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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(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, 2000
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 ORGANIZATION) IDENTIFICATION NO.)
17911 VON KARMAN AVENUE, SUITE 300 (949) 622-4333
IRVINE, CALIFORNIA 92614 (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING AREA CODE)
INCLUDING ZIP CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, $.0001 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
As of March 16, 2001, 78,207,911 shares of Common Stock ($.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 $2,226,326,392.
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, 2000, to be filed within 120 days after the close of the fiscal
year that is the subject of this Report.
The index to exhibits is contained in Part IV herein on Page 67.
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TABLE OF CONTENTS
FORM 10-K
PAGE
NUMBER
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 16
Item 6. Selected Financial Data..................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 7A. Quantitative and Qualitative Disclosure about the Market
Risk of Financial Instruments............................... 26
Item 8. Financial Statements and Supplementary Data................. 27
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
We are the largest title insurance and diversified real estate related
services company in the United States. Our title insurance
underwriters -- Fidelity National Title, Chicago Title, Ticor Title, Security
Union Title and Alamo Title -- together issued approximately 30% of all title
insurance policies issued nationally during 1999. We provide title insurance in
49 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin
Islands, and in Canada and Mexico.
In addition, we provide a broad array of escrow and other title related
services, as well as real estate related services, including:
- collection and trust activities
- trustee's sales guarantees
- recordings
- reconveyances
- property appraisal services
- credit reporting
- exchange intermediary services in connection with real estate
transactions
- real estate tax services
- home warranty insurance
- foreclosure posting and publishing services
- loan portfolio services
- flood certification
- field services
All dollars presented in this document are in thousands, except per share
amounts and unless indicated otherwise.
MARKET FOR TITLE INSURANCE
The market for title insurance in the United States is large and growing.
According to Corporate Development Services, Inc., total revenues for the entire
U.S. title insurance industry grew from $6.0 billion in 1997 to $8.7 billion in
1999, which represented a compound annual growth rate of 20%. Growth in the
industry is closely tied to various macroeconomic factors, including, but not
limited to, growth in the gross national product, inflation, interest rates and
sales of new and existing homes as well as the refinancing of previously issued
mortgages.
Virtually every real estate transaction consummated in the U.S. requires
the use of title insurance by a lending institution before a transaction can be
finalized. Generally, revenues from title insurance policies are directly
correlated with the value of the property underlying the title policy, and
appreciation in the overall value of the real estate market drives growth in
total industry revenues. Industry revenues are also driven by swings in interest
rates, which affect demand for new mortgage loans and refinancing transactions.
The U.S. title insurance industry is concentrated among a handful of
industry participants. According to Corporate Development Services, the top five
title insurance companies accounted for 89% of net premiums collected in 1999.
Over 40 independent title insurance companies accounted for the remaining 11% of
net premiums collected in 1999. Over the last few years, the title insurance
industry has been consolidating, beginning with the merger of Lawyers Title
Insurance and Commonwealth Land Title Insurance in 1998 to
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create LandAmerica Financial Group, Inc., followed by our acquisition of Chicago
Title in March 2000. Consolidation has created opportunities for increased
financial and operating efficiencies for the industry's largest participants and
should continue to drive profitability and market share in the industry.
STRATEGY
Our strategy is to maximize operating profits by increasing our market
share in the title insurance business and by aggressively and effectively
managing operating expenses throughout the real estate business cycle. In
addition, we plan to broaden our market penetration by focusing on our real
estate related services. To accomplish our goals, we intend to:
- Operate each of our five title brands independently. We believe that in
order to maintain and strengthen our title insurance revenue base, we
must leave the Fidelity Title, Chicago Title, Ticor Title, Security Union
Title and Alamo Title brands intact and operate them independently.
Entrepreneurship and close customer relationships are an integral part of
the culture at each of our title brands. We believe that this culture of
independence aids in employee retention, which is critical to the
operating success of each brand.
- Consistently deliver high quality products with superior customer
service. We believe customer service and consistent product delivery are
the most important factors in attracting and retaining customers. We
continue to focus our marketing efforts and distribution network to serve
our customers in the residential, institutional and commercial market
sectors.
- Implement our disciplined operating philosophy throughout the Chicago
Title brands. We have introduced our key standard operating metrics at
Chicago Title, Ticor Title and Security Union Title. We monitor opened
and closed orders per employee and revenue per employee on a weekly basis
at all of our brands. While we aggressively monitor personnel costs with
revenues, we have not sacrificed and will not sacrifice our level of
customer service to increase these metrics.
- Employ our industry-leading technology to enhance efficiency and simplify
the title insurance research process. Through our majority owned
information technology services subsidiary, Micro General Corporation, a
full-service enterprise solutions enabler offering a complete range of
information technology services, we are preparing for the beta launch of
our Net Global Solutions system in 2001. This browser-based real estate
documentation system, when implemented in 2001, will provide us with the
necessary platform to begin to make meaningful progress in increasing the
efficiencies of the title insurance research and issuance process. Our
Next Generation System will allow data retrieval and file access from
remote locations, thereby allowing complete workflow mobility among all
of our title insurance brands as well as our real estate related
subsidiaries. We also plan to offer the use of this system to our agents.
- Continue to expand the scope and breadth of the real estate related
products and services we offer. We plan to maximize the value of the
Fidelity brand through the penetration of our real estate related
products and services into our large, diverse customer base. We have
consolidated most of the real estate related products and services we
offer, which include property appraisal, credit reporting, flood
certification, real estate tax services, home warranty insurance,
foreclosure posting and publishing, exchange intermediary services, loan
portfolio services and field services, under the Fidelity brand. We are
also developing a national real estate information database, which we
believe will allow us to improve the value and content of our existing
information products, to market customized real property information
products directly to real estate brokers and their customers and reduce
expenditures to, and reliance upon, third party data vendors.
RECENT DEVELOPMENTS
On March 20, 2000, we merged with Chicago Title Corporation pursuant to an
Agreement and Plan of Merger dated August 1, 1999 and amended on October 13,
1999. Prior to the merger, Chicago Title was one of the nation's largest
providers of title insurance and real estate related services for residential
and
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commercial real estate transactions. For the year ended December 31, 1999,
Chicago Title had revenues of $2.0 billion and net earnings of $105.8 million.
As of December 31, 1999, Chicago Title had total assets of $1.9 billion. At the
time of the merger, Chicago Title had more than 340 full service offices and
approximately 4,100 policy-issuing agents in 49 states, Puerto Rico, the U.S.
Virgin Islands, Guam and Canada, which are now part of our operations.
On January 3, 2001, we acquired International Data Management Corporation,
or "IDM," a leading provider of real estate information services. IDM's real
estate information databases contains over 100 million real property ownership
and sales records from the continental United States. The databases are updated
daily to reflect new sales, mortgage information and other changes in real
property ownership. Our acquisition of IDM contributes to our strategy of
expanding the scope and breadth of the real estate related products and services
we offer.
On January 24, 2001, we issued 8,050,000 shares of our common stock at a
public offering price of $33.50 per share. Proceeds from this offering, net of
underwriting discounts and commissions and other related expenses were $256.2
million. Net proceeds of $249.5 million were used to pay down indebtedness. The
remainder of the cash proceeds are available for general corporate purposes.
INDUSTRY OVERVIEW
Title Insurance Policies. Generally, real estate buyers and mortgage
lenders purchase title insurance to insure good and marketable title to real
estate. Today, virtually all real property mortgage lenders require their
borrowers to obtain a title insurance policy at the time a mortgage loan is
made. Title insurance premiums are based upon either the purchase price of the
property insured or the amount of the mortgage loan. Title insurance premiums
are due in full at the closing of the real estate transaction, and the policy
generally terminates upon the resale or refinancing of the property.
Prior to issuing policies, underwriters can reduce or eliminate future
claim losses by accurately performing searches and examinations. A title
company's predominant expense relates to such searches and examinations, the
preparation of preliminary title reports, policies or commitments and the
maintenance of title "plants," which are indexed compilations of public records,
maps and other relevant historical documents. Claim losses generally result from
errors or mistakes made in the title search and examination process and from
hidden defects such as fraud, forgery, incapacity, missing heirs or refinancing
of the property.
Commercial real estate title insurance policies insure title to commercial
real property, and generally involve higher coverage amounts and yield higher
premiums, thereby generating greater profit margins than title policies for
residential real estate transactions. Prior to the Chicago Title merger, we
issued primarily residential real property title insurance policies. In the
Chicago Title merger, we acquired Chicago Title's National Commercial &
Industrial business group, which specializes in meeting the needs of clients
involved in large commercial transactions. As discussed later under the heading
"Economic Factors Affecting Industry," the volume of commercial real estate
transactions is affected primarily by fluctuations in local supply and demand
conditions for office space, while residential real estate transaction volume is
primarily affected by macroeconomic and seasonal factors. Thus, we believe the
addition of Chicago Title's commercial real estate title insurance base will
help in maintaining uniform revenue levels throughout the seasons.
Losses and Reserves. While most other forms of insurance provide for the
assumption of risk of loss arising out of unforeseen events, title insurance
serves to protect the policyholder from risk of loss from events that predate
the issuance of the policy. As a result, claim losses associated with issuing
title policies are less expensive when compared to other insurance underwriters.
The maximum amount of liability under a title insurance policy is usually the
face amount of the policy plus the cost of defending the insured's title against
an adverse claim.
Reserves for claim losses are based upon known claims, as well as losses we
expect to incur based upon historical experience and other factors, including
industry averages, claim loss history, legal environment, geographic
considerations, expected recoupments and the types of policies written. We also
accrue reserves for losses arising from escrow, closing and disbursement
functions due to fraud or operational error.
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A title insurance company can minimize its losses by having strict quality
control systems and underwriting standards in place. These controls increase the
likelihood that the appropriate level of diligence is conducted in completing a
title search so that the possibility of potential claims is significantly
mitigated. In the case of independent agents, who conduct their own title
searches, the agency agreement between the agent and the title insurance
underwriter gives the underwriter the ability to proceed against the agent when
a loss arises from a flawed title search.
Courts and juries sometimes award damages against insurance companies,
including title insurance companies, in excess of policy limits. Such awards are
typically based on allegations of fraud, misrepresentation, deceptive trade
practices or other wrongful acts commonly referred to as "bad faith." Although
we have not experienced damage awards materially in excess of policy limits, the
possibility of such bad faith damage awards may cause us to experience increased
costs and difficulty in settling title claims.
The maximum insurable amount under any single title insurance policy is
determined by statutorily calculated net worth. The highest self-imposed single
policy maximum insurable amounts for any of our title insurance subsidiaries is
$100.0 million.
Direct and Agency Operations. We provide title insurance services through
our direct operations and wholly owned underwritten title companies, and
additionally through independent title insurance agents who issue title policies
on behalf of title underwriters. Title underwriters determine the terms and
conditions upon which they will insure title to the real property according to
their underwriting standards, policies and procedures. In our direct operations,
the title underwriter issues the title insurance policy and retains the entire
premium paid in connection with the transaction. In our agency operations, the
search and examination function is performed by an independent agent. The agent
thus retains the majority of the title premium collected, with the balance
remitted to the title underwriter for bearing the risk of loss in the event that
a claim is made under the title insurance policy. Independent agents may select
among several title underwriters based upon the amount of the premium "split"
offered by the underwriter, the overall terms and conditions of the agency
agreement and the scope of services offered to the agent. Premium splits vary by
geographic region.
Our direct operations provide the following benefits:
- higher margins because we retain the entire premium from each transaction
instead of paying a commission to an agent;
- continuity of service levels to a broad range of customers; and
- additional sources of income through escrow and other real estate related
services, such as property appraisal services, collection and trust
activities, real estate information and technology services, trustee's
sales guarantees, credit reporting, flood certification, real estate tax
services, reconveyances, recordings, foreclosure publishing and posting
services and exchange intermediary services in connection with real
estate transactions.
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 -- i.e., mortgage interest rates. Other factors
affecting real estate activity include, but are not limited to, demand for
housing, employment levels, family income levels and general economic
conditions. We have found that residential real estate activity decreases in the
following situations:
- when mortgage interest rates are high;
- when the mortgage funding supply is limited; and
- when the United States economy is weak.
Because commercial real estate transactions tend to be driven more by
supply and demand for commercial space and occupancy rates in a particular area
rather than by macroeconomic events, our commercial real estate title insurance
business can generate revenues which offset the industry cycles discussed above.
