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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NO. 1-9396
FIDELITY NATIONAL FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 86-0498599
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
17911 VON KARMAN AVENUE 92614 (714) 622-4333
IRVINE, CALIFORNIA (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE INCLUDING AREA CODE)
OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
COMMON STOCK, $.0001 PAR VALUE NEW YORK STOCK EXCHANGE
LIQUID YIELD OPTION NOTES, DUE 2009, NEW YORK STOCK EXCHANGE
ZERO COUPON, CONVERTIBLE SUBORDINATED
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
As of March 26, 1998, 22,736,836 shares of Common Stock ($.0001 par value)
were outstanding, and the aggregate market value of the shares of the Common
Stock held by non-affiliates of the registrant was $672,838,000. The aggregate
market value was computed with reference to the closing price on the New York
Stock Exchange on such date.
LOCATION OF EXHIBIT INDEX: The index to exhibits is contained in Part IV
herein on page number .
The information in Part III hereof is incorporated herein by reference to
the Registrant's Proxy Statement on Schedule 14A for the fiscal year ended
December 31, 1997, to be filed within 120 days after the close of the fiscal
year that is the subject of this Report.
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TABLE OF CONTENTS
FORM 10-K
PAGE NO.
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PART I
Item 1 Business.......................................... 1
Item 2 Properties........................................ 10
Item 3 Legal Proceedings................................. 11
Item 4 Submission of Matters to a Vote of Security
Holders................................................ 11
PART II
Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters.................................... 12
Item 6 Selected Financial Data........................... 13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 17
Item 8 Financial Statements and Supplementary Data....... 30
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 66
PART III
Item 10 Directors and Executive Officers of the
Registrant............................................. 66
Item 11 Executive Compensation........................... 66
Item 12 Security Ownership of Certain Beneficial Owners
and Management......................................... 66
Item 13 Certain Relationships and Related Transactions... 66
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K.................................... 66
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PART I
ITEM 1. BUSINESS
Fidelity National Financial, Inc., through its principal subsidiaries
(collectively, the "Company"), is one of the largest national underwriters
engaged in the business of issuing title insurance policies and performing other
title-related services such as escrow, collection and trust activities, real
estate information and technology services, trustee sale guarantees, credit
reporting, attorney services, flood certification, tax monitoring,
reconveyances, recordings, foreclosure publishing and posting services and
exchange intermediary services in connection with real estate transactions.
Title insurance services are provided through the Company's direct operations
and otherwise through independent title insurance agents who issue title
policies on behalf of the underwriting subsidiaries. Title insurance is
generally accepted as the most efficient means of determining title to, and the
priority of interests in, real estate in nearly all parts of the United States.
Today, virtually all real property mortgage lenders require their borrowers to
obtain a title insurance policy at the time a mortgage loan is made or to allow
the sale of loans in the secondary market.
The Company's principal subsidiaries consist of Fidelity National Title
Insurance Company ("Fidelity Title"), which, in turn, is the parent company of
Fidelity National Title Insurance Company of Tennessee ("Fidelity Tennessee"),
and was the parent company of Fidelity National Title Insurance Company of
California ("Fidelity California"), which was merged into Fidelity Title as of
August 7, 1997, and was the parent company of Nations Title Insurance Company
("Nations Title"), which was merged into Fidelity Title as of December 29, 1997;
Fidelity National Title Insurance Company of New York ("Fidelity New York"),
which, in turn, is the parent company of Nations Title Insurance of New York
Inc. ("Nations New York") and National Title Insurance of New York Inc.
("National"); Fidelity National Title Insurance Company of Pennsylvania
("Fidelity Pennsylvania"), which was merged into Fidelity New York as of April
11, 1997, which in turn, was the parent company of American Title Insurance
Company ("ATIC"), which was merged into Fidelity Pennsylvania as of November 21,
1996; (collectively, the "Insurance Subsidiaries"); its wholly-owned
underwritten title companies (collectively, the "UTCs"); and its network of
wholly-owned title-related ancillary service companies known as Fidelity's
Lender Express Network ("FLEXNet").
Nations Title Insurance Company, Nations Title Insurance of New York Inc.
and National Title Insurance of New York Inc. were acquired, along with Nations
Title Inc. ("NTI," collectively, "Nations Title Inc.") in a transaction which
closed on April 1, 1996. Certain of the ancillary service companies were
acquired in separate transactions during 1997.
On November 17, 1997, Fidelity National Financial, Inc. signed an Agreement
and Plan of Merger ("Merger Agreement") to merge a newly-formed subsidiary of
the Company into Granite Financial, Inc. ("Granite"). Granite, located in
Golden, Colorado, is a rapidly expanding speciality finance company engaged in
the business of originating, funding, purchasing, selling, securitizing and
servicing equipment leases for a broad range of businesses located throughout
the United States. Granite is a prominent consolidator in the $48 billion
small-ticket lease finance market with the acquisitions of Global Finance &
Leasing in March, 1997; SFR Funding, Inc., in June, 1997; and North Pacific
Funding, Inc. (dba C&W Leasing), a privately held corporation based in Seattle,
Washington, and its wholly-owned subsidiary, in December, 1997. This transaction
closed on February 26, 1998.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments" and Notes B and O of Notes to
Consolidated Financial Statements.
INDUSTRY OVERVIEW
TITLE POLICIES. Title insurance policies state the terms and conditions
upon which a title underwriter will insure title to real estate. The
beneficiaries of title insurance policies are generally buyers of real property
or mortgage lenders. Most mortgage lenders require title insurance as a
condition to making loans secured by real estate.
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Title insurance is different from other types of insurance because it
relates to past events which affect title to property at the time of closing and
not unforeseen future events. Prior to issuing policies, underwriters can reduce
or eliminate future losses by accurately performing searches and examinations.
Title insurance policies are issued on the basis of a preliminary title report
or commitment. These reports are prepared after a search of public records, maps
and other relevant documents to ascertain title ownership and the existence of
easements, restrictions, rights of way, conditions, encumbrances or other
matters affecting the title to, or use of, real property. A visual inspection or
survey of the property may also be made prior to the issuance of certain title
insurance policies. To facilitate the preparation of preliminary reports without
the necessity of manually searching public records, copies of public records,
maps and other relevant historical documents are compiled and indexed in a
"title plant." Each title plant relates to a particular county and is kept
current on a daily or other periodic basis by the continual addition of copies
of recorded documents which affect real property in the particular county. Title
companies often subscribe to independent title information services to assist in
the updating of their title plants and the maintenance of title records.
The major expense of a title company is the search and examination function
in preparing preliminary title reports, commitments and title policies; and not
from claim losses associated with the issuance of said policies. The premium for
title insurance is due in full at the closing of the real estate transaction and
is based upon the purchase price of the property insured or the amount of the
mortgage loan. Coverage under the policy generally terminates upon resale or
refinance of the property. The terms of coverage have become relatively
standardized in accordance with forms approved by state or national trade
associations.
THE TITLE POLICY PROCESS. A brief description of the process of issuing a
title insurance policy, which usually occurs over a thirty to ninety day period,
is as follows:
(i) The customer, typically a real estate salesperson or broker,
escrow agent or lender, places an order for a title policy.
(ii) Sales personnel note the specifics of the order and place a
request with the title department for a preliminary report (a commitment in
the eastern United States).
(iii) After the relevant historical data on the property is compiled,
the title officer prepares a preliminary title report which documents (a)
the current status of title and conditions affecting the property, (b) any
exclusions, exceptions and/or limitations which the title underwriter might
include in the policy and (c) specific issues which need to be addressed
and resolved by the parties to the transaction before the title policy will
be issued. The preliminary report is circulated to all the parties for
satisfaction of any specific issues.
(iv) After the specific issues identified in the preliminary report
are satisfied, an escrow agent closes the transaction in accordance with
the instructions of the parties and the title underwriter's conditions.
(v) Once the transaction is closed and all monies have been released,
the title underwriter issues the policies (a) to the owner and the lender
on a new home sale or resale transaction or (b) to the lender only, on a
refinance transaction.
LOSSES AND RESERVES. The maximum amount of liability under a title
insurance policy is usually the face amount of the policy plus the cost of
defending the insured's title against an adverse claim. The reserve for claim
losses is based upon known claims, as well as losses the insurer expects to
incur based on historical experience and other factors, including industry
averages, claim loss history, legal environment, geographic considerations,
expected recoupments and the types of policies written. The title underwriter
establishes a reserve for each known claim based on a review and evaluation of
potential liability.
ECONOMIC FACTORS AFFECTING INDUSTRY. Title insurance revenue is closely
related to the level of real estate activity and the average price of real
estate sales. Real estate sales are directly affected by the availability of
funds to finance purchases. Other factors affecting real estate activity include
demand, mortgage interest rates, family income levels and general economic
conditions. While the level of sales activity was relatively depressed in
certain geographical areas during the period 1991 through mid-1993, lower
mortgage interest rates beginning in the latter part of 1991 triggered an
increase in refinancing activity which continued
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at record levels through 1993 and into the first quarter of 1994. During 1994
and early 1995, steady interest rate increases caused by actions taken by the
Federal Reserve Board, resulted in a significant decline in refinancing
transactions and a stagnation in residential resales and new home sales. Since
late 1995, decreases in mortgage interest rates and the resulting improvement in
the real estate market have had a favorable effect on the level of real estate
activity, including refinancing transactions, new home sales and resales. The
overall economic environment, stable mortgage interest rates and strength in the
real estate market, especially in California and on the West Coast, contributed
to very positive conditions for the industry throughout 1996 and 1997 and into
the first quarter of 1998. It is impossible to predict in what future direction
interest rates and the real estate market may move or fluctuate.
TITLE INSURANCE OPERATIONS
The Insurance Subsidiaries are currently licensed to issue title insurance
policies through direct operations and independent agents in all states (with
the exception of Iowa) and the District of Columbia, the Bahamas, the Virgin
Islands and Puerto Rico.
The Company maintains direct operations in Arizona, California, Florida,
Georgia, Hawaii, Nevada, New Jersey, New Mexico, New York, North Carolina,
Oregon, Pennsylvania, Tennessee, Texas and Washington. Direct operations are
divided into approximately 70 branches consisting of more than 350 offices. Each
branch processes title insurance transactions within its geographical area,
which is usually a county boundary. Each branch is operated as a separate profit
center.
The Company also transacts title insurance business through a network of
approximately 2,200 agents, primarily in those areas in which agents are the
more accepted title insurance provider.
The following table sets forth for the years 1997, 1996 and 1995,
respectively, the approximate dollars and percentages of title insurance premium
revenue by state according to records maintained by the Company:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
California................ $202,848 38.0% $183,108 38.5% $124,407 43.6%
New York.................. 60,022 11.3 45,938 9.7 17,436 6.1
Texas..................... 47,051 8.8 42,122 8.9 28,761 10.1
Florida................... 29,457 5.5 25,444 5.3 16,141 5.7
Pennsylvania.............. 26,318 5.0 25,441 5.3 13,751 4.8
Arizona................... 24,431 4.6 23,865 5.0 15,462 5.4
All others................ 143,093 26.8 130,043 27.3 69,594 24.3
-------- ----- -------- ----- -------- -----
Totals.......... $533,220 100.0% $475,961 100.0% $285,552 100.0%
======== ===== ======== ===== ======== =====
For the entire title insurance industry, 12 states accounted for 72.1% of
title premiums written in the United States in 1996. California represented the
single largest state with 17.5%. The Company is licensed and has operations in
all 12 of these states.
MARKETING. The Company attempts to increase the volume of its title
insurance business primarily through customer solicitation by sales personnel.
The Company actively encourages its personnel to develop new business
relationships with persons in the real estate community, such as real estate
sales agents and brokers, financial institutions, independent escrow companies
and title agents, real estate developers, mortgage brokers and attorneys. The
Company's marketing efforts are also assisted by general advertising. The
Company believes customer service is the most important factor in attracting and
retaining customers and measures customer service in terms of quality and
timeliness in the delivery of services.
DIRECT AND AGENCY OPERATIONS. Preliminary title reports and commitments to
issue policies are prepared by title underwriters or wholly-owned underwritten
title companies (direct operations) or by independent agents on behalf of the
underwriters (agency operations). The terms and conditions upon which the real
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property will be insured are determined in accordance with the underwriting
standards, policies and procedures of the title underwriter. In direct
operations, the title underwriter issues the title insurance policy and retains
the entire premium paid in connection with the transaction. In agency
operations, the search and examination function is performed by an independent
agent. The majority of the title premium collected is retained by the agent with
the balance remitted to the title underwriter. Independent agents may select
among several title underwriters based upon the amount of the premium "split"
offered by the underwriter, the overall terms and conditions of the agency
agreement and the scope of services offered to the agent. Premium splits vary by
geographic region. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Expenses and Recent Developments."
Prior to the acquisition of the Nations group of companies, which was
completed on April 1, 1996, the Company generated the majority of its revenue
from its network of direct operations as opposed to agency relationships, the
latter being more common in the title industry. See below and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview and Recent Developments." The Company's direct operations
generate higher margins than agency operations because the Company retains the
entire premium from each transaction instead of paying commissions to agents and
claim losses are less than in agency based operations because the Company
controls the issuance of the title policy. Direct operations also provide
additional sources of income, such as escrow fees, collection and trust fees,
real estate information and technology service fees, trustee sale guarantee
fees, credit reporting fees, attorney service fees, flood certification fees,
tax monitoring fees, reconveyance fees, recording fees, foreclosure publishing
and posting service fees and exchange intermediary service fees in connection
with real estate transactions.
In 1997, 46.9% of the Company's title insurance premiums were generated by
direct operations. In 1996 and 1995, 49.8% and 62.1%, respectively, of title
insurance premiums were generated by direct operations. The percentage of title
insurance premiums generated by agency operations was 53.1%, 50.2% and 37.9% in
1997, 1996 and 1995, respectively. The average percentage of premiums generated
by agents and retained by the Company was 20.9%, 21.3% and 23.7% in 1997, 1996
and 1995, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview, Revenue and Expenses."
The relationship between the Company and each agent is governed by an
agency agreement which states the conditions under which the agent is authorized
to issue a title insurance policy on behalf of the Company. The agency agreement
also prescribes the circumstances under which the agent may be liable to the
Company if a policy loss is attributable to errors made by the agent. The agency
agreement typically is terminable upon 30 days' notice or immediately for cause.
In determining whether to engage or retain an independent agent the Company
considers the agent's experience, financial condition and loss history. Loss
history is an important consideration in the Company's decision to initiate or
continue agency relationships. The Company maintains financial and loss
experience records for each agent and conducts periodic audits of its agents.
On April 1, 1996, the Company completed its acquisition of one hundred
percent of Nations Title Inc. and its wholly-owned subsidiaries Nations Title
Insurance Company (which was merged into Fidelity Title as of December 29,
1997), Nations Title Insurance of New York Inc. and National Title Insurance of
New York Inc., from Nations Holding Group for a purchase price of $19.3 million
plus 212,960 shares, $2.1 million, of Fidelity National Financial, Inc.'s common
stock, subject to certain adjustments. The acquisition positioned the Company as
the nation's fourth largest title insurance underwriter. The Company believes
that the combination of its direct operations and Nations Title Inc.'s strong
agency network provides a balance to the Company's title premium revenue between
direct and agency, as well as a hedge against future market downturns. The
acquisition of Nations Title Inc. has also increased the Company's revenue and
positively impacted its balance sheet and margins due to the operating economies
of the combined companies. The acquisition has also increased market share in
areas where the Company has had a limited presence, particularly in those areas
where business is primarily agent driven, as well as in states where the Company
has a strong market position. During 1997, the Nations Title Inc. purchase price
was reduced $749,000, pursuant to certain terms and conditions contained in the
acquisition agreement. The purchase price adjustment resulted in Nations Holding
Group returning 26,499 shares of Company common stock. The returned shares were
subsequently cancelled. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview, Revenue and Recent
Developments."
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ESCROW, TRUST AND OTHER TITLE-RELATED SERVICES. The Company holds funds
and documents in real estate transactions for delivery upon closing pursuant to
the instructions of the respective parties to an escrow. The Company derives
revenue from other ancillary services generated from direct operations, such as
collection and trust fees, real estate information and technology service fees,
trustee sale guarantee fees, credit reporting fees, attorney service fees, flood
certification fees, tax monitoring fees, reconveyance fees, recording fees,
foreclosure publishing and posting service fees and exchange intermediary
service fees in connection with real estate transactions.
In a few cases, the Company leases its title plants to independent agents
for their examination of title records for a rental or usage fee.
TITLE LOSSES AND RESERVES. The Company believes that the level of risk
undertaken pursuant to its underwriting standards is consistent with that of the
industry. The maximum amount of liability under a title insurance policy is
usually the face amount of the policy plus the cost of defending the insured's
title against an adverse claim. The Company's reserve for claim losses includes
known claims as well as losses the Company expects to incur, net of recoupments.
Each known claim is reserved for on the basis of a review by the Company as to
the estimated amount of the claim and the costs required to settle the claim.
Reserves for claims which are incurred but not reported are provided for at the
time premium revenue is recognized based on historical loss experience and other
factors, including industry averages, claim loss history, legal environment,
geographic considerations and types of policies written. Claims greater than
$500,000 ("major claims") are reserved for as they become known because the
unique circumstances surrounding most major claims make it inherently
impractical to predict the incidence and amount of such claims. The occurrence
of a significant major claim in any given period could have a material adverse
effect on the Company's financial condition and results of operations for such
period. See "Reinsurance." Escrow losses are expensed as they become known.
If a loss is related to a policy issued by an independent agent, the
Company may proceed against the independent agent pursuant to the terms of the
agency agreement. In any event, the Company may proceed against third parties
who are responsible for any loss sustained under the title insurance policy
under rights of subrogation.
The Company believes that its quality controls and historical focus on
residential resale and refinance transactions have helped minimize the net title
claims paid as a percentage of title insurance premiums ("net claims paid
ratio"). The Company further reduces its losses by following aggressive
recoupment procedures under rights of subrogation or warranties and by carefully
reviewing all claims. The Company paid title claims, net of recoupments, of
approximately $35.3 million, $37.3 million and $26.2 million in 1997, 1996 and
1995, respectively, representing 6.6%, 7.8% and 9.2% of title insurance premium
revenue during such periods. The 1997 and 1996 claims paid include Nations Title
Inc. claims paid (since April 1, 1996 for the year ended December 31, 1996)
totalling $8.5 million and $9.3 million, respectively. Fluctuations in the net
claims paid ratio can be attributed to the development of claims and related
payments over time. As payments related to prior years are made, particularly
prior years in which premium volume was at higher levels than those generated in
the year the loss is paid, the net claims paid ratio increases as a simple
percentage. The inverse occurs when the payments to premiums relationship is
reversed. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Expenses." There can be no assurance that the Company's
current paid loss experience will continue at these levels.
Courts and juries sometimes award damages against insurance companies,
including title insurance companies, in excess of policy limits. Such awards are
typically based on allegations of fraud, misrepresentation, deceptive trade
practices or other wrongful acts commonly referred to as "bad faith." Although
the Company has not experienced damage awards materially in excess of policy
limits, the possibility of such bad faith damage awards may cause the Company to
experience increased costs and difficulty in settling title claims.
The Company generally pays losses in cash. In some instances claims are
settled by purchasing the interest of the insured in the real property or the
interest of the adverse claimant. Such interests are generally
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recorded as an asset on the Company's books at the lower of cost or fair value
less selling costs and any related indebtedness is carried as a liability. At
December 31, 1997, the amount of these interests was $8.8 million.
REINSURANCE. In the ordinary course of business, the Company reinsures
certain risks with other title insurers for the purpose of limiting its maximum
loss exposure and also assumes reinsurance for certain risks of other title
insurers for the purpose of earning additional income. The Company cedes or
assumes a portion of certain policy liabilities under agent fidelity, excess of
loss and case-by-case reinsurance agreements. Reinsurance agreements provide
that the reinsurer is liable for loss and loss adjustment expense payments
exceeding the amount retained by the ceding company. However, the ceding company
remains primarily liable in the event the reinsurer does not meet its
contractual obligations. See Note A of Notes to Consolidated Financial
Statements.
COMPETITION. The title insurance industry is highly competitive. The
number and size of competing companies varies in the different geographic areas
in which the Company conducts its business. In the Company's principal markets,
competitors include other major title underwriters such as Chicago Title
Insurance Company, Commonwealth Land Title Insurance Company, First American
Title Insurance Company, Lawyers Title Insurance Corporation, Old Republic Title
Insurance Company and Stewart Title Guaranty Company, as well as numerous
independent agency operations at the regional and local level.
Competition is based primarily on the quality and timeliness of service,
since the parties to a real estate transaction are usually concerned with time
schedules and costs associated with delays in closing the transaction. In those
states where prices are not established by regulatory authorities the price of
the title insurance policy is also a competitive factor. The Company believes
that its competitive position is enhanced by its quality customer service and
pricing.
REGULATION. Title insurance companies, including underwriters,
underwritten title companies and independent agents, are subject to extensive
regulation under applicable state laws. Each insurance underwriter is usually
subject to a holding company act in its state of domicile which regulates, among
other matters, the ability to pay dividends and investment policies. The laws of
most states in which the Company transacts business establish supervisory
agencies with broad administrative powers relating to issuing and revoking
licenses to transact business, regulating trade practices, licensing agents,
approving policy forms, accounting principles, financial practices, establishing
reserve and capital and surplus requirements, defining suitable investments for
reserves, capital and surplus and approving rate schedules. The Company has
analyzed its current Insurance Subsidiary structure and the regulatory
environments of the various states of domicile of the Insurance Subsidiaries.
Based on this analysis the Company has implemented a program to merge certain of
its Insurance Subsidiaries, ultimately resulting in two Insurance Subsidiaries,
Fidelity Title and Fidelity New York, as opposed to the current five, which is
down from eight underwriters at the end of 1996.
Pursuant to statutory accounting requirements of the various states in
which the Insurance Subsidiaries are qualified, they must defer a portion of
premiums earned as an unearned premium reserve for the protection of
policyholders and must maintain qualified assets in an amount equal to the
statutory requirements. The level of unearned premium reserve required to be
maintained at any time is determined on a quarterly basis by statutory formula
based upon either the age and dollar amount of policy liabilities underwritten
or the age and dollar amount of statutory premiums written. As of December 31,
1997, the combined statutory unearned premium reserve required and reported for
the Insurance Subsidiaries was $174.5 million.
The Insurance Subsidiaries are regulated by the insurance commissioners of
their respective states of domicile. Regulatory examinations usually occur at
three year intervals. Examinations are currently in progress for Fidelity Title
(1996), Fidelity New York (1996), Nations New York (1996), National (1996) and
ATIC (1994). The Company has not received preliminary reports of examination for
Fidelity Title, Fidelity New York, Nations New York or National, as the
examinations are currently ongoing.
The Department of Insurance of the State of Florida has completed the field
portion of its triennial examination of ATIC, which was merged into Fidelity
Pennsylvania as of November 21, 1996, which was in turn merged into Fidelity New
York as of April 11, 1997; as of and for the three-year period ended
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December 31, 1994. The Company has received a preliminary report of examination.
The preliminary report, as forwarded to the Company by the Department of
Insurance of the State of Florida, indicates that the examiners are proposing
adjustments that could materially impact the statutory capital and surplus of
ATIC and subsequently, Fidelity Pennsylvania, its former parent company, and
ultimately Fidelity New York. Certain of these adjustments have not been
included in the 1997 Fidelity New York Statutory Annual Statement as filed with
insurance regulatory authorities as the Company does not agree with these
findings and has requested support for the examination report. These same
adjustments have not been considered in the calculation of dividend capability,
statutory surplus and statutory income (loss) reported below.
Examinations have been completed for Fidelity Pennsylvania (1995), Fidelity
Tennessee (1995) and Nations Title (1996). All adjustments proposed by the
examiners have been recorded by the Company for Fidelity Pennsylvania, Fidelity
Tennessee and Nations Title, and are included in the calculation of dividend
capability, statutory surplus and statutory income (loss) reported below.
Statutorily calculated net worth determines the maximum insurable amount
under any single title insurance policy. As of January 1, 1998, the Company's
self-imposed single policy maximum insurable amounts, which comply with all
statutory limitations, for Fidelity Title, Fidelity New York and Fidelity
Tennessee were $42.0 million, $80.0 million and $6.0 million, respectively. The
self-imposed single policy maximum insurable amounts for Nations New York and
National were $20.0 million and $6.7 million, respectively.
The Insurance Subsidiaries are subject to regulations that restrict their
ability to pay dividends or make other distributions of cash or property to
their immediate parent company without prior approval from the Department of
Insurance of their respective states of domicile. In the case of Fidelity Title,
the total amount of dividends made in any twelve-month period may not exceed the
greater of 10% of the surplus as regards policyholders as of the last day of the
preceding year or net income for the twelve-month period ending the last day of
the preceding year. In the case of Fidelity New York, the total amount of
dividends and distributions is limited to surplus as regards policyholders,
excluding capital stock, less fifty percent of statutory premium reserve as of
the last day of the preceding year and capital contributions received in the
latest five-year period. As of January 1, 1998, Fidelity Title could pay
dividends or make other distributions to the Company of $6,823,000. Fidelity New
York does not have any dividend paying capability as of January 1, 1998.
The combined statutory capital and surplus of the Insurance Subsidiaries
was $94,101,000, $73,326,000 and $67,174,000 as of December 31, 1997, 1996 and
1995, respectively. The combined statutory income (loss) of the Insurance
Subsidiaries was $21,500,000, $6,052,000 and $(1,533,000) for the years ended
December 31, 1997, 1996 and 1995, respectively. These amounts do not include
certain of the proposed ATIC examination adjustments previously discussed.
As a condition to continued authority to underwrite policies in the states
in which the Insurance Subsidiaries conduct their business, the Insurance
Subsidiaries are required to pay certain fees and file information regarding
their officers, directors and financial condition. In addition, the Company's
escrow and trust business is subject to regulation by various state banking
authorities.
Pursuant to statutory requirements of the various states in which the
Insurance Subsidiaries are domiciled, they must maintain certain levels of
minimum capital and surplus. Each of the Company's title underwriters have
complied with the minimum statutory requirements as of December 31, 1997. See
Note K of Notes to Consolidated Financial Statements.
