FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
366,563 |
|
|
$ |
848,942 |
|
Reconciliation of net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
404,770 |
|
|
|
298,178 |
|
Net increase in reserve for claim losses |
|
|
90,286 |
|
|
|
62,104 |
|
Gain on sale of minority interest in FIS stock |
|
|
|
|
|
|
(318,209 |
) |
Gain on sales of assets |
|
|
(30,122 |
) |
|
|
(34,281 |
) |
Stock-based compensation cost |
|
|
56,754 |
|
|
|
24,547 |
|
Minority interest |
|
|
143,383 |
|
|
|
39,081 |
|
Change in assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
Net (increase) decrease in secured trust deposits |
|
|
(20,676 |
) |
|
|
1,344 |
|
Net decrease (increase) in trade receivables |
|
|
98,964 |
|
|
|
(55,238 |
) |
Net increase in prepaid expenses and other assets |
|
|
(183,219 |
) |
|
|
(122,165 |
) |
Net (decrease) increase in accounts payable, accrued liabilities |
|
|
(163,067 |
) |
|
|
106,907 |
|
Net (decrease) increase in income taxes |
|
|
(165,095 |
) |
|
|
157,710 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
598,541 |
|
|
|
1,008,920 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sales of investment securities available for sale |
|
|
2,106,901 |
|
|
|
2,438,505 |
|
Proceeds from maturities of investment securities available for sale |
|
|
228,890 |
|
|
|
270,787 |
|
Proceeds from sale of assets |
|
|
4,653 |
|
|
|
21,343 |
|
Net proceeds from sale of equity interest in subsidiary |
|
|
|
|
|
|
454,337 |
|
Cash received as collateral on loaned securities, net |
|
|
11,075 |
|
|
|
3,388 |
|
Collections of notes receivable |
|
|
4,265 |
|
|
|
3,973 |
|
Additions to title plants |
|
|
(14,761 |
) |
|
|
(8,720 |
) |
Additions to property and equipment |
|
|
(128,884 |
) |
|
|
(112,516 |
) |
Additions to capitalized software |
|
|
(160,655 |
) |
|
|
(119,818 |
) |
Purchases of investment securities available for sale |
|
|
(2,279,794 |
) |
|
|
(3,144,828 |
) |
Net proceeds (purchases) of short-term investment securities |
|
|
427,069 |
|
|
|
(229,795 |
) |
Issuance of notes receivable |
|
|
(4,133 |
) |
|
|
(6,145 |
) |
Acquisitions of businesses, net of cash acquired |
|
|
(172,955 |
) |
|
|
(191,257 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
21,671 |
|
|
|
(620,746 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings |
|
$ |
630,171 |
|
|
$ |
2,829,584 |
|
Debt issuance costs |
|
|
|
|
|
|
(34,155 |
) |
Debt service payments |
|
|
(790,674 |
) |
|
|
(1,091,001 |
) |
Dividends paid |
|
|
(129,736 |
) |
|
|
(1,897,029 |
) |
Subsidiary dividends paid to minority interest shareholders |
|
|
(40,896 |
) |
|
|
|
|
Stock options exercised |
|
|
38,822 |
|
|
|
44,393 |
|
Tax benefit associated with the exercise of stock options |
|
|
23,473 |
|
|
|
31,069 |
|
Exercise of subsidiary stock options |
|
|
40,516 |
|
|
|
|
|
Purchases of treasury stock |
|
|
|
|
|
|
(70,874 |
) |
Subsidiary purchases of treasury stock |
|
|
(103,837 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(332,161 |
) |
|
|
(188,013 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents, excluding pledged cash related to
secured trust deposits |
|
|
288,051 |
|
|
|
200,161 |
|
Cash and cash equivalents, excluding pledged cash related to secured trust
deposits at beginning of period |
|
|
278,685 |
|
|
|
136,022 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, excluding pledged cash related to secured trust
deposits at end of period |
|
$ |
566,736 |
|
|
$ |
336,183 |
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
341,000 |
|
|
$ |
177,300 |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
192,262 |
|
|
$ |
104,353 |
|
|
|
|
|
|
|
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Fair value of shares issued in connection with acquisitions |
|
$ |
|
|
|
$ |
1,625 |
|
|
|
|
|
|
|
|
Capital transactions of FIS |
|
$ |
862,296 |
|
|
$ |
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
7
Fidelity National Financial, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note A Basis of Financial Statements
The unaudited financial information included in this report includes the accounts of Fidelity
National Financial, Inc. and its subsidiaries (collectively, the Company or FNF) prepared in
accordance with generally accepted accounting principles and the instructions to Form 10-Q and
Article 10 of Regulation S-X. All adjustments considered necessary for a fair presentation have
been included. This report should be read in conjunction with the Companys Annual Report on Form
10-K for the year ended December 31, 2005.
The Company made a reclassification adjustment to the Consolidated Statements of Income,
included within this Quarterly Report on Form10-Q, with regard to the presentation of interest and
investment income and other operating expenses. This adjustment was necessary to properly reflect
certain credits earned as a reduction of other operating expenses as opposed to an increase in
investment income. The adjustment resulted in a reduction of interest and investment income of $2.6
million for the quarter ended September 30, 2005 and $10.3 million and $5.9 million for the nine
month periods ended September 30, 2006 and 2005, respectively, and a corresponding reduction of
other operating expenses. This adjustment had no effect on net income.
Certain other reclassifications have been made in the 2006 Condensed Consolidated Financial
Statements to conform to current period classification.
Recent Accounting Pronouncements
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108 (Topic 1N), Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). This SAB addresses how the effects
of prior-year uncorrected misstatements should be considered when quantifying misstatements in
current-year financial statements. SAB 108 requires registrants to quantify misstatements using
both the balance sheet and income statement approaches and to evaluate whether either approach
results in quantifying an error that is material in light of relevant quantitative and qualitative
factors. When the effect of initial adoption is determined to be material, the SAB allows
registrants to record that effect as a cumulative effect adjustment to beginning-of-year retained
earnings. SAB 108 is effective for annual financial statements covering the first fiscal year
ending after November 15, 2006. Management is currently evaluating the impact of SAB 108 on the
Companys statements of financial position and operations.
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 158, Employers Accounting for Defined Benefit Pension
and Other Post Retirement Plans (SFAS 158). SFAS 158 requires entities to recognize on their
balance sheets the funded status of pension and other postretirement benefit plans. Entities are
required to recognize actuarial gains and losses, prior service cost, and any remaining transition
amounts from the initial application of Statement of Financial Accounting Standards No. 87,
Employers Accounting for Pensions, and Statement of Financial Accounting Standards No. 106,
Employers Accounting for Postretirement Benefits Other Than Pensions, when recognizing a plans
funded status, with the offset to accumulated other comprehensive income. SFAS 158 will not change
the amounts recognized in the income statement as net periodic benefit cost. All of the
requirements of SFAS 158 are effective as of December 31, 2006 for calendar-year public companies,
except for a requirement for fiscal-year-end measurements of plan assets and benefit obligations
with which the Company is already in compliance. Management is currently evaluating the impact on
the Companys statements of financial position and operations.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 requires an
evaluation to determine the likelihood that an uncertain tax position will be sustained upon
examination, including resolution of any related appeals or litigation processes. If it is
determined that it is more likely than not that an uncertain tax position will be sustained upon
examination, the next step is to determine the amount to be recognized. FIN 48 prescribes
recognition of the largest amount of tax benefit that is greater than 50 percent likely of being
recognized upon ultimate settlement of an uncertain tax position. Such amounts are to be recognized
as of the first financial reporting period during which the
8
more-likely-than-not recognition threshold is met. Similarly, an amount that has previously
been recognized will be derecognized as of the first financial reporting period during which the
more-likely-than-not recognition threshold is not met. FIN 48 is effective for fiscal years
beginning after December 15, 2006. Management is currently evaluating the impact on the Companys
statements of financial position and operations.
Recent Developments
On June 25, 2006, the Company entered into a Securities Exchange and Distribution Agreement
(the SEDA) with Fidelity National Title Group, Inc. (FNT) and a merger agreement with Fidelity
National Information Services, Inc. (FIS) (both amended and restated as of September 18, 2006),
providing for the elimination of FNFs holding company structure, the sale of certain of FNFs
assets and liabilities to FNT in exchange for shares of FNT stock, and the distribution of FNFs
ownership stake in FNT to FNF shareholders. Pursuant to the SEDA, on October 24, 2006, FNT
completed the acquisition of substantially all of the assets and liabilities of FNF (other than
FNFs interests in FIS and in FNF Capital Leasing, Inc., a small leasing subsidiary) in exchange
for 45,265,956 shares of FNTs Class A common stock (the Asset Contribution). The assets
transferred included FNFs specialty insurance business, its interest in certain claims management
operations, certain timber and real estate holdings and certain smaller operations, together with
all cash and certain investment assets held by FNF as of October 24, 2006. In connection with the
Asset Contribution, FNF converted all of the FNT Class B common stock held by FNF into FNT Class A
common stock and distributed the shares acquired by FNF from FNT, together with the converted
shares, to holders of record of FNF common stock as of October 17, 2006 in a tax-free distribution
(the 2006 Distribution). As a result of the 2006 Distribution, FNF no longer owns any common
stock of FNT and FNT is now a stand alone public company with all of its approximately 218.7
million shares held by the public. Also, on November 9, 2006, FNF will merge with and into FIS,
after which FNT will legally change its name to Fidelity National Financial, Inc. (New FNF).
Beginning on November 10, 2006, FNTs common stock will trade on the New York Stock Exchange under
the trading symbol FNF. FNFs current chairman of the board and chief executive officer has assumed
the same positions in New FNF and the position of executive chairman of the board of FIS. Other key
members of FNFs senior management will also continue their involvement in both New FNF and FIS in
executive capacities.
Acquisitions among entities under common control such as the Asset Contribution are not
considered business combinations and are to be accounted for at historical cost in accordance with
EITF 90-5, Exchanges of Ownership Interests between Enterprises under Common Control. Furthermore,
the substance of the proposed transactions and the merger is effectively a reverse spin-off of FIS
by FNF in accordance with EITF 02-11, Accounting for Reverse Spinoffs. Accordingly, the historical
financial statements of FNF will become those of FNT; however, the criteria to account for FIS as
discontinued operations as prescribed by SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets will not be met. This is primarily due to the continuing involvement of FNT with
and significant influence that FNT will have over FIS subsequent to the merger through common board
members, common senior management and continuing business relationships. It is expected that FIS
will continue to be included in FNFs consolidated financial statements through the date of the
completion of the SEDA.
Note B Acquisitions
The results of operations and financial position of the entities acquired during any year are
included in the Consolidated Financial Statements from and after the date of acquisition. The
Company 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.
Certegy Inc.
On September 14, 2005, the Company through Fidelity National Information Services, Inc.
(Former FIS) entered into a definitive merger agreement with Certegy, Inc. (Certegy) under
which FIS and Certegy combined operations to form a single publicly traded company called Fidelity
National Information Services, Inc. (NYSE:FIS). Certegy was a payment processing company
headquartered in St. Petersburg, Florida. On January 26, 2006, Certegys shareholders approved the
merger which was subsequently consummated on February 1, 2006.
9
As a result of the merger, FIS became one of the largest providers of processing services to
U.S. financial institutions, with market-leading positions in core processing, card issuing
services, check risk management, mortgage processing, and lending services.
Under the terms of the merger agreement, FIS was merged into a wholly owned subsidiary of
Certegy in a tax-free merger, and all of FISs outstanding stock was converted into Certegy common
stock. As a result of the merger:
|
|
|
FISs pre-merger shareholders owned approximately 67.4% of the combined companys
outstanding common stock immediately after the merger, while Certegys pre-merger
shareholders owned approximately 32.6%, |
|
|
|
|
FNF and its subsidiaries now own approximately 51% of the combined companys
outstanding common stock, and |
|
|
|
|
the combined companys board of directors was reconstituted so that a majority of the
board now consists of directors designated by FISs stockholders. |
In connection with the merger, Certegy amended its articles of incorporation to increase the
number of authorized shares of capital stock from 400 million shares to 800 million shares, with
600 million shares being designated as common stock and 200 million shares being designated as
preferred stock. Additionally, Certegy amended its Stock Incentive Plan to increase the total
number of shares of common stock available for issuance by an additional 6 million shares, and to
increase the limits on the number of options, restricted shares, and other awards that may be
granted to any individual in any calendar year. These changes were approved by Certegys
shareholders on January 26, 2006.
As part of the merger transaction, Certegy declared a $3.75 per share special cash dividend
that was paid to Certegys pre-merger shareholders. This dividend, totaling $236.6 million, was
paid by Certegy at the consummation of the merger.
Generally accepted accounting principles in the U.S. require that one of the two companies in
the transaction be designated as the acquirer for accounting purposes. FIS was designated as the
accounting acquirer because immediately after the merger its shareholders held more than 50% of the
common stock of the combined company. As a result, the merger was accounted for as a reverse
acquisition under the purchase method of accounting. Under this accounting treatment, FIS was
considered the acquiring entity and Certegy was considered the acquired entity for financial
reporting purposes.
The purchase price was based on the number of outstanding shares of common stock of Certegy on
February 1, 2006, the date of consummation of the merger, valued at $33.38 per share (which was the
average of the trading price of Certegy common stock two days before and two days after the
announcement of the merger on September 15, 2005 of $37.13, less the $3.75 per share special
dividend declared prior to closing). The purchase price also included the estimated fair value of
Certegys stock options and restricted stock units outstanding at the transaction date.
The total purchase price was as follows (in millions):
|
|
|
|
|
Value of Certegys common stock |
|
$ |
2,121.0 |
|
Value of Certegys stock options |
|
|
54.2 |
|
FISs estimated transaction costs |
|
|
5.9 |
|
|
|
|
|
|
|
$ |
2,181.1 |
|
|
|
|
|
The transaction was accounted for by FIS under the purchase method of accounting, and as a
result, the purchase price was allocated to Certegys tangible and identifiable intangible assets
acquired and liabilities assumed based on their fair values as of February 1, 2006. Goodwill was
recorded based on the amount that the purchase price exceeds the fair value of the net assets
acquired. The purchase price allocation was as follows (in millions):
10
|
|
|
|
|
Tangible assets |
|
$ |
826.8 |
|
Computer software |
|
|
131.6 |
|
Intangible assets |
|
|
653.5 |
|
Goodwill |
|
|
1,951.7 |
|
Liabilities assumed |
|
|
(1,382.5 |
) |
|
|
|
|
Total purchase price |
|
$ |
2,181.1 |
|
|
|
|
|
The allocation of the purchase price to intangible assets, including computer software, is
based on studies and valuations that were finalized as of September 30, 2006. As a result, during the quarter ended
September 30, 2006, the Company has adjusted its initial purchase accounting to reflect revalued
customer contracts, computer software, deferred income taxes and
assumed liabilities which resulted in a net adjustment to goodwill of $56.9 million.
The following table summarizes the liabilities assumed that impact the purchase price
allocation (in millions):
|
|
|
|
|
Notes payable and capital lease obligations |
|
$ |
222.8 |
|
Deferred income taxes |
|
|
224.4 |
|
Dividends payable |
|
|
236.6 |
|
Dividend bridge loan |
|
|
239.0 |
|
Liabilities associated with pension, SERP, and Postretirement benefit plans |
|
|
32.6 |
|
Estimated severance payments to certain Certegy employees |
|
|
10.0 |
|
Estimated employee relocation and facility closure costs |
|
|
9.5 |
|
Other merger related |
|
|
28.5 |
|
Other operating liabilities |
|
|
379.1 |
|
|
|
|
|
|
|
$ |
1,382.5 |
|
|
|
|
|
In connection with the merger, FIS announced that it will terminate and settle the Certegy U.S
Retirement Income Plan (pension plan). The estimated impact of this settlement has been reflected
in the purchase price allocation as an increase in the pension liability, less the fair value of
the pension plan assets, based on estimates of the total cost to settle the liability through the
purchase of annuity contracts or lump sum settlements to the beneficiaries. The final settlement
will not occur until after an IRS determination has been obtained. In addition to the pension plan
obligation, FIS assumed liabilities for Certegys Supplemental Executive Retirement Plan (SERP)
and Postretirement Benefit Plan. The total liability recorded as part of the purchase price
allocation related to all three plans, net of the fair value of plan related assets, was $32.6
million.
The Company has evaluated the various lease agreements, vendor arrangements, and customer
contracts of Certegy. This evaluation has resulted in the recognition of certain liabilities
associated with exiting activities of the acquired company.
Also, the merger triggered the performance criteria relating to FISs stock option grant made
in March 2005 and these awards vested when the trading value of the Companys stock remained above
$31.27 for 45 days following the Merger. As a result, the Company recorded a charge of $24.5
million in the first nine months of 2006.
Selected unaudited pro forma combined results of operations for the nine months ended
September 30, 2006 and 2005, assuming the Certegy merger had occurred as of January 1, 2005, using
actual general and administrative expenses prior to the acquisition are set forth below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
2006 |
|
2005(a) |
Total revenue |
|
$ |
7,727,005 |
|
|
$ |
8,052,394 |
|
Net earnings |
|
$ |
319,940 |
|
|
$ |
814,200 |
|
Pro forma earnings per share basic |
|
$ |
1.83 |
|
|
$ |
4.71 |
|
Pro forma earnings per share diluted |
|
$ |
1.78 |
|
|
$ |
4.59 |
|
|
|
|
(a) |
|
The nine months ended September 30, 2005 includes the $318.2 million gain on sale of a
minority interest in FIS. |
11
Other Transactions:
Cascade Timberlands LLC
The Company began purchasing equity interests in Cascade Timberlands LLC (Cascade
Timberlands) in March 2006. As of September 30, 2006, the Company had acquired approximately 71%
of Cascade Timberlands for $89.2 million. The primary assets of Cascade Timberlands are
approximately 293,000 acres of productive timberlands located on the eastern side of the Cascade
mountain range extending from Bend, Oregon south on State Highway 20 toward the California border.
Cascade Timberlands was created by the secured creditors of Crown Pacific LP upon the conclusion of
the bankruptcy case of Crown Pacific LP in December 2004.
Acquisition of Equity Interest in Sedgwick
On January 31, 2006, the Company, along with its equity partners, Thomas H. Lee Partners
(THL) and Evercore Capital Partners, completed an acquisition of an approximately 40% interest in
Sedgwick CMS Holdings, Inc. (Sedgwick), for approximately $126 million. Sedgwick, headquartered
in Memphis, Tennessee, is a leading provider of outsourced insurance claims management services to
large corporate and public sector entities.
Service Link L.P.
On August 1, 2005, the Company acquired Service Link, L.P. (Service Link), a national
provider of centralized mortgage and residential real estate title and closing services to major
financial institutions and institutional lenders. The initial acquisition price was approximately
$110 million in cash. During the third quarter of 2006, the Company paid additional contingent
consideration of $57.0 million related to this purchase, based on Service Links operations meeting
certain performance measures over a 12-month period ending July 2006.
Note C Recapitalization Transactions
Distribution of Fidelity National Title Group, Inc.
On October 17, 2005, the Company completed a pro rata distribution of shares, representing
17.5% of the outstanding common stock of FNT, to the Companys shareholders. This distribution
completed a restructuring that resulted in FNT becoming the parent company of the Companys title
insurance businesses. Following the distribution, FNT became a majority-owned subsidiary of FNF and
a separate registrant reporting its results on a stand-alone basis. The Company continues to
consolidate FNT in its results, and subsequent to the distribution, the Company began recording
minority interest liabilities and expense relating to the 17.5% minority interest. This
restructuring was a taxable transaction to the Company and the Companys shareholders. The Company
recognized income tax expense of approximately $108 million in the fourth quarter of 2005 relating
to this restructuring which was paid in the first quarter of 2006.
