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As filed with the Securities and Exchange Commission on
September 14, 2005
Registration Number 333-126402
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3 to
Form S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Fidelity National Title Group, Inc.
(Exact Name of Registrant as Specified in its Charter)
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Delaware |
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6361 |
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16-1725106 |
(State or Other Jurisdiction of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number) |
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(I.R.S. Employer
Identification Number) |
601 Riverside Avenue
Jacksonville, Florida 32204
(904) 854-8100
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrants Principal Executive Offices)
Raymond R. Quirk
Chief Executive Officer
Fidelity National Title Group, Inc.
601 Riverside Avenue
Jacksonville, Florida 32204
(904) 854-8100
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
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Peter T. Sadowski
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Robert S. Rachofsky |
General Counsel
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LeBoeuf, Lamb, Greene & MacRae LLP |
Fidelity National Financial, Inc.
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125 West 55th Street |
601 Riverside Avenue
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New York, NY 10019-5389 |
Jacksonville, Florida 32204
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(212) 424-8000 |
(904) 854-8100
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to Section 8(a), may determine.
FIDELITY NATIONAL FINANCIAL, INC.
601 Riverside Avenue
Jacksonville, Florida 32204
, 2005
Dear Fidelity National Financial Stockholders:
On May 16, 2005, the board of directors of Fidelity
National Financial, Inc. (FNF) approved a
restructuring that will result in FNF contributing its title
insurance businesses to a newly formed holding company, Fidelity
National Title Group, Inc. (FNT). In connection
with the restructuring, a pro rata distribution of shares of FNT
Class A Common Stock representing 17.5% of the outstanding
common stock of FNT will be made to FNF stockholders.
As a result of the distribution, FNF stockholders will receive
.175 shares of FNT Class A Common Stock for each share
of FNF common stock held at the close of business on the
distribution record date, currently expected to be on or
about ,
2005.
On ,
2005, shares of FNT Class A Common Stock will be quoted on
the New York Stock Exchange under the symbol FNT.
Shares of FNF common stock will continue to be listed on the New
York Stock Exchange under the symbol FNF.
Immediately after the distribution is completed, FNF will own
shares of Class B Common Stock of FNT representing the
remaining 82.5% of the shares of FNT common stock. FNT
Class B Common Stock will have ten votes per share and
Class A Common Stock will have one vote per share. As a
result, FNF will hold 97.9% of all voting power of FNT common
stock immediately after the distribution. The foregoing
percentages do not include shares of Class A Common Stock
that we will grant as restricted stock to our employees and
directors in connection with this distribution, which will also
constitute outstanding shares. FNF also currently owns other
operating subsidiaries, including its majority-owned subsidiary
Fidelity National Information Services, Inc., a leading provider
of technology solutions and processing and information services
to the financial services and real estate industries, and its
wholly-owned subsidiary Fidelity National Insurance Company,
which operates various specialty lines of insurance. Separating
the businesses that comprise FNF into distinct public companies
should provide improved transparency for the investment
community and a simpler means of valuing FNF. We also believe
that using an independent operating subsidiary strategy will
allow us to focus on continuing to improve the operations of
each subsidiary while maximizing long-term shareholder value.
No action is required on your part to receive your FNT
Class A Common Stock. FNF stockholders will not be required
to pay anything to FNF or FNT for the new stock or to surrender
any certificates representing shares of FNF stock. The
receipt of the stock of FNT in the distribution will be a
taxable event to you for U.S. federal income tax
purposes.
The enclosed prospectus describes the distribution of shares of
FNT Class A Common Stock and contains important information
about FNT and its business. I suggest that you read it
carefully. If you have any questions regarding the distribution,
please contact FNTs transfer
agent, .
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Very truly yours, |
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William P. Foley, II |
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Chief Executive Officer and Chairman of the Board |
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Fidelity National Financial, Inc. |
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Chairman of the Board |
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Fidelity National Title Group, Inc. |
[FNT Letterhead]
, 2005
Dear Fidelity National Title Stockholder:
We are delighted to welcome you as a stockholder of Fidelity
National Title Group, Inc. (FNT). FNT was
recently formed as the holding company for the title insurance
businesses of Fidelity National Financial, Inc.
(FNF).
As an FNF stockholder, you will receive .175 shares of our
Class A Common Stock for each share of FNF common stock
that you held at the close of business on the distribution
record date, currently expected to be on or
about ,
2005. Immediately after the distribution, FNF will own shares of
our Class B Common Stock representing 82.5% of the
outstanding shares of our common stock and 97.9% of the voting
power of our common stock. The foregoing percentages do not
include shares of Class A Common Stock that we will grant
as restricted stock to our employees and directors in connection
with this distribution, which will also constitute outstanding
shares. Our Class A Common Stock will be publicly traded
for the first time
on ,
2005 on the New York Stock Exchange under the symbol
FNT. The receipt of the stock of FNT in the
distribution will be a taxable event to you for U.S. federal
income tax purposes.
We will conduct our title insurance business through our title
insurance underwriters Fidelity National Title,
Chicago Title, Ticor Title, Security Union Title and Alamo
Title which together comprise the largest title
insurance company in the United States.
We are enthusiastic about what the future holds for FNT. We
believe that the formation of FNT as a separate publicly traded
title company will enhance our efforts to improve our operating
businesses and expand our leadership in the title insurance
industry, while allowing us to continue to pursue growth
opportunities in our industry.
Congratulations on becoming one of the founding
stockholders of FNT.
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Very truly yours, |
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Raymond R. Quirk |
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Chief Executive Officer |
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Fidelity National Title Group, Inc. |
The information in this preliminary
prospectus is not complete and may be changed. These securities
may not be distributed until the registration statement filed
with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell and is not
soliciting an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted.
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(Subject to Completion) Issued
September 14, 2005
PROSPECTUS
Shares
(FNT LOGO)
CLASS A COMMON STOCK
We are currently a wholly-owned subsidiary of Fidelity National
Financial, Inc. (FNF). In the distribution described
in this prospectus, FNF will distribute 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. The shares being distributed represent 100% of
the outstanding shares of our Class A Common Stock.
Immediately after the distribution is completed, FNF will own
100% of our outstanding Class B Common Stock, representing
82.5% of the shares of our common stock. The foregoing
percentages do not include shares of Class A Common Stock
that we will grant as restricted stock to our employees and
directors in connection with this distribution, which will also
constitute outstanding shares.
In the distribution, you will receive .175 shares of
Class A Common Stock for each share of FNF common stock
that you held at the close of business on the distribution
record date, currently expected to be on or
about ,
2005. Immediately following the distribution, we will be an
independent, publicly traded company.
We are sending you this prospectus to describe the distribution.
We expect the distribution to occur on or
about ,
2005. You will receive your proportionate number of shares of
Fidelity National Title Group, Inc. (FNT)
Class A Common Stock through our transfer agents
book-entry registration system. These shares will not be in
certificated form. Following the distribution, you may request
to receive your shares of FNT Class A Common Stock in
certificated form.
No stockholder action is necessary for you to receive your
shares of FNT Class A Common Stock. This means that:
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you do not need to pay anything to FNT or FNF; and |
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you do not need to surrender any of your shares of FNFs
common stock to receive your shares of FNT Class A Common
Stock. |
In addition, a stockholder vote is not required for the
distribution to occur.
The distribution is expected to be taxable to FNF shareholders.
We have applied for the listing of our Class A Common Stock
on the New York Stock Exchange under the symbol FNT.
As you review this prospectus, you should carefully consider
the matters described in Risk Factors beginning on
page 7.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved these securities, or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
We expect the shares to be delivered on or
about ,
2005.
TABLE OF CONTENTS
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus.
The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
PROSPECTUS SUMMARY
This summary highlights some of the information about FNT
contained elsewhere in this prospectus and may not contain all
of the information that may be important to you. In this
prospectus, 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 in this prospectus 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,
including the more detailed information in our financial
statements and related notes appearing elsewhere in this
prospectus. 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 Distribution
We are currently a wholly-owned subsidiary of FNF. After the
distribution of the shares covered by this prospectus, FNF will
beneficially own 100% of the shares of our Class B Common
Stock, representing 82.5% of our outstanding common stock and
97.9% of all voting power of our common stock. 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).
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.
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.
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Competitive cost structure. We have been able to maintain
competitive operating margins and also 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 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.
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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 this distribution, 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.
We are dependent on our subsidiaries to pay dividends. As
a holding company, we are dependent on distributions from our
subsidiaries and our ability to declare and pay dividends 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 the payment of dividends. 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,
see Risk Factors.
Company 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. 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 Distribution
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The Distribution |
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The distribution is part of a restructuring whereby FNT will
become a separate publicly traded company. |
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Reason for the Distribution |
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The distribution should enhance the ability of the financial
markets to evaluate the individual operations of the title
business which were previously valued as part of FNFs
operations. A separate publicly traded title company will also
allow investors who prefer title company operations to that of
the broader operations of FNF to own an investment directly in
FNT. Moreover, separate incentive compensation plans for key
employees will provide incentives that are more directly related
to the performance of the title insurance business. |
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Distributing Company |
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FNF. After the distribution, FNF will own 100% of FNTs
Class B Common Stock, comprising approximately 82.5% of
FNTs outstanding common stock. FNF has indicated it
currently has no plans to dispose of its common stock interest
in FNT. |
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Securities to be Distributed |
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Approximately shares
of the Class A Common Stock of FNT, representing 100% of
the outstanding Class A Common Stock of FNT and
approximately 17.5% of FNTs outstanding common stock.
Immediately following the distribution, approximately
1,540 stockholders of record will hold shares of the
Class A Common Stock, although many of the shares may be
registered in the name of a single stockholder who represents a
number of stockholders. |
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Distribution Ratio |
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Each stockholder of FNF common stock will receive
.175 shares of Class A Common Stock of FNT for each
FNF share held on the distribution record date. |
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Voting Rights |
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Holders of Class A Common Stock are entitled to one vote
per share held on all matters submitted to a vote of FNT
stockholders. Holders of Class B Common Stock are entitled
to ten votes per share held on all matters submitted to a vote
of stockholders. |
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Distribution Record Date |
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Expected to
be ,
2005 (close of business) |
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Distribution Date |
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Expected to
be ,
2005 |
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Distribution Agent |
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Continental Stock Transfer & Trust Company |
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Registrar and Transfer Agent |
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Continental Stock Transfer & Trust Company |
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Use of Proceeds |
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Because this is not an offering for cash, there will be no
proceeds to FNT from the distribution. |
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Dividend Policy |
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We currently intend to pay an annual dividend of $1.00 per
FNT common share payable quarterly to FNT stockholders of
record, beginning in
the quarter
of 2005. Any determination to pay cash dividends will be made at
the discretion of our board of directors. |
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Proposed NYSE Symbol |
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We have applied for the listing of our Class A Common Stock
on the New York Stock Exchange under the symbol FNT. |
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Tax Consequences |
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The receipt of the stock of FNT in the distribution will be a
taxable event to FNF stockholders for U.S. federal income
tax purposes. See United States Federal Income Tax
Considerations. |
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Distribution of Shares |
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On or shortly after the distribution date, beneficial owners of
shares of FNF common stock on the distribution record date
should have credited to their brokerage, custodian or similar
account through which they own their FNF common stock, the
number of shares of our Class A Common Stock to which they
are entitled in the distribution. |
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Relationship with FNF after the Distribution |
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We expect to enter into certain agreements with FNF which will
address various matters such as corporate services, taxes,
employee matters, registration rights and intellectual property,
among other things. See Our Arrangements with FNF. |
The number and percentages of shares of our common stock
identified above and elsewhere in this prospectus as outstanding
after this distribution do not include shares of Class A
Common Stock that we will grant as restricted stock to our
employees and directors in connection with this distribution,
which will also constitute outstanding shares. Although the
final number of such shares to be granted has not yet been
determined, we do not believe that it will
exceed shares,
of which an aggregate
of shares
will be granted to our top five most highly paid executive
officers and our directors. See Management
Omnibus Incentive Plan.
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Summary Historical Financial Information
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. The summary historical financial
information as of June 30, 2005 and for the six months
ended June 30, 2005 and 2004 has been derived from our
unaudited condensed combined financial statements, which are
included elsewhere in this prospectus. You should read this
financial information in conjunction with the audited and
unaudited combined financial statements included elsewhere in
this prospectus 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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Six Months Ended | |
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June 30, | |
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Year Ended December 31, | |
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2005(1) | |
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2004(1) | |
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2004(1) | |
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2003(1) | |
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2002 | |
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STATEMENT OF EARNINGS DATA (in thousands)
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Total title premiums
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$ |
2,321,596 |
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$ |
2,335,449 |
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$ |
4,718,217 |
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$ |
4,700,750 |
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$ |
3,547,727 |
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Escrow and other title-related fees
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543,465 |
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514,019 |
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1,039,835 |
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1,058,729 |
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790,787 |
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Other income
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87,372 |
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66,780 |
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131,361 |
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211,236 |
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128,816 |
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Total revenue
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2,952,433 |
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2,916,248 |
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5,889,413 |
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5,970,715 |
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4,467,330 |
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Total expenses
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2,561,607 |
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2,478,236 |
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5,006,486 |
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4,878,795 |
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3,697,966 |
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Earnings before income taxes and minority interest
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390,826 |
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438,012 |
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882,927 |
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1,091,920 |
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769,364 |
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Income tax expense
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146,637 |
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160,312 |
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323,598 |
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407,736 |
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276,970 |
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Earnings before minority interest
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244,189 |
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277,700 |
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|
|
559,329 |
|
|
|
684,184 |
|
|
|
492,394 |
|
Minority interest
|
|
|
1,292 |
|
|
|
455 |
|
|
|
1,165 |
|
|
|
859 |
|
|
|
624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
242,897 |
|
|
$ |
277,245 |
|
|
$ |
558,164 |
|
|
$ |
683,325 |
|
|
$ |
491,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited proforma net earnings per share basic and
diluted
|
|
$ |
1.40 |
|
|
|
|
|
|
$ |
3.22 |
|
|
|
|
|
|
|
|
|
|
Unaudited proforma weighted average shares
outstanding basic and diluted(2)
|
|
|
172,951 |
|
|
|
|
|
|
|
172,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
June 30, 2005 | |
|
|
| |
BALANCE SHEET DATA (in thousands)
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
614,555 |
|
Total assets
|
|
|
5,973,378 |
|
Total long-term debt
|
|
|
7,802 |
|
Minority interest
|
|
|
4,643 |
|
Total equity
|
|
|
3,044,615 |
|
|
|
(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 $2.1 million for the six months ended
June 30, 2005 and 2004, respectively. |
|
(2) |
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. |
6
RISK FACTORS
An investment in our common stock involves a number of risks.
Each stockholder of FNT common stock should carefully consider
the following information about these risks, together with the
other information contained in this prospectus. These risks
could materially affect our business, results of operations or
financial condition and cause the trading price of our common
stock to decline.
Risks Relating to Our Business
|
|
|
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. |
While prevailing mortgage interest rates have declined to record
lows in recent years and both volume and 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.
|
|
|
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.
|
|
|
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; |
7
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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, and could affect
our ability to pay dividends on our common stock. In addition,
we may incur significant costs in the course of complying with
regulatory requirements. We cannot assure you that future
legislative or regulatory changes will not adversely affect our
business operations. See Business
Regulation.
|
|
|
Regulatory investigations of the insurance industry may
lead to new regulation and legal uncertainty, which could
negatively affect our results of operations. |
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 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. Other state insurance departments and attorneys
general also have made formal or informal inquiries of us
regarding these matters.
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 we will pay a penalty of $5.6 million.
We have been cooperating and intend to continue to cooperate
with the other ongoing investigations. We have discontinued all
reinsurance agreements of the type the investigations cover. The
total amount of premiums we ceded to reinsurers was
approximately $10 million over the existence of these
agreements. These investigations are at an early stage and as a
result we are unable to give any assurance regarding their
consequences for the industry or for us.
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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. 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.
8
|
|
|
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 Standard & Poors, a
division of The McGraw-Hill Companies, Inc.
(S&P), Moodys Corporation
(Moodys), Fitch Ratings, Inc.
(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 rating, operating
performance, and ability to meet its obligations to
policyholders and are not evaluations directed to investors. In
connection with the announcement of this 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-. 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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|
|
As a holding company, we depend on distributions from our
subsidiaries, and if distributions from our subsidiaries are
materially impaired, our ability to declare and pay dividends
may be adversely affected. |
We are a holding company whose primary assets are the securities
of our operating subsidiaries. Our ability to pay dividends is
dependent on the ability of our subsidiaries to pay dividends or
repay funds to us. If our operating subsidiaries are not able to
pay dividends or repay funds to us, we may not be able to
declare and pay dividends to our stockholders.
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.
|
|
|
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
9
companies, expansion by smaller regional companies and any new
entrants with alternative products could affect our business
operations and financial condition.
|
|
|
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. Prior to the distribution, FNF will contribute to
us the various 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 will not
be our employees after the distribution but who have
historically provided services to us. These allocations are
expected to in general continue after the distribution under the
corporate services agreements to be 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 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.
Risks Relating to the Distribution
|
|
|
We will be controlled by FNF as long as it owns a majority
of the voting power of our common stock and our other
stockholders will be unable to affect the outcome of stockholder
voting during this time. |
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. After the completion of this
distribution, FNF will own 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; |
|
|
|
mergers or other business combinations involving us; |
|
|
|
the acquisition or disposition of assets by us; |
|
|
|
our issuance of stock; |
|
|
|
our payment of dividends; |
|
|
|
our financing; and |
|
|
|
amendments to our certificate of incorporation and bylaws. |
We have agreed that, with 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
10
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.