The UTCs are also subject to certain regulation by insurance regulatory or
banking authorities, primarily relating to minimum net worth and dividend
capability. Minimum net worth of $7.5 million and $2.5 million is required for
Fidelity National Title Company ("FNTC") and Fidelity National Title Company of
California ("FNCAL"), respectively. In addition, the Company has agreed to
notify the State of California Department of Insurance of dividend payments by
FNTC and FNCAL greater than 30% of earnings before income taxes through 1998.
7
10
RATINGS
The Insurance Subsidiaries are regularly assigned ratings by independent
agencies designed to indicate their financial condition and/or claims paying
ability. Financial data and other information is supplied to the rating agencies
and subjected to quantitative and qualitative analyses from which the ratings
were derived. Ratings of the Company's principal Insurance Subsidiaries, as
assigned by Demotech, Inc. during 1997, are listed below.
DEMOTECH, INC.
(FINANCIAL STABILITY RATING)
------------------------------------
Fidelity Title A = Exceptional
Fidelity New York A = Exceptional
INVESTMENT POLICIES AND INVESTMENT PORTFOLIO
The Company's investment policy is designed to maintain a high quality
portfolio, maximize income, minimize interest rate risk and match the duration
of the portfolio to the Company's liabilities. The Company also makes
investments in certain equity securities in order to take advantage of perceived
value and for strategic purposes. Most of the Company's investment assets
qualify as "admitted assets" and for purposes of capital and surplus and
unearned premium reserves as prescribed by various state insurance regulations.
These investments are restricted by the state insurance regulations of their
domiciliary states and are limited primarily to cash and cash equivalents,
federal and municipal governmental securities, mortgage loans, certain
investment grade debt securities, equity securities and real estate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
As of December 31, 1997 and 1996, the carrying amount, which approximates
the fair value, of total investments was $326.3 million and $227.7 million,
respectively.
It is the practice of the Company to purchase investment grade fixed
maturity securities, selected non-investment grade fixed maturity securities and
equity securities. The securities in the Company's portfolio are subject to
economic conditions and normal market risks and uncertainties.
The following table sets forth certain information regarding the investment
ratings of the Company's fixed maturity portfolio at December 31, 1997 and 1996:
DECEMBER 31,
----------------------------------------------------------------------------------
1997 1996
--------------------------------------- --------------------------------------
% % % %
AMORTIZED OF FAIR OF AMORTIZED OF FAIR OF
RATINGS(1) COST TOTAL VALUE TOTAL COST TOTAL VALUE TOTAL
---------- --------- ----- -------- ----- --------- ----- -------- -----
(DOLLARS IN THOUSANDS)
AAA.................. $103,187 48.3% $104,488 48.2% $110,718 66.0% $109,956 66.1%
AA................... 36,484 17.1 37,141 17.1 10,485 6.3 10,572 6.3
A.................... 66,215 31.0 66,655 30.7 40,587 24.2 40,007 24.1
Other................ 7,703 3.6 8,717 4.0 5,822 3.5 5,794 3.5
-------- ----- -------- ----- -------- ----- -------- -----
Total........... $213,589 100.0% $217,001 100.0% $167,612 100.0% $166,329 100.0%
======== ===== ======== ===== ======== ===== ======== =====
- ---------------
(1) Ratings as assigned by Standard & Poor's Corporation
The following table sets forth certain information regarding the Company's
fixed maturity securities at December 31, 1997. Expected maturities may differ
from contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties. Fixed maturity
8
11
securities with an amortized cost of $17,640,000 and a fair value of $18,159,000
were callable at December 31, 1997:
DECEMBER 31, 1997
---------------------------------------
% %
AMORTIZED OF FAIR OF
MATURITY COST TOTAL VALUE TOTAL
-------- --------- ----- -------- -----
(DOLLARS IN THOUSANDS)
One year or less.............................. $ 5,180 2.4% $ 5,188 2.4%
After one year through five years............. 120,134 56.2 121,780 56.1
After five years through ten years............ 76,760 35.9 78,346 36.1
After ten years............................... 11,515 5.5 11,687 5.4
-------- ----- -------- -----
Total............................... $213,589 100.0% $217,001 100.0%
======== ===== ======== =====
Equity securities at December 31, 1997 and 1996 consist of investments in
various industry groups as follows:
DECEMBER 31,
----------------------------------------
1997 1996
------------------ ------------------
FAIR FAIR
COST VALUE COST VALUE
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Banks, trust and insurance companies........ $ 50 $ 50 $ 800 $ 863
Industrial, miscellaneous and all other..... 35,826 70,368 19,349 41,475
------- ------- ------- -------
Total............................. $35,876 $70,418 $20,149 $42,338
======= ======= ======= =======
The Company's investment results for the years ended December 31, 1997,
1996 and 1995 were as follows:
DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Net investment income(1)(2)........................ $ 18,275 $ 15,523 $ 15,014
Average invested assets(1)......................... 328,172 266,480 233,831
Effective return on average invested assets(1)..... 5.6% 5.8% 6.4%
- ---------------
(1) Excludes investments in real estate. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Revenue."
(2) Net investment income as reported in the Consolidated Statements of Earnings
has been adjusted to provide the tax equivalent yield on tax exempt
investments and to exclude net realized capital gains on the sale of
investments. Net realized capital gains totalled $16,988,000, $2,625,000 and
$5,213,000 in 1997, 1996 and 1995, respectively.
REAL ESTATE AND PROPERTY MANAGEMENT OPERATIONS
The Company, principally through Manchester Development Corporation
("Manchester"), currently doing business as Orion Realty Group, a wholly-owned
subsidiary, previously invested in various real estate projects directly and
through partnerships. Some of these partnerships involve related parties. See
Notes D and E of Notes to Consolidated Financial Statements. Manchester
currently assists in the identification and leasing of space for operating
purposes and manages property owned by the Company. The Company's investments in
real estate and partnerships represented approximately 1.0% of the Company's
assets at December 31, 1997.
9
12
EMPLOYEES
As of December 31, 1997, the Company had approximately 5,200 full-time
equivalent employees. The Company believes that its relations with employees are
generally good.
YEAR 2000 ISSUES
The Company has reviewed its information systems hardware, operations and
application software relative to their compliance with potential Year 2000
issues. The Company believes that it has identified substantially all of the
application software programs which require modification in order to become Year
2000 compliant and has a formal plan to correct and test the programs affected
by the conversion of a two-digit year to a four-digit year. The Company expects
the early phases of the project to be completed during the middle of 1998. The
final phase of the project is scheduled to be completed by mid-1999. The review
of systems also included the identification of vendors that may have a
significant impact on the Company's operations and their expected completion of
any conversions.
The Company believes that its information systems operations and those of
its significant vendors are or will become Year 2000 compliant such that there
will not be any material adverse impact on the Company's results of operations
or financial condition. The Company estimates costs to be incurred prior to
December 31, 1999 to be approximately $200,000 to complete all programming
changes, related testing and implementation.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
The Company wishes to caution readers that the forward-looking statements
contained in this Form 10-K under "Item 1. Business," "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Form 10-K involve known and unknown risks and uncertainties
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by any forward-looking statements made by or on behalf of
the Company. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is filing the following
cautionary statements identifying important factors that in some cases have
affected, and in the future could cause the Company's actual results to differ
materially from those expressed in any such forward-looking statements.
The factors that could cause the Company's results to differ materially
include, but are not limited to, general economic and business conditions,
including interest rate fluctuations; the impact of competitive products and
pricing; success of operating initiatives; adverse publicity; changes in
business strategy or development plans; quality of management; availability,
terms, and deployment of capital; the results of financing efforts; business
abilities and judgment of personnel; availability of qualified personnel;
employee benefit costs and changes in, or the failure to comply with government
regulations.
ITEM 2. PROPERTIES
During 1997, the Company sold its corporate home office building in Irvine,
California, which housed the Company's corporate departments and certain
operating subsidiaries, recording a net realized gain of $4.3 million, prior to
applicable income taxes. Also during 1997, a subsidiary of the Company completed
the purchase of a building in Santa Barbara, California, which houses certain of
the Company's corporate departments.
The majority of the branch offices of the Company are leased from third
parties. The remainder are owned by the Company or leased from partnerships in
which the Company has an interest or leased from affiliates.
10
13
As of December 31, 1997, the Company leased office and storage spaces as
follows:
NUMBER OF
LOCATIONS
---------
California.................................................. 197
Florida..................................................... 36
Texas....................................................... 33
Arizona..................................................... 29
Oregon...................................................... 19
Pennsylvania and Tennessee.................................. 8
New Jersey, New York and Washington......................... 7
Nevada, New Mexico and North Carolina....................... 6
Georgia, Hawaii and Michigan................................ 4
Connecticut................................................. 2
One each in: Alabama, Colorado, Illinois, Kansas, Maryland,
Massachusetts, Minnesota, Missouri, Ohio, Rhode Island and Virginia.
See Note J of Notes to Consolidated Financial Statements.
ITEM 3. 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. Management believes that
no actions depart from customary litigation incidental to the business of the
Company and that resolution of all such litigation will not have a material
adverse effect on the Company.
See Note J of Notes to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in the
fourth quarter of 1997.
See "Management's Discussion and Analysis of Financial Condition -- Recent
Developments" and Note O of Notes to Consolidated Financial Statements.
11
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The following table sets forth the range of high and low closing prices for
the common stock on the New York Stock Exchange. The high and low closing prices
and the amount of dividends declared for the periods indicated have been
retroactively adjusted for stock dividends and splits declared since the
Company's inception.
DIVIDENDS
HIGH LOW DECLARED
------ ------ ---------
Year ended December 31, 1997
First quarter............................................. $14.09 $10.91 $.064
Second quarter............................................ $15.34 $10.45 $.064
Third quarter............................................. $21.59 $14.44 $.064
Fourth quarter............................................ $31.25 $18.64 $ .07
Year ended December 31, 1996
First quarter............................................. $14.67 $12.39 $.058
Second quarter............................................ $12.91 $10.33 $.058
Third quarter............................................. $13.33 $11.26 $.058
Fourth quarter............................................ $13.98 $12.60 $.064
On March 26, 1998, the last reported sale price of the common stock on the
New York Stock Exchange Composite Tape was $36.00 per share. As of March 26,
1998, the Company had approximately 900 stockholders of record.
Dividend Policy and Restrictions On Dividend Payments. Since the last
quarter of 1987, the Company has consistently paid cash dividends on a quarterly
basis, which payments have been made at the discretion of the Company's Board of
Directors. On March 19, 1998, the Company's Board of Directors declared a cash
dividend of $.07 per share which will be payable on May 1, 1998 to stockholders
of record on April 10, 1998. The continued payment of dividends will depend upon
operating results, business requirements, contractual restrictions, regulatory
considerations and other factors. The Company anticipates the continued payment
of dividends. See "Business -- Regulation" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Contractual Restrictions on Dividend Payments. The Company's ability to
pay dividends on its common stock and make certain payments is restricted by
provisions contained in the Company's various debt agreements. The Company
believes that amounts to fund currently anticipated dividends and certain
payments are available pursuant to the terms and conditions of its various debt
agreements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Notes G and O of
Notes to Consolidated Financial Statements.
12
15
ITEM 6. SELECTED FINANCIAL DATA
The historical operating results data, per share data and balance sheet
data set forth below are derived from the Consolidated Financial Statements of
the Company. Per share data has been retroactively adjusted for stock dividends
and splits since the Company's inception. The Consolidated Financial Statements
for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 have been
audited by KPMG Peat Marwick LLP, independent certified public accountants.
Audited Consolidated Balance Sheets at December 31, 1997 and 1996 and
Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for the
years ended December 31, 1997, 1996, and 1995, and Notes thereto are included
elsewhere herein and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere herein.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994
(3)(4)(5)(6) (3)(4) (2) (1) 1993
------------ -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
OPERATING RESULTS DATA:
Revenue:
Title insurance premiums............. $533,220 $475,961 $285,552 $369,275 $429,772
Escrow fees.......................... 81,241 66,927 49,723 52,260 69,982
Other fees and revenue............... 98,695 76,333 56,954 59,351 60,958
Interest and investment income,
including realized gains
(losses)........................... 33,556 17,692 17,616 11,918 14,671
-------- -------- -------- -------- --------
746,712 636,913 409,845 492,804 575,383
-------- -------- -------- -------- --------
Expenses:
Personnel costs...................... 240,223 211,668 165,514 181,953 196,470
Other operating expenses............. 161,200 154,043 123,888 129,367 137,125
Agent commissions.................... 223,797 187,901 82,713 132,713 147,427
Provision for claim losses........... 38,661 33,302 19,031 27,838 39,220
Interest expense..................... 9,401 9,446 9,239 8,594 2,587
-------- -------- -------- -------- --------
673,282 596,360 400,385 480,465 522,829
-------- -------- -------- -------- --------
Earnings before income taxes and
extraordinary item................... 73,430 40,553 9,460 12,339 52,554
Income tax expense...................... 31,959 16,216 1,828 2,594 16,259
-------- -------- -------- -------- --------
Earnings before extraordinary item...... 41,471 24,337 7,632 9,745 36,295
Extraordinary item, net of income taxes
(1)(2)(6)............................ (1,700) -- (813) 2,400 --
-------- -------- -------- -------- --------
Net earnings......................... $ 39,771 $ 24,337 $ 6,819 $ 12,145 $ 36,295
======== ======== ======== ======== ========
Diluted net earnings................. $ 42,913 $ 27,533 $ 6,819 $ 15,201 $ 36,295
======== ======== ======== ======== ========
PER SHARE DATA:
Net diluted earnings per share before
extraordinary item................... $ 2.08 $ 1.34 $ .49 $ .51 $ 1.78
Extraordinary item, net of income taxes,
diluted basis........................ (.08) -- (.05) .10 --
-------- -------- -------- -------- --------
Net earnings per share, diluted basis
................................... $ 2.00 $ 1.34 $ .44 $ .61 $ 1.78
======== ======== ======== ======== ========
Weighted average shares outstanding,
diluted basis (000's)................ 21,483 20,484 15,694 24,864 20,365
Dividends per share..................... $ .26 $ .24 $ .22 $ .20 $ .18
13
16
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994
(3)(4)(5)(6) (3)(4) (2) (1) 1993
------------ -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
OTHER DATA:
Direct operations market share(7)....... 21.3% 21.0% 20.3% 20.6% 18.3%
Orders closed by direct operations...... 406,000 394,000 302,000 335,000 464,000
Average fee per file(8)................. $ 853 $ 806 $ 790 $ 750 $ 710
Provision for claim losses to title
insurance premiums................... 7.3% 7.0% 6.7% 7.5% 9.1%
Net claims paid ratio(9)................ 6.6% 7.8% 9.2% 6.3% 4.2%
Title-related revenue:
Percentage direct operations......... 57.5% 59.5% 71.1% 62.6% 65.3%
Percentage agency operations......... 42.5% 40.5% 28.9% 37.4% 34.7%
Employees at year end................... 5,200 4,500 4,100 3,500 4,700
Number of licensed states at year end... 49 49 49 49 48
Return on average equity before
extraordinary item(1)(2)(6)(10)...... 27.1% 25.9% 10.0% 10.3% 40.3%
Return on average equity including
extraordinary item(1)(2)(6)(10)...... 25.9% 25.9% 9.0% 12.9% 40.3%
BALANCE SHEET DATA:
Investments............................. $326,277 $227,674 $180,082 $217,648 $236,533
Cash and cash equivalents............... 54,005 63,971 47,431 34,689 42,731
Total assets............................ 600,559 509,296 405,063 418,119 396,279
Notes payable........................... 123,023 148,922 136,047 142,129 52,769
Reserve for claim losses................ 190,747 187,245 146,094 153,306 142,512
Minority interest....................... 3,614 1,287 393 616 22,424
Stockholders' equity.................... 196,319 110,251 77,947 73,954 114,926
- ---------------
(1) During 1994, the Company recognized a $2.4 million extraordinary gain, net
of related income taxes of $1.3 million, related to the early retirement of
$48 million maturity value of the Company's Liquid Yield Option Notes (the
"LYONs").
(2) During 1995, the Company recognized an $813,000 extraordinary loss, net of
related income taxes of $437,000, related to the early retirement of its
Senior Secured Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Extraordinary Item."
(3) The Company acquired NTI and its wholly-owned subsidiaries Nations Title,
Nations New York and National on April 1, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments" and Note B of Notes to Consolidated
Financial Statements. The selected financial data above includes the
balance sheet accounts of NTI and subsidiaries at December 31, 1997 and
1996 and the results of its operations for the year ended December 31, 1997
and for the nine-month period ended December 31, 1996.
(4) The Company acquired 80% of CRM, Inc. ("CRM") on November 1, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments" and Note B of Notes to Consolidated
Financial Statements. The selected financial data above includes the
Company's interest in the balance sheet accounts of CRM at December 31,
1997 and 1996 and the Company's interest in the results of its operations
for the year ended December 31, 1997 and for the two-month period ended
December 31, 1996.
(5) On July 3, 1997, the Company converted an outstanding note balance in
conjunction with the exercise of warrants into a 51% ownership interest of
National Alliance Marketing Group ("National Alliance"), subject to certain
regulatory approvals. The selected financial data above includes the
Company's
14
17
interest in the balance sheet accounts of National Alliance at December 31,
1997 and the Company's interest in the results of operations for the period
from July 3, 1997 through December 31, 1997.
On August 22, 1997, the Company acquired First Title Corporation ("First
Title"). The selected financial data above includes the balance sheet
accounts of First Title at December 31, 1997 and the results of its
operations for the period from August 22, 1997 through December 31, 1997.
The Company acquired Ifland Credit Services ("ICS") on September 18, 1997.
The selected financial data above includes the balance sheet accounts of
ICS at December 31, 1997 and the results of its operations for the period
from September 18, 1997 through December 31, 1997.
The Company acquired Credit Reports, Inc. ("CRI") and Express Network, Inc.
("ENI") on October 9, 1997. The selected financial data above includes the
balance sheet accounts of CRI and ENI at December 31, 1997 and the results
of their operations for the period from October 9, 1997 through December
31, 1997.
The Company acquired Classified Credit Data, Inc. ("CCD") on October 21,
1997. The selected financial data above includes the balance sheet accounts
of CCD at December 31, 1997 and the results of their operations for the
period from October 21, 1997 through December 31, 1997.
The Company acquired Bron Research, Inc. ("BRON") on October 1, 1997. This
acquisition has been accounted for as a pooling-of-interests. The selected
financial data above includes the balance sheet accounts of BRON at
December 31, 1997 and the results of its operations for the year ended
December 31, 1997. BRON's financial position and results of operations
prior to 1997 were insignificant, and as such, the selected financial data
above has not been restated for prior years.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments" and Note B of Notes to
Consolidated Financial Statements.
(6) During 1997, the Company recognized an extraordinary loss of $1.7 million,
net of related income taxes of $1.1 million, related to the early
retirement of $45 million maturity value of the Company's LYONs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Extraordinary Item and Recent Developments."
(7) This estimate of direct operations market share is based upon the number of
title recordings by the Company in the counties where the Company maintains
direct operations and excludes title recordings by the Company's agents and
excludes title recordings in certain eastern and southeastern states
because such information is not available. The direct operations market
share percentage has been weighted to give effect to the Company's related
direct revenue in the applicable counties.
(8) Average fee per file is based upon title insurance premiums, escrow fees
and certain other title-related fees from direct operations divided by
orders closed.
(9) The net claims paid ratio is the percentage resulting from total title
claims paid, net of recoupments, divided by title insurance premiums.
(10) Percentage return on average equity is net earnings for the period divided
by the simple average of total stockholders' equity as of the beginning and
end of each year presented.
15
18
QUARTERLY FINANCIAL DATA
Selected quarterly financial data is as follows:
QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997
Revenue......................................... $153,192 $178,458 $197,915 $217,147
Earnings before income taxes and extraordinary
loss.......................................... 5,123 15,075 27,271 25,961
Earnings before extraordinary loss.............. 3,023 9,105 15,857 13,486
Extraordinary loss, net of income taxes......... -- -- -- (1,700)
Net earnings basic basis........................ 3,023 9,105 15,857 11,786
Net earnings diluted basis...................... 3,831 9,913 16,675 12,494
Earnings per share before extraordinary item,
basic basis................................... .20 .60 1.03 .76
Extraordinary loss, net of income taxes, basic
basis......................................... -- -- -- (.09)
Basic earnings per share........................ .20 .60 1.03 .67
Earnings per share before extraordinary item,
diluted basis................................. .18 .48 .78 .62
Extraordinary loss net of income taxes, diluted
basis......................................... -- -- -- (.07)
Diluted earnings per share...................... .18 .48 .78 .55
Dividends paid per share........................ .06 .06 .06 .07
1996
Revenue......................................... $126,398 $171,628 $166,692 $172,195
Earnings before income taxes.................... 8,300 11,757 10,623 9,873
Net earnings, basic basis....................... 5,145 6,946 6,317 5,929
Net earnings, diluted basis..................... 5,985 7,720 7,102 6,726
Basic earnings per share........................ .35 .46 .42 .39
Diluted earnings per share...................... .29 .38 .35 .33
Dividends paid per share........................ .06 .06 .06 .06
1995
Revenue......................................... $ 83,059 $ 95,494 $113,471 $117,821
Earnings (loss) before income taxes and
extraordinary loss............................ (4,737) 1,322 7,831 5,044
Earnings (loss) before extraordinary loss....... (2,447) 1,021 5,873 3,185
Extraordinary loss, net of income taxes......... (813) -- -- --
Net earnings (loss), basic basis................ (3,260) 1,021 5,873 3,185
Net earnings (loss), diluted basis.............. (3,260) 1,021 6,677 4,000
Earnings (loss) per share before extraordinary
item, basic basis............................. (.15) .07 .40 .21
Extraordinary loss, net of income taxes, basic
basis......................................... (.05) -- -- --
Basic earnings (loss) per share................. (.20) .07 .40 .21
Earnings (loss) per share before extraordinary
item, diluted basis........................... (.15) .06 .33 .20
Extraordinary loss net of income taxes, diluted
basis......................................... (.05) -- -- --
Diluted earnings (loss) per share............... (.20) .06 .33 .20
Dividends paid per share........................ .05 .05 .05 .06
16
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to provide information to facilitate
the understanding and assessment of significant changes and trends related to
the financial condition and results of operations of the Company. This
discussion and analysis should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto appearing elsewhere
herein.
OVERVIEW
The following table sets forth certain financial and other data for the
years indicated:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Total revenue...................................... $746,712 $636,913 $409,845
Total expenses..................................... $673,282 $596,360 $400,385
Earnings before extraordinary item................. $ 41,471 $ 24,337 $ 7,632
Extraordinary item -- loss on early retirement of
debt, net of income taxes........................ (1,700) -- (813)
-------- -------- --------
Net earnings..................................... $ 39,771 $ 24,337 $ 6,819
======== ======== ========
Net claims paid ratio(1)........................... 6.6% 7.8% 9.2%
Return on average equity before extraordinary
item(2).......................................... 27.1% 25.9% 10.0%
Return on average equity including extraordinary
item(2).......................................... 25.9% 25.9% 9.0%
- ---------------
(1) The net claims paid ratio is the percentage resulting from total title
claims paid, net of recoupments, divided by title insurance premiums.
(2) Percentage return on average equity is net earnings for the period divided
by the simple average of total stockholders' equity as of the beginning and
end of each year presented.
Title insurance revenue is closely related to the level of real estate
activity and the average price of real estate sales. Real estate sales are
directly affected by the availability of funds to finance purchases. Other
factors affecting real estate activity include demand, mortgage interest rates,
family income levels and general economic conditions. While the level of sales
activity was relatively depressed in certain geographical areas during the
period 1991 through mid-1993, lower mortgage interest rates beginning in the
latter part of 1991 triggered an increase in refinancing activity which
continued at record levels through 1993 and into the first quarter of 1994.
During 1994 and early 1995, steady interest rate increases caused by actions
taken by the Federal Reserve Board resulted in a significant decline in
refinancing transactions and a stagnation in residential resales and new home
sales. Since late 1995, decreases in mortgage interest rates and the resulting
improvement in the real estate market have had a favorable effect on the level
of real estate activity, including refinancing transactions, new home sales and
resales. The overall economic environment, stable mortgage interest rates and
strength in the real estate market, especially in California and on the West
Coast, contributed to very positive conditions for the industry throughout 1996
and 1997 and into the first quarter of 1998. It is impossible to predict in what
future direction interest rates and the real estate market may move or
fluctuate.
Additionally, during 1997, the Company acquired certain ancillary service
companies in various separate transactions. See "Recent Developments." The
acquired ancillary service companies have been bundled with other existing
lender services to form Fidelity's Lender Express Network ("FLEXNet"). FLEXNet
provides a complete range of real estate transactional services, leading to a
broader base of services provided and increased other fees and revenue.
Also, during 1997 the Company sold a majority interest of its subsidiary
American Title Company ("ATC"), an underwritten title company, to certain
members of ATC's management. See "Recent Developments." ATC functions as an
exclusive agent of the Company, and represents one of the Company's largest
agents. The conversion of ATC business from direct to agency resulted in a
continued increase in the
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percentage of title-related revenue generated from agency operations to 42.5% in
1997 compared to 40.5% in 1996.
The following table sets forth information regarding title-related revenue
derived from direct operations and title-related revenue derived from agency
operations:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
% % %
1997 OF TOTAL 1996 OF TOTAL 1995 OF TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Revenue from direct
operations:
Title insurance premiums.... $250,314 37.6% $237,244 40.2% $177,202 47.3%
Escrow fees................. 81,241 12.2 66,927 11.4 49,723 13.3
Other title-related fees and
revenue.................. 50,899 7.7 46,762 7.9 39,117 10.5
-------- ----- -------- ----- -------- -----
Total............... 382,454 57.5 350,933 59.5 266,042 71.1
Revenue from agency
operations:
Title insurance premiums.... 282,906 42.5 238,717 40.5 108,350 28.9
-------- ----- -------- ----- -------- -----
Total title-related
revenue........... $665,360 100.0% $589,650 100.0% $374,392 100.0%
======== ===== ======== ===== ======== =====
On April 1, 1996, the Company completed its acquisition of the Nations
Title Inc. group of companies. See "Recent Developments." The acquisition
positioned Fidelity National Financial, Inc. as the nation's fourth largest
title insurance underwriter. Nations Title Inc. and its three wholly-owned
underwriting subsidiaries, Nations Title Insurance Company (which was
subsequently merged into Fidelity Title), Nations Title Insurance of New York
Inc. and National Title Insurance of New York Inc., expanded the Company's
national agency network and increased its market share in the more traditional
agency driven states. The Nations Title Inc. acquisition resulted in additional
agency business and a shift in the mix of business from direct to agency during
1996. The revenue and expense information presented in Management's Discussion
and Analysis of Financial Condition and Results of Operations includes Nations
Title Inc.'s results of operations for the nine-month period ended December 31,
1996. In 1996, the total title-related revenue (excluding interest and
investment income and non-title-related other fees and revenue) generated by
agency operations increased to 40.5% from 28.9% in 1995.