Recapitalization of Former FIS in 2005
The recapitalization of Former FIS was completed on March 9, 2005 through $2.8 billion in
borrowings under new senior credit facilities consisting of an $800 million Term Loan A facility, a
$2.0 billion Term Loan B facility (collectively, the Term Loan Facilities) and an undrawn $400
million revolving credit facility (the Revolver). Former FIS fully drew upon the entire $2.8
billion in Term Loan Facilities, while the Revolver remained undrawn at the closing. The current
interest rate on both the Term Loan Facilities and the Revolver is LIBOR plus 1.25% to 1.75%. Bank
of America, JP Morgan Chase, Wachovia Bank, Deutsche Bank and Bear Stearns led a consortium of
lenders which provided the new senior credit facilities.
The minority equity interest sale was accomplished through Former FIS selling an approximately
25% minority equity interest in the common stock of Former FIS to an investment group led by THL
and Texas Pacific Group (TPG). Former FIS issued a total of 50 million shares of the common stock
of Former FIS to the investment group for a total purchase price of $500 million, before certain
expenses paid by Former FIS. The minority equity interest sale resulted in a gain of $318.2
million. This gain was calculated under the provisions of Securities and Exchange Commission
(SEC) Staff Accounting Bulletin Topic 5H (SAB Topic 5H) and relates to the issuance of
securities of a non-wholly owned subsidiary. The gain represented the difference between the
Companys book
12
value investment in Former FIS immediately prior to the transaction and its book value
investment in Former FIS immediately following the transaction. No deferred income taxes were
recorded in connection with this transaction as the tax basis of the investment was greater than
the book basis on the date of the sale.
Note D Earnings Per Share
The Company presents basic earnings per share, representing net earnings divided by the
weighted average shares outstanding (excluding all common stock equivalents), and diluted
earnings per share, representing basic earnings per share adjusted for the dilutive effect of all
common stock equivalents. The following table illustrates the computation of basic and diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except |
|
|
(In thousands, except |
|
|
|
per share amounts) |
|
|
per share amounts) |
|
Net earnings, basic |
|
$ |
127,571 |
|
|
$ |
214,403 |
|
|
$ |
366,563 |
|
|
$ |
848,942 |
|
Dilution relating to
common stock equivalents
of subsidiary(1) |
|
$ |
(1,293 |
) |
|
$ |
|
|
|
$ |
(2,851 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, diluted |
|
$ |
126,278 |
|
|
$ |
214,403 |
|
|
$ |
363,712 |
|
|
$ |
848,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding during the
period, basic |
|
|
176,048 |
|
|
|
172,515 |
|
|
|
175,119 |
|
|
|
172,686 |
|
Plus: Common stock
equivalent shares assumed
from conversion of
options |
|
|
4,735 |
|
|
|
5,025 |
|
|
|
5,004 |
|
|
|
4,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding during the
period, diluted |
|
|
180,783 |
|
|
|
177,540 |
|
|
|
180,123 |
|
|
|
177,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.72 |
|
|
$ |
1.24 |
|
|
$ |
2.09 |
|
|
$ |
4.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.70 |
|
|
$ |
1.21 |
|
|
$ |
2.02 |
|
|
$ |
4.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For purposes of computing earnings per diluted share, FNF is required to analyze the
dilutive impact of outstanding options at its public subsidiaries, FNT and FIS, and, if
necessary, adjust the net earnings available to FNF shareholders before calculating earnings
per diluted share. For the three-month and nine month periods ended September 30, 2006, net
earnings were reduced by $1.3 million and $2.9 million, respectively, resulting in a reduction
of $0.01 and $0.02, respectively, in earnings per diluted share. |
Options to purchase 1,409,399 shares and 1,945,380 shares of the Companys common stock for
the three and nine months ended September 30, 2006 and 2,301,852 shares and 2,988,274 shares for
the three and nine months ended September 30, 2005, respectively, were not included in the
computation of diluted earnings per share because they were antidilutive.
Note E Investments
During the second quarter of 2005, the Company began lending fixed maturity and equity
securities to financial institutions in short-term security lending transactions. The Companys
security lending policy requires that the cash received as collateral be 102% or more of the fair
value of the loaned securities. These short-term security lending arrangements increase investment
income with minimal risk. At September 30, 2006 and December 31, 2005, the Company had security
loans outstanding with values of $305.6 million and $143.4 million, respectively, included in
accounts payable and accrued liabilities and the Company held cash in the same amounts as
collateral for the loaned securities.
13
Gross unrealized losses on investment securities and the fair value of the related securities,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position at September 30, 2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
29,751 |
|
|
$ |
(91 |
) |
|
$ |
806,961 |
|
|
$ |
(14,395 |
) |
|
$ |
836,712 |
|
|
$ |
(14,486 |
) |
States and
political
subdivisions |
|
|
176,054 |
|
|
|
(739 |
) |
|
|
635,369 |
|
|
|
(8,820 |
) |
|
|
811,423 |
|
|
|
(9,559 |
) |
Foreign government
and agencies |
|
|
5,978 |
|
|
|
(17 |
) |
|
|
23,508 |
|
|
|
(414 |
) |
|
|
29,486 |
|
|
|
(431 |
) |
Corporate securities |
|
|
150,631 |
|
|
|
(1,349 |
) |
|
|
432,408 |
|
|
|
(12,024 |
) |
|
|
583,039 |
|
|
|
(13,373 |
) |
Equity securities |
|
|
138,684 |
|
|
|
(23,074 |
) |
|
|
|
|
|
|
|
|
|
|
138,684 |
|
|
|
(23,074 |
) |
|
|
|
Total
temporarily
impaired
securities |
|
$ |
501,098 |
|
|
$ |
(25,270 |
) |
|
$ |
1,898,246 |
|
|
$ |
(35,654 |
) |
|
$ |
2,399,344 |
|
|
$ |
(60,923 |
) |
|
|
|
A substantial portion of the Companys unrealized losses relate to its holdings of debt
securities. Unrealized losses relating to U.S. government, state and political subdivision and
fixed maturity corporate 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. The unrealized losses related
to equity securities were caused by market changes that the Company considers to be temporary and
thus the Company does not consider these investments other-than-temporarily impaired. During the
third quarter of 2006, the Company recorded an impairment charge on an equity investment that it
considered to be other-than-temporarily impaired, resulting in a charge of $9.1 million. During
the third quarter of 2005, the Company recorded an impairment charge on two equity investments that
it considered to be other-than-temporarily impaired, which resulted in a charge of $14.9 million.
Note F Stock-Based Compensation Plans
The Companys 1993 Stock Plan (1993 Plan) expired in June 2003. Options generally had a term
of 10 years from the date of grant and were exercisable subject to the terms and conditions set by
the Board of Directors. The per share option price was determined at the date of grant, provided
that the price for incentive stock options shall not be less than 100% of their market value or
award stock shares. A total of 599,802 stock options were outstanding under the 1993 Plan as of
September 30, 2006. No further awards may be granted under this plan.
In connection with the 1998 acquisition of FNF Capital, Inc. (formerly known as Granite),
which was accounted for as a pooling-of-interests, the Company assumed 1,140,855 options
outstanding under Granites existing stock option plan (the Granite Plan), of which 24,524 stock
options were outstanding as of September 30, 2006. The Granite Plan provides that qualified stock
options be granted at an exercise price equal to fair market value on the date of the grant with a
term not to exceed 10 years. The Granite Plan also provides that non-qualified stock options be
granted at an exercise price not less than 85% of the fair market value on the date of grant with a
term not to exceed 10 years.
During 1998, stockholders approved the adoption of the 1998 Stock Incentive Plan (1998
Plan). The 1998 Plan authorizes up to 9,985,828 shares of common stock for issuance under the
terms of the 1998 Plan. As of September 30, 2006, there were 6,276,473 options outstanding under
this plan. The 1998 Plan provides for grants of incentive stock options as defined in Section 422
of the Internal Revenue Code of 1986, as amended, non-qualified stock options and rights to
purchase shares of common stock (Purchase Rights). The term of options may not exceed 10 years
from the date of grant (five years in the case of a person who owns or is deemed to own more than
10% of the total combined voting power of all classes of stock of the Company), and the right to
exercise such options shall vest equally over three years. The option exercise price for each share
granted pursuant to an incentive stock option may not be less than 100% of the fair market value of
a share of common stock at the time such option is granted (110% of fair market value in the case
of an incentive stock option granted to a person who owns more than 10% of the combined voting
power of all classes of stock of the Company). There is no minimum purchase price for shares of
common stock purchased pursuant to a Purchase Right, and any such purchase price shall be
determined by the Board of Directors.
14
In connection with its merger with Chicago Title, the Company assumed the options outstanding
under Chicago Titles existing stock option plans: the 1998 Long-Term Incentive Plan and the
Directors Stock Option Plan. Pursuant to the terms of the merger, options under these plans,
totaling 5,304,456, became fully vested on March 20, 2000. The options granted in accordance with
these two plans generally have a term of five to 10 years. As of September 30, 2006, there were
317,060 options outstanding under these plans.
In 2001, stockholders approved the adoption of the 2001 Stock Incentive Plan (2001 Plan).
The 2001 Plan authorized up to 4,026,275 shares of common stock for issuance under the terms of the
2001 Plan. As of September 30, 2006, there were 544,656 options outstanding under this plan. The
2001 Plan provides for grants of incentive stock options as defined in Section 422 of the
Internal Revenue Code of 1986, as amended, nonqualified stock options, rights to purchase shares of
common stock and deferred shares. The term of options may not exceed 10 years from the date of
grant (five years in the case of an incentive stock option granted to a person who owns or is
deemed to own more than 10% of the total combined voting power of all classes of stock of the
Company), and are exercisable subject to the terms and conditions set by the Board of Directors.
The option exercise price for each share granted pursuant to an incentive stock option may not be
less than 100% of the fair market value of a share of common stock at the time such option is
granted (110% of fair value in the case of an incentive stock option granted to a person who owns
more than 10% of the combined voting power of all classes of stock of the Company). The option
exercise price for each share granted pursuant to a nonqualified stock option may be less than the
fair value of the common stock at the date of grant to reflect the application of the optionees
deferred bonus, if applicable. The 2001 Plan allows for exercise prices with a fixed discount from
the quoted market price. Options were granted in 2003 at an exercise price of $15.36 to key
employees of the Company who applied deferred bonuses expensed in 2002 amounting to $4.6 million to
the exercise price. Pursuant to the terms of the 2001 Plan, there are no future exercise price
decreases to options granted under this Plan in 2003 and beyond. In 2002, options were granted at
an exercise price of $11.41 to key employees of the Company who applied deferred bonuses expensed
in 2001 amounting to $5.7 million to the exercise price. The exercise price of these options
decreases approximately $0.35 per year through 2007 and $.22 per year from 2008 through 2013, at
which time the exercise price will be $8.33.
In 2003, the Company issued to its non-employee Directors and to certain of its employees,
rights to purchase 879,450 shares of restricted common stock (Restricted Shares) of the Company,
pursuant to the 2001 Plan. A portion of the Restricted Shares vest over a five-year period and a
portion of the Restricted Shares vest over a four-year period, of which one-fifth vested
immediately on the date of grant. The Company recorded compensation expense of $3.3 million and
unearned compensation expense of $23.0 million in connection with the issuance of Restricted Stock
in 2003. The Company recorded compensation expense of $1.3 million and $1.3 million in the
three-month periods ended September 30, 2006 and 2005, respectively, and $ 3.8 million and $3.9
million in the nine-month periods ended September 30, 2006 and 2005, respectively, in connection
with these shares. The Company used 769,450 shares of its common stock held as treasury shares and
110,000 newly issued common shares for the sale of Restricted Shares to its employees and
directors. As of September 30, 2006 and December 31, 2005, 387,310 shares of non-vested restricted
common stock were outstanding. Shares issued relating to this plan vest on the anniversary of the
grant date which was November 18, 2003.
In connection with the acquisition of ANFI, Inc. (ANFI), the Company assumed 988,389 options
outstanding under ANFIs existing option plans: the American National Financial, Inc. 1999 Stock
Option Plan and the American National Financial, Inc. 1998 Stock Incentive Plan. The options
granted under these plans generally had a term of 10 years. As of September 30, 2006, there were
411,655 options outstanding under these plans.
In connection with the acquisition of Fidelity National Information Solutions, Inc. (FNIS),
the Company assumed 2,585,387 options outstanding under FNIS existing option plans: the Fidelity
National Information Solutions 2001 Stock Incentive Plan, the Vista Information Solutions, Inc.
1999 Stock Option Plan, the Micro General Corporation 1999 Stock Incentive Plan and the Micro
General Corporation 1998 Stock Incentive Plan. The options granted under these plans generally had
a term of 10 years. As of September 30, 2006, there were 734,788 options outstanding under these
plans.
In connection with the acquisition of Sanchez Computer Associates, Inc. (Sanchez), the
Company assumed 1,024,588 options outstanding under Sanchez 1995 Stock Incentive Plan. The option
granted under this plan generally had a term of 8 years. As of September 30, 2006, there were
280,797 options outstanding under this plan.
15
In connection with the acquisition of InterCept, Inc. (InterCept), the Company assumed
1,708,155 options outstanding under InterCepts existing option plans: the 2002 InterCept Stock
Option Plan, 1996 InterCept Stock Option Plan, 1994 InterCept Option Plan and the Boggs InterCept
Stock Option Plan. The options granted under these plans were fully vested prior to the acquisition
and the majority of them had a remaining term of 90 days which expired on February 7, 2005. As of
September 30, 2006, there were 315,203 options outstanding under these plans.
In 2004, stockholders approved the Fidelity National Financial 2004 Omnibus Incentive Plan
(the 2004 Plan). The 2004 Plan authorized up to 12,500,000 shares, plus the number of shares
subject to prior plan awards that are outstanding as of the effective date of the 2004 Plan and
that are deemed not delivered under the prior plans because of certain conditions. As of September
30, 2006, there were 2,897,300 options outstanding under this plan. The options granted under this
plan have a life of 8 years and vest over a three year period. The 2004 Plan provides for the grant
of stock options, stock appreciation rights, restricted stock, restricted stock units and
performance shares, performance units, other stock-based awards and dividend equivalents.
Beginning in 2005, FNT and FIS also both issued stock options and restricted stock through
their own plans. The awards outstanding under these plans impact the Companys diluted earnings per
share based on the impact they would have on earnings available to the Company if the options and
awards were exercised and diluted the Companys ownership percentage in the respective
subsidiaries. For purposes of computing earnings per diluted share, FNF has to analyze the dilutive
impact of outstanding options at its public subsidiaries, Fidelity National Title Group, Inc. and
Fidelity National Information Services, Inc., and, if necessary, adjust the net earnings available
to FNF shareholders before calculating earnings per diluted share. For the three-month and
nine-month periods ended September 30, 2006, net earnings were reduced by $1.3 million and $2.9
million, respectively, resulting in a reduction of $0.01 and $0.02, respectively, in earnings per
diluted share for each period.
Transactions under all stock option plans, including stock options granted by the Companys
Board of Directors which are outside of the Companys stock option plans, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
Options |
|
Exercise Price |
|
Exercisable |
Balance, December 31, 2005 |
|
|
15,890,293 |
|
|
$ |
18.47 |
|
|
|
11,480,299 |
|
Granted |
|
|
183,500 |
|
|
|
39.20 |
|
|
|
|
|
Exercised |
|
|
2,837,625 |
|
|
|
13.69 |
|
|
|
|
|
Cancelled/Expired |
|
|
196,910 |
|
|
|
38.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006 |
|
|
13,039,258 |
|
|
$ |
18.73 |
|
|
|
9,935,651 |
|
The aggregate intrinsic value of options exercised in the nine-month periods ended September
30, 2006 and 2005 was $73.4 million and $100.5 million, respectively.
The following table summarizes information related to stock options outstanding and
exercisable as of September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Intrinsic |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
Value at |
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
Intrinsic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
September 30, |
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
Value at |
|
Range of Exercise |
|
|
Number of |
|
|
Contractual |
|
|
Exercise |
|
|
2006 (in |
|
|
Number of |
|
|
Contractual |
|
|
Exercise |
|
|
September 30, |
|
Prices |
|
|
Options |
|
|
Life |
|
|
Price |
|
|
thousands) |
|
|
Options |
|
|
Life |
|
|
Price |
|
|
2006 |
|
$ |
.02 |
|
|
|
|
|
5.97 |
|
|
|
2,039,668 |
|
|
|
2.47 |
|
|
$ |
4.78 |
|
|
$ |
75,203 |
|
|
|
2,039,668 |
|
|
|
2.47 |
|
|
$ |
4.78 |
|
|
$ |
75,203 |
|
|
5.98 |
|
|
|
|
|
9.35 |
|
|
|
1,176,301 |
|
|
|
4.20 |
|
|
|
7.71 |
|
|
|
39,921 |
|
|
|
1,176,301 |
|
|
|
4.20 |
|
|
|
7.71 |
|
|
|
39,921 |
|
|
9.36 |
|
|
|
|
|
9.52 |
|
|
|
1,209,402 |
|
|
|
4.54 |
|
|
|
9.52 |
|
|
|
38,854 |
|
|
|
1,209,402 |
|
|
|
4.54 |
|
|
|
9.52 |
|
|
|
38,854 |
|
|
9.53 |
|
|
|
|
|
11.10 |
|
|
|
1,297,673 |
|
|
|
3.22 |
|
|
|
10.45 |
|
|
|
40,488 |
|
|
|
1,297,673 |
|
|
|
3.22 |
|
|
|
10.45 |
|
|
|
40,488 |
|
|
11.11 |
|
|
|
|
|
24.83 |
|
|
|
1,748,098 |
|
|
|
5.39 |
|
|
|
15.61 |
|
|
|
45,526 |
|
|
|
1,592,846 |
|
|
|
5.38 |
|
|
|
15.56 |
|
|
|
41,556 |
|
|
24.84 |
|
|
|
|
|
25.32 |
|
|
|
2,182,677 |
|
|
|
5.95 |
|
|
|
25.32 |
|
|
|
35,644 |
|
|
|
1,246,746 |
|
|
|
5.95 |
|
|
|
25.32 |
|
|
|
20,360 |
|
|
25.33 |
|
|
|
|
|
32.61 |
|
|
|
215,293 |
|
|
|
3.49 |
|
|
|
29.60 |
|
|
|
2,593 |
|
|
|
190,100 |
|
|
|
3.04 |
|
|
|
29.29 |
|
|
|
2,350 |
|
|
32.62 |
|
|
|
|
|
33.03 |
|
|
|
1,748,246 |
|
|
|
6.00 |
|
|
|
33.02 |
|
|
|
15,082 |
|
|
|
590,980 |
|
|
|
5.93 |
|
|
|
33.02 |
|
|
|
5,101 |
|
|
33.04 |
|
|
|
|
|
42.02 |
|
|
|
1,170,614 |
|
|
|
7.25 |
|
|
|
35.03 |
|
|
|
7,745 |
|
|
|
340,649 |
|
|
|
7.09 |
|
|
|
35.02 |
|
|
|
2,259 |
|
|
42.03 |
|
|
|
|
|
171.86 |
|
|
|
251,286 |
|
|
|
4.45 |
|
|
|
50.39 |
|
|
|
(2,197 |
) |
|
|
251,286 |
|
|
|
4.45 |
|
|
|
50.39 |
|
|
|
(2,197 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
.02 |
|
|
|
|
|
171.86 |
|
|
|
13,039,258 |
|
|
|
4.82 |
|
|
$ |
18.73 |
|
|
$ |
298,859 |
|
|
|
9,935,651 |
|
|
|
4.35 |
|
|
$ |
15.09 |
|
|
$ |
263,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2006, the Company began accounting for stock based
compensation under the provisions of SFAS 123R Share Based Payment (SFAS No. 123R) issued in
December 2004 under the modified prospective method. Previous to this adoption, the Company had
adopted the fair value recognition provisions of
16
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123), for stock-based employee compensation in 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. In 2003, the Company 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 the fair value
method, stock-based employee compensation cost is recognized from the beginning of 2003 as if the
fair value method of accounting had been used to account for all employee awards granted, modified,
or settled in years beginning after December 31, 2002. Prior year financial statements were not
restated. The adoption of SFAS 123R using the modified prospective method did not have a material
impact on the Companys financial position or results of operations for the first nine months of
2006 as all options that were previously accounted for under prior methods were fully vested as of
December 31, 2005. Net income reflects expenses of $11.1 million and $7.8 million for the quarters
ended September 30, 2006 and 2005, respectively, and $56.8 million and $24.9 million for the
nine-month periods ended September 30, 2006 and 2005, respectively, which is included in personnel
costs in the reported financial results. During the third quarter of 2006 the compensation
committee approved the immediate vesting of stock options and restricted stock shares previously
granted to a director who retired from the board of directors in the third quarter. Stock based
compensation expense for the three-month and nine-month periods ended September 30, 2006 include a
$0.3 million charge for this acceleration of vesting. The expense for the first nine months of 2006
included $24.5 million in expense relating to performance based options at FIS for which the
performance and market based criteria were met during the first quarter.