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Historically, real estate transactions have produced seasonal revenue
levels for title insurers. The first calendar quarter is typically the weakest
quarter in terms of revenue due to the generally low volume of home sales during
January and February. The fourth calendar quarter is typically the strongest in
terms of revenue due to commercial entities desiring to complete transactions by
year-end. Significant changes in interest rates may alter these traditional
seasonal patterns due to the effect the cost of financing has on the volume of
real estate transactions.
TITLE INSURANCE OPERATIONS
Our direct operations are divided into approximately 200 profit centers
consisting of more than 1,000 offices. Each profit center processes title
insurance transactions within its geographical area, which is usually identified
by a county, a group of counties forming a region, or a state, depending on the
management structure in that part of the country. We also transact title
insurance business through a network of over 7,000 agents, primarily in those
areas in which agents are the more accepted title insurance provider.
The following table sets forth the approximate dollars and percentages of
title insurance premium revenue by state. The year ended December 31, 2000,
includes title insurance premium revenue by state, both in dollars and as a
percentage of the total, on a pro forma basis, assuming the Chicago Title merger
had been consummated on January 1, 2000.
YEAR ENDED DECEMBER 31,
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2000 1999 1998
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AMOUNT % AMOUNT % AMOUNT %
---------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
California...................... $ 444,012 21.4% $289,285 30.8% $301,406 33.1%
Texas........................... 321,740 15.5 179,490 19.1 178,407 19.6
New York........................ 184,263 8.9 92,280 9.8 88,899 9.8
Florida......................... 139,532 6.7 48,596 5.2 44,860 4.9
New Jersey...................... 84,226 4.0 28,371 3.0 23,085 2.5
Michigan........................ 80,688 3.9 24,324 2.6 23,233 2.6
All others...................... 824,650 39.6 277,106 29.5 250,388 27.5
---------- ----- -------- ----- -------- -----
Totals................ $2,079,111 100.0% $939,452 100.0% $910,278 100.0%
========== ===== ======== ===== ======== =====
For the entire title insurance industry, 12 states accounted for 71.8% of
title premiums written in the United States in 1999. California represented the
single largest state with 18.0%.
We also analyze our business by examining the level of premiums generated
by direct and agency operations. The following table presents the percentages of
title insurance premiums generated by direct and agency operations:
YEAR ENDED DECEMBER 31,
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2000 1999 1998
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AMOUNTS % AMOUNTS % AMOUNTS %
---------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Direct.................................. $ 811,621 41.7% $407,769 43.4% $425,551 46.7%
Agency.................................. 1,134,538 58.3 531,683 56.6 484,727 53.3
---------- ----- -------- ----- -------- -----
Total title insurance
premiums.................... $1,946,159 100.0% $939,452 100.0% $910,278 100.0%
========== ===== ======== ===== ======== =====
Our relationship with 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 our behalf. The agency agreement also prescribes the
circumstances under which the agent may be liable to us if a policy loss is
attributable to the agent's errors. The agency agreement is usually terminable
without cause upon 30 days' notice or immediately for cause. In determining
whether to engage or retain an independent agent, we consider the agent's
experience, financial condition, and loss history. For each agent with whom we
enter into an agency agreement, we maintain financial and loss experience
records. We also conduct periodic audits of our agents.
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Escrow and Other Title Related Fees. In addition to fees for underwriting
title insurance policies, we derive a significant amount of our revenues from
escrow and other title related fees. The role generally taken by a title
insurance company in a real estate transaction is that of an intermediary
completing all the necessary documentation and services required for the
completion of the real estate transaction.
In a typical residential transaction, a title insurance order is received
from a realtor, lawyer, developer or mortgage lender. When a title order is
received by the title insurance company or agent, the title search begins and
the title order is now "open." Once documentation has been prepared and signed,
mortgage lender payoff demands are in hand and documents have been ordered, the
title order is considered "closed." A lawyer, an escrow company or a title
insurance company or agent performs the closing function, most commonly referred
to as an "escrow" in the western United States. The entity providing the closing
function (the "closer") holds the seller's deed of trust and the buyer's
mortgage until all issues relating to the transaction have been settled. After
these issues have been cleared, the closer delivers the transaction documents,
records the appropriate title documents in the county recorder's office and
arranges the transfer of funds to pay off prior loans and extinguish the liens
securing such loans. Title policies are then issued. The lender's policy insures
the lender against any defect affecting the priority of the mortgage, in an
amount equal to the outstanding balance of the related mortgage loan. The
buyer's policy insures the buyer against defects in title, in an amount equal to
the purchase price.
The combination of title insurance premiums and these escrow and other
title related services allows us to generate a significant source of revenue.
Reinsurance. In the ordinary course of business, we reinsure certain risks
with other title insurers for the purpose of limiting our maximum loss exposure.
We also assume reinsurance for certain risks of other title insurers for the
purpose of earning additional income. In addition, we cede a portion of certain
policy and other liabilities under agent fidelity, excess of loss and
case-by-case reinsurance agreements. Reinsurance agreements provide generally
that the reinsurer is liable for loss and loss adjustment expense payments
exceeding the amount retained by the ceding company. However, the ceding company
remains primarily liable in the event the reinsurer does not meet its
contractual obligations. We have a $30.9 million reinsurance recoverable from
Lloyds of London on claim loss expense recoverables as of December 31, 2000.
REAL ESTATE RELATED SERVICES
We also provide many of the specialized products and services required to
execute and close real estate transactions that are not offered by our title
insurance subsidiaries. The real estate related services we provide allow us to
diversify from our core title business and yield higher profit margins than if
we did not provide these services. These services include the following:
- Property appraisal services. We offer property appraisal services through
a network of state-licensed contract appraisers. In addition, we provide
detailed real estate property evaluation services to lending institutions
utilizing artificial intelligence software, detailed real estate
statistical analysis and physical property inspections.
- Credit reporting. We provide credit information reports to mortgage
lenders nationwide, as well as a variety of related products to meet the
ever-changing needs of the mortgage industry.
- Flood certification. Federal legislation passed in 1994 requires most
mortgage lenders to obtain a property's flood zone status at the time a
loan is originated. We provide these required flood zone determination
reports to mortgage lenders nationwide.
- Real estate tax services. We advise lending and mortgage related
institutions throughout the United States of the status of property tax
payments that are due on properties securing their loans over the entire
life of the loan. We protect lenders against losses from failing to
monitor delinquent taxes.
- Home warranty insurance. We issue one-year, renewable insurance policies
that protect homeowners against defects in household systems and
appliances.
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- Foreclosure posting and publishing. We offer posting and publication of
foreclosure and auction notices to the real estate foreclosure industry.
- Exchange intermediary services. We provide customers with qualified
exchanges under Section 1031 of the Internal Revenue Code, which allows
customers to defer the payment of capital gain taxes on the sale of their
investment property.
- Loan portfolio services. We provide a comprehensive line of document
preparation and recording services on a national basis, including
computerized tracking services, mortgage assignment and release
preparation and due diligence and research services designed to resolve
and retrieve missing or defective documents and obtain certified copies
of documents and chain-of-title verification.
- Field services. We provide property inspection, preservation and
maintenance services to mortgage lenders nationwide.
OTHER INCOME
Other income represents externally generated revenue by Micro General, FNF
Capital and Express Network, which was sold in the second quarter of 2000.
Micro General has used its core system development transactional expertise
to launch two new entities, escrow.com and TXMNet, Inc. escrow.com provides a
service transaction environment for internet commerce, as well as online
auctions and business-to-business exchanges, and TXMNet, Inc. provides automated
decision-based products that manage real estate transactions over the internet.
MARKETING
We market and distribute our products and services to customers in the
residential, institutional lender, and commercial market sectors of the real
estate industry through customer solicitation by sales personnel. We actively
encourage our sales personnel to develop new business relationships with persons
in the real estate community, such as real estate sales agents and brokers,
financial institutions, independent escrow companies and title agents, real
estate developers, mortgage brokers and attorneys. While the focus of the
smaller, local client remains important, large customers, such as national
residential mortgage lenders, real estate investment trusts and developers are
becoming increasingly important. The buying criteria of locally based clients
differ from those of large, geographically diverse customers in that the former
tend to emphasize personal relationships and ease of transaction execution,
while the latter generally places more emphasis on consistent product delivery
and ability of service providers to meet their information systems requirements
for electronic product delivery. We believe customer service and consistent
product delivery are the most important factors in attracting and retaining
customers, and we measure customer service in terms of quality, consistency and
timeliness in the delivery of services.
COMPETITION
The title insurance industry is highly competitive. According to Corporate
Development Services, the top five title insurance companies accounted for 89%
of net premiums collected in 1999. Over 40 independent title insurance companies
accounted for the remaining 11% of the market. The number and size of competing
companies varies in the different geographic areas in which we conduct our
business. In our principal markets, competitors include other major title
underwriters such as First American Corporation, LandAmerica Financial Group,
Inc., Old Republic International Corporation and Stewart Information Services
Corporation, as well as numerous independent agency operations at the regional
and local level. These smaller companies may expand into other markets in which
we compete. Also, the removal of regulatory barriers might result in new
competitors entering the title insurance business, and those new competitors may
include diversified financial services companies that have greater financial
resources than we do and possess other competitive advantages. Competition among
the major title insurance companies, expansion by smaller regional companies and
any new entrants could affect our business operations and financial condition.
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We believe competition in the title insurance industry is based primarily
on expertise, quality and timeliness of service, and price of products and
services. In addition, the financial strength of the insurer has become an
increasingly important factor in decisions relating to the purchase of title
insurance, particularly in multi-state transactions and in situations involving
real estate related investment vehicles such as real estate investment trusts
and real estate mortgage investment conduits.
Our real estate related service subsidiaries face significant competition
from other similar service providers. In addition, these customers may choose to
produce these services internally rather than purchase them from outside
vendors.
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 we transact business establish supervisory agencies with broad
administrative powers relating to issuing and revoking licenses to transact
business, regulating trade practices, licensing agents, approving policy forms,
accounting practices, financial practices, establishing reserve and capital and
surplus as regards policyholders ("capital and surplus") requirements, defining
suitable investments for reserves and capital and surplus and approving rate
schedules. In 1998, the National Association of Insurance Commissioners approved
codified accounting practices that changed the definition of what constitutes
prescribed statutory accounting practices. This codification will result in
changes to the accounting policies that insurance enterprises use to prepare
their statutory financial statements commencing in 2001. We have evaluated the
effects of these rules and believe that they will not have a material effect on
the statutory capital and surplus of our insurance subsidiaries.
Pursuant to statutory accounting requirements of the various states in
which our title insurance subsidiaries are licensed, those subsidiaries must
defer a portion of premiums earned as an unearned premium reserve for the
protection of policyholders and must maintain qualified assets in an amount
equal to the statutory requirements. The level of unearned premium reserve
required to be maintained at any time is determined on a quarterly basis by
statutory formula based upon either the age, number of policies, and dollar
amount of policy liabilities underwritten, or the age and dollar amount of
statutory premiums written. As of December 31, 2000, the combined statutory
unearned premium reserve required and reported for our title insurance
subsidiaries was $698.7 million.
The insurance commissioners of their respective states of domicile regulate
our title insurance subsidiaries. Regulatory examinations usually occur at
three-year intervals, and certain of these examinations are currently ongoing.
The Auditor Division of the Controller of the State of California is currently
conducting an examination of the funds due the State of California under various
escheatment regulations for the years ended on and prior to December 31, 1998.
We have received a preliminary copy of the report and are continuing discussions
with the Auditor Division of the Controller of the State of California to
quantify amounts due, if any. We do not believe that the examinations performed
by the insurance regulators or the Auditor Division of the Controller of the
State of California will have a material impact on our financial position, our
results of operations, or our combined capital and surplus.
Our title 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. During 2001, our title
insurance subsidiaries could pay dividends or make other distributions to us of
$107.5 million.
The combined statutory capital and surplus of our title insurance
subsidiaries was $463.1 million, $163.5 million and $164.3 million as of
December 31, 2000, 1999 and 1998, respectively. The combined statutory earnings
of our title insurance subsidiaries were $88.9 million, $43.6 million and $37.8
million for the years ended December 31, 2000, 1999 and 1998, respectively.
8
11
As a condition to continued authority to underwrite policies in the states
in which our title insurance subsidiaries conduct their business, they are
required to pay certain fees and file information regarding their officers,
directors and financial condition. In addition, our escrow and trust business is
subject to regulation by various state banking authorities.
