. (FNT or the
Company) and subsidiaries and has been prepared in
accordance with generally accepted accounting principles and the
instructions to
Form 10-Q and
Article 10 of
Regulation S-X.
All adjustments considered necessary for a fair presentation
have been included. This report should be read in conjunction
with the Companys combined financial statements included
in its Registration Statement on
Form S-1 filed on
September 27, 2005.
As of September 30, 2005, FNT was a wholly-owned subsidiary
of Fidelity National Financial, Inc. (FNF). On
September 26, 2005 FNF received all regulatory approvals
required to contribute to FNT all of the legal entities that are
combined for presentation in these historical financial
statements. Also, on September 26, 2005, FNF declared a
dividend to its stockholders of record as of October 6,
2005 which resulted in a distribution of 17.5%
(30.4 million shares) of its interest in FNT which
represents the title insurance segment of FNF. On
October 17, 2005, FNF distributed to its current
stockholders 0.175 shares of FNT Class A common stock
for each share of FNF common stock held on the record date. FNF
beneficially owns 100% of the FNT Class B common stock
representing 82.5% of the Companys outstanding common
stock. FNT Class B common stock has ten votes per share
while FNT Class A common stock has one vote per share. This
resulted in the distribution of approximately 30.4 million
Class A common shares and FNF owning 143.1 million
Class B common shares. Following the distribution FNF
controls 97.9% of the voting rights of FNT.
Prior to the distribution the Company issued two
$250 million intercompany notes payable to FNF, with terms
that mirror FNFs existing $250 million, 7.30% public
debentures due in August 2011 and $250 million, 5.25%
public debentures due in March 2013. Interest on each note
accrues from the last date on which interest was paid on the
corresponding FNF note. Proceeds from the issuance of the 2011
public debentures were used by FNF to repay debt incurred in
connection with the acquisition of the Companys
subsidiary, Chicago Title, and the proceeds from the 2013 public
debentures were used for general corporate purposes. Following
the issuance of the intercompany notes, the Company filed a
Form S-4
Registration Statement with the SEC, under which the Company
proposes to make an exchange offer in which the Company would
offer to exchange the outstanding FNF notes for notes the
Company would issue having substantially the same terms and
deliver the FNF notes received to FNF to reduce the debt under
the intercompany notes. On October 17, 2005, the Company
also entered into a credit agreement in the amount of
$400 million. On October 24, 2005, the Company
borrowed $150 million under this facility and paid it to
FNF in satisfaction of a $150 million intercompany note
issued by one of the Companys subsidiaries to FNF in
August 2005.
Fidelity National Title Group, Inc., through its principal
subsidiaries, is the largest title insurance company in the
United States. The Companys title insurance
underwriters Fidelity National Title, Chicago Title,
Ticor Title, Security Union Title and Alamo Title
together issue all of the Companys title insurance
policies in 49 states, the District of Columbia, Guam,
Puerto Rico, the U.S. Virgin Islands, and in Canada and
Mexico. The Company operates its business through a single
segment, title and escrow, and does not generate significant
revenue outside the United States. Although the Company earns
title premiums on residential and commercial sale and refinance
real estate transactions, the Company does not separately track
its revenues from these various types of transactions.
|
|
|
Principles of Combination and Basis of Presentation |
The accompanying Combined Financial Statements include those
assets, liabilities, revenues, and expenses directly
attributable to the Companys operations and allocations of
certain FNF corporate assets,
F-39
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
liabilities and expenses to the Company. These amounts have been
allocated to the Company on a basis that is considered by
management to reflect most fairly the utilization of services
provided to or the benefit obtained by the Company. Management
believes the methods used to allocate these amounts are
reasonable. All intercompany profits, transactions and balances
between the combined entities have been eliminated. The
Companys investments in non-majority-owned partnerships
and affiliates are accounted for on the equity method. All
dollars presented herein are in thousands unless otherwise noted.
|
|
|
Unaudited Proforma Net Earnings Per Share |
Unaudited proforma net earnings per share information for the
2005 and 2004 periods is calculated using the number of
outstanding shares of FNT as of October 17, 2005, the
distribution date.
|
|
|
Transactions with Related Parties |
The Companys financial statements reflect transactions
with other businesses and operations of FNF, including those
being conducted by another FNF subsidiary, Fidelity National
Information Services, Inc. (FIS).