The fair value for these options was estimated at the date of grant using a Black-Scholes
option-pricing model with the following weighted average assumptions. The risk free interest rate
used in the calculation is the rate that corresponds to the weighted average expected life of an
option. The risk free interest rates used for options granted during the first nine months of 2006
and 2005 were 4.88% and 4.1%, respectively. The volatility factors for the expected market price of
the common stock of 28.5% and 27.0%, respectively, were used for options granted in the first nine
months of 2006 and 2005. The expected dividend yield rates used for the first nine months of 2006
and 2005 were 2.6% and 2.4%, respectively. Weighted average expected lives of 4.1 years and 4.0
years, respectively, were used for the first nine months of 2006 and 2005. The weighted average
fair values of each option granted during the first nine months of 2006 and 2005 were $9.25 and
$8.56, respectively.
Pro forma information regarding net earnings and earnings per share is required by SFAS 123R,
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 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 for the three-month and nine-month periods
ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
|
|
(In thousands, except |
|
|
|
per share amounts) |
|
Net earnings, as reported |
|
$ |
214,403 |
|
|
$ |
848,942 |
|
|
|
|
|
|
|
|
Add: Stock-based compensation
expense included in reported
net earnings, net of related
tax effects |
|
|
4,918 |
|
|
|
15,483 |
|
Deduct: Total stock-based
compensation expense
determined under fair value
based methods for all awards,
net of related tax effects |
|
|
(5,215 |
) |
|
|
(16,448 |
) |
|
|
|
|
|
|
|
Pro forma net earnings |
|
$ |
214,106 |
|
|
$ |
847,977 |
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
1.24 |
|
|
$ |
4.92 |
|
Basic pro forma |
|
$ |
1.24 |
|
|
$ |
4.91 |
|
Diluted as reported |
|
$ |
1.21 |
|
|
$ |
4.79 |
|
Diluted pro forma |
|
$ |
1.20 |
|
|
$ |
4.77 |
|
At September 30, 2006, the total unrecognized compensation cost related to nonvested stock
option grants was $20.4 million, which is expected to be recognized in pre-tax income over a
weighted average period of 1.2 years and the total unrecognized compensation cost related to
nonvested restricted stock grants is $7.4 million, which is expected to be recognized in pre-tax
income over a weighted average period of 1.3 years. Also included in our consolidated stock-based
compensation costs are stock based compensation at FNT and FIS. At September 30, 2006, the total
unrecognized compensation costs related to FNT non-vested stock option grants was $6.8 million,
which is
17
expected to be recognized in pre-tax income over a weighted average period of 3.1 years and
the total unrecognized compensation costs related to FNT non-vested restricted stock grants was
$12.8 million, which is expected to be recognized in pre-tax income over a weighted average period
of 3.0 years. At September 30, 2006, the total unrecognized compensation costs related to FIS
non-vested stock option grants is $44.6 million, which is expected to be recognized in pre-tax
income over a weighted average period of 2.2 years. There are no outstanding restricted stock
grants at FIS.
Note G Notes Payable
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
FIS Term Loan A Facility, secured, interest payable at LIBOR plus 1.25% (6.58% at
September 30, 2006), 0.25% quarterly principal amortization, due March, 2011 |
|
$ |
788,000 |
|
|
$ |
794,000 |
|
FIS Term Loan B Facility, secured, interest payable at LIBOR plus 1.75% (7.08% at
September 30, 2006), 0.25% quarterly principal amortization, due March, 2013 |
|
|
1,730,000 |
|
|
|
1,760,000 |
|
FIS Syndicated credit agreement, secured, interest due quarterly at LIBOR plus 1.25%
(Eurodollar borrowings) and Prime plus 0.25% (Base Rate borrowings) (6.58% and 8.5% at
September 30, 2006), unused portion of $285.8 million at September 30, 2006, maturing
March 2011 |
|
|
114,200 |
|
|
|
|
|
FNT Syndicated credit agreement, unsecured, at LIBOR plus 0.4%(5.72% at September 30,
2006, unused portion of $325 million at September 30, 2006) |
|
|
75,000 |
|
|
|
100,000 |
|
Syndicated credit agreement, unsecured, interest due quarterly at LIBOR plus 1.25%,
undrawn, unused portion of $250 million at September 30, 2006 |
|
|
|
|
|
|
|
|
Unsecured notes, net of discount, interest payable semi-annually at 4.75%, due September
2008 |
|
|
195,343 |
|
|
|
|
|
Unsecured notes, net of discount, interest payable semi-annually at 7.30%, due August 2011 |
|
|
247,481 |
|
|
|
249,437 |
|
Unsecured notes net of discount, interest payable semi-annually at 5.25%, due March 2013 |
|
|
248,818 |
|
|
|
248,651 |
|
Other promissory notes with various interest rates and maturities |
|
|
125,284 |
|
|
|
64,931 |
|
|
|
|
|
|
|
|
|
|
$ |
3,524,126 |
|
|
$ |
3,217,019 |
|
|
|
|
|
|
|
|
Through the merger with Certegy, the Company through FIS has an obligation to service
$200 million (aggregate principal amount) of unsecured 4.75% fixed-rate notes due in 2008. The
notes were recorded in purchase accounting at a discount of $5.7 million, which is being amortized
over the term of the notes. The notes accrue interest at a rate of 4.75% per year, payable
semi-annually in arrears on each March 15 and September 15. Through this merger, the Company also
assumed approximately $22.2 million in other notes payable and as result of the merger FIS borrowed
$180.0 million on its line of credit of which $65.8 million was repaid prior to September 30, 2006.
Effective October 24, 2006, FNT repaid and terminated its $400 million credit agreement and
entered into a credit agreement (the FNT New Credit Agreement) with Bank of America, N.A. as
Administrative Agent and Swing Line Lender, and the other financial institutions party thereto. The
FNT New Credit Agreement provides for an $800 million unsecured revolving credit facility maturing
on the fifth anniversary of the closing date. FNT has the option to increase the size of the credit
facility by an additional $300 million, subject to certain requirements. Amounts under the
revolving credit facility may be borrowed, repaid and reborrowed by the borrower thereunder from
time to time until the maturity of the revolving credit facility. Voluntary prepayment of the
revolving credit facility under the FNT New Credit Agreement is permitted at any time without fee
upon proper notice and subject to a minimum dollar requirement. Revolving loans under the credit
facility bear interest at a variable rate based on either (i) the higher of (a) a rate per annum
equal to one-half of one percent in excess of the Federal Reserves Federal Funds rate, or (b) Bank
of Americas prime rate or (ii) a rate per annum equal to the British Bankers Association London
Interbank Offered Rate (LIBOR) rate plus a margin of between .23%-.675%, depending on the
Companys then current senior unsecured long-term debt rating from the rating agencies. In
addition, FNT will pay a commitment fee between .07%-.175% on the entire facility, also depending
on the FNTs senior unsecured long-term debt rating.
The FNT New Credit Agreement contains affirmative, negative and financial covenants customary
for financings of this type, including, among other things, limits on the creation of liens, sales
of assets, the incurrence of indebtedness, restricted payments, transactions with affiliates, and
certain amendments. The FNT New Credit
18
Agreement requires the Company to maintain certain financial ratios and levels of
capitalization. The FNT New Credit Agreement also includes customary events of default for
facilities of this type (with customary grace periods, as applicable) and provides that, upon the
occurrence of an event of default, the interest rate on all outstanding obligations will be
increased and payments of all outstanding loans may be accelerated and/or the lenders commitments
may be terminated. In addition, upon the occurrence of certain insolvency or bankruptcy related
events of default, all amounts payable under the FNT New Credit Agreement shall automatically
become immediately due and payable, and the lenders commitments will automatically terminate.
Principal maturities of notes payable at September 30, 2006, are as follows (dollars in
thousands):
|
|
|
|
|
2006 |
|
$ |
23,904 |
|
2007 |
|
|
55,600 |
|
2008 |
|
|
249,504 |
|
2009 |
|
|
61,590 |
|
2010 |
|
|
106,404 |
|
Thereafter |
|
|
3,027,124 |
|
|
|
|
|
|
|
$ |
3,524,126 |
|
|
|
|
|
Note H Segment Information
During 2005, the Company restructured its business segments to more accurately reflect a
change in the Companys current operating structure. Accordingly previously reported segment
information has been restated to be consistent with the current presentation.
Summarized financial information concerning the Companys reportable segments is shown in the
following table.
As of and for the three months ended September 30, 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
Information |
|
|
Specialty |
|
|
Corporate |
|
|
|
|
|
|
|
|
|
Title Group, Inc. |
|
|
Services, Inc. |
|
|
Insurance |
|
|
and Other |
|
|
Eliminations |
|
|
Total |
|
Title premiums |
|
$ |
1,183,141 |
|
|
$ |
21,580 |
|
|
$ |
|
|
|
$ |
3,428 |
|
|
$ |
(21,573 |
) |
|
$ |
1,186,576 |
|
Other revenues |
|
|
281,152 |
|
|
|
1,059,071 |
|
|
|
99,619 |
|
|
|
1,386 |
|
|
|
(45,916 |
) |
|
|
1,395,312 |
|
Intersegment revenue |
|
|
|
|
|
|
(67,489 |
) |
|
|
|
|
|
|
|
|
|
|
67,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers |
|
$ |
1,464,293 |
|
|
$ |
1,013,162 |
|
|
$ |
99,619 |
|
|
$ |
4,814 |
|
|
|
|
|
|
$ |
2,581,888 |
|
Interest and
investment income,
including realized
gains and (losses) |
|
|
42,739 |
|
|
|
1,653 |
|
|
|
4,017 |
|
|
|
4,525 |
|
|
|
|
|
|
|
52,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,507,032 |
|
|
$ |
1,014,815 |
|
|
$ |
103,636 |
|
|
$ |
9,339 |
|
|
$ |
|
|
|
$ |
2,634,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
|
29,881 |
|
|
|
111,135 |
|
|
|
1,706 |
|
|
|
(552 |
) |
|
|
|
|
|
|
142,170 |
|
Interest expense |
|
|
12,762 |
|
|
|
49,629 |
|
|
|
398 |
|
|
|
3,142 |
|
|
|
|
|
|
|
65,931 |
|
Earnings (loss)
before income tax
and minority
interest |
|
|
161,250 |
|
|
|
121,447 |
|
|
|
19,070 |
|
|
|
(6,284 |
) |
|
|
|
|
|
|
295,483 |
|
Income tax expense |
|
|
57,241 |
|
|
|
42,902 |
|
|
|
7,343 |
|
|
|
2,434 |
|
|
|
|
|
|
|
109,920 |
|
Minority interest |
|
|
610 |
|
|
|
(35 |
) |
|
|
|
|
|
|
57,417 |
|
|
|
|
|
|
|
57,992 |
|
Net earnings (loss) |
|
|
103,399 |
|
|
|
78,580 |
|
|
|
11,727 |
|
|
|
(66,135 |
) |
|
|
|
|
|
|
127,571 |
|
Assets |
|
|
6,143,478 |
|
|
|
7,432,119 |
|
|
|
487,861 |
|
|
|
455,954 |
|
|
|
|
|
|
|
14,519,412 |
|
Goodwill |
|
|
1,101,761 |
|
|
|
3,782,225 |
|
|
|
44,856 |
|
|
|
(67,108 |
) |
|
|
|
|
|
|
4,861,734 |
|
19
As of and for the three months ended September 30, 2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
Information |
|
|
Specialty |
|
|
Corporate |
|
|
|
|
|
|
|
|
|
Title Group, Inc. |
|
|
Services, Inc. |
|
|
Insurance |
|
|
and Other |
|
|
Eliminations |
|
|
Total |
|
Title premiums |
|
$ |
1,405,295 |
|
|
$ |
23,998 |
|
|
$ |
|
|
|
$ |
(1,270 |
) |
|
$ |
(23,239 |
) |
|
$ |
1,404,784 |
|
Other revenues |
|
|
336,371 |
|
|
|
674,111 |
|
|
|
95,448 |
|
|
|
(9,875 |
) |
|
|
(17,717 |
) |
|
|
1,078,338 |
|
Intersegment revenue |
|
|
|
|
|
|
(40,956 |
) |
|
|
|
|
|
|
|
|
|
|
40,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers |
|
$ |
1,741,666 |
|
|
$ |
657,153 |
|
|
$ |
95,448 |
|
|
$ |
(11,145 |
) |
|
|
|
|
|
$ |
2,483,122 |
|
Interest and
investment income,
including realized
gains and (losses) |
|
|
32,577 |
|
|
|
5,878 |
|
|
|
2,387 |
|
|
|
3,921 |
|
|
|
|
|
|
|
44,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,774,243 |
|
|
$ |
663,031 |
|
|
$ |
97,835 |
|
|
$ |
(7,224 |
) |
|
|
|
|
|
$ |
2,527,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
|
23,818 |
|
|
|
70,782 |
|
|
|
963 |
|
|
|
56 |
|
|
|
|
|
|
|
95,619 |
|
Interest expense |
|
|
4,669 |
|
|
|
37,548 |
|
|
|
145 |
|
|
|
6,104 |
|
|
|
|
|
|
|
48,466 |
|
Earnings (loss)
before income tax
and minority
interest |
|
|
272,571 |
|
|
|
92,054 |
|
|
|
15,409 |
|
|
|
(5,516 |
) |
|
|
|
|
|
|
374,518 |
|
Income tax expense |
|
|
102,137 |
|
|
|
32,245 |
|
|
|
6,008 |
|
|
|
3,799 |
|
|
|
|
|
|
|
144,189 |
|
Minority interest |
|
|
700 |
|
|
|
1,917 |
|
|
|
|
|
|
|
13,309 |
|
|
|
|
|
|
|
15,926 |
|
Net earnings (loss) |
|
|
169,734 |
|
|
|
57,892 |
|
|
|
9,401 |
|
|
|
(22,624 |
) |
|
|
|
|
|
|
214,403 |
|
Assets |
|
|
6,042,067 |
|
|
|
2,887,843 |
|
|
|
201,140 |
|
|
|
1,778,729 |
|
|
|
|
|
|
|
10,909,779 |
|
Goodwill |
|
|
1,074,017 |
|
|
|
1,354,572 |
|
|
|
22,669 |
|
|
|
425,524 |
|
|
|
|
|
|
|
2,876,782 |
|
20
As of and for the nine months ended September 30, 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
Information |
|
|
Specialty |
|
|
Corporate |
|
|
|
|
|
|
|
|
|
Title Group, Inc. |
|
|
Services, Inc. |
|
|
Insurance |
|
|
and Other |
|
|
Eliminations |
|
|
Total |
|
Title premiums |
|
$ |
3,472,576 |
|
|
$ |
58,683 |
|
|
$ |
|
|
|
$ |
4,714 |
|
|
$ |
(58,441 |
) |
|
$ |
3,477,532 |
|
Other revenues |
|
|
845,238 |
|
|
|
2,944,850 |
|
|
|
304,070 |
|
|
|
4,608 |
|
|
|
(112,212 |
) |
|
|
3,986,554 |
|
Intersegment revenue |
|
|
|
|
|
|
(170,653 |
) |
|
|
|
|
|
|
|
|
|
|
170,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers |
|
|
4,317,814 |
|
|
|
2,832,880 |
|
|
|
304,070 |
|
|
|
9,322 |
|
|
$ |
|
|
|
$ |
7,464,086 |
|
Interest and
investment income,
including realized
gains and (losses) |
|
|
137,771 |
|
|
|
6,831 |
|
|
|
11,410 |
|
|
|
13,992 |
|
|
|
|
|
|
|
170,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
4,455,585 |
|
|
$ |
2,839,711 |
|
|
$ |
315,480 |
|
|
$ |
23,314 |
|
|
$ |
|
|
|
$ |
7,634,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
|
83,312 |
|
|
|
318,304 |
|
|
|
4,678 |
|
|
|
(1,524 |
) |
|
|
|
|
|
|
404,770 |
|
Interest expense |
|
|
36,462 |
|
|
|
141,930 |
|
|
|
979 |
|
|
|
4,165 |
|
|
|
|
|
|
|
183,536 |
|
Earnings (loss)
before income tax
and minority
interest |
|
|
300,903 |
|
|
|
183,926 |
|
|
|
41,043 |
|
|
|
(15,928 |
) |
|
|
|
|
|
|
509,944 |
|
Income tax expense |
|
|
165,610 |
|
|
|
108,109 |
|
|
|
25,958 |
|
|
|
2,392 |
|
|
|
|
|
|
|
302,069 |
|
Minority interest |
|
|
1,889 |
|
|
|
(41 |
) |
|
|
|
|
|
|
141,533 |
|
|
|
|
|
|
|
143,381 |
|
Net earnings (loss) |
|
|
299,014 |
|
|
|
183,967 |
|
|
|
41,043 |
|
|
|
(157,461 |
) |
|
|
|
|
|
|
366,563 |
|
Assets |
|
|
6,143,478 |
|
|
|
7,432,119 |
|
|
|
487,861 |
|
|
|
455,954 |
|
|
|
|
|
|
|
14,519,412 |
|
Goodwill |
|
|
1,101,761 |
|
|
|
3,782,225 |
|
|
|
44,856 |
|
|
|
(67,108 |
) |
|
|
|
|
|
|
4,861,734 |
|
21
As of and for the nine months ended September 30, 2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
Information |
|
|
Specialty |
|
|
Corporate |
|
|
|
|
|
|
|
|
|
Title Group, Inc. |
|
|
Services, Inc. |
|
|
Insurance |
|
|
and Other |
|
|
Eliminations |
|
|
Total |
|
Title premiums |
|
$ |
3,726,891 |
|
|
$ |
61,290 |
|
|
$ |
|
|
|
$ |
(306 |
) |
|
$ |
(61,290 |
) |
|
$ |
3,726,585 |
|
Other revenues |
|
|
899,856 |
|
|
|
1,997,112 |
|
|
|
248,276 |
|
|
|
(8,686 |
) |
|
|
(74,997 |
) |
|
|
3,061,561 |
|
Intersegment revenue |
|
|
|
|
|
|
(136,287 |
) |
|
|
|
|
|
|
|
|
|
|
136,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers |
|
$ |
4,626,747 |
|
|
$ |
1,922,115 |
|
|
$ |
248,276 |
|
|
|
(8,992 |
) |
|
|
|
|
|
$ |
6,788,146 |
|
Gain on issuance of
subsidiary stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and
investment income,
including realized
gains and (losses) |
|
|
96,654 |
|
|
|
9,406 |
|
|
|
5,532 |
|
|
|
331,401 |
|
|
|
|
|
|
|
442,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
4,723,401 |
|
|
$ |
1,931,521 |
|
|
$ |
253,808 |
|
|
$ |
322,409 |
|
|
$ |
|
|
|
$ |
7,231,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
|
73,207 |
|
|
|
221,885 |
|
|
|
2,930 |
|
|
|
156 |
|
|
|
|
|
|
|
298,178 |
|
Interest expense |
|
|
5,393 |
|
|
|
87,357 |
|
|
|
168 |
|
|
|
27,083 |
|
|
|
|
|
|
|
120,001 |
|
Earnings (loss)
before income tax
and minority
interest |
|
|
663,397 |
|
|
|
250,374 |
|
|
|
40,418 |
|
|
|
288,411 |
|
|
|
|
|
|
|
1,242,600 |
|
Income tax expense |
|
|
248,774 |
|
|
|
93,139 |
|
|
|
15,561 |
|
|
|
(2,897 |
) |
|
|
|
|
|
|
354,577 |
|
Minority interest |
|
|
1,992 |
|
|
|
6,171 |
|
|
|
|
|
|
|
30,918 |
|
|
|
|
|
|
|
39,081 |
|
Net earnings (loss) |
|
|
412,631 |
|
|
|
151,064 |
|
|
|
24,857 |
|
|
|
260,390 |
|
|
|
|
|
|
|
848,942 |
|
Assets |
|
|
6,042,067 |
|
|
|
2,887,843 |
|
|
|
201,140 |
|
|
|
1,778,729 |
|
|
|
|
|
|
|
10,909,779 |
|
Goodwill |
|
|
1,074,017 |
|
|
|
1,354,572 |
|
|
|
22,669 |
|
|
|
425,524 |
|
|
|
|
|
|
|
2,876,782 |
|
The activities of the reportable segments include the following:
Fidelity National Title Group, Inc.