Pursuant to statutory requirements of the various states in which our title
insurance subsidiaries are domiciled, they must maintain certain levels of
minimum capital and surplus. Each of our title underwriters has complied with
the minimum statutory requirements as of December 31, 2000.
Our underwritten title companies are also subject to certain regulation by
insurance regulatory or banking authorities, primarily relating to minimum net
worth. Minimum net worth of $7.5 million, $2.5 million and $3.0 million is
required for Fidelity National Title Company, Fidelity National Title Company of
California and Chicago Title Company, respectively. All of our companies are in
compliance with their respective minimum net worth requirements at December 31,
2000.
RATINGS
Our title insurance subsidiaries are regularly assigned ratings by
independent agencies designed to indicate their financial condition and/or
claims paying ability. The ratings agencies determine ratings by quantitatively
and qualitatively analyzing financial data and other information. Our
subsidiaries include Fidelity National Title, Chicago Title, Ticor Title,
Security Union Title and Alamo Title. Ratings of our principal title insurance
subsidiaries assigned during 2000, individually and collectively, are listed
below:
Standard and Poor's (Financial Strength Rating)
FNF Family.................................................. A-
Moody's (Financial Strength Rating)
FNF Family.................................................. Baa1
Fitch (Claims Paying Ability Rating)
FNF Family.................................................. A-
Demotech, Inc. (Financial Stability Rating)
Fidelity Title.............................................. A'
Fidelity Title New York..................................... A'
Chicago Title............................................... A"
Ticor Title................................................. A'
Security Union Title........................................ A'
Alamo Title................................................. A'
INVESTMENT POLICIES AND INVESTMENT PORTFOLIO
Our investment policy is designed to maintain a high quality portfolio,
maximize income, minimize interest rate risk and match the duration of our
portfolio to our liabilities. We also make investments in certain equity
securities in order to take advantage of perceived value and for strategic
purposes. Various states regulate what types of assets qualify for purposes of
capital and surplus and unearned premium reserves. Our subsidiaries' investments
are restricted by the state insurance regulations of their domiciliary states
and are limited primarily to cash and cash equivalents, federal and municipal
governmental securities, mortgage loans, certain investment grade debt
securities, equity securities and real estate.
As of December 31, 2000 and 1999, the carrying amount, which approximates
the fair value, of total investments was $1,685.3 million and $506.9 million,
respectively.
We purchase investment grade fixed maturity securities, selected
non-investment grade fixed maturity securities and equity securities. The
securities in our portfolio are subject to economic conditions and normal market
risks and uncertainties.
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The following table presents certain information regarding the investment
ratings of our fixed maturity portfolio at December 31, 2000 and 1999.
DECEMBER 31,
------------------------------------------------------------------------------
2000 1999
--------------------------------------- ------------------------------------
AMORTIZED % OF FAIR % OF AMORTIZED % OF FAIR % OF
RATING(1) COST TOTAL VALUE TOTAL COST TOTAL VALUE TOTAL
--------- ---------- ----- ---------- ----- --------- ----- -------- -----
(DOLLARS IN THOUSANDS)
AAA.................. $ 785,636 67.3% $ 803,682 67.6% $163,831 46.3% $160,280 46.2%
AA................... 180,585 15.5 184,365 15.5 79,271 22.4 78,280 22.6
A.................... 110,220 9.5 109,688 9.2 85,139 24.1 83,418 24.0
BBB.................. 43,368 3.7 43,706 3.7 20,340 5.7 19,875 5.7
Other................ 46,502 4.0 47,240 4.0 5,244 1.5 5,198 1.5
---------- ----- ---------- ----- -------- ----- -------- -----
$1,166,311 100.0% $1,188,681 100.0% $353,825 100.0% $347,051 100.0%
========== ===== ========== ===== ======== ===== ======== =====
- ---------------
(1) Ratings as assigned by Standard & Poor's Ratings Group and Moody's Investors
Service.
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. Fixed maturity securities with an amortized cost of $81.4
million and a fair value of $81.8 million were callable at December 31, 2000.
The following table presents certain information regarding our fixed
maturity securities at December 31, 2000:
DECEMBER 31, 2000
---------------------------------------------
AMORTIZED % FAIR %
MATURITY COST OF TOTAL VALUE OF TOTAL
-------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
One year or less.............................. $ 102,891 8.8% $ 102,988 8.7%
After one year through five years............. 545,397 46.8 551,720 46.4
After five years through ten years............ 247,638 21.2 254,617 21.4
After ten years............................... 73,723 6.3 77,076 6.5
---------- ----------
969,649 986,401
Mortgage-backed securities.................... 196,662 16.9 202,280 17.0
---------- ----- ---------- -----
$1,166,311 100.0% $1,188,681 100.0%
========== ===== ========== =====
Our equity securities at December 31, 2000 and 1999 consisted of
investments in various industry groups as follows:
DECEMBER 31,
-------------------------------------
2000 1999
----------------- -----------------
FAIR FAIR
COST VALUE COST VALUE
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Banks, trust and insurance companies.............. $ 1,726 $ 2,037 $ 1,559 $ 1,628
Industrial, miscellaneous and all other........... 51,224 37,922 38,180 37,253
------- ------- ------- -------
$52,950 $39,959 $39,739 $38,881
======= ======= ======= =======
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Our investment results for the years ended December 31, 2000, 1999 and 1998
were as follows:
DECEMBER 31,
--------------------------------
2000 1999 1998
---------- -------- --------
(DOLLARS IN THOUSANDS)
Net investment income(1)(2)........................... $ 100,193 $ 33,914 $ 26,665
Average invested assets(1)............................ $1,649,951 $547,413 $482,530
Effective return on average invested assets(1)........ 6.1% 6.2% 5.5%
- ---------------
(1) Excludes investments in real estate. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Net investment income as reported in our Consolidated Statements of Earnings
has been adjusted in the presentation above to provide the tax equivalent
yield on tax exempt investments and to exclude net realized capital gains
(losses) on the sale of investments and other assets. Net realized capital
gains (losses) totaled ($201), ($76) and $17.2 million in 2000, 1999 and
1998, respectively.
EMPLOYEES
As of December 31, 2000, we had approximately 16,000 full-time equivalent
employees. We believe that our relations with employees are generally good.
RISK FACTORS
The risk factors listed in this section and other factors noted herein or
incorporated by reference could cause our actual results to differ materially
from those contained in any forward-looking statements.
OUR REVENUES MAY DECLINE DURING PERIODS WHEN THE DEMAND FOR OUR PRODUCTS
DECREASES.
In the title insurance industry, revenues are directly affected by the
level of real estate activity and the average price of real estate sales on both
a national and local basis. Real estate sales are directly affected by changes
in the cost of financing purchases of real estate -- i.e., mortgage interest
rates. Other macroeconomic factors affecting real estate activity include, but
are not limited to, demand for housing, employment levels, family income levels
and general economic conditions. Because these factors can change dramatically,
revenue levels in the title insurance industry can also change dramatically. For
example, beginning in late 1995 and into 1998, the level of real estate activity
increased, including refinancing transactions, new home sales and resales, due
in part to decreases in mortgage interest rates. Stable mortgage interest rates
and strength in the real estate market, especially in California and throughout
the West Coast, contributed to very positive conditions for the title insurance
industry throughout 1997 and 1998. However, during the second half of 1999 and
through 2000, steady interest rate increases caused by actions taken by the
Federal Reserve Board resulted in a significant decline in refinancing
transactions. As a result, the market shifted from a refinance-driven market in
1998 to a more traditional market driven by new home purchases and resales in
1999 and 2000. The favorable industry conditions that existed in 1998
represented an unusual mixture of macroeconomic factors that may not occur again
in the foreseeable future.
Historically, real estate transactions have produced seasonal revenue
levels for title insurers. The first calendar quarter is typically the weakest
quarter in terms of revenue due to the generally low volume of home sales during
January and February. The fourth calendar quarter is typically the strongest in
terms of revenue due to commercial entities desiring to complete transactions by
year-end. Significant changes in interest rates may alter these traditional
seasonal patterns due to the effect the cost of financing has on the volume of
real estate transactions.
Our revenues in future periods will continue to be subject to these and
other factors which are beyond our control and, as a result, are likely to
fluctuate.
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AS A HOLDING COMPANY, WE DEPEND ON DISTRIBUTIONS FROM OUR SUBSIDIARIES, AND IF
DISTRIBUTIONS FROM OUR SUBSIDIARIES ARE MATERIALLY IMPAIRED, OUR ABILITY TO
DECLARE AND PAY DIVIDENDS MAY BE ADVERSELY AFFECTED.
We are a holding company whose primary assets are the securities of our
operating subsidiaries. Our ability to pay dividends is dependent on the ability
of our subsidiaries to pay dividends or repay funds to us. If our operating
subsidiaries are not able to pay dividends or repay funds to us, we may not be
able to declare and pay dividends to you.
Our title insurance and home warranty subsidiaries must comply with state
and federal laws which require them to maintain minimum amounts of working
capital surplus and reserves, and place restrictions on the amount of dividends
that they can distribute to us. During 2000, approximately 91.3% of our
year-to-date revenues was derived from subsidiaries engaged in these regulated
businesses. Compliance with these laws will limit the amounts our regulated
subsidiaries can dividend to us. During 2001, our title insurance subsidiaries
could pay dividends or make other distributions to us of $107.5 million.
OUR ENTERING INTO NEW BUSINESS LINES SUBJECTS US TO ASSOCIATED RISKS, SUCH AS
THE DIVERSION OF MANAGEMENT ATTENTION, DIFFICULTY INTEGRATING OPERATIONS AND
LACK OF EXPERIENCE IN OPERATING SUCH BUSINESSES.
We have acquired, and may in the future acquire, businesses in industries
with which management is less familiar than we are with the title insurance
industry. For example, in February 1998, we acquired FNF Capital, Inc., whose
primary business is financing equipment leases. Also, in the last three years,
we have expanded the range and amount of real estate related services we
provide, began underwriting home warranty policies, invested in restaurant
businesses, expanded our commercial title insurance business and considered
acquiring underwriters of other lines of insurance products. These activities
involve risks that could adversely affect our operating results, such as
diversion of management's attention, integration of the operations, systems and
personnel of the new businesses and lack of substantial experience in operating
such businesses.
DIFFICULTIES WE MAY ENCOUNTER MANAGING OUR GROWTH COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
We have historically achieved growth through a combination of developing
new products, increasing our market share for existing products, and
acquisitions. Part of our strategy is to pursue opportunities to diversify and
expand our operations by acquiring or making investments in other companies. The
success of each acquisition will depend upon:
- our ability to integrate the acquired business' operations, products and
personnel;
- our ability to retain key personnel of the acquired businesses; and
- our ability to expand our financial and management controls and reporting
systems and procedures.
OUR SUBSIDIARIES THAT ENGAGE IN INSURANCE RELATED BUSINESSES MUST COMPLY WITH
ADDITIONAL REGULATIONS. THESE REGULATIONS MAY IMPEDE, OR IMPOSE BURDENSOME
CONDITIONS ON, OUR RATE INCREASES OR OTHER ACTIONS THAT WE MIGHT WANT TO TAKE TO
INCREASE THE REVENUES OF OUR SUBSIDIARIES.
Our title insurance business is subject to extensive regulation by state
insurance authorities in each state in which we operate. These agencies have
broad administrative and supervisory power relating to the following, among
other matters:
- licensing requirements;
- trade and marketing practices;
- accounting and financing practices;
- capital and surplus requirements;
- the amount of dividends and other payments made by insurance
subsidiaries;
- investment practices;
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- rate schedules;
- deposits of securities for the benefit of policyholders;
- establishing reserves; and
- regulation of reinsurance.
Most states also regulate insurance holding companies like us with respect
to acquisitions, changes of control and the terms of transactions with our
affiliates. These regulations may impede or impose burdensome conditions on our
rate increases or other actions that we may want to take to enhance our
operating results, and could affect our ability to pay dividends on our common
stock. In addition, we may incur significant costs in the course of complying
with regulatory requirements. We cannot assure you that future legislative or
regulatory changes will not adversely affect our business operations.
WE FACE COMPETITION IN OUR INDUSTRY FROM TRADITIONAL TITLE INSURERS AND FROM NEW
ENTRANTS.