A detail of related party items included in revenues and
expenses is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months | |
|
|
Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Agency title premiums earned
|
|
$ |
69.7 |
|
|
$ |
95.6 |
|
Rental income earned
|
|
|
5.0 |
|
|
|
4.8 |
|
Interest revenue
|
|
|
0.7 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
Total revenue
|
|
|
75.4 |
|
|
|
100.7 |
|
Agency title commissions
|
|
|
61.3 |
|
|
|
84.2 |
|
Data processing costs
|
|
|
41.4 |
|
|
|
46.3 |
|
Corporate services allocated
|
|
|
(26.0 |
) |
|
|
(49.9 |
) |
Title insurance information expense
|
|
|
18.1 |
|
|
|
22.4 |
|
Other real-estate related information
|
|
|
10.8 |
|
|
|
7.1 |
|
Software expense
|
|
|
5.7 |
|
|
|
4.3 |
|
Rental expense
|
|
|
2.6 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
Total expenses
|
|
|
113.9 |
|
|
|
116.3 |
|
|
|
|
|
|
|
|
Total pretax impact of related party activity
|
|
$ |
(38.5 |
) |
|
$ |
(15.6 |
) |
|
|
|
|
|
|
|
Included as a reduction of expenses for all periods are payments
from FNF and FIS relating to the provision by FNT of corporate
services to FNF and to FIS and its subsidiaries. These corporate
services include accounting, internal audit and treasury,
payroll, human resources, tax, legal, purchasing, risk
management, mergers and acquisitions and general management. For
the nine months ended September 30, 2005 and 2004, the
Companys expenses were reduced by $26.0 million and
$49.9 million related to the provision of these corporate
services by the Company to FNF, FIS and its subsidiaries.
The Company does business with the lender outsourcing solutions
segment of FIS. This segments services include title
agency functions whereby an FIS subsidiary acts as the title
agent in the issuance of title insurance policies by a title
insurance underwriter owned by the Company and in connection
with certain trustee sales guarantees, a form of title insurance
issued as part of the foreclosure process. As a result, the
F-40
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
Companys title insurance subsidiaries pay commissions on
title insurance policies sold through FIS. For the nine months
ended September 30, 2005 and 2004, these FIS operations
generated $69.7 million and $95.6 million of revenues
for the Company, which the Company records as agency title
premiums. The Company pays FIS commissions at the rate of 88% of
premiums generated, equal to $61.3 million and
$84.2 million for the nine months ended September 30,
2005 and 2004, respectively.
Through June 30, 2005, the Company leased equipment to a
subsidiary of FIS. Revenue relating to these leases was
$5.0 million and $4.8 million for the nine months
ended September 30, 2005 and 2004, respectively.
The title plant assets of several of the Companys title
insurance subsidiaries are managed or maintained by a subsidiary
of FIS. The underlying title plant information and software
continues to be owned by each of the Companys title
insurance underwriters, but FIS manages and updates the
information in return for either (i) a cash management fee
or (ii) the right to sell that information to title
insurers, including title insurance underwriters that the
Company owns and other third party customers. In most cases, FIS
is responsible for keeping the title plant assets current and
fully functioning, for which the Company pays a fee to FIS based
on the Companys use of, or access to, the title plant. For
the nine months ended September 30, 2005 and 2004, the
Companys payments to FIS under these arrangements were
$20.3 million and $22.4 million, respectively. In
addition, since November 2004, each applicable title insurance
underwriter in turn receives a royalty on sales of access to its
title plant assets. For the nine months ended September 30,
2005, the revenues from these title plant royalties were
$2.2 million. In the first nine months of 2004, there was
no royalty agreement in place. In addition, the Company has
entered into agreements with FIS that permit FIS and certain of
its subsidiaries to access and use (but not to re-sell) the
starters databases and back plant databases of the
Companys title insurance subsidiaries. Starters databases
are the Companys databases of previously issued title
policies and back plant databases contain historical records
relating to title that are not regularly updated. Each of the
Companys applicable title insurance subsidiaries receives
a fee for any access or use of its starters and back plant
databases by FIS. The Company also does business with additional
entities within the information services segment of FIS that
provide real estate information to the Companys operations
and the Company recorded expenses of $10.8 million and
$7.1 million for the nine months ended September 30,
2005 and 2004, respectively related to these services.