This segment consists of the operation of FNFs majority owned subsidiary, FNT. FNTs title
insurance underwriters Fidelity National Title, Chicago Title, Ticor Title, Security Union Title
and Alamo Title together issued approximately 29.0% of all title insurance policies issued
nationally during 2005. FNT provides core title insurance and escrow and other title related
services including collection and trust activities, trustees sales guarantees, recordings and
reconveyances.
Fidelity National Information Services, Inc.
This segment consists of the operation of FNFs majority owned subsidiary, FIS, which provides
transaction processing services, consisting principally of technology solutions for banks and other
financial institutions, credit and debit card services and check risk management and related
services for retailers and others. FIS also provides lender processing services, consisting
principally of technology solutions for mortgage lenders, selected mortgage origination services
such as title agency and closing services, default management and mortgage information services.
22
Specialty Insurance
This segment, consisting of various non-title insurance subsidiaries, issues flood, home
warranty and homeowners insurance policies.
Corporate and Other
The corporate and other segment consists of the operations of the FNF parent holding company
(including certain smaller businesses and investments) and certain other unallocated corporate
overhead expenses.
Note I Dividends
On February 8, 2006, the Companys Board of Directors declared a cash dividend of $0.25 per
share, payable on March 30, 2006, to stockholders of record as of March 15, 2006. On April 26,
2006, the Companys Board of Directors declared a cash dividend of $0.25 per share, payable on June
30, 2006, to stockholders of record as of June 15, 2006. On July 20, 2006, the Companys Board of
Directors declared a cash dividend of $0.25 per share, payable on September 29, 2006 to
stockholders of record as of September 14, 2006.
Note J Pension and Postretirement Benefits
The following details the Companys periodic (income) expense for pension and postretirement
benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
Pension Benefits |
|
Postretirement Benefits |
|
|
(In thousands, except per share amounts) |
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
2 |
|
|
$ |
38 |
|
Interest cost |
|
|
2,097 |
|
|
|
2,087 |
|
|
|
286 |
|
|
|
296 |
|
Expected return on assets |
|
|
(2,453 |
) |
|
|
(1,959 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
(1,010 |
) |
|
|
(384 |
) |
Amortization of actuarial loss |
|
|
2,217 |
|
|
|
2,207 |
|
|
|
467 |
|
|
|
137 |
|
|
|
|
Total net periodic (income) expense |
|
$ |
1,861 |
|
|
$ |
2,335 |
|
|
$ |
(255 |
) |
|
$ |
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
Pension Benefits |
|
Postretirement Benefits |
|
|
(In thousands, except per share amounts) |
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
42 |
|
|
$ |
114 |
|
Interest cost |
|
|
6,291 |
|
|
|
6,261 |
|
|
|
814 |
|
|
|
888 |
|
Expected return on assets |
|
|
(7,359 |
) |
|
|
(5,877 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
(2,215 |
) |
|
|
(1,152 |
) |
Amortization of actuarial loss |
|
|
6,651 |
|
|
|
6,621 |
|
|
|
1,020 |
|
|
|
411 |
|
|
|
|
Total net periodic (income) expense |
|
$ |
5,583 |
|
|
$ |
7,005 |
|
|
$ |
(339 |
) |
|
$ |
261 |
|
|
|
|
There have been no material changes to the Companys projected benefit payments under these
plans since December 31, 2005.
Through the Certegy and Kordoba acquisitions, the Company assumed certain liabilities relating
to defined benefit plans at FIS. The total liabilities relating to
those plans is $50.7 million and
the impact on pretax earnings for the three months ended September 30, 2006 and 2005 was $0.6
million and $0.5 million, respectively, and for the nine months ended September 30, 2006 and 2005
was $1.9 million and $1.6 million, respectively. In connection with the Certegy merger, FIS
announced that it will terminate and settle the Certegy U.S. Retirement Plan (pension plan) (see
note B).
Note K Legal Proceedings
In the ordinary course of business, the Company is involved in various pending and threatened
litigation matters related to its operations, some of which include claims for punitive or
exemplary damages. The Company believes
23
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 the
Companys experience, monetary demands in plaintiffs court pleadings bear little relation
to the ultimate loss, if any, it 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, Connecticut, New Hampshire 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. The Company intends
to vigorously defend the actions.
A class action in California alleges that the Company violated the Real Estate Settlement
Procedures Act 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 class action in Texas alleges that the Company overcharged for recording fees in Arizona,
California, Colorado, Oklahoma and Texas. The suit seeks to recover the recording fees for the
class that was overcharged, interest and attorneys fees. The suit was filed in the United States
District Court for the Western District of Texas, San Antonio Division on March 24, 2006. Similar
suits are pending in Indiana, Kansas, and Missouri. The Company intends to vigorously defend these
actions.
A class action in New Mexico alleges the Company has engaged in anti-competitive price fixing
in New Mexico. The suit seeks an injunction against price fixing and writs issued to the State
regulators mandating the law be interpreted to provide a competitive market, compensatory damages,
punitive damages, statutory damages, interest and attorneys fees for the injured class. The suit
was filed in State Court in Santa Fe, New Mexico on April 27, 2006. The Company intends to
vigorously defend this action.
24
Two class actions filed in Illinois allege the Company has paid attorneys to refer business to
the Company by paying them for core title services in conjunction with orders when the attorneys,
in fact, did not perform any core title services and the payments were to steer business to the
Company. The suits seek compensatory damages, attorneys fees and injunctive relief to terminate
the practice. The suit was filed in State Court in Chicago, Illinois on May 11, 2006. The Company
intends to vigorously defend these actions.
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. One Ohio
case states that the damages per class member are less than the jurisdictional limit for removal to
federal court.
The Company receives inquiries and requests for information from state insurance departments,
attorneys general and other regulatory agencies from time to time about various matters relating to
its business. Sometimes these take the form of civil investigative subpoenas. The Company attempts
to cooperate with all such inquiries. From time to time, the Company is assessed fines for
violations of regulations or other matters or enters into settlements with such authorities which
require the Company to pay money or take other actions.
The National Association of Insurance Commissioners and various state insurance regulators
have been investigating so called captive reinsurance agreements since 2004. The investigations
have focused on arrangements in which title insurers would write title insurance generated by
realtors, developers and lenders and cede a portion of the premiums to a reinsurance company
affiliate of the entity that generated the business. The U.S. Department of Housing and Urban
Development (HUD) also has made formal or informal inquiries of the Company regarding these
matters. The Company has been cooperating and intends to continue to cooperate with all ongoing
investigations. The Company has discontinued all captive reinsurance arrangements. The total amount
of premiums the Company ceded to reinsurers was approximately $10 million over the existence of
these agreements. The Company has settled most of the accusations of wrongdoing that arose from
these investigations by discontinuing the practice and paying fines. Some investigations are
continuing. The Company anticipates they will be settled in a similar manner.
Additionally, the Company has received inquiries from regulators about its business
involvement with title insurance agencies affiliated with builders, realtors and other traditional
sources of title insurance business, some of which the Company participated in forming as joint
ventures with its subsidiaries. These inquiries have focused on whether the placement of title
insurance with the Company through these affiliated agencies is proper or an improper form of
referral payment. Like most other title insurers, the Company participates in these affiliated
business arrangements in a number of states. The Company has settled the accusations of wrongdoing
that arose from some of these investigations by discontinuing the practice and paying fines. Other
investigations are continuing. The Company anticipates they will be settled in a similar manner.
The Company and its subsidiaries have settled all allegations of wrongdoing arising from a
wide-ranging review of the title insurance industry by the New York State Attorney General (the
NYAG). Under the terms of the settlement, the Company paid a $2 million fine and will immediately
reduce premiums by 15% on owners policies under $1 million. Rate hearings will be conducted by the
New York State Insurance Department (the NYSID) this year where all rates will be considered
industry wide. The settlement clarifies practices considered wrongful under New York law by the
NYAG and the NYSID, and the Company has agreed not to engage in those practices. The Company will
take steps to assure that consumers are aware of the filed rates for premiums on title insurance
products and that the products are correctly rated. The settlement also resolves all issues raised
by the market conduct investigation of the Company and its subsidiaries by the NYSID except the
issues of rating errors found by the NYSID. As part of the settlement, the Company and its
subsidiaries denied any wrongdoing. Neither the fines nor the rate reductions are expected to have
a material impact on earnings of the Company. The Company cooperated fully with the NYAG and NYSID
inquiries into these matters and will continue to cooperate with the NYSID.
In November 2006, the NYAG and NYSID raised an issue with respect to the applicability of the
rate reduction to lenders policies. The Company and other defendants dispute this position.
Further, U.S. Representative Oxley, the Chairman of the House Financial Services Committee,
recently asked the Government Accountability Office (the GAO) to investigate the title insurance
industry. Representative Oxley
25
stated that the Committee is concerned about payments that certain title insurers have made to
developers, lenders and real estate agents for referrals of title insurance business.
Representative Oxley asked the GAO to examine, among other things, the foregoing relationships and
the levels of pricing and competition in the title insurance industry. A congressional hearing was
held regarding title insurance practices on April 27, 2006. The Company is unable to predict the
outcome of this inquiry or whether it will adversely affect the Companys business or results of
operations.
On July 3, 2006, the California Insurance Commissioner (Commissioner) issued a Notice of
Proposed Action and Notice of Public Hearing (the Notice) relating to proposed regulations
governing rate-making for title insurance (the Proposed Regulations). A hearing on the Proposed
Regulations took place on August 30, 2006. If implemented, the Proposed Regulations would result in
significant reductions in title insurance rates, which are likely to have a significant negative
impact on the companys California revenues. In addition, the Proposed Regulations would give the
Commissioner the ability to set maximum allowable title insurance rates on a going-forward basis.
It is possible that such maximum rates would be lower than the rates that the company would
otherwise set. In addition, the Florida Office of Insurance Regulation (the OIR) has recently
released three studies of the title insurance industry which purport to demonstrate that title
insurance rates in Florida are too high and that the Florida title insurance industry is
overwhelmingly dominated by five firms, which includes FNT. The studies recommend tying premium
rates to loss ratios thereby making the rates a reflection of the actual risks born by the insurer.
The OIR is presently developing a rule to govern the upcoming rate analysis and rate setting
process and has said that it will use the information to begin a full review of the title insurance
rates charged in Florida. New York, Connecticut, Nevada, New Mexico, Texas, and Washington
insurance regulators have also announced similar inquiries (or other reviews of title insurance
rates or practices) and other states could follow. At this stage, the Company is unable to predict
what the outcome will be of these or any similar reviews.
Canadian lawyers who have traditionally played a role in real property transactions in Canada
allege that the Companys practices in processing residential mortgages are the unauthorized
practice of law. Their Law Societies have demanded an end to the practice, and have begun
investigations into those practices. In several provinces bills have been filed that ostensibly
would affect the way the Company does business. The Company is unable to predict the outcome of
this inquiry or whether it will adversely affect the Companys business or results of operations.
In Missouri a class action is pending alleging that certain acts performed by the Company in
closing real estate transactions are the unlawful practice of law. The Company intends to
vigorously defend this action.
The Company and its subsidiaries, FIS and Fidelity Information Services, Inc. (FI), together
with certain of its employees, were named on March 6, 2006 as defendants in a civil lawsuit brought
by Grace & Digital Information Technology Co., Ltd. (Grace), a Chinese company that formerly
acted as a sales agent for Alltel Information Services (AI), the predecessor to Fidelity
Information Services, in China.
Grace originally filed a lawsuit in December 2004 in state court in Monterey County,
California, alleging that FIS breached the sales agency agreement between Grace and AIS by failing
to pay Grace commissions on certain contracts in 2001 and 2003. However, the 2001 contracts were
never completed and the 2003 contracts, as to which Grace provided no assistance, were for a
different project and were executed one and one-half years after FIS terminated the sales agency
agreement with Grace. In addition to its breach of contract claim, Grace also alleged that FNF
violated the Foreign Corrupt Practices Act (FCPA) in its dealings with a bank customer in China.
FNF denied Graces allegations in this California lawsuit.
In
December 2005, the Monterey County court dismissed the lawsuit on the grounds of
inconvenient forum, which decision Grace appealed on February 10, 2006. Further, on March 6, 2006,
Grace filed a new lawsuit in the United States District Court for the Middle District of Florida
arising from the same transaction, and added an additional allegation to its complaint that FNF
violated the Racketeer Influenced and Corrupt Organizations Act (RICO) in its dealings with the
same bank customer. FNF and its subsidiaries intend to defend this case vigorously. On March 7,
2006, FNF filed its motion to dismiss this lawsuit, and on March 27, 2006, FNF filed an answer
denying Graces underlying allegations and counterclaiming against Grace for tortious interference
and abuse of process. These motions have all been fully briefed and are pending before the Court. A
pretrial management order has been entered providing for discovery, pretrial motion deadlines, and,
if necessary, a trial in the later part of 2007.
26
FNF and its counsel have investigated these allegations and, based on the results of the
investigations, FNF does not believe that there have been any violations of the FCPA or RICO, or that the ultimate
disposition of these allegations or the lawsuit will have a material adverse impact on FNFs or any
of its subsidiaries financial position, results of operations or cash flows. FNF and its
subsidiaries, including FIS, have fully cooperated with the Securities and Exchange Commission and
the U.S. Department of Justice in connection with their inquiry into these allegations.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical
are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including statements regarding our
expectations, hopes, intentions or strategies regarding the future. All forward-looking statements
included in this document are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements. It is important to note that
our actual results could vary materially from those forward-looking statements contained herein due
to many factors, including, but not limited to: general economic and business conditions, including
interest rate fluctuations and general volatility in the capital markets; changes in the
performance of the real estate markets; the impact of competitive products and pricing; success of
operating initiatives; adverse publicity; the ability to identify businesses to be acquired;
availability of qualified personnel; employee benefits costs and changes in, or the failure to
comply with, government regulations and other risks detailed in our filings with the Securities and
Exchange Commission (SEC).
The Company made a reclassification adjustment to the Consolidated Statements of Income,
included within this Quarterly Report on Form10-Q, with regard to the presentation of interest and
investment income and other operating expenses. This adjustment was necessary to properly reflect
certain credits earned as a reduction of other operating expenses as opposed to an increase in
investment income. The adjustment resulted in a reduction of interest and investment income of $2.6
million for the quarter ended September 30, 2005 and $10.3 million and $5.9 million for the nine
month periods ended September 30, 2006 and 2005, respectively, and a corresponding reduction of
other operating expenses. This adjustment had no effect on net income.
The following discussion should be read in conjunction with the Companys Annual Report on
Form 10-K for the year ended December 31, 2005.
Overview
Through the third quarter of 2006, we are a holding company that is a provider of outsourced
products and services to a variety of industries. During 2005, we completed certain strategic
initiatives, including contributing our title operations to a newly formed subsidiary, Fidelity
National Title Group, Inc. (FNT) (NYSE:FNT) which in turn became a majority-owned, publicly
traded company; selling a minority interest in our subsidiary Fidelity National Information
Services, Inc. and agreeing to merge it with a separate publicly traded company, Certegy Inc.
(Certegy). The merged entity is now known as Fidelity National Information Services, Inc. (FIS)
(NYSE:FIS). Through FNT, we are one of the United States largest title insurance companies, with
an approximate 29.0% national market share in 2005. Through FIS, we provide industry leading data
processing, payment and risk management services to financial institutions and retailers. Through
our other wholly-owned subsidiaries, we are a leading provider of specialty insurance products,
including flood insurance, homeowners insurance and home warranty insurance. Since February 1, 2006
when we closed our acquisition of an approximately 40% interest in Sedgwick CMS (Sedgwick), we
are now a provider of outsourced insurance claims management services to large corporate and public
sector entities.
We have four reporting segments:
|
|
|
Fidelity National Title Group, Inc. This segment consists of the operations of our
majority owned subsidiary, FNT. FNTs title insurance underwriters Fidelity National
Title, Chicago Title, Ticor Title, Security Union Title and Alamo Title together issued
approximately 29.0% of all title insurance policies issued nationally during 2005. FNT
provides core title insurance and escrow and other title related services including
collection and trust activities, trustees sales guarantees, recordings and reconveyances. |
27
|
|
|
Fidelity National Information Services, Inc. This segment consists of the operations of
our majority owned subsidiary, FIS. FIS provides transaction processing services,
consisting principally of technology solutions for banks and other financial institutions,
credit and debit card services and check risk management and related services for retailers
and others. FIS also provides lender processing services, consisting principally of
technology solutions for mortgage lenders, selected mortgage origination services such as
title agency and closing services, default management and mortgage information services.
FISs credit and debit card services and check risk management services were added through
our merger with Certegy. This merger closed in February 2006. Consequently, these
businesses are not included in the financial information in this report for periods prior
to February 1, 2006. |
|
|
|
|
Specialty Insurance. The specialty insurance segment, consisting of our various
non-title insurance subsidiaries, issues flood, home warranty, homeowners, automobile and
certain niche personal lines insurance policies. |
|
|
|
|
Corporate and Other. The corporate and other segment consists of the operations of the
parent holding company (including certain smaller business and investments) and certain
other unallocated corporate overhead expenses. |
On June 25, 2006, the Company entered into a Securities Exchange and Distribution Agreement
(the SEDA) with FNT and a merger agreement with FIS (both amended and restated as of September
18, 2006), providing for the elimination of FNFs holding company structure, the sale of certain of
FNFs assets and liabilities to FNT in exchange for shares of FNT stock, and the distribution of
FNFs ownership stake in FNT to FNF shareholders. Pursuant to the SEDA, on October 24, 2006, FNT
completed the acquisition of substantially all of the assets and liabilities of FNF (other than
FNFs interests in FIS and in FNF Capital Leasing, Inc., a small subsidiary) in exchange for
45,265,956 shares of FNTs Class A common stock (the Asset Contribution). The assets transferred
included FNFs specialty insurance business, its interest in certain claims management operations,
certain timber and real estate holdings and certain smaller operations, together with all cash and
certain investment assets held by FNF as of October 24, 2006. In connection with the Asset
Contribution, FNF converted all of the FNT Class B common stock held by FNF into FNT Class A common
stock and distributed the shares acquired by FNF from FNT, together with the converted shares, to
holders of record of FNF common stock as of October 17, 2006 in a tax-free distribution (the 2006
Distribution). As a result of the 2006 Distribution, FNF no longer owns any common stock of FNT
and FNT is now a stand alone public company with all of its approximately 218.7 million shares held
by the public. Also, on November 9, 2006, FNF will merge with and into FIS, after which FNT will
legally change its name to Fidelity National Financial, Inc. (New FNF). Beginning on November 10,
2006, FNTs common stock will trade on the New York Stock Exchange under the trading symbol FNF.
FNFs current chairman of the board and chief executive officer, William P. Foley, II, has assumed
the same positions in New FNF and the position of executive chairman of the board of FIS. Other key
members of FNFs senior management will also continue their involvement in both New FNF and FIS in
executive capacities.