During 1995, 71.1% of total title-related revenue was generated from direct
operations. The Company traditionally focused on direct operations because it
retains the entire premium from each transaction and is able to generate
additional sources of revenue by providing other title-related services.
The Company's strategy of expanding into selected markets continues. The
Company's strategy includes the restructuring of acquired operations, expansion
into the commercial market while maintaining its level of focus on the
residential resale and refinance markets, enhancing sales and marketing efforts,
minimizing net claim payments through stringent quality controls and effectively
managing overhead costs.
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RESULTS OF OPERATIONS
REVENUE. The following table presents information regarding the components
of the Company's revenue:
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS, OTHER THAN
FEE PER FILE)
Title insurance premiums........................... $533,220 $475,961 $285,552
Escrow fees........................................ 81,241 66,927 49,723
Other fees and revenue............................. 98,695 76,333 56,954
Interest and investment income, including realized
gains (losses)................................... 33,556 17,692 17,616
-------- -------- --------
Total revenue.................................... $746,712 $636,913 $409,845
======== ======== ========
Orders closed by direct operations................. 406,000 394,000 302,000
Average fee per file from direct operations........ $ 853 $ 806 $ 790
Favorable mortgage interest rates in the latter part of 1991 through early
1994 triggered refinancing activity at record levels. Beginning in early 1994
through mid-1995, steady interest rate increases caused by actions taken by the
Federal Reserve Board resulted in a significant decline in refinancing
transactions and a stagnation in residential resales and new home sales. Title
orders and requests for title-related services followed the market trend as
expected. Since late 1995, decreases in mortgage interest rates and the
resulting improvement in the real estate market have had a positive impact on
the level of real estate activity, order counts and closed orders. The overall
economic environment, stable mortgage interest rates in the seven percent range
and strength in the real estate market, especially in California, the Company's
strongest market, and on the West Coast, were positive factors through 1996 and
1997 and into the first quarter of 1998. These factors and the Company's
acquisition of Nations Title Inc., which was completed on April 1, 1996, have
resulted in title premiums of $533.2 million, $476.0 million and $285.6 million,
for 1997, 1996 and 1995, respectively. The difference in title insurance
premiums between 1997 and 1996 of $57.2 million represents an increase of 12.0%.
Title insurance premiums increased $190.4 million, or 66.7%, in 1996 from 1995.
The average fee per file increased to $853 in 1997 from $806 in 1996, which
had previously increased from $790 in 1995. The increase in fee per file in 1997
over 1996 and 1996 over 1995 is the result of increased fee revenue attributable
to higher fees charged per policy due to appreciated property values,
particularly in California, an overall rate increase and an expansion in the
commercial business sector offset by an increase in refinancing transactions.
Title business generated was primarily related to new home sale or resale
transactions, which typically charge higher fees than refinancing transactions.
Fees generated from refinancing transactions are generally less than fees
generated from resale transactions because the base rate charged on such a
policy is usually lower. Furthermore, one policy is issued to a lender in a
refinance transaction and two policies are issued in a resale transaction (buyer
and lender).
The Company's direct operations generate escrow fees from holding funds and
documents in connection with the closing of real estate transactions, as well as
real estate information and technology service fees, trustee sale guarantee
fees, credit reporting fees, attorney service fees, flood certification fees,
tax monitoring fees, reconveyance fees, recording fees, foreclosure publishing
and posting service fees and exchange intermediary service fees in connection
with real estate transactions.
The trends in escrow fees are primarily related to the title insurance
activity generated by the Company's direct operations. Escrow fees have
fluctuated during the 1997, 1996 and 1995 years in a pattern generally
consistent with the fluctuation in title insurance premiums. Escrow fees
increased $14.3 million to $81.2 million in 1997, a 21.4% increase from $66.9
million in 1996. This increase is consistent with the trend in title premiums
but is also due to the Company's focused efforts to expand its escrow market
presence in certain areas, such as Southern California. Escrow fees increased
$17.2 million to $66.9 million in 1996, a 34.6% increase from $49.7 million in
1995. The 1996 percentage increase in escrow fees is not as significant as the
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percentage increase in title premiums due to the change in the direct
operation/agency business mix. See "Overview." Agency title insurance premiums
do not generate escrow fees for the Company.
Other fees and revenue trend closely with the level and mix of business, as
well as the performance of certain of the Company's title-related subsidiaries.
During 1997, the Company acquired certain ancillary service companies in various
separate transactions. See "Recent Developments." The acquired ancillary service
companies have been bundled with other existing lender services to form
Fidelity's Lender Express Network ("FLEXNet"). FLEXNet provides a complete range
of real estate transactional services, leading to increased other fees and
revenues in 1997 as compared to 1996. 1997 other fees and revenue were $98.7
million, an increase of $22.4 million, or 29.4%, over 1996 other fees and
revenue of $76.3 million. In 1996, other fees and revenue increased $19.3
million, or 33.9%, to $76.3 million from $57.0 million in 1995. The increase is
primarily related to the increase in title premiums and escrow fees generated by
the Company's direct operations. Direct operations generate other fees and
income. Additionally, over the past two years the Company's ancillary service
businesses have significantly expanded their market presence and revenue, which
are included in other fees and revenue. The Company continues to make a
concerted effort to expand and develop the ancillary service contribution to
title-related operations.
Interest and investment income levels are primarily a function of
securities markets, interest rates and the amount of cash available for
investment. In 1997 investment income increased $15.9 million, or 89.8%, to
$33.6 million compared to $17.7 million in 1996. Average invested assets,
excluding real estate, increased 23.2% to $328.2 million in 1997 from $266.5
million in 1996, while the tax equivalent yield decreased to 5.6% in 1997 from
5.8% in 1996 due to declining interest rates, which resulted in an increase in
interest and dividend income of approximately $1.5 million. The Company shifted
the emphasis in its fixed income portfolio from taxable to non-taxable
securities during 1997. The difference in investment income results is primarily
attributable to the substantial increase in net realized capital gains during
1997 compared to 1996. In 1997, net realized capital gains totalled
approximately $17.0 million compared to $2.6 million in 1996. The primary
components of 1997 capital gains, prior to applicable income taxes, are the
following: $10.5 million in capital gains from the sale of investment
securities, $4.3 million in capital gain from the sale of the Company's former
home office building, $1.3 million from the sale of a majority interest in
American Title Company and approximately $800,000 in capital gain from the sale
of the Company's former small business investment company subsidiary, FNF
Ventures, Inc. During 1996, interest and investment income increased .6% to
$17.7 million from $17.6 million in 1995. As interest rates declined during 1996
from 1995, the tax adjusted yield decreased to 5.8% in 1996 compared to 6.4% in
1995. Average invested assets, excluding real estate, increased $32.7 million,
or 14.0%, to $266.5 million in 1996 from $233.8 million in 1995. The difference
in investment income results is primarily attributable to increased interest
income resulting from an increase in average invested assets offset by a
decrease in yield and in capital gains. During 1996, the Company recognized $2.6
million of capital gains compared to $5.2 million of capital gains recorded in
1995. Included in the 1995 gain amount is a $3.4 million net gain realized upon
the sale of the Company's common stock holdings in US Facilities Corporation
during the third quarter of 1995.
EXPENSES. The following table presents the components of the Company's
expenses:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1995 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
Personnel costs............................ $240,223 $211,668 $165,514
Other operating expenses................... 161,200 154,043 123,888
Agent commissions.......................... 223,797 187,901 82,713
Provision for claim losses................. 38,661 33,302 19,031
Interest expense........................... 9,401 9,446 9,239
-------- -------- --------
Total expenses................... $673,282 $596,360 $400,385
======== ======== ========
The Company's operating expenses primarily consist of personnel costs and
other operating expenses which are incurred as title insurance orders are
received and processed. Direct title insurance premiums and
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escrow fee revenue are recognized as income at the time the underlying real
estate transaction closes. As a result, revenue lags approximately 60-90 days
behind expenses and therefore gross margins may fluctuate.
Personnel costs include both base salaries and commissions (direct
operations) paid to employees and are the most significant operating expense
incurred by the Company. These costs generally fluctuate with the level of
orders opened and closed and with the mix of revenue between direct and agency
operations. Personnel costs totalled $240.2 million, $211.7 million and $165.5
million for the years ended December 31, 1997, 1996 and 1995, respectively. See
"Overview" and "Revenue." Personnel costs, as a percentage of total revenue,
have decreased to 32.2% from 33.2% in 1996, which had previously decreased from
40.4% in 1995.
The Company has taken significant measures to maintain appropriate
personnel levels and costs relative to the volume and mix of business and
revenues. The Company will not, however, compromise its customer service
standards or quality controls in responding to market conditions. The Company
continues to monitor the prevailing market conditions and will respond as
necessary.
Other operating expenses consist of facilities expenses, title plant
maintenance, premium taxes (which insurance underwriters are required to pay on
title premiums and title-related revenue in lieu of franchise and other state
taxes), escrow losses, postage and courier services, computer services,
professional services, advertising expenses, general insurance, trade and notes
receivable allowances and depreciation. Other operating expenses decreased as a
percentage of total revenue to 21.6% in 1997 from 24.2% in 1996, which had
previously decreased from 30.2% in 1995. In response to market conditions, the
Company implemented aggressive cost control programs in order to maintain
operating expenses at levels consistent with the levels of title-related
revenue; however, certain fixed costs are incurred regardless of revenue levels,
resulting in the year over year percentage fluctuations. The Company continues
to be committed to these cost control measures. Total other operating expenses
totalled $161.2 million, $154.0 million and $123.9 million in 1997, 1996 and
1995, respectively. See "Overview."
The period over period fluctuations in personnel costs and other operating
expenses are primarily the result of the fluctuations in total revenue, the
impact of the continued implementation of the Company's proprietary title and
escrow related technology on productivity and efficiency, as well as the changes
in the direct operation and agency operation title premium mix and the effect of
the newly acquired ancillary service companies on personnel and other operating
expenses. Additionally, the sale of ATC has shifted certain costs from personnel
and other operating expenses to commissions.
The 1996 addition of Nations Title Inc. title premiums, which are primarily
agency-related, has provided a balance between direct operation and agency
revenue. In previous periods the majority of title premiums and total revenue
were generated by direct operations, which resulted in higher personnel costs
and other operating expenses.
Agent commissions represent the portion of premiums retained by agents
pursuant to the terms of their respective agency contracts. The following table
illustrates the relationship of agent premiums and agent commissions:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Agent premiums.................... $282,906 100.0% $238,717 100.0% $108,350 100.0%
Agent commissions................. 223,797 79.1 187,901 78.7 82,713 76.3
-------- ----- -------- ----- -------- -----
Premiums retained by the
Company.................... $ 59,109 20.9% $ 50,816 21.3% $ 25,637 23.7%
======== ===== ======== ===== ======== =====
Agent commissions and the resulting percentage of agent premiums retained
by the Company varies according to regional differences in real estate closing
practices and state regulations. During 1997, the Company sold a majority
interest in its underwritten title company subsidiary ATC resulting in the
transfer of premiums from direct operations to agency operations and increased
commission expense in 1997 compared to
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1996, as well as a decrease in premiums retained by the Company on a year over
year basis. Commission rates paid to ATC are higher than average commission
rates paid to the 1996 agent base. The 1996 increase in agent commissions as a
percentage of agency premiums over 1995, resulting in a decrease in the
percentage of agency premiums retained by the Company, is attributable to the
fact that the average commissions paid to agents acquired in the Nations Title
Inc. acquisition exceed those paid to the former agent base. The combination of
higher agency commission rates and the significant agency revenue generated
since the sale of ATC and by the Nations Title Inc. acquisition have resulted in
higher overall commissions in 1997 and 1996.
The provision for claim losses includes an estimate of anticipated title
claims and major claims. The estimate of anticipated title claims is accrued as
a percentage of title premium revenue based on the Company's historical loss
experience and other relevant factors. The Company monitors its claims
experience on a continual basis and adjusts the provision for claim losses
accordingly. Based on Company loss development studies, the Company believes
that as a result of its underwriting and claims handling practices, as well as
the refinancing business of prior years, the Company will maintain the trend of
favorable claim loss experience. Based on this information, in 1997, 1996 and
1995, the Company recorded a provision for claim losses of 7.0% of title
insurance premiums prior to major claim expense, net of recoupments and the
impact of premium rates and Company loss experience in the state of Texas.
Premiums are generally higher in Texas for similar coverage than in other
states, while loss experience is comparable. As a result, losses as a percentage
of premiums are lower. These factors resulted in a net provision for claim
losses of 7.3%, 7.0% and 6.7% in 1997, 1996 and 1995, respectively.
A summary of the reserve for claim losses follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Beginning balance.................................. $187,245 $146,094 $153,306
Reserves assumed from First Title Corp........... 284 -- --
Reserves relinquished due to the sale of American
Title Company................................. (160) -- --
Reserves assumed from Nations Title Inc.......... -- 45,171 --
Title claim loss provision related to:
Current year.................................. 36,404 32,505 23,901
Prior years................................... 2,257 797 (4,870)
-------- -------- --------
Total title claim loss provision................. 38,661 33,302 19,031
Title claims paid, net of recoupments related to:
Current year.................................. (2,376) (2,430) (2,818)
Prior years................................... (32,907) (34,892) (23,425)
-------- -------- --------
Total title claims paid, net of recoupments...... (35,283) (37,322) (26,243)
-------- -------- --------
Ending balance..................................... $190,747 $187,245 $146,094
======== ======== ========
Provision for title claim losses to title insurance
premiums......................................... 7.3% 7.0% 6.7%
Net claims paid ratio.............................. 6.6% 7.8% 9.2%
Interest expense is incurred by the Company in financing its capital asset
purchases and certain acquisitions. Interest expense consists of interest
related to the Company's outstanding debt and the amortization of original issue
discount and debt issuance costs related to the Liquid Yield Option Notes due
2009 ("LYONs") issued in February 1994. Interest expense on non-LYONs debt
totalled $4.1 million, $4.2 million and $4.3 million for the years 1997, 1996
and 1995, respectively. The LYONs-related component of interest expense amounted
to $5.3 million, $5.2 million and $4.9 million for 1997, 1996 and 1995,
respectively. Interest expense was comparable over the three-year period
primarily as a result of slightly more favorable interest rates related to
outstanding non-LYONs debt, offset by an increase in the LYONs component of
interest expense. See "Extraordinary Item and Recent Developments."
22
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Income tax expense for 1997, 1996 and 1995, as a percentage of earnings
before income taxes, including the extraordinary losses in 1997 and 1995, was
43.6%, 40.0% and 16.9%, respectively. See "Extraordinary Item." The fluctuations
in income tax expense as a percentage of earnings before income taxes, including
the extraordinary item, are attributable to the effect of state income taxes on
the Company's wholly-owned underwritten title companies and ancillary service
companies; a change in the amount and characteristics of net income, operating
income versus investment income; and the tax treatment of certain items. See
Note H of Notes to Consolidated Financial Statements for additional information
regarding income taxes.
EXTRAORDINARY ITEM. In an effort to reduce the leverage of the Company
while taking advantage of the favorable environment relative to the Company's
common stock, on October 17, 1997, the Company, in a private transaction,
purchased $45 million aggregate principal amount at maturity of its outstanding
Liquid Yield Option Note due 2009 from Merrill Lynch, Pierce, Fenner & Smith
Incorporated for an aggregate purchase price of $27.2 million (or $605 per
$1,000 principal amount at maturity of LYONs), which exceeded the accreted value
recorded by the Company pursuant to the LYONs Indenture at that date. The
purchase price was paid in the form of 1,267,619 shares, $26.4 million, of the
Company's common stock and $790,000 in cash. The purchase of the LYONs increased
stockholders' equity by approximately $24.7 million while reducing outstanding
debt by approximately $24.3 million. An extraordinary loss due to the early
retirement of debt of approximately $1.7 million, net of applicable income
taxes, related to this transaction has been recorded in the Consolidated
Statement of Earnings for the year ended December 31, 1997. See "Recent
Developments."
In order to reduce interest expense incurred and interest rates paid, the
Company prepaid the Senior Secured Notes (the "Senior Notes") issued in March
1993. Pursuant to the terms and conditions of the Senior Note Agreement, the
Company provided for the Make Whole Provision, as defined, and related expenses
in 1995. This amount, $813,000, net of applicable income taxes, has been
reflected as an extraordinary item in the Consolidated Statements of Earnings
for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements include debt service, operating expenses,
taxes and dividends on its common stock. The Company believes that all
anticipated cash requirements for current operations will be met from internally
generated funds, through cash received from subsidiaries, cash generated by
investment securities and short-term bank borrowings through existing credit
facilities.
Two of the significant sources of the Company's funds are dividends and
distributions from its subsidiaries. As a holding company, the Company receives
cash from its subsidiaries in the form of dividends and as reimbursement for
operating and other administrative expenses it incurs. The reimbursements are
executed within the guidelines of various management agreements among the
Company and its subsidiaries. Fluctuations in operating cash flows are primarily
the result of increases or decreases in revenue. See "Overview." The Company's
Insurance Subsidiaries and UTCs collect premiums and pay claims and operating
expenses. The Insurance Subsidiaries also have cash flow sources derived from
investment income, repayments of principal and proceeds from sales and
maturities of investments and dividends from subsidiaries. Positive cash flow
from the Insurance Subsidiaries is invested primarily in short-term investments
and medium-term bonds. Short-term investments held by the Company's Insurance
Subsidiaries provide liquidity for projected claims and operating expenses. The
Insurance Subsidiaries are restricted by state regulations in their ability to
pay dividends and make distributions. Each state of domicile regulates the
extent to which the Company's title underwriters can pay dividends or make other
distributions to the Company. The UTCs are also regulated by insurance
regulatory or banking authorities. The Company's ancillary service subsidiaries
collect revenue and pay operating expenses; however, they are not regulated by
insurance regulatory or banking authorities. Positive cash flow from the UTCs
and ancillary service subsidiaries is invested primarily in cash and cash
equivalents.
The short- and long-term liquidity requirements of the Company, Insurance
Subsidiaries and UTCs are monitored regularly to match cash inflows with cash
requirements. The Company, Insurance Subsidiaries, UTCs and ancillary service
subsidiaries forecast their daily cash needs and periodically review their
short- and
23
26
long-term projected sources and uses of funds, as well as the asset, liability,
investment and cash flow assumptions underlying these projections.
For purposes of satisfying insurance regulatory requirements, the Company
is required to maintain certain levels of readily marketable securities and
other liquid assets. At December 31, 1997, the fair value of the Company's total
investment securities was approximately $326.3 million. These investments
consist of securities which the Company believes are readily marketable and
could be liquidated if necessary. See "Business -- Investment Policies and
Investment Portfolio."
On September 21, 1995, the Company obtained a $35 million credit facility
with a banking syndicate led by Chase Manhattan Bank N.A. The facility includes
a $22 million term loan and a $13 million revolving credit facility. The $22
million term loan was used to refinance higher rate indebtedness and for general
corporate purposes. $5 million of the $13 million revolving credit facility was
used to fund a portion of the Nations Title Inc. acquisition and the remainder
was available for general corporate purposes. This credit facility was
terminated and paid subsequent to year end with proceeds from a new credit
facility containing terms more favorable to the Company. See Note G of Notes to
Consolidated Financial Statements.
In February 1994, the Company issued zero coupon, convertible subordinated
Liquid Yield Option Notes due February 2009 at an interest rate of 5.5% with a
principal amount at maturity of $235,750,000. Net proceeds to the Company were
approximately $101,000,000. The proceeds were used for investment and general
corporate purposes, including the repurchase of treasury shares. See "Recent
Developments" and Note G of Notes to Consolidated Financial Statements.
In the normal course of business certain of the Company's subsidiaries
enter into off-balance sheet credit risk associated with certain aspects of its
title insurance policies and Manchester's real estate activities. This credit
risk is in the form of standby letters of credit and general partnership
guarantees. The Company believes that this credit risk is adequately secured by
either legal remedies associated with settlement procedures or the underlying
real estate assets. See Note J of Notes to Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS. In March 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128"), effective for fiscal years ending after
December 15, 1997. SFAS 128 introduces and requires the presentation of "basic"
earnings per share which represents net earnings divided by the weighted average
shares outstanding excluding all common stock equivalents. Dual presentation of
"diluted" earnings per share, reflecting the dilutive effects of all common
stock equivalents, is also required. The diluted presentation is similar to the
former presentation of fully diluted earnings per share. All quarterly and
annual per share data have been restated to reflect the impact of SFAS 128. The
adoption of SFAS 128 did not have a material impact on the Consolidated
Financial Statements of the Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of general-
purpose financial statements. SFAS 130 requires all items that are necessary to
be recognized under accounting standards as components of comprehensive income
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS 130 does not require a specific
format for that financial statement, but requires that an enterprise display an
amount representing total comprehensive income for the period covered by that
financial statement. SFAS 130 requires an enterprise to (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 130 will not have a
material impact on the Company's financial reporting.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for public business enterprises to
report information about operating segments in annual financial statements
24
27
and requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
segment assets, information about the revenues derived from the enterprise's
products or services and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. Management has not determined whether the adoption of SFAS 131
will have a material impact on the Company's financial reporting.
RECENT DEVELOPMENTS
In February of 1996, the Company proposed a merger with Giant Group, Ltd.
("Giant"). The Company had purchased 705,489 shares (or 14.8%) of Giant's
outstanding common stock. The Company's intent in acquiring Giant was to utilize
its liquid assets to take advantage of investment opportunities in non-interest
rate sensitive businesses. On April 26, 1996, the parties reached a settlement
agreement pursuant to which Giant repurchased its shares from Fidelity. In
addition, as part of the settlement, Fidelity acquired 767,807 shares of Rally's
Hamburger, Inc. ("Rally's") stock from Giant for $.83 per share, as well as an
option to purchase additional shares of Rally's common stock.
On April 1, 1996, the Company completed its acquisition of one hundred
percent of Nations Title Inc. and its whollyowned subsidiaries Nations Title
Insurance Company (which was merged into Fidelity Title as of December 29,
1997), Nations Title Insurance of New York Inc. and National Title Insurance of
New York Inc. from Nations Holding Group for a purchase price of $19.3 million
plus 212,960 shares, $2.1 million, of the Company's common stock, subject to
certain adjustments. The acquisition positioned Fidelity National Financial,
Inc. as the nation's fourth largest title insurance underwriter. The Company
believes that the combination of its direct operations and Nations Title Inc.'s
strong agency network provides a balance to the Company's title premium revenue
between direct and agency, as well as a hedge against future market downturns.
The acquisition of Nations Title Inc. has also increased the Company's revenue
and positively impacted its balance sheet and margins due to the operating
economies of the combined companies. The acquisition has also increased market
share in areas where the Company has had a limited presence, particularly in
those areas where business is primarily agent driven, as well as in states where
the Company has a strong market position. During 1997, the Nations Title Inc.
purchase price was reduced $749,000, pursuant to certain terms and conditions
contained in the acquisition agreement. The purchase price adjustment resulted
in Nations Holding Group returning 26,499 shares of common stock to the Company.
The returned shares were subsequently cancelled. This transaction has been
accounted for as a purchase. See Note B of Notes to Consolidated Financial
Statements.
On April 4, 1996, the Company purchased 17% of the outstanding common stock
of National Alliance Marketing Group, Inc. ("National Alliance"), a California
corporation, for $566,667; together with a warrant to acquire an additional 14%
of National Alliance common stock. In addition, the Company loaned $1,200,000 to
National Alliance at closing at a rate of prime plus one percent. Subsequently,
the Company agreed to increase the credit facility from $1,200,000 to
$1,700,000. In consideration for the increase in the credit facility National
Alliance agreed to increase the warrant shares which the Company could purchase.
If the entire $1,700,000 was borrowed the Company could purchase an additional
34% of the outstanding shares of National Alliance. After receiving approval of
the transaction from the California Department of Insurance, the transaction
closed on July 12, 1996. National Alliance is the parent company of Alliance
Home Warranty
25
28
Company ("Alliance"), a California insurance company. Alliance sells home
warranty plans to buyers of resale homes, primarily in the Central and Southern
California markets. A home warranty contract generally promises the repair or
replacement of major operating systems and built-in appliances inside a home for
a period of one year. On July 3, 1997, the Company converted the outstanding
note balance in conjunction with the exercise of the warrants and now owns 51%
of the outstanding common stock of National Alliance, subject to certain
regulatory approvals. The outstanding balance of the notes receivable due from
National Alliance at conversion was approximately $1.6 million. See Note B of
Notes to Consolidated Financial Statements.
On May 16, 1996, the Company paid $3.1 million to acquire a first lien loan
of $3.4 million secured by a commercial office building owned by a real estate
partnership in which Manchester Development Corporation is the sole general
partner. During 1996, but prior to the Company's acquisition of the loan,
officers and directors of the Company assigned their ownership interests in the
real estate partnership to Manchester. The Company leases space in the
commercial office building.
On September 30, 1996, the Company accepted the assignment from a real
estate partnership of the right to redeem a retail shopping center valued at
$4.5 million in exchange for a net payment of $434,000. Officers and directors
of the Company who held ownership interests in the real estate partnership
assigned their rights to redeem to the Company. On November 21, 1996, the
Company redeemed the retail property at a price of $2.8 million. The Company
continues to collect rent from the retail tenants while actively marketing the
property for sale. The property is carried at cost, which approximates fair
value.