The title insurance industry is highly competitive. According to Corporate
Development Services, the top five title insurance companies accounted for 89%
of net premiums collected in 1999. Over 40 independent title insurance companies
accounted for the remaining 11% of the market. The number and size of competing
companies varies in the different geographic areas in which we conduct our
business. In our principal markets, competitors include other major title
underwriters such as First American Corporation, LandAmerica Financial Group,
Inc., Old Republic International Corporation and Stewart Information Services
Corporation, as well as numerous independent agency operations at the regional
and local level. These smaller companies may expand into other markets in which
we compete. Also, the removal of regulatory barriers might result in new
competitors entering the title insurance business, and those new competitors may
include diversified financial services companies that have greater financial
resources than we do and possess other competitive advantages. Competition among
the major title insurance companies, expansion by smaller regional companies and
any new entrants could affect our business operations and financial condition.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The information contained in this Form 10-K contains forward looking
statements that involve a number of risks and uncertainties. Statements that are
not historical facts, including statements about our beliefs and expectations,
are forward-looking statements. Forward-looking statements are based on
management's beliefs as well as assumptions made by, and information currently
available to, management. Because such statements are based on expectations as
to future economic performance and are not statements of fact, actual results
may differ materially from those projected. We undertake no obligation to update
any forward-looking statements, whether as a result of new information, future
events or otherwise.
Important factors that may affect these projections or expectations
include, but are not limited to:
- general economic and business conditions, including interest rate
fluctuations and general volatility in the capital markets;
- changes in the performance of the real estate markets;
- the impact of competitive products and pricing;
- success of operating initiatives;
- our ability to integrate the business operations we acquired in our
merger with Chicago Title Corporation and our ability to implement
cost-saving synergies associated with that acquisition;
- availability of qualified personnel;
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- employee benefits costs; and
- changes in, or the failure to comply with, government regulations and
other risks detailed in our filings with the Securities and Exchange
Commission.
All of these factors are difficult to predict and many are beyond our
control. Accordingly, while we believe these forward-looking statements to be
reasonable, there can be no assurance that they will approximate actual
experience or that expectations derived from them will be realized. When used in
our documents or oral presentations, the words "anticipate," "believe,"
"estimate," "objective," "projection," "forecast," "goal," or similar words are
intended to identify forward-looking statements.
ITEM 2. PROPERTIES
The majority of the branch offices are leased from third parties. We own
the remaining branch offices. See Note J to Notes to Consolidated Financial
Statements.
As of December 31, 2000, we leased office and storage space as follows:
NUMBER OF
LOCATIONS(1)
------------
California.................................................. 435
Texas....................................................... 131
Arizona..................................................... 122
Illinois.................................................... 91
Florida..................................................... 62
Washington.................................................. 57
Oregon...................................................... 53
Indiana..................................................... 29
New York and Ohio........................................... 26
Nevada...................................................... 20
North Carolina and Maryland................................. 18
New Jersey and Pennsylvania................................. 17
Tennessee................................................... 14
Colorado and Virginia....................................... 13
Minnesota................................................... 11
Kansas...................................................... 9
Georgia..................................................... 8
Missouri and Michigan....................................... 7
New Mexico, Massachusetts and Connecticut................... 6
Louisiana and Hawaii........................................ 5
Montana..................................................... 4
South Carolina.............................................. 3
Wisconsin, Washington D.C., Rhode Island, Delaware, Alabama
and Kentucky.............................................. 2
Utah, New Hampshire, Idaho and Canada....................... 1
- ---------------
(1) Represents the number of locations in each state listed.
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ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we are involved in various pending and
threatened litigation matters related to our operations, some of which include
claims for punitive or exemplary damages. We believe that no actions, other than
those listed below, depart from customary litigation incidental to our business
and that the resolution of all such litigation will not have a material adverse
effect on us.
As previously disclosed in our prior Securities and Exchange Commission
filings, we have been named as a defendant in five class action lawsuits
alleging irregularities and violations of title and escrow practices. One of
these suits was filed by the Attorney General of the State of California on
behalf of the California Controller and the California Department of Insurance
against the entire title and escrow industry in California. The other four were
filed by private law firms in State and Federal courts in San Francisco and Los
Angeles. In February 2000, we reached a settlement of the lawsuit filed by the
California Department of Insurance. The settlement does not require us to pay
any fine or penalty. We are vigorously defending the remaining lawsuits. We do
not believe that the resolution of these lawsuits will have a material impact on
us.
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 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange under the symbol
"FNF." The following table shows, for the periods indicated, the high and low
sales prices of our common stock, as reported by the New York Stock Exchange,
and the amounts of dividends per share declared on our common stock.
DIVIDENDS
HIGH LOW DECLARED
------ ------ ---------
Year ended December 31, 2000
First quarter......................................... $18.25 $11.62 $.10
Second quarter........................................ 20.06 12.50 .10
Third quarter......................................... 24.94 16.88 .10
Fourth quarter........................................ 39.38 19.75 .10
Year ended December 31, 1999
First quarter......................................... $30.75 $14.56 $.07
Second quarter........................................ 21.00 14.50 .07
Third quarter......................................... 21.06 13.44 .07
Fourth quarter........................................ 16.00 13.81 .10
On March 16, 2001, the last reported sale price of our common stock on the
New York Stock Exchange was $30.01 per share. As of March 16, 2001, the Company
had approximately 1,897 stockholders of record.
Our Board of Directors declared a cash dividend of $0.10 per share in each
of the four quarters of 2000. Our current dividend policy anticipates the
payment of quarterly dividends in the future. The declaration and payment of
dividends will be in the discretion of our Board of Directors and will be
dependent upon our future earnings, financial condition and capital
requirements. Our ability to declare and pay dividends is also subject to our
compliance with the financial covenants contained in our existing $800 million
syndicated credit agreement and further described below.
Since we are a holding company, our ability to pay dividends will depend
largely on the ability of our subsidiaries to pay dividends to us, and the
ability of our title insurance subsidiaries to do so is subject to, among other
factors, their compliance with applicable insurance regulations. During 2001,
our title insurance subsidiaries could pay dividends or make other distributions
to us of $107.5 million. In addition to regulatory restrictions, our ability to
declare dividends is subject to restrictions under our existing syndicated
credit agreement. We do not believe the restrictions contained in our credit
agreement will, in the foreseeable future, adversely affect our ability to pay
cash dividends at the current dividend rate.
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ITEM 6. SELECTED FINANCIAL DATA
The information set forth below should be read in conjunction with the
consolidated financial statements and related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Form 10-K. Per share data has been retroactively adjusted for
stock dividends and splits since our inception. Certain reclassifications have
been made to the prior year amounts to conform with the 2000 presentation.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
(1)(2)(3) (2)(3) (2)(3) (2)(4) (2)
---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
OPERATING DATA:
Revenue:
Title insurance premiums........... $1,946,159 $ 939,452 $ 910,278 $616,074 $552,799
Escrow and other title related
fees............................. 459,121 206,570 215,254 152,464 131,572
Real estate related services....... 166,718 67,844 69,970 38,129 24,708
Interest and investment income,
including realized gains and
losses........................... 87,191 32,045 44,502 36,740 18,894
Other income....................... 82,805 109,943 53,376 20,586 6,489
---------- ---------- ---------- -------- --------
2,741,994 1,355,854 1,293,380 863,993 734,462
---------- ---------- ---------- -------- --------
Expenses:
Personnel costs.................... 845,349 407,078 394,284 273,221 240,232
Other operating expenses........... 626,308 332,296 258,866 189,141 175,828
Agent commissions.................. 884,498 423,675 385,649 261,182 221,948
Provision for claim losses......... 97,322 52,713 59,294 41,558 36,275
Interest expense................... 59,374 15,626 17,024 12,269 11,590
---------- ---------- ---------- -------- --------
2,512,851 1,231,388 1,115,117 777,371 685,873
---------- ---------- ---------- -------- --------
Earnings before amortization of cost
in excess of net assets acquired,
income taxes and extraordinary
item............................... 229,143 124,466 178,263 86,622 48,589
Amortization of cost in excess of net
assets acquired.................... 35,003 6,638 3,129 1,019 363
---------- ---------- ---------- -------- --------
Earnings before income taxes and
extraordinary item................. 194,140 117,828 175,134 85,603 48,226
Income tax expense.................... 85,825 46,975 69,442 36,595 18,985
---------- ---------- ---------- -------- --------
Earnings before extraordinary
item............................. 108,315 70,853 105,692 49,008 29,241
Extraordinary item, net of income
taxes.............................. -- -- -- (1,700) --
---------- ---------- ---------- -------- --------
Net earnings....................... $ 108,315 $ 70,853 $ 105,692 $ 47,308 $ 29,241
========== ========== ========== ======== ========
PER SHARE DATA:
Basic earnings per share before
extraordinary item................. $ 1.84 $ 2.38 $ 3.79 $ 2.10 $ 1.43
Extraordinary item, net of income
taxes, basic basis................. -- -- -- (0.07) --
---------- ---------- ---------- -------- --------
Basic earnings per share........... $ 1.84 $ 2.38 $ 3.79 $ 2.03 $ 1.43
========== ========== ========== ======== ========
Weighted average shares outstanding,
basic basis........................ 58,821 29,811 27,921 23,355 20,426
Diluted earnings per share before
extraordinary item................. $ 1.78 $ 2.27 $ 3.23 $ 1.76 $ 1.23
Extraordinary item, net of income
taxes, diluted basis............... -- -- -- (.06) --
---------- ---------- ---------- -------- --------
Diluted earnings per share......... $ 1.78 $ 2.27 $ 3.23 $ 1.70 $ 1.23
========== ========== ========== ======== ========
Weighted average shares outstanding,
diluted basis...................... 60,937 31,336 33,474 29,599 26,431
Dividends declared per share.......... $ .40 $ .31 $ .26 $ .24 $ .22
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YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
(1)(2)(3) (2)(3) (2)(3) (2)(4) (2)
---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
BALANCE SHEET DATA:
Investments(5)........................ $1,685,331 $ 506,916 $ 519,332 $376,285 $270,134
Cash and cash equivalents(6).......... 262,955 38,569 42,492 54,975 65,551
Total assets.......................... 3,833,985 1,042,546 969,470 747,695 609,658
Notes payable......................... 791,430 226,359 214,624 163,015 179,508
Reserve for claim losses.............. 907,482 239,962 224,534 201,674 196,527
Minority interests.................... 5,592 4,613 1,532 3,614 1,287
Stockholders' equity.................. 1,106,737 432,494 396,740 274,050 162,645
OTHER DATA:
Orders opened by direct operations.... 1,352,000 743,000 987,000 621,000 575,000
Orders closed by direct operations.... 971,000 551,000 670,000 436,000 430,000
Provision for claim losses to title
insurance premiums................. 5.0% 5.6% 6.5% 6.7% 6.6%
Title related revenue(7):
Percentage direct operations....... 52.8% 53.6% 56.9% 57.1% 59.0%
Percentage agency operations....... 47.2% 46.4% 43.1% 42.9% 41.0%
Diluted earnings per share before
amortization of cost in excess of
net assets acquired................ $ 2.56 $ 2.48 $ 3.32 $ 1.74 $ 1.24
- ---------------
(1) Our financial results for the year ended December 31, 2000 include the
operations of Chicago Title for the period from March 20, 2000, the merger
date, through December 31, 2000. In the first quarter of 2000, we recorded
certain non-recurring charges totaling $13.4 million, after applicable
taxes.
(2) During 1997 and 1996, we acquired certain real estate related service
companies in various transactions. The selected consolidated financial data
above includes the balance sheet accounts of the acquired companies as of
December 31 of the year acquired and all subsequent years presented; and the
results of their operations for the periods from the date of acquisition
through December 31 of the acquisition year and for the years ended December
31 for all subsequent years presented.
(3) We completed the merger of our wholly owned subsidiary, ACS Systems, Inc.,
with and into Micro General on May 14, 1998. This transaction was accounted
for as a reverse merger of Micro General into ACS, with Micro General as the
surviving legal entity. The selected consolidated financial data above
includes the balance sheet accounts of Micro General at December 31, 2000,
1999 and 1998 and the results of its operations for the years ended December
31, 2000 and 1999 and for the period from May 14, 1998 through December 31,
1998. As of December 31, 2000, we owned 65.7% of Micro General.
(4) During 1997, we recognized an extraordinary loss of $1.7 million, net of
income taxes of $1.2 million, related to the early retirement of $45.0
million maturity value of our Liquid Yield Option Notes.
(5) Investments as of December 31, 2000, include securities pledged to secure
trust deposits of $459.4 million.