Acquisitions among entities under common control such as the Asset Contribution are not
considered business combinations and are to be accounted for at historical cost in accordance with
EITF 90-5, Exchanges of Ownership Interests between Enterprises under Common Control. Furthermore,
the substance of the proposed transactions and the merger is effectively a reverse spin-off of FIS
by FNF in accordance with EITF 02-11, Accounting for Reverse Spinoffs. Accordingly, the historical
financial statements of FNF will become those of FNT; however, the criteria to account for FIS as
discontinued operations as prescribed by SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets will not be met. This is primarily due to the continuing involvement of FNT with
and significant influence that FNT will have over FIS subsequent to the merger through common board
members, common senior management and continuing business relationships. It is expected that FIS
will continue to be included in FNFs consolidated financial statements through the date of
completion of the SEDA.
Factors Affecting Comparability
Our Condensed Consolidated Statements of Earnings for the three-month and nine-month periods
ended September 30, 2006 include the results of operations of Certegy Inc. (Certegy), which was
acquired on February 1, 2006, as discussed in Note B of Notes to Condensed Consolidated Financial
Statements. This acquisition may affect the comparability of our 2006 and 2005 results of
operations, particularly with respect to FIS in which the
28
operating results of Certegy are included since its merger date. Our 2005 results also include
a gain of $318.2 million on the sale of a minority interest in FIS and additional minority interest
expense relating to that transaction and to the FNT distribution.
Results of Operations
Consolidated Results of Operations
Net Earnings. The following table presents certain financial data for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands, |
|
|
(Dollars in thousands, |
|
|
|
except per share data) |
|
|
except per share data) |
|
Total revenue |
|
$ |
2,634,822 |
|
|
$ |
2,527,885 |
|
|
$ |
7,634,090 |
|
|
$ |
7,231,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
2,339,339 |
|
|
$ |
2,153,367 |
|
|
$ |
6,822,077 |
|
|
$ |
5,988,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
127,571 |
|
|
$ |
214,403 |
|
|
$ |
366,563 |
|
|
$ |
848,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per share |
|
$ |
0.72 |
|
|
$ |
1.24 |
|
|
$ |
2.09 |
|
|
$ |
4.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings per share |
|
$ |
0.70 |
|
|
$ |
1.21 |
|
|
$ |
2.02 |
|
|
$ |
4.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. The following table presents the components of our revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Direct title insurance premiums |
|
$ |
485,043 |
|
|
$ |
641,542 |
|
|
$ |
1,479,415 |
|
|
$ |
1,702,397 |
|
Agency title insurance premiums |
|
|
701,533 |
|
|
|
763,242 |
|
|
|
1,998,117 |
|
|
|
2,024,188 |
|
Escrow and other title related fees |
|
|
267,744 |
|
|
|
323,506 |
|
|
|
808,468 |
|
|
|
864,472 |
|
Transaction processing |
|
|
1,013,372 |
|
|
|
646,447 |
|
|
|
2,832,638 |
|
|
|
1,912,168 |
|
Specialty insurance |
|
|
99,619 |
|
|
|
95,448 |
|
|
|
304,070 |
|
|
|
248,276 |
|
Interest and investment income |
|
|
48,129 |
|
|
|
36,064 |
|
|
|
139,883 |
|
|
|
90,503 |
|
Realized gains and losses, net |
|
|
4,805 |
|
|
|
8,699 |
|
|
|
30,121 |
|
|
|
34,281 |
|
Gain on issuance of subsidiary stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
318,209 |
|
Other income |
|
|
14,577 |
|
|
|
12,937 |
|
|
|
41,378 |
|
|
|
36,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
2,634,822 |
|
|
$ |
2,527,885 |
|
|
$ |
7,634,090 |
|
|
$ |
7,231,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orders opened by direct title operations (1) |
|
|
811,400 |
|
|
|
976,600 |
|
|
|
2,490,700 |
|
|
|
2,843,600 |
|
Orders closed by direct title operations (1) |
|
|
521,900 |
|
|
|
694,000 |
|
|
|
1,602,700 |
|
|
|
1,891,100 |
|
|
|
|
(1) |
|
These measures are used by management to judge productivity and are a measure of
transaction volume for our 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. |
Revenues
Total consolidated revenues for the third quarter of 2006 increased $106.9 million or 4.2% to
$2,634.8 million, primarily due to a $366.9 million increase in transaction processing revenues,
and a $12.1 million increase in interest and investment income, partially offset by decreases in
direct and agency title insurance premiums of $156.5 million and $61.7 million, respectively, and a
decrease of $55.8 million in escrow and other title related fees. Total consolidated revenues for
the first nine months of 2006 increased $402.9 million or 5.6% to $7,634.1 million, primarily due
to a $920.5 million increase in transaction processing revenues, a $55.8 million increase in
specialty insurance revenues, and a $49.4 million increase in interest and investment income,
offset by a $318.2 million gain recognized in the 2005 period relating to the issuance of
subsidiary stock in the sale of a minority interest in FIS, decreases in direct and agency title
insurance premiums of $223.0 million and $26.1 million, respectively, and a decrease of $56.0
million in escrow and other title related fees. Excluding the net gain on issuance of subsidiary
stock, total revenue increased $721.2 million or 10.4% as compared to the prior year period. The
large increases in transaction processing revenues attributable to FIS for the three-month and
nine-month periods ended September 30, 2006 compared to 2005 were due to $290.3 million and $761.9
million, respectively, of revenues from the inclusion
29
of the results of Certegy from its merger date of February 1, 2006 through September 30, 2006
and an increase in revenues from the historically owned transaction processing and lender
processing businesses within FIS. The increases in specialty insurance revenues were primarily the
result of additional flood claim processing revenues resulting from the 2005 hurricane season and
increased revenues from the homeowners insurance businesses.
Consolidated title insurance premiums for the three and nine-month periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2006 |
|
|
% |
|
|
2005 |
|
|
% |
|
|
2006 |
|
|
% |
|
|
2005 |
|
|
% |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Title premiums from
direct operations
(1) |
|
$ |
485,043 |
|
|
|
40.9 |
% |
|
$ |
641,542 |
|
|
|
45.7 |
% |
|
$ |
1,479,415 |
|
|
|
42.5 |
% |
|
$ |
1,702,397 |
|
|
|
45.7 |
% |
Title premiums from
agency operations
(1) |
|
|
701,533 |
|
|
|
59.1 |
% |
|
|
763,242 |
|
|
|
54.3 |
% |
|
|
1,998,117 |
|
|
|
57.5 |
% |
|
|
2,024,188 |
|
|
|
54.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,186,576 |
|
|
|
100.0 |
% |
|
$ |
1,404,784 |
|
|
|
100.0 |
% |
|
$ |
3,477,532 |
|
|
|
100.0 |
% |
|
$ |
3,726,585 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes premiums reported by FNT and FIS. |
Title insurance premiums decreased 15.5% to $1,186.6 million in the third quarter of 2006 as
compared with the third quarter of 2005. The decrease was made up of a $156.5 million or 24.4%
decrease in direct premiums and a $61.7 million or 8.1% decrease in premiums from agency
operations. Title insurance premiums decreased 6.7% to $3,477.5 million in the first nine months of
2006 as compared with the first nine months of 2005. The decrease was made up of a $223.0 million
or 13.1% decrease in direct premiums and a $26.1 million or 1.3% decrease in premiums from agency
operations.
The decreased level of direct title premiums is the result of a decrease in closed order
volume and was partially offset by an increase in fee per file, reflecting a declining refinance
market and a slowing purchase market. Closed order volumes decreased to 521,900 in the third
quarter of 2006 compared to 694,000 in the third quarter of 2005 and to 1,602,700 in the first nine
months of 2006 compared to 1,891,100 in the first nine months of 2005. The average fee per file in
our direct operations was $1,406 in the third quarter of 2006 compared to $1,370 in the third
quarter of 2005 and $1,391 in the first nine months of 2006 compared to $1,341 in the first nine
months of 2005, reflecting a strong commercial market, the decrease in refinance activity, and
continued appreciation in home prices. The fee per file tends to increase as mortgage interest
rates rise, and the mix of business changes from a predominantly refinance-driven market to more of
a resale-driven market because resale transactions generally involve the issuance of both a
lenders policy and an owners policy whereas refinance transactions typically only require a
lenders policy.
We are using accrual basis accounting to record agency premiums in a manner that is generally
consistent with direct premium activity because our agents typically experience the same market
conditions that other direct title insurance companies experience. The changes in agency premiums
during the three-month and nine-month periods ended September 30, 2006 as compared to the
corresponding 2005 periods were more favorable than the changes in direct premiums due to the fact
that title insurance markets are currently stronger in geographic regions where title insurance
business is more agency driven. During the third quarter and first nine months of 2006, agency
premiums decreased 8.1% and 1.3%, respectively, compared to the corresponding 2005 periods, while
direct title premiums decreased 24.4% and 13.1%, respectively, during the same periods.
Trends in escrow and other title related fees are, to some extent, related to title insurance
activity generated by our direct operations. Escrow fees, which are more directly related to our
direct operations than are other title related fees, fluctuated in a pattern generally consistent
with the fluctuation in direct title insurance premiums and order counts. Escrow and other title
related fees were $267.7 million and $323.5 million for the third quarters of 2006 and 2005,
respectively, and $808.5 million and $864.5 million in the first nine months of 2006 and 2005,
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 third
quarter of 2006 was $48.1 million, compared with $36.1 million in the third quarter of 2005, an
increase of $12.0 million, or 33.5 %. Interest and investment income in the first nine months of
2006 was $139.9 million, compared with $90.5 million in the first nine months of 2005. The
increases are primarily due to increases in interest rates for cash and short-term investments,
increases in earnings from the securities lending program, increases in average balances and yield
rates
30
for long-term fixed income assets, and, for the nine month periods, a special dividend paid on
our holdings of Certegy Inc. common stock in the first quarter of 2006 before its merger with FIS.
Net realized gains for the third quarter of 2006 decreased to $4.8 million compared to $8.7
million for the third quarter of 2005, primarily due to a gain on sale of real estate in the 2005
period and capital losses in the 2006 period with no capital losses in the 2005 period, partially
offset by lower impairment charges and higher capital gains in the 2006 period. During the third
quarter of 2006, the Company recorded an impairment charge on an equity investment that it
considered to be other-than-temporarily impaired, resulting in a charge of $9.1 million, compared
to impairment charges totaling $14.9 million on two equity investments in the third quarter of
2005. Net realized gains for the first nine months of 2006 decreased to $30.1 million from $34.3
million in the first nine months of 2005, primarily due to lower net realized gains on other
assets, including the 2005 sale of real estate mentioned above, partially offset by the lower third
quarter impairment charges mentioned above and lower capital losses in 2006.
Expenses. The following table presents the components of our expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Personnel costs |
|
$ |
863,163 |
|
|
$ |
841,051 |
|
|
$ |
2,632,935 |
|
|
$ |
2,396,243 |
|
Other operating expenses |
|
|
610,732 |
|
|
|
442,001 |
|
|
|
1,706,137 |
|
|
|
1,282,250 |
|
Agent commissions |
|
|
538,700 |
|
|
|
590,876 |
|
|
|
1,537,489 |
|
|
|
1,558,547 |
|
Depreciation and amortization |
|
|
142,170 |
|
|
|
95,619 |
|
|
|
404,770 |
|
|
|
298,178 |
|
Provision for claim losses |
|
|
118,643 |
|
|
|
135,354 |
|
|
|
357,210 |
|
|
|
333,320 |
|
Interest expense |
|
|
65,931 |
|
|
|
48,466 |
|
|
|
183,536 |
|
|
|
120,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
2,339,339 |
|
|
$ |
2,153,367 |
|
|
$ |
6,822,077 |
|
|
$ |
5,988,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our operating expenses consist primarily of personnel costs and other operating expenses,
which in our title insurance business 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 title 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 exists in
reducing variable costs and certain fixed costs are incurred regardless of revenue levels.
Personnel costs include base salaries, commissions, benefits, stock-based compensation and
bonuses paid to employees, and are one of our most significant operating expenses. Personnel costs
totaled $863.2 million and $841.1 million for the third quarters of 2006 and 2005, respectively,
and $2,632.9 million and $2,396.2 million for the first nine months of 2006 and 2005, respectively.
Personnel costs, as a percentage of total revenue (excluding the $318.2 million gain in 2005 on
issuance of subsidiary stock), were 32.8% and 33.3% in the third quarters of 2006 and 2005,
respectively, and 34.5% and 33.1% for the first nine months of 2006 and 2005, respectively. The
increase of $22.1 million in the third quarter is primarily due to an increase of $98.9 million in
personnel costs at FIS primarily resulting from the merger with Certegy, offset by a decrease at
FNT of $75.3 million. The increase of $236.7 million in the nine month periods is primarily a
result of the Certegy merger and includes a $24.5 million stock-based compensation charge in the
first quarter relating to performance based options at FIS for which the vesting criteria was met
during the quarter, offset by an FNT decrease of $61.2 million or 4.3% primarily due to the
decline in direct title premiums and escrow and other fees and a corresponding decrease in
personnel costs relating thereto, partially offset by an increase in compensation costs resulting
from increased competition for personnel in the western part of the country driving increases in
compensation in certain geographic regions. On a consolidated basis, total stock-based
compensation costs were $11.1 million and $7.8 million for the three months ended September 30,
2006 and 2005, respectively and $56.8 million and $24.9 million for the nine months ended September
30, 2006 and 2005, respectively. Excluding the $24.1 million charge mentioned above, stock based
compensation costs for the nine month periods were more comparable at $32.7 million to $24.9
million, respectively. The Company adopted SFAS 123 in 2003 and none of the additional expense
relates to the adoption of SFAS 123R in the period as all options that were not accounted for under
the fair value method were fully vested as of December 31, 2005.
31
Other operating expenses consist primarily of facilities expenses, title plant maintenance,
premium taxes (which insurance underwriters are required to pay on title premiums in lieu of
franchise and other state taxes), postage and courier services, computer services, professional
services, advertising expenses, general insurance, depreciation, amortization of other intangibles
and trade and notes receivable allowances. Other operating expenses totaled $610.7 million and
$442.0 million for the three months ended September 30, 2006 and 2005, respectively, and $1,706.1
million and $1,282.2 million for the nine months ended September 30, 2006 and 2005, respectively.
The increases of $168.7 million or 38.2% in the third quarter and $423.9 million or 33.1% in the nine
month period primarily relate to increases at FIS relating to the Certegy merger.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2006 |
|
|
% |
|
|
2005 |
|
|
% |
|
|
2006 |
|
|
% |
|
|
2005 |
|
|
% |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Agent premiums |
|
$ |
701,533 |
|
|
|
100.0 |
% |
|
$ |
763,242 |
|
|
|
100.0 |
% |
|
$ |
1,998,117 |
|
|
|
100.0 |
% |
|
$ |
2,024,188 |
|
|
|
100.0 |
% |
Agent commissions |
|
|
538,700 |
|
|
|
76.8 |
% |
|
|
590,876 |
|
|
|
77.4 |
% |
|
|
1,537,489 |
|
|
|
76.9 |
% |
|
|
1,558,547 |
|
|
|
77.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
162,833 |
|
|
|
23.2 |
% |
|
$ |
172,366 |
|
|
|
22.6 |
% |
|
$ |
460,628 |
|
|
|
23.1 |
% |
|
$ |
465,641 |
|
|
|
23.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net margin from agency title insurance premiums as a percentage of total agency premiums
increased in the third quarter and first nine months of 2006 compared with the same periods in 2005
due to differences in the percentages of premiums retained by agents as commissions across
different geographic regions.
Depreciation and amortization was $142.2 million and $95.6 million in the third quarters of
2006 and 2005, respectively, and $404.8 million and $298.2 million in the first nine months of 2006
and 2005, respectively. The increases in depreciation and amortization of $46.6 million in the
third quarter and $106.6 million in the nine month period were primarily due to increased
amortization of intangible assets and software acquired in 2006 and 2005, including the eight
months since the Certegy merger.
The provision for claim losses includes an estimate of anticipated title and title related
claims, escrow losses and homeowners claims relating to our specialty insurance segment. 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 as new
information becomes known, new loss patterns emerge, or as other contributing factors are
considered and incorporated into the analysis of the reserve for claim losses. The claim loss
provision for title insurance was $88.9 million and $103.4 million in the third quarters of 2006
and 2005, respectively, and $260.4 million and $254.3 million in the first nine months of 2006 and
2005, respectively. Our claim loss provision as a percentage of total title premiums was 7.5% in
the 2006 periods and 7.4% and 6.8% for the three month and nine month periods ended September 30,
2005. The claim loss provision for our specialty insurance businesses was $29.7 million and $31.9
million in the third quarters of 2006 and 2005, respectively, and $96.6 million and $78.8 million
in the first nine months of 2006 and 2005, respectively, with the increase for the nine month
period resulting from the increase in volume of business in the homeowners and home warranty lines.
Interest expense was $65.9 million and $48.5 million in the third quarters of 2006 and 2005,
respectively, and $183.5 million and $120.0 million in the first nine months of 2006 and 2005,
respectively. The increases of $17.4 million in the third quarter and $63.5 million in the nine
month period are the result of increases in interest rates and average borrowings as compared to
the prior year.
Income tax expense as a percentage of earnings before income taxes excluding the 2005 gain on
the issuance of subsidiary stock, for which no taxes were provided, was 37.2% and 38.5% for the
third quarters of 2006 and 2005, respectively, and 37.2% and 38.4% for the first nine months of
2006 and 2005, respectively. No income taxes were provided for the 2005 gain on the issuance of
subsidiary stock as the Companys tax basis in its investment in FIS exceeded the book basis on the
date of the sale. Income tax expense as a percentage of earnings before income taxes
32
is attributable to our estimate of ultimate income tax liability, and changes in the
characteristics of net earnings year to year.
Minority interest was $58.0 million and $15.9 million for the third quarters of 2006 and 2005,
respectively, and $143.4 million and $39.1 million for the first nine months of 2006 and 2005,
respectively. The increases in minority interest expense are attributable to earnings generated by
FIS, for which as of February 1, 2006, our ownership was reduced from 75% to 51% and FNT, of which,
as of October 2005, our ownership was reduced from 100% to 82.5%.
Net earnings were $127.6 million and $214.4 million for the third quarters of 2006 and 2005,
respectively and $366.6 million and $848.9 million ($530.7 million excluding the $318.2 million
gain on sale of subsidiary stock) for the first nine months of 2006 and 2005, respectively.
Segment Results of Operations
Fidelity National Title Group, Inc.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct title insurance premiums |
|
$ |
461,340 |
|
|
$ |
626,178 |
|
|
$ |
1,413,641 |
|
|
$ |
1,643,574 |
|
Agency title insurance premiums |
|
|
721,801 |
|
|
|
779,117 |
|
|
|
2,058,935 |
|
|
|
2,083,317 |
|
Escrow and other title related fees |
|
|
269,188 |
|
|
|
324,910 |
|
|
|
810,845 |
|
|
|
868,375 |
|
Interest and investment income |
|
|
41,261 |
|
|
|
28,994 |
|
|
|
115,680 |
|
|
|
71,149 |
|
Realized gains and losses, net |
|
|
1,478 |
|
|
|
3,583 |
|
|
|
22,091 |
|
|
|
25,505 |
|
Other income |
|
|
11,964 |
|
|
|
11,461 |
|
|
|
34,393 |
|
|
|
31,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
1,507,032 |
|
|
|
1,774,243 |
|
|
|
4,455,585 |
|
|
|
4,723,401 |
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
436,064 |
|
|
|
511,325 |
|
|
|
1,354,720 |
|
|
|
1,415,928 |
|
Other operating expenses |
|
|
223,359 |
|
|
|
246,109 |
|
|
|
666,587 |
|
|
|
693,927 |
|
Agent commissions |
|
|
555,010 |
|
|
|
612,139 |
|
|
|
1,587,547 |
|
|
|
1,617,260 |
|
Depreciation and amortization |
|
|
29,881 |
|
|
|
23,818 |
|
|
|
83,312 |
|
|
|
73,207 |
|
Provision for claim losses |
|
|
88,706 |
|
|
|
103,612 |
|
|
|
260,444 |
|
|
|
254,289 |
|
Interest expense |
|
|
12,762 |
|
|
|
4,669 |
|
|
|
36,462 |
|
|
|
5,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
1,345,782 |
|
|
|
1,501,672 |
|
|
|
3,989,072 |
|
|
|
4,060,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
161,250 |
|
|
|
272,571 |
|
|
|
466,513 |
|
|
|
663,397 |
|
Income tax expense |
|
|
57,241 |
|
|
|
102,137 |
|
|
|
165,610 |
|
|
|
248,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before minority interest |
|
|
104,009 |
|
|
|
170,434 |
|
|
|
300,903 |
|
|
|
414,623 |
|
Minority interest |
|
|
610 |
|
|
|
700 |
|
|
|
1,889 |
|
|
|
1,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
103,399 |
|
|
$ |
169,734 |
|
|
$ |
299,014 |
|
|
$ |
412,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues decreased $267.2 million or 15.1% for the third quarter of 2006 to $1,507.0
million and decreased $267.8 million or 5.7% for the first nine months of 2006 to $4,455.6 million.