This concentrated ownership also might delay or prevent a change
in control and may impede or prevent transactions in which
stockholders might otherwise receive a premium for their shares.
In addition, we will enter into a registration rights agreement
with FNF requiring us, under certain circumstances, to register
FNT shares beneficially owned by FNF following this
distribution. See Our Arrangements with FNF
Registration Rights Agreement. If FNF exercises these
registration rights, the market price of our common stock could
be adversely affected.
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|
|
We could have conflicts with entities remaining with FNF,
and the chairman of our board of directors will also be 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.
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 this 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 this
distribution. As an officer and director of multiple companies,
he will have 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 |
|
|
|
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 Description of Capital
Stock Provisions of our Certificate of Incorporation
and Resolutions Relating to Corporate Opportunities.
Moreover, our ability to take advantage of certain corporate
opportunities may be limited by FNFs voting control over
us.
11
Risks Relating to our Common Stock
|
|
|
You may experience fluctuations in the prices of our
common stock or the common stock of FNF as a result of this
distribution. |
Prior to this distribution, there has not been a market for our
common stock. Our common stock will be traded on the NYSE after
the distribution. We cannot predict the prices at which our
common stock may trade after the distribution. After the
distribution, FNF common stock will continue to be listed and
traded on the NYSE. As a result of the distribution, the trading
price of FNF common stock will likely be lower than the trading
price of FNF common stock immediately prior to the distribution.
The combined trading prices of FNF common stock and FNT common
stock after the distribution may be less than, equal to or
greater than the trading prices of FNF common stock immediately
prior to the distribution. Until the market has fully analyzed
the operations of FNF separate from the operations of FNT and
the operations of FNT separate from the operations of FNF, the
prices at which both FNT and FNF common stock trade may
fluctuate.
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|
The price of our common stock may be volatile and may be
affected by market conditions beyond our control. |
Our share price is likely to fluctuate in the future because of
the volatility of the stock market in general and a variety of
factors, including:
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quarterly variations in actual or anticipated results of our
operations; |
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changes in financial estimates by securities analysts; |
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actions or announcements by our competitors; |
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|
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regulatory actions; |
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|
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changes in the market outlook for the lending and real estate
industries; |
|
|
|
departure of our key personnel; and |
|
|
|
future sales of our common stock, including by FNF. |
These market fluctuations could result in volatility in the
price of our shares of common stock, which could cause a decline
in the value of your investment. You should also be aware that
price volatility may be greater if the public float and trading
volume of our shares of common stock is low.
|
|
|
Provisions in our charter documents, Delaware law and
state insurance laws may delay or prevent a change in control
and may therefore prevent stockholders from receiving the
benefit of potential control transactions. |
Our certificate of incorporation, bylaws and the laws of
Delaware contain provisions that may delay, deter or prevent a
takeover attempt that some stockholders might consider in their
best interests. For example, our organizational documents
provide for a classified board of directors with staggered
terms, prevent stockholders from taking action by written
consent, prevent stockholders from calling a special meeting of
stockholders, provide for supermajority voting requirements to
amend our certificate of incorporation and certain provisions of
our bylaws and provide for the filling of vacancies on our board
of directors by the majority of the directors then in office.
These provisions will render the removal of the incumbent board
of directors or management more difficult. In addition, these
provisions may prevent stockholders from receiving the benefit
of any premium over the market price of our common stock offered
by a bidder in a potential takeover. Even in the absence of a
takeover attempt, the existence of these provisions may
adversely affect the prevailing market price of our common stock
if they are viewed as discouraging takeover attempts in the
future.
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
12
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.
13
THE DISTRIBUTION
History
We are currently a wholly-owned subsidiary of FNF. We were
incorporated in Delaware on May 24, 2005 in connection with
a restructuring by FNF of its title insurance business. In the
restructuring, FNT will become the holding company for
FNFs title insurance business. The distribution will
result in FNTs title insurance business becoming a
separate public company, distinct from FNFs information
services business and specialty insurance business.
Benefits of the Distribution
We believe that we can realize significant benefits from the
distribution. These benefits include:
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|
having a separate public company which will enable financial
markets to better evaluate the individual operations of the
title business apart from FNF; |
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|
|
having a separate management and ownership structure for our
company which will provide equity based compensation that is
more closely related to the business in which our employees
work; and |
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placing us in a better position to focus on the title insurance
business and maintain our competitiveness in a consolidating
title insurance market. |
Actions to be Taken Prior to the Distribution
Currently, FNF directly owns various subsidiaries engaged in the
title insurance business. FNF will contribute the stock or other
securities of these entities to its subsidiary Chicago Title and
Trust Company (CTT). As a result of this
contribution, these entities and their subsidiaries will become
direct or indirect subsidiaries of CTT. Following this
contribution, FNF will contribute the stock of CTT to FNT.
Following this contribution, the entities comprising FNFs
title business will be direct or indirect subsidiaries of FNT.
This reorganization is subject to the prior approval of
insurance and other regulators in several states.
Prior to the distribution of FNT common stock to the
stockholders of FNF, we will enter into certain agreements in
connection with the distribution. These agreements include:
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a separation agreement between us and FNF; |
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corporate services agreements under which we will provide
corporate and other support services to FNF and to FIS, and
under which FNF will provide certain services to us; |
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a tax matters agreement which covers our responsibilities with
respect to tax liabilities and refunds, tax attributes, tax
contests and other matters relating to income tax; |
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a services agreement between us and FIS under which FIS will
provide IT and other technology support services to us; and |
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various other agreements covering employee matters, intellectual
property, and other matters. |
The separation agreement provides, among other things, that both
FNT and FNF will have access to financial information of each
other and that FNT will provide to FNF all financial information
and other data that will allow FNF to consolidate our results of
operations and financial position or account for FNFs
investment in our company under the equity method of accounting.
It also provides that, subject to certain limited exceptions, we
will not issue any shares of stock without consent of FNF. In
addition, each of FNT and FNF have agreed to indemnify the other
in connection with the liabilities each assumes and any breach
by it of the agreements entered into as a result of this
distribution. For more detailed descriptions of the above
agreements, see Our Arrangements with FNF.
In addition, prior to the distribution we intend to issue
$500 million principal amount of notes to FNF, with terms
that mirror FNFs existing public debt. We also anticipate
that, at the time of or shortly
14
after the distribution, we will enter into a new credit
facility, borrow $150 million under that facility and pay
it to FNF in satisfaction of a $150 million intercompany
note issued by one of our subsidiaries to FNF in
August 2005. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
Manner of Effecting the Distribution
FNF will effect the distribution by delivering shares of
Class A Common Stock of FNT representing 17.5% of the
outstanding shares of FNT common stock (not including restricted
stock grants) to Continental Stock Transfer & Trust
Company, which will serve as the distribution agent for the
distribution, for a pro rata distribution to the holders of
record of FNF as of the close of business on the record date
of ,
2005. The distribution of FNT Class A Common Stock will be
made on the basis of a distribution ratio of .175 shares of
FNT Class A Common Stock for every share of FNF common
stock held as of the close of business on the record date. The
actual total number of shares of FNT Class A Common Stock
to be distributed depends on the number of shares of FNF common
stock outstanding as of the record date. The distribution agent
will credit the brokerage accounts of FNF stockholders, or if
requested, will mail FNT Class A Common Stock certificates
to FNF stockholders,
on ,
2005.
No Fractional Shares
No fractional shares of FNT Class A Common Stock will be
issued to FNF stockholders as part of the distribution. Instead,
all fractional shares will be aggregated and sold in the public
market by the distribution agent, and the aggregate cash
proceeds will be distributed proportionately to stockholders
otherwise entitled to fractional shares. The distribution agent
in its sole discretion will determine how and through which
broker-dealer to make the sales of the aggregated fractional
shares, all of which will be sold at prevailing market prices.
Neither the distribution agent nor the broker-dealer will be an
affiliate of FNF or FNT. If you would otherwise be entitled to a
fractional share, you will receive a check or a credit to your
brokerage account in an amount equal to the value of the
fractional shares as soon as practicable after the distribution.
Results of the Distribution
After the distribution, FNT will be a publicly traded company,
with FNF owning 100% of our Class B Common Stock, representing
82.5% of FNTs outstanding common stock and 97.9% of the
voting power of our common stock (in each case, not including
restricted stock grants). FNF will continue to be a publicly
traded company. In addition, immediately after the distribution
the number and identity of stockholders of record of FNT will be
the same as the number and identity of stockholders of record of
FNF
on ,
2005, the record date for the distribution. As of the record
date, FNF had
approximately stockholders
of record
and shares
of common stock outstanding. The distribution will not affect
the number of outstanding shares of FNF common stock or the
rights of FNF stockholders.
On ,
2005, shares of FNT Class A Common Stock will be quoted on the
NYSE under the symbol FNT. Shares of FNF common
stock will continue to be listed on the NYSE under the symbol
FNF.
15
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 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:
|
|
|
|
|
adverse changes in real estate activity; |
|
|
|
regulatory conditions in California; |
|
|
|
regulation by state insurance authorities; |
|
|
|
regulatory investigations involving title insurance; |
|
|
|
rate regulation by state authorities; |
|
|
|
downgrades by our rating agencies; |
|
|
|
dependence upon our subsidiaries for dividend payments; |
|
|
|
competition from traditional title insurers and new
entrants; and |
|
|
|
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
proceeds from the distribution.
DIVIDEND POLICY
We currently intend to pay an annual dividend of $1.00 per
FNT common share payable quarterly to FNT stockholders of
record, beginning in
the quarter
of 2005. Any determination to pay cash dividends will be at the
discretion of our board of directors and will be dependent upon
various factors then existing, including:
|
|
|
|
|
our financial condition, operating results and current and
anticipated cash needs; |
|
|
|
general economic and business conditions; |
|
|
|
our strategic plans and business prospects; |
|
|
|
regulatory restrictions on the ability of our subsidiaries to
pay dividends to us to provide us with cash for the payment of
dividends to our stockholders; |
|
|
|
any legal or contractual restrictions on our ability to pay
dividends to our stockholders; and |
|
|
|
other factors that our board of directors may consider to be
relevant. |
Our U.S. insurance subsidiaries are regulated by the insurance
laws and regulations of their respective states of domicile
regarding dividends and distributions 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. For a more
detailed discussion of the regulatory restrictions on dividends
from our title insurance subsidiaries, see
Business Regulation.
16
CAPITALIZATION
The following table describes our cash and cash equivalents and
capitalization as of June 30, 2005 on an actual basis, and
on an as-adjusted basis to give effect to the distribution, the
debt we will incur immediately prior to the distribution, the
payment of dividends by two of our subsidiaries to FNF after
June 30, 2005 and our estimated distribution expenses. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 | |
|
|
| |
|
|
Actual | |
|
As Adjusted | |
|
|
| |
|
| |
|
|
(In thousands) | |
Cash and cash equivalents
|
|
$ |
614,555 |
|
|
$ |
469,555 |
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
7,802 |
|
|
|
657,802 |
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value
|
|
|
|
|
|
|
17 |
|
|
Additional paid-in capital
|
|
|
|
|
|
|
2,301,600 |
|
|
Investment by FNF
|
|
|
3,096,617 |
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(52,002 |
) |
|
|
(52,002 |
) |
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,044,615 |
|
|
|
2,249,615 |
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
3,052,417 |
|
|
$ |
2,907,417 |
|
|
|
|
|
|
|
|
The actual and as-adjusted information set forth in the table:
|
|
|
|
|
|
excludes shares of common stock to be granted as restricted
stock under our omnibus incentive plan as of completion of this
distribution and |
|
|
|
|
|
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. |
|
The as adjusted information set forth in the table includes:
|
|
|
|
|
the payment of a dividend of $145 million in July 2005 to
FNF by one of our insurance subsidiaries; |
|
|
|
$150 million of borrowings under a new credit facility (which we
plan to enter into at the time of or shortly after the
distribution) to repay a $150 million principal amount
promissory note dividended in August 2005 to FNF by one of our
insurance subsidiaries; and |
|
|
|
our planned issuance of $500 million principal amount of
notes to FNF, with terms that mirror FNFs existing public
debt. |
See Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources.
17
SELECTED HISTORICAL FINANCIAL INFORMATION
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. The selected historical financial
information as of June 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 June 30, 2005 and for the six
months ended June 30, 2005 and 2004 has been derived from
our unaudited condensed combined financial statements, which are
included elsewhere in this prospectus. You should read this
financial information in conjunction with the audited and
unaudited combined financial statements included elsewhere in
this prospectus 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
|
|
June 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005(2) | |
|
2004(2) | |
|
2004(2) | |
|
2003(2) | |
|
2002 | |
|
2001(1)(3) | |
|
2000(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Statement of Earnings Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct title insurance premiums
|
|
$ |
1,017,396 |
|
|
$ |
987,019 |
|
|
$ |
2,003,447 |
|
|
$ |
2,105,317 |
|
|
$ |
1,557,769 |
|
|
$ |
1,252,656 |
|
|
$ |
786,588 |
|
Agency title insurance premiums
|
|
|
1,304,200 |
|
|
|
1,348,430 |
|
|
|
2,714,770 |
|
|
|
2,595,433 |
|
|
|
1,989,958 |
|
|
|
1,441,416 |
|
|
|
1,159,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total title premiums
|
|
|
2,321,596 |
|
|
|
2,335,449 |
|
|
|
4,718,217 |
|
|
|
4,700,750 |
|
|
|
3,547,727 |
|
|
|
2,694,072 |
|
|
|
1,945,793 |
|
Escrow and other title related fees
|
|
|
543,465 |
|
|
|
514,019 |
|
|
|
1,039,835 |
|
|
|
1,058,729 |
|
|
|
790,787 |
|
|
|
656,739 |
|
|
|
496,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total title and escrow
|
|
|
2,865,061 |
|
|
|
2,849,468 |
|
|
|
5,758,052 |
|
|
|
5,759,479 |
|
|
|
4,338,514 |
|
|
|
3,350,811 |
|
|
|
2,442,228 |
|
Interest and investment income
|
|
|
45,430 |
|
|
|
28,163 |
|
|
|
64,885 |
|
|
|
56,708 |
|
|
|
72,305 |
|
|
|
88,232 |
|
|
|
80,407 |
|
Realized gains and losses, net
|
|
|
21,922 |
|
|
|
17,044 |
|
|
|
22,948 |
|
|
|
101,839 |
|
|
|
584 |
|
|
|
946 |
|
|
|
4,605 |
|
Other income
|
|
|
20,020 |
|
|
|
21,573 |
|
|
|
43,528 |
|
|
|
52,689 |
|
|
|
55,927 |
|
|
|
50,476 |
|
|
|
27,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,952,433 |
|
|
|
2,916,248 |
|
|
|
5,889,413 |
|
|
|
5,970,715 |
|
|
|
4,467,330 |
|
|
|
3,490,465 |
|
|
|
2,554,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
|
904,603 |
|
|
|
838,063 |
|
|
|
1,680,805 |
|
|
|
1,692,895 |
|
|
|
1,260,070 |
|
|
|
1,036,236 |
|
|
|
765,319 |
|
Other operating expenses
|
|
|
451,093 |
|
|
|
422,113 |
|
|
|
849,554 |
|
|
|
817,597 |
|
|
|
633,193 |
|
|
|
558,263 |
|
|
|
457,476 |
|
Agent commissions
|
|
|
1,005,121 |
|
|
|
1,046,601 |
|
|
|
2,117,122 |
|
|
|
2,035,810 |
|
|
|
1,567,112 |
|
|
|
1,131,892 |
|
|
|
906,043 |
|
Depreciation and amortization
|
|
|
49,389 |
|
|
|
44,193 |
|
|
|
95,718 |
|
|
|
79,077 |
|
|
|
53,042 |
|
|
|
100,225 |
|
|
|
88,033 |
|
Provision for claim losses
|
|
|
150,677 |
|
|
|
125,010 |
|
|
|
259,402 |
|
|
|
248,834 |
|
|
|
175,963 |
|
|
|
134,527 |
|
|
|
97,161 |
|
Interest expense
|
|
|
724 |
|
|
|
2,256 |
|
|
|
3,885 |
|
|
|
4,582 |
|
|
|
8,586 |
|
|
|
15,695 |
|
|
|
15,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2,561,607 |
|
|
|
2,478,236 |
|
|
|
5,006,486 |
|
|
|
4,878,795 |
|
|
|
3,697,966 |
|
|
|
2,976,838 |
|
|
|
2,329,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
|
390,826 |
|
|
|
438,012 |
|
|
|
882,927 |
|
|
|
1,091,920 |
|
|
|
769,364 |
|
|
|
513,627 |
|
|
|
225,182 |
|
Income tax expense
|
|
|
146,637 |
|
|
|
160,312 |
|
|
|
323,598 |
|
|
|
407,736 |
|
|
|
276,970 |
|
|
|
205,965 |
|
|
|
97,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before minority interest
|
|
|
244,189 |
|
|
|
277,700 |
|
|
|
559,329 |
|
|
|
684,184 |
|
|
|
492,394 |
|
|
|
307,662 |
|
|
|
128,129 |
|
Minority interest
|
|
|
1,292 |
|
|
|
455 |
|
|
|
1,165 |
|
|
|
859 |
|
|
|
624 |
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
242,897 |
|
|
$ |
277,245 |
|
|
$ |
558,164 |
|
|
$ |
683,325 |
|
|
$ |
491,770 |
|
|
$ |
301,953 |
|
|
$ |
128,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited proforma net earnings per share basic and
diluted
|
|
$ |
1.40 |
|
|
|
|
|
|
$ |
3.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited proforma weighted average shares
outstanding basic and diluted(4)
|
|
|
172,951 |
|
|
|
|
|
|
|
172,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
(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 $2.1 million for the six months ended
June 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) |
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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, | |
|
As of December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance sheet data (at end of period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$ |
3,424,810 |
|
|
$ |
2,791,713 |
|
|
$ |
2,819,489 |
|
|
$ |
2,510,182 |
|
|
$ |
2,337,472 |
|
|
$ |
1,705,267 |
|
|
$ |
1,579,790 |
|
Cash and cash equivalents
|
|
|
614,555 |
|
|
|
497,653 |
|
|
|
268,414 |
|
|
|
395,857 |
|
|
|
433,379 |
|
|
|
491,709 |
|
|
|
214,398 |
|
Total assets
|
|
|
5,973,378 |
|
|
|
5,262,282 |
|
|
|
5,074,091 |
|
|
|
4,782,664 |
|
|
|
4,494,716 |
|
|
|
3,848,300 |
|
|
|
3,542,307 |
|
Notes payable
|
|
|
7,802 |
|
|
|
36,946 |
|
|
|
22,390 |
|
|
|
54,259 |
|
|
|
107,874 |
|
|
|
176,116 |
|
|
|
148,858 |
|
Reserve for claim losses
|
|
|
984,290 |
|
|
|
977,926 |
|
|
|
980,746 |
|
|
|
932,439 |
|
|
|
887,973 |
|
|
|
881,053 |
|
|
|
907,292 |
|
Minority interests
|
|
|
4,643 |
|
|
|
3,448 |
|
|
|
3,951 |
|
|
|
2,488 |
|
|
|
1,098 |
|
|
|
239 |
|
|
|
204 |
|
Equity
|
|
|
3,044,615 |
|
|
|
2,531,127 |
|
|
|
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)
|
|
|
1,577,164 |
|
|
|
1,689,219 |
|
|
|
3,142,945 |
|
|
|
3,771,393 |
|
|
|
2,953,797 |
|
|
|
2,496,597 |
|
|
|
1,267,407 |
|
Direct operations orders closed(1)
|
|
|
1,048,931 |
|
|
|
1,165,864 |
|
|
|
2,249,792 |
|
|
|
2,916,201 |
|
|
|
2,141,680 |
|
|
|
1,685,147 |
|
|
|
911,349 |
|
Fee per closed file(1)
|
|
$ |
1,447 |
|
|
$ |
1,257 |
|
|
$ |
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. |
19
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. 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. Prior to the distribution FNF will contribute to us
the subsidiaries relating to our business and operations as
described in this prospectus.