Included in the Companys expenses for the nine months
ended September 30, 2005 and 2004 are amounts paid to a
subsidiary of FIS for the provision by FIS of IT infrastructure
support, data center management and related IT support services.
For the nine months ended September 30, 2005 and 2004, the
amounts included in the Companys expenses to FIS for these
services were $41.4 million and $46.3 million,
respectively. In addition, the Company incurred software
expenses relating to an agreement with a subsidiary of FIS that
amounted to expense of $5.7 million and $4.3 million
for the nine months ended September 30, 2005 and 2004,
respectively.
The Company believes the amounts earned by the Company or
charged to the Company under each of the foregoing arrangements
are fair and reasonable. Although the commission rate paid on
the title insurance premiums written by the FIS title agencies
was set without negotiation, the Company believes the
commissions earned are consistent with the average rate that
would be available to a third party title agent given the amount
and the geographic distribution of the business produced and the
low risk of loss profile of the business placed. In connection
with the title plant management and maintenance services
provided by FIS, the Company believes that the fees charged to
the Company by FIS are at approximately the same rates that FIS
and other similar vendors charge unaffiliated title insurers.
The IT infrastructure support and data center management
services provided to the Company by FIS is priced within the
range of prices that FIS offers to its unaffiliated third party
customers for the same types of services. However, the amounts
the Company earned or were charged under these arrangements were
not negotiated at arms-length, and may not represent the
terms that the Company might have obtained from an unrelated
third party.
F-41
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
Notes receivable from FNF, Due from FNF and Notes Payable
to FNF to the Company were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Notes receivable from FNF
|
|
$ |
22.8 |
|
|
$ |
22.8 |
|
Due from (to) FNF
|
|
|
(9.7 |
) |
|
|
63.7 |
|
Notes payable to FNF (See Note E)
|
|
|
650.0 |
|
|
|
|
|
The Company has notes receivable from FNF relating to agreements
between its title underwriters and FNF. These notes amounted to
$22.8 million at September 30, 2005 and
December 31, 2004. As of September 30, 2005, these
notes bear interest at a rate of 4.66%. The Company earned
interest revenue of $0.7 million and $0.3 million for
the nine months ended September 30, 2005 and 2004, relating
to these notes, respectively.
The Company is included in FNFs consolidated tax returns
and thus any income tax liability or receivable is due to/from
FNF. As of September 30, 2005, the Company had recorded a
payable to FNF of $9.7 million relating to intercompany
activity, including income taxes and at December 31, 2004,
the Company had recorded a receivable from FNF relating to
overpayment of taxes of $63.7 million.
Note B Acquisitions
The results of operations and financial position of the entities
acquired during any year are included in the Combined 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 identifiable assets
and liabilities and the purchase price paid is recorded as
goodwill. The acquisitions below were not considered material
for pro forma disclosure purposes.
On August 1, 2005, the Company acquired Service Link, L.P.
(Service Link), a national provider of centralized
mortgage and residential real estate title and closing services
to major financial institutions and institutional lenders. The
acquisition price was approximately $110 million in cash.
|
|
|
American Pioneer Title Insurance Company |
On March 22, 2004, FNT 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 Companys Ticor Title brand. The Company
recorded approximately $34.5 million in goodwill and
approximately $10.6 million in other intangible assets
relating to this transaction.
Note C Investments
During the second quarter of 2005, the Company began lending
fixed maturity and equity securities to financial institutions
in short-term security lending transactions. The Companys
security lending policy requires that the cash received as
collateral be 102% or more of the fair value of the loaned
securities. These short-term security lending arrangements
increase investment income with minimal risk. At
September 30, 2005, the Company had security loans
outstanding with a fair value of $146.2 million included in
accounts payable and accrued liabilities and the Company held
cash in the amount of $151.3 million as collateral for the
loaned securities.