On November 1, 1996, the Company acquired 80% of the outstanding stock of
CRM, Inc. ("CRM") for a purchase price of $3.5 million, $1.0 million in cash and
191,169 shares, $2.5 million, of the Company's common stock. CRM provides real
estate information services with a heavy concentration in the areas of tax
services and flood certification. The Company combined its existing tax service
business with that of CRM. Under certain circumstances the Company can purchase
the remaining 20% of the outstanding stock of CRM. CRM, Inc. now operates as
Fidelity National Tax Service, Inc. This transaction has been accounted for as a
purchase. See Note B of Notes to Consolidated Financial Statements.
Effective July 1, 1997, the Company sold a majority interest (60%) of its
subsidiary American Title Company ("ATC"), an underwritten title company, to
certain members of ATC's management. ATC will function as an exclusive agent of
the Company. The sale price of the 60% interest was $6.0 million resulting in a
realized gain of approximately $1.3 million before applicable income taxes.
On July 10, 1997, the Company sold its former home office building in
Irvine, California for a purchase price of $16.2 million, resulting in a net
realized gain of $4.3 million, before applicable income taxes.
On July 22, 1997, the Company purchased 1,000,000 shares of common stock of
GB Foods Corporation, which represents approximately 15.5% of the outstanding
common stock of GB Foods Corporation, for a purchase price of $5.0 million.
Additionally, the Company purchased warrants to acquire an additional 3,500,000
shares of GB Foods Corporation at various prices ranging from $5.00 -- $7.50 for
a purchase price of $800,000, 1,500,000 warrants are exercisable at $5.00 per
share, 1,000,000 warrants are exercisable at $7.00 per share and 1,000,000
warrants are exercisable at $7.50 per share. In conjunction with the common
stock purchase, the Company gained control of three seats on the GB Foods
Corporation Board of Directors. The purpose of the investment is consistent with
the Company's strategic goal to diversify into noninterest rate sensitive
businesses. The Company has announced that it expects to exercise 1,000,000 of
the $5.00 warrants in conjunction with a previously announced GB Foods
Corporation acquisition, in order to provide GB Foods Corporation additional
capital. The GB Foods acquisition is expected to close during the second quarter
of 1998. The Company's investment in GB Foods Corporation is accounted for under
the equity method.
On August 22, 1997, the Company acquired the common stock of First Title
Corporation ("First Title"), a title company with fourteen offices throughout
the southeastern United States. First Title has been merged into a subsidiary of
the Company. First Title was acquired for $4.7 million; payable in 80% common
stock of the Company (253,398 shares or $3.8 million) and 20% cash
(approximately $900,000). This transaction has been accounted for as a purchase.
See Note B of Notes to Consolidated Financial Statements.
26
29
On September 18, 1997, the Company acquired the common stock of Ifland
Credit Services ("ICS"), a credit reporting company headquartered in Lexington,
Kentucky, for a purchase price of $3.75 million. ICS has been merged with Credit
Reports, Inc. The purchase price was payable 80% in common stock of the Company
(170,155 shares or $3.0 million) and 20% cash ($750,000). This transaction has
been accounted for as a purchase. See Note B of Notes to Consolidated Financial
Statements.
Effective as of October 1, 1997, the Company acquired Bron Research, Inc.
("BRON"), a flood certification company headquartered in Austin, Texas. The
purchase price paid by the Company for the acquisition was $9.85 million, paid
in 523,272 shares of Company common stock. BRON now operates as Fidelity
National Flood, Inc. This transaction has been accounted for as a
pooling-of-interests. See Note B of Notes to Consolidated Financial Statements.
On October 9, 1997, the Company acquired the common stock of Credit
Reports, Inc. ("CRI"), a credit reporting company headquartered in Scottsdale,
Arizona, with operations in California, Colorado, Nevada and Oregon. CRI has
been merged with ICS. The purchase price for CRI was $200,000, subject to
certain purchase price adjustments based on the combined equity of CRI and
Express Network, Inc., its affiliate, payable in 11,455 shares of Company common
stock. This transaction has been accounted for as a purchase. See Note B of
Notes to Consolidated Financial Statements.
Also on October 9, 1997, the Company acquired the common stock of Express
Network, Inc. ("ENI"), a provider of attorney services such as courier,
messenger, courthouse filing, process serving, investigation and reprographics.
ENI provides services to legal firms in Los Angeles, Orange County, San Diego,
Riverside and San Francisco, California. The purchase price for ENI was $10.55
million; subject to certain purchase price adjustments based on the combined
equity of ENI and CRI, its affiliate, payable in 50% common stock of the Company
(302,158 shares or $5.275 million) and 50% cash (approximately $5.275 million).
Approximately $2.8 million of the cash portion of the purchase price will be
paid in equal installments over a four-year period. This transaction has been
accounted for as a purchase. See Note B of Notes to Consolidated Financial
Statements.
On October 17, 1997, the Company in a private transaction, purchased $45
million aggregate principal amount at maturity of its outstanding Liquid Yield
Option Notes due 2009 from Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") for an aggregate purchase price of $27.2 million (or $605 per
$1,000 principal amount at maturity of LYONs). The purchase price was paid in
the form of 1,267,619 shares, $26.4 million, of the Company's common stock (the
"Exchange Shares"). The Company also paid Merrill Lynch, the excess of a base
price of $21.48 per Exchange Share over the actual sales price (less $0.05 per
share in commissions) realized by Merrill Lynch for sales of up to 552,619
Exchange Shares. The Company also paid Merrill Lynch, for each day, an amount in
cash to be determined by multiplying the Net Carry Amount (number of Exchange
Shares multiplied by $21.48) by the Applicable Rate (LIBOR plus 2.50%). The
Company's payment obligations were subject to reduction for dividends on
Exchange Shares received by Merrill Lynch during the period. The Company paid
the foregoing amounts to Merrill Lynch in cash of approximately $790,000 on
November 7, 1997. The purchase of the LYONs increased stockholders' equity by
approximately $24.7 million while reducing outstanding debt by approximately
$24.3 million. Additionally, an extraordinary loss due to the early retirement
of debt of approximately $1.7 million, net of applicable income taxes, was
recorded in the fourth quarter of 1997. The maturity value of LYONs outstanding
at December 31, 1997 is approximately $140.6 million.
On October 21, 1997, the Company acquired 100% of the common stock of
Classified Credit Data, Inc. ("CCD") a credit reporting company headquartered in
Orange County, California, for a purchase price of $300,000 which was paid in
cash. CCD was merged with ICS and CRI in order to form Fidelity National Credit
Services. This transaction has been accounted for as a purchase.
Effective October 23, 1997, the Company sold its small business investment
company subsidiary FNF Ventures, Inc., to certain members of FNF Ventures,
Inc.'s management. The sale price was $2.8 million, resulting in a realized gain
of approximately $800,000, before applicable income taxes.
27
30
On November 17, 1997, Fidelity National Financial, Inc. signed an Agreement
and Plan of Merger ("Merger Agreement") to merge a newly-formed subsidiary of
the Company into Granite Financial, Inc. ("Granite"). Granite, located in
Golden, Colorado, is a rapidly expanding speciality finance company engaged in
the business of originating, funding, purchasing, selling, securitizing and
servicing equipment leases for a broad range of businesses located throughout
the United States. Granite is a prominent consolidator in the $48 billion
small-ticket lease finance market with the acquisitions of Global Finance &
Leasing in March, 1997; SFR Funding, Inc., in June, 1997; and North Pacific
Funding, Inc. (dba C&W Leasing), a privately held corporation based in Seattle,
Washington, and its wholly-owned subsidiary, in December, 1997.
Under the original terms of the definitive agreement (as adjusted for the
Company's recent 10% stock dividend), each share of Granite common stock would
be converted into the right to receive .771 shares of Company common stock
without interest, together with cash in lieu of any fractional share. The
exchange ratio was collared between $20.75 and $25.94. The adjustment factor was
designed to insure that the average market value of the shares of Company common
stock to be issued to the stockholders of Granite is neither less than $16.00
nor more than $20.00 per share of Granite common stock. The market value was
determined based on the average closing price of Company common stock during the
20 day trading period ending on the third business day prior to the date of the
shareholder meetings to be held to approve the transaction. Below $20.75
Fidelity could make up the difference in additional shares of its common stock
at its option and above $25.94 Granite shareholders would have the exchange
ratio reduced pro rata. Such average closing price was determined to be $28.48,
resulting in an adjusted exchange ratio of .702 shares of Company common stock
for each share of Granite common stock. The merger will be treated as a
reorganization pursuant to Section 368(a)(1) of the Internal Revenue Code of
1986, as amended, and be accounted for as a "pooling-of-interests" for
accounting purposes.
The shareholders of Granite approved the merger, and the Company
shareholders approved the issuance of shares in connection with the merger, at
special shareholders' meetings on Tuesday, February 24, 1998. The merger was
completed Thursday, February 26, 1998. Under the terms of the definitive
agreement, shareholders of Granite Financial, Inc. common stock receive .702
shares of Fidelity National Financial, Inc. common stock for each share of
Granite Financial, Inc. common stock, with fractional shares to be paid in cash,
resulting in the issuance of approximately 4.4 million shares of Fidelity
National Financial, Inc. common stock. Fidelity National Financial, Inc. common
stock, as reported by the New York Stock Exchange, closed at $28.69 on February
26, 1998. The Company believes that the acquisition of Granite Financial, Inc.
complements its core title operations and is a significant step in realizing its
previously stated goal of positioning the Company as a diversified financial
services company. See Note O of Notes to Consolidated Financial Statements.
On March 18, 1998, the Company announced that it had entered into an
agreement to sell National Title Insurance of New York Inc. to American Title
Company, subject to regulatory approval and certain other conditions. The
purchase price is structured at a premium to book value. National was acquired
in April 1996, as part of the Nations Title Inc. acquisition and has not been
actively underwriting policies since the transaction closed. American Title
Company is an underwritten title company which was formerly a wholly-owned
subsidiary of the Company. Effective July 1, 1997, 60% of ATC was sold to
certain members of ATC management. The Company will continue to own 40% of ATC,
and ultimately National, following the transaction. See Note O of Notes to
Consolidated Financial Statements.
On March 19, 1998, the Company's Board of Directors declared a cash
dividend of $.07 per share which will be payable on May 1, 1998, to stockholders
of record on April 10, 1998.
On March 25, 1998, the Company closed a new credit facility, the proceeds
of which were used to terminate and pay the Company's credit agreement dated as
of September 21, 1995. Additional amounts available under the new credit
facility are available for general corporate purposes. See Notes G and O of
Consolidated Financial Statements.
Also, on March 25, 1998, the Company announced that it had executed an
agreement to merge Matrix Capital Corporation ("Matrix") with a newly-formed
subsidiary of the Company. The merger is subject to due diligence, regulatory
approvals and other customary conditions, and requires approval of the merger by
the
28
31
shareholders of Matrix and approval of the issuance of Company common stock in
connection with the merger by the shareholders of the Company.
Matrix, through its subsidiaries, focuses on mortgage merchant banking by
purchasing and selling residential mortgage loans and servicing rights; offering
brokerage, consulting, and analytical services to other financial services
companies and financial institutions; originating and servicing residential
mortgage portfolios and providing real estate management and disposition
services. Matrix also provides trust administration and broker-dealer services.
Matrix is structured to provide these services through a combination of a
mortgage banking firm, a mortgage servicing brokerage and consulting firm, a
federally chartered banking institution, a real estate and disposition firm, a
trust company and a broker-dealer.
Under the terms of the definitive agreement, each share of Matrix stock
will be converted into the right to receive .80 shares of Company common stock
without interest, together with cash in lieu of any fractional share. The
exchange ratio has been collared between $28.75 and $35.00 per Company share.
The market value is to be determined based on the average closing price of
Company stock during the 20 day trading period ending on the third business day
immediately prior to the last of the stockholders' meetings held to approve the
transaction (the "Average Stock Price"). Below $28.75 the Company may make up
the difference in additional shares at its option and above $35.00 the exchange
ratio would be adjusted to a number equal to $28.00 plus fifty percent of the
amount by which the Average Stock Price exceeds $35.00 divided by the Average
Stock Price. It is intended that the merger be treated as a reorganization
pursuant to Section 368(a)(1) of the Internal Revenue Code and be accounted for
as a "pooling-of-interests." See Note O of Notes to Consolidated Financial
Statements.
SEASONALITY. Historically, the greatest volume of residential resale
activity has occurred in the spring and summer months. However, events during
the past five years, including numerous actions taken by the Federal Reserve
Board, have caused unusual fluctuations in real estate activity, particularly in
the seasonal pattern of residential resale and refinance activity. The Company
cannot predict whether the historical pattern of residential resale and
refinance activity will continue to be affected by such outside factors.
INFLATION. To the extent real estate prices or mortgage interest rates
increase due to inflationary factors, the Company's title insurance premium
revenue generally increases because premiums are determined in part by the value
of property or the amount of the mortgage loan. The Company's personnel costs
and other operating expenses are also sensitive to inflation.
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32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
PAGE NO.
--------
Independent Auditors' Report................................ 31
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... 32
Consolidated Statements of Earnings for the years ended
December 31, 1997, 1996 and 1995.......................... 33
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995.............. 34
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... 35
Notes to Consolidated Financial Statements.................. 36
30
33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Fidelity National Financial, Inc.:
We have audited the Consolidated Balance Sheets of Fidelity National
Financial, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
related Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows
for each of the years in the three-year period ended December 31, 1997. These
Consolidated Financial Statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these Consolidated
Financial Statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Consolidated Financial Statements referred to above
present fairly, in all material respects, the consolidated financial position of
Fidelity National Financial, Inc. and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 16, 1998, except as to Note O
of the Consolidated Financial Statements,
which is as of March 25, 1998
31
34
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
--------------------
1997 1996
-------- --------
ASSETS
Investments:
Fixed maturities available for sale, at fair value........ $217,001 166,329
Equity securities, at fair value.......................... 70,418 42,338
Other long-term investments, at cost, which approximates
fair value............................................. 15,864 6,782
Short-term investments, at cost, which approximates fair
value.................................................. 17,793 873
Investments in real estate and partnerships, net.......... 5,201 11,352
-------- --------
Total investments................................. 326,277 227,674
Cash and cash equivalents (including certificates of deposit
of $5,219 in 1997 and $4,057 in 1996)..................... 54,005 63,971
Trade receivables (less allowance of $5,153 in 1997 and
$6,822 in 1996)........................................... 52,650 54,355
Notes receivable, net (including $1,366 in 1997 and $1,996
in 1996 with affiliated parties).......................... 8,898 11,317
Prepaid expenses and other assets........................... 70,213 55,072
Title plants................................................ 51,756 50,701
Property and equipment, net................................. 36,760 38,617
Income taxes receivable..................................... -- 7,589
-------- --------
$600,559 $509,296
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $ 63,312 $ 53,987
Notes payable............................................. 123,023 148,922
Reserve for claim losses.................................. 190,747 187,245
Deferred income taxes..................................... 13,422 7,604
Income taxes payable...................................... 10,122 --
-------- --------
400,626 397,758
Minority interest......................................... 3,614 1,287
Stockholders' equity:
Preferred stock, $.0001 par value; authorized, 3,000,000
shares; issued and outstanding, none................... -- --
Common stock, $.0001 par value; authorized, 50,000,000
shares in 1997 and 1996; issued, 24,055,755 in 1997 and
21,353,963 in 1996..................................... 2 2
Additional paid-in capital................................ 101,735 61,271
Retained earnings......................................... 126,535 91,019
-------- --------
228,272 152,292
Net unrealized gains on investments....................... 22,422 12,334
Less treasury stock, 6,041,352 shares in 1997 and 1996, at
cost................................................... 54,375 54,375
-------- --------
196,319 110,251
Commitments and contingencies.............................
Subsequent events.........................................
-------- --------
$600,559 $509,296
======== ========
See Notes to Consolidated Financial Statements.
32
35
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
REVENUE:
Title insurance premiums................................. $533,220 $475,961 $285,552
Escrow fees.............................................. 81,241 66,927 49,723
Other fees and revenue................................... 98,695 76,333 56,954
Interest and investment income, including realized gains
(losses).............................................. 33,556 17,692 17,616
-------- -------- --------
746,712 636,913 409,845
-------- -------- --------
EXPENSES:
Personnel costs.......................................... 240,223 211,668 165,514
Other operating expenses................................. 161,200 154,043 123,888
Agent commissions........................................ 223,797 187,901 82,713
Provision for claim losses............................... 38,661 33,302 19,031
Interest expense......................................... 9,401 9,446 9,239
-------- -------- --------
673,282 596,360 400,385
-------- -------- --------
Earnings before income taxes and extraordinary item...... 73,430 40,553 9,460
Income tax expense....................................... 31,959 16,216 1,828
-------- -------- --------
Earnings before extraordinary item.................... 41,471 24,337 7,632
Extraordinary item -- loss on early retirement of debt,
net of applicable income tax benefit of $1,180 in 1997
and $437 in 1995...................................... (1,700) -- (813)
-------- -------- --------
Net earnings.......................................... $ 39,771 $ 24,337 $ 6,819
======== ======== ========
Basic net earnings....................................... $ 39,771 $ 24,337 $ 6,819
======== ======== ========
Basic earnings per share before extraordinary item....... $ 2.61 $ 1.62 $ .50
Extraordinary item -- loss on early retirement of debt,
net of applicable income tax benefit, basic basis..... (.11) -- (.05)
-------- -------- --------
Basic net earnings per share............................. $ 2.50 $ 1.62 $ .45
======== ======== ========
Weighted average shares outstanding, basic basis......... 15,911 15,037 15,131
======== ======== ========
Diluted net earnings..................................... $ 42,913 $ 27,533 $ 6,819
======== ======== ========
Diluted net earnings per share before extraordinary
item.................................................. $ 2.08 $ 1.34 $ .49
Extraordinary item -- loss on early retirement of debt
net of applicable income tax benefit, diluted basis... (.08) -- (.05)
-------- -------- --------
Diluted net earnings per share........................... $ 2.00 $ 1.34 $ .44
======== ======== ========
Weighted average shares, diluted basis................... 21,483 20,484 15,694
======== ======== ========
See Notes to Consolidated Financial Statements.
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36
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK ADDITIONAL NET TREASURY STOCK
--------------- PAID-IN RETAINED UNREALIZED -----------------
SHARES AMOUNT CAPITAL EARNINGS GAINS (LOSSES) SHARES AMOUNT
------ ------ ---------- -------- -------------- ------ --------
Balance, December 31, 1994............. 20,845 $2 $ 56,659 $ 66,668 $(8,914) 4,396 $(40,461)
Exercise of stock options............ 204 -- 1,439 -- -- -- --
Net unrealized gains on
investments....................... -- -- -- -- 14,780 -- --
Purchase of treasury stock........... -- -- -- -- -- 1,859 (15,831)
ACS Systems, Inc. purchase price
adjustment........................ 53 -- -- -- -- -- --
Cash dividends ($.22 per share)...... -- -- -- (3,214) -- -- --
Net earnings......................... -- -- -- 6,819 -- -- --
------ ---- -------- -------- ------- ----- --------
Balance, December 31, 1995............. 21,102 2 58,098 70,273 5,866 6,255 (56,292)
------ ---- -------- -------- ------- ----- --------
Exercise of stock options............ 61 -- 440 -- -- -- --
Net unrealized gains on
investments....................... -- -- -- -- 6,468 -- --
Acquisitions......................... 191 -- 2,733 -- -- (214) 1,917
Cash dividends ($.24 per share)...... -- -- -- (3,591) -- -- --
Net earnings......................... -- -- -- 24,337 -- -- --
------ ---- -------- -------- ------- ----- --------
Balance, December 31, 1996............. 21,354 2 61,271 91,019 12,334 6,041 (54,375)
------ ---- -------- -------- ------- ----- --------
Exercise of stock options............ 145 -- 1,412 -- -- -- --
Net unrealized gains on
investments....................... -- -- -- -- 10,088 -- --
Acquisitions......................... 1,260 -- 12,450 -- -- -- --
LYONs retirement and conversion...... 1,323 -- 27,351 -- -- -- --
Nations Title Inc. purchase price
adjustment........................ (26) -- (749) -- -- -- --
Cash dividends ($.26 per share)...... -- -- -- (4,255) -- -- --
Net earnings......................... -- -- -- 39,771 -- -- --
------ ---- -------- -------- ------- ----- --------
Balance, December 31, 1997............. 24,056 $2 $101,735 $126,535 $22,422 6,041 $(54,375)
====== ==== ======== ======== ======= ===== ========
See Notes to Consolidated Financial Statements.
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37
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 39,771 $ 24,337 $ 6,819
Adjustments to reconcile net earnings to net cash provided
by
(used in) operating activities:
Extraordinary item: Loss on early retirement of LYONs... 2,090 -- --
Depreciation and amortization........................... 14,123 12,814 13,410
Net increase (decrease) in reserve for claim losses..... 3,382 (4,020) (7,212)
Amortization of LYONs original issue discount and other
debt issuance costs.................................. 5,939 5,295 4,916
Provision for losses on real estate and notes
receivable........................................... 600 775 783
Equity in (gains) losses of unconsolidated
partnerships......................................... (488) 520 (72)
Gain on sales of investments............................ (10,534) (3,713) (5,023)
(Gain) loss on sale of real estate and other assets..... (6,454) 1,088 (190)
Changes in assets and liabilities, net of effects from
acquisitions:
Net (increase) decrease in trade receivables............ 2,757 (7,030) (11,306)
Net increase in prepaid expenses and other assets....... (1,664) (5,434) (6,268)
Net increase (decrease) in accounts payable and accrued
liabilities.......................................... 6,422 (509) (4,797)
Net increase in income taxes............................ 16,793 3,417 7,673
--------- --------- ---------
Net cash provided by (used in) operating
activities....................................... 72,737 27,540 (1,267)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investment securities:
Held to maturity (principally maturities of
securities).......................................... -- -- 2,310
Available for sale...................................... 272,766 182,512 214,524
Proceeds from sales of other assets....................... 15,756 3,700 3,442
Proceeds from sales of real estate........................ 6,407 917 --
Collections of notes receivable........................... 4,142 14,645 3,035
Additions to title plants................................. (830) (1,011) (1,719)
Additions to property and equipment....................... (19,680) (14,085) (9,655)
Additions to notes receivable............................. (3,415) (8,470) (5,980)
Purchases of investment securities:
Held to maturity........................................ -- -- (1,941)
Available for sale...................................... (350,503) (183,788) (151,305)
Investments in real estate and partnerships............... (1,048) -- (100)
Sale of subsidiary, net of cash........................... 5,934 -- --
Acquisitions of businesses, net of cash acquired.......... (7,055) (10,138) (11,363)
--------- --------- ---------
Net cash provided by (used in) investing
activities....................................... (77,526) (15,718) 41,248
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings................................................ 11,226 22,904 48,285
Debt service payments..................................... (14,626) (17,066) (59,150)
Extraordinary items:
Early retirement of LYONs............................... 790 -- --
Early retirement of debt................................ -- -- 1,250
Dividends paid............................................ (3,979) (3,477) (3,232)
Exercise of stock options................................. 1,412 440 1,439
Issuance (purchase) of treasury stock, net................ -- 1,917 (15,831)
--------- --------- ---------
Net cash provided by (used in) financing
activities....................................... (5,177) 4,718 (27,239)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents...... (9,966) 16,540 12,742
Cash and cash equivalents at beginning of year............ 63,971 47,431 34,689
--------- --------- ---------
Cash and cash equivalents at end of year.................. $ 54,005 $ 63,971 $ 47,431
========= ========= =========
See Notes to Consolidated Financial Statements.
35
38
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following describes the significant accounting policies of Fidelity
National Financial, Inc. ("Fidelity Financial") and its subsidiaries
(collectively, the "Company") which have been followed in preparing the
accompanying Consolidated Financial Statements.
Description of business
Fidelity National Financial, Inc., through its principal subsidiaries
(collectively, the "Company"), is engaged in the business of issuing title
insurance policies and performing other title-related services such as escrow,
collection and trust activities, real estate information and technology
services, trustee sale guarantees, credit reporting, attorney services, flood
certification, tax monitoring, reconveyance fees, recording fees, foreclosure
publishing and posting services and exchange intermediary services in connection
with real estate transactions. Title insurance services are provided through the
Company's direct operations and otherwise through independent title insurance
agents who issue title policies on behalf of the underwriting subsidiaries.
The Company's principal subsidiaries consist of Fidelity National Title
Insurance Company ("Fidelity Title"), which, in turn, is the parent company of
Fidelity National Title Insurance Company of Tennessee ("Fidelity Tennessee"),
and was the parent company of Fidelity National Title Insurance Company of
California ("Fidelity California"), which was merged into Fidelity Title as of
August 7, 1997, and was the parent company of Nations Title Insurance Company
("Nations Title"), which was merged into Fidelity Title as of December 29, 1997;
Fidelity National Title Insurance Company of New York ("Fidelity New York"),
which, in turn, is the parent company of Nations Title Insurance of New York
Inc. ("Nations New York") and National Title Insurance of New York Inc.
("National"); Fidelity National Title Insurance Company of Pennsylvania
("Fidelity Pennsylvania"), which was merged into Fidelity New York as of April
11, 1997, which in turn, was the parent company of American Title Insurance
Company ("ATIC"), which was merged into Fidelity Pennsylvania as of November 21,
1996; (collectively, the "Insurance Subsidiaries"); its wholly-owned
underwritten title companies (collectively, the "UTCs"); and its network of
wholly-owned title-related ancillary service companies known as Fidelity's
Lender Express Network ("FLEXNet").
Nations Title Insurance Company, Nations Title Insurance of New York Inc.
and National Title Insurance of New York Inc. were acquired, along with Nations
Title Inc. ("NTI," collectively, "Nations Title Inc.") in a transaction which
closed on April 1, 1996. Certain of the ancillary service companies were
acquired in separate transactions during 1997. See Note B.
On November 17, 1997, Fidelity National Financial, Inc. signed an Agreement
and Plan of Merger ("Merger Agreement") to merge a newly-formed subsidiary of
the Company into Granite Financial, Inc. ("Granite"). Granite, located in
Golden, Colorado, is a rapidly expanding speciality finance company engaged in
the business of originating, funding, purchasing, selling, securitizing and
servicing equipment leases for a broad range of businesses located throughout
the United States. This transaction closed on February 26, 1998. See Note 0.
Principles of consolidation and basis of presentation
The accompanying Consolidated Financial Statements include the accounts of
the Company and its wholly-owned and majority-owned subsidiaries. All material
intercompany profits, transactions and balances have been eliminated. The
Company's investments in non-majority-owned partnerships are accounted for on
the equity method.