33
Total title insurance premiums for the three-month and nine-month periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2006 |
|
|
% |
|
|
2005 |
|
|
% |
|
|
2006 |
|
|
% |
|
|
2005 |
|
|
% |
|
|
|
(Dollars in thousands) |
|
Title premiums from
direct operations |
|
$ |
461,340 |
|
|
|
39.0 |
% |
|
$ |
626,178 |
|
|
|
44.6 |
% |
|
$ |
1,413,641 |
|
|
|
40.7 |
% |
|
|
1,643,574 |
|
|
|
44.1 |
% |
Title premiums from
agency operations |
|
|
721,801 |
|
|
|
61.0 |
% |
|
|
779,117 |
|
|
|
55.4 |
% |
|
|
2,058,935 |
|
|
|
59.3 |
% |
|
|
2,083,317 |
|
|
|
55.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,183,141 |
|
|
|
100.0 |
% |
|
$ |
1,405,295 |
|
|
|
100.0 |
% |
|
$ |
3,472,576 |
|
|
|
100.0 |
% |
|
$ |
3,726,891 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title insurance premiums decreased 15.8% to $1,183.1 million in the third quarter of 2006 as
compared with the third quarter of 2005. The decrease was made up of a $164.8 million, or 26.3%,
decrease in direct premiums and a $57.3 million, or 7.4%, decrease in premiums from agency
operations. Title insurance premiums decreased 6.8% to $3,472.6 million in the first nine months of
2006 as compared with the first nine months of 2005. The decrease was made up of a $229.9 million,
or 14.0%, decrease in direct premiums and a $24.4 million, or 1.2%, decrease in premiums from
agency operations.
The decreased level of direct title premiums in the third quarter is the result of a 27.0%
decrease in closed order volume and was partially offset by a 4.9% increase in fee per file,
reflecting a declining refinance market and a slowing purchase market. Closed order volumes
decreased to 440,200 in the third quarter of 2006 compared to 602,900 in the third quarter of 2005
and to 1,350,300 in the first nine months of 2006 compared to 1,651,800 in the first nine months of
2005. The average fee per file in our direct operations was $1,582 in the third quarter of 2006
compared to $1,508 in the third quarter of 2005 and $1,571 in the first nine months of 2006
compared to $1,469 in the first nine months of 2005, reflecting a strong commercial market, the
decrease in refinance activity, and continued appreciation in home prices. The fee per file tends
to increase as mortgage interest rates rise, and the mix of business changes from a predominantly
refinance-driven market to more of a resale-driven market because resale transactions generally
involve the issuance of both a lenders policy and an owners policy whereas refinance transactions
typically only require a lenders policy.
We are using accrual basis accounting to record agency premiums in a manner that is consistent
with direct premium activity because our agents experience the same market conditions that other
direct title insurance companies experience. The changes in agency premiums during the three-month
and nine-month periods ended September 30, 2006 as compared to the corresponding 2005 periods were
more favorable than the changes in direct premiums due to the fact that title insurance markets are
currently stronger in geographic regions where title insurance business is more agency driven.
During the third quarter and first nine months of 2006, agency premiums decreased 7.4% and 1.2%,
respectively, compared to the corresponding 2005 periods, while direct title premiums decreased
26.3% and 14.0%, respectively, during the same periods. Agency revenues from FIS title agency
businesses were $24.8 million and $26.8 million in the third quarter of 2006 and 2005,
respectively, and $66.7 million and $69.7 million in the first nine months of 2006 and 2005,
respectively.
Trends in escrow and other title related fees are, to some extent, related to title insurance
activity generated by our direct operations. Escrow and other title related fees were $269.2
million and $324.9 million for the third quarters of 2006 and 2005, respectively and $810.8 million
and $868.4 million for the first nine months of 2006 and 2005, respectively. Escrow fees, which are
more directly related to our direct operations than our other title related fees, decreased $52.3
million, or 23.9%, in the third quarter of 2006 compared to the third quarter of 2005, and $76.8
million, or 13.1%, in the first nine months of 2006 compared to the first nine months of 2005,
consistent with the decrease in direct title premiums. Other title-related fees decreased $3.5
million, or 3.3%, for the third quarter of 2006 compared to the third quarter of 2005 and increased
$19.2 million, or 6.8%, for the first nine months of 2006 compared to the first nine months of
2005, representing growth in the Canadian real estate market, including growth in our market share
and the strength of the Canadian dollar, growth in other operations not directly related to title
insurance, and acquisitions, including the acquisition of Service Link in August 2005.
34
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 third
quarter of 2006 was $41.3 million, compared with $29.0 million in the third quarter of 2005, an
increase of $12.3 million, or 42.3%. Interest and investment income in the first nine months of
2006 was $115.7 million, compared with $71.1 million in the first nine months of 2005. The
increases are primarily due to increases in interest rates for cash and short-term investments,
increases in earnings from the securities lending program, increases in average balances and yield
rates for long-term fixed income assets, and, for the nine month periods, a special dividend paid
on our holdings of Certegy Inc. common stock in the first quarter of 2006 before its merger with
FIS.
Net realized gains for the third quarter of 2006 decreased to $1.5 million compared to $3.6
million for the third quarter of 2005, primarily due to a gain on sale of real estate in the 2005
period and capital losses in the 2006 period with no capital losses in the 2005 period, partially
offset by higher capital gains and lower impairment charges in the 2006 period. . During the third
quarter of 2006, the Company recorded an impairment charge on an investment that it considered to
be other-than-temporarily impaired, resulting in a charge of $8.4 million, compared to impairment
charges totaling $13.6 million on two investments in the third quarter of 2005. Net realized gains
for the first nine months of 2006 decreased to $22.1 million from $25.5 million in the first nine
months of 2005, primarily due to lower net realized gains on other assets, including the 2005 sale
of real estate mentioned above, partially offset by the lower third quarter impairment charges
mentioned above and lower capital losses in 2006.
Our operating expenses consist primarily of personnel costs and other operating expenses,
which in our title insurance business 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 title 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 exists in
reducing variable costs and certain fixed costs are incurred regardless of revenue levels.
Personnel costs include base salaries, commissions, benefits, bonuses and stock based
compensation paid to employees and are one of our most significant operating expenses. Personnel
costs totaled $436.1 million and $511.3 million for the third quarters of 2006 and 2005,
respectively, and $1,354.7 million and $1,415.9 million for the first nine months of 2006 and 2005,
respectively. Personnel costs as a percentage of total revenues from direct title premiums and
escrow and other fees increased to 59.7% for the third quarter of 2006 from 53.8% for the third
quarter of 2005 and to 60.9% for the first nine months of 2006 from 56.4% for the first nine months
of 2005. The decrease in personnel costs in dollar terms for the third quarter of 2006 as compared
to the third quarter of 2005 is primarily the result of the decreases in direct title premiums and
escrow and other fees, partially offset by an increase in compensation costs resulting from
increased competition for personnel in the western part of the country. Average employee count
decreased to 18,120 in the third quarter of 2006 from 19,949 in the third quarter of 2005,
primarily due to the decrease in orders, partially offset by the 2005 acquisition of Service Link.
Average annualized personnel cost per employee decreased in the third quarter of 2006 compared to
the third quarter of 2005, primarily due to decreases in variable personnel costs such as overtime,
commissions and bonuses. The decrease in personnel costs for the first nine months of 2006 as
compared to the first nine months of 2005 is primarily the result of decreases in direct title
premiums and escrow and other fees as mentioned above, partially offset by increased salary and
benefit costs due to competition. Average employee count decreased to 18,677 in the first nine
months of 2006 from 19,115 in the first nine months of 2005, primarily due to the decrease in
orders, partially offset by the acquisition of Service Link. Average annualized personnel cost per
employee decreased in the first nine months of 2006 compared to the first nine months of 2005,
primarily due to decreases in variable personnel costs such as overtime, commissions and bonuses,
partially offset by increases in fixed personnel costs caused by competition. Stock-based
compensation costs were $3.5 million and $3.3 million for the third quarters of 2006 and 2005,
respectively, and $10.1 million and $8.9 million for the first nine months of 2006 and 2005,
respectively. None of the additional expense relates to the Companys adoption on January 1, 2006,
of Statement of Financial Accounting Standards No. 123R, Share Based Payment (SFAS 123R)
because all options that were not previously accounted for under the fair value method were fully
vested as of December 31, 2005.
35
Other operating expenses consist primarily of facilities expenses, title plant maintenance,
premium taxes (which insurance underwriters are required to pay on title premiums in lieu of
franchise and other state taxes), postage and courier services, computer services, professional
services, advertising expenses, general insurance and trade and notes receivable allowances. Other
operating expenses totaled $223.4 million and $246.1 million for the third quarters of 2006 and
2005, respectively, and $666.6 million and $699.8 million for the first nine months of 2006 and
2005, respectively. Other operating expenses as a percentage of total revenues from direct title
premiums and escrow and other fees were 30.6% and 25.9% for the third quarters of 2006 and 2005,
respectively, and 30.0% and 27.6% for the first nine months of 2006 and 2005, respectively.
Agent commissions represent the portion of premiums retained by agents pursuant to the terms
of their respective agency contracts. Agent commissions and the resulting percentage of agent
premiums we retain vary according to regional differences in real estate closing practices and
state regulations.
The following table illustrates the relationship of agent premiums and agent commissions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
|
2006 |
|
% |
|
2005 |
|
% |
|
2006 |
|
% |
|
2005 |
|
% |
|
|
(Dollars in thousands) |
Agent premiums |
|
$ |
721,801 |
|
|
|
100.0 |
% |
|
$ |
779,117 |
|
|
|
100.0 |
% |
|
$ |
2,058,935 |
|
|
|
100.0 |
% |
|
$ |
2,083,317 |
|
|
|
100.0 |
% |
Agent commissions |
|
|
555,010 |
|
|
|
76.9 |
% |
|
|
612,139 |
|
|
|
78.6 |
% |
|
|
1,587,547 |
|
|
|
77.1 |
% |
|
|
1,617,260 |
|
|
|
77.6 |
% |
|
|
|
Net |
|
$ |
166,791 |
|
|
|
23.1 |
% |
|
$ |
166,978 |
|
|
|
21.4 |
% |
|
$ |
471,388 |
|
|
|
22.9 |
% |
|
$ |
466,057 |
|
|
|
22.4 |
% |
|
|
|
Net margin from agency title insurance premiums as a percentage of total agency premiums
increased in the third quarter and first nine months of 2006 compared with the third quarter and
nine months of 2005, respectively, due to differences in the percentages of premiums retained by
agents as commissions across different geographic regions.
Depreciation and amortization was $29.9 million in the third quarter of 2006 as compared to
$23.8 million in the third quarter of 2005 and $83.3 million in the first nine months of 2006 as
compared to $73.2 million in the first nine months of 2005.
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 as new information becomes known, new loss patterns emerge, or as other
contributing factors are considered and incorporated into the analysis of the reserve for claim
losses. The claim loss provision for title insurance was $88.7 million in the third quarter of 2006
as compared to $103.6 million in the third quarter of 2005 and $260.4 million in the first nine
months of 2006 as compared to $254.3 million in the first nine months of 2005. Our claim loss
provision as a percentage of total title premiums was 7.5% in the third quarter and first nine
months of 2006 and 7.4% in the third quarter and 6.8 % for the first nine months of 2005.
Interest expense increased to $12.8 million in the third quarter of 2006 from $4.7 million in
the third quarter of 2005 and to $36.5 million in the first nine months of 2006 from $5.4 million
in the first nine months of 2005, due to increases in average debt. Average debt increased to
approximately $573.1 million and $587.1 million in the third quarter and first nine months of 2006,
respectively, from approximately $85.2 million and $11.7 million in the third quarter and first
nine months of 2005, respectively. Increases in average debt during the 2006 periods as compared to
the 2005 periods is primarily due to two January 2006 public bond issuances with balances at
September 30, 2006 of $240,841 and $248,818 and interest payable at 7.3% and 5.25% respectively
(collectively the Public Bonds). In January of 2006, FNT issued the Public Bonds in exchange for
an equal amount of the outstanding FNF bonds with the same terms. FNT then delivered the FNF bonds
to FNF in payment of two intercompany notes payable to FNF. (See Note E to the Condensed Financial
Statements.)
Income tax expense as a percentage of earnings before income taxes was 35.5% for the third
quarter and first nine months of 2006 and 37.5% for the third quarter and first nine months of
2005. Income tax expense as a
36
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. The decrease in the
2006 periods as compared to the 2005 periods is due to an increased proportion of tax-exempt
interest income in the 2006 periods.
Net earnings were $103.4 million and $169.7 million for the third quarters of 2006 and 2005,
respectively, and $299.0 million and $412.6 million for the first nine months of 2006 and 2005,
respectively.
Fidelity National Information Services, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Revenues |
|
$ |
1,080,651 |
|
|
$ |
698,110 |
|
|
$ |
3,003,533 |
|
|
$ |
2,058,403 |
|
Interest and investment income |
|
|
361 |
|
|
|
1,733 |
|
|
|
3,500 |
|
|
|
4,826 |
|
Realized gains and losses, net |
|
|
1,292 |
|
|
|
4,145 |
|
|
|
3,331 |
|
|
|
4,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
1,082,304 |
|
|
|
703,988 |
|
|
|
3,010,364 |
|
|
|
2,067,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
416,733 |
|
|
|
317,821 |
|
|
|
1,245,945 |
|
|
|
946,442 |
|
Other operating expenses |
|
|
383,120 |
|
|
|
185,710 |
|
|
|
1,011,725 |
|
|
|
561,467 |
|
Depreciation and amortization |
|
|
111,135 |
|
|
|
70,783 |
|
|
|
318,304 |
|
|
|
221,885 |
|
Provision for claim loss |
|
|
240 |
|
|
|
72 |
|
|
|
425 |
|
|
|
284 |
|
Interest expense |
|
|
49,629 |
|
|
|
37,548 |
|
|
|
141,930 |
|
|
|
87,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
960,857 |
|
|
|
611,934 |
|
|
|
2,718,329 |
|
|
|
1,817,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
121,447 |
|
|
|
92,054 |
|
|
|
292,035 |
|
|
|
250,374 |
|
Income tax expense |
|
|
42,902 |
|
|
|
32,245 |
|
|
|
108,109 |
|
|
|
93,139 |
|
Minority interest expense |
|
|
(35 |
) |
|
|
1,917 |
|
|
|
(41 |
) |
|
|
6,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
78,580 |
|
|
$ |
57,892 |
|
|
$ |
183,967 |
|
|
$ |
151,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Revenues at FIS were $1,082.3 million and $704.0 million in the third quarters of 2006 and
2005, respectively. The $382.5 million increase in revenues in 2006 compared with the 2005 period
includes recording revenues from Certegy following the 2006 merger, which contributed $290.3
million of the increase. Certegys revenues come primarily from its credit card processing business
and check services businesses. Revenues at FIS were $3,010.4 million and $2,067.8 million in the
nine months periods of 2006 and 2005, respectively with the increase primarily made up of $761.9
million in revenue from Certegy since the February 1, 2006 acquisition date with increases in FISs
integrated financial solutions business and lender processing services making up the rest of the
increase.
Expenses
Personnel costs were $416.7 million and $317.8 million in the third quarters of 2006 and 2005,
respectively. The increase in the 2006 quarter as compared to the prior year quarter is consistent
with the increase in revenue relating to the 2006 merger with Certegy. As a percentage of revenues,
personnel costs were 38.5% and 45.1% in the third quarters of 2006 and 2005, respectively.
Personnel costs were $1,245.9 million and $946.4 million in the nine month periods of 2006 and
2005, respectively. The increase for the nine month period was also attributable to the 2006 merger
with Certegy and the inclusion of a $24.5 million expense relating to the performance based options
granted at FIS in March 2005 for which the performance criteria were met during the first quarter
of 2006. As a percentage of revenues, personnel costs were 41.4% and 45.8% in the nine month
periods of 2006 and 2005, respectively.
Other operating expenses were $383.1 million and $185.2 million in the third quarters of 2006
and 2005, respectively. The increase of $197.9 million for the 2006 period as compared with the
prior year period was primarily the result of the above mentioned merger with Certegy. Other
operating expenses were $1,011.7 million and $561.5 million in the nine month periods of 2006 and
2005, respectively.
Depreciation and amortization costs were $111.1 million and $71.3 million in the third
quarters of 2006 and 2005, respectively. The increase of $39.8 million relates primarily to the
amortization of intangible assets and computer software acquired in the 2006 merger with Certegy
which contributed $27.9 million of the increase. Depreciation and amortization costs were $318.3
million and $221.9 million in the nine months periods of 2006
and 2005, respectively.
37
Interest expense was $49.6 million in the third quarter of 2006 as compared to $37.5 million
in the third quarter of 2005 related primarily to increased interest rates and increased average
borrowings. For the nine month periods of 2006 and 2005, interest expense was $141.9 million and
$87.4 million, respectively. The increase in average borrowings primarily relates to the inclusion
of a full nine months including the $2.8 billion borrowed in the recapitalization transaction on
March 9, 2005 which only impacted 23 days of the first quarter of 2005 and additional debt of
approximately $250 million included since the February 1, 2006 merger with Certegy.
Net earnings were $78.6 million and $57.9 million for the third quarter of 2006 and 2005,
respectively and $184.0 million and $151.0 million for the nine month periods of 2006 and 2005,
respectively.
Specialty Insurance Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Revenues |
|
$ |
103,636 |
|
|
$ |
97,835 |
|
|
$ |
315,480 |
|
|
$ |
253,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
11,409 |
|
|
|
10,492 |
|
|
|
33,791 |
|
|
|
28,044 |
|
Other operating expenses |
|
|
41,756 |
|
|
|
39,241 |
|
|
|
113,364 |
|
|
|
103,638 |
|
Depreciation and amortization |
|
|
1,706 |
|
|
|
963 |
|
|
|
4,678 |
|
|
|
2,930 |
|
Provision for claim losses |
|
|
29,695 |
|
|
|
31,730 |
|
|
|
96,646 |
|
|
|
78,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
84,566 |
|
|
|
82,426 |
|
|
|
248,479 |
|
|
|
213,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
$ |
19,070 |
|
|
$ |
15,409 |
|
|
$ |
67,001 |
|
|
$ |
40,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Revenues from specialty insurance include revenues from the issuance of flood, home warranty
and homeowners insurance policies and were $103.6 million and $97.8 million for the third quarters
of 2006 and 2005, respectively, and $315.5 million and $253.8 million in the first nine months of
2006 and 2005, respectively. Specialty insurance revenue increased in 2006 as compared with 2005 as
a result of organic growth in our homeowners insurance and the continued runoff of flood processing
revenues relating to the 2005 hurricane season.
Expenses
Personnel costs were $11.4 million and $10.5 million in the third quarters of 2006 and 2005,
respectively, and $33.8 million and $28.0 million in the first nine months of 2006 and 2005,
respectively. As a percentage of revenues, personnel costs were 11.0% and 10.7% in the third
quarters of 2006 and 2005, respectively, and 10.7% and 11.0% in the first nine months of 2006 and
2005, respectively.