F-42
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
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 September 30,
2005 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
|
|
$ |
619,806 |
|
|
$ |
(10,370 |
) |
|
$ |
233,469 |
|
|
$ |
(2,979 |
) |
|
$ |
853,275 |
|
|
$ |
(13,349 |
) |
States and political subdivisions
|
|
|
572,242 |
|
|
|
(5,382 |
) |
|
|
129,767 |
|
|
|
(3,124 |
) |
|
|
702,008 |
|
|
|
(8,506 |
) |
Corporate securities
|
|
|
295,230 |
|
|
|
(4,073 |
) |
|
|
239,053 |
|
|
|
(5,605 |
) |
|
|
534,283 |
|
|
|
(9,678 |
) |
Equity securities
|
|
|
95,714 |
|
|
|
(15,515 |
) |
|
|
31 |
|
|
|
(39 |
) |
|
|
95,745 |
|
|
|
(15,554 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$ |
1,582,992 |
|
|
$ |
(35,340 |
) |
|
$ |
602,320 |
|
|
$ |
(11,747 |
) |
|
$ |
2,185,311 |
|
|
$ |
(47,087 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A substantial portion of the Companys unrealized losses
relate to its holdings of equity securities. The unrealized
losses relating to these securities were caused by market
changes that the Company considers to be temporary. Unrealized
losses relating to U.S. government, state and political
subdivision holdings were primarily 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. During the third
quarter of 2005, the Company did record an impairment charge on
two investments that it considered to be other-than-temporarily
impaired, which resulted in a charge of $6.2 million. In
the third quarter of 2004, the Company also recorded an
impairment charge of $6.9 million.
Note D Stock Based Compensation Plans
Certain FNT employees are participants in FNFs stock-based
compensation plans, which provide for the granting of incentive
and nonqualified stock options, restricted stock and other
stock-based incentive awards for officers and key employees. The
amounts below are based on allocations of FNFs stock
compensation expense relating to awards given to FNT employees
during the historical period.
The Company accounts for stock-based compensation using the fair
value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123) 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.
F-43
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED 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:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, except per | |
|
|
share amounts) | |
Net earnings, as reported
|
|
$ |
412,631 |
|
|
$ |
413,168 |
|
|
|
|
|
|
|
|
Add: Stock-based compensation expense included in reported net
earnings, net of related tax effects
|
|
|
5,375 |
|
|
|
2,020 |
|
Deduct: Total stock-based compensation expense determined under
fair value based methods for all awards, net of related tax
effects
|
|
|
(5,983 |
) |
|
|
(3,168 |
) |
|
|
|
|
|
|
|
Pro forma net earnings
|
|
$ |
412,023 |
|
|
$ |
412,020 |
|
|
|
|
|
|
|
|
Pro forma net earnings per share basic and diluted,
as reported
|
|
$ |
2.38 |
|
|
$ |
2.38 |
|
Pro forma net earnings per share basic and diluted,
as reported adjusted for SFAS 123 effects
|
|
$ |
2.37 |
|
|
$ |
2.37 |
|
Note E Notes Payable
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Unsecured note due to FNF, interest payable semiannually at
3.55%, due August, 2008, refinanced October 24, 2005
|
|
$ |
150,000 |
|
|
$ |
|
|
Unsecured note due to FNF, net of discount, interest payable
semiannually at 7.3%, due August, 2011
|
|
|
250,000 |
|
|
|
|
|
Unsecured note due to FNF, net of discount, interest payable
semiannually at 5.25%, due March, 2013
|
|
|
250,000 |
|
|
|
|
|
Other promissory notes with various interest rates and maturities
|
|
|
7,076 |
|
|
|
22,390 |
|
|
|
|
|
|
|
|
|
|
$ |
657,076 |
|
|
$ |
22,390 |
|
|
|
|
|
|
|
|
Prior to the distribution, on September 30, 2005, the
Company issued two $250 million intercompany notes payable
to FNF, with terms that mirror FNFs existing
$250 million 7.30% public debentures due in August 2011 and
$250 million 5.25% public debentures due in March 2013.
Proceeds from the issuance of the 2011 public debentures were
used by FNF to repay debt incurred in connection with the
acquisition of the Companys subsidiary, Chicago Title, and
the proceeds from the 2013 public debentures were used for
general corporate purposes. Following the issuance of the
intercompany notes, the Company filed a Registration Statement
on Form S-4,
pursuant to which it proposes to make an exchange offer in which
the Company would offer to exchange the outstanding FNF notes
for notes the Company would issue having substantially the same
terms and deliver the FNF notes received to FNF to reduce the
debt under the intercompany notes.