(6) Cash and cash equivalents as of December 31, 2000 includes cash pledged to
secure trust deposits of $132.1 million.
(7) Includes title insurance premiums and escrow and other title related fees.
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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data is as follows:
QUARTER ENDED
---------------------------------------------------------
MARCH 31,(2) JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------ -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000(1)
Revenue................................... $377,657 $757,642 $790,103 $816,592
Earnings before income taxes.............. 7,661 59,234 63,677 63,568
Net earnings.............................. 1,869 31,371 37,570 37,505
Basic earnings per share.................. .06 .47 .56 .55
Diluted earnings per share................ .06 .46 .54 .53
Dividends paid per share.................. .10 .10 .10 .10
1999
Revenue................................... $345,096 $358,743 $343,686 $308,329
Earnings before income taxes.............. 33,504 40,238 30,216 13,870
Net earnings.............................. 19,767 23,741 18,607 8,738
Basic earnings per share.................. .64 .78 .62 .31
Diluted earnings per share................ .60 .75 .60 .30
Dividends paid per share.................. .07 .07 .07 .07
- ---------------
(1) Our financial results for the year ended December 31, 2000 include the
operations of Chicago Title for the period from March 20, 2000, the merger
date, through December 31, 2000.
(2) In the first quarter of 2000, we recorded certain non-recurring charges
totaling $13.4 million, after applicable income taxes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto and Selected Financial
Data included elsewhere in this Form 10-K.
Factors Affecting Comparability. Our Condensed Consolidated Statements of
Earnings include the results of operations of Chicago Title for the period from
March 20, 2000, the merger date, through December 31, 2000. As a result, year
over year comparisons may not be meaningful. Excluding the effect of the Chicago
Title merger, our title insurance premiums for the year ended December 31, 2000
were $834.7 million. We have also reviewed our existing non-title operations in
connection with the merger and related transition and integration. As a result,
during the first quarter of 2000 we recorded certain non-recurring charges
totaling $13.4 million, after applicable taxes. These charges primarily relate
to the revaluation of non-title assets, including our investment in Express
Network, Inc., which was sold in the second quarter of 2000, and existing
goodwill associated with Express Network and the write-off of obsolete software.
Overview. The following table presents certain financial data for the years
indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Total revenue.................................. $2,741,994 $1,355,854 $1,293,380
========== ========== ==========
Total expenses................................. $2,547,854 $1,238,026 $1,118,246
========== ========== ==========
Net earnings................................... $ 108,315 $ 70,853 $ 105,692
========== ========== ==========
Net earnings for year ended December 31, 2000 were $108.3 million, or $1.78
per diluted share. Excluding the non-recurring, non-title related charges we
recorded in the first quarter of 2000 of $13.4 million, or $0.22 per diluted
share, net earnings for year ended December 31, 2000, were $121.7 million, or
$2.00 per
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diluted share, as compared with net earnings for the corresponding periods in
1999 and 1998 of $70.9 million, or $2.27 per diluted share and $105.7 million,
or $3.23 per diluted share.
The following table presents the calculation of earnings before
amortization of cost in excess of net assets acquired and non-recurring charges.
We believe that earnings before amortization of cost in excess of net assets
acquired and non-recurring charges better reflects the operational performance
of our business.
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net earnings -- diluted............................. $108,315 $71,116 $108,155
Amortization of cost in excess of net assets
acquired.......................................... 35,003 6,638 3,129
Tax effect of amortization of cost in excess of net
assets acquired................................... (838) -- --
Non-recurring charges, net of tax................... 13,371 -- --
-------- ------- --------
Earnings before amortization of cost in excess of
net assets acquired and non-recurring charges..... $155,851 $77,754 $111,284
======== ======= ========
Diluted earnings per share before amortization of
cost in excess of net assets acquired and
non-recurring charges............................. $ 2.56 $ 2.48 $ 3.32
======== ======= ========
Diluted weighted average shares outstanding......... 60,937 31,336 33,474
======== ======= ========
Revenue. The following table presents the components of our revenue:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Title insurance premiums....................... $1,946,159 $ 939,452 $ 910,278
Escrow and other title related fees............ 459,121 206,570 215,254
Real estate related services................... 166,718 67,844 69,970
Interest and investment income, including
realized gains and losses.................... 87,191 32,045 44,502
Other income................................... 82,805 109,943 53,376
---------- ---------- ----------
Total revenue........................ $2,741,994 $1,355,854 $1,293,380
========== ========== ==========
Orders opened by direct operations............. 1,352,000 743,000 987,000
Orders closed by direct operations............. 971,000 551,000 670,000
Title insurance revenue is closely related to the level of real estate
activity and the average price of real estate sales on both a national and local
basis. Real estate sales are directly affected by changes in the cost of
financing purchases of real estate -- i.e., mortgage interest rates. Other
macroeconomic factors affecting real estate activity include, but are not
limited to, demand for housing, employment levels, family income levels and
general economic conditions. Because these factors can change dramatically,
revenue levels in the title insurance industry can also change dramatically. For
example, beginning in late 1995 and into 1998, the level of real estate activity
increased, including refinancing transactions, new home sales and resales, due
in part to decreases in mortgage interest rates. Stable mortgage interest rates
and strength in the real estate market, especially in California and throughout
the West Coast, contributed to very positive conditions for the title insurance
industry throughout 1997 and 1998. However, during the second half of 1999 and
through 2000, steady interest rate increases caused by actions taken by the
Federal Reserve Board resulted in a significant decline in refinancing
transactions, which shifted the real estate market from a refinance-driven
market to a more traditional market driven by new home purchases and resales. As
a result of the shift in mix of business along with the steady increases in
interest rates, total title premiums, on a pro forma basis (assuming the Chicago
Title merger occurred on January 1, 1999) have decreased in 2000 as compared
with pro forma 1999 title insurance premiums.
Total revenue in 2000 more than doubled to $2,742.0 million from $1,355.9
million in 1999. Total revenue in 1999 of $1,355.9 million reflects a 4.8%
increase from 1998 revenue of $1,293.4 million. The
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increase in total revenue from 1999 to 2000 is primarily the result of the
merger of Chicago Title on March 20, 2000. The increase in total revenue from
1998 to 1999 is primarily the result of continued strength in our core title and
real estate related service operations, which were positively impacted by
favorable market conditions leading to an increase in real estate activity. The
increased real estate activity combined with acquisitions of real estate related
service companies and the integration of those real estate related service
operations into our core businesses, also contributed to increased revenue.
Title insurance premiums increased to $1,946.2 million in 2000 from $939.5
million in 1999. In 1999, title premiums increased 3.2% from $910.3 million in
1998. The premium increases from 1998 to 1999 were indicative of the favorable
market conditions existing during that period. In 1999, refinance transactions
declined from record levels in 1998 to levels consistent with historical norms
due to interest rate increases caused by actions taken by the Federal Reserve
Board. Increases in mortgage interest rates were partially offset by consumer
confidence in the overall economy, which resulted in record home sales in 1999.
As the volume of refinance transactions decreased, the market shifted, beginning
in the second half of 1999 and continuing through 2000, from a refinance-driven
market to a more traditional market driven by new home purchases and resales. In
2000, the decrease in real estate market activity was more than offset by the
addition of the Chicago Title operations and an increase in the average fee per
file. The increase in fee per file is consistent with a return to more
normalized levels of refinance activity and the continuing increase in home
prices, as well as increased commercial activity as we continue to grow our
National Commercial Division. The addition of the Chicago Tile operations during
2000 has also impacted the mix of business between our direct and agency
operations as compared with prior years.
The following table presents the percentages of title insurance premiums
generated by our direct and agency operations:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998
------------------ ---------------- ----------------
AMOUNTS % AMOUNT % AMOUNT %
---------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Direct................................ $ 811,621 41.7% $407,769 43.4% $425,551 46.7%
Agency................................ 1,134,538 58.3 531,683 56.6 484,727 53.3
---------- ----- -------- ----- -------- -----
Total title insurance
premiums.................. $1,946,159 100.0% $939,452 100.0% $910,278 100.0%
========== ===== ======== ===== ======== =====
Trends in escrow and other title related fees are primarily related to
title insurance activity generated by our direct operations. Escrow and other
title related fees during the three-year period ended December 31, 2000,
fluctuated in a pattern generally consistent with the fluctuation in direct
title insurance premiums and order counts. Escrow and other title related fees
were $459.1 million, $206.6 million and $215.3 million, respectively, during
2000, 1999 and 1998.
Revenues from real estate related services generally trend closely with the
level and mix of business, as well as the performance of our title related
subsidiaries. During 1996 and 1997, we acquired real estate related service
companies in various separate transactions. Our strategy in making the real
estate related service company acquisitions was to acquire previously existing
entities in businesses we believed to be complementary to our core title and
escrow businesses. Revenues from real estate related services in 2000, 1999 and
1998 were $166.7 million, $67.8 million and $70.0 million, respectively. The
increase in revenues from real estate related services in 2000 is primarily the
result of the acquisition of Chicago Title as well as increases in revenue from
our credit reporting, flood certification, home warranty insurance and tax
qualifying property exchange services.
Interest and investment income levels are primarily a function of
securities markets, interest rates and the amount of cash available for
investment. In 2000, interest and investment income was $87.2 million, compared
with $32.0 million in 1999. The increase in interest and investment income
earned during 2000 is primarily due to an increase in average invested assets,
excluding real estate, from $547.4 million in 1999 to $1,650.0 million in 2000,
primarily as a result of the Chicago Title acquisition. The tax equivalent yield
in 2000, excluding realized losses, was 6.1%. Included in interest and
investment income in 2000 is $201 of net
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realized losses. Interest and investment income in 1999 was $32.0 million,
compared with $44.5 million in 1998, a decrease of $12.5 million, or 28.0%.
Average invested assets, excluding real estate, increased 13.4% to $547.4
million, from $482.5 million in 1998. The tax equivalent yield in 1999,
excluding net realized losses, was 6.2%. The decrease in investment income in
1999 from 1998 is the result of net realized losses in 1999 of $76, compared
with net realized gains in 1998 of $17.2 million, offset by an increase in
interest and dividend income generated by the increased invested asset base and
interest rate increases during the year. Included in 1998 net realized gains is
a gain from the conversion of our investment in Data Tree Corporation of
approximately $9.7 million.
Other income represents revenue generated by Micro General, our
majority-owned information-services subsidiary, FNF Capital, our
equipment-leasing subsidiary and Express Network. Other income was $82.8 million
in 2000, $109.9 million in 1999 and $53.4 million in 1998. The decrease in other
income in 2000 is due to the sale of Express Network in the second quarter of
2000 as well as decreases in externally generated revenue by Micro General.
Other income increased in 1999 from 1998 as a result of including Micro General
in our results of operations beginning in May 1998 as well as increases in
externally generated revenue by Micro General in 1999 as compared with 1998.
Expenses. The following table presents the components of our expenses:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Personnel costs................................ $ 845,349 $ 407,078 $ 394,284
Other operating expenses....................... 626,308 332,296 258,866
Agent commissions.............................. 884,498 423,675 385,649
Provision for claim losses..................... 97,322 52,713 59,294
Interest expense............................... 59,374 15,626 17,024
Amortization of cost in excess of net assets
acquired..................................... 35,003 6,638 3,129
---------- ---------- ----------
Total expenses....................... $2,547,854 $1,238,026 $1,118,246
========== ========== ==========
Our operating expenses consist primarily of personnel costs, other
operating expenses and agent commissions, which are incurred as orders are
received and processed. Title insurance premiums, escrow and other title related
fees are generally recognized as income at the time the underlying transaction
closes. As a result, revenue lags approximately 60-90 days behind expenses and
therefore gross margins may fluctuate. The changes in the market environment,
mix of business between direct and agency operations and the contributions from
our various business units have impacted margins and net earnings. We have
implemented programs and have taken necessary actions to maintain expense levels
consistent with revenue. However, a short time lag does exist in reducing
variable costs and certain fixed costs are incurred regardless of revenue
levels.
Personnel costs include base salaries, commissions and bonuses paid to
employees, and are one of our most significant operating expenses. These costs
generally fluctuate with the level of orders opened and closed and with the mix
of revenue. Personnel costs totaled $845.3 million, $407.1 million and $394.3
million for the years ended December 31, 2000, 1999 and 1998, respectively.