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 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 not being transferred to
us, including those being conducted with FIS.
20
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
21
agreement in place, but if it had been, 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 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 will be
22
the subject of agreements to be entered into by us with related
parties at or prior to the time of the distribution. These new
agreements and certain other agreements we will enter into at
the time of the distribution are described in Our
Arrangements with FNF.
Prior to the distribution we intend 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 our subsidiary, Chicago
Title, and the proceeds from the 2013 public debentures were
used for general corporate purposes. Following the issuance of
the intercompany notes, we may make an exchange offer in which
we would offer to exchange the outstanding FNF notes for notes
we would issue having substantially the same terms and deliver
the FNF notes received to FNF to reduce the debt under the
intercompany 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 July 29, 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,
23
benefiting our revenues. Through the second quarter of 2005,
refinance activity has continued to decrease, 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 43.3% of
new loan originations in the first six months of 2005 were
refinance transactions as compared with approximately 48.8% in
the first six 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 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.
24
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% |
|
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
losses 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
incurred but not reported losses, combined with our reserves for
known claims, totaled $1,000.1 million, slightly above our
carried reserves at that date.
25
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
|
|
|
275,406 |
|
|
|
237,919 |
|
|
|
207,290 |
|
|
|
Prior year
|
|
|
(16,004 |
) |
|
|
10,915 |
|
|
|
(31,337 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
|
259,402 |
|
|
|
248,834 |
|
|
|
175,953 |
|
Claims paid, net of recoupment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(19,095 |
) |
|
|
(11,591 |
) |
|
|
(10,058 |
) |
|
|
Prior year
|
|
|
(230,597 |
) |
|
|
(196,980 |
) |
|
|
(158,975 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total paids, net of recoupments
|
|
|
(249,692 |
) |
|
|
(208,571 |
) |
|
|
(169,033 |
) |
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 Years
|
|
|
(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
26
home sale activity. In the independent actuaries estimate
only one half of the effect of projecting significant losses
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.
27
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 Six Months ended June 30, 2005 and
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Direct title insurance premiums
|
|
$ |
1,017,396 |
|
|
$ |
987,019 |
|
Agency title insurance premiums
|
|
|
1,304,200 |
|
|
|
1,348,430 |
|
|
|
|
|
|
|
|
|
Total title insurance premiums
|
|
|
2,321,596 |
|
|
|
2,335,449 |
|
Escrow and other title-related fees
|
|
|
543,465 |
|
|
|
514,019 |
|
Interest and investment income
|
|
|
45,430 |
|
|
|
28,163 |
|
Realized gains and losses, net
|
|
|
21,922 |
|
|
|
17,044 |
|
Other income
|
|
|
20,020 |
|
|
|
21,573 |
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,952,433 |
|
|
|
2,916,248 |
|
|
|
|
|
|
|
|
Personnel costs
|
|
|
904,603 |
|
|
|
838,063 |
|
Other operating expenses
|
|
|
451,093 |
|
|
|
422,113 |
|
Agent commissions
|
|
|
1,005,121 |
|
|
|
1,046,601 |
|
Depreciation and amortization
|
|
|
49,389 |
|
|
|
44,193 |
|
Provision for claim losses
|
|
|
150,677 |
|
|
|
125,010 |
|
Interest expense
|
|
|
724 |
|
|
|
2,256 |
|
|
|
|
|
|
|
|
|
Total expense
|
|
|
2,561,607 |
|
|
|
2,478,236 |
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
|
390,826 |
|
|
|
438,012 |
|
Income tax expense
|
|
|
146,637 |
|
|
|
160,312 |
|
|
|
|
|
|
|
|
Earnings before minority interest
|
|
|
244,189 |
|
|
|
277,700 |
|
Minority interest
|
|
|
1,292 |
|
|
|
455 |
|
|
|
|
|
|
|
|
Net Earnings
|
|
$ |
242,897 |
|
|
$ |
277,245 |
|
|
|
|
|
|
|
|
Orders opened by direct title operations(1)
|
|
|
1,577,164 |
|
|
|
1,689,219 |
|
Orders closed by direct title operations(1)
|
|
|
1,048,931 |
|
|
|
1,165,864 |
|
28
|
|
(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. |
Total revenues for the first six months of 2005 increased
$36.2 million to $2,952.4 million as compared to the
first six months of 2004. This increase was primarily the result
of a change in accounting estimate relating to agency title
premiums, increased direct title premiums, escrow and other
title-related fees and interest and investment income. 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 $50.0 million in additional agency revenue in
the second quarter and six month period than we would have under
our prior method. The impact on net earnings of this adjustment
was approximately $2.0 million.
Total title insurance premiums for the six-month periods were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, | |
|
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
2005 | |
|
Total | |
|
2004 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Title premiums from direct operations
|
|
$ |
1,017,396 |
|
|
|
43.8% |
|
|
$ |
987,019 |
|
|
|
42.3% |
|
Title premiums from agency operations
|
|
|
1,304,200 |
|
|
|
56.2% |
|
|
|
1,348,430 |
|
|
|
57.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,321,596 |
|
|
|
100.0% |
|
|
$ |
2,335,449 |
|
|
|
100.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title insurance premiums decreased 0.6% to $2,321.6 million
in the first six months of 2005 as compared with the first six
months of 2004. A decrease of $44.2 million or 3.3% in
premiums from agency operations was offset by an increase of
$30.4 million or 3.1% in direct premiums. The decrease in
agency premiums was offset by approximately $50.0 million
in additional agency premiums accrued in the second quarter of
2005 due to the change in estimate for accruing agency revenues
noted above. The increased level of direct title premiums is a
direct result of an increase in the average fee per file offset
by a decline in closed order levels as compared with the prior
year. The drop experienced in closed orders reflects a slowing
refinance market as evidenced by the MBA statistics showing that
approximately 43.3% of new loan originations in the first six
months of 2005 were refinance transactions as compared with
approximately 48.8% in the first six months of 2004. The
increase in fee per file is the result of the decreased levels
of refinance-driven activity, which typically have lower fees,
in the first six months of 2005 as compared with the same period
of the prior year, as well as the appreciation of home prices
over the past year. The decrease in agency revenues relates to
the fact that the first six months of 2004 benefited from the
continued strong refinance volumes of 2003, which were at an
all-time high, while in the first six months of 2005 there was a
weaker refinance environment. The 2004 period included
$74.5 million in revenue from FISs title agency
business, which benefited from refinancings, while the 2005
period only included $42.8 million in revenue from
FISs title 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 during the
six-month periods ended June 30, 2005 and 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 $543.5 million and
$514.0 million for the first six 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 in the
first six months of 2005 was $45.4 million, compared with
$28.2 million in the first six months of 2004, an increase
of $17.2 million, or 60.9%. The increase in interest and
investment income in the first six months of 2005 is due
primarily to an increase in our fixed income asset base during
the current year period and the increasing interest rate
environment.
29
Net realized gains for the first six months of 2005 were
$21.9 million compared with net realized gains of
$17.0 million for the corresponding period of the prior
year.
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 and mix of business between direct and
agency operations 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 short-run fixed
costs and certain long-run fixed costs are incurred regardless
of revenue levels.
Personnel costs include base salaries, commissions, benefits and
bonuses paid to employees, and are one of our most significant
operating expenses. Personnel costs totaled $904.6 million
and $838.1 million for the six months ended June 30,
2005 and 2004, respectively. Personnel costs, as a percentage of
total direct title premiums and escrow and other title-related
fees, were 58.0% in the first six months of 2005, and 55.8% for
the first six months of 2004. The increase of $66.5 million
or 7.9% in personnel costs primarily relates to an increase in
revenues from direct operations of 3.9% and higher costs
incurred in 2005 due to the competitive environment.
Other operating expenses consist primarily of facilities
expenses, title plant-related charges, 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 receivable allowances.
Other operating expenses totaled $451.1 million and
$422.1 million for the six months ended June 30, 2005
and 2004, respectively. The increase of $29.0 million or
6.8% primarily relates to the increase in revenues from direct
operations.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Agent title premiums
|
|
$ |
1,304,200 |
|
|
|
100.0% |
|
|
$ |
1,348,430 |
|
|
|
100.0% |
|
Agent commissions
|
|
|
1,005,121 |
|
|
|
77.1% |
|
|
|
1,046,601 |
|
|
|
77.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net margin
|
|
$ |
299,079 |
|
|
|
22.9% |
|
|
$ |
301,829 |
|
|
|
22.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net margin from agency title insurance premiums increased as a
percentage of total agency premiums due to our writing a higher
percentage of policies in states where we pay lower commission
rates.
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 $150.7 million in
the first six months of 2005 as compared to $125.0 million
in the first six months of 2004. Our claim loss provision as a
percentage of total title premiums was 6.5% and 5.4% in the
first six months of 2005 and 2004, respectively. The increase is
attributable to higher than expected payment levels, especially
for individually significant claims, and a return to a more
normalized environment with the volume of resale transactions
exceeding the refinance transactions.
30
Interest expense was $0.7 million and $2.3 million in
the first six months of 2005 and 2004, respectively.
Income tax expense as a percentage of earnings before income
taxes was 37.5% for the first six months of 2005 and 36.6% for
the first six months of 2004. Income tax expense as a percentage
of earnings before income taxes changes due to the
characteristics of pre-tax earnings, such as the percentage of
earnings from operating income, investment income and state tax
apportionment, year to year.
|
|
|
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
31
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, 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
32
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.
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.
33
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.
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.
34
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 |
|
|
$ |
1,558,382 |
|
|
$ |
1,414,783 |
|
Earnings before income taxes and minority interest
|
|
|
171,740 |
|
|
|
266,272 |
|
|
|
219,478 |
|
|
|
225,437 |
|
Net earnings
|
|
|
108,958 |
|
|
|
168,288 |
|
|
|
138,645 |
|
|
|
142,274 |
|
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 |
|
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 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 to be
entered 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.
35
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.
Prior to the distribution we intend 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 our subsidiary, Chicago
Title, and the proceeds from the 2013 public debentures 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. Following issuance of the intercompany notes, we may make
an exchange offer in which we would offer to exchange the
outstanding FNF notes for notes we would issue having
substantially the same terms and deliver the FNF notes received
to FNF to reduce the debt under the intercompany notes. We also
plan to enter into a credit agreement in the amount of between
$300 million and $400 million. We currently anticipate
that at the time of or shortly after the distribution we would
borrow $150 million under this facility and pay it to FNF
in satisfaction of a $150 million intercompany note issued
by one of our subsidiaries to FNF in August 2005.
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 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; |
36
|
|
|
|
|
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.
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.
37
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:
|
|
|
|
|
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:
|
|
|
|
|
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. |
|
|
|
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. |
|
|
|
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. |
|
|
|
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 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.
38
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 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
39
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. |
40
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
41
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.
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:
|
|
|
|
|
Bias for action |
|
|
|
Autonomy and entrepreneurship |
|
|
|
Employee ownership |
|
|
|
Minimal bureaucracy |
|
|
|
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
42
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.
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:
|
|
|
|
|
higher margins because we retain the entire premium from each
transaction instead of paying a commission to an independent
agent; |
|
|
|
continuity of service levels to a broad range of
customers; and |
|
|
|
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.
43
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
(In thousands) | |
Direct
|
|
$ |
1,017,396 |
|
|
|
43.8 |
% |
|
$ |
987,019 |
|
|
|
42.3 |
% |
|
$ |
2,003,447 |
|
|
|
42.5 |
% |
|
$ |
2,105,317 |
|
|
|
44.8 |
% |
|
$ |
1,557,769 |
|
|
|
43.9 |
% |
Agency
|
|
|
1,304,200 |
|
|
|
56.2 |
% |
|
|
1,348,430 |
|
|
|
57.7 |
% |
|
|
2,714,770 |
|
|
|
57.5 |
% |
|
|
2,595,433 |
|
|
|
55.2 |
% |
|
|
1,989,958 |
|
|
|
56.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total title insurance premiums
|
|
$ |
2,321,596 |
|
|
|
100.0 |
% |
|
$ |
2,335,449 |
|
|
|
100.0 |
% |
|
$ |
4,718,217 |
|
|
|
100.0 |
% |
|
$ |
4,700,750 |
|
|
|
100.0 |
% |
|
$ |
3,547,727 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
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 six months of 2005 and 17.7% and 17.7% of
our revenues for 2004 and 2003, respectively. 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
45
underwriting 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.
46
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 | |
|
|
|
% of | |
|
Amortized | |
|
% of | |
|
|
|
% of | |
Rating (1) |
|
Cost | |
|
% of Total | |
|
Fair Value | |
|
Total | |
|
Cost | |
|
Total | |
|
Fair Value | |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
48
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 |
49
|
|
|
|
|
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. 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. |
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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
50
exposed FNF to potential fines, penalties and suits in the
future, by permitting so called contingent commissions to 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 attorney generals 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 continue to cooperate with other investigating
authorities, and no other actions have been filed by the
authorities against us or our underwriters.
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.
51
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 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 (or, in some jurisdictions, the lesser) of:
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10% of the insurers statutory surplus as of the
immediately prior year end; or |
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the statutory net investment income or the statutory net income
of the insurer during the prior calendar year. |
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 immaterial fines for violations of
regulations or other matters. Like many other insurance
companies, in 2004 our subsidiaries received civil subpoenas
from the New York State Attorney General, requesting information
about our arrangements with agents and other matters. We have
been cooperating and intend to continue to cooperate with these
inquiries.
In the fall of 2004, the California Department of Insurance
began 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
52
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 by realtors,
developers and lenders and cede a portion of the premiums to a
reinsurance company affiliate of the entity that generated the
business. Other state insurance departments and attorneys
general also have made formal or informal inquiries to us
regarding these matters.
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 we will pay a penalty of $5.6 million.
We have been cooperating and intend to continue to cooperate
with the other ongoing investigations. We have discontinued all
reinsurance agreements of the type the investigations cover. The
total amount of premiums we ceded to reinsurers was
approximately $10 million over the existence of these
agreements. These investigations are at an early stage and as a
result we are unable to give any assurance regarding their
consequences for the industry or for us.
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. 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.
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.
53
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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Moodys | |
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Fitch | |
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A. M. Best | |
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Demotech | |
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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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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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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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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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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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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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A- |
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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
investors in this distribution. These financial strength ratings
should not be relied on with respect to making an investment in
our securities. In connection with the announcement of this
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-.
S&P states that an A- rating 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 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.
54
MANAGEMENT
Directors and Executive Officers
Set forth below is certain information concerning our directors
and executive officers. All ages are as of April 30, 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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46 |
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President, National Agency Operations |
Anthony J. Park
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38 |
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Chief Financial Officer |
Willie M. Davis
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70 |
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Director Nominee |
John F. Farrell, Jr.