Subsequent to September 30, 2005, on October 17, 2005,
the Company entered into a Credit Agreement, dated as of
October 17, 2005, with Bank of America, N.A. as
Administrative Agent and Swing Line Lender (the Credit
Agreement), and the other financial institutions party
thereto.
The Credit Agreement provides for a $400 million unsecured
revolving credit facility maturing on the fifth anniversary of
the closing date. Amounts under the revolving credit facility
may be borrowed, repaid and
F-44
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
reborrowed by the borrowers thereunder from time to time until
the maturity of the revolving credit facility. Voluntary
prepayment of the revolving credit facility under the Credit
Agreement is permitted at any time without fee upon proper
notice and subject to a minimum dollar requirement. Revolving
loans under the credit facility bear interest at a variable rate
based on either (i) the higher of (a) a rate per annum
equal to one-half of one percent in excess of the Federal
Reserves Federal Funds rate, or (b) Bank of
Americas prime rate; or (ii) a rate per
annum equal to the British Bankers Association LIBOR rate plus a
margin of between .35%-1.25%, all in, depending on the
Companys then current public debt credit rating from the
rating agencies.
The Credit Agreement contains 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 limitations on restricted payments and
transactions with affiliates. The Credit Agreement requires the
Company to maintain investment grade debt ratings, certain
financial ratios related to liquidity and statutory surplus and
certain levels of capitalization. The Credit Agreement also
includes customary events of default for facilities of this type
(with customary grace periods, as applicable) and provides that,
upon the occurrence of an event of default, the interest rate on
all outstanding obligations will be increased and payments of
all outstanding loans may be accelerated and/or the
lenders commitments may be terminated. In addition, upon
the occurrence of certain insolvency or bankruptcy related
events of default, all amounts payable under the Credit
Agreement shall automatically become immediately due and
payable, and the lenders commitments will automatically
terminate.
On October 24, 2005, the Company borrowed $150 million
under this facility and paid it to FNF in satisfaction of a
$150 million intercompany note issued by one of the
Companys subsidiaries to FNF in August 2005.
Principal maturities of notes payable at September 30,
2005, are as follows (dollars in thousands):
|
|
|
|
|
2005
|
|
$ |
3,923 |
|
2006
|
|
|
|
|
2007
|
|
|
3,153 |
|
2008
|
|
|
150,000 |
|
2009
|
|
|
|
|
Thereafter
|
|
|
500,000 |
|
|
|
|
|
|
|
$ |
657,076 |
|
|
|
|
|
Note F Pension and Postretirement
Benefits
The following details the Companys periodic (income)
expense for pension and postretirement benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
Pension Benefits | |
|
Postretirement Benefits | |
|
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Service cost
|
|
$ |
|
|
|
$ |
|
|
|
$ |
114 |
|
|
$ |
155 |
|
Interest cost
|
|
|
6,261 |
|
|
|
6,488 |
|
|
|
888 |
|
|
|
959 |
|
Expected return on assets
|
|
|
(5,877 |
) |
|
|
(5,678 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
|
|
|
|
|
|
|
|
(1,152 |
) |
|
|
(2,028 |
) |
Amortization of actuarial loss
|
|
|
6,621 |
|
|
|
5,253 |
|
|
|
411 |
|
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic (income) expense
|
|
$ |
7,005 |
|
|
$ |
6,063 |
|
|
$ |
261 |
|
|
$ |
(666 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
There have been no material changes to the Companys
projected benefit payments under these plans since
December 31, 2004.