Personnel costs as a percentage of total revenue have remained relatively
consistent over the three-year period ended December 31, 2000. Those percentages
were 30.8% in 2000, 30.0% in 1999 and 30.5% in 1998. We have taken significant
measures to maintain appropriate personnel levels and costs relative to the
volume and mix of business while maintaining customer service standards and
quality controls. We will continue to monitor prevailing market conditions and
will adjust personnel costs in accordance with activity.
Other operating expenses consist primarily of facilities expenses, title
plant maintenance, premium taxes (which insurance underwriters are required to
pay on title premiums in lieu of franchise and other state taxes), postage and
courier services, computer services (including personnel costs associated with
information technology support), professional services, advertising expenses,
general insurance, depreciation and trade and notes receivable allowances. We
continue to be committed to cost control measures. In response to market
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conditions, we have implemented aggressive cost control programs in order to
maintain operating expenses at levels consistent with the levels of revenue.
However, certain fixed costs are incurred regardless of revenue levels,
resulting in period-over-period fluctuations. Our cost control programs are
designed to evaluate expenses, both current and budgeted, relative to existing
and projected market conditions. Other operating expenses decreased as a
percentage of total revenue to 22.8% in 2000 from 24.5% in 1999. The decrease in
other operating expenses in 2000 is attributable to the change in our cost
structure as a result of the addition of the Chicago Title operations, which are
primarily title and real estate related. Other operating expenses increased as a
percentage of total revenue to 24.5% in 1999 from 20.0% in 1998 as a result of
the impact of Micro General's business expansion, increased data processing and
information technology costs and normal year over year price increases including
rent escalations, travel and other general and administrative costs. Total other
operating expenses totaled $626.3 million, $332.3 million and $258.9 million in
2000, 1999 and 1998, respectively.
Agent commissions represent the portion of premiums retained by agents
pursuant to the terms of their respective agency contracts. Agent commissions
and the resulting percentage of agent premiums we retain vary according to
regional differences in real estate closing practices and state regulations.
The following table illustrates the relationship of agent premiums and
agent commissions:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998
------------------ ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
---------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Agent premiums........................ $1,134,538 100.0% $531,683 100.0% $484,727 100.0%
Agent commissions..................... 884,498 78.0 423,675 79.7 385,649 79.6
---------- ----- -------- ----- -------- -----
Premiums we retain.................. $ 250,040 22.0% $108,008 20.3% $ 99,078 20.4%
========== ===== ======== ===== ======== =====
The provision for claim losses includes an estimate of anticipated title
claims. The estimate of anticipated title claims is accrued as a percentage of
title premium revenue based on our historical loss experience and other relevant
factors. We monitor our claims loss experience on a continual basis and adjust
the provision for claim losses accordingly. Based on our loss development
studies, we believe that as a result of our underwriting and claims handling
practices, as well as the refinancing business of prior years, we will maintain
the claim loss trends we have experienced over the past several years. As such,
our claim loss provision as a percentage of total title premiums was 5.0% in
2000, as compared with 5.6% in 1999 and 6.5% in 1998.
A summary of the reserve for claim losses follows:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Beginning balance.............................. $239,962 $224,534 $201,674
Reserves assumed............................. 669,837(1) -- --
Reserves transferred......................... -- (4,310)(2) --
Claim loss provision related to:
Current year.............................. 108,985 57,321 59,294
Prior years............................... (11,663) (4,608) --
-------- -------- --------
Total claim loss provision........... 97,322 52,713 59,294
Claims paid, net of recoupments related to:
Current year.............................. (6,479) (1,229) (1,045)
Prior years............................... (93,160) (31,746) (35,389)
-------- -------- --------
Total claims paid, net of
recoupments........................ (99,639) (32,975) (36,434)
-------- -------- --------
Ending balance................................. $907,482 $239,962 $224,534
======== ======== ========
Provision for claim losses as a percentage of
title insurance premiums..................... 5.0% 5.6% 6.5%
======== ======== ========
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- ---------------
(1) In connection with the Chicago Title merger on March 20, 2000, we assumed
Chicago Title's then outstanding reserve for claim losses.
(2) On March 18, 1998, the Company announced that it had entered into an
agreement to sell National Title Insurance of New York Inc. ("National") to
American Title Company, a wholly-owned subsidiary of American National
Financial, Inc. ("ANFI"), for $3.25 million, subject to regulatory approval
and certain other conditions. The purchase price was structured at a premium
to book value. As of December 31, 2000, the Company holds a 28.3% interest
in ANFI. National was acquired in April 1996, as part of the Nations Title
Inc. acquisition, and has not been actively underwriting policies since that
time. This transaction received regulatory approval on May 27, 1999 and
closed on June 10, 1999. The Company recognized a gain of approximately $1.2
million prior to applicable income taxes, in connection with the sale of
National. This gain has been reflected in the Consolidated Statement of
Earnings for the year ended December 31, 1999.
The favorable development on prior year loss reserves during 2000 and 1999
was attributable to lower than expected payment levels on recent issue years
which included a high proportion of refinance business.
Interest expense for the years ended December 31, 2000, 1999 and 1998 was
$59.4 million, $15.6 million and $17.0 million, respectively. The increase in
interest expense in 2000 as compared with 1999 is attributable to the increase
in outstanding notes payable, primarily related to the financing of the Chicago
Title merger, and an increase in certain indices on which our variable interest
rates are based. The decrease in interest expense in 1999 as compared with 1998
is primarily due to the redemption of our Liquid Yield Option Notes in 1999. In
addition, included in interest expense in 1998 is a $4.7 million interest charge
relating to the settlement of an Internal Revenue Service examination for the
tax years 1990 through 1994.
Amortization of cost in excess of net assets acquired was $35.0 million in
2000, $6.6 million in 1999 and $3.1 million in 1998. In connection with the
merger of Chicago Title, we recorded cost in excess of net assets acquired of
approximately $755.6 million. As a result, amortization of cost in excess of net
assets acquired has increased accordingly.
Income tax expense as a percentage of earnings before income taxes for
2000, 1999 and 1998 was 44.2%, 39.9% and 39.7%, respectively. The fluctuation in
income tax expense as a percentage of earnings before income taxes is
attributable to our estimate of ultimate income tax liability, the impact of the
non-recurring charges and the non-deductible goodwill recorded pursuant to the
Chicago Title merger and the characteristics of net earnings -- i.e., operating
income versus investment income.
LIQUIDITY AND CAPITAL RESOURCES
On March 20, 2000, we acquired Chicago Title. Pursuant to the terms of the
merger agreement, Chicago Title stockholders received aggregate merger
consideration valued at approximately $1.1 billion. The merger consideration was
paid in the form of 1.7673 shares of our common stock and $26.00 in cash for
each share of Chicago Title common stock, resulting in the issuance of
approximately 38.8 million shares of our common stock valued at an average price
during the applicable period of $13.1771 per share and the payment of
approximately $570.2 million in cash.
In connection with the Chicago Title merger, we entered into a syndicated
credit agreement. The credit agreement provides for three distinct credit
facilities:
- $100.0 million, 18 month revolving credit facility due September 30,
2001;
- $250.0 million, 6 year revolving credit facility due March 19, 2006; and
- $450.0 million term loan facility with a 6 year amortization period, due
March 19, 2006.
The credit agreement bears interest at a variable rate of interest based on
the debt ratings assigned to us by certain independent agencies, and is
unsecured. The current interest rate is LIBOR plus 1.125%. Amounts borrowed
under the credit agreement were used to pay the cash portion of the merger
consideration, to
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refinance previously existing indebtedness, to pay fees and expenses incurred in
connection with the merger and to fund other general corporate purposes.
The credit agreement and other debt facilities impose certain affirmative
and negative covenants on us relating to current debt ratings, certain financial
ratios related to liquidity, net worth, capitalization, investments,
acquisitions and restricted payments, and certain dividend restrictions. We are
in compliance with all of our debt covenants as of December 31, 2000.
On January 24, 2001, we issued 8,050,000 shares of our common stock at a
public offering price of $33.50 per share. Proceeds from this offering, net of
underwriting discounts and commissions and other related expenses, were $256.2
million. Net proceeds of $100.0 million were used to repay in full and terminate
the $100.0 million, 18 month revolving credit facility and net proceeds of
$149.5 million were used to pay down in full the $250.0 million, 6 year
revolving credit facility. The remainder of the cash proceeds are available for
general corporate purposes.
Our cash requirements include debt service, operating expenses, lease
fundings, lease securitizations, taxes and dividends on our common stock. We
believe that all anticipated cash requirements for current operations will be
met from internally generated funds, through cash dividends from subsidiaries,
cash generated by investment securities and bank borrowings through existing
credit facilities. Our short-and long-term liquidity requirements are monitored
regularly to match cash inflows with cash requirements. We forecast the daily
needs of all of our subsidiaries and periodically review their short- and
long-term projected sources and uses of funds, as well as the asset, liability,
investment and cash flow assumptions underlying these projections.
Our two significant sources of our funds are dividends and distributions
from our subsidiaries. As a holding company, we receive cash from our
subsidiaries in the form of dividends and as reimbursement for operating and
other administrative expenses we incur. The reimbursements are executed within
the guidelines of management agreements among us and our subsidiaries. Our
insurance subsidiaries are restricted by state regulation in their ability to
pay dividends and make distributions. Each state of domicile regulates the
extent to which our title underwriters can pay dividends or make other
distributions to us. Our underwritten title companies, real estate related
service companies, Micro General and FNF Capital, collect revenue and pay
operating expenses. However, they are not regulated to the same extent as our
insurance subsidiaries. Positive cash flow from these subsidiaries are invested
primarily in cash and cash equivalents.
Recent Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative
instruments, contracts and hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
SFAS 133 was amended by Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB No. 133" ("SFAS 137"). SFAS 137 defers the
effective date to all fiscal quarters of fiscal years beginning after June 15,
2000. SFAS 133, as amended by SFAS 137 and Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Hedging
Activities -- an amendment of SFAS 133." ("SFAS 138"), is effective for our
first quarter in the fiscal year ending December 31, 2001, and does not have a
material effect on our financial position or results of operations.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," ("SFAS
140"). SFAS 140 revises the accounting standards for securitizations and other
transfers of financial assets and collateral and requires certain disclosures.
SFAS 140 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after March 31, 2001. Adoption of SFAS
140 will not have a material effect on our financial statements.
Emerging Issues Task Force No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets", ("EITF 99-20") sets forth the rules for
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28
recognizing interest income on all credit-sensitive mortgage and asset-backed
securities and certain prepayment-sensitive securities including agency
Interest-only strips, whether purchased or retained in securitization, and
determining when these securities must be written down to fair value because of
impairment. EITF 99-20 is effective for all fiscal quarters beginning after
March 15, 2001. Early adoption is permitted. We have decided not to early adopt
EITF 99-20. Application of provisions of the EITF are to be adopted
prospectively. Adoption of EITF 99-20 will require impairments to the valuation
of residual interest in securitizations to be recorded as a reduction to the
carrying value of the residual interests through a charge to earnings. The
initial potential impact of adoption would be a charge to earnings of
approximately $3.2 million in 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT THE MARKET RISK OF
FINANCIAL INSTRUMENTS
Our Consolidated Balance Sheet includes a substantial amount of assets and
liabilities whose fair values are subject to market risks. See
"Business -- Investment Policies and Investment Portfolio" and Notes C and G of
Notes to Consolidated Financial Statements. The following sections address the
significant market risks associated with our financial activities as of our year
ended December, 31, 2000.
Interest Rate Risk
Our fixed maturity investments and borrowings are subject to interest rate
risk. Increases and decreases in prevailing interest rates generally translate
into decreases and increases in fair values of those instruments. Additionally,
fair values of interest rate sensitive instruments may be affected by the
creditworthiness of the issuer, prepayment options, relative values of
alternative investments, the liquidity of the instrument and other general
market conditions.
Equity Price Risk
The carrying values of investments subject to equity price risks are based
on quoted market prices or management's estimates of fair value as of the
balance sheet date. Market prices are subject to fluctuation and, consequently,
the amount realized in the subsequent sale of an investment may significantly
differ from the reported market value. Fluctuation in the market price of a
security may result from perceived changes in the underlying economic
characteristics of the investee, the relative price of alternative investments
and general market conditions. Furthermore, amounts realized in the sale of a
particular security may be affected by the relative quantity of the security
being sold.
Caution should be used in evaluating our overall market risk from the
information below, since actual results could differ materially because the
information was developed using estimates and assumptions as described below,
and because our reserve for claim losses (representing 33.3% of total
liabilities) is not included in the hypothetical effects.