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67 |
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Director Nominee |
Philip G. Heasley
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55 |
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Director Nominee |
William A. Imparato
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58 |
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Director Nominee |
Donald M. Koll
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72 |
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Director Nominee |
General William Lyon
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Director Nominee |
Frank P. Willey
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Director Nominee |
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. 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.
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
55
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.
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 ten 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 is 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
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 will be divided into three classes of
approximately equal size and 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
56
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.
For a description of requirements of our bylaws with respect to
stockholder proposals and director nominations by stockholders,
see Description of Capital Stock Certain
Provisions of our Certificate and Bylaws and of Delaware
Law Advance Notice Requirements for Stockholder
Proposals and Director Nominees.
Committees of the Board of Directors
Upon completion of this distribution, the standing committees of
our board of directors will 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 will be 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.
Compensation committee. This committee will have 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; and |
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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:
|
|
|
|
|
|
an annual retainer of $35,000; |
|
|
|
|
|
a per meeting fee of $1,500 for each board meeting attended; |
|
57
|
|
|
|
|
|
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); |
|
|
|
|
|
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 $2,000; and |
|
|
|
|
expenses of attending board and committee meetings. |
In addition, each non-employee director will be granted 5,000
shares of our Class A Common Stock as restricted stock, such
grants to be made concurrent with the completion of this
distribution. The restricted shares will vest in four equal
annual installments, provided the recipient remains employed, or
on the board, as applicable, through the vesting dates. Vesting
will be accelerated upon a change in control or upon termination
of employment, or service on the board, due to death or
disability or if we terminate the recipients employment or
service on the board without cause. The restricted shares will
have the same voting and dividend rights as other outstanding
shares of our Class A Common Stock, but will be
non-transferable and subject to forfeiture unless and until
vested.
Executive Compensation
The following table sets forth the compensation paid or awarded
to our chief executive officer and our other executive officers
who, based on salary and bonus compensation from FNF and its
subsidiaries, were the most highly compensated for the year
ended December 31, 2004. All information set forth in this
table reflects compensation earned by these individuals for
services with FNF and its subsidiaries.
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Compensation | |
|
Long-term Compensation | |
|
|
| |
|
| |
|
|
|
|
|
|
Securities | |
|
|
|
|
|
|
Other Annual | |
|
Restricted Stock | |
|
Underlying | |
|
All Other | |
|
|
Fiscal | |
|
Salary(1) | |
|
Bonus(2) | |
|
Compensation(3) | |
|
Units(4) | |
|
Options(5) | |
|
Compensation(6) | |
Name and Title |
|
Year | |
|
($) | |
|
($) | |
|
($) | |
|
($) | |
|
(#) | |
|
($) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Raymond R. Quirk
|
|
|
2004 |
|
|
|
606,250 |
|
|
|
1,210,227 |
|
|
|
7,304 |
|
|
|
|
|
|
|
150,000 |
|
|
|
28,956 |
|
|
Chief Executive Officer |
|
|
2003 |
|
|
|
594,529 |
|
|
|
1,557,123 |
|
|
|
89,148 |
|
|
|
1,156,050 |
|
|
|
8,250 |
|
|
|
23,644 |
|
|
|
|
|
2002 |
|
|
|
418,764 |
|
|
|
837,500 |
|
|
|
6,000 |
|
|
|
|
|
|
|
129,421 |
|
|
|
23,019 |
|
Christopher Abbinante
|
|
|
2004 |
|
|
|
475,000 |
|
|
|
879,344 |
|
|
|
6,000 |
|
|
|
|
|
|
|
106,400 |
|
|
|
25,876 |
|
|
President, Eastern Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger S. Jewkes
|
|
|
2004 |
|
|
|
469,059 |
|
|
|
450,000 |
|
|
|
6,000 |
|
|
|
|
|
|
|
93,100 |
|
|
|
17,477 |
|
|
President, Western Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erika Meinhardt
|
|
|
2004 |
|
|
|
341,668 |
|
|
|
600,000 |
|
|
|
8,781 |
|
|
|
|
|
|
|
106,400 |
|
|
|
22,284 |
|
|
President, National Agency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony J. Park
|
|
|
2004 |
|
|
|
250,001 |
|
|
|
197,542 |
|
|
|
|
|
|
|
|
|
|
|
26,600 |
|
|
|
17,269 |
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Amounts shown for the indicated fiscal year include amounts
deferred at the election of the named executive officer pursuant
to the 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. |
58
|
|
(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 $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:
|
|
|
|
|
Position |
|
Multiple | |
|
|
| |
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 including any restricted shares issued to such officer
or director upon conversion of FNF restricted shares in
connection with the distribution. 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
All of our common stock is currently owned by FNF, and thus none
of our present or future officers or directors currently owns
any shares of our common stock. In addition, those officers and
directors who own shares of FNF common stock will be treated on
the same terms as any other holders of FNF common stock and will
receive shares of our common stock in the distribution in
respect of any shares of
59
FNF common stock that they hold on the record date of the
distribution. FNF stock options and restricted stock held by our
employees and directors will also be affected in connection with
the separation. See Treatment of FNF Stock
Options and Restricted Shares.
The following table sets forth the number of shares of FNF
common stock beneficially owned on May 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
May 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
|
|
|
9,575,912 |
|
|
|
5.42 |
% |
Willie D. Davis
|
|
|
82,406 |
|
|
|
* |
|
John F. Farrell, Jr.
|
|
|
56,613 |
|
|
|
* |
|
Philip G. Heasley
|
|
|
31,156 |
|
|
|
* |
|
William A. Imparato
|
|
|
114,723 |
|
|
|
* |
|
Donald M. Koll
|
|
|
181,659 |
|
|
|
* |
|
General William Lyon
|
|
|
132,977 |
|
|
|
* |
|
Frank P. Willey
|
|
|
1,546,435 |
|
|
|
* |
|
Raymond R. Quirk
|
|
|
634,849 |
|
|
|
* |
|
Christopher Abbinante
|
|
|
74,196 |
|
|
|
* |
|
Roger S. Jewkes
|
|
|
45,807 |
|
|
|
* |
|
Erika Meinhardt
|
|
|
176,167 |
|
|
|
* |
|
Anthony J. Park
|
|
|
108,390 |
(2) |
|
|
* |
|
All directors and executive officers as a group (persons)
|
|
|
12,761,290 |
|
|
|
7.17 |
% |
|
|
|
|
* |
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 1,591 shares of FNF common
stock held by Mr. Parks spouse. |
60
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Realizable | |
|
|
Individual Grants | |
|
Value at Assumed | |
|
|
| |
|
Annual Rates of | |
|
|
Number of | |
|
Percentage | |
|
|
|
Stock Price | |
|
|
Securities | |
|
of Total | |
|
|
|
Appreciation for | |
|
|
Underlying | |
|
Options | |
|
Exercise | |
|
|
|
Option Term(3) | |
|
|
Options | |
|
Granted to | |
|
or Base | |
|
|
|
| |
|
|
Granted | |
|
Employees in | |
|
Price | |
|
Expiration | |
|
5% | |
|
10% | |
Name |
|
(#) | |
|
Fiscal 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 $10 per
share cash dividend by FNF on March 28, 2005. All of such
options were granted under FNFs 1998 Plan and vest in
three equal annual installments beginning on the first
anniversary of the date of grant. Vesting is accelerated upon a
change in control of FNF occurring more than one year after the
date of grant. |
|
(3) |
These are assumed rates of appreciation, and are not intended to
forecast future appreciation of FNFs common stock. |
61
The following table summarizes information regarding exercises
of FNF stock options by the named executive officers during 2004
and unexercised FNF options held by them as of December 31,
2004.
Aggregated FNF Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of | |
|
Value of Unexercised | |
|
|
|
|
|
|
Securities Underlying | |
|
In-the-Money Options | |
|
|
Shares | |
|
|
|
Unexercised Options | |
|
at December 31, | |
|
|
Acquired on | |
|
Value | |
|
at December 31, 2004 | |
|
2004(1)($) | |
|
|
Exercise | |
|
Realized | |
|
| |
|
| |
Name |
|
(#) | |
|
($) | |
|
Exercisable/ | |
|
Unexercisable | |
|
Exercisable/ | |
|
Unexercisable | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Raymond R. Quirk
|
|
|
|
|
|
$ |
|
|
|
|
498,827 |
|
|
|
177,152 |
|
|
$ |
11,940,537 |
|
|
$ |
1,854,020 |
|
Christopher Abbinante
|
|
|
22,355 |
|
|
$ |
2,054,540 |
|
|
|
21,058 |
|
|
|
127,457 |
|
|
$ |
246,628 |
|
|
$ |
1,062,823 |
|
Roger S. Jewkes
|
|
|
|
|
|
$ |
|
|
|
|
27,145 |
|
|
|
98,013 |
|
|
$ |
573,718 |
|
|
$ |
663,409 |
|
Erika Meinhardt
|
|
|
3,300 |
|
|
$ |
85,511 |
|
|
|
133,336 |
|
|
|
115,546 |
|
|
$ |
3,328,553 |
|
|
$ |
815,981 |
|
Anthony J. Park
|
|
|
|
|
|
$ |
|
|
|
|
90,005 |
|
|
|
29,039 |
|
|
$ |
2,564,087 |
|
|
$ |
206,454 |
|
|
|
(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
It is anticipated that, at the time of the distribution, FNF
stock options and restricted stock held by our employees and
directors will be affected as follows:
|
|
|
|
|
stock options: FNF stock options will be equitably adjusted to
reflect the impact of the distribution. Holders of FNF stock
options will continue to hold such options, as adjusted,
pursuant to the terms and conditions of their individual award
agreements; and |
|
|
|
restricted stock: holders of FNF restricted stock will receive
unrestricted FNT shares in the distribution in the same
proportion as other FNF stockholders. Such holders will continue
to hold FNF restricted stock pursuant to the terms and
conditions of their individual award agreements. |
Omnibus Incentive Plan
In connection with this distribution, we intend to establish a
2005 Omnibus Incentive Plan, or omnibus plan. The omnibus
plan will permit us to grant the following types of awards:
|
|
|
|
|
nonqualified stock options; |
|
|
|
incentive stock options within the meaning of
section 422 of the Internal Revenue Code; |
|
|
|
stock appreciation rights; |
|
|
|
restricted stock; |
|
|
|
restricted stock units; |
|
|
|
performance shares; |
|
|
|
performance units; and |
|
|
|
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.
The following is a description of the omnibus plan and the
awards that may be made in connection with and after the
distribution.
62
Effective date and term. The omnibus plan will become
effective on or before the distribution, and will authorize 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,
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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
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goals established by the committee, the payment of shares as a
bonus or in lieu of cash based on attainment 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 will provide 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 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, this distribution
shall not 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;
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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 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 anticipate granting 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 will be
granted 230,000, 115,000, 50,000, 50,000, 25,000 and 50,000
restricted shares respectively. Each non-employee director will
receive 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 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. Although the total number of such grants to all
personnel has not yet been determined, we do not expect it to
exceed 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.
Current guidance requires that such amendments be made by
December 31, 2005. 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 this distribution, we intend to establish 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 our common stock that will be made 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).
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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 new agreements that we
will enter 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 will be filed with the
Securities and Exchange Commission as exhibits to the
registration statement of which this prospectus is a part.
Our Arrangements with FNF
The new agreements we will enter with FNF will include:
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the separation agreement; |
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corporate services agreements; |
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the new notes payable to FNF; |
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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 new agreements we will enter into with FIS are discussed
separately below under Our Arrangements with
FIS.
We will enter into a separation agreement with FNF prior to the
completion of the distribution.
No Representations and Warranties. The separation
agreement will provide 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 will have no recourse against FNF if the
transfer of any subsidiary to us is defective in any manner. We
will agree to bear the economic and legal risks that any
conveyance is 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.
Exchange Offers. The separation agreement requires that,
upon request of FNF, we will conduct one or more exchange
offers, in which we will offer to exchange our newly-issued debt
securities for the outstanding public debt securities of FNF. If
we conduct such an exchange offer, we intend to deliver any FNF
notes obtained to FNF to reduce our obligations under the mirror
notes we will issue to FNF at the time of the distribution.
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
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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
prior to these filings, 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 will also
agree 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 will each
agree 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
will also provide 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 of 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 any 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;
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any action or liability arising as a result of the distribution. |
The separation agreement will also specify procedures with
respect to claims subject to indemnification and related matters
and provide 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 will contain 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 will agree 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;
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enter into any agreement that binds or purports to bind FNF. |
In addition, we agree 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 will provide that we will pay all costs incurred in
connection with the distribution.
Dispute Resolution Procedures. The separation agreement
will provide 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.
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Termination. The separation agreement can be terminated
only by the mutual consent of both parties.
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FNF Corporate Services Agreements |
We will enter into a corporate services agreement with FNF under
which we will provide corporate and other support services to
FNF. The corporate services agreement will govern 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 will also enter 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 will agree 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
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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 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 will 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 will 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.
We intend 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 our subsidiary, Chicago Title, and the proceeds
from the 2013 public debentures were used for general corporate
purposes. Following issuance of the intercompany notes, we may
make an exchange offer in which we would offer to exchange the
outstanding FNF notes for notes we would issue having
substantially the same terms and deliver the FNF notes received
to FNF to reduce the debt under the intercompany notes. See
Liquidity and Capital Resources.
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In connection with the distribution, we and FNF will enter into
a tax matters agreement, which will govern 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 will govern 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.
Allocation of Tax Liability. The tax matters agreement
will provide 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. Under the tax matters agreement, FNF
will be 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 generally will be 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 will be
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 will allocate 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. The tax matters agreement is effective on the date of
distribution and is effective until the occurrence of any of the
following: (i) written mutual agreement of the parties;
(ii) FNF is no longer the parent company of FNT; or
(iii) FNF does not file a consolidated tax return.
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)
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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.
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 is not divesting itself of all of its shares of our
common stock as part of the distribution, FNF would not be able
to freely sell our shares without registration under the
Securities Act of 1933 (Securities Act) or a valid
exemption therefrom. Accordingly, we will enter into a
registration rights agreement with FNF requiring us, under
certain circumstances, to register our shares beneficially owned
by FNF following the distribution. These registration rights
will generally become effective at the time of the distribution.
Demand Registration Rights. Under the registration rights
agreement, FNF will have 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 will
have 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 will have 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 will agree to cooperate fully in connection
with any registration for FNFs benefit and with any
offering FNF makes under the registration rights agreement. We
will also agree 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 will be
transferable by FNF and will be for an indefinite term. In
addition, the registration rights agreement will contain
indemnification and contribution provisions with respect to
information included in any registration statement, prospectus
or related documents.
Timing of Demand Registrations. We will not be 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 will 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
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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 will permit 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 will govern 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 to
be 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 to be
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 will enter into a sublease agreement pursuant to which we
will 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.
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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.
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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 will enter 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 have consented to this assignment and
assumption arrangement and have 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
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 will enter into with FIS and its subsidiaries
will 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. |
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 will enter into a corporate
services agreement with FIS under which we will provide
corporate and other support services to FIS. The corporate
services agreement will govern 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 will agree to provide additional services that we and
FIS may identify during the term of the agreement.
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 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
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 is 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,
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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.
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 will enter into agreements with FIS whereby
certain FIS subsidiaries will be 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
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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 will enter into a license and
services agreement with FIS. Under this agreement, we will
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 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, under this agreement, FIS will
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 given after the fifth
anniversary of the date of the agreement, 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 will enter 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
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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 will enter 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
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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 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 will be effective for
a term of five years unless earlier terminated in accordance
with its terms. We will 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 will enter into a
software license agreement pursuant to which we will 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
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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.
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 will enter 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
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FNF, prior to the distribution we will enter 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 will enter into a lease
agreement with FIS covering our rental of this space following
the distribution. See Our Arrangements with FNF.
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
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 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.
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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 $0.3 million. For the six
months ended June 30, 2005, the revenues from the royalty
payable by FIS were $1.4 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.
Under the title plant management agreement, Property Insight has
no liability to the 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.
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).
OWNERSHIP OF COMMON STOCK
Prior to the completion of this distribution, all shares of our
common stock were owned by FNF. Upon the completion of this
distribution, FNF will beneficially own approximately 82.5% of
our
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outstanding common stock in the form of 100% of our Class B
Common Stock (not including the restricted stock grants referred
to below).
Except for FNF, no person will beneficially own any of our
outstanding common stock prior to completion of this
distribution, and we are not aware of any person other than FNF
who will beneficially own 5% or more of our common stock upon
completion of this distribution. Our directors and officers do
not currently own any of our common stock, although they will
receive grants of Class A Common Stock as restricted stock
upon the completion of the distribution. Further, in the
distribution those who own shares of FNF common stock will be
treated on the same terms as any other holders of FNF common
stock. See Management Stock Ownership of
Directors and Executive Officers for information about the
ownership of FNF common stock by our directors and executive
officers.
DESCRIPTION OF CAPITAL STOCK
The following description of select provisions of our
certificate of incorporation, our bylaws, and of the Delaware
General Corporation Law is necessarily general and does not
purport to be complete. This summary is qualified in its
entirety by reference in each case to the applicable provisions
of our certificate of incorporation and bylaws, which are filed
as exhibits to our registration statement of which this
prospectus forms a part, and to the provisions of Delaware law.