Note G Legal Proceedings
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. The Company believes that no actions, other
than those listed below, depart from customary litigation
incidental to its business. As background to the disclosure
below, please note the following:
|
|
|
|
|
These matters raise difficult and complicated factual and legal
issues and are subject to many uncertainties and complexities,
including but not limited to the underlying facts of each
matter, novel legal issues, variations between jurisdictions in
which matters are being litigated, differences in applicable
laws and judicial interpretations, the length of time before
many of these matters might be resolved by settlement or through
litigation and, in some cases, the timing of their resolutions
relative to other similar cases brought against other companies,
the fact that many of these matters are putative class actions
in which a class has not been certified and in which the
purported class may not be clearly defined, the fact that many
of these matters involve multi-state class actions in which the
applicable law for the claims at issue is in dispute and
therefore unclear, and the current challenging legal environment
faced by large corporations and insurance companies. |
|
|
|
In these matters, plaintiffs seek a variety of remedies
including equitable relief in the form of injunctive and other
remedies and monetary relief in the form of compensatory
damages. In most cases, the monetary damages sought include
punitive or treble damages. Often more specific information
beyond the type of relief sought is not available because
plaintiffs have not requested more specific relief in their
court pleadings. In general, the dollar amount of damages sought
is not specified. In those cases where plaintiffs have made a
specific statement with regard to monetary damages, they often
specify damages just below a jurisdictional limit regardless of
the facts of the case. This represents the maximum they can seek
without risking removal from state court to federal court. In
our experience, monetary demands in plaintiffs court
pleadings bear little relation to the ultimate loss, if any, we
may experience. |
|
|
|
For the reasons specified above, it is not possible to make
meaningful estimates of the amount or range of loss that could
result from these matters at this time. The Company reviews
these matters on an on-going basis and follows the provisions of
SFAS No. 5, Accounting for Contingencies
when making accrual and disclosure decisions. When assessing
reasonably possible and probable outcomes, the Company bases its
decision on its assessment of the ultimate outcome following all
appeals. |
|
|
|
In the opinion of the Companys management, while some of
these matters may be material to the Companys operating
results for any particular period if an unfavorable outcome
results, none will have a material adverse effect on its overall
financial condition. |
Several class actions are pending in Ohio, Pennsylvania and
Florida alleging improper premiums were charged for title
insurance. 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. Recently the courts order denying class
certification in one of the Ohio actions was reversed and the
case was remanded to the trial court for further proceedings.
The Company has petitioned the Supreme Court of Ohio for review.
The Company intends to vigorously defend the actions.
A class action in California alleges that the Company violated
the Real Estate Settlement Procedures Act (RESPA)
and state law by giving favorable discounts or rates to builders
and developers for escrow fees and requiring purchasers to use
Chicago Title Insurance Company for escrow services. The
action seeks
F-46
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
refunds of the premiums charged and additional damages. The
Company intends to vigorously defend this action.
A shareholder derivative action was filed in Florida on
February 11, 2005 alleging that FNF directors and certain
executive officers breached their fiduciary and other duties,
and exposed FNF to potential fines, penalties and suits in the
future, by permitting so called contingent commissions to obtain
business. The Company and the directors and executive officers
named as defendants filed motions to dismiss the action on
June 3, 2005. The plaintiff abandoned his original
complaint and responded to the motions by filing an amended
complaint on July 13, 2005, and FNF, along with the
directors and executive officers named as defendants, have
responded to the amended complaint. The amended complaint
repeats the allegations of the original complaint and adds
allegations about captive reinsurance programs,
which FNF continues to believe were lawful. These captive
reinsurance programs are the subject of investigations by
several state departments of insurance and attorney generals.
FNT has agreed to indemnify FNF in connection with this matter
under the separation agreement that was entered into in
connection with the distribution of FNT common stock. The
Company has agreed to indemnify FNF in connection with this
matter and FNF intends to vigorously defend this action.
None of the cases described above includes a statement as to the
dollar amount of damages demanded. Instead, each of the cases
includes a demand in an amount to be proved at trial. Two of the
Ohio cases state that the damages per class member are less than
the jurisdictional limit for removal to federal court.
The Company gets inquiries and requests for information from
state insurance departments, attorneys general and other
regulatory agencies from time to time about various matters
relating to its business. Sometimes these take the form of civil
investigative subpoenas. The Company attempts to cooperate with
all such inquiries. From time to time, the Company is assessed
fines for violations of regulations or other matters or enters
into settlements with such authorities which require the Company
to pay money or take other actions.
In the fall of 2004, the California Department of Insurance
began an investigation into reinsurance practices in the title
insurance industry. In February 2005 FNF was issued a subpoena
to provide information to the California Department of Insurance
as part of its investigation. This investigation paralleled
similar inquiries of the National Association of Insurance
Commissioners, which began earlier in 2004. The investigations
have focused on arrangements in which title insurers would write
title insurance generated by realtors, developers and lenders
and cede a portion of the premiums to a reinsurance company
affiliate of the entity that generated the business.