36
39
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and cash equivalents
For purposes of reporting cash flows, highly liquid instruments purchased
with original maturities of three months or less are considered cash
equivalents. The carrying amounts reported in the Consolidated Balance Sheets
for these instruments approximate their fair value.
Investments
Fixed maturity securities are purchased to support the investment
strategies of the Company, which are developed based on many factors including
rate of return, maturity, credit risk, tax considerations and regulatory
requirements. Fixed maturity securities which may be sold prior to maturity to
support the Company's investment strategies are carried at fair value and are
classified as available for sale as of the balance sheet dates. Fair values for
fixed maturity securities are principally a function of current interest rates
and are based on quoted market prices.
Equity securities are considered to be available for sale and carried at
fair value as of the balance sheet dates. Fair values are based on quoted market
prices.
Other long-term investments, which consist of a limited partnership
investment in an investment fund, as well as certain other debt instruments and
equity investments, are carried at cost, which approximates fair value.
Short-term investments, which consist primarily of securities purchased
under agreements to resell, commercial paper and money market instruments, which
have an original maturity of one year or less, are carried at amortized cost,
which approximates fair value.
Investments in real estate and partnerships are generally held for
investment purposes and are carried at cost in the absence of any other than
temporary impairment in value. Investments in real estate which are held for
sale, including real estate acquired through foreclosure of properties in
satisfaction of commercial and real estate loans, are carried at the lower of
cost or fair value less estimated costs to sell.
Realized gains and losses on the sale of investments are determined on the
basis of the cost of the specific investments sold and are credited or charged
to income on a trade date basis. Unrealized gains or losses on bonds and common
stocks which are classified as available for sale, net of applicable deferred
income taxes (benefits), are excluded from income and credited or charged
directly to a separate component of stockholders' equity. The carrying value for
investments considered available for sale is reduced to estimated realizable
value if the decline in fair value is deemed other than temporary. Such
reductions are recognized as realized losses.
Trade receivables
The carrying amounts reported in the Consolidated Balance Sheets for trade
receivables approximate their fair value.
Fair value of financial instruments
The fair values of financial instruments presented in the applicable notes
to the Company's Consolidated Financial Statements are estimates of the fair
values at a specific point in time using available market information and
appropriate valuation methodologies. These estimates are subjective in nature
and involve uncertainties and significant judgment in the interpretation of
current market data. Therefore, the fair values presented are not necessarily
indicative of amounts the Company could realize or settle currently. The Company
does not necessarily intend to dispose of or liquidate such instruments prior to
maturity. See Notes C, D and G.
37
40
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Title plants
Title plants are recorded at the cost incurred to construct or obtain and
organize historical title information to the point it can be used to perform
title searches. Costs incurred to maintain, update and operate title plants are
expensed as incurred. Title plants are not amortized as they are considered to
have an indefinite life if maintained. Sales of title plants are reported at the
amount received net of the adjusted costs of the title plant sold. Sales of
title plant copies are reported at the amount received. No cost is allocated to
the sale of copies of title plants unless the value of the title plant is
diminished.
Property and equipment
Property and equipment are recorded at cost, less depreciation.
Depreciation is computed primarily using the straight-line method based on the
estimated useful lives of the related assets which range from three to thirty
years. Leasehold improvements are amortized on a straight-line basis over the
lesser of the term of the applicable lease or the estimated useful lives of such
assets.
Cost in excess of net assets acquired and other intangible assets
Intangible assets include cost in excess of net assets acquired,
capitalized licensing costs and capitalized software costs and are amortized on
a straight line basis over three to forty years. Intangible assets at December
31, 1997 consist of cost in excess of net assets acquired of $28,977,000 less
accumulated amortization of $2,394,000, capitalized licensing costs of
$2,500,000 less accumulated amortization of $159,000, capitalized software of
$12,326,000 less accumulated amortization of $4,636,000 and capitalized debt
offering costs of $4,163,000 less accumulated amortization of $2,008,000. At
December 31, 1996, intangible assets consist of cost in excess of net assets
acquired of $8,349,000 less accumulated amortization of $1,733,000, capitalized
licensing costs of $3,937,000 less accumulated amortization of $98,000,
capitalized software of $11,720,000 less accumulated amortization of $2,740,000
and capitalized debt offering costs of $4,738,000 less accumulated amortization
of $1,738,000.
Impairment of intangible assets is monitored on a continual basis, and is
assessed based on an analysis of the cash flows generated by the underlying
assets. No impairment of intangible assets has been noted.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("Statement 109"), "Accounting for Income
Taxes." Statement 109 provides that deferred tax assets and liabilities be
recognized for temporary differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities and expected benefits of
utilizing net operating loss and credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The impact on deferred taxes of changes in tax rates and
laws, if any, are applied to the years during which temporary differences are
expected to be settled and reflected in the financial statements in the period
enacted.
Reserve for claim losses
The Company's reserve for claim losses includes known claims as well as
losses the Company expects to incur, net of recoupments. Each known claim is
reserved for on the basis of a review by the Company as to the estimated amount
of the claim and the costs required to settle the claim. Reserves for claims
which are incurred but not reported are provided for at the time premium revenue
is recognized based on historical loss experience and other factors, including
industry averages, claim loss history, current legal environment, geographic
considerations and type of policy written. Major claims (greater than $500,000)
are evaluated and
38
41
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts greater than $500,000 are reserved for as they become known because the
unique circumstances surrounding most major claims make it inherently
impractical to predict the incidence and amount of such claims. The occurrence
of a significant major claim in any given period could have a material adverse
effect on the Company's financial condition and results of operations for such
period. Escrow losses are expensed when they become known and are included in
other operating expenses. See Note I.
If a loss is related to a policy issued by an independent agent, the
Company may proceed against the independent agent pursuant to the terms of the
agency agreement. In any event, the Company may proceed against third parties
who are responsible for any loss under the title insurance policy under rights
of subrogation.
Reinsurance
In the ordinary course of business, the Company reinsures certain risks
with other insurers for the purpose of limiting its maximum loss exposure and
also assumes reinsurance for certain risks of other insurers for the purpose of
earning additional revenue. The Company cedes or assumes a portion of certain
policy liabilities under agent fidelity, excess of loss and case-by-case
reinsurance agreements. Reinsurance agreements provide that in the event of a
loss (including costs, attorneys' fees and expenses) exceeding the retained
amounts, the reinsurer is liable for the excess amount assumed. However, the
ceding company remains primarily liable in the event the reinsurer does not meet
its contractual obligations. Reinsurance activity is not considered significant.
Title, escrow, other fees and revenue and agent commissions
Title insurance premiums, escrow fees and other fees and revenue are
recognized as revenue at the time of closing of the related real estate
transaction. Title insurance commissions earned by the Company's agents are
recognized as an expense concurrently with premium recognition.
Share and per share restatement
On December 13, 1995, the Company declared a 10% stock dividend, to
shareholders of record on January 15, 1996, distributed February 2, 1996. The
par value of the additional shares of common stock issued in connection with the
stock dividend was credited to common stock and a like amount charged to
retained earnings as of December 31, 1995. Fractional shares were paid in cash.
On December 11, 1996, the Company declared a 10% stock dividend, to
shareholders of record on December 23, 1996, distributed January 7, 1997. The
par value of the additional shares of Common Stock issued in connection with the
stock dividend was credited to common stock and a like amount charged to
retained earnings as of December 31, 1996. Fractional shares were paid in cash.
On December 17, 1997, the Company declared a 10% stock dividend, to
shareholders of record on December 29, 1997, distributed January 14, 1998. The
par value of the additional shares of common stock issued in connection with the
stock dividend was credited to common stock and a like amount charged to
retained earnings as of December 31, 1997. Fractional shares were paid in cash.
All data with respect to earnings per share, dividends per share and share
information, including price per share where applicable, in the Consolidated
Financial Statements and Notes thereto have been retroactively adjusted to
reflect all stock dividends and splits.
Earnings per share
Basic earnings per share is computed by dividing net earnings available to
common shareholders by the weighted average number of common shares outstanding
during the period. Dilutive earnings per share is
39
42
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
calculated by dividing net earnings available to common shareholders plus the
impact of assumed conversions by dilutive potential securities. The Company has
granted certain options and warrants which have been treated as common share
equivalents for purposes of calculating diluted earnings per share. The Liquid
Yield Option Notes ("LYONs") are considered other dilutive securities for
purposes of calculating diluted earnings per share to the extent that they are
not antidilutive.
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), effective for fiscal years ending after December 15, 1997. SFAS 128
introduces and requires the presentation of "basic" earnings per share which
represents net earnings divided by the weighted average shares outstanding
excluding all common stock equivalents. Dual presentation of "diluted" earnings
per share, reflecting the dilutive effects of all common stock equivalents, is
also required. The diluted presentation is similar to the former presentation of
fully diluted earnings per share. All quarterly and annual per share data have
been restated to reflect the impact of SFAS 128. The adoption of SFAS 128 did
not have a material impact on the Consolidated Financial Statements of the
Company.
The following table sets forth the calculation of basic and diluted
earnings per share for each of the years in the three-year period ended December
31, 1997:
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic earnings per share calculation
Earnings before extraordinary loss........................ $41,471 $24,337 $ 7,632
Extraordinary loss, net of applicable income tax benefit
of $1,180 in 1997 and $437 in 1995..................... (1,700) -- (813)
------- ------- -------
Net earnings.............................................. $39,771 $24,337 $ 6,819
======= ======= =======
Weighted average shares........................... 15,911 15,037 15,131
======= ======= =======
Basic earnings per share
Earnings before extraordinary loss........................ 2.61 1.62 0.50
Extraordinary loss........................................ (0.11) -- (0.05)
------- ------- -------
Net earnings.............................................. $ 2.50 $ 1.62 $ 0.45
======= ======= =======
40
43
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Diluted earnings per share calculation
Earnings before extraordinary loss........................ $41,471 $24,337 $ 7,632
Plus: Impact of assumed conversion of LYONs............... 3,142 3,196 --(1)
------- ------- -------
Earnings before extraordinary loss plus assumed
conversion............................................. 44,613 27,533 7,632
Extraordinary loss, net of applicable income tax benefit
of $1,180 in 1997 and $437 in 1995..................... (1,700) -- (813)
------- ------- -------
Net earnings plus assumed conversions..................... $42,913 $27,533 $ 6,819
======= ======= =======
Weighted average shares................................... 15,911 15,037 15,131
Plus: Incremental shares from assumed conversions
LYONs................................................ 4,553 4,793 --(1)
Options.............................................. 1,019 654 563
------- ------- -------
Dilutive potential shares................................. 21,483 20,484 15,694
======= ======= =======
Diluted earnings per share
Earnings before extraordinary loss plus assumed
conversions............................................ $ 2.08 $ 1.34 $ 0.49
Extraordinary loss........................................ (0.08) -- (0.05)
------- ------- -------
Net earnings.............................................. $ 2.00 $ 1.34 $ 0.44
======= ======= =======
- ---------------
(1) As the conversion of the Liquid Yield Option Notes ("LYONs") have an
antidilutive effect in 1995, the assumed conversion is not considered in the
Diluted Earnings Per Share Calculation. Assumed conversion of the LYONs
would result in additional net earnings of $3,245,000 and 4,793,000
additional dilutive potential shares.
Management estimates
The preparation of these Consolidated Financial Statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the Consolidated Financial Statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Certain reclassifications
Certain reclassifications have been made in the 1996 and 1995 Consolidated
Financial Statements to conform to the classifications used in 1997.
B. ACQUISITIONS
On April 1, 1996, the Company completed its acquisition of Nations Title
Inc. from Nations Holding Group for a purchase price of $19.3 million plus
212,960 shares, $2.1 million, of the Company's common stock, subject to certain
adjustments. This transaction has been accounted for as a purchase. During 1997,
the Nations Title Inc. purchase price was reduced $749,000, pursuant to certain
terms and conditions contained in the acquisition agreement. The purchase price
adjustment resulted in Nations Holding Group returning 26,499 shares of common
stock to the Company. The returned shares were subsequently cancelled.
41
44
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assets acquired and liabilities assumed in the Nations Title Inc.
acquisition were as follows (dollars in thousands):
Assets acquired at fair value............................. $ 74,177
Liabilities assumed at fair value......................... (52,777)
--------
Total purchase price............................ $ 21,400
========
On April 4, 1996, the Company purchased 17% of the outstanding common stock
of National Alliance Marketing Group, Inc. ("National Alliance"), a California
corporation, for $566,667; together with a warrant to acquire an additional 14%
of National Alliance common stock. In addition, the Company loaned $1,200,000 to
National Alliance at closing at a rate of prime plus one percent. Subsequently,
the Company agreed to increase the credit facility from $1,200,000 to
$1,700,000. In consideration for the increase in the credit facility National
Alliance agreed to increase the warrant shares which the Company could purchase.
If the entire $1,700,000 was borrowed, the Company could purchase an additional
34% of the outstanding shares of National Alliance. After receiving approval of
the transaction from the California Department of Insurance, the transaction
closed on July 12, 1996. National Alliance is the parent company of Alliance
Home Warranty Company ("Alliance"), a California insurance company. Alliance
sells home warranty plans to buyers of resale homes, primarily in the Central
and Southern California markets. A home warranty contract generally promises the
repair or replacement of major operating systems and built-in appliances inside
a home for a period of one year. On July 3, 1997, the Company converted the
outstanding note balance in conjunction with the exercise of the warrants and
now owns 51% of the outstanding common stock of National Alliance, subject to
certain regulatory approvals. The outstanding balance of the notes receivable
due from National Alliance at conversion was approximately $1.6 million.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the National Alliance acquisition were as follows
(dollars in thousands):
Tangible assets acquired at fair value..................... $ 3,200
Cost in excess of net assets acquired...................... 3,150
Liabilities assumed at fair value.......................... (1,809)
Minority interest.......................................... (2,224)
-------
Total purchase price............................. $ 2,317
=======
On November 1, 1996, the Company acquired 80% of the outstanding stock of
CRM, Inc. ("CRM") for a purchase price of $3.5 million, $1.0 million in cash and
191,169 shares, $2.5 million, of the Company's Common Stock. CRM provides real
estate information services with a heavy concentration in the areas of tax
services and flood certification. The Company combined its existing tax service
business with that of CRM. Under certain circumstances the Company can purchase
the remaining 20% of the outstanding stock of CRM. CRM, Inc. operates as a
majority-owned subsidiary of the Company and is now known as Fidelity National
Tax Service, Inc. ("Fidelity National Tax"). This transaction has been accounted
for as a purchase. The CRM results of operations were not material to the 1996
Consolidated Financial Statements.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Fidelity National Tax acquisition were as follows
(dollars in thousands):
Tangible assets acquired at fair value...................... $2,073
Cost in excess of net assets acquired....................... 2,590
Liabilities assumed at fair value........................... (263)
Minority interest........................................... (880)
------
Total purchase price.............................. $3,520
======
42
45
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On August 22, 1997, the Company acquired the common stock of First Title
Corporation ("First Title"), a title company with fourteen offices throughout
the southeastern United States. First Title has been merged into a subsidiary of
the Company. First Title was acquired for $4.7 million; payable in 80% common
stock of the Company (253,398 shares or $3.8 million) and 20% cash
(approximately $900,000). This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the First Title Corporation acquisition were as follows
(dollars in thousands):
Tangible assets acquired at fair value...................... $1,294
Cost in excess of net assets acquired....................... 4,033
Liabilities assumed at fair value........................... (627)
------
Total purchase price.............................. $4,700
======
On September 18, 1997, the Company acquired the common stock of Ifland
Credit Services ("ICS"), a credit reporting company headquartered in Lexington,
Kentucky, for a purchase price of $3.75 million. ICS has been merged with Credit
Reports, Inc. ("CRI") and Classified Credit Data, Inc. ("CCD") in order to form
Fidelity National Credit Services. The purchase price was payable 80% in common
stock of the Company (170,155 shares or $3.0 million) and 20% cash ($750,000).
This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Ifland Credit Services acquisition were as follows
(dollars in thousands):
Tangible assets acquired at fair value...................... $ 618
Cost in excess of net assets acquired....................... 3,517
Liabilities assumed at fair value........................... (385)
------
Total purchase price.............................. $3,750
======
Effective as of October 1, 1997, the Company acquired Bron Research, Inc.
("BRON"), a flood certification company headquartered in Austin, Texas. The
purchase price paid by the Company for the acquisition was $9.85 million, paid
in 523,272 shares of Company common stock. BRON now operates as Fidelity
National Flood, Inc. This transaction has been accounted for as a
pooling-of-interests. BRON's financial position and results of operations as of
and for the year ended December 31, 1997 are included in the Consolidated
Financial Statements. Prior to 1997, BRON's financial position and results of
operations were insignificant, and as such, the Consolidated Financial
Statements have not been restated.
On October 9, 1997, the Company acquired the common stock of Credit
Reports, Inc. a credit reporting company headquartered in Scottsdale, Arizona,
with operations in California, Colorado, Nevada and Oregon. CRI has been merged
with ICS and CCD in order to form Fidelity National Credit Services. The
purchase price for CRI was $200,000, subject to certain purchase price
adjustments based on the combined equity of CRI and Express Network, Inc., its
affiliate, payable in 11,455 shares of Company common stock. This transaction
has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Credit Reports, Inc. acquisition were as follows
(dollars in thousands):
Tangible assets acquired at fair value...................... $2,559
Cost in excess of net assets acquired....................... 139
Liabilities assumed at fair value........................... (2,498)
------
Total purchase price.............................. $ 200
======
43
46
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Also on October 9, 1997, the Company acquired the common stock of Express
Network, Inc. ("ENI"), a provider of attorney services such as courier,
messenger, courthouse filing, process serving, investigation and reprographics.
ENI provides services to legal firms in Los Angeles, Orange County, San Diego,
Riverside and San Francisco, California. The purchase price for ENI was $10.55
million; subject to certain purchase price adjustments based on the combined
equity of ENI and CRI, its affiliate, payable in 50% common stock of the Company
(302,158 shares or $5.275 million) and 50% cash (approximately $5.275 million).
Approximately $2.8 million of the cash portion of the purchase price will be
paid in equal installments over a four-year period. This transaction has been
accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Express Network, Inc. acquisition were as follows
(dollars in thousands):
Tangible assets acquired at fair value..................... $ 3,018
Cost in excess of net assets acquired...................... 9,640
Liabilities assumed at fair value.......................... (2,108)
-------
Total purchase price............................. $10,550
=======
On October 21, 1997, the Company acquired 100% of the common stock of
Classified Credit Data, Inc., a credit reporting company headquartered in Orange
County, California, for a purchase price of $300,000, which was paid in cash.
CCD was merged with ICS and CRI in order to form Fidelity National Credit
Services. This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Classified Credit Data acquisition were as follows
(dollars in thousands):
Tangible assets acquired at fair value...................... $385
Cost in excess of net assets acquired....................... 386
Liabilities assumed at fair value........................... (471)
----
Total purchase price.............................. $300
====
Selected unaudited pro forma combined results of operations for the years
ended December 31, 1997, 1996 and 1995, assuming the Nations Title Inc. and
Fidelity National Tax acquisitions occurred on January 1, 1997, 1996 and 1995,
and assuming the National Alliance, First Title, ICS, CRI, ENI and CCD
acquisitions occurred on January 1, 1997 and 1996, are presented as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Total revenue.............................. $776,109 $720,118 $588,759
Basic earnings before extraordinary item... 42,294 22,001 7,395
Basic net earnings......................... 40,594 22,001 6,582
Basic earnings per share................... $ 2.47 $ 1.39 $ .42
Diluted earnings before extraordinary
item..................................... $ 45,436 $ 25,197 $ 7,395
Diluted net earnings....................... 43,736 25,197 6,582
Diluted earnings per share................. $ 1.99 $ 1.19 $ .41
44
47
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. INVESTMENTS
The carrying amounts and fair values of the Company's fixed maturity
securities at December 31, 1997 and 1996 are as follows:
DECEMBER 31, 1997
---------------------------------------------------------
GROSS GROSS
CARRYING AMORTIZED UNREALIZED UNREALIZED FAIR
AMOUNT COST GAINS LOSSES VALUE
-------- --------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Fixed maturity investments (available
for sale):
U.S. government and agencies......... $ 36,869 $ 36,537 $ 373 $ (41) $ 36,869
States and political subdivisions.... 122,164 119,626 2,545 (7) 122,164
Corporate securities................. 52,810 52,308 532 (30) 52,810
Mortgage-backed securities........... 5,158 5,118 60 (20) 5,158
-------- -------- ------ ------- --------
$217,001 $213,589 $3,510 $ (98) $217,001
======== ======== ====== ======= ========
DECEMBER 31, 1996
---------------------------------------------------------
GROSS GROSS
CARRYING AMORTIZED UNREALIZED UNREALIZED FAIR
AMOUNT COST GAINS LOSSES VALUE
-------- --------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Fixed maturity investments (available
for sale):
U.S. government and agencies......... $ 87,765 $ 88,376 $ 106 $ (717) $ 87,765
States and political subdivisions.... 16,534 16,282 270 (18) 16,534
Corporate securities................. 46,354 47,058 241 (945) 46,354
Mortgage-backed securities........... 15,676 15,896 86 (306) 15,676
-------- -------- ------ ------- --------
$166,329 $167,612 $ 703 $(1,986) $166,329
======== ======== ====== ======= ========
The change in unrealized gains (losses) on fixed maturities for the years
ended December 31, 1997, 1996, and 1995 was $4,695,000, $(3,255,000) and
$13,025,000, respectively.
The amortized cost and estimated fair value of fixed maturity securities,
which are classified as available for sale at December 31, 1997, by contractual
maturity, are shown as follows. Expected maturities may differ from contractual
maturities because certain borrowers have the right to call or prepay
obligations with or without call or prepayment penalties:
DECEMBER 31, 1997
---------------------------------------------
AMORTIZED % FAIR %
COST OF TOTAL VALUE OF TOTAL
--------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Maturity
One year or less......................... $ 5,180 2.4% $ 5,188 2.4%
After one year through five years........ 120,134 56.2 121,780 56.1
After five years through ten years....... 76,760 35.9 78,346 36.1
After ten years.......................... 11,515 5.5 11,687 5.4
-------- -------- -------- --------
Total............................ $213,589 100.0% $217,001 100.0%
======== ======== ======== ========
Subject to call............................ $ 17,640 8.3% $ 18,159 8.4%
45
48
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fixed maturity securities valued at approximately $18,881,000 and
$17,670,000 were on deposit with various governmental authorities at December
31, 1997 and 1996, respectively, as required by law.
Equity securities at December 31, 1997 and 1996 consist of investments in
various industry groups as follows:
DECEMBER 31,
---------------------------------------
1997 1996
------------------ -----------------
FAIR FAIR
COST VALUE COST VALUE
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Banks, trust and insurance companies.......... $ 50 $ 50 $ 800 $ 863
Industrial, miscellaneous and all other....... 35,826 70,368 19,349 41,475
------- ------- ------- -------
Total....................................... $35,876 70,418 $20,149 $42,338
======= ======= ======= =======
The carrying value of the Company's investment in equity securities is fair
value. As of December 31, 1997, gross unrealized gains and gross unrealized
losses on equity securities were $36,774,000 and $2,232,000, respectively. Gross
unrealized gains and gross unrealized losses on equity securities were
$22,912,000 and $723,000, respectively, as of December 31, 1996.
Included in equity securities at December 31, 1997 and 1996, is an
investment in a certain equity security, CKE Restaurants, Inc., with a cost
basis of $3,366,000 and a fair value of $31,404,000 at December 31, 1997 and a
cost basis of $3,366,000 and a fair value of $17,892,000 at December 31, 1996.
The change in unrealized gains on equity securities for the years ended
December 31, 1997, 1996 and 1995 was $12,353,000, $15,245,000 and $9,369,000,
respectively.
Interest and investment income, including realized gains (losses), consists
of the following:
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents..................... $ 1,103 $ 1,666 $ 1,571
Fixed maturity securities..................... 10,098 9,431 8,254
Equity securities............................. 11,664 4,823 5,091
Short-term investments........................ 1,891 165 155
Notes receivable.............................. 2,369 2,675 2,355
Other......................................... 6,431 (1,068) 190
------- ------- -------
$33,556 $17,692 $17,616
======= ======= =======
Net realized gains included in interest and investment income amounted to
$16,988,000, $2,625,000 and $5,213,000 for the years ended December 31, 1997,
1996 and 1995, respectively. Included in net realized gains for the year ended
December 31, 1997, are net realized gains from the sales of investments of
approximately $10,500,000, a net realized gain from the sale of the Company's
former home office building of approximately $4,300,000, and net realized gains
on the sale of 60% of American Title Company, a former wholly-owned underwritten
title company subsidiary, and the sale of FNF Ventures, Inc., a small business
investment company subsidiary of approximately $1,300,000 and $800,000,
respectively. All amounts are before applicable income taxes.
During the years ended December 31, 1997, 1996 and 1995, gross realized
gains on sales of fixed maturity securities considered available for sale were
$735,000, $452,000 and $1,700,000, respectively; and gross realized losses were
$429,000, $714,000 and $1,331,000, respectively. Gross proceeds from the sale of
fixed
46
49
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maturity securities considered available for sale amounted to $137,019,000,
$93,108,000 and $188,902,000, during the years ended December 31, 1997, 1996 and
1995, respectively.
During the years ended December 31, 1997, 1996 and 1995, gross realized
gains on sales of equity securities considered available for sale were
$12,658,000, $5,937,000 and $5,111,000, respectively; and gross realized losses
were $2,430,000, $1,962,000 and $457,000, respectively. Gross proceeds from the
sale of equity securities amounted to $135,747,000, $89,404,000 and $25,622,000
during the years ended December 31, 1997, 1996 and 1995, respectively.