General
Our authorized capital stock will consist of 300 million
shares of Class A Common Stock, 300 million shares of
Class B Common Stock and 50 million shares of
preferred stock. Immediately after the completion of this
distribution,
approximately shares
of Class A Common Stock (not including restricted stock
grants) will be outstanding and
approximately shares
of Class B Common Stock will be outstanding.
Common Stock
Holders of our common stock are entitled to receive such
dividends as may be declared by our board of directors out of
funds legally available therefor. See Dividend
Policy. Holders of our Class A Common Stock are
entitled to one vote per share on all matters on which the
holders of common stock are entitled to vote. Holders of
Class B Common Stock will be entitled to ten votes per
share of Class B Common Stock held. Neither our
Class A Common Stock nor our Class B Common Stock will
entitle its holders to cumulative voting rights. In the event of
our liquidation or dissolution, holders of our common stock
would be entitled to share equally and ratably in our assets, if
any, remaining after the payment of all liabilities and the
liquidation preference of any outstanding class or series of
preferred stock. The shares of common stock issued by us in the
distribution will be fully paid and nonassessable. The rights
and privileges of holders of our common stock are subject to the
rights and preferences of the holders of any series of preferred
stock that we may issue in the future, as described below.
Class B Common Stock
The Class A Common Stock and Class B Common Stock have
identical rights and privileges, except with regard to voting
rights as described above and the following conversion and stock
dividend provisions. The Class B Common Stock will be
convertible into shares of Class A Common Stock at a
one-to-one conversion ratio as follows:
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the holder of any share of Class B Common Stock may elect
at any time, and at such holders sole option, to convert
such share into one fully paid and nonassessable share of
Class A Common Stock; |
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if at any time FNF and its affiliates collectively own less than
40% of the total number of issued and outstanding shares of
capital stock of FNT, each issued and outstanding share of
Class B Common Stock will automatically be converted into
one share of Class A Common Stock; and |
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upon the issuance or transfer of any share of Class B
Common Stock to a person other than FNF or an affiliate of FNF
(excluding certain permitted transfers), such share will
automatically be converted into one fully paid and nonassessable
share of Class A Common Stock. |
Notwithstanding the foregoing, FNF may transfer shares of
Class B Common Stock (without conversion into Class A
Common Stock) if such transfer is effected as part of a
distribution by FNF of shares of Class B Common Stock to
its shareholders in a tax-free spinoff under
Section 355(a) of the Internal Revenue Code of 1986, as
amended, and any subsequent transfer of such shares will not
cause such shares to convert into Class A Common Stock.
In addition, in the event of any dividend payable in shares of
common stock or in rights or other instruments exercisable for
shares of common stock, the Board of Directors may provide for
the holders of Class A Common Stock to receive additional
shares of such class or instruments exercisable for shares of
such class, and for the holders of Class B Common Stock to
receive additional shares of Class B Common Stock or
instruments exercisable for shares of such class, as applicable.
Authorized Preferred Stock
Subject to the approval by holders of shares of any class or
series of preferred stock, to the extent such approval is
required, our board of directors will have the authority
following the distribution to issue preferred stock in one or
more series and to fix the number of shares constituting any
such series and the designations, powers, preferences,
limitations and relative rights, including dividend rights,
dividend rate, voting rights, terms of redemption, redemption
price or prices, conversion rights and liquidation preferences
of the shares constituting any series, without any further vote
or action by stockholders.
Certain Provisions of our Certificate of Incorporation,
Bylaws and Delaware Law
A number of provisions of our certificate of incorporation and
our bylaws deal with matters of corporate governance and the
rights of stockholders. The following discussion is a general
summary of select provisions of our certificate of
incorporation, our bylaws and certain Delaware laws that might
be deemed to have a potential anti-takeover effect.
These provisions may have the effect of discouraging a future
takeover attempt which is not approved by our board of directors
but which individual stockholders may deem to be in their best
interest or in which stockholders may be offered a substantial
premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a
transaction may not have an opportunity to do so. Such
provisions will also render the removal of the incumbent board
of directors or management more difficult.
Common Stock. Our unissued shares of authorized
Class A and Class B Common Stock will be available for
future issuance without additional stockholder approval. While
the authorized but unissued shares are not designed to deter or
prevent a change of control, under some circumstances we could
use the authorized but unissued shares to create voting
impediments or to frustrate persons seeking to effect a takeover
or otherwise gain control by, for example, issuing those shares
in private placements to purchasers who might side with our
board of directors in opposing a hostile takeover bid.
Preferred Stock. The existence of authorized but unissued
preferred stock could reduce our attractiveness as a target for
an unsolicited takeover bid since we could, for example, issue
shares of the preferred stock to parties that might oppose such
a takeover bid or issue shares of the preferred stock containing
terms the potential acquiror may find unattractive. This ability
may have the effect of delaying or preventing a change of
control, may discourage bids for our common stock at a premium
over the market price of our common stock, and may adversely
affect the market price of, and the voting and the other rights
of the holders of, our common stock.
Classified Board of Directors and Related Provisions. Our
certificate of incorporation provides that our board of
directors must be divided into three classes of directors (each
class containing approximately one-third of the total number of
directors) serving staggered three-year terms. As a result,
approximately one-third of our board of directors will be
elected each year. This classified board provision will prevent a
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third party who acquires control of a majority of our
outstanding voting stock from obtaining control of our board of
directors until the second annual stockholders meeting following
the date the acquiror obtains the controlling interest. The
number of directors constituting our board of directors is
determined from time to time by our board of directors. Our
certificate of incorporation also provides that directors may be
removed only for cause by the affirmative vote of
the holders of a majority of all outstanding voting stock
entitled to vote. This provision, in conjunction with the
provisions of our certificate of incorporation authorizing our
board of directors to fill vacancies on the board, will prevent
stockholders from removing incumbent directors without cause and
filling the resulting vacancies with their own nominees.
No Stockholder Action by Written Consent; Special
Meetings. Our certificate of incorporation permits our
stockholders to act by written consent without a meeting as long
as FNF owns more than 50% of our voting stock. Once FNF ceases
to own that percentage of our voting stock, our certificate of
incorporation provides that stockholder action can be taken only
at an annual or special meeting of stockholders and cannot be
taken by written consent in lieu of a meeting. Our certificate
of incorporation also provides that, except as otherwise
required by law, special meetings of the stockholders can only
be called by a majority of our entire board of directors or our
chairman of the board or chief executive officer. Stockholders
may not call a special meeting or require that our board of
directors call a special meeting of stockholders.
Advance Notice Requirements for Stockholder Proposals and
Director Nominees. Our bylaws provide that, if one of our
stockholders desires to submit a proposal or nominate persons
for election as directors at an annual stockholders
meeting, the stockholders written notice must be received
by us not less than 120 days prior to the anniversary date
of the date of the proxy statement for the immediately preceding
annual meeting of stockholders. However, if the annual meeting
is called for a date that is not within 30 days before or
after such anniversary date, notice by a stockholder must be
received by us not later than the close of business on the 10th
day following the day on which public disclosure of the date of
the annual meeting was made. The notice must describe the
proposal or nomination and set forth the name and address of,
and stock held of record and beneficially by, the stockholder.
Notices of stockholder proposals or nominations must set forth
the reasons for the proposal or nomination and any material
interest of the stockholder in the proposal or nomination and a
representation that the stockholder intends to appear in person
or by proxy at the annual meeting. Director nomination notices
must set forth the name and address of the nominee, arrangements
between the stockholder and the nominee and other information
required under Regulation 14A of the Exchange Act. The
presiding officer of the meeting may refuse to acknowledge a
proposal or nomination not made in compliance with the
procedures contained in our bylaws. The advance notice
requirements regulating stockholder nominations and proposals
may have the effect of precluding a contest for the election of
directors or the introduction of a stockholder proposal if the
requisite procedures are not followed and may discourage or
deter a third-party from conducting a solicitation of proxies to
elect its own slate of directors or to introduce a proposal.
Voting Requirements on Amending our Certificate of
Incorporation or Bylaws. Our certificate of incorporation
and our bylaws provide that amendments to certain provisions of
our bylaws, including those related to stockholder proposals and
calling special meetings of stockholders, must be approved by
both our board of directors and by the vote, at a regular or
special stockholders meeting, of the holders of at least
two-thirds of the votes entitled to be cast by the holders of
all our capital stock then entitled to vote. All other
amendments to our bylaws require either: (i) approval by a
majority of our entire board of directors (without stockholder
consent) or (ii) the vote, at a regular or special
stockholders meeting, of the holders of at least
two-thirds of the votes entitled to be cast by the holders of
all our capital stock then entitled to vote. In addition, our
certificate of incorporation provides that amendments to certain
provisions of our certificate of incorporation, including those
relating to the classified board, removal of directors, calling
special meetings and no stockholder action by written consent,
must be approved by the vote, at a regular or special
stockholders meeting, of the holders of at least
two-thirds of the votes entitled to be cast by the holders of
all of our capital stock then entitled to vote (in addition to
the approval of our board of directors).
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Business Combination Statute. Following the distribution,
we will be subject to Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general,
Section 203 prohibits a publicly held Delaware corporation
from engaging in a business combination with an interested
stockholder for a period of three years following the date the
person became an interested stockholder, unless the business
combination or the transaction in which the person became an
interested stockholder is approved in a prescribed manner.
Generally, a business combination includes a merger,
asset or stock sale, or other transaction resulting in a
financial benefit to the interested stockholder. Generally, an
interested stockholder is a person who, together
with affiliates and associates, owns or within three years prior
to the determination of interested stockholder status did own,
15% or more of a corporations voting stock. Because we
were not subject to Section 203 prior to the distribution,
following the distribution FNF and its subsidiaries would not be
considered an interested stockholder.
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 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
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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.
Limitations on Director Liability
Under the Delaware General Corporation Law, we may indemnify any
person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
corporation), by reason of the fact that he or she is or was our
director, officer, employee or agent, or is or was serving at
our request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to our best
interests, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her
conduct was unlawful. In addition, Section 102(b)(7) of the
Delaware General Corporation Law provides that a certificate of
incorporation may contain a provision eliminating or limiting
the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty
as a director, provided that such provision shall not eliminate
or limit the liability of a director (i) for any breach of
the directors duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware
General Corporation Law (relating to liability for unauthorized
acquisitions or redemptions of, or dividends on, capital stock),
or (iv) for any transaction from which the director derived
an improper personal benefit. Our certificate of incorporation
contains the provisions permitted by Section 102(b)(7) of
the Delaware General Corporation Law.
Distribution Agent, Transfer Agent and Registrar
The distribution agent, transfer agent and registrar for our
common stock is Continental Stock Transfer & Trust
Company.
SHARES ELIGIBLE FOR FUTURE SALE
All shares distributed to FNF stockholders in the distribution
will be freely tradable without restriction or further
registration under the Securities Act, except that any shares
received in the distribution by our affiliates, as
that term is defined in Rule 144 under the Securities Act,
may generally only be sold in compliance with the limitations of
Rule 144 described below.
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Rule 144
In general, under Rule 144 as currently in effect, an
affiliate would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
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1% of the number of shares of common stock then
outstanding; or |
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the average weekly trading volume of the common stock on the New
York Stock Exchange during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale. |
Sales under Rule 144 are also subject to certain manner of
sale provisions and notice requirements and to the availability
of current public information about us.
Registration Rights
As described in Our Arrangements with FNF
Registration Rights Agreement, we have entered into a
registration rights agreement with FNF. We do not have any other
contractual obligations to register our common stock.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material United States
federal income tax consequences generally applicable to an FNF
stockholder that receives FNT shares in the distribution. This
summary is based on the United States Internal Revenue Code of
1986, as amended (the Code), the Treasury
Regulations promulgated thereunder, and judicial and
administrative interpretations thereof, all as in effect on the
date of this circular and all of which are subject to change
(possibly on a retroactive basis).
A United States Holder is a beneficial owner of FNF
common stock that is a citizen or resident individual of the
United States, a corporation or any other entity taxable as a
corporation, in either case organized in or under the laws of
the United States or any state or political subdivision thereof,
or an estate or trust that is subject to United States federal
income taxation without regard to the source of its income. A
United States Holder does not include, and this discussion does
not address the tax consequences to, certain persons subject to
special provisions of United States 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 their shares as part of a
straddle, a hedge, a constructive sale or a conversion
transaction, holders of FNF shares whose functional currency is
other than the United States dollar, pass-through entities and
investors therein, persons who acquired their stock through the
exercise of employee stock options or otherwise as compensation,
or persons who hold their shares as ordinary assets and not as
capital assets.
A Non-United States Holder is a beneficial owner of
FNF common stock that holds such stock as a capital asset and
that is in general an individual, corporation, estate, or trust
other than an individual who is a citizen or resident of the
United States; a corporation (or an entity taxed as a
corporation for United States federal income tax purposes)
created or organized in the United States or under the laws of
the United States or any subdivision thereof; an estate the
income of which is includible in gross income for United States
federal income tax purposes regardless of its source; or a trust
if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more
United States persons have the authority to control all
substantial decisions of the trust.
This summary does not address all of the United States federal
income tax consequences that may be relevant to the particular
circumstances of an FNF stockholder that receives FNT stock in
the distribution, nor does it address the effect of any foreign,
state or local tax law on an FNF stockholder that receives FNT
stock in the distribution.
This summary is for general information purposes only and is not
intended to be, and should not be construed to be, legal or tax
advice to any particular shareholder. Consequently, FNF
shareholders are advised to consult their own tax advisors to
determine the particular tax consequences of the distribution,
and of acquiring, exchanging, holding or disposing of shares of
FNT common stock.
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Tax Consequences of the Distribution to United States
Holders
FNF will report the distribution as a taxable distribution in
which each FNF stockholder receives an amount equal to the fair
market value, at the time of the distribution, of the FNT shares
the stockholder receives plus the amount of any cash received in
lieu of fractional shares of FNT common stock (the
Distribution Amount). Assuming that there will be a
public market for the FNT stock at the time of the distribution,
the fair market value of an FNT share to a stockholder is
expected to be the average of the high and low trading price on
the date of the distribution, or if such date is not a trading
day, on the first trading day following the distribution.
However, if the Distribution Amount exceeds the FNF
shareholders allocable share of FNFs current and
accumulated earnings and profits for federal income tax purposes
determined as of the end of the FNFs fiscal year ending
December 31, 2005, the excess generally will be treated
first as a basis-reducing, tax-free return of capital to the
extent of the shareholders basis in his or her FNF common
stock, and after this basis is reduced to zero, as capital gain.
FNFs management has advised that, based on the information
currently available, FNFs accumulated earnings and profits
at December 31, 2005 is expected to be large enough that
the Distribution Amount will not exceed the Holders
allocable share of such earnings and profits.
The Distribution Amount is expected to constitute
qualified dividend income for United States federal
income tax purposes, subject to certain holding period
requirements. Each corporate holder of FNF common stock (other
than S corporations) receiving FNT shares and recognizing
dividend income would be entitled to the dividends-received
deduction (generally 70%) with respect to the dividends, subject
to certain holding period requirements.
The Distribution Amount also may be considered an
extraordinary dividend under the United States
federal income tax rules depending on the facts and
circumstances of the shareholder. Treatment of the Distribution
Amount as an extraordinary dividend may affect a corporate
shareholders basis in its FNF stock, or, with respect to
individual shareholders, may affect the tax characterization of
a sale of his or her FNF shares.
An FNF shareholders tax basis in the FNT shares received
in the distribution would equal the fair market value of the FNT
common stock on the date of the distribution, and the
shareholders holding period in the stock would begin the
day after the distribution.
Individual Reporting and Backup Withholding
In early 2006, each individual recipient of FNT shares in the
distribution will receive an IRS Form 1099-DIV reflecting
the Distribution Amount. An FNF stockholder may be subject to
backup withholding at a rate of 28% of amounts paid to the
shareholder, unless the shareholder, before the distribution,
has provided his or her correct taxpayer identification number
on an IRS Form W-9 or a substitute therefor. Any amounts
withheld under the backup withholding rules may be allowed as a
refund or credit against such shareholders United States
federal income tax liability provided the required information
is furnished to the IRS.
Tax Consequences of the Distribution to Non-United States
Holders
A Non-United States Holder generally will be subject to
withholding of United States federal income tax at a 30% rate or
such lower rate as may be specified by an applicable income tax
treaty. However, if the distribution is effectively connected
with the conduct of a trade or business within the United States
or is attributable to a permanent establishment in the event
such standard applies to the Non-United States Holder under an
applicable tax treaty with the United States, the distribution
will not be subject to the withholding tax, but instead will be
subject to United States federal income tax on a net income
basis at applicable graduated individual or corporate rates.
Certain certification and disclosure requirements must be
satisfied for effectively connected income to be exempt from
withholding. Any dividends received by a foreign corporation
subject to United States federal income tax on a net basis may,
under specific circumstances, be subject to an additional
branch profits tax at a 30% rate or such lower rate
as may be specified by an applicable income tax treaty.
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A Non-United States Holder who wishes to claim the benefit of an
applicable treaty rate (and avoid backup withholding as
discussed below) for dividends, will be required to
(a) complete IRS Form W-8BEN (or other applicable
form) and certify under penalties of perjury that such holder is
not a United States person, or (b) if the common stock is
held through certain foreign intermediaries, satisfy the
relevant certification requirements of applicable United States
Treasury regulations. Special certification and other
requirements apply to certain Non-United States Holders that are
entities rather than individuals.
A Non-United States Holder eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may
obtain a refund of any excess amount withheld by filing an
appropriate claim for refund with the IRS.