The hypothetical effects of changes in market rates or prices on the fair
values of financial instruments would have been as follows as of December 31,
2000:
a. An approximate $43.1 million net increase (decrease) in the fair
value of fixed maturity securities would have occurred if interest rates
had (decreased) increased by 100 basis points. The change in fair values
was determined by estimating the present value of future cash flows using
various models, primarily duration modeling.
b. An approximate $10.6 million net increase (decrease) in the fair
value of equity securities would have occurred if there was a 20% price
increase (decrease) in market prices.
c. It is not anticipated that there would be a significant change in
the fair value of other long-term investments or short-term investments if
there was a change in market conditions, based on the nature and duration
of the financial instruments involved.
d. Interest expense on average debt outstanding would have increased
(decreased) approximately $7.0 million, if interest rates increased
(decreased) 100 basis points.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
PAGE
NUMBER
------
Independent Auditors' Report................................ 28
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... 29
Consolidated Statements of Earnings for the years ended
December 31, 2000, 1999 and 1998.......................... 30
Consolidated Statements of Comprehensive Earnings for the
years ended December 31, 2000, 1999 and 1998.............. 31
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998.............. 32
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... 33
Notes to Consolidated Financial Statements.................. 34
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INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
FIDELITY NATIONAL FINANCIAL, INC.:
We have audited the accompanying Consolidated Balance Sheets of Fidelity
National Financial, Inc. and subsidiaries as of December 31, 2000 and 1999 and
the related Consolidated Statements of Earnings, Comprehensive Earnings,
Stockholders' Equity and Cash Flows for each of the years in the three-year
period ended December 31, 2000. These Consolidated Financial Statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these Consolidated Financial Statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2000 and
1999, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Los Angeles, California
February 14, 2001
28
31
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
DECEMBER 31,
------------------------
2000 1999
---------- ----------
Investments:
Fixed maturities available for sale, at fair value, at
December 31, 2000 includes $248,512 of pledged fixed
maturity securities related to secured trust
deposits............................................... $1,188,681 $ 347,051
Equity securities, at fair value.......................... 39,959 38,881
Other long-term investments, at cost, which approximates
fair value............................................. 46,870 43,253
Short-term investments, at December 31, 2000 includes
$210,861 of pledged short-term investments related to
secured trust deposits................................. 409,317 74,232
Investments in real estate and partnerships, net.......... 504 3,499
---------- ----------
Total investments................................. 1,685,331 506,916
Cash and cash equivalents, at December 31, 2000 includes
$132,141 of pledged cash related to secured trust
deposits.................................................. 262,955 38,569
Leases and residual interests in securitizations............ 151,052 142,141
Trade receivables, net...................................... 127,633 60,784
Notes receivable, net....................................... 16,381 18,304
Income taxes receivable..................................... 22,343 --
Cost in excess of net assets acquired, net.................. 770,060 53,576
Prepaid expenses and other assets........................... 231,118 75,310
Title plants................................................ 275,295 59,914
Property and equipment, net................................. 172,838 55,453
Deferred tax asset.......................................... 118,979 31,579
---------- ----------
$3,833,985 $1,042,546
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $ 446,394 $ 135,943
Notes payable............................................. 791,430 226,359
Reserve for claim losses.................................. 907,482 239,962
Secured trust deposits.................................... 576,350 --
Income taxes payable...................................... -- 3,175
---------- ----------
2,721,656 605,439
Minority interests........................................ 5,592 4,613
Stockholders' equity:
Preferred stock, $.0001 par value; authorized, 3,000,000
shares; issued and outstanding, none................... -- --
Common stock, $.0001 par value; authorized, 100,000,000
shares as of December 31, 2000 and 50,000,000 shares as
of December 31, 1999; issued, 69,499,409 as of December
31, 2000 and 39,224,169 as of December 31, 1999........ 7 4
Additional paid-in capital................................ 695,141 246,959
Retained earnings......................................... 409,216 327,785
---------- ----------
1,104,364 574,748
Accumulated other comprehensive earnings (loss)........... 2,373 (5,975)
Less treasury stock, cancelled in 2000 and 12,036,102
shares as of December 31, 1999, at cost................ -- (136,279)
---------- ----------
1,106,737 432,494
---------- ----------
$3,833,985 $1,042,546
========== ==========
See Notes to Consolidated Financial Statements.
29
32
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
REVENUE:
Title insurance premiums............................. $1,946,159 $ 939,452 $ 910,278
Escrow and other title related fees.................. 459,121 206,570 215,254
Real estate related services......................... 166,718 67,844 69,970
Interest and investment income, including realized
gains and losses.................................. 87,191 32,045 44,502
Other income......................................... 82,805 109,943 53,376
---------- ---------- ----------
2,741,994 1,355,854 1,293,380
---------- ---------- ----------
EXPENSES:
Personnel costs...................................... 845,349 407,078 394,284
Other operating expenses............................. 626,308 332,296 258,866
Agent commissions.................................... 884,498 423,675 385,649
Provision for claim losses........................... 97,322 52,713 59,294
Interest expense..................................... 59,374 15,626 17,024
---------- ---------- ----------
2,512,851 1,231,388 1,115,117
---------- ---------- ----------
Earnings before income taxes and amortization of cost
in excess of net assets acquired.................. 229,143 124,466 178,263
Amortization of cost in excess of net assets
acquired.......................................... 35,003 6,638 3,129
---------- ---------- ----------
Earnings before income taxes......................... 194,140 117,828 175,134
Income tax expense................................... 85,825 46,975 69,442
---------- ---------- ----------
Net earnings...................................... $ 108,315 $ 70,853 $ 105,692
========== ========== ==========
Basic net earnings per share......................... $ 1.84 $ 2.38 $ 3.79
========== ========== ==========
Weighted average shares outstanding, basic basis..... 58,821 29,811 27,921
========== ========== ==========
Diluted net earnings per share....................... $ 1.78 $ 2.27 $ 3.23
========== ========== ==========
Weighted average shares outstanding, diluted basis... 60,937 31,336 33,474
========== ========== ==========
See Notes to Consolidated Financial Statements.
30
33
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Net earnings............................................... $108,315 $ 70,853 $105,692
Other comprehensive earnings (loss):
Unrealized gains (losses) on investments, net(1)......... 8,644 (17,678) (1,608)
Reclassification adjustments for (gains) losses included
in net earnings(2).................................... (296) 46 (10,366)
-------- -------- --------
Other comprehensive earnings (loss)........................ 8,348 (17,632) (11,974)
-------- -------- --------
Comprehensive earnings..................................... $116,663 $ 53,221 $ 93,718
======== ======== ========
- ---------------
(1) Net of income tax expense (benefit) of $5.8 million, ($11.3) million and
($1.1) million for 2000, 1999 and 1998, respectively.
(2) Net of income tax expense (benefit) of $198, ($30) and $6.8 million for
2000, 1999 and 1998, respectively.
See Notes to Consolidated Financial Statements.
31
34
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY STOCK
---------------- PAID-IN RETAINED COMPREHENSIVE -------------------
SHARES AMOUNT CAPITAL EARNINGS EARNINGS (LOSS) SHARES AMOUNT
------- ------ ---------- -------- --------------- ------- ---------
Balance, December 31, 1997......... 33,362 $ 3 $ 137,569 $167,222 $ 23,631 6,645 $ (54,375)
Exercise of stock options,
including associated tax
benefit........................ 1,583 -- 22,868 -- -- -- --
Other comprehensive loss --
unrealized loss on investments
and other financial
instruments.................... -- -- -- -- (11,974) -- --
Acquisitions..................... 133 -- 4,250 -- -- -- --
Conversion of LYONs.............. 462 -- 9,201 -- -- -- --
Cash dividends declared ($0.26
per share)..................... -- -- -- (7,347) -- -- --
Net earnings..................... -- -- -- 105,692 -- -- --
------- --- --------- -------- -------- ------- ---------
Balance, December 31, 1998......... 35,540 3 173,888 265,567 11,657 6,645 (54,375)
------- --- --------- -------- -------- ------- ---------
Purchase of treasury stock....... -- -- -- -- -- 5,391 (81,904)
Exercise of stock options,
including associated tax
benefit........................ 211 -- 2,488 -- -- -- --
Other comprehensive loss --
unrealized loss on investments
and other financial
instruments.................... -- -- -- -- (17,632) -- --
Acquisitions..................... -- -- 297 -- -- -- --
Redemption and conversion of
LYONs.......................... 3,473 1 70,286 -- -- -- --
Cash dividends declared ($0.31
per share)..................... -- -- -- (8,635) -- -- --
Net earnings..................... -- -- -- 70,853 -- -- --
------- --- --------- -------- -------- ------- ---------
Balance, December 31, 1999......... 39,224 4 246,959 327,785 (5,975) 12,036 (136,279)
Purchase of treasury stock....... -- -- -- -- -- 39 (551)
Exercise of stock options,
including associated tax
benefit........................ 3,589 -- 63,521 -- -- -- --
Other comprehensive earnings --
unrealized gain on investments
and other financial
instruments.................... -- -- -- -- 8,348 -- --
Acquisition of Chicago Title
Corporation.................... 38,761 4 521,490 -- -- -- --
Retirement of treasury stock..... (12,075) (1) (136,829) -- -- (12,075) 136,830
Cash dividends declared ($0.40
per share)..................... -- -- -- (26,884) -- -- --
Net earnings..................... -- -- -- 108,315 -- -- --
------- --- --------- -------- -------- ------- ---------
Balance, December 31, 2000......... 69,499 $ 7 $ 695,141 $409,216 $ 2,373 -- $ --
======= === ========= ======== ======== ======= =========
See Notes to Consolidated Financial Statements.
32
35
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 108,315 $ 70,853 $ 105,692
Adjustment to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization........................... 95,427 29,968 21,373
Net increase (decrease) in reserve for claim losses..... (3,225) 19,738 22,860
Amortization of LYONs original issue discount and other
debt issuance costs................................... 2,480 602 4,432
Provision for losses (recovery) on real estate and notes
receivable............................................ 1,016 (154) 582
(Gain) loss on sales of investments..................... 3,163 2,093 (19,679)
(Gain) loss on sales of real estate and other assets.... (2,962) (2,017) 2,489
Changes in assets and liabilities, net of effects from
acquisitions:
Net increase in leases and residual interests in
securitizations....................................... (12,801) (48,634) (39,725)
Tax benefit associated with the exercise of stock
options............................................... 17,000 -- 11,763
Net increase in secured trust deposits.................. (16,577) -- --
Net (increase) decrease in trade receivables............ (10,775) 15,153 (22,486)
Net increase in prepaid expenses and other assets....... (38,556) (15,604) (17,703)
Net increase (decrease) in accounts payable, accrued
liabilities and minority interests.................... 30,639 (5,831) 35,207
Net decrease in income taxes............................ (12,081) (16,303) (21,280)
--------- --------- ---------
Net cash provided by operating activities.......... 161,063 49,864 83,525
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for
sale.................................................... 340,029 87,685 172,991
Proceeds from maturities of investment securities
available for sale...................................... 64,935 232,770 5,966
Proceeds from sales of title plant........................ -- 1,100 --
Proceeds from sales of other assets....................... -- 2,168 6,848
Proceeds from sales of real estate........................ 6,170 1,380 --
Collections of notes receivable........................... 11,833 5,213 9,372
Additions to title plants................................. (1,673) (2,092) (1,480)
Additions to property and equipment....................... (47,953) (29,313) (22,393)
Additions to notes receivable............................. (10,135) (12,768) (11,717)
Purchases of investment securities available for sale..... (282,164) (375,069) (251,753)
Net (purchases) proceeds from short-term investment
activities.............................................. (196,414) 34,895 (62,981)
Investments in real estate and partnerships............... -- (559) --
Sale of subsidiary, net of cash........................... -- 2,469 --
Acquisition of businesses, net of cash acquired........... (537,980) -- (1,036)
--------- --------- ---------
Net cash used in investing activities.............. (653,352) (52,121) (156,183)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings................................................ 767,040 108,878 84,287
Principal payments........................................ (205,861) (22,936) (28,877)
Dividends paid............................................ (22,615) (8,192) (6,340)
Exercise of stock options................................. 46,521 2,488 11,105
Purchases of treasury stock............................... (551) (81,904) --
--------- --------- ---------
Net cash provided by (used in) financing
activities....................................... 584,534 (1,666) 60,175
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents...... 92,245 (3,923) (12,483)
Cash and cash equivalents at beginning of year............ 38,569 42,492 54,975
--------- --------- ---------
Cash and cash equivalents at end of year.................. $ 130,814 $ 38,569 $ 42,492
========= ========= =========
See Notes to Consolidated Financial Statements.