D. NOTES RECEIVABLE
Notes receivable consist of the following:
DECEMBER 31,
------------------
1997 1996
------- -------
(DOLLARS IN
THOUSANDS)
Mortgage notes, secured by various deeds of trust,
installments due monthly including interest at rates
ranging from 7.0% to 10%, due through 2022................ $ 426 $ 512
Promissory notes, secured by various assets and unsecured,
installments due monthly including interest at rates
ranging from 7.4% to 13%, due through 2008................ 8,876 11,463
Promissory note due from the Company's Chief Executive
Officer, secured by a deed of trust, in monthly
installments including interest at 9.5%, paid in November
1997...................................................... -- 471
Officer and employee secured and unsecured notes receivable
at rates ranging from 7.0% to 10.0%, due through 2004..... 1,346 1,525
------- -------
10,648 13,971
Allowance for doubtful receivables.......................... (1,750) (2,654)
------- -------
$ 8,898 $11,317
======= =======
The allowance for doubtful receivables is primarily related to promissory
notes at December 31, 1997 and 1996. Interest income is not recognized on the
Company's non-performing notes receivable.
The carrying amounts and estimated fair values of the Company's notes
receivable were as follows at December 31, 1997 and 1996 (dollars in thousands):
DECEMBER 31,
-----------------------------------------
1997 1996
------------------ -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- -------
Mortgage notes........................................ $ 426 $ 426 $ 412 $ 412
Other promissory notes................................ 7,365 7,365 8,909 8,909
Affiliated notes...................................... 1,107 1,107 1,996 1,996
------ ------ ------- -------
$8,898 $8,898 $11,317 $11,317
====== ====== ======= =======
The fair values of significant notes receivable are established using
discounted cash flow analyses based on current market interest rates and
comparison of rates being received to interest rates currently being offered for
similar loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations. All other notes
receivable are not significant individually or in the aggregate, or are current
and at market rates, and their carrying value approximates fair value.
47
50
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In September 1991, Manchester Development Corporation ("Manchester"), a
wholly-owned subsidiary, sold certain real estate investments and operating
properties to Folco Development Corporation ("Folco"), of which the Company's
Chief Executive Officer and spouse are sole shareholders, at the assets' net
book value of $2,211,000. This transaction resulted in a note receivable from
Folco to Manchester of approximately $1,492,000 secured by subordinated deeds of
trust on the 11 office buildings included in the sale to Folco. In connection
with the sale, the existing leases of space by the Company were amended thereby
increasing rental rates approximately 20%. The terms of the agreement between
Manchester and Folco provide that each of the subordinated deeds of trust will
be released and reconveyed upon payment to Manchester of 15% of the net sales
proceeds from the sale of the property encumbered by the subordinated deeds of
trust. The note was paid on November 10, 1997. At December 31, 1996, the balance
outstanding on the note approximated $471,000 and one property remained unsold.
E. INVESTMENTS IN REAL ESTATE AND PARTNERSHIPS
At December 31, 1997 and 1996, the Company had financial interests ranging
from 22% to 50% in three real estate partnerships which were accounted for under
the equity method. These partnerships are involved in the ownership and
management of commercial office buildings, retail facilities and have acquired
specific parcels of real property for investment purposes. The Company, through
Manchester Development Corporation ("Manchester"), a wholly-owned subsidiary,
had a general partnership interest in one of the three real estate partnerships
at December 31, 1997 and 1996.
Two of these partnerships, representing raw land investments, also have
officers and directors of the Company as partners with ownership interests that
are based on cash contributions. These two partnerships require that all of the
partners, including the Company, make pro-rata capital contributions should the
partnerships require additional funds to pay liabilities.
On May 16, 1996, the Company paid $3.1 million to acquire a first lien loan
of $3.4 million secured by a commercial office building owned by a real estate
partnership in which Manchester is the sole general partner. During 1996, but
prior to the Company's acquisition of the loan, officers and directors of the
Company assigned their ownership interests in the real estate partnership to
Manchester. The Company leases space in the commercial office building.
On September 30, 1996, the Company accepted the assignment from a real
estate partnership of the right to redeem a retail shopping center valued at
$4.5 million in exchange for a net payment of $434,000. Officers and directors
of the Company, who have ownership interests in the real estate partnership,
assigned their rights to redeem to the Company. On November 21, 1996, the
Company redeemed the retail property at a price of $2.8 million. The Company
continues to collect rent from the retail tenants while actively marketing the
property for sale. The property is carried at cost, which approximates fair
value.
Summarized combined financial information of the unconsolidated
partnerships is as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------ ------ -------
(DOLLARS IN THOUSANDS)
Total assets, primarily land, development and
improvement costs............................. $3,922 $3,960 $14,096
Total liabilities, primarily notes and mortgages
payable....................................... 819 841 12,664
------ ------ -------
Partners' equity................................ $3,103 $3,119 $ 1,432
====== ====== =======
Revenue......................................... $ 47 $ 378 $ 1,568
====== ====== =======
Net income (loss)............................... $ 22 $ (73) $ (515)
====== ====== =======
48
51
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997 and 1996, the Company had a 92.5% and a 76.3% interest
in real estate partnerships which are consolidated with the Company.
Manchester is presently a partner with Sussex Holdings, Ltd. (an affiliate
of Folco) in Folco Mission Valley Partners Limited Partnership, a California
limited partnership. Manchester owns a 22% limited partnership interest and
Sussex Holdings, Ltd. owns a 78% general partnership interest. Fidelity Title is
the sole tenant in the building and received an approximate 30% decrease in its
annual rental rate based upon its lease with Folco Mission Valley.
Investments in real estate and partnerships consist of the following:
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
Investments in real estate:
Land................................................... $ 4,291 $ 7,476
Commercial buildings, net of accumulated depreciation
of $67 and $2,925................................... 663 6,537
Investments in unconsolidated partnerships............... 1,714 1,806
------- -------
6,668 15,819
Valuation allowance...................................... (1,467) (4,467)
------- -------
$ 5,201 $11,352
======= =======
During 1997, the Company sold an investment in real estate at a purchase
price that approximated book value.
F. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
Land..................................................... $ 4,863 $ 4,370
Buildings................................................ 7,148 14,700
Leasehold improvements................................... 11,427 9,452
Furniture, fixtures and equipment........................ 85,788 71,365
------- -------
109,226 99,887
Accumulated depreciation and amortization................ (72,466) (61,270)
------- -------
$36,760 $38,617
======= =======
49
52
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. NOTES PAYABLE
Notes payable consist of the following:
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
Credit agreement, secured by common stock of certain
Insurance Subsidiaries, with principal due quarterly and
interest due monthly at LIBOR rate plus 2.0% (7.63% at
December 31, 1997), due September 2001, paid subsequent to
year end.................................................. $ 15,250 $ 18,250
Bank revolving credit facility, secured by common stock of
certain Insurance Subsidiaries, with interest due
quarterly at LIBOR plus 2.0% (7.63% at December 31, 1997),
principal due quarterly beginning April 1998, due
September 2001, unused portion of $8 million at December
31, 1997 and 1996, paid subsequent to year end............ 5,000 5,000
Equipment line of credit, secured by equipment, with
interest due monthly at prime rate plus 1.00% (9.50% at
December 31, 1997), principal, due May 1998, unused
portion of $3,970 and $414 at December 31, 1997 and
1996...................................................... 4,030 5,586
Bank promissory note, secured by equipment, with principal
and interest due monthly at LIBOR plus 1.77%, paid in
September 1997............................................ -- 2,760
Bank promissory note, secured by equipment, with principal
and interest due monthly at LIBOR plus 1.77% (7.40% at
December 31, 1997), due October 1998...................... 2,134 4,787
Bank promissory note, secured by equipment, with principal
and interest due monthly at LIBOR plus 2.10% (7.73% at
December 31, 1997), due June 1999......................... 2,052 3,282
Bank promissory note, secured by equipment, with principal
and interest at 30 day commercial paper rate plus 2.44%
(8.02% at December 31, 1997), due September 2000.......... 5,000 7,031
Bank promissory note, secured by equipment, with principal
and interest due monthly at LIBOR plus 1.84% (7.47% at
December 31, 1997), due May 2001.......................... 4,042 --
Bank promissory note, secured by equipment, with principal
and interest due monthly at LIBOR plus 1.84% (7.47% at
December 31, 1997), due September 2001.................... 5,784 --
Promissory note, guaranteed by United States Small Business
Administration, with interest only at 7.59% due monthly
and principal due at maturity, September 2006, liability
assumed by purchaser when subsidiary sold in October
1997...................................................... -- 3,000
Promissory note, secured by real estate, with principal and
interest due monthly at 9.875%, due April 1998............ 1,693 1,723
Liquid Yield Option Notes, zero coupon, convertible
subordinated notes due 2009 with interest at 5.5%......... 76,635 97,013
Other promissory notes with various interest rates and
maturities................................................ 1,403 490
-------- --------
$123,023 $148,922
======== ========
50
53
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principal maturities, including accretion of original issue discount, are
as follows (dollars in thousands):
1998...................................................... $ 18,354
1999...................................................... 10,806
2000...................................................... 9,715
2001...................................................... 6,491
2002...................................................... 937
Thereafter................................................ 140,657
--------
$186,960
========
The Company's credit agreement, dated as of September 21, 1995, included a
$22 million term loan and a $13 million revolving credit facility, is and was
collateralized by the common stock of certain Insurance Subsidiaries. This
credit facility was terminated and paid subsequent to year end with the proceeds
from a new credit facility. Additionally, the Company must comply with certain
affirmative and negative covenants related to its debt agreements which require,
among other things, that the Company maintain certain financial ratios related
to liquidity, net worth, capitalization, investments, restricted payments and
certain dividend restrictions.
The Company entered into an interest rate swap agreement concurrent with
the funding of the credit agreement, dated as of September 21, 1995, which is
principally used by the Company in the management of interest rate exposure. The
interest rate swap agreement is accounted for on the accrual basis. Income and
expense are recorded in the same category as that arising from the related debt.
Amounts to be paid or received under interest rate swap agreements are
recognized as interest income or expense in the period in which they accrue. The
interest rate swap agreement has not had a material impact on the Consolidated
Financial Statements. See Note N.
In February 1994, the Company issued zero coupon, convertible subordinated
Liquid Yield Options Notes due February 2009 ("LYONs") at an interest rate of
5.5% with a principal amount at maturity of $235,750,000. Net proceeds to the
Company were approximately $101,000,000. The proceeds were used for investment
and general corporate purposes, including the repurchase of treasury shares. See
Note K.
On October 17, 1997, the Company in a private transaction, purchased $45
million aggregate principal amount at maturity of its outstanding Liquid Yield
Option Notes due 2009 from Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") for an aggregate purchase price of $27.2 million (or $605 per
$1,000 principal amount at maturity of LYONs). The purchase price was paid in
the form of 1,267,619 shares, $26.4 million, of the Company's common stock (the
"Exchange Shares"). The Company also paid Merrill Lynch, the excess of a base
price of $21.48 per Exchange Share over the actual sales price (less $0.05 per
share in commissions) realized by Merrill Lynch for sales of up to 552,619
Exchange Shares. The Company also paid Merrill Lynch, for each day, an amount in
cash to be determined by multiplying the Net Carry Amount (number of Exchange
Shares multiplied by $21.48) by the Applicable Rate (LIBOR plus 2.50%). The
Company's payment obligations were subject to reduction for dividends on
Exchange Shares received by Merrill Lynch during the period. The Company paid
the foregoing amounts to Merrill Lynch in cash of approximately $790,000 on
November 7, 1997. The purchase of the LYONs increased stockholders' equity by
approximately $24.7 million while reducing outstanding debt by approximately
$24.3 million. Additionally, an extraordinary loss due to the early retirement
of debt of approximately $1.7 million, net of applicable income taxes, was
recorded in the fourth quarter of 1997. The maturity value of LYONs outstanding
at December 31, 1997 is approximately $140.6 million.
51
54
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts and estimated fair values of the Company's notes
payable were as follows at December 31, 1997 and 1996 (dollars in thousands):
DECEMBER 31,
--------------------------------------------
1997 1996
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Short-term borrowings................... $ 5,158 $ 5,158 $ 5,710 $ 5,710
Long-term borrowings, variable rate..... 39,263 39,263 41,110 41,110
Long-term borrowings, fixed rate........ 78,602 113,722 102,102 93,214
-------- -------- -------- --------
$123,023 $158,143 $148,922 $140,034
======== ======== ======== ========
Short-term borrowings approximate their fair value. The fair value of the
Company's fixed rate and variable rate notes payable is estimated using
discounted cash flow analyses based on current market interest rates and
comparison of interest rates being paid to the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The LYON's fair
value is calculated based on quoted market prices.
H. INCOME TAXES
Income tax expense (benefit) consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
Current....................................... $31,217 $ 7,886 $(2,729)
Deferred...................................... (438) 8,330 4,120
------- ------- -------
$30,779 $16,216 $ 1,391
======= ======= =======
Total income tax expense (benefit) for the years ended December 31, 1997,
1996 and 1995 was allocated as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
Income from continuing operations............. $31,959 $16,216 $ 1,828
Extraordinary gain (loss)..................... (1,180) -- (437)
------- ------- -------
$30,779 $16,216 $ 1,391
======= ======= =======
52
55
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax expense (benefit) consists of the following:
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- ------- ------
(DOLLARS IN THOUSANDS)
Provision for claim losses in excess of
statutory amounts............................ $ 2,142 $ 5,108 $4,890
Employee benefit accruals...................... (3,758) (1,847) 81
(Excess) deficit book over tax bad debt
expense...................................... 2,298 304 (535)
Other acquisition accruals..................... 1,660 1,862 610
Statutory unearned premium reserve............. 1,313 3,624 303
Accelerated depreciation....................... (587) (1,068) --
Investments in partnerships.................... (68) (434) --
Investments in real estate..................... (624) 128 --
Section 338 (h)(10) gain deferral.............. (1,711) (153) (504)
Other.......................................... (1,103) 806 (725)
------- ------- ------
$ (438) $ 8,330 $4,120
======= ======= ======
The effective tax rate differs from the statutory income tax rate as
follows:
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
----- ----- ------
Statutory income tax rate............................. 35.0% 35.0% 34.0%
Tax exempt interest income............................ (1.6) (.8) (23.3)
Non-deductible expenses............................... 6.2 2.0 6.5
State taxes, net of Federal deduction................. 3.6 2.7 --
Other................................................. .4 1.1 (.3)
---- ---- -----
43.6% 40.0% 16.9%
==== ==== =====
53
56
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The deferred tax assets and liabilities at December 31, 1997 consist of the
following:
DEFERRED DEFERRED TAX
TAX ASSETS LIABILITIES
---------- ------------
(DOLLARS IN THOUSANDS)
Provision for claim losses in excess of statutory amounts... $47,072 $ --
Employee benefit accruals................................... 8,175 --
Excess book over tax provision for bad debts................ 3,517 --
Other assets................................................ 2,165 --
Statutory unearned premium reserve.......................... -- 48,783
Accelerated depreciation.................................... 77 --
Investment securities....................................... -- 15,532
Investments in partnerships................................. -- 392
Investments in real estate.................................. -- 154
Section 338 (h)(10) gain deferral........................... -- 2,046
Other acquisition accruals.................................. -- 5,509
Other liabilities........................................... -- 2,012
Net operating loss available for carryover.................. 711 --
------- -------
Less: valuation allowance................................... 711 --
------- -------
Total deferred taxes........................................ $61,006 $74,428
======= =======
The deferred tax assets and liabilities at December 31, 1996 consist of the
following:
DEFERRED DEFERRED TAX
TAX ASSETS LIABILITIES
---------- ------------
(DOLLARS IN THOUSANDS)
Provision for claim losses in excess of statutory amounts... $49,215 $ --
Employee benefit accruals................................... 4,756 --
Excess book over tax provision for bad debts................ 5,758 --
Other assets................................................ 1,803 --
Statutory unearned premium reserve.......................... -- 47,470
Accelerated depreciation.................................... -- 521
Investment securities....................................... -- 8,503
Investments in partnerships................................. -- 460
Investments in real estate.................................. -- 778
Section 338 (h)(10) gain deferral........................... -- 3,758
Other acquisition accruals.................................. -- 3,266
Other liabilities........................................... -- 4,380
Net operating loss available for carryover.................. 711 --
------- -------
62,243 69,136
Less: valuation allowance................................... 711 --
------- -------
Total deferred taxes........................................ $61,532 $69,136
======= =======
Based upon the Company's current and historical pre-tax earnings,
management believes it is more likely than not that the Company will realize the
benefit of its existing deferred tax assets, net of the recorded valuation
allowance. Management believes the existing net deductible temporary differences
will reverse during periods in which the Company generates net taxable income.
However, there can be no assurance that the Company will generate any earnings
or any specific level of continuing earnings in future years. Certain tax
54
57
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
planning or other strategies could be implemented, if necessary, to supplement
income from operations to fully realize recorded tax benefits.
The Company's 1990 through 1994 Federal income tax returns are currently
under examination by the Internal Revenue Service. Based on information
currently available, management does not believe the outcome of these
examinations will have a material impact on the financial condition or results
of operations of the Company.
I. SUMMARY OF RESERVE FOR CLAIM LOSSES
A summary of the reserve for claim losses follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Beginning balance.......................................... $187,245 $146,094 $153,306
Reserves assumed from First Title Corp................... 284 -- --
Reserves relinquished due to the sale of American Title
Company .............................................. (160) -- --
Reserves assumed from Nations Title Inc.................. -- 45,171 --
Title claim loss provision related to:
Current year.......................................... 36,404 32,505 23,901
Prior years........................................... 2,257 797 (4,870)
-------- -------- --------
Total title claim loss provision......................... 38,661 33,302 19,031
Title claims paid, net of recoupments related to:
Current year.......................................... (2,376) (2,430) (2,818)
Prior years........................................... (32,907) (34,892) (23,425)
-------- -------- --------
Total title claims paid, net of recoupments.............. (35,283) (37,322) (26,243)
-------- -------- --------
Ending balance............................................. $190,747 $187,245 $146,094
======== ======== ========
The provision for claim losses includes an estimate of anticipated title
claims and major claims. The estimate of anticipated title claims is accrued as
a percentage of title premium revenue based on the Company's historical loss
experience and other relevant factors. The Company monitors its claims
experience on a continual basis and adjusts the provision for claim losses
accordingly.
J. COMMITMENTS AND CONTINGENCIES
The Company's title insurance underwriting subsidiaries are, in the
ordinary course of business, subject to claims made under, and from time-to-time
are named as defendants in legal proceedings relating to, policies of insurance
they have issued or other services performed on behalf of insured policyholders
and other customers. The Company believes that the reserves reflected in its
Consolidated Financial Statements are adequate to pay losses and loss adjustment
expenses which may result from such claims and proceedings; however, such
estimates may be more or less than the amount ultimately paid when the claims
are settled.
Effective January 1996, the Company extended the term of an employment
agreement with its Chief Executive Officer for an additional period of five
years through March 31, 2001. Under this extension, he is to receive a minimum
annual base salary and an annual bonus based on the Company's performance. In
addition, the Board of Directors may grant the Chief Executive Officer an annual
merit bonus in cash or common stock based on his individual performance during
each year of the extension.
55
58
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1996, the Company entered into one year employment
agreements with four of its key executives, whereby each was to receive a
minimum annual base salary and an annual bonus based on the Company's
performance. Bonuses in the form of cash or Common Stock could be paid to the
executives at the discretion of the Compensation Committee of the Board of
Directors. Certain terms of these contracts were subsequently amended/revised
effective January 1, 1997 and April 1, 1997. Additionally, effective September
15, 1997, the Company entered into a three year employment agreement with a
fifth key executive. Terms and conditions of the fifth executive's contract are
similar to the other four.
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. Management believes that
no actions depart from customary litigation incidental to the business of the
Company and that resolution of all such litigation will not have a material
adverse effect on the Company.
In conducting its operations, the Company routinely holds customers' assets
in trust, pending completion of real estate transactions. Such amounts are
maintained in segregated bank accounts and have not been included in the
accompanying Consolidated Balance Sheets. The Company has a contingent liability
relating to proper disposition of these balances for its customers which
amounted to $608.6 million at December 31, 1997.
The Company leases certain of its premises and equipment under leases which
expire at various dates. Several of these agreements include escalation clauses
and provide for purchases and renewal options for periods ranging from one to
five years.
Future minimum operating lease payments are as follows (dollars in
thousands):
1998....................................................... $22,698
1999....................................................... 16,736
2000....................................................... 11,698
2001....................................................... 8,492
2002....................................................... 5,087
Thereafter................................................. 6,610
-------
Total future minimum operating lease payments.............. $71,321
=======
Rent expense incurred under operating leases during the years ended
December 31, 1997, 1996 and 1995 was $24,929,000, $23,413,000 and $21,388,000,
respectively. Included in rent expense for 1997, 1996 and 1995 is $523,000 paid
to related parties.
K. STOCKHOLDERS' EQUITY
Title insurance companies, including underwriters, underwritten title
companies and independent agents, are subject to extensive regulation under
applicable state laws. Each insurance underwriter is usually subject to a
holding company act in its state of domicile which regulates, among other
matters, the ability to pay dividends and investment policies. The laws of most
states in which the Company transacts business establish supervisory agencies
with broad administrative powers relating to issuing and revoking licenses to
transact business, regulating trade practices, licensing agents, approving
policy forms, accounting principles, financial practices, establishing reserve
and capital and surplus requirements, defining suitable investments for
reserves, capital and surplus and approving rate schedules.
The Insurance Subsidiaries are regulated by the insurance commissioners of
their respective states of domicile. Regulatory examinations usually occur at
three year intervals. Examinations are currently in progress for Fidelity Title
(1996), Fidelity New York (1996), Nations New York (1996), National (1996)
56
59
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and ATIC (1994). The Company has not received preliminary reports of examination
for Fidelity Title, Fidelity New York, Nations New York or National, as the
examinations are currently ongoing.
The Department of Insurance of the State of Florida has completed the field
portion of their triennial examination of ATIC, which was merged into Fidelity
Pennsylvania as of November 21, 1996, which was in turn merged into Fidelity New
York as of April 11, 1997; as of and for the three-year period ended December
31, 1994. The Company has received a preliminary report of examination. The
preliminary report, as forwarded to the Company by the Department of Insurance
of the State of Florida, indicates that the examiners are proposing adjustments
that could materially impact the statutory capital and surplus of ATIC, Fidelity
Pennsylvania, its former parent company, and ultimately Fidelity New York.
Certain of these adjustments have not been included in the 1997 Fidelity New
York Statutory Annual Statement as filed with insurance regulatory authorities
as the Company does not agree with these findings and has requested support for
the examination report. These same adjustments have not been considered in the
calculation of dividend capability, statutory surplus and statutory income
(loss) reported below.
Examinations have been completed for Fidelity Pennsylvania (1995), Fidelity
Tennessee (1995) and Nations Title (1996). All adjustments proposed by the
examiners have been recorded by the Company for Fidelity Pennsylvania, Fidelity
Tennessee and Nations Title, and are included in the calculation of dividend
capability, statutory surplus and statutory income (loss) reported below.
Statutorily calculated net worth determines the maximum insurable amount
under any single title insurance policy. As of January 1, 1998, the Company's
self-imposed single policy maximum insurable amounts, which comply with all
statutory limitations, for Fidelity Title, Fidelity New York and Fidelity
Tennessee were $42.0 million, $80.0 million and $6.0 million, respectively. The
self-imposed single policy maximum insurable amounts for Nations New York and
National are $20.0 million and $6.7 million, respectively.
The Insurance Subsidiaries are subject to regulations that restrict their
ability to pay dividends or make other distributions of cash or property to
their immediate parent company without prior approval from the Department of
Insurance of their respective states of domicile. In the case of Fidelity Title,
the total amount of dividends made in any twelve-month period may not exceed the
greater of 10% of the surplus as regards policyholders as of the last day of the
preceding year or net income for the twelve-month period ending the last day of
the preceding year. In the case of Fidelity New York, the total amount of
dividends and distributions is limited to surplus as regards policyholders,
excluding capital stock, less fifty percent of statutory premium reserve as of
the last day of the preceding year and capital contributions received in the
latest five-year period. As of January 1, 1998, Fidelity Title could pay
dividends or make other distributions to the Company of $6,823,000. Fidelity New
York does not have any dividend paying capability as of January 1, 1998.
The combined statutory capital and surplus of the Insurance Subsidiaries
was $94,101,000, $73,326,000 and $67,174,000 as of December 31, 1997, 1996 and
1995, respectively. The combined statutory income (loss) of the Insurance
Subsidiaries was $21,500,000, $6,052,000 and $(1,533,000) for the years ended
December 31, 1997, 1996 and 1995, respectively. These amounts do not include
certain of the proposed ATIC examination adjustments previously discussed.
As a condition to continued authority to underwrite policies in the states
in which the Insurance Subsidiaries conduct their business, the Insurance
Subsidiaries are required to pay certain fees and file information regarding
their officers, directors and financial condition. In addition, the Company's
escrow and trust business is subject to regulation by various state banking
authorities.
The UTCs are also subject to certain regulation by insurance regulatory or
banking authorities, primarily relating to minimum net worth and dividend
capability. Minimum net worth of $7.5 million and $2.5 million is required for
Fidelity National Title Company ("FNTC") and Fidelity National Title Company of
California ("FNCAL"), respectively. In addition, the Company has agreed to
notify the State of California Department
57
60
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Insurance of dividend payments by FNTC and FNCAL greater than 30% of earnings
before income taxes through 1998.
L. EMPLOYEE BENEFIT PLANS
Employee benefits include an employee stock purchase plan, three stock
option plans and a 401(k) plan.
In 1987, stockholders approved the adoption of an Employee Stock Purchase
Plan ("ESPP"). Under the terms of the ESPP and subsequent amendments, there are
7,986,000 shares of the Company's Common Stock available for purchase at current
market prices by Company employees who meet certain vesting requirements.
Pursuant to the ESPP, Company employees may contribute an amount between 5% and
15% of their base salary and certain commissions. The Company contributes
varying amounts as specified in the ESPP. During the years ended December 31,
1997, 1996 and 1995, 321,449, 338,047 and 315,901 shares, respectively, were
purchased and allocated to employees, based upon their contributions, at an
average price of $15.10, $12.45 and $9.77 per share, respectively. The Company
contributed $1.7 million or the equivalent of 111,582 shares for the year ended
December 31, 1997, $1.2 million or the equivalent of 97,471 shares for the year
ended December 31, 1996 and $1.4 million or the equivalent of 143,559 shares for
the year ended December 31, 1995 in accordance with the employer's matching
contribution. A total of 6,524,409 shares have been purchased by both the ESPP
and employees since the adoption of the ESPP.