Other operating expenses in the specialty insurance segment were $41.8 million and $39.2
million in the third quarters of 2006 and 2005, respectively, and $113.4 million and $103.6 million
in the first nine months of 2006 and 2005, respectively. As a percentage of revenues, other
operating expenses were 40.3% and 40.1% in the third quarters of 2006 and 2005, respectively, and
35.9% and 40.8% for the first nine months of 2006 and 2005, respectively. The decrease as a
percentage of revenues in the 2006 period is primarily the result of growth of the business lines,
which has not required a proportionate increase in these costs.
The provision for claim loss was $29.7 million and $31.7 million in the third quarters of 2006
and 2005, respectively, and $96.6 million and $78.8 million in the first nine months of 2006 and
2005, respectively. The increase was primarily the result of increased activity in the homeowners
insurance business.
Corporate and Other Segment
The corporate and other segment is primarily comprised of the operations of our parent holding
company and smaller entities not included in our operating subsidiaries. It generated a pretax loss
of $6.3 million and $5.5 million in the third quarters of 2006 and 2005, respectively. It generated
a pretax loss of $13.5 million in the first nine
38
months of 2006 and pretax income of $288.4 million in the first nine months of 2005 which
included the $318.2 million gain on sale of subsidiary securities in connection with the sale of a
minority interest in FIS.
Liquidity and Capital Resources
Cash Requirements. Our cash requirements include debt service, operating expenses, taxes,
capital expenditures, systems development, treasury stock repurchases, business acquisitions and
dividends on our common stock. We believe that all anticipated cash requirements for current
operations will be met from internally generated funds, through cash dividends from subsidiaries,
cash generated by investment securities and borrowings through public debt offerings and existing
credit facilities. Our short-term and long-term liquidity requirements are monitored regularly to
match cash inflows with cash requirements. We forecast the 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 such forecasts.
We have $500.0 million of capacity under a shelf registration statement that may be used,
subject to market conditions, to issue debt or other securities at our discretion. We presently
intend to use the proceeds from the sale of any securities under the shelf registration statement
primarily to finance strategic opportunities. While we seek to give ourselves flexibility with
respect to meeting such needs, there can be no assurance that market conditions would permit us to
sell such securities on acceptable terms at any given time, or at all.
Our two significant sources of internally generated funds are dividends and other payments
from our subsidiaries. As a holding company, we receive cash from our subsidiaries in the form of
dividends and as reimbursement for operating and other administrative expenses we incur. The
reimbursements are executed within the guidelines of management agreements among us and our
subsidiaries. Our insurance subsidiaries are restricted by state regulation in their ability to pay
dividends and make distributions. Each state of domicile regulates the extent to which our title
underwriters can pay dividends or make other distributions to FNT. As of December 31, 2005, $1.9
billion of FNTs net assets were restricted from dividend payments without prior approval from the
Departments of Insurance. During the remainder of 2006, FNTs first tier title subsidiaries can pay
or make distributions to FNT of approximately $145 million without prior approval. During the first
nine months of 2006, FNT paid us $124.6 million in dividends. Our underwritten title companies and
FIS collect revenue and pay operating expenses. However, they are not regulated to the same extent
as our insurance subsidiaries. Positive cash flow from these subsidiaries is invested primarily in
cash and cash equivalents. Also, the new FIS credit facility (discussed below) limits FISs ability
to pay us dividends.
In connection with the distribution of FNT stock, FNT issued two $250 million intercompany
notes payable to FNF (the Mirror Notes), with terms that mirrored FNFs existing $250 million
7.30% public debentures due in August 2011 and $250 million 5.25% public debentures due in March
2013. Following issuance of the Mirror Notes, FNT filed a Registration Statement on Form S-4,
pursuant to which FNT offered to exchange the outstanding FNF notes for notes FNT would issue
having substantially the same terms and deliver the FNF notes received to FNF to reduce FNTs debt
under the Mirror Notes. On January 18, 2006 FNT completed these exchange offers with $241.3 million
aggregate principal amount of the 7.30% notes due 2011 and the entire $250.0 million aggregate
principal amount of the 5.25% notes due 2013 validly tendered and not withdrawn in the exchange
offers. Following the completion of the exchange offers, FNT issued a new 7.30% Mirror Note due
2011 in the amount of $8.7 million, representing the principal amount of the portion of the
original Mirror Notes that was not exchanged. A balance of $6.6 million of these notes remained
outstanding at September 30, 2006, all of which was redeemed on October 23, 2006. Interest on the
Mirror Notes accrued from the last date on which interest on the corresponding FNF notes was paid
and at the same rate.
Capital Expenditures. Total capital expenditures for property and equipment were $128.9
million and $112.5 million for the nine months ended September 30, 2006 and 2005, respectively.
Total capital expenditures for software were $176.9 million and $119.7 million for the nine months
ended September 30, 2006 and 2005, respectively. In 2004, FIS began the development work to
implement changes required to keep pace with the marketplace and the requirements of its customers.
FIS expects to spend an incremental $16 million in 2006 on the development of its mortgage
servicing platform. With respect to the core banking software, FIS expects to spend approximately
$54 million in 2006 on development, enhancements and integration projects. FIS expects to
capitalize a portion of those expenditures.
39
Financing. On October 17, 2005, we entered into a new Credit Agreement, dated as of October
17, 2005, with Bank of America, N.A. as Administrative Agent and Swing Line Lender, and the other
financial institutions party thereto. This credit agreement replaced our prior $700.0 million,
5-year revolving credit facility which was due November 4, 2008. This Credit Agreement was
terminated on October 24, 2006.
The Credit Agreement provides for a $250 million unsecured revolving credit facility maturing
on the fifth anniversary of the closing date. Amounts under the revolving credit facility may be
borrowed, repaid and reborrowed by the Borrowers from time to time until the maturity of the
revolving credit facility. Voluntary prepayment of the revolving credit facility under the Credit
Agreement is permitted at any time without fee upon proper notice and subject to a minimum dollar
requirement. Revolving loans under the credit facility bear interest at a variable rate based on
either (i) the higher of (a) a rate per annum equal to one-half of one percent in excess of the
Federal Reserves Federal Funds rate, or (b) Bank of Americas prime rate or (ii) a rate per
annum equal to the British Bankers Association LIBOR rate plus a margin of between 0.625%-2.25%,
all-in including commitment fees, depending on the Companys then current public debt credit rating
from the rating agencies.
The Credit Agreement contains certain affirmative and negative covenants customary for
financings of this type, including, among other things, limits on the creation of liens and on
sales of assets and the incurrence of indebtedness, restrictions on investments and limitations on
restricted payments and transactions with affiliates. The Credit Agreement also contains customary
financial covenants regarding net worth, fixed charge coverage, total debt to total capitalization
and a minimum unencumbered cash balance. The Credit Agreement includes customary events of default
for facilities of this type (with customary grace periods, as applicable) and provides that, upon
the occurrence of an event of default, the interest rate on all outstanding obligations will be
increased and payments of all outstanding loans may be accelerated and/or the lenders commitments
may be terminated. In addition, upon the occurrence of certain insolvency or bankruptcy related
events of default, all amounts payable under the Credit Agreement shall automatically become
immediately due and payable, and the lenders commitments will automatically terminate. The Credit
Agreement also requires a pledge of subsidiary stock if our ratings decline to certain below
investment grade credit ratings.
Also on October 17, 2005, FNT entered into a Credit Agreement, dated as of October 17, 2005,
with Bank of America, N.A. as Administrative Agent and Swing Line Lender, and the other financial
institutions party thereto (the FNT Previous Credit Agreement).
The FNT Previous Credit Agreement provided for a $400 million unsecured revolving credit
facility maturing on the fifth anniversary of the closing date. Amounts under the revolving credit
facility could be borrowed, repaid and reborrowed by the borrower from time to time until the
maturity of the revolving credit facility. Voluntary prepayment of the revolving credit facility
under the FNT Previous Credit Agreement was permitted at any time without fee upon proper notice
and subject to a minimum dollar requirement. Revolving loans under the credit facility bore
interest at a variable rate based on either (i) the higher of (a) a rate per annum equal to
one-half of one percent in excess of the Federal Reserves Federal Funds rate, or (b) Bank of
Americas prime rate or (ii) a rate per annum equal to the British Bankers Association LIBOR rate
plus a margin of between 0.35%-1.25%, depending on FNTs then current public debt credit rating
from the rating agencies. On October 24, 2005, FNT borrowed $150 million under its $400 million
credit facility in order to repay a $150 million intercompany note issued by one of FNTs
subsidiaries to the Company in August 2005. Prior to December 31, 2005, $50 million of this
borrowing was repaid. As of September 30, 2006, $75 million of this line remains outstanding at a
current rate of 5.72%. The FNT Previous Credit Agreement was repaid and terminated on October 24,
2006.
The FNT Previous Credit Agreement contained affirmative, negative and financial covenants
customary for financings of this type, including, among other things, limits on the creation of
liens, sales of assets and the incurrence of indebtedness, restrictions on investments, and
limitations on restricted payments and transactions with affiliates and certain amendments. The FNT
Previous Credit Agreement required FNT to maintain investment grade debt ratings, certain financial
ratios related to liquidity and statutory surplus and certain levels of capitalization.
Effective October 24, 2006, FNT entered into a credit agreement (the FNT New Credit
Agreement) with Bank of America, N.A. as Administrative Agent and Swing Line Lender, and the other
financial institutions party thereto. The FNT New Credit Agreement, which replaces the FNT Previous
Credit Agreement, provides for an $800
40
million unsecured revolving credit facility maturing on the fifth anniversary of the closing
date. FNT has the option to increase the size of the credit facility by an additional $300 million,
subject to certain requirements. Amounts under the revolving credit facility may be borrowed,
repaid and reborrowed by the borrower thereunder from time to time until the maturity of the
revolving credit facility. Voluntary prepayment of the revolving credit facility under the FNT New
Credit Agreement is permitted at any time without fee upon proper notice and subject to a minimum
dollar requirement. Revolving loans under the credit facility bear interest at a variable rate
based on either (i) the higher of (a) a rate per annum equal to one-half of one percent in excess
of the Federal Reserves Federal Funds rate, or (b) Bank of Americas prime rate or (ii) a rate
per annum equal to the British Bankers Association London Interbank Offered Rate (LIBOR) rate
plus a margin of between .23%-.675%, depending on FNTs then current senior unsecured long-term
debt rating from the rating agencies. In addition, FNT will pay a commitment fee between .07%-.175%
on the entire facility, also depending on FNTs senior unsecured long-term debt rating.
The FNT New Credit Agreement contains affirmative, negative and financial covenants customary
for financings of this type, including, among other things, limits on the creation of liens, sales
of assets, the incurrence of indebtedness, restricted payments, transactions with affiliates, and
certain amendments. The FNT New Credit Agreement requires FNT to maintain certain financial ratios
and levels of capitalization. The FNT New Credit Agreement also includes customary events of
default for facilities of this type (with customary grace periods, as applicable) and provides
that, upon the occurrence of an event of default, the interest rate on all outstanding obligations
will be increased and payments of all outstanding loans may be accelerated and/or the lenders
commitments may be terminated. In addition, upon the occurrence of certain insolvency or bankruptcy
related events of default, all amounts payable under the FNT New Credit Agreement shall
automatically become immediately due and payable, and the lenders commitments will automatically
terminate.
On March 9, 2005, we completed a recapitalization plan of FIS. FIS entered into $3.2 billion
in senior credit facilities consisting of a $800.0 million Term Loan A facility, a $2.0 billion
Term Loan B facility (collectively, the Term Loan Facilities) and a $400.0 million revolving
credit facility (Revolver) with a consortium of lenders led by Bank of America. FIS fully drew
upon the entire $2.8 billion in Term Loan Facilities to consummate the recapitalization. FIS used
proceeds from the loans to repay the outstanding principal and interest on a $2.7 billion note it
previously paid as a dividend to us. We in turn used these funds to pay $1.8 billion as a special
cash dividend of $10.00 per share to our shareholders and $400 million to pay down our existing
credit facility. The remainder was used for general corporate purposes. Revolving credit borrowings
and Term A Loans bear interest at a floating rate, which, at the borrowers option, is based on
either the British Bankers Association LIBOR or base rate plus, in both cases, an applicable
margin, which is subject to adjustment based on the senior secured leverage ratio of the borrowers.
The Term B Loans bear interest at either the British Bankers Association LIBOR plus 1.75% per annum
or, at the borrowers option, a base rate plus 0.75% per annum. The borrowers may choose one month,
two month, three month, six month, and to the extent available, nine month or one year LIBOR, which
then applies for a period of that duration. Interest is due at the end of each interest period,
provided that for LIBOR loans that exceed three months, the interest is due three months after the
beginning of such interest period. The Term Loan A matures in March 2011, the Term Loan B in March
2013, and the Revolver in March 2011. The Term Loan Facilities are subject to quarterly
amortization of principal in equal installments of 0.25% of the original principal amount with the
remaining balance payable at maturity. In addition to the scheduled amortization, and with certain
exceptions, the Term Loan Facilities are subject to mandatory prepayment from excess cash flow
which is reduced based on senior-secured leverage, issuance of additional equity and debt and sales
of certain assets. Voluntary prepayments of both the Term Loan Facilities and revolving loans and
commitment reductions of the revolving credit facility are permitted at any time without fee upon
proper notice and subject to minimum dollar requirements. As of September 30, 2006, there was $788
million outstanding on Term Loan A at 6.58%, $1,730.0 million on Term Loan B at 7.08% and $114.2
million outstanding relating to the revolving line of credit at 6.755%.
The new credit facilities contain affirmative, negative, and financial covenants customary for
financings of this type, including, among other things, limits on the creation of liens, limits on
the incurrence of indebtedness, restrictions on investments and dispositions, limitations on
dividends and other restricted payments and capital expenditures, a minimum interest coverage
ratio, and a maximum secured leverage ratio.
On March 9, 2005, FIS used proceeds from the Term Loans to repay all outstanding principal and
interest on a $2.7 billion principal amount promissory note that it distributed to FNF as a
dividend on March 8, 2005. On March 9, 2005, FIS also completed its minority interest sale, in
which it issued common shares representing a 25% interest
41
in FIS to an investor group for $500 million. FIS used the proceeds of that issuance and the
remaining Term Loan proceeds to retire its former revolving credit facility, as described below,
and pay expenses relating to the recapitalization and the minority interest sale. These expenses
totaled $79.2 million, and included certain fees and expenses of the investor group totaling
approximately $45.7 million. The remaining proceeds from the Term Loans and minority interest sale
were retained to use for general corporate purposes.
FIS is highly leveraged. As of September 30, 2006, it was paying interest on the Term Loan
Facilities at a rate of one month LIBOR plus 1.25 to 1.75%, (or 6.58-7.08%). At that rate, the
annual interest on the remaining $1,818 million of Term Loan debt not subject to an interest rate
swap agreement as noted below would be $124.8 million. A one percent increase in the LIBOR rate
would increase its annual debt service on the Term Loan Facilities by $18.2 million. The credit
rating assigned to the Term Loan Facilities and Revolver by Standard & Poors is currently BB+.
On April 11, 2005, FIS entered into interest rate swap agreements which have effectively fixed
the interest rate at approximately 6.1% through April 2008 on $350 million of the Term Loan B
Facility and at approximately 5.9% through April 2007 on an additional $350.0 million of the Term
Loan B Facility. The estimated fair value of the cash flow hedges results in an asset of the
Company of $6.0 million as of September 30, 2006, which is included in the accompanying
consolidated balance sheet in prepaid expenses and other assets and as a component of accumulated
other comprehensive earnings, net of deferred taxes.
As described above, on February 1, 2006 FIS merged with Certegy in a transaction in which
Certegy was the surviving legal entity. We own 51.0% of the common stock of the merged entity as of
September 30, 2006. FIS now currently pays quarterly dividends to its shareholders of $0.05 per
share and is expected to continue to do so in the future. Upon completion of the merger, FISs
credit facilities were amended to limit the amount of dividends the combined company can pay on its
common stock to $60 million per year, plus certain other amounts, except that dividends on the
common stock may not be paid if any event of default under the facilities shall have occurred or be
continuing or would result from such payment.
Through the merger with Certegy, the Company has an obligation to service $200 million
(aggregate principal amount) of unsecured 4.75% fixed-rate notes due in 2008. The notes were
recorded in purchase accounting at a discount of $5.7 million, which is being amortized over the
term of the notes. The notes accrue interest at a rate of 4.75% per year, payable semi-annually in
arrears on each March 15 and September 15.
During the second quarter of 2005, we began lending fixed maturity and equity securities to
financial institutions in short-term security lending transactions. Our security lending policy
requires that the cash received as collateral be 102% or more of the fair value of the loaned
securities. These short-term security lending arrangements increase investment income with minimal
risk. At September 30, 2006, we had security loans outstanding with a fair value of $305.6 million
included in accounts payable and accrued liabilities and we held cash in the same amount as
collateral for the loaned securities.
Seasonality. Historically, real estate transactions have produced seasonal revenue levels for
title insurers. The first calendar quarter is typically the weakest quarter in terms of revenue due
to the generally low volume of home sales during January and February. Recently, the third calendar
quarter has been typically the strongest in terms of revenue primarily due to a higher volume of
home sales in the summer months and the fourth calendar quarter is usually also strong due to
commercial entities desiring to complete transactions by year-end. Significant changes in interest
rates may alter these traditional seasonal patterns due to the effect the cost of financing has on
the volume of real estate transactions.
Contractual Obligations. Due to the closing of the SEDA and merger transactions subsequent to
quarter end, all contractual obligations of FNF became contractual obligations of FNT and are
reported in FNTs Form 10-Q filed for the quarter ended September 30, 2006.
Capital Stock Transactions. On April 24, 2002, our Board of Directors approved a three-year
stock repurchase program. Purchases are made by us from time to time in the open market, in block
purchases or in privately negotiated transactions. From January 1, 2004, through December 31, 2004,
we repurchased a total of 430,500 shares of common stock for $16.5 million. Additionally, on
December 13, 2004, we entered into an agreement to repurchase 2,530,346 shares of Company common
stock from Willis Stein & Partners (Willis Stein) and J.P.
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Morgan Chase, as escrow agent for the former stockholder of Aurum. We acquired Aurum in March
2004. The $112.2 million purchase price was a discount to the closing price of the Companys common
stock on December 13, 2004. On April 6, 2005, we acquired 2,250,000 shares at a purchase price of
$70.9 million from ALLTEL. On April 25, 2005, our Board of Directors approved another three-year
stock repurchase program similar to the 2002 plan. This plan authorizes us to repurchase up to 10
million shares.
Equity Investments. Our equity investments are in public companies whose security prices are
subject to significant volatility. Should the fair value of these investments fall below our cost
bases and/or the financial condition or prospects of these companies deteriorate, we may determine
in a future period that this decline in fair value is other-than-temporary, requiring that an
impairment loss be recognized in the period such a determination is made.
Off-Balance Sheet Arrangements. Other than facility and equipment leasing arrangements, we do
not engage in off-balance sheet financing activities. On June 29, 2004 we entered into an
off-balance sheet financing arrangement (commonly referred to as a synthetic lease). The
owner/lessor in this arrangement acquired land and various real property improvements associated
with new construction of an office building in Jacksonville, Florida that will be part of our
corporate campus and headquarters. The lease expires on June 28, 2011, with renewal subject to
consent of the lessor and the lenders. The lessor is a third-party limited liability company. The
synthetic lease facility provides for amounts up to $75.0 million. As of September 30, 2006, the
full $75.0 million had been drawn on the facility to finance land costs and related fees and
expenses. The leases include guarantees by us of up to 86.7% of the outstanding lease balance, and
options to purchase the facilities at the outstanding lease balance. The guarantee becomes
effective if we decline to purchase the facilities at the end of the lease and also decline to
renew the lease. The lessor financed the acquisition of the facilities through funding provided by
third-party financial institutions. We have no affiliation or relationship with the lessor or any
of its employees, directors or affiliates, and our transactions with the lessor are limited to the
operating lease agreements and the associated rent expense that will be included in other operating
expenses in the Consolidated Statements of Earnings after the end of the construction period.
We do not believe the lessor is a variable interest entity, as defined in FASB Interpretation
No. 46R, Consolidation of Variable Interest Entities (FIN 46). In addition, we have verified
that even if the lessor was determined to be a variable interest entity, we would not be required
to consolidate the lessor or the assets and liabilities associated with the assets leased to us.