Gain of Disposition of Common Stock
A Non-United States Holder generally will not be subject to
United States federal income or withholding tax with respect to
gain recognized on a sale or other disposition of common stock
unless (i) the gain is effectively connected with a trade
or business of the Non-United States Holder in the United
States, and, where a tax treaty applies, is attributable to a
United States permanent establishment of the Non-United States
Holder; (ii) in the case of a Non-United States Holder who
is an individual and holds the common stock as a capital asset,
such holder is present in the United States for 183 or more days
in the taxable year of the sale or other disposition and certain
other conditions are met; or (iii) FNF is at the time of
the distribution or has been a United States real property
holding corporation for United States federal income tax
purposes. FNF believes it is not, has not been, and will not be
at the time of the distribution a United States real
property holding corporation for United States federal
income tax purposes.
Federal Estate Tax
FNT stock held by an individual Non-United States Holder at the
time of death will be included in such holders gross
estate for United States federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
Individual Reporting and Backup Withholding
FNF must report annually to the IRS and to each individual
Non-United States Holder the amount of dividends paid to such
holder and the tax withheld with respect to such dividends,
regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding
also may be made available to the tax authorities in the country
in which the Non-United States Holder resides under the
provisions of an applicable income tax treaty.
A Non-United States Holder will be subject to backup withholding
unless applicable certification requirements are met.
Information reporting and, depending on the circumstances,
backup withholding, will apply to the proceeds of a sale of FNT
stock within the United States or conducted through the United
States related financial intermediaries unless the beneficial
owner certifies under penalties of perjury that it is a
Non-United States Holder (and the payor does not have actual
knowledge or reason to know that the beneficial owner is not a
United States person) or the holder otherwise establishes an
exemption. Any amounts withheld under the backup withholding
rules may be allowed as a refund or credit against such
holders United States federal income tax liability
provided the required information is furnished to the IRS.
THE PRECEDING DISCUSSION OF CERTAIN MATERIAL U.S. FEDERAL
INCOME AND ESTATE TAX CONSEQUENCES IS GENERAL INFORMATION ONLY
AND IS NOT TAX ADVICE. ACCORDINGLY, EACH NON-U.S. HOLDER
SHOULD CONSULT THAT NON-U.S. HOLDERS OWN TAX ADVISER
AS TO THE PARTICULAR TAX CONSEQUENCES TO IT OF PURCHASING,
HOLDING, OR DISPOSING OF OUR COMMON STOCK, INCLUDING THE
APPLICABILITY OF ANY STATE, LOCAL, OR FOREIGN TAX LAWS, AND OF
ANY CHANGES OR PROPOSED CHANGES IN APPLICABLE LAW.
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LEGAL MATTERS
The validity of the shares of common stock distributed hereby
will be passed upon for us by LeBoeuf, Lamb, Greene &
MacRae LLP.
EXPERTS
The combined financial statements and schedule of Fidelity
National Title Group, Inc. and 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 and in the registration statement in reliance
upon the reports of KPMG LLP, an 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.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act
with respect to the common stock we will distribute under this
prospectus. This prospectus does not contain all of the
information included in the registration statement and the
exhibits and schedules to the registration statement. For
further information with respect to us and our common stock,
please refer to the registration statement, including its
exhibits and schedules, which you may inspect and obtain copies
of at prescribed rates at the public reference facilities of the
Securities and Exchange Commission at the addresses provided
below.
Upon completion of this distribution, we will become subject to
the information and periodic reporting requirements of the
Securities Exchange Act of 1934, and, under that Act, we will
file reports, proxy statements and other information with the
Securities and Exchange Commission. You may inspect those
reports, proxy statements and other information and the
registration statement and its exhibits and schedules, without
charge, and you may make copies of them at prescribed rates at
the public reference facilities of the Securities and Exchange
Commissions principal office at 100 F Street,
N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Securities and Exchange
Commissions public reference facilities by calling the
Securities and Exchange Commission in the United States at
1-800-SEC-0330. The Securities and Exchange Commission also
maintains a web site at http://www.sec.gov that contains
reports, proxy and information statements and other information
regarding registrants that file electronically with the
Securities and Exchange Commission.
95
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page | |
|
|
| |
|
|
|
F-2 |
|
|
|
|
F-3 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
|
|
|
F-35 |
|
|
|
|
F-36 |
|
|
|
|
F-37 |
|
|
|
|
F-38 |
|
|
|
|
F-39 |
|
F-1
When the transactions referred to in Note A of the Notes
to Combined Financial Statements have been consummated, we will
be in a position to render the following report.
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.
Jacksonville, Florida
August 16, 2005, except for Note A which is as
of ,
2005
F-2
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
COMBINED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(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 |
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
Liabilities:
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(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
Fidelity National Financial, Inc. (FNF) expects to initiate
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. Once certain
regulatory approvals are received all of the legal entities that
are being combined for presentation in these historical
financial statements will be contributed to FNT, which will be
100% owned by FNF. FNF will then distribute to its current
shareholders 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
F-7
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
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. 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
F-8
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
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 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
F-9
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
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.
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
F-10
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
losses on fixed maturity and equity securities which are
classified as available for sale, net of applicable deferred
income taxes (benefits), are excluded from earnings and credited
or charged directly to a separate component of
stockholders equity. If any unrealized losses on fixed
maturity or equity securities are deemed other-than-temporary,
such unrealized losses are recognized as realized losses.
|
|
|
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
F-11
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
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.
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.
F-12
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
The reserve for claim losses also includes reserves for losses
arising from the escrow, closing and disbursement functions due
to fraud or operational error.
If a loss is related to a policy issued by an independent agent,
the Company may proceed against the independent agent pursuant
to the terms of the agency agreement. In any event, the Company
may proceed against third parties who are responsible for any
loss under the title insurance policy under rights of
subrogation.
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.
F-13
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
|
|
|
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.
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.
F-14
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
|
|
|
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. 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.
F-15
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
F-16
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
F-17
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
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-18
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-19
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-20
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-21
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-22
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 |
F-23
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
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 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.
F-24
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
In conducting its operations, the Company routinely holds
customers assets in escrow, pending completion of real
estate transactions. Certain of these amounts are maintained in
segregated bank accounts and have not been included in the
accompanying 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.
F-25
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
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, $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.
F-26
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
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 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.
F-27
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
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.
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-28
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-29
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-30
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-31
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-32
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-33
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-34
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED COMBINED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, | |
|
As of December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
ASSETS |
Investments:
|
|
|
|
|
|
|
|
|
|
Fixed maturities available for sale, at fair value, at
June 30, 2005 includes $296,814 and $141,090 of pledged
fixed maturities relating to secured trust deposits and
securities lending program, respectively and December 31,
2004 includes $265,639 of pledged fixed maturity securities
related to secured trust deposits
|
|
$ |
2,525,060 |
|
|
$ |
2,174,817 |
|
|
Equity securities, at fair value at June 30, 2005 includes
$1,699 of pledged equities related to securities lending program
|
|
|
142,883 |
|
|
|
115,070 |
|
|
Other long-term investments
|
|
|
20,884 |
|
|
|
21,219 |
|
|
Short-term investments, at June 30, 2005 and
December 31, 2004 includes $393,286 and $280,351,
respectively, of pledged short-term investments related to
secured trust deposits
|
|
|
735,983 |
|
|
|
508,383 |
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
3,424,810 |
|
|
|
2,819,489 |
|
Cash and cash equivalents, at June 30, 2005 and
December 31, 2004 includes $370,771 and $195,200,
respectively, of pledged cash related to secured trust deposits
|
|
|
614,555 |
|
|
|
268,414 |
|
Trade receivables, net of allowance of $11,252 at June 30,
2005 and $11,792 at December 31, 2004
|
|
|
185,751 |
|
|
|
145,447 |
|
Notes receivable, net of allowance of $1,990 at June 30,
2005 and $1,740 at December 31, 2004. Balances include
notes from related parties of $22,800 at June 30, 2005 and
December 31, 2004
|
|
|
37,818 |
|
|
|
39,196 |
|
Goodwill
|
|
|
962,587 |
|
|
|
959,600 |
|
Prepaid expenses and other assets
|
|
|
310,221 |
|
|
|
311,730 |
|
Title plants
|
|
|
303,332 |
|
|
|
301,610 |
|
Property and equipment, net
|
|
|
134,304 |
|
|
|
164,916 |
|
Due from FNF
|
|
|
|
|
|
|
63,689 |
|
|
|
|
|
|
|
|
|
|
$ |
5,973,378 |
|
|
$ |
5,074,091 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$ |
782,859 |
|
|
$ |
603,705 |
|
|
Notes payable
|
|
|
7,802 |
|
|
|
22,390 |
|
|
Reserve for claim losses
|
|
|
984,290 |
|
|
|
980,746 |
|
|
Secured trust deposits
|
|
|
1,057,166 |
|
|
|
735,295 |
|
|
Deferred tax liabilities
|
|
|
83,109 |
|
|
|
51,248 |
|
|
Due to FNF
|
|
|
8,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,924,120 |
|
|
|
2,393,384 |
|
|
Minority interests
|
|
|
4,643 |
|
|
|
3,951 |
|
Equity:
|
|
|
|
|
|
|
|
|
|
Investment by FNF
|
|
|
3,096,617 |
|
|
|
2,719,056 |
|
|
Accumulated other comprehensive loss
|
|
|
(52,002 |
) |
|
|
(42,300 |
) |
|
|
|
|
|
|
|
|
|
|
3,044,615 |
|
|
|
2,676,756 |
|
|
|
|
|
|
|
|
|
|
$ |
5,973,378 |
|
|
$ |
5,074,091 |
|
|
|
|
|
|
|
|
See Notes to Unaudited Condensed Combined Financial Statements.
F-35
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED COMBINED STATEMENTS OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, except per share | |
|
|
amounts) | |
Revenue:
|
|
|
|
|
|
|
|
|
|
Direct title insurance premiums
|
|
$ |
1,017,396 |
|
|
$ |
987,019 |
|
|
Agency title insurance premiums, includes $42.8 million and
$74.5 million of premiums from related parties for the six
months ended June 30, 2005 and 2004, respectively (see
Note A)
|
|
|
1,304,200 |
|
|
|
1,348,430 |
|
|
|
|
|
|
|
|
|
|
Total title premiums
|
|
|
2,321,596 |
|
|
|
2,335,449 |
|
|
Escrow and other title related fees, includes $5.0 million
and $2.9 million of revenue from related parties for the
six months ended June 30, 2005 and 2004, respectively (see
Note A)
|
|
|
543,465 |
|
|
|
514,019 |
|
|
|
|
|
|
|
|
|
|
Total title and escrow
|
|
|
2,865,061 |
|
|
|
2,849,468 |
|
|
Interest and investment income, includes $0.4 million and
$0.2 million of interest revenue from related parties for
the six months ended June 30, 2005 and 2004, respectively
(see Note A)
|
|
|
45,430 |
|
|
|
28,163 |
|
|
Realized gains and losses, net
|
|
|
21,922 |
|
|
|
17,044 |
|
|
Other income
|
|
|
20,020 |
|
|
|
21,573 |
|
|
|
|
|
|
|
|
|
|
$ |
2,952,433 |
|
|
$ |
2,916,248 |
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Personnel costs, excludes $12.2 million and
$15.5 million of personnel costs allocated to related
parties for the six months ended June 30, 2005 and 2004,
respectively (see Note A)
|
|
|
904,603 |
|
|
|
838,063 |
|
|
Other operating expenses, includes $44.3 million and
$34.0 million of other operating expenses from related
parties net of amounts allocated to related parties for the six
months ended June 30, 2005 and 2004, respectively (see
Note A)
|
|
|
451,093 |
|
|
|
422,113 |
|
|
Agent commissions, includes agent commissions of
$37.7 million and $65.6 million paid to related
parties for the six months ended June 30, 2005 and 2004,
respectively (see Note A)
|
|
|
1,005,121 |
|
|
|
1,046,601 |
|
|
Depreciation and amortization
|
|
|
49,389 |
|
|
|
44,193 |
|
|
Provision for claim losses
|
|
|
150,677 |
|
|
|
125,010 |
|
|
Interest expense
|
|
|
724 |
|
|
|
2,256 |
|
|
|
|
|
|
|
|
|
|
|
2,561,607 |
|
|
|
2,478,236 |
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest
|
|
|
390,826 |
|
|
|
438,012 |
|
|
Income tax expense
|
|
|
146,637 |
|
|
|
160,312 |
|
|
|
|
|
|
|
|
|
Earnings before minority interest
|
|
|
244,189 |
|
|
|
277,700 |
|
|
Minority interest
|
|
|
1,292 |
|
|
|
455 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
242,897 |
|
|
$ |
277,245 |
|
|
|
|
|
|
|
|
|
Unaudited proforma net earnings per share basic
and diluted
|
|
$ |
1.40 |
|
|
|
|
|
|
Unaudited proforma weighted average shares
outstanding
basic and diluted
|
|
|
172,951 |
|
|
|
|
|
See Notes to Unaudited Condensed Combined Financial Statements.
F-36
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED COMBINED STATEMENTS OF EQUITY
AND COMPREHENSIVE EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
|
|
Investment | |
|
Comprehensive | |
|
|
|
Comprehensive | |
|
|
by FNF | |
|
Loss | |
|
Total Equity | |
|
Earnings | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance, December 31, 2004
|
|
$ |
2,719,056 |
|
|
$ |
(42,300 |
) |
|
$ |
2,676,756 |
|
|
$ |
|
|
|
Other comprehensive earnings unrealized loss on
investments net of tax
|
|
|
|
|
|
|
(9,702 |
) |
|
|
(9,702 |
) |
|
|
(9,702 |
) |
|
Net contribution of capital
|
|
|
134,664 |
|
|
|
|
|
|
|
134,664 |
|
|
|
|
|
|
Net earnings
|
|
|
242,897 |
|
|
|
|
|
|
|
242,897 |
|
|
|
242,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2005
|
|
$ |
3,096,617 |
|
|
$ |
(52,002 |
) |
|
$ |
3,044,615 |
|
|
$ |
233,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Condensed Combined Financial Statements.
F-37
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED COMBINED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
242,897 |
|
|
$ |
277,245 |
|
|
Adjustment to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
49,389 |
|
|
|
44,193 |
|
|
|
Net increase (decrease) in reserve for claim losses
|
|
|
3,544 |
|
|
|
16,863 |
|
|
|
Gain on sales of investments and other assets
|
|
|
(21,922 |
) |
|
|
(17,044 |
) |
|
Changes in assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in secured trust deposits
|
|
|
2,190 |
|
|
|
(1,121 |
) |
|
|
Net increase in trade receivables
|
|
|
(40,304 |
) |
|
|
(9,838 |
) |
|
|
Net (increase) decrease in prepaid expenses and other assets
|
|
|
12,847 |
|
|
|
(20,237 |
) |
|
|
Net increase (decrease) in accounts payable, accrued liabilities
and minority interests
|
|
|
33,533 |
|
|
|
(91,577 |
) |
|
|
Net increase in income taxes
|
|
|
109,001 |
|
|
|
178,073 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
391,175 |
|
|
|
376,557 |
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of investment securities available for sale
|
|
|
1,339,841 |
|
|
|
983,368 |
|
|
Proceeds from maturities of investment securities available for
sale
|
|
|
150,102 |
|
|
|
89,701 |
|
|
Proceeds from sales of real estate, property and equipment
|
|
|
30,519 |
|
|
|
4,189 |
|
|
Cash received as collateral on loaned securities, net
|
|
|
2,951 |
|
|
|
|
|
|
Collections of notes receivable
|
|
|
8,609 |
|
|
|
2,762 |
|
|
Additions to title plants
|
|
|
(2,071 |
) |
|
|
(6,052 |
) |
|
Additions to property and equipment
|
|
|
(31,207 |
) |
|
|
(30,557 |
) |
|
Additions to capitalized software
|
|
|
(2,986 |
) |
|
|
(3,001 |
) |
|
Additions to notes receivable
|
|
|
(7,731 |
) |
|
|
(4,314 |
) |
|
Purchases of investment securities available for sale
|
|
|
(1,598,705 |
) |
|
|
(1,388,303 |
) |
|
Net proceeds of short-term investment activities
|
|
|
(224,185 |
) |
|
|
227,937 |
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(5,018 |
) |
|
|
(110,822 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(339,881 |
) |
|
|
(235,092 |
) |
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
Debt service payments
|
|
|
(14,588 |
) |
|
|
(17,655 |
) |
|
Dividends paid
|
|
|
(11,240 |
) |
|
|
(159,600 |
) |
|
Net contribution from (distribution to) FNF
|
|
|
145,104 |
|
|
|
(28,119 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
119,276 |
|
|
|
(205,374 |
) |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents, excluding
pledged cash related to secured trust deposits
|
|
|
170,570 |
|
|
|
(63,909 |
) |
|
Cash and cash equivalents, excluding pledged cash related to
secured trust deposits, at beginning of year
|
|
|
73,214 |
|
|
|
164,715 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, excluding pledged cash related to
secured trust deposits, at end of year
|
|
$ |
243,784 |
|
|
$ |
100,806 |
|
|
|
|
|
|
|
|
See Notes to Unaudited Condensed Combined Financial Statements.
F-38
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
|
|
A. |
Basis of Financial Statements |
The unaudited condensed combined financial information included
in this report includes the accounts of Fidelity National
Title Group, Inc. and subsidiaries has been prepared in
accordance with generally accepted accounting principles. 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
elsewhere in this document.