In 1987, stockholders also approved the adoption of a Stock Option Plan
("1987 Option Plan"). Under the terms of the 1987 Option Plan, the Company may
grant stock options to certain key employees and non-employee directors or
officers. The number of shares issuable under the 1987 Option Plan is 1,647,113
shares of Common Stock at not less than fair market value on the date of grant.
Employees are eligible to receive incentive stock options or non-qualified stock
options and non-employee directors are eligible to receive non-qualified stock
options. Options available to directors or officers may not exceed one-half of
the aggregate number of shares available for grant. All options granted become
exercisable at the discretion of the Board of Directors and expire five to
eleven years from the date of grant. Options that lapse or are cancelled prior
to exercise are added to the shares authorized for future grants. The 1987
Option Plan expired December 31, 1997.
In 1992, the stockholders approved the adoption of the 1991 Stock Option
Plan ("1991 Option Plan"). Under the terms of the 1991 Option Plan, options may
be granted to officers and key employees of the Company or any or all of its
present or future subsidiaries. The number of shares reserved for issuance under
the 1991 Option Plan and subsequent amendments is 2,362,525 shares of Common
Stock, which may be newly issued or treasury shares. The per share option price
is determined at the date of grant. The option price may be less than the fair
market value of the Common Stock at the date of grant to reflect the application
of the optionee's deferred bonus, if applicable. Options granted under the 1991
Option Plan shall be exercisable in such installments and for such periods as
may be fixed at the time of grant, but in no event shall any stock options
extend for a period in excess of 12 years from the date of grant.
In 1994, the stockholders approved the adoption of the 1993 Stock Plan
("1993 Plan"). Under the terms of the 1993 Plan, options may be granted to
officers, key employees and non-employee directors of the Company. The number of
shares of Common Stock reserved for issuance under the 1993 Plan is 998,250. The
per share option price is 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. The 1993 Plan also contains an automatic grant of
non-qualified stock options to non-employee directors at an exercise price equal
to 100% of fair value at date of grant, and the right to exercise such options
shall vest equally over three years. Stock options granted under the 1993 Plan
are exercisable subject to the terms and conditions set by the Board of
Directors; however, options shall be exercisable no earlier than six months nor
ten years following the grant date.
58
61
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth activity in the 1987 and 1991 Stock Option
Plans and the 1993 Stock Plan from December 31, 1994 through December 31, 1997:
1987 STOCK OPTION PLAN 1991 STOCK OPTION PLAN 1993 STOCK PLAN
--------------------------------------- ---------------------- -------------------------
INCENTIVE NON-QUALIFIED EXERCISE EXERCISE EXERCISE
OPTIONS OPTIONS PRICE SHARES PRICE(1) SHARES PRICE
--------- ------------- ----------- -------- ----------- ---------- ------------
Outstanding at December 31,
1994............................ 4,386 545,835 $1.14-11.46 1,454,374 $ .59-7.45 69,878 $10.43-11.15
Granted in 1995................. 9,858 465,850 $ 7.61-9.77 63,030 $ 3.42-3.68 97,162 $ 7.51-8.17
Exercised in 1995............... (2,194) -- -- (237,661) $ 4.66-7.45 -- --
Expired or cancelled in 1995.... -- -- -- -- -- (6,655) $10.42-11.15
--------- ---------- ----------- -------- ----------- ---------- ------------
Outstanding at December 31,
1995............................ 12,050 1,011,685 $1.14-11.46 1,279,743 $ .59-7.45 160,385 $ 7.51-11.16
Granted in 1996................. -- 323,675 10.54 104,699 5.91-6.20 52,659 10.66-11.16
Exercised in 1996............... -- -- -- (61,287) .66-7.45 -- --
Expired or cancelled in 1996.... -- (69,878) 7.61-11.46 (33,576) 3.68-7.45 -- --
--------- ---------- ----------- -------- ----------- ---------- ------------
Outstanding at December 31,
1996............................ 12,050 1,265,482 $1.14-11.46 1,289,579 $ .59-7.29 213,044 $ 7.51-11.16
Granted in 1997................. -- 589,600 6.93-18.24 182,881 6.93-11.48 27,500 12.65
Exercised in 1997............... -- (69,575) 9.77-10.54 (52,657) .59-7.29 (22,410) 11.16
Expired or cancelled in 1997.... -- -- -- -- -- -- --
--------- ---------- ----------- -------- ----------- ---------- ------------
Outstanding at December 31,
1997............................ 12,050 1,785,507 $1.14-18.24 1,419,803 $ .59-11.48 218,134 $ 7.51-12.65
========= ========== =========== ======== =========== ========== ============
Exercisable at December 31,
1997............................ 12,050 1,206,907 $1.14-18.24 1,400,984 $ .59-7.29 208,008 $ 7.51-12.65
========= ========== =========== ======== =========== ========== ============
Exercisable through............... June 2005 Sept. 2007 May 2008 April 2008
- ---------------
(1) This variable plan allows for exercise prices with a fixed discount from the
quoted market price. 63,030 options were granted in 1995 at an exercise
price of $7.70 to key employees of the Company who applied deferred bonuses
expensed in 1994 amounting to $236,773 to the exercise price, reducing it to
$3.95 if exercised within the first year of the grant. The exercise price of
these options decreases approximately 6.0% per year through 2000 and $.16
per share from 2001 through 2006, at which time the exercise price will be
$1.61. 104,699 options were granted in 1996 at an exercise price of $10.33
to key employees of the Company who applied deferred bonuses expensed in
1995 amounting to $432,640 to the exercise price, reducing it to $6.20 if
exercised within the first year of the grant. The exercise price of these
options decreases approximately 5.0% per year through 2001 and $.18 per
share from 2002 through 2007, at which time the exercise price will be
$3.64. In 1997, 182,881 options were granted at an exercise price of $11.48
to key employees of the company who applied deferred bonuses expensed in
1996 amounting to $875,730 to the exercise price, reducing it to $6.93 if
exercised within the first year of the grant. The exercise price of these
options decreases approximately 7% per year through 2002 and $.20 per share
from 2003 through 2008, at which time the exercise price will be $4.11.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("Opinion 25") and related
Interpretations in accounting for its employee stock options. As discussed
below, in management's opinion, the alternative fair value accounting provided
for under Statement of Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("Statement 123") requires use of option valuation models that
were not developed for use in valuing employee stock options. Under Opinion 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
expense is recognized.
Pro forma information regarding net earnings and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value
59
62
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
method of that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions. The risk free interest rates used in the
calculation is the rate on the date the options were granted. The risk free
interest rate used for options granted during 1997, 1996 and 1995 were 6.0%,
6.5% and 6.9%, respectively. A volatility factor for the expected market price
of the common stock of 50% was used for options granted in 1997, 1996 and 1995.
The expected dividend yield used for 1997, 1996 and 1995 was 1.0%, 2.0% and
2.0%, respectively. A weighted average expected life of seven years was used in
all years as the Company has little history of options being exercised.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that do not have vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the value of an estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purpose of pro forma disclosures, the estimated fair value of the
options is amortized into expense over the options' vesting period. The
Company's pro forma information follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
Pro forma basic net earnings....................... $38,862 $22,390 $5,509
Pro forma diluted net earnings..................... $42,004 $25,586 $5,509
Pro forma earnings per share
Basic............................................ $ 2.44 $ 1.49 $ .36
Diluted.......................................... 1.96 1.25 .35
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
Stock options outstanding
beginning of year........... 2,780,155 $ 7.39 2,463,863 $ 6.95 2,074,473 $ 6.57
Stock options granted......... 799,981 10.64 481,033 9.57 635,900 7.26
Stock options exercised....... (144,642) 8.63 (61,287) 4.26 (239,855) 4.67
Stock options cancelled....... -- -- (103,454) 9.01 (6,655) 10.78
--------- ------ --------- ------ --------- ------
Stock options outstanding, end
of year..................... 3,435,494 $ 8.09 2,780,155 $ 7.39 2,463,863 $ 6.95
Exercisable at end of year.... 2,827,949 -- 2,395,853 -- 1,942,557 --
Weighted-average fair value of
options granted during the
year........................ -- $11.68 -- $10.59 -- $ 8.19
The weighted average remaining contractual life of the options outstanding
at December 31, 1997 is 7.6 years.
The following table sets forth options outstanding and exercisable by price
range as of December 31, 1997:
60
63
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS OUTSTANDING
- ----------------------------------------------------------------------------- ----------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AS OF 12/31/97 CONTRACTUAL LIFE PRICE AS OF 12/31/97 PRICE
- --------------------- -------------- ---------------- -------- -------------- --------
$0.5940 - 2.8130 460,509 5.65 $ 1.6541 460,509 $1.6541
3.4180 - 6.0480 394,755 9.00 5.6646 394,756 5.6646
6.2550 - 6.9320 205,973 9.94 6.8883 177,373 6.8812
7.2880 - 7.2880 370,540 7.20 7.2880 370,540 7.2880
7.5130 - 7.6270 439,230 7.34 7.6116 437,012 7.6121
8.0770 - 10.5370 616,796 7.37 10.2184 616,796 10.2184
10.6150 - 11.4580 505,373 6.82 11.2324 340,373 11.3339
11.4770 - 11.4770 376,318 9.18 11.4770 0 0.0000
12.6450 - 15.9660 33,000 9.94 13.1985 19,590 12.6450
18.2390 - 18.2390 33,000 9.71 18.2390 11,000 18.2390
- --------------------- --------- ---- -------- --------- -------
$0.5940 - $18.2390 3,435,494 7.62 $ 8.0908 2,827,949 $7.3743
The Company also offers the Fidelity National Financial, Inc. 401(k) Profit
Sharing Plan, a qualified voluntary contributory savings plan, available to
substantially all employees. Eligible employees may contribute up to 15% of
their pretax annual compensation, up to the amount allowed pursuant to the
Internal Revenue Code. The Company may elect to make matching contributions. The
Company has historically not made matching contributions.
61
64
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
M. SUPPLEMENTARY CASH FLOW INFORMATION
The following supplemental cash flow information is provided with respect
to interest and tax payments, as well as certain non-cash investing and
financing activities.
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
Cash paid (refunded) during the year:
Interest............................................ $ 4,244 $ 4,766 $ 4,568
======= ======= =======
Income taxes........................................ $13,971 $14,334 $(3,147)
======= ======= =======
Non-cash investing and financing activities:
Dividends declared and unpaid....................... $ 1,254 $ 975 $ 860
======= ======= =======
Acquisition of Nations Title Inc.................... $ -- $ 2,130 $ --
======= ======= =======
Acquisition of Fidelity National Tax................ $ -- $ 2,520 $ --
======= ======= =======
Acquisition of National Alliance Marketing Group,
Inc.............................................. $ 2,317 $ -- $ --
======= ======= =======
Acquisition of First Title Corporation.............. $ 3,760 $ -- $ --
======= ======= =======
Acquisition of Ifland Credit Services............... $ 2,985 $ -- $ --
======= ======= =======
Acquisition of Bron Research, Inc................... $ 9,850 -- --
======= ======= =======
Acquisition of Credit Reports, Inc.................. $ 200 -- --
======= ======= =======
Acquisition of Express Network, Inc................. $ 5,275 $ -- $ --
======= ======= =======
Retirement of LYONs................................. $25,512 $ -- $ --
======= ======= =======
Conversion of LYONs................................. $ 888 $ -- $ --
======= ======= =======
N. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF RISK
During 1997, the Company generated 38.0% and 11.3% of its title insurance
premiums in California and New York, respectively. The Company generated a
significant amount of title insurance premiums in California and Texas, 38.5%
and 8.9% in 1996, and 43.6% and 10.1% in 1995, respectively.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments, trade receivables, notes receivable and financial instruments used
in hedging activities.
The Company places its cash equivalents and short-term investments with
high credit quality financial institutions and, by policy, limits the amount of
credit exposure with any one financial institution. Investments in commercial
paper of industrial firms and financial institutions are rated A1, P1 or better.
Concentrations of credit risk with respect to trade receivables are limited
because a large number of geographically diverse customers make up the Company's
customer base, thus spreading the trade receivables credit risk. The Company
controls credit risk through monitoring procedures.
Concentrations of credit risk with respect to notes receivable are limited
because a number of diverse entities make up the Company's notes receivable
base, thus spreading the credit risk. The Company controls credit risk through
credit approvals, credit limits and monitoring procedures. The Company performs
in-depth credit evaluations for all notes and requires guarantees and/or
collateral, if deemed necessary.
62
65
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The counterparty to the agreement relating to the Company's interest rate
swap instrument consists of a major high credit quality financial institution.
The Company does not believe that there is significant risk of nonperformance by
this counterparty because the Company continually monitors the credit rating of
such counterparties and limits the financial exposure and the amount of
agreements entered into with any one financial institution. While the notional
amounts of financial instruments are often used to express the volume of these
transactions, the potential accounting loss on these transactions if the
counterparty failed to perform is limited to the amounts, if any, by which the
counterparty's obligation under the contract exceeds the obligation of the
Company to the counterparty.
O. SUBSEQUENT EVENTS
On November 17, 1997, Fidelity National Financial, Inc. signed an Agreement
and Plan of Merger ("Merger Agreement") to merge a newly-formed subsidiary of
the Company into Granite Financial, Inc. ("Granite"). Granite, located in
Golden, Colorado, is a rapidly expanding speciality finance company engaged in
the business of originating, funding, purchasing, selling, securitizing and
servicing equipment leases for a broad range of businesses located throughout
the United States.
Under the original terms of the definitive agreement (as adjusted for the
Company's recent 10% stock dividend), each share of Granite common stock would
be converted into the right to receive .771 shares of Company common stock
without interest, together with cash in lieu of any fractional share. The
exchange ratio was collared between $20.75 and $25.94. The adjustment factor was
designed to insure that the average market value of the shares of Company common
stock to be issued to the stockholders of Granite is neither less than $16.00
nor more than $20.00 per share of Granite common stock. The market value was
determined based on the average closing price of Company common stock during the
20 day trading period ending on the third business day prior to the date of the
shareholder meetings to be held to approve the transaction. Below $20.75
Fidelity could make up the difference in additional shares of its common stock
at its option and above $25.94 Granite shareholders would have the exchange
ratio reduced pro rata. Such average closing price was determined to be $28.48,
resulting in an adjusted exchange ratio of .702 shares of Company common stock
for each share of Granite common stock. The merger will be treated as a
reorganization pursuant to Section 368(a)(1) of the Internal Revenue Code of
1986, as amended, and be accounted for as a "pooling-of-interests" for
accounting purposes.
The shareholders of Granite approved the merger, and the Company
shareholders approved the issuance of shares in connection with the merger, at
special shareholders' meetings on Tuesday, February 24, 1998. The merger was
completed Thursday, February 26, 1998. Under the terms of the definitive
agreement, shareholders of Granite Financial, Inc. common stock receive .702
shares of Fidelity National Financial, Inc. common stock for each share of
Granite Financial, Inc. common stock, with fractional shares to be paid in cash,
resulting in the issuance of approximately 4.4 million shares of Fidelity
National Financial, Inc. common stock. Fidelity National Financial, Inc. common
stock, as reported by the New York Stock Exchange, closed at $28.69 on February
26, 1998.
63
66
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Selected unaudited pro forma combined financial position and results of
operations as of and for the years ending December 31, 1997, 1996 and 1995,
assuming the Granite Financial, Inc. acquisition occurred on January 1, 1997,
1996 and 1995, are presented as follows:
DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Total assets....................................... $679,592 $546,883 $405,670
Total liabilities.................................. 447,762 424,578 327,495
Total stockholders' equity......................... 231,830 122,305 78,175
Total revenue...................................... $763,181 $642,377 $410,798
Basic earnings before extraordinary item........... $ 44,797 $ 25,384 $ 7,690
Basic net earnings................................. 43,097 25,384 6,877
Basic earnings per share........................... 2.12 1.31 .35
Diluted earnings before extraordinary item......... $ 47,939 $ 28,580 $ 7,690
Diluted net earnings............................... 46,239 28,580 6,877
Diluted earnings per share......................... 1.79 1.15 .34
On March 18, 1998, the Company announced that it had entered into an
agreement to sell National Title Insurance of New York Inc. to American Title
Company, subject to regulatory approval and certain other conditions. The
purchase price is structured at a premium to book value. National was acquired
in April 1996, as part of the Nations Title Inc. acquisition and has not been
actively underwriting policies since the transaction closed. American Title
Company is an underwritten title company which was formerly a wholly-owned
subsidiary of the Company. Effective July 1, 1997, 60% of ATC was sold to
certain members of ATC management. The Company will continue to own 40% of ATC,
and ultimately National, following the transaction.
On March 19, 1998, the Company's Board of Directors declared a cash
dividend of $.07 per share which will be payable on May 1, 1998, to stockholders
of record on April 10, 1998.
On March 25, 1998, the Company closed a new credit facility, the proceeds
of which were used to terminate and pay the Company's credit agreement dated as
of September 21, 1995. Additional amounts available under the new credit
facility are available for general corporate purposes.
Also, on March 25, 1998, the Company announced that it had executed an
agreement to merge Matrix Capital Corporation ("Matrix") with a newly-formed
subsidiary of the Company. The merger is subject to due diligence, regulatory
approvals and other customary conditions, and requires approval of the merger by
the shareholders of Matrix and approval of the issuance of Company common stock
in connection with the merger by the shareholders of the Company.
Under the terms of the definitive agreement, each share of Matrix stock
will be converted into the right to receive .80 shares of Company common stock
without interest, together with cash in lieu of any fractional share. The
exchange ratio has been collared between $28.75 and $35.00 per Company share.
The market value
64
67
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is to be determined based on the average closing price of Company stock during
the 20 day trading period ending on the third business day immediately prior to
the last of the stockholders' meetings held to approve the transaction (the
"Average Stock Price"). Below $28.75 the Company may make up the difference in
additional shares at its option and above $35.00 the exchange ratio would be
adjusted to a number equal to $28.00 plus fifty percent of the amount by which
the Average Stock Price exceeds $35.00 divided by the Average Stock Price. It is
intended that the merger be treated as a reorganization pursuant to Section
368(a)(1) of the Internal Revenue Code and be accounted for as a
"pooling-of-interests."
65
68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. THROUGH 13.
Within 120 days after the close of its fiscal year, the Company intends to
file with the Securities and Exchange Commission a definitive proxy statement
pursuant to Regulation 14A of the Securities Exchange Act of 1934 as amended,
which will include the election of directors, the report of compensation
committee on annual compensation, certain relationships and related transactions
and other business.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS. The following is a list of the Consolidated
Financial Statements of Fidelity National Financial, Inc. and its subsidiaries
included in Item 8 of Part II.
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Earnings for the years ended December 31, 1997,
1996 and 1995.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULES. The following is a list of financial
statement schedules filed as part of this annual report on Form 10-K.
Schedule I: Fidelity National Financial, Inc. (Parent Company Financial
Statements).
Schedule II: Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
(a)(3) The following exhibits are incorporated by reference or are set
forth on pages to this Form 10-K:
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
3 Charter and Bylaws of the Issuer.
3.1 Certificate of Incorporation of Registrant, with Amendments,
incorporated by reference from Form S-1, Registration No.
33-11321.
3.1.1 Amendment to Article FOURTH of Certificate of Incorporation
of Registrant dated February 2, 1989 and approved by the
stockholders of the Company on March 24, 1989, incorporated
by reference from Form 10-K filed January 29, 1990.
3.1.2 Amendment to Article FOURTH of Certificate of Incorporation
of Registrant dated June 10, 1992 and approved by the
stockholders of the Company on July 15, 1992, incorporated
by reference from Proxy Statement on Schedule 14A dated June
17, 1992.
3.1.3 Amendment to Article FOURTH of Certificate of Incorporation
of Registrant dated June 15, 1993 and approved by the
stockholders of the Company on June 15, 1993, incorporated
by reference from Proxy Statement on Schedule 14A dated May
5, 1993.
66
69
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
3.1.4 Amendment to Article FOURTH of Certificate of Incorporation
of Registrant dated June 14, 1994 and approved by the
stockholders of the Company on June 14, 1994, incorporated
by reference from Proxy Statement on Schedule 14A dated May
11, 1994.
3.2 Bylaws of Registrant with Amendments, incorporated by
reference from Form S-1, Registration No. 33-11321.
3.2.1 Amendment to Article VII, Section 7 of the Bylaws of
Registrant dated April 22, 1988, incorporated by reference
from Form 10-K filed January 29, 1990.
3.2.2 Amendment to Article III, Section 3(d) of the Bylaws of
Registrant dated September 14, 1991, incorporated by
reference from Form 10-K filed March 29, 1993.
3.2.3 Amendment to Article II, Section 1(b) of the Bylaws of
Registrant dated October 29, 1991, incorporated by reference
from Form 10-K filed March 29, 1993.
3.2.4 Amendment to Article II, Section 1(b) of the Bylaws of
Registrant dated December 10, 1991, incorporated by
reference from Form 10-K filed March 29, 1993.
3.2.5 Amendment to Article IV, Sections 1(a) and (b) and Section 4
of the Bylaws of Registrant dated June 9, 1992, incorporated
by reference from Form 10-K filed March 29, 1993.
4 Instruments Defining Rights of Security Holders.
4.1 Specimen Certificate, incorporated by reference from Form
S-1, Registration No. 33-11321.
4.2 Articles FOURTH and EIGHTH of Certificate of Incorporation
of Registrant, with Amendments, incorporated by reference
from Form S-1, Registration No. 33-11321.
4.2.1 Amendment to Article FOURTH of Certificate of Incorporation
of Registrant dated February 2, 1989 and approved by the
stockholders of the Company on March 24, 1989, incorporated
by reference from Form 10-K filed January 29, 1990.
4.2.2 Amendment to Article FOURTH of Certificate of Incorporation
of Registrant dated June 10, 1992 and approved by the
stockholders of the Company on July 15, 1992, incorporated
by reference from Proxy Statement on Schedule 14A dated June
17, 1992.
4.2.3 Amendment to Article FOURTH of Certificate of Incorporation
of Registrant dated June 14, 1994 and approved by the
stockholders of the Company on June 14, 1994, incorporated
by reference from Proxy Statement on Schedule 14A dated May
11, 1994.
4.3 Articles II and IV of the Bylaws of the Registrant with
Amendments, incorporated by reference from Form S-1,
Registration No. 33-11321.
4.4 Subscription Documents, incorporated by reference from Form
S-1, Registration No. 33-11321.
10 Material Contracts.
10.1 Employment Agreement effective as of April 1, 1991, between
William P. Foley, II and Fidelity National Financial, Inc.,
incorporated by reference from Form 10-K filed March 23,
1992.
10.1.1 First amendment to Employment Agreement between William P.
Foley, II and Fidelity National Financial, Inc., effective
as of January 1, 1996, incorporated by reference from Form
10-K filed March 31, 1997.
10.1.2 Employment Agreements effective as of January 1, 1996
between four key executives and Fidelity National Financial,
Inc., incorporated by reference from Form 10-K filed March
31, 1997.
10.1.2.1 First amendments revisions to Employment Agreements between
four key executives and Fidelity National Financial, Inc.,
effective January 1, 1997 and April 1, 1997.
10.1.3 Employment Agreement effective September 15, 1997 between a
key executive and Fidelity National Financial, Inc.
67
70
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
10.2 Sale Agreement with Exhibits dated August 23, 1991 between
Fidelity National Financial, Inc. and Meridian Bank, a
Pennsylvania banking corporation, incorporated by reference
from Form 10-K filed March 23, 1992.
10.4 Fidelity National Financial, Inc. 1987 Stock Option Plan,
incorporated by reference from Form S-1, Registration No.
33-11321.
10.4.1 Amendments to Fidelity National Financial, Inc. 1987 Stock
Option Plan approved by the stockholders of the Company on
March 24, 1989, incorporated by reference from Form S-8,
Registration No. 33-34300.
10.5 Fidelity National Financial, Inc. 1987 Employee Stock
Purchase Plan, incorporated by reference from Form S-1,
Registration No. 33-11321.
10.5.1 Amendments to Fidelity National Financial, Inc. 1987
Employee Stock Purchase Plan approved by the stockholders of
the Company on March 24, 1989, incorporated by reference
from Form S-8, Registration No. 33-15027.
10.5.2 Amendments to Fidelity National Financial, Inc. 1987
Employee Stock Purchase Plan, incorporated by reference from
Form S-8, Registration No. 33-45709.
10.5.3 Amendments to Fidelity National Financial, Inc. 1987
Employee Stock Purchase Plan approved by the stockholders of
the Company on June 15, 1993, incorporated by reference from
Form S-8, Registration No. 33-64836.
10.5.4 Amendments to Fidelity National Financial, Inc. 1987 Stock
Purchase Plan approved by the stockholders of the Company on
June 20, 1995, incorporated by reference from Form S-8,
Registration No. 33-61983.
10.6 Fidelity National Financial, Inc. 401(k) Profit Sharing
Defined Contribution Plan and Trust adopted January 1, 1990,
incorporated by reference from Form 10-K filed January 29,
1991.
10.6.1 Amendments to Fidelity National Financial, Inc. 401(k)
Profit Sharing Plan, incorporated by reference from Form
S-8, Registration No. 33-56514.
10.7 Fidelity National Financial, Inc. 1991 Stock Option Plan,
approved by the stockholders of the Company on July 15,
1992, incorporated by reference from Form S-8, Registration
No. 33-45272.
10.7.1 Amendments to Fidelity National Financial, Inc. 1991 Stock
Option Plan approved by the stockholders of the Company on
June 15, 1993, incorporated by reference from Form S-8,
Registration No. 33-64834.
10.7.2 Amendment to Fidelity National Financial, Inc. 1991 Stock
Plan, approved by the stockholders of the Company on June
14, 1994, incorporated by reference from Form S-8,
Registration No. 33-83026.
10.8.3 Credit Agreement dated as of September 21, 1995 between
Fidelity National Financial Inc. and The Chase Manhattan
Bank, N.A., Sanwa Bank California, Imperial Bank and First
Interstate Bank, incorporated by reference from Form 8-K
filed September 29, 1995.
10.8.3.1 Amendment No. 1, dated as of December 18, 1995, to the
Fidelity National Financial, Inc. Credit Agreement dated as
of September 21, 1995, incorporated by reference from Form
10-K filed March 31, 1997.