The Company recently negotiated a settlement with the California
Department of Insurance with respect to that departments
inquiry into these arrangements, which the Company refers to as
captive reinsurance arrangements. Under the terms of the
settlement, the Company will refund approximately
$7.7 million to those consumers whose California property
was subject to a captive reinsurance arrangement and will pay a
penalty of $5.6 million. The Company also recently entered
into similar settlements with 15 other states, in which the
Company agreed to refund a total of approximately
$2 million to policyholders. Other state insurance
departments and attorneys general and the U.S. Department
of Housing and Urban Development (HUD) also have
made formal or informal inquiries of the Company regarding these
matters.
The Company has been cooperating and intends to continue to
cooperate with the other ongoing investigations. The Company has
discontinued all captive reinsurance arrangements. The total
amount of premiums the Company ceded to reinsurers was
approximately $10 million over the existence of these
agreements. The remaining investigations are continuing and the
Company currently is unable to give any assurance regarding
their consequences for the industry or for FNT.
Additionally, the Company has received inquiries from regulators
about its business involvement with title insurance agencies
affiliated with builders, realtors and other traditional sources
of title insurance
F-47
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
business, some of which the Company participated in forming as
joint ventures with its subsidiaries. These inquiries have
focused on whether the placement of title insurance with the
Company through these affiliated agencies is proper or an
improper form of referral payment. Like most other title
insurers, the Company participates in these affiliated business
arrangements in a number of states. The Company recently entered
into a settlement with the Florida Department of Financial
Services under which it agreed to refund approximately
$3 million in premiums received though these types of
agencies in Florida and pay a fine of $1 million. The other
pending inquiries are at an early stage and as a result the
Company can give no assurance as to their likely outcome.
Since 2004 the Companys subsidiaries have received civil
subpoenas and other inquiries from the New York State Attorney
General, requesting information about their arrangements with
agents and customers and other matters relating to, among other
things, rate calculation practices, use of blended rates in
multi-state transactions, rebates and referral fees. These
inquiries are at an early stage and as a result the Company can
give no assurance as to their likely outcome.
Finally, the California Department of Insurance has recently
announced its intent to examine levels of pricing and
competition in the title insurance industry in California, with
a view to determining whether prices are too high and if so,
implementing rate reductions. New York and Colorado insurance
regulators have also announced similar inquiries and other
states could follow. At this stage, the Company is unable to
predict what the outcome will be of this or any similar review.
Note H Subsequent Event
On October 18, 2005, the date of the distribution, the
Company granted 777,500 shares of restricted stock and
2,206,500 stock options to certain employees and directors.
These awards vest over a four year period.
F-48
In order to tender, a holder of FNF notes should send or deliver
a properly completed and signed letter of transmittal and
consent and any other required documents to the exchange agent
at its address set forth below or tender pursuant to DTCs
Automated Tender Offer Program.
The exchange agent for the exchange offers and consent
solicitations is:
D.F. KING & CO., INC.
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By overnight delivery, mail or hand: |
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By facsimile transmission: |
48 Wall Street, 22nd Floor
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(for eligible institutions only) |
New York, New York 10005
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(212) 809-8839 |
Attn: Gina Ruotolo
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To confirm facsimile transmission: |
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(212) 493-6958 |
Any questions or requests for assistance or for additional
copies of this prospectus and consent solicitation statement,
the letter of transmittal and consent or related documents may
be directed to the information agent at the telephone numbers
listed below. You may also contact the dealer manager at its
telephone numbers set forth below or your custodian bank,
depositary, broker, trust company or other nominee for
assistance concerning the exchange offers and consent
solicitations.
The information agent for the exchange offers and consent
solicitations is:
D.F. KING & CO., INC.
48 Wall Street
New York, New York 10005
Banks and brokers call: (212) 269-5550
All others call collect: (800) 848-2998
The exclusive dealer manager for the exchange offers and consent
solicitations is:
LEHMAN BROTHERS
Attn: Liability Management Group
Radoslav Antonov
745 Seventh Avenue
New York, New York 10019
Collect: (212) 528-7581
Toll free: (800) 438-3242