Fidelity National Financial, Inc. (FNF) expects to initiate
a distribution of 17.5% of its interest in FNT to existing
shareholders in the third quarter of 2005. FNT represents the
title insurance segment of FNF.
FNT is currently a wholly-owned subsidiary of FNF. Once certain
regulatory approvals are received all of the legal entities that
are being combined for presentation in these historical
financial statements will be contributed to FNT, which will be
100% owned by FNF. FNF will then distribute to its current
shareholders 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% 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 at the time or shortly after
the distribution it will 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 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.
F-39
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
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 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 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 other businesses and operations of FNF not
being transferred to it, including 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:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Agency title premiums earned
|
|
$ |
42.8 |
|
|
$ |
74.5 |
|
Rental income earned
|
|
|
5.0 |
|
|
|
2.9 |
|
Interest revenue
|
|
|
0.4 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
48.2 |
|
|
$ |
77.6 |
|
A detail of related party items included in operating expenses
is as follows:
|
|
|
|
|
|
|
|
|
Agency title commissions
|
|
$ |
37.7 |
|
|
$ |
65.6 |
|
Data processing costs
|
|
|
24.7 |
|
|
|
29.1 |
|
Corporate services allocated
|
|
|
(36.1 |
) |
|
|
(37.1 |
) |
Title insurance information expense
|
|
|
11.2 |
|
|
|
15.3 |
|
Other real-estate related information
|
|
$ |
8.5 |
|
|
$ |
4.6 |
|
Software expense
|
|
|
3.6 |
|
|
|
3.0 |
|
Rental expense
|
|
|
1.7 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
Total expenses
|
|
$ |
51.3 |
|
|
$ |
81.6 |
|
Total pretax impact of related party activity
|
|
$ |
(3.1 |
) |
|
$ |
(4.0 |
) |
|
|
|
|
|
|
|
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 six months ended June 30, 2005 and 2004, the
Companys expenses were reduced by $2.3 million and
$4.6 million, respectively related to the provision of
these corporate services by the Company to FNF and its
subsidiaries (other than FIS and its subsidiaries). For the six
months ended June 30, 2005 and 2004, the Companys
expenses were reduced
F-40
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
by $33.8 million and $32.5 million related to the
provision of these corporate services by the Company to 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
Companys title insurance subsidiaries pay commissions on
title insurance policies sold through FIS. For the six months
ended June 30, 2005 and 2004, these FIS operations
generated $42.8 million and $74.5 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 $37.7 million and
$65.6 million for the six months ended June 30, 2005
and 2004, respectively.
The Company also has historically leased equipment to a
subsidiary of FIS. Revenue relating to these leases was
$5.0 million and $2.9 million for the six months ended
June 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 six months ended June 30, 2005 and 2004, the
Companys payments to FIS under these arrangements were
$12.6 million and $15.3 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 six months ended June 30, 2005,
the revenues from these title plant royalties were
$1.4 million. In the first six 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. The Company
recorded expenses of $5.9 million and $4.6 million for
the six months periods ended June 30, 2004 and 2004,
respectively. The Company also recorded expense of
$2.6 million relating to a cost sharing agreement with a
subsidiary of FIS in the six months ended June 30, 2005.
Included in the Companys expenses for the six months ended
June 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 six
months ended June 30, 2005 and 2004, the amounts included
in the Companys expenses to FIS for these services were
$24.7 million and $29.1 million, respectively. In
addition, the Company incurred software expenses relating to an
agreement with a subsidiary of FIS that amounted to expense of
$3.6 million and $3.0 million for the six months ended
June 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
F-41
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
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.
Notes receivable and due from FNF to the Company were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Notes receivable from FNF
|
|
$ |
22.8 |
|
|
$ |
22.8 |
|
(Due to) Due from FNF
|
|
$ |
(8.9 |
) |
|
$ |
57.4 |
|
The Company has notes receivable from FNF relating to agreements
between its title underwriters and FNF. These notes amounted to
$22.8 million at June 30, 2005 and December 31,
2004. As of June 30, 2005, these notes bear interest at a
rate of 2.66%. The Company earned interest revenue of
$0.4 million and $0.2 million relating to these notes
during the six months ended March 31, 2005 and 2004,
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 June 30, 2005 and December 31, 2004, the
Company had recorded a payable of $8.9 million to FNF and a
receivable from FNF relating to overpayment of taxes of
$57.4 million, respectively.
The Company will also enter into a services agreement with a
subsidiary of FIS, pursuant to which FIS will continue to
provide IT infrastructure support and data center management
services to the Company. The pricing for these services is
consistent with that charged in 2004. When FIS ceases to provide
these services to the Company, the Companys costs of
performing these services ourselves or of procuring them from
third parties may increase.
Our financial statements for 2005 and 2004 reflect allocations
for a lease of office space to the Company for its corporate
headquarters and business operations. In connection with the
distribution, the Company will enter into a lease with FIS,
pursuant to which FIS will lease office space to the Company for
its corporate headquarters and business operations.
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 indentifiable assets
and liabilities and the purchase price paid is recorded as
goodwill.
On July 29, 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.
F-42
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
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 in other intangible assets relating to this transaction.
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 June 30,
2005, the Company had security loans outstanding with a fair
value of $142.8 million included in accounts payable and
accrued liabilities and the Company held cash in the amount of
$147.5 million as collateral for the loaned securities.
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 June 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
|
|
$ |
438,772 |
|
|
$ |
(2,934 |
) |
|
$ |
385,567 |
|
|
$ |
(2,217 |
) |
|
$ |
824,339 |
|
|
$ |
(5,151 |
) |
States and political subdivisions
|
|
|
179,361 |
|
|
|
(928 |
) |
|
|
219,577 |
|
|
|
(2,938 |
) |
|
|
398,938 |
|
|
|
(3,866 |
) |
Corporate securities
|
|
|
127,368 |
|
|
|
(1,306 |
) |
|
|
263,184 |
|
|
|
(4,403 |
) |
|
|
390,552 |
|
|
|
(5,709 |
) |
Equity securities
|
|
|
60,305 |
|
|
|
(4,949 |
) |
|
|
54,791 |
|
|
|
(6,345 |
) |
|
|
115,096 |
|
|
|
(11,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$ |
805,806 |
|
|
$ |
(10,117 |
) |
|
$ |
923,119 |
|
|
$ |
(15,903 |
) |
|
$ |
1,728,925 |
|
|
$ |
(26,020 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
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 allocation 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
F-43
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
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 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:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, except per | |
|
|
share amounts) | |
Net earnings, as reported
|
|
$ |
245,545 |
|
|
$ |
276,192 |
|
Add: Stock-based compensation expense included in reported net
earnings, net of related tax effects
|
|
|
3,329 |
|
|
|
1,330 |
|
Deduct: Total stock-based compensation expense determined under
fair value based methods for all awards, net of related tax
effects
|
|
|
(3,895 |
) |
|
|
(2,338 |
) |
|
|
|
|
|
|
|
Pro forma net earnings
|
|
$ |
244,979 |
|
|
$ |
275,184 |
|
|
|
|
|
|
|
|
|
|
E. |
Pension and Postretirement Benefits |
The following details the Companys periodic (income)
expense for pension and postretirement benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
Pension Benefits | |
|
Postretirement Benefits | |
|
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Service cost
|
|
$ |
|
|
|
$ |
|
|
|
$ |
76 |
|
|
$ |
103 |
|
Interest cost
|
|
|
4,174 |
|
|
|
4,325 |
|
|
|
592 |
|
|
|
662 |
|
Expected return on assets
|
|
|
(3,918 |
) |
|
|
(3,565 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
|
|
|
|
|
|
|
|
(768 |
) |
|
|
(1,352 |
) |
Amortization of actuarial loss
|
|
|
4,414 |
|
|
|
3,502 |
|
|
|
274 |
|
|
|
229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic (income) expense
|
|
$ |
5,760 |
|
|
$ |
4,262 |
|
|
$ |
174 |
|
|
$ |
(358 |
) |
There have been no material changes to the Companys
projected benefit payments under these plans since
December 31, 2004.
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 |
F-44
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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 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 offers 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.
F-45
FIDELITY NATIONAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
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 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 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.
F-46
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
Item 13. |
Other Expenses of Issuance and Distribution |
The expenses expected to be incurred by FNT (the
Company) in connection with the issuance and
distribution of the securities being registered under this
Registration Statement are estimated to be as follows:
|
|
|
|
|
|
Securities and Exchange Commission Registration Fee
|
|
$ |
55,898 |
|
New York Stock Exchange Listing Fee
|
|
$ |
769,600 |
|
Printing and Engraving
|
|
$ |
210,000 |
|
Legal Fees and Expenses
|
|
$ |
550,000 |
|
Accounting Fees and Expenses
|
|
$ |
150,000 |
|
Miscellaneous
|
|
$ |
100,000 |
|
|
|
|
|
|
Total
|
|
$ |
1,835,498 |
|
|
|
|
|
|
|
* |
To be completed by amendment |
|
|
Item 14. |
Indemnification of Directors and Officers |
Section 145 of the Delaware General Corporation Law
provides that a corporation may indemnify directors and
officers, as well as other employees and individuals, against
expenses (including attorneys fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by
such person in connection with any threatened, pending or
completed actions, suits or proceedings in which such person is
made a party by reason of such person being or having been a
director, officer, employee or agent to the Registrant. The
Delaware General Corporation Law provides that Section 145
is not exclusive of other rights to which those seeking
indemnification may be entitled under any certificate of
incorporation, bylaws, agreement, vote of stockholders or
disinterested directors or otherwise. The Registrants
certificate of incorporation provides for indemnification by the
Registrant of its directors, officers and employees to the
fullest extent permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law
permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the
directors duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law, (iii) for unlawful payments of dividends or
unlawful stock repurchases, redemptions or other distributions,
or (iv) for any transactions from which the director
derived an improper personal benefit. The Registrants
certificate of incorporation provides for such limitation of
liability.
The Registrant maintains standard policies of insurance under
which coverage is provided (i) to its directors and
officers against loss arising from claims made by reason of
breach of duty or other wrongful act, and (ii) to the
Registrant with respect to payments which may be made by the
Registrant to such directors and officers pursuant to the above
indemnification provision or otherwise as a matter of law.
|
|
Item 15. |
Recent Sales of Unregistered Securities |
The Registrant was incorporated on May 24, 2005 under the
laws of the State of Delaware. In connection with its formation,
the Registrant issued 1,000 shares of common stock for
$1,000 to Fidelity National Financial, Inc., pursuant to the
exemption provided by Section 4(2) of the Securities Act of
1933.
II-1
|
|
Item 16. |
Exhibits and Financial Statement Schedules |
(a) Exhibits
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
3 |
.1 |
|
Form of Amended and Restated Certificate of Incorporation.** |
|
3 |
.2 |
|
Form of Amended and Restated Bylaws.*** |
|
4 |
.1 |
|
Form of Specimen Certificate of Common Stock.*** |
|
5 |
.1 |
|
Form of Opinion of LeBoeuf, Lamb, Greene & MacRae LLP
relating to the Common Stock.** |
|
10 |
.1 |
|
Form of Separation Agreement,
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.2 |
|
Form of Corporate Services Agreement,
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.3 |
|
Form of Reverse Corporate Services Agreement,
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.4 |
|
Form of Tax Matters Agreement,
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.5 |
|
Form of Employee Matters Agreement,
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.6 |
|
Form of Registration Rights Agreement,
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.7 |
|
Form of Intellectual Property Cross License Agreement,
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.8 |
|
Form of Sublease Agreement
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.9 |
|
Form of Assignment, Assumption and Novation Agreement
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.10 |
|
Form of Corporate Services Agreement,
dated ,
2005 between FIS and the Registrant.*** |
|
10 |
.11 |
|
Form of Reverse Corporate Services Agreement,
dated ,
2005 between FIS and the Registrant.*** |
|
10 |
.12 |
|
Form of Starters Repository Access Agreement,
dated ,
2005 between FIS and the Registrant.*** |
|
10 |
.13 |
|
Form of Back Plant Repository Access Agreement,
dated ,
2005 between FIS and the Registrant.*** |
|
10 |
.14 |
|
Form of License and Services Agreement
dated ,
2005 between FIS and the Registrant.*** |
|
10 |
.15 |
|
Form of Lease Agreement,
dated ,
2005 between FIS and the Registrant.*** |
|
10 |
.16 |
|
Form of Master Information Technology Services Agreement,
dated ,
2005 between FIS and the Registrant.*** |
|
10 |
.17 |
|
Form of SoftPro Software License Agreement
dated ,
2005 between Fidelity National Information Solutions, Inc. and
the Registrant.*** |
|
10 |
.18 |
|
Form of 7.30% Promissory Note due August 15, 2011 payable
to FNF.*** |
|
10 |
.19 |
|
Form of 5.25% Promissory Note due March 15, 2013 payable to
FNF.*** |
|
10 |
.20 |
|
Tax Sharing Agreement dated June 17, 1998 among Chicago
Title Corporation, Chicago Title and Trust Company, Chicago
Title Insurance Company, Ticor Title Insurance Company
and Security Union Title Insurance Company.*** |
|
10 |
.21 |
|
Tax Sharing Agreement dated May 13, 2004 among Chicago
Title and Trust Company, Chicago Title Insurance
Company of Oregon and FNF.*** |
|
10 |
.22 |
|
Tax Sharing Agreement dated August 20, 2004 among Chicago
Title and Trust Company, Ticor Title Insurance Company
of Florida and FNF.*** |
|
10 |
.23 |
|
Tax Sharing Agreement dated January 31, 2005 among Alamo
Title Holding Company, Alamo Title Insurance Company and
FNF.*** |
|
10 |
.24 |
|
Tax Allocation Agreement dated December 13, 1999 among
Fidelity National Title Insurance Company (as successor in
interest by merger with Fidelity National Title Insurance
Company of New York), Nations Title Insurance Company of New
York, Inc., and FNF.*** |
II-2
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
10 |
.25 |
|
Issuing Agency Contract dated as of July 22, 2004 between
Chicago Title Insurance Company and LSI
Title Company.*** |
|
10 |
.26 |
|
Issuing Agency Contract dated as of July 22, 2004 between
Chicago Title Insurance Company and LSI Title Agency,
Inc.*** |
|
10 |
.27 |
|
Issuing Agency Contract dated as of July 22, 2004 between
Chicago Title Insurance Company and Lenders Service
Title Agency, Inc.*** |
|
10 |
.28 |
|
Issuing Agency Contract dated as of August 9, 2004 between
Chicago Title Insurance Company and LSI Alabama, LLC.*** |
|
10 |
.29 |
|
Issuing Agency Contract dated as of February 8, 2005
between Chicago Title Insurance Company and LSI
Title Company of Oregon, LLC.*** |
|
10 |
.30 |
|
Issuing Agency Contract dated as of September 28, 2004
between Fidelity National Title Insurance Company and LSI
Title Company.*** |
|
10 |
.31 |
|
Issuing Agency Contract dated as of September 28, 2004
between Fidelity National Title Insurance Company and LSI
Title Agency, Inc.*** |
|
10 |
.32 |
|
Issuing Agency Contract dated as of September 28, 2004
between Fidelity National Title Insurance Company and
Lenders Service Title Agency, Inc.*** |
|
10 |
.33 |
|
Issuing Agency Contract dated as of September 28, 2004
between Fidelity National Title Insurance Company and LSI
Alabama, LLC.*** |
|
10 |
.34 |
|
Issuing Agency Contract dated as of February 24, 2005
between Fidelity National Title Insurance Company and LSI
Title Company of Oregon, LLC.*** |
|
10 |
.35 |
|
Transitional Cost Sharing Agreement dated as of April 14,
2005 by and among Chicago Title Insurance Company, FIS
Management Services, LLC, Lenders Service
Title Agency, Inc., LSI Alabama, LLC, LSI Maryland, Inc.,
LSI Title Agency, Inc., LSI Title Company, and LSI
Title Company of Oregon, LLC.*** |
|
10 |
.36 |
|
Agreement for Sale of Title Plants dated January 4, 2005
between Ticor Title Company of Oregon and LSI Title Company of
Oregon, LLC.*** |
|
10 |
.37 |
|
Agreement For Sale of Plant Index and For Use of Computerized
Title Plant Services dated as of December 20, 2004
between Chicago Title Insurance Company and LSI
Title Agency, Inc.*** |
|
10 |
.38 |
|
Title Plant Maintenance Agreement dated as of March 4,
2005 among Property Insight, LLC, Security Union
Title Insurance Company, Chicago Title Insurance
Company and Ticor Title Insurance Company.*** |
|
10 |
.39 |
|
Title Plant Access Agreement dated March 4, 2005 between
Rocky Mountain Support Services, Inc. and Property Insight,
LLC.*** |
|
10 |
.40 |
|
Title Plant Management Agreement dated as of May 17,
2005 between Property Insight, LLC and Ticor
Title Insurance Company of Florida.*** |
|
10 |
.41 |
|
Master Loan Agreement, dated December 28, 2000 among
Chicago Title Insurance Company, Fidelity National Title
Insurance Company, Ticor Title Insurance Company, Alamo Title
Insurance Company, Security Union Title Insurance Company and
FNF.*** |
|
10 |
.42 |
|
Master Loan Agreement dated February 10, 1999 among Chicago
Title and Trust Company, Chicago Title Insurance Company,
Security Union Title Insurance Company and Ticor Title Insurance
Company.*** |
|
10 |
.43 |
|
OTS and OTS Gold Software License Agreement dated as of
March 4, 2005 between Rocky Mountain Support Services, Inc.