This is because the assets leased by us will not exceed 50% of the total fair value of the lessors
assets excluding certain assets that should be excluded from such calculation under FIN 46, nor did
the lessor finance 95% or more of the leased balance with non-recourse debt, target equity or
similar funding.
In conducting our operations, we routinely hold customers assets in escrow, pending
completion of real estate transactions. Certain of these amounts are maintained in segregated bank
accounts and have not been included in the Consolidated Balance Sheets. As a result of holding
these customers assets in escrow, we have ongoing programs for realizing economic benefits during
the year through favorable borrowing and vendor arrangements with various banks. There were no
investments or loans outstanding as of September 30, 2006 related to these arrangements.
Critical Accounting Policies
There have been no material changes in our critical accounting policies described in our
Annual Report on Form 10-K for the year ended December 31, 2005.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
158, Employers Accounting for Defined Benefit Pension and Other Post Retirement Plans (SFAS
158). SFAS 158 requires entities to recognize on their balance sheets the funded status of pension
and other postretirement benefit plans. Entities are required to recognize actuarial gains and
losses, prior service cost, and any remaining transition amounts from the initial application of
Statement of Financial Accounting Standards No. 87, Employers Accounting for Pensions, and
Statement of Financial Accounting Standards No. 106, Employers Accounting for Postretirement
Benefits Other Than Pensions, when recognizing a plans funded status, with the offset to
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accumulated other comprehensive income. SFAS 158 will not change the amounts recognized in the
income statement as net periodic benefit cost. All of the requirements of SFAS 158 are effective as
of December 31, 2006 for calendar-year public companies, except for a requirement for
fiscal-year-end measurements of plan assets and benefit obligations with which the Company is
already in compliance. Management is currently evaluating the impact on the Companys statements of
financial position and operations.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108 (Topic 1N), Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). This SAB addresses how the effects
of prior-year uncorrected misstatements should be considered when quantifying misstatements in
current-year financial statements. SAB 108 requires registrants to quantify misstatements using
both the balance sheet and income statement approaches and to evaluate whether either approach
results in quantifying an error that is material in light of relevant quantitative and qualitative
factors. When the effect of initial adoption is determined to be material, the SAB allows
registrants to record that effect as a cumulative effect adjustment to beginning-of-year retained
earnings. SAB 108 is effective for annual financial statements covering the first fiscal year
ending after November 15, 2006. Management is currently evaluating the impact of SAB 108 on the
Companys statements of financial position and operations.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 requires an evaluation to
determine the likelihood that an uncertain tax position will be sustained upon examination,
including resolution of any related appeals or litigation processes. If it is determined that it is
more likely than not that an uncertain tax position will be sustained upon examination, the next
step is to determine the amount to be recognized. FIN 48 prescribes recognition of the largest
amount of tax benefit that is greater than 50 percent likely of being recognized upon ultimate
settlement of an uncertain tax position. Such amounts are to be recognized as of the first
financial reporting period during which the more-likely-than-not recognition threshold is met.
Similarly, an amount that has previously been recognized will be reversed as of the first financial
reporting period during which the more-likely-than-not recognition threshold is not met. FIN 48 is
effective for fiscal years beginning after December 15, 2006. Management is currently evaluating
the impact on the Companys statements of financial position and operations.
In December 2004, the FASB issued SFAS No. 123R, which requires that compensation cost
relating to share-based payments be recognized in our 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), effective as of the beginning of 2003.
Using 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. Upon adoption of SFAS No. 123,
we 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). Using this method, stock-based employee compensation cost has been 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. The adoption of SFAS
No. 123R on January 1, 2006 had no significant impact on our financial condition or results of
operations due to the fact that all options accounted for using the intrinsic value method under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, were fully
vested at December 31, 2005. In accordance with the provisions of SFAS No. 123R, we have not
restated our share-based compensation expense for the 2005 periods presented.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There have been no material changes in the market risks described in our Annual Report on Form
10-K for the year ended December 31, 2005.
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our
principal executive officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, our principal executive
44
officer and principal financial officer concluded that our disclosure controls and procedures
are effective to provide reasonable assurance that our disclosure controls and procedures will
timely alert them to material information required to be included in our periodic SEC reports.
There have been no changes in our internal controls over financial reporting that occurred
during our last fiscal quarter that have materially affected or are reasonably likely to materially
affect our internal controls over financial reporting.
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company is involved in various pending and threatened
litigation matters related to its operations, some of which include claims for punitive or
exemplary damages. The Company believes that no actions, other than those listed below, depart from
customary litigation incidental to its business. As background to the disclosure below, please note
the following:
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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. |
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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. |
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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. |
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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, Connecticut, New Hampshire 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. The Company intends
to vigorously defend the actions.
A class action in California alleges that the Company violated the Real Estate Settlement
Procedures Act 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.
45
A class action in Texas alleges that the Company overcharged for recording fees in Arizona,
California, Colorado, Oklahoma and Texas. The suit seeks to recover the recording fees for the
class that was overcharged, interest and attorneys fees. The suit was filed in the United States
District Court for the Western District of Texas, San Antonio Division on March 24, 2006. Similar
suits are pending in Indiana, Kansas, and Missouri. The Company intends to vigorously defend these
actions.
A class action in New Mexico alleges the Company has engaged in anti-competitive price fixing
in New Mexico. The suit seeks an injunction against price fixing and writs issued to the State
regulators mandating the law be interpreted to provide a competitive market, compensatory damages,
punitive damages, statutory damages, interest and attorneys fees for the injured class. The suit
was filed in State Court in Santa Fe, New Mexico on April 27, 2006. The Company intends to
vigorously defend this action.
Two class actions filed in Illinois allege the Company has paid attorneys to refer business to
the Company by paying them for core title services in conjunction with orders when the attorneys,
in fact, did not perform any core title services and the payments were to steer business to the
Company. The suits seek compensatory damages, attorneys fees and injunctive relief to terminate
the practice. The suit was filed in State Court in Chicago, Illinois on May 11, 2006. The Company
intends to vigorously defend these actions.
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. One Ohio
cases states that the damages per class member are less than the jurisdictional limit for removal
to federal court.
The Company receives inquiries and requests for information from state insurance departments,
attorneys general and other regulatory agencies from time to time about various matters relating to
its business. Sometimes these take the form of civil investigative subpoenas. The Company attempts
to cooperate with all such inquiries. From time to time, the Company is assessed fines for
violations of regulations or other matters or enters into settlements with such authorities which
require the Company to pay money or take other actions.
The National Association of Insurance Commissioners and various state insurance regulators
have been investigating so called captive reinsurance agreements since 2004. The investigations
have focused on arrangements in which title insurers would write title insurance generated by
realtors, developers and lenders and cede a portion of the premiums to a reinsurance company
affiliate of the entity that generated the business. The U.S. Department of Housing and Urban
Development (HUD) also has made formal or informal inquiries of the Company regarding these
matters. The Company has been cooperating and intends to continue to cooperate with all ongoing
investigations. The Company has discontinued all captive reinsurance arrangements. The total amount
of premiums the Company ceded to reinsurers was approximately $10 million over the existence of
these agreements. The Company has settled most of the accusations of wrongdoing that arose from
these investigations by discontinuing the practice and paying fines. Some investigations are
continuing. The Company anticipates they will be settled in a similar manner.
Additionally, the Company has received inquiries from regulators about its business
involvement with title insurance agencies affiliated with builders, realtors and other traditional
sources of title insurance business, some of which the Company participated in forming as joint
ventures with its subsidiaries. These inquiries have focused on whether the placement of title
insurance with the Company through these affiliated agencies is proper or an improper form of
referral payment. Like most other title insurers, the Company participates in these affiliated
business arrangements in a number of states. The Company has settled the accusations of wrongdoing
that arose from some of these investigations by discontinuing the practice and paying fines. Other
investigations are continuing. The Company anticipates they will be settled in a similar manner.
The Company and its subsidiaries have settled all allegations of wrongdoing arising from a
wide-ranging review of the title insurance industry by the New York State Attorney General (the
NYAG). Under the terms of the settlement, the Company paid a $2 million fine and will immediately
reduce premiums by 15% on owners policies under $1 million. Rate hearings will be conducted by the
New York State Insurance Department (the NYSID) this year where all rates will be considered
industry wide. The settlement clarifies practices considered wrongful under
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New York law by the NYAG and the NYSID, and the Company has agreed not to engage in those
practices. The Company will take steps to assure that consumers are aware of the filed rates for
premiums on title insurance products and that the products are correctly rated. The settlement also
resolves all issues raised by the market conduct investigation of the Company and its subsidiaries
by the NYSID except the issues of rating errors found by the NYSID. As part of the settlement, the
Company and its subsidiaries denied any wrongdoing. Neither the fines nor the rate reductions are
expected to have a material impact on earnings of the Company. The Company cooperated fully with
the NYAG and NYSID inquiries into these matters and will continue to cooperate with the NYSID.
In November 2006, the NYAG and NYSID raised an issue with respect to the applicability of the
rate reduction to lenders policies. The Company and other defendants dispute this position.
Further, U.S. Representative Oxley, the Chairman of the House Financial Services Committee,
recently asked the Government Accountability Office (the GAO) to investigate the title insurance
industry. Representative Oxley stated that the Committee is concerned about payments that certain
title insurers have made to developers, lenders and real estate agents for referrals of title
insurance business. Representative Oxley asked the GAO to examine, among other things, the
foregoing relationships and the levels of pricing and competition in the title insurance industry.
A congressional hearing was held regarding title insurance practices on April 27, 2006. The Company
is unable to predict the outcome of this inquiry or whether it will adversely affect the Companys
business or results of operations.
On July 3, 2006, the California Insurance Commissioner (Commissioner) issued a Notice of
Proposed Action and Notice of Public Hearing (the Notice) relating to proposed regulations
governing rate-making for title insurance (the Proposed Regulations). A hearing on the Proposed
Regulations took place on August 30, 2006. If implemented, the Proposed Regulations would result in
significant reductions in title insurance rates, which are likely to have a significant negative
impact on the companys California revenues. In addition, the Proposed Regulations would give the
Commissioner the ability to set maximum allowable title insurance rates on a going-forward basis.
It is possible that such maximum rates would be lower than the rates that the Company would
otherwise set. In addition, the Florida Office of Insurance Regulation (the OIR) has recently
released three studies of the title insurance industry which purport to demonstrate that title
insurance rates in Florida are too high and that the Florida title insurance industry is
overwhelmingly dominated by five firms, which includes FNT. The studies recommend tying premium
rates to loss ratios thereby making the rates a reflection of the actual risks born by the insurer.
The OIR is presently developing a rule to govern the upcoming rate analysis and rate setting
process and has said that it will use the information to begin a full review of the title insurance
rates charged in Florida. New York, Connecticut, Nevada, New Mexico, Texas, and Washington
insurance regulators have also announced similar inquiries (or other reviews of title insurance
rates or practices) and other states could follow. At this stage, the Company is unable to predict
what the outcome will be of these or any similar reviews.
Canadian lawyers who have traditionally played a role in real property transactions in Canada
allege that the Companys practices in processing residential mortgages are the unauthorized
practice of law. Their Law Societies have demanded an end to the practice, and have begun
investigations into those practices. In several provinces bills have been filed that ostensibly
would affect the way we do business. The Company is unable to predict the outcome of this inquiry
or whether it will adversely affect the Companys business or results of operations. In Missouri a
class action is pending alleging that certain acts performed by the Company in closing real estate
transactions are the unlawful practice of law. The Company intends to vigorously defend this
action.
The Company and its subsidiaries, FIS and Fidelity Information Services, Inc. (FI), together
with certain of its employees, were named on March 6, 2006 as defendants in a civil lawsuit brought
by Grace & Digital Information Technology Co., Ltd. (Grace), a Chinese company that formerly
acted as a sales agent for Alltel Information Services (AI), the predecessor to Fidelity
Information Services, in China.
Grace originally filed a lawsuit in December 2004 in state court in Monterey County,
California, alleging that FIS breached the sales agency agreement between Grace and AIS by failing
to pay Grace commissions on certain contracts in 2001 and 2003. However, the 2001 contracts were
never completed and the 2003 contracts, as to which Grace provided no assistance, were for a
different project and were executed one and one-half years after FIS terminated the sales agency
agreement with Grace. In addition to its breach of contract claim, Grace also alleged that
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FNF violated the Foreign Corrupt Practices Act (FCPA) in its dealings with a bank customer in
China. FNF denied Graces allegations in this California lawsuit.
In December 2005, the Monterey County court dismissed the lawsuit on the grounds of
inconvenient forum, which decision Grace appealed on February 10, 2006. Further, on March 6, 2006,
Grace filed a new lawsuit in the United States District Court for the Middle District of Florida
arising from the same transaction, and added an additional allegation to its complaint that FNF
violated the Racketeer Influenced and Corrupt Organizations Act (RICO) in its dealings with the
same bank customer. FNF and its subsidiaries intend to defend this case vigorously. On March 7,
2006, FNF filed its motion to dismiss this lawsuit, and on March 27, 2006, FNF filed an answer
denying Graces underlying allegations and counterclaiming against Grace for tortious interference
and abuse of process. These motions have all been fully briefed and are pending before the Court. A
pretrial management order has been entered providing for discovery, pretrial motion deadlines, and,
if necessary, a trial in the later part of 2007.
FNF and its counsel have investigated these allegations and, based on the results of the
investigations, FNF does not believe that there have been any violations of the FCPA or RICO, or
that the ultimate disposition of these allegations or the lawsuit will have a material adverse
impact on FNFs or any of its subsidiaries financial position, results of operations or cash
flows. FNF and its subsidiaries, including FIS, have fully cooperated with the Securities and
Exchange Commission and the U.S. Department of Justice in connection with their inquiry into these
allegations.
Item 1A. Risk Factors
Our business faces a number of risks. The risks described below update the risk factors
described in our 2005 Form 10-K and should be read in conjunction with those risk factors. The risk
factors described in this Form 10-Q and the 2005 Form 10-K may not be the only risks we face.
Additional risks that we do not yet know of or that we currently think are immaterial may also
impair our business operations. If any of the following risks actually occur, our business, results
of operations or financial condition could be materially affected and the trading price of our
common stock could decline.
If adverse changes in the levels of real estate activity occur, our revenues may decline.
Title insurance revenue is closely related to the level of real estate activity which includes
sales, mortgage financing 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. Both the volume and the average price of residential real
estate transactions have recently experienced declines in many parts of the country, and these
trends appear likely to continue. Further, interest rates have risen from record low levels in
2003, resulting in reductions in the level of mortgage refinancings and total mortgage originations
in 2004 and again in 2005 and 2006.
We have found that residential real estate activity generally decreases in the following
situations:
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when the mortgage funding supply is limited; and |
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when the United States economy is weak. |
Declines in the level of real estate activity or the average price of real estate sales are
likely to adversely affect our title insurance revenues. The Mortgage Bankers Association currently
projects residential mortgage production in 2006 to be $2.46 trillion, which would represent an
18.7% decline relative to 2005. The MBA further projects that the 18.7% decrease will result from
purchase transactions declining from $1.51 billion in 2005 to $1.39 billion in 2006, or 8.0%, and
refinancing transactions dropping from $1.51 billion to $1.07 billion, or 29.3%.
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
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which they operate. Title insurance rates are regulated differently in the various states,
with some states requiring our subsidiaries to file rates before such rates become effective and
some states promulgating the rates that can be charged. In almost all states in which our
subsidiaries operate, our rates must not be excessive, inadequate or unfairly discriminatory.
On July 3, 2006, the California Insurance Commissioner (Commissioner) issued a Notice of
Proposed Action and Notice of Public Hearing (the Notice) relating to proposed regulations
governing rate-making for title insurance (the Proposed Regulations). A hearing on the Proposed
Regulations took place on August 30, 2006. If implemented, the Proposed Regulations would result in
significant reductions in title insurance rates, which are likely to have a significant negative
impact on the companys California revenues. California is the largest source of revenue for the
title insurance industry, including for us. In addition, the Proposed Regulations would give the
Commissioner the ability to set maximum allowable title insurance rates on a going-forward basis.
It is possible that such maximum rates would be lower than the rates that the company would
otherwise set. In addition, the Florida Office of Insurance Regulation (the OIR) has recently
released three studies of the title insurance industry which purport to demonstrate that title
insurance rates in Florida are too high and that the Florida title insurance industry is
overwhelmingly dominated by five firms, which includes FNT. The studies recommend tying premium
rates to loss ratios thereby making the rates a reflection of the actual risks born by the insurer.
The OIR is presently developing a rule to govern the upcoming rate analysis and rate setting
process and has said that it will use the information to begin a full review of the title insurance
rates charged in Florida.
New York, Connecticut, Nevada, New Mexico, Texas, and Washington insurance regulators have
also announced inquiries (or other reviews of title insurance rates or practices) and other states
could follow. At this stage, the Company is unable to predict what the outcome will be of this or
any similar review.
The Company and its subsidiaries have settled all allegations of wrongdoing arising from a
wide-ranging review of the title insurance industry by the New York State Attorney General (the
NYAG). Under the terms of the settlement, the Company will pay a $2 million fine and immediately
reduce premiums by 15% on owners policies under $1 million. Rate hearings will be conducted by the
New York State Insurance Department (the NYSID) this year where all rates will be considered
industry wide. The settlement clarifies practices considered wrongful under New York law by the
NYAG and the NYSID, and the Company has agreed not to engage in those practices. The Company will
take steps to assure that consumers are aware of the filed rates for premiums on title insurance
products and that the products are correctly rated. The settlement also resolves all issues raised
by the market conduct investigation of the Company and its subsidiaries by the NYSID except the
issues of rating errors found by the NYSID. As part of the settlement, the Company and its
subsidiaries denied any wrongdoing. Neither the fines nor the 15% rate reduction are expected to
have a material impact on earnings of the Company. The Company cooperated fully with the NYAG and
NYSID inquiries into these matters and will continue to cooperate with the NYSID.
Further, U.S. Representative Oxley, the Chairman of the House Financial Services Committee,
recently asked the Government Accountability Office (the GAO) to investigate the title insurance
industry. Representative Oxley stated that the Committee is concerned about payments that certain
title insurers have made to developers, lenders and real estate agents for referrals of title
insurance business. Representative Oxley asked the GAO to examine, among other things, the
foregoing relationships and the levels of pricing and competition in the title insurance industry.
A congressional hearing was held regarding title insurance practices on April 27, 2006. We are
unable to predict the outcome of this inquiry or whether it will adversely affect our business or
results of operations.
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 (S&P), Moodys
Corporation (Moodys), Fitch Ratings, Inc. (Fitch), A.M. Best Company (A.M. Best), Demotech,
Inc., and LACE Financial Corporation. Ratings reflect the opinion of a rating agency with regard to
an insurance companys or insurance holding companys financial strength, operating performance,
and ability to meet its obligations to policyholders and are not evaluations directed to investors.
In connection with the announcement on April 27, 2006, of the proposed transactions under the SEDA
and the subsequent merger of FNF with and into FIS, S&P and A.M. Best revised their
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outlook on our ratings to positive from stable and Moodys and Fitch affirmed financial
strength ratings of A3 and A-, respectively. After the completion of the distribution of FNT stock
to FNF shareholders on October 24, 2006, Fitch upgraded its financial strength rating to A. Our
ratings are subject to continued periodic review by those rating 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.
Item 6. Exhibits
(a) Exhibits:
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31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification by Chief Executive Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350. |
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32.2 |
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Certification by Chief Financial Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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FIDELITY NATIONAL FINANCIAL, INC.
(registrant) |
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By:
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/s/ Alan L. Stinson |
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Alan L. Stinson |
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Executive Vice President, Chief Financial Officer |
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(Principal Financial and Accounting Officer)
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Date: November 9, 2006 |
51
|
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Exhibit No. |
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Description |
31.1
|
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Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
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Certification by Chief Executive Officer of Periodic Financial Reports
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350. |
|
|
|
32.2
|
|
Certification by Chief Financial Officer of Periodic Financial Reports
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350. |
52