10.8.3.2 Amendment No. 2, dated as of March 15, 1996, to the Fidelity
National Financial, Inc. Credit Agreement dated as of
September 21, 1995, incorporated by reference from Form 10-K
filed March 31, 1997.
10.8.3.3 Amendment No. 3, dated as of July 15, 1996, to the Fidelity
National Financial, Inc. Credit Agreement dated as of
September 21, 1995, incorporated by reference from Form 10-K
filed March 31, 1997.
68
71
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
10.8.3.4 Amendment No. 4, dated as of February 24, 1997, to the
Fidelity National Financial, Inc. Credit Agreement dated as
of September 21, 1995, incorporated by reference from Form
10-K filed March 31, 1997.
10.8.3.5 Amendment No. 5, dated as of March 31, 1997, to the Fidelity
National Financial, Inc. Credit Agreement dated as of
September 21, 1995.
10.8.3.6 Amendment No. 6, dated as of August 5, 1997, to the Fidelity
National Financial, Inc. Credit Agreement dated as of
September 21, 1995.
10.8.3.7 Amendment No. 7, dated as of September 16, 1997, to the
Fidelity National Financial, Inc. Credit Agreement dated as
of September 21, 1995.
10.8.3.8 Amendment No. 8, dated as of November 21, 1997, to the
Fidelity National Financial, Inc. Credit Agreement dated as
of September 21, 1995.
10.8.3.9 Amendment No. 9, dated as of February 17, 1998, to the
Fidelity National Financial, Inc. Credit Agreement dated as
of September 21, 1995.
10.10 Agreement of Limited Partnership of Folco Mission Valley
Partners Limited Partnership, a California limited
partnership, dated August 8, 1991, by Folco Development
Corporation, an Arizona corporation, as general partner, and
Fidelity National Title Insurance Company, an Arizona
corporation, as limited partner, incorporated by reference
from Form 10-K filed March 23, 1992.
10.10.2 Office Building Lease dated October 1, 1991 between Folco
Mission Valley Partners Limited Partnership, a California
limited partnership, as Landlord, and Fidelity National
Title Insurance Company, an Arizona corporation, as Tenant,
incorporated by reference from Form 10-K filed March 23,
1992.
10.12 Form of First Amendment to Office Building Lease between
Folco Development Corporation, an Arizona corporation, as
Landlord, and Fidelity National Title Insurance Company, an
Arizona corporation, as Tenant, with respect to nine office
buildings, and the schedule of such buildings, incorporated
by reference from Form 10-K filed March 23, 1992.
10.14 Goodyear Investors Number II Partnership Agreement dated
October 7, 1986 among Manchester Development Corporation,
Folco Development Corporation Defined Benefit Pension Plan,
Enfield Construction Company, et al., incorporated by
reference from Form S-1, Registration No. 33-11321.
10.16 Agreement of Limited Partnership of Prospect Office
Partners, a California limited partnership, dated September
1, 1988 by and among William P. Foley, II, Frank P. Willey,
Max F. Hickman, Manchester Development Corporation, and
James G. Watt Partnership, incorporated by reference from
Form 10-K filed January 29, 1989.
10.16.1 Promissory Note dated October 1, 1988 in the original
principal amount of $850,000 to Manchester Development
Corporation by Prospect Office Partners, incorporated by
reference from Form 10-K filed March 29, 1993.
10.16.2 Modification Agreement dated November 30, 1992 between
Manchester Development Corporation and Prospect Office
Partners, incorporated by reference from Form 10-K filed
March 29, 1993.
10.18 Wilmac III Limited Partnership Certificate and Agreement of
Limited Partnership, dated December 31, 1987 by and among
Manchester Development Corporation, Stephen L. McCartney,
Frank P. Willey and Robert P. Coluccio, incorporated by
reference from Form 10-K filed January 29, 1989.
10.19 Agreement of Limited Partnership of Tustin Retail, a
California limited partnership, dated April 1988 by and
among Manchester Development Corporation and Vistar
Financial Inc., incorporated by reference from Form 10-K
filed January 29, 1989.
69
72
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
10.19.1 Amendment to Agreement of Limited Partnership of Tustin
Retail by and among Manchester Development Corporation,
Vistar Financial, Inc., William P. Foley, II, Frank P.
Willey, John E. Hock, Robert A. Diemer, Gerald S. Misurek
and Stuart R. Boesche, incorporated by reference from Form
10-K filed March 29, 1993.
10.19.2 Promissory Note dated May 1, 1988 in the original principal
amount of $700,000 to Manchester Development Corporation by
Tustin Retail, incorporated by reference from Form 10-K
filed March 29, 1993.
10.19.3 Fixed Rate Promissory Note dated March 1, 1992 in the
original principal amount of $303,500 to Manchester
Development Corporation by Tustin Retail, incorporated by
reference from Form 10-K filed March 29, 1993.
10.19.4 Modification Agreement dated November 30, 1992 between
Manchester Development Corporation and Tustin Retail,
incorporated by reference from Form 10-K filed March 29,
1993.
10.25 Stock Purchase Agreement dated November 23, 1992 by and
among Fidelity National Financial, Inc., Fidelity National
Title Insurance Company of Pennsylvania, Security Title and
Guaranty Company, and Helmsley Enterprises, Inc.,
incorporated by reference from Form 10-K filed March 29,
1993.
10.32 Asset Purchase Agreement dated December 31, 1993 by and
between American Title Insurance Company ("Seller") and
Fidelity National Title Insurance Company of New York
("Purchaser"), incorporated by reference from Form 10-K
filed March 18, 1994.
10.33 Asset Purchase Agreement dated December 31, 1993, by and
between American Title Insurance Company ("Seller") and
Fidelity National Title Insurance Company of Pennsylvania
("Buyer"), incorporated by reference from Form 10-K filed
March 18, 1994.
10.35 Fidelity National Financial, Inc. 1993 Stock Plan, approved
by stockholders of the Company on June 14, 1994,
incorporated by reference from Form S-8, Registration No.
33-83026.
10.36 Agreement to Purchase Option to Purchase an Undivided 60%
Interest in Assets of World Tax Service, by and between
Fidelity Participations, Inc. and World Tax Service, Inc.,
incorporated by reference from Form 10-K filed March 30,
1995.
10.36.1 Stock Purchase Agreement dated June 9, 1995 between Fidelity
National Financial, Inc., WTC Financial and World Tax
Service to acquire World Tax Service and certain assets of
WTC Financial, incorporated by reference from Form 10-K
filed March 25, 1996.
10.38 Variable Rate Promissory Note dated August 24, 1994 in the
principal amount of $10,127,141 to Fleet Credit Corporation
by Fidelity Asset Management, Inc., incorporated by
reference from Form 10-K filed March 30, 1995.
10.39 Variable Rate Promissory Note dated August 24, 1994 in the
principal amount of $10,134,939.93 to Fleet Credit
Corporation by Fidelity Asset Management, Inc., incorporated
by reference from Form 10-K filed March 30, 1995.
10.39.1 Variable Rate Promissory Note dated June 22, 1995 in the
principal amount of $4,938,337 to Fleet Credit Corporation
by Fidelity Asset Management, Inc., incorporated by
reference from Form 10-K filed March 25, 1996.
10.39.2 Variable Rate Promissory Note dated September 12, 1996 in
the principal amount of $7,500,000 to MetLife Capital
Corporation by Fidelity Asset Management, Inc., incorporated
by reference from Form 10-K filed March 31, 1997.
10.39.3 Variable Rate Promissory Note dated April 30, 1997 in the
principal amount of $4,767,422 to Fleet Capital Leasing by
Fidelity Asset Management, Inc.
10.39.4 Variable Rate Promissory Note dated July 29, 1997 in the
principal amount of $8,000,000 to Imperial Bank by Fidelity
Asset Management, Inc.
70
73
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
10.39.5 Variable Rate Promissory Note dated September 30, 1997 in
the principal amount of $6,131,283 to Fleet Capital Leasing
by Fidelity Asset Management, Inc.
10.41 Stock Purchase Agreement dated February 14, 1995 by and
among Fidelity National Financial, Inc., Raul Costelo, Jeff
A. Sanderson and Mark J. Attaway to acquire outstanding
capital stock of ACS Systems, Inc., incorporated by
reference from Form 10-K filed March 30, 1995.
10.42 Stock Purchase Agreement by and among Ronald G. Bridge
(selling shareholder); Western Title Co. of Washington, Inc.
and Fidelity National Financial, Inc. to acquire Western
Title Co. of Washington, Inc., incorporated by reference
from Form 10-K filed March 30, 1995.
10.43 Stock Purchase Agreement dated as of August 18, 1995 by and
among William D. Rothenberg, Marshall D. Wexler, Southern
California Title Company and Fidelity National Financial,
Inc., incorporate by reference from Form 10-K filed March
25, 1996.
10.44 Acquisition Agreement dated September 13, 1995 by and among
Fidelity National Financial, Inc. and Nations Holding Group,
Inc. and its wholly-owned subsidiary Nations Title Inc. to
acquire all of the issued and outstanding shares of Nations
Title Inc., incorporated by reference from Form 10-K filed
March 25, 1996.
10.45 Agreement for purchase and sale of stock dated November 4,
1996 by and between Fidelity National Financial, Inc. and
the stockholders of CRM, Inc., incorporated by reference
from Form 10-K filed March 31, 1997.
10.46 Stock Purchase and Loan Agreement by and among ATC Holdings,
Inc., Fidelity National Financial, Inc., and American Title
Company.
10.47 Agreement and Plan of Reorganization dated as of August 15,
1997 by and among Fidelity National Financial, Inc., First
Title Corporation, Ernest N. Moore, Jeanene S. Moore and T.
Frank Jordan and First Title Acquisition Corporation.
10.48 Agreement and Plan of Reorganization dated September 1997 by
and among Fidelity National Financial, Inc., ICS Ifland
Credit Services, Inc., Rick W. Ifland and ICS Acquisition
Corporation.
10.49 Agreement and Plan of Reorganization by and among Fidelity
National Financial, Inc.; Bron Acquisition Corporation, Bron
Research, Inc., and the Shareholders of Bron Research, Inc.,
dated as of September 24, 1997.
10.50 Agreement and Plan of Reorganization dated as of September
12, 1997, by and among Fidelity National Financial, Inc.,
Credit Reports, Inc., Colin Howard Friedman and Hedy Kramer
Friedman, as trustees of the Friedman Family Trust UDT,
dated July 23, 1987, Colin H. Friedman, Farid Meshkatai and
CRI Acquisition Corporation.
10.51 Agreement and Plan of Reorganization dated as of September
12, 1997 by and among Fidelity National, Inc., Express
Network, Inc., Colin Howard Friedman and Hedy Kramer
Friedman, as trustees of the Friedman Family Trust UDT,
dated July 23, 1987, Farid Meshkatai, and Anita Kramer
Meshkatai, as Trustee of the Anita Kramer Living Trust,
dated July 23, 1987, Colin H. Friedman, and ENI Acquisition
Corporation.
10.52 Fidelity National Financial, Inc. Liquid Yield Option Notes,
due 2009 (zero coupon-subordinated) Exchange Agreement dated
October 17, 1997.
10.53 Stock and Asset Purchase Agreement dated as of May 22, 1997,
by and between Randall F. Zurbach and John C. Wilbur, Jr.
and Fidelity National Financial, Inc.
10.54 Agreement and Plan of Merger, dated November 17, 1997 by and
among Fidelity National Financial, Inc.; Granite Acquisition
Corporation and Granite Financial, Inc., incorporated by
reference from Form S-4, Registration No. 333-44153.
11 Computation of Basic and Diluted Earnings per Share
71
74
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
21 List of Subsidiaries
23 Independent Auditors' Consent
27 1997 Financial Data Schedule
27.1 1996 Financial Data Schedule -- Restated
27.2 1995 Financial Data Schedule -- Restated
27.3 1997 1Q Financial Data Schedule -- Restated
27.4 1997 2Q Financial Data Schedule -- Restated
27.5 1997 3Q Financial Data Schedule -- Restated
27.6 1996 1Q Financial Data Schedule -- Restated
27.7 1996 2Q Financial Data Schedule -- Restated
27.8 1996 3Q Financial Data Schedule -- Restated
(b) REPORTS ON FORM 8-K. The Company filed reports on Form 8-K during the
fourth quarter ending December 31, 1997 as follows:
Current report on Form 8-K dated November 3, 1997, relating to Fidelity
National Financial, Inc.'s purchase of $45 million face amount of its
outstanding Liquid Yield Option Notes.
Current report on Form 8-K dated November 5, 1997, relating to the combined
financial results of Fidelity National Financial, Inc. and Bron Research, Inc.
for the month ended October 31, 1997.
Combined report on Form 8-K dated November 21, 1997, relating to Fidelity
National Financial, Inc.'s signing of a Merger Agreement with Granite Financial,
Inc.
72
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
FIDELITY NATIONAL FINANCIAL, INC.
By: /s/ WILLIAM P. FOLEY, II
------------------------------------
William P. Foley, II
Chief Executive Officer
Date: March 19, 1998
----------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM P. FOLEY, II Chairman of the Board and Chief March 19, 1998
- --------------------------------------------------- Executive Officer (Principal
William P. Foley, II Executive Officer)
/s/ FRANK P. WILLEY President and Director March 19, 1998
- ---------------------------------------------------
Frank P. Willey
/s/ ALLEN D. MEADOWS Executive Vice President and March 19, 1998
- --------------------------------------------------- Chief Financial Officer
Allen D. Meadows (Principal Financial and
Accounting Officer)
/s/ WILLIAM A. IMPARATO Director March 19, 1998
- ---------------------------------------------------
William A. Imparato
/s/ DONALD M. KOLL Director March 19, 1998
- ---------------------------------------------------
Donald M. Koll
Director March 19, 1998
- ---------------------------------------------------
Daniel D. (Ron) Lane
/s/ GENERAL WILLIAM LYON Director March 19, 1998
- ---------------------------------------------------
General William Lyon
/s/ STEPHEN C. MAHOOD Director March 19, 1998
- ---------------------------------------------------
Stephen C. Mahood
/s/ J. THOMAS TALBOT Director March 19, 1998
- ---------------------------------------------------
J. Thomas Talbot
/s/ CARY H. THOMPSON Director March 19, 1998
- ---------------------------------------------------
Cary H. Thompson
/s/ WILLIAM W. WEHNER Director March 19, 1998
- ---------------------------------------------------
William W. Wehner
73
76
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Fidelity National Financial, Inc.:
Under date of February 16, 1998, except as to Note O to the Consolidated
Financial Statements, which is as of March 25, 1998, we reported on the
Consolidated Balance Sheets of Fidelity National Financial, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related Consolidated
Statements of Earnings, Stockholders' Equity and Cash Flows for each of the
years in the three-year period ended December 31, 1997 which are included in the
Annual Report on Form 10-K. In connection with our audits of the aforementioned
Consolidated Financial Statements, we also audited the related financial
statement schedules in the Annual Report on Form 10-K. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statement schedules based on our
audits.
In our opinion, such schedules, when considered in relation to the basic
Consolidated Financial Statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 16, 1998, except as to Note O
to the Consolidated Financial Statements,
which is as of March 25, 1998
74
77
SCHEDULE I
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
--------------------
1997 1996
-------- --------
ASSETS
Cash........................................................ $ -- $ 2,922
Investment securities available for sale, at fair value..... 46,811 31,569
Trade receivables, net...................................... 20 20
Notes receivable, net....................................... 2,500 4,535
Investment in subsidiaries.................................. 278,430 215,253
Investments in real estate and partnerships, net............ 1,435 1,435
Income taxes receivable..................................... -- 7,589
Prepaid expenses and other assets........................... 4,290 6,083
-------- --------
$333,486 $269,406
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $ 7,466 $ 2,935
Notes payable............................................. 96,885 120,263
Accounts payable to subsidiaries.......................... 9,272 28,353
Deferred income taxes..................................... 13,422 7,604
Income taxes payable...................................... 10,122 --
-------- --------
137,167 159,155
-------- --------
Stockholders' Equity:
Preferred stock, $.0001 par value; authorized 3,000,000
shares; issued and outstanding, none................... -- --
Common stock, $.0001 par value; authorized, 50,000,000
shares in 1997 and 1996; issued 24,055,755 in 1997 and
21,353,963 in 1996..................................... 2 2
Additional paid-in capital................................ 101,735 61,271
Retained earnings......................................... 126,535 91,019
-------- --------
228,272 152,292
Net unrealized gains on investments....................... 22,422 12,334
Less treasury stock, 6,041,352 shares in 1997 and 1996, at
cost................................................... 54,375 54,375
-------- --------
196,319 110,251
Commitments and contingencies.............................
Subsequent events.........................................
-------- --------
$333,486 $269,406
======== ========
See accompanying Notes to Financial Statements.
(Schedule continued on following page.)
75
78
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
REVENUE:
Other fees and revenue.................................... $ 13 $ 1,617 $ 583
Interest and investment income............................ 1,868 227 2,563
-------- ------- -------
1,881 1,844 3,146
-------- ------- -------
EXPENSES:
Other operating expenses.................................. 9,645 2,288 204
Interest expense.......................................... 7,163 7,177 8,427
-------- ------- -------
16,808 9,465 8,631
-------- ------- -------
Losses before income tax benefit, equity in earnings of
subsidiaries and extraordinary item....................... (14,927) (7,621) (5,485)
Income tax benefit.......................................... 6,493 3,048 899
-------- ------- -------
Losses before equity in earnings of subsidiaries and
extraordinary item........................................ (8,434) (4,573) (4,586)
Equity in earnings of subsidiaries.......................... 49,905 28,910 12,218
-------- ------- -------
Earnings before extraordinary item.......................... 41,471 24,337 7,632
Extraordinary item -- loss on early retirement of debt, net
of applicable income tax benefit of $1,180 in 1997 and
$437 in 1995.............................................. (1,700) -- (813)
-------- ------- -------
Net earnings................................................ $ 39,771 $24,337 $ 6,819
======== ======= =======
Basic net earnings.......................................... $ 39,771 $24,337 $ 6,819
======== ======= =======
Basic earnings per share before extraordinary item.......... $ 2.61 $ 1.62 $ .50
Extraordinary item -- loss on early retirement of debt, net
of applicable income tax benefit.......................... (.11) -- (.05)
-------- ------- -------
Basic net earnings per share................................ $ 2.50 $ 1.62 $ .45
======== ======= =======
Weighted average shares outstanding, basic basis............ 15,911 15,037 15,131
======== ======= =======
Diluted net earnings........................................ $ 42,913 $27,533 $ 6,819
Diluted net earnings per share before extraordinary item.... $ 2.08 $ 1.34 $ .49
Extraordinary item -- loss on early retirement of debt net
of applicable income tax benefit.......................... (.08) -- (.05)
-------- ------- -------
Diluted net earnings per share.............................. $ 2.00 $ 1.34 $ .44
======== ======= =======
Weighted average shares, diluted basis...................... 21,483 20,484 15,694
======== ======= =======
Dividends per share......................................... $ .26 $ .24 $ .22
======== ======= =======
Retained earnings, beginning of year........................ $ 91,019 $70,273 $66,668
Dividends declared........................................ (4,255) (3,591) (3,214)
Net earnings.............................................. 39,771 24,337 6,819
-------- ------- -------
Retained earnings, end of year.............................. $126,535 $91,019 $70,273
======== ======= =======
See accompanying Notes to Financial Statements.
(Schedule continued on following page.)
76
79
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................. $ 39,771 $ 24,337 $ 6,819
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary item: Loss on early retirement of
LYONs............................................... 2,090 -- --
Depreciation and amortization......................... -- 90 98
Amortization of LYONs original issue discount and
issuance costs...................................... 5,939 5,295 4,916
Provision for losses on notes receivable.............. 195 240 (80)
Net equity in earnings of subsidiaries................ (49,905) (28,910) (12,218)
(Gain) loss on sale of investments.................... (746) 1,625 (639)
Net increase (decrease) in income taxes............... 16,793 3,417 7,673
Net (increase) decrease in prepaid expenses and other
assets.............................................. (99) (1,470) 4,397
Net increase (decrease) in accounts payable and
accrued liabilities................................. 3,553 (1,380) (2,584)
-------- -------- --------
Net cash provided by operating activities........ 17,591 3,244 8,382
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments....................... 7,491 8,699 25,112
Purchase of investments.................................. (12,217) (8,814) (7,471)
Additions to notes receivable............................ -- (4,350) --
Collections on notes receivable.......................... 1,590 393 106
Additions to investment in subsidiaries.................. (7,055) (10,699) (7,034)
Investment in real estate and partnerships, net.......... -- -- (53)
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... (10,191) (14,771) 10,660
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings............................................... -- 5,000 33,772
Debt service payments.................................... (3,000) (3,000) (46,814)
Extraordinary items:
Early retirement of LYON's............................ 790 -- --
Early retirement of debt.............................. -- -- 1,250
Dividends paid........................................... (3,979) (3,477) (3,232)
Issuance (acquisition) of treasury stock, net............ -- 1,917 (15,831)
Exercise of stock options................................ 1,412 440 1,439
Net borrowings from (payments to) subsidiaries........... (5,545) 13,325 10,618
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... (10,322) 14,205 (18,798)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (2,922) 2,678 244
Cash and cash equivalents at beginning of year............. 2,922 244 --
-------- -------- --------
Cash and cash equivalents at end of year................... $ -- $ 2,922 $ 244
======== ======== ========
See accompanying Notes to Financial Statements.
(Schedule continued on following page.)
77
80
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
NOTES TO FINANCIAL STATEMENTS
A. Fidelity National Financial, Inc. (the "Company") transacts substantially
all of its business through its subsidiaries. The Parent Company Financial
Statements should be read in connection with the aforementioned Consolidated
Financial Statements and Notes thereto included elsewhere herein.
B. Notes payable consist of the following:
DECEMBER 31,
----------------------
1997 1996
--------- ----------
(DOLLARS IN THOUSANDS)
Credit agreement, secured by common stock of certain
Insurance Subsidiaries, with principal due quarterly and
interest due monthly at LIBOR rate plus 2.0% (7.63% at
December 31, 1997), due September 2001, paid subsequent to
year end.................................................. $15,250 $ 18,250
Bank revolving credit facility, secured by common stock of
certain Insurance Subsidiaries, with interest due
quarterly at LIBOR rate plus 2.0% (7.63% at December 31,
1997) principal due quarterly beginning April 1998, due
September 2001, unused portion of $8 million at December
31, 1997 and 1996, paid subsequent to year end............ 5,000 5,000
Liquid Yield Option Notes, zero coupon, convertible
subordinated notes due 2009 with interest at 5.5%......... 76,635 97,013
------- --------
$96,885 $120,263
======= ========
Principal maturities, including accretion of original issue discount, are
as follows (dollars in thousands):
1998...................................................... $ 3,563
1999...................................................... 5,250
2000...................................................... 5,500
2001...................................................... 5,000
2002...................................................... 938
Thereafter................................................ 140,572
--------
$160,823
========
78
81
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
C. SUPPLEMENTARY CASH FLOW INFORMATION:
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
Cash paid (refunded) during the year:
Interest.................................................. $ 1,931 $ 1,953 $ 3,126
======= ======= =======
Income taxes.............................................. $13,971 $14,334 $(3,147)
======= ======= =======
Non-cash investing and financing activities:
Dividends declared and unpaid............................. $ 1,254 $ 975 $ 860
======= ======= =======
Acquisition of Nations Title Inc.......................... $ -- $ 2,130 $ --
======= ======= =======
Acquisition of Fidelity National Tax...................... $ -- $ 2,520 $ --
======= ======= =======
Acquisition of National Alliance Marketing Group, Inc..... $ 2,317 $ -- $ --
======= ======= =======
Acquisition of First Title Corporation.................... $ 3,760 $ -- $ --
======= ======= =======
Acquisition of Ifland Credit Services..................... $ 2,985 $ -- $ --
======= ======= =======
Acquisition of Bron Research, Inc......................... $ 9,850 $ -- $ --
======= ======= =======
Acquisition of Credit Reports, Inc........................ $ 200 $ -- $ --
======= ======= =======
Acquisition of Express Network, Inc....................... $ 5,275 $ -- $ --
======= ======= =======
Retirement of LYONs....................................... $25,512 $ -- $ --
======= ======= =======
Conversion of LYONs....................................... $ 888 $ -- $ --
======= ======= =======
79
82
SCHEDULE II
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------- ---------- ----------------------- ---------- ---------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) OF PERIOD
----------- ---------- ---------- ---------- ---------- ---------
Year ended December 31, 1997:
Reserve for claim losses.............. $187,245 $38,661 $ 124(1) $35,283(2) $190,747
Allowance on:
Trade receivables.................. 6,822 1,920 204(1) 3,793(3) 5,153
Notes receivable................... 2,654 270 (153)(1) 1,021(3) 1,750
Real estate allowance................. 4,467 330 -- 3,330(4) 1,467
Amortization of cost in excess of net
assets acquired and other
intangible assets.................. 6,309 2,888 -- -- 9,197
Year ended December 31, 1996:
Reserve for claim losses.............. $146,094 $33,302 $45,171 $37,322(2) $187,245
Allowance on:
Trade Receivables.................. 3,471 2,644 3,091(1) 2,384(3) 6,822
Notes Receivable................... 2,941 775 153(1) 1,215(3) 2,654
Real estate allowance................. 3,467 -- 1,000(1) -- 4,467
Amortization of cost in excess of net
assets acquired and other
intangible assets.................. 3,988 2,321 -- -- 6,309
Year ended December 31, 1995:
Reserve for claim losses.............. $153,306 $19,031 $ -- $26,243(2) $146,094
Allowance on:
Trade receivables.................. 2,029 1,701 -- 259(3) 3,471
Notes receivable................... 2,783 612 -- 454(3) 2,941
Real estate allowance................. 3,296 171 -- -- 3,467
Amortization of cost in excess of net
assets acquired and other
intangible assets.................. 1,503 2,485 -- -- 3,988
- ---------------
(1) Represents net reserve for claim losses and other allowances assumed from
sales and acquisitions during the year.
(2) Represents payments of claim losses, net of recoupments.
(3) Represents uncollectible accounts written off, change in reserve due to
reevaluation of specific items and change in reserve due to sale of certain
assets.
(4) Represents reduction in the reserve balance due to the sale of a real estate
property.
80