and Fidelity National Tax Service, Inc.*** |
|
10 |
.44 |
|
SIMON Software License Agreement dated as of March 4, 2005
between Rocky Mountain Support Services, Inc. and Fidelity
National Tax Service, Inc.*** |
|
10 |
.45 |
|
TEAM Software License Agreement dated as of March 4, 2005
between Rocky Mountain Support Services, Inc. and Fidelity
National Tax Service, Inc.*** |
|
10 |
.46 |
|
Cross Conveyance and Joint Ownership Agreement dated
March 4, 2005 between Rocky Mountain Support Services, Inc.
and LSI Title Company.*** |
II-3
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
10 |
.47 |
|
eLenderSolutions Software Development and Property Allocation
Agreement dated as of March 4, 2005 between Rocky Mountain
Support Services, Inc. and LSI Title Company.*** |
|
10 |
.48 |
|
Titlepoint Software Development and Property Allocation
Agreement dated as of March 4, 2005 between Rocky Mountain
Support Services, Inc. and Property Insight, LLC.*** |
|
10 |
.49 |
|
Form of Fidelity National Title Group, Inc. 2005 Omnibus
Incentive Plan.** |
|
10 |
.50 |
|
Form of Fidelity National Title Group, Inc. Employee Stock
Purchase Plan.*** |
|
10 |
.51 |
|
Form of Restricted Stock Grant Agreement** |
|
21 |
.1 |
|
Subsidiaries of the Registrant.*** |
|
23 |
.1 |
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm.** |
|
23 |
.2 |
|
Consent of LeBoeuf, Lamb, Greene & MacRae LLP (included
in Exhibit 5.1).** |
|
24 |
.1 |
|
Power of Attorney (included on signature page of registration
statement). |
|
99 |
.1 |
|
Consent of Willie M. Davis to be named as Nominee for
Director.*** |
|
99 |
.2 |
|
Consent of John F. Farrell, Jr. to be named as Nominee for
Director.*** |
|
99 |
.3 |
|
Consent of Philip G. Heasley to be named as Nominee for
Director.*** |
|
99 |
.4 |
|
Consent of William A. Imparato to be named as Nominee for
Director.*** |
|
99 |
.5 |
|
Consent of Donald M. Koll to be named as Nominee for Director.*** |
|
99 |
.6 |
|
Consent of General William Lyon to be named as Nominee for
Director.*** |
|
99 |
.7 |
|
Consent of Frank P. Willey to be named as Nominee for
Director.*** |
|
|
* |
To be filed by amendment |
|
** |
Filed herewith |
|
*** |
Previously filed |
II-4
WHEN THE TRANSACTIONS REFERRED TO IN NOTE A OF THE NOTES TO
COMBINED FINANCIAL STATEMENTS HAVE BEEN CONSUMMATED, WE
WILL BE IN A POSITION TO RENDER THE FOLLOWING REPORT
/s/ KPMG LLP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Fidelity National Title Group, Inc.:
Under the date of August 16, 2005, except for Note A,
which is as
of ,
2005, we reported on the 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, which are included in this registration
statement. In connection with our audits of the aforementioned
Combined Financial Statements, we also audited the related
financial statement schedule as listed in Item 16.(b). The
Combined Financial Statement Schedule is the responsibility of
the Companys management. Our responsibility is to express
an opinion on this Combined Financial Statement Schedule based
on our audits.
In our opinion, such Combined Financial Statement Schedule, when
considered in relation to the basic Combined Financial
Statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Jacksonville, Florida
August 16, 2005, except for Note A,
which is as
of ,
2005
II-5
SCHEDULE V
Fidelity National Title Group, Inc. and subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
Charge to | |
|
|
|
|
|
Balance at | |
|
|
Beginning | |
|
Costs and | |
|
Other | |
|
Deduction | |
|
End of | |
Description |
|
of Period | |
|
Expenses | |
|
(Described) | |
|
(Described) | |
|
Period | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for claim losses
|
|
|
932,439 |
|
|
|
259,402 |
|
|
|
38,597 |
(3) |
|
|
249,692 |
(1) |
|
|
980,746 |
|
Allowance on trade receivables
|
|
$ |
12,833 |
|
|
$ |
228 |
|
|
$ |
|
|
|
$ |
1,269 |
(2) |
|
$ |
11,792 |
|
Allowance on notes receivable
|
|
|
1,555 |
|
|
|
185 |
|
|
|
|
|
|
|
|
|
|
|
1,740 |
|
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for claim losses
|
|
|
887,973 |
|
|
|
248,834 |
|
|
|
4,203 |
(4) |
|
|
208,571 |
(1) |
|
|
932,439 |
|
Allowance on trade receivables
|
|
|
10,148 |
|
|
|
456 |
|
|
|
2,229 |
(2) |
|
|
|
|
|
|
12,833 |
|
Allowance on notes receivable
|
|
|
1,001 |
|
|
|
554 |
|
|
|
|
|
|
|
|
|
|
|
1,555 |
|
Year ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for claim losses
|
|
$ |
881,053 |
|
|
$ |
175,963 |
|
|
|
|
|
|
$ |
169,043 |
(1) |
|
$ |
887,973 |
|
Allowance on trade receivables
|
|
|
9,707 |
|
|
|
1,317 |
|
|
|
|
|
|
|
876 |
(2) |
|
|
10,148 |
|
Allowance on notes receivable
|
|
|
5,093 |
|
|
|
|
|
|
|
|
|
|
|
4,092 |
(2) |
|
|
1,001 |
|
|
|
(1) |
Represents payments of claim losses, net of recoupments |
|
(2) |
Represents uncollectible accounts written off, change in reserve
due to reevaluation of specific items |
|
(3) |
Represents reserve for claim losses assumed in the acquisition
of APTIC in 2004 |
|
(4) |
Represents reserve for claim losses assumed in the acquisition
of ANFI in 2003 |
The undersigned hereby undertakes as follows:
|
|
|
(a) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue. |
|
|
(b) (1) For purposes of determining any liability
under the Securities Act of 1933, the information omitted from
the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective. |
|
|
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities distributed
therein, and the distribution of such securities at that time
shall be deemed to be the initial bona fide distribution thereof. |
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
Fidelity National Title Group, Inc. has duly caused this
Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in
Jacksonville, Florida, on this
14th day
of September, 2005.
|
|
|
Fidelity National
Title Group, Inc.
|
|
|
|
|
|
Name: Anthony J. Park |
|
Title: Chief Financial Officer |
We, the undersigned directors and/or officers of Fidelity
National Title Group, Inc. (the Company),
hereby severally constitute and appoint Raymond R. Quirk and
Anthony J. Park, and each of them individually, with full powers
of substitution and resubstitution, our true and lawful
attorneys, with full powers to them and each of them to sign for
us, in our names and in the capacities indicated below, the
Registration Statement on Form S-1 filed with the
Securities and Exchange Commission, and any and all amendments
to such Registration Statement (including post-effective
amendments), and to file or cause to be filed the same, with all
exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto such
attorneys, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in connection therewith, as fully to all intents and
purposes as each of them might or could do in person, and hereby
ratifying and confirming all that such attorneys, and each of
them, or their substitute or substitutes, shall do or cause to
be done by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933 this
Amendment No. 3 to the Registration Statement has been
signed by the following persons in the capacities indicated on
this
14th day
of September, 2005.
|
|
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date | |
|
|
|
|
| |
|
|
|
*
William
P. Foley, II |
|
Chairman of the Board of Directors |
|
|
September 14, 2005 |
|
|
|
|
*
Raymond
R. Quirk |
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
September 14, 2005 |
|
|
|
|
/s/ Anthony J. Park
Anthony
J. Park |
|
Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
September 14, 2005 |
|
|
By: |
|
/s/ Anthony J. Park
Anthony
J. Park
Attorney-in-fact |
|
|
|
|
|
|
II-7
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
3 |
.1 |
|
Form of Amended and Restated Certificate of Incorporation.** |
|
3 |
.2 |
|
Form of Amended and Restated Bylaws.*** |
|
4 |
.1 |
|
Form of Specimen Certificate of Common Stock.*** |
|
5 |
.1 |
|
Form of Opinion of LeBoeuf, Lamb, Greene & MacRae LLP
relating to the Common Stock.** |
|
10 |
.1 |
|
Form of Separation Agreement,
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.2 |
|
Form of Corporate Services Agreement,
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.3 |
|
Form of Reverse Corporate Services Agreement,
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.4 |
|
Form of Tax Matters Agreement,
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.5 |
|
Form of Employee Matters Agreement,
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.6 |
|
Form of Registration Rights Agreement,
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.7 |
|
Form of Intellectual Property Cross License Agreement,
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.8 |
|
Form of Sublease Agreement
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.9 |
|
Form of Assignment, Assumption and Novation Agreement
dated ,
2005 between FNF and the Registrant.*** |
|
10 |
.10 |
|
Form of Corporate Services Agreement,
dated ,
2005 between FIS and the Registrant.*** |
|
10 |
.11 |
|
Form of Reverse Corporate Services Agreement,
dated ,
2005 between FIS and the Registrant.*** |
|
10 |
.12 |
|
Form of Starters Repository Access Agreement,
dated ,
2005 between FIS and the Registrant.*** |
|
10 |
.13 |
|
Form of Back Plant Repository Access Agreement,
dated ,
2005 between FIS and the Registrant.*** |
|
10 |
.14 |
|
Form of License and Services Agreement
dated ,
2005 between FIS and the Registrant.*** |
|
10 |
.15 |
|
Form of Lease Agreement,
dated ,
2005 between FIS and the Registrant.*** |
|
10 |
.16 |
|
Form of Master Information Technology Services Agreement,
dated ,
2005 between FIS and the Registrant.*** |
|
10 |
.17 |
|
Form of SoftPro Software License Agreement
dated ,
2005 between Fidelity National Information Solutions, Inc. and
the Registrant.*** |
|
10 |
.18 |
|
Form of 7.30% Promissory Note due August 15, 2011 payable
to FNF.*** |
|
10 |
.19 |
|
Form of 5.25% Promissory Note due March 15, 2013 payable to
FNF.*** |
|
10 |
.20 |
|
Tax Sharing Agreement dated June 17, 1998 among Chicago
Title Corporation, Chicago Title and Trust Company, Chicago
Title Insurance Company, Ticor Title Insurance Company
and Security Union Title Insurance Company.*** |
|
10 |
.21 |
|
Tax Sharing Agreement dated May 13, 2004 among Chicago
Title and Trust Company, Chicago Title Insurance
Company of Oregon and FNF.*** |
|
10 |
.22 |
|
Tax Sharing Agreement dated August 20, 2004 among Chicago
Title and Trust Company, Ticor Title Insurance Company
of Florida and FNF.*** |
|
10 |
.23 |
|
Tax Sharing Agreement dated January 31, 2005 among Alamo
Title Holding Company, Alamo Title Insurance Company and
FNF.*** |
|
10 |
.24 |
|
Tax Allocation Agreement dated December 13, 1999 among
Fidelity National Title Insurance Company (as successor in
interest by merger with Fidelity National Title Insurance
Company of New York), Nations Title Insurance Company of New
York, Inc., and FNF.*** |
|
10 |
.25 |
|
Issuing Agency Contract dated as of July 22, 2004 between
Chicago Title Insurance Company and LSI
Title Company.*** |
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
10 |
.26 |
|
Issuing Agency Contract dated as of July 22, 2004 between
Chicago Title Insurance Company and LSI Title Agency,
Inc.*** |
|
10 |
.27 |
|
Issuing Agency Contract dated as of July 22, 2004 between
Chicago Title Insurance Company and Lenders Service
Title Agency, Inc.*** |
|
10 |
.28 |
|
Issuing Agency Contract dated as of August 9, 2004 between
Chicago Title Insurance Company and LSI Alabama, LLC.*** |
|
10 |
.29 |
|
Issuing Agency Contract dated as of February 8, 2005
between Chicago Title Insurance Company and LSI
Title Company of Oregon, LLC.*** |
|
10 |
.30 |
|
Issuing Agency Contract dated as of September 28, 2004
between Fidelity National Title Insurance Company and LSI
Title Company.*** |
|
10 |
.31 |
|
Issuing Agency Contract dated as of September 28, 2004
between Fidelity National Title Insurance Company and LSI
Title Agency, Inc.*** |
|
10 |
.32 |
|
Issuing Agency Contract dated as of September 28, 2004
between Fidelity National Title Insurance Company and
Lenders Service Title Agency, Inc.*** |
|
10 |
.33 |
|
Issuing Agency Contract dated as of September 28, 2004
between Fidelity National Title Insurance Company and LSI
Alabama, LLC.*** |
|
10 |
.34 |
|
Issuing Agency Contract dated as of February 24, 2005
between Fidelity National Title Insurance Company and LSI
Title Company of Oregon, LLC.*** |
|
10 |
.35 |
|
Transitional Cost Sharing Agreement dated as of April 14,
2005 by and among Chicago Title Insurance Company, FIS
Management Services, LLC, Lenders Service
Title Agency, Inc., LSI Alabama, LLC, LSI Maryland, Inc.,
LSI Title Agency, Inc., LSI Title Company, and LSI
Title Company of Oregon, LLC.*** |
|
10 |
.36 |
|
Agreement for Sale of Title Plants dated January 4, 2005
between Ticor Title Company of Oregon and LSI Title Company of
Oregon, LLC.*** |
|
10 |
.37 |
|
Agreement For Sale of Plant Index and For Use of Computerized
Title Plant Services dated as of December 20, 2004
between Chicago Title Insurance Company and LSI
Title Agency, Inc.*** |
|
10 |
.38 |
|
Title Plant Maintenance Agreement dated as of March 4,
2005 among Property Insight, LLC, Security Union
Title Insurance Company, Chicago Title Insurance
Company and Ticor Title Insurance Company.*** |
|
10 |
.39 |
|
Title Plant Access Agreement dated March 4, 2005 between
Rocky Mountain Support Services, Inc. and Property Insight,
LLC.*** |
|
10 |
.40 |
|
Title Plant Management Agreement dated as of May 17,
2005 between Property Insight, LLC and Ticor
Title Insurance Company of Florida.*** |
|
10 |
.41 |
|
Master Loan Agreement, dated December 28, 2000 among
Chicago Title Insurance Company, Fidelity National Title
Insurance Company, Ticor Title Insurance Company, Alamo Title
Insurance Company, Security Union Title Insurance Company and
FNF.*** |
|
10 |
.42 |
|
Master Loan Agreement dated February 10, 1999 among Chicago
Title and Trust Company, Chicago Title Insurance Company,
Security Union Title Insurance Company and Ticor Title Insurance
Company.*** |
|
10 |
.43 |
|
OTS and OTS Gold Software License Agreement dated as of
March 4, 2005 between Rocky Mountain Support Services, Inc.
and Fidelity National Tax Service, Inc.*** |
|
10 |
.44 |
|
SIMON Software License Agreement dated as of March 4, 2005
between Rocky Mountain Support Services, Inc. and Fidelity
National Tax Service, Inc.*** |
|
10 |
.45 |
|
TEAM Software License Agreement dated as of March 4, 2005
between Rocky Mountain Support Services, Inc. and Fidelity
National Tax Service, Inc.*** |
|
10 |
.46 |
|
Cross Conveyance and Joint Ownership Agreement dated
March 4, 2005 between Rocky Mountain Support Services, Inc.
and LSI Title Company.*** |
|
10 |
.47 |
|
eLenderSolutions Software Development and Property Allocation
Agreement dated as of March 4, 2005 between Rocky Mountain
Support Services, Inc. and LSI Title Company.*** |
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
10 |
.48 |
|
Titlepoint Software Development and Property Allocation
Agreement dated as of March 4, 2005 between Rocky Mountain
Support Services, Inc. and Property Insight, LLC.*** |
|
10 |
.49 |
|
Form of Fidelity National Title Group, Inc. 2005 Omnibus
Incentive Plan.** |
|
10 |
.50 |
|
Form of Fidelity National Title Group, Inc. Employee Stock
Purchase Plan.*** |
|
10 |
.51 |
|
Form of Restricted Stock Grant Agreement** |
|
21 |
.1 |
|
Subsidiaries of the Registrant.*** |
|
23 |
.1 |
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm.** |
|
23 |
.2 |
|
Consent of LeBoeuf, Lamb, Greene & MacRae LLP (included
in Exhibit 5.1).** |
|
24 |
.1 |
|
Power of Attorney (included on signature page of registration
statement). |
|
99 |
.1 |
|
Consent of Willie M. Davis to be named as Nominee for
Director.*** |
|
99 |
.2 |
|
Consent of John F. Farrell, Jr. to be named as Nominee for
Director.*** |
|
99 |
.3 |
|
Consent of Philip G. Heasley to be named as Nominee for
Director.*** |
|
99 |
.4 |
|
Consent of William A. Imparato to be named as Nominee for
Director.*** |
|
99 |
.5 |
|
Consent of Donald M. Koll to be named as Nominee for Director.*** |
|
99 |
.6 |
|
Consent of General William Lyon to be named as Nominee for
Director.*** |
|
99 |
.7 |
|
Consent of Frank P. Willey to be named as Nominee for
Director.*** |
|
|
* |
To be filed by amendment |
|
** |
Filed herewith |
|
*** |
Previously filed |