33
36
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following describes the significant accounting policies of Fidelity
National Financial, Inc. and its subsidiaries (collectively, the "Company")
which have been followed in preparing the accompanying Consolidated Financial
Statements.
Description of Business
Fidelity National Financial, Inc., through its principal subsidiaries
(collectively, the "Company"), is the largest title insurance and diversified
real estate related services company in the United States. The Company's title
insurance underwriters -- Fidelity National Title, Chicago Title, Ticor Title,
Security Union Title and Alamo Title -- together issue all of the Company's
title insurance policies in 49 states, the District of Columbia, Guam, Puerto
Rico and the U.S. Virgin Islands, and in Canada and Mexico.
In addition, the Company provides a broad array of escrow and other title
related services, as well as real estate related services, including: collection
and trust activities, trustee's sales guarantees, recordings, reconveyances,
property appraisal rights, credit reporting, exchange intermediary services in
connection with real estate transactions, real estate tax services, home
warranty insurance, foreclosure posting and publishing services, loan portfolio
services, flood certification and field services.
The Company's principal title subsidiaries consist of Fidelity National
Title Insurance Company, Fidelity National Title Insurance Company of New York,
Chicago Title Insurance Company, Chicago Title Insurance Company of Oregon,
Ticor Title Insurance Company, Security Union Title Insurance Company and Alamo
Title Insurance. The Company's principle underwritten title company subsidiaries
consist of Fidelity National Title Company, Fidelity National Title Company of
California and Chicago Title Company.
The Company includes the accounts of its majority-owned
information-services subsidiary, Micro General Corporation (NASDAQ: MGEN, "Micro
General") in its consolidated results. As of December 31, 2000, the Company owns
65.7% of Micro General.
The Company also originates, funds, purchases, sells, securitizes and
services equipment leases for a broad range of businesses through its
wholly-owned subsidiary, FNF Capital, Inc. ("FNF Capital").
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 and affiliates are
accounted for on the equity method. The Company's financial results for the year
ended December 31, 2000 include the operations of Chicago Title Corporation
("Chicago Title") for the period from March 20, 2000, the merger date, through
December 31, 2000. See Note B.
All dollars presented in the accompanying Consolidated Financial Statements
are in thousands, except per share amounts and unless indicated otherwise.
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.
34
37
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
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. Included in fixed maturities are
mortgage-backed securities, which are recorded at purchase cost. Discount or
premium is recorded for the difference between the purchase price and the
principal amount. The discount or premium is amortized using the interest method
and is recorded as an adjustment to interest and investment income. The interest
method results in the recognition of a constant rate of return on the investment
equal to the prevailing rate at the time of purchase or at the time of
subsequent adjustments of book value. Changes in prepayment assumptions are
accounted for prospectively.
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, market, or on the equity method, as
appropriate.
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 fixed maturity
and equity securities which are classified as available for sale, net of
applicable deferred income taxes (benefits), are excluded from earnings and
credited or charged directly to a separate component of stockholders' equity. If
any unrealized losses on fixed maturity or equity securities are deemed other
than temporary, such unrealized losses are recognized as realized losses.
Leases and Residual Interests in Securitizations
Leases and residual interests in securitizations includes direct financing
leases, direct financing leases assigned to lender and residual interests in
securitizations.
Direct Financing Leases
The Company's leases are accounted for as direct financing leases. Under
this method, the amount by which gross lease rentals exceed the cost of the
related assets, less the estimated recoverable residual value at the expiration
of the lease, is recognized as income from direct financing leases over the life
of the lease using the interest method. Interest is accrued only if deemed
collectible. Direct financing leases which the Company has both the intent and
ability to hold to maturity are classified as held to maturity. Direct financing
leases originated principally for the purpose of selling in the near term are
classified as available for sale and are
35
38
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
stated at the lower of amortized cost or market as determined by outstanding
commitments from investors or current investor-yield requirements calculated on
an aggregate basis.
Direct Financing Leases Assigned to Lender
Direct financing leases securitized through the issuance of a debt security
prior to the effective date of Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125") are accounted for as collateralized
borrowings. The leases collateralizing the debt are recorded as direct financing
leases assigned to lenders. The related debt is recorded as notes payable.
Allowance for Credit Losses on Leases
The Company establishes an allowance for credit losses to provide for
expected losses in the Company's existing portfolio of leases and leases
transferred on a recourse basis. The allowance for credit losses is based on the
Company's historical and expected loss experience, industry knowledge and other
economic factors. The ultimate obligation for defaults and delinquencies related
to leases transferred on a recourse basis is measured and recorded at the time
of transfer.
Leases are collateralized by equipment. In addition, lessees generally are
required to personally guarantee lease payments. The Company's risk of loss is
partially mitigated by recovering collateral and enforcing guarantees. However,
the resale value of leased equipment generally declines at a rate greater than
the principal of the lease. As a result, full recovery on defaulted leases is
not usually possible.
Lease Securitization and Residual Interests in Securitizations
A transfer of financial assets in which control is surrendered is accounted
for as a sale to the extent that consideration other than beneficial interests
in the transferred assets is received in the exchange. Liabilities and
derivatives incurred or obtained by the transfer of financial assets are
required to be measured at fair value, if practicable. Also, servicing assets
and other retained interests in the transferred assets are measured by
allocating the previous carrying value between the assets sold and the interest
retained, if any, based on their relative fair values at the date of transfer.
Residual interests in securitizations ("Residuals") of lease receivables in
a trust are recorded as a result of the sale of lease receivables through
securitization. The securitizations are generally structured as follows: first,
the Company sells a portfolio of lease receivables to a special purpose entity
("SPE") which has been established for the limited purpose of buying and
reselling the Company's lease receivables; next, the SPE transfers the same
lease receivables to a trust ("Trust"), and the Trust in turn issues interest
bearing asset-backed securities ("Bonds and Certificates"), generally in an
amount equal to the aggregate initial principal balance of the lease receivables
multiplied by an advance rate. The Company typically sells these lease
receivables at face value and with limited recourse relating to defaulted loans,
prepayments, and certain representations and warranties provided by the Company
to the Trust in the form of Bonds and Certificates. One or more investors
purchase these Bonds and Certificates and the proceeds from the sale of the
Bonds and Certificates are used as consideration to purchase the lease
receivables from the Company.
At the closing of each securitization that is accounted for as a sale, the
Company removes from its Consolidated Balance Sheet the lease receivables held
for sale and adds to its Consolidated Balance Sheet (i) the cash received and
(ii) the allocated cost of the Residuals which consists of (a) cash collateral
account ("Cash Collateral Account") and (b) net excess cash flows. The excess of
the cash received by the Company
36
39
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
over the allocated cost of the lease receivables sold less transaction costs,
equals the net gain on sale recorded by the Company.
The Company allocates its basis in the lease receivables between the
portion of the lease receivables sold and the portion retained based on the
relative fair values of those portions on the date of the sale.
Residuals are recorded at estimated fair value and accounted for as
available for sale securities. Changes in the fair value of the Residuals are
recorded as unrealized gains or losses, net of applicable deferred income taxes
(benefits), and are excluded from earnings and credited or charged directly to a
separate component of stockholders' equity. Included in accumulated other
comprehensive earnings (loss) at December 31, 2000 and 1999 are net unrealized
losses of $3.2 million and $914, respectively, related to Residuals. The Company
is not aware of an active market for the purchase or sale of Residuals at this
time. Accordingly, the Company estimates the fair value of the Residuals by
calculating the present value of the estimated expected future excess cash flows
received by the Company after being released by the Trust (cash out method)
using a discount rate of approximately 12%, which management believes is
commensurate with the risks involved.
The Company is entitled to the cash flows from the Residuals that represent
collections on the lease receivables in excess of the amounts required to pay
the Bond and Certificate principal and interest, the base servicing fees and
certain other fees such as trustee and custodial fees. At the end of each
collection period, the aggregate cash collections from the lease receivables are
allocated first to the servicing fees and certain other fees such as trustee and
custodial fees for the period, then to the Bond and Certificate holders for
interest at the pass-through rate on the Bonds and Certificates plus principal,
as defined in the Trust and Security Agreements. If the amount of cash required
for the above allocations exceeds the amount collected during the collection
period, the shortfall is drawn from the Cash Collateral Account. If the cash
collected during the period exceeds the amount necessary for the above
allocations, and there is no shortfall in the related Cash Collateral Account,
the excess is released to the Company. If the Cash Collateral Account balance is
not at the required credit enhancement level, the excess cash collected is used
to build the Cash Collateral Account until the credit enhancement level is
achieved. The specified credit enhancement levels are defined in the applicable
Trust and Security Agreements, which are expressed generally as a percentage of
either the original or current collateral principal balance.
The implicit interest rate on the lease receivables is relatively high in
comparison to the pass-through rate on the Bonds and Certificates. In
determining the value of the Residuals described above, the Company estimates
the future rates of prepayments, delinquencies, defaults and default loss
severity as they impact the amount and timing of the estimated cash flows. The
Company uses a zero prepayment estimate because the lease contracts generally
require the lessee to pay all or a majority of the lease payments due under the
remaining lease term. The Company's loss estimate is 2.5% to 4.5% of the lease
net investment value, which is based on historical loss data for comparable
leases and the specific characteristics of the leases originated by the Company.
The Company's default estimates resulted in a weighted average life of the pool
of leases of between approximately 1.5 and 2.0 years.
In future periods, the Company may increase the carrying value of the
Residuals if the actual performance of the lease receivables results in an
estimated fair value higher than the original estimate. If the actual
performance of the lease receivables results in an estimated fair value that is
lower than the original estimate, a decrease in the carrying value of the
Residuals may be required.
During 2000 and 1999, the Company sold equipment leases and loans in
securitization transactions. In all those securitizations, the Company retained
servicing responsibilities and subordinated interests. The Company receives
annual servicing fees approximating $6.00 per serviced contract and rights to
future cash flows arising after the investors in the securitization trust have
received the return for which they contracted. The
37
40
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
investors and the securitization trusts have no recourse to the Company's other
assets for failure of debtors to pay when due. The Company's retained interests
are subordinate to investor's interests. Their value is subject to credit,
prepayment and interest rate risks on the transferred financial assets.
Sales of Leases
Gains or losses resulting from the sales of leases are recognized in the
accompanying Consolidated Statements of Earnings at the date of sale and are
based upon the excess of the proceeds over the allocated cost of the leases
sold. Nonrefundable fees and direct costs associated with the origination of
leases are deferred and recognized when the leases are sold.
Lease Acquisition Costs and Broker Commissions
Lease acquisition costs consist of broker bonuses and commissions paid upon
the origination of equipment lease contracts. The costs are included in direct
finance leases and are amortized to expense over the life of the related lease
using the interest method.
Trade Receivables
The carrying values 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.
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 carrying value of the title plant
is diminished or impaired.
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 software costs and capitalized debt offering costs, and are
amortized on a straight-line basis over three to forty years. At December 31,
2000,
38
41
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
intangible assets consist of cost in excess of net assets acquired of $822.8
million less accumulated amortization of $52.7 million, capitalized software
costs of $33.6 million less accumulated amortization of $17.0 million and
capitalized debt offering costs of $13.5 million less accumulated amortization
of $3.6 million. Intangible assets at December 31, 1999 consist of cost in
excess of net assets acquired of $67.3 million less accumulated amortization of
$13.7 million, capitalized software of $18.3 million less accumulated
amortization of $10.0 million and capitalized debt offering costs of $2.1
million less accumulated amortization of $1.1 million.
Impairment of intangible assets is monitored on a continual basis, and is
assessed based on an analysis of the undiscounted cash flows generated by the
underlying assets. In 2000, the Company recorded pre-tax impairment losses
totaling $7.0 million, primarily relating to the write off of cost in excess of
net assets acquired and capitalized software costs of non-title related
businesses. These amounts are included as part of the $13.4 million after tax,
non-recurring charges the Company recorded in the first quarter of 2000.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss and credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The impact on deferred taxes of changes in tax rates and laws, if any,
are applied to the years during which temporary differences are expected to be
settled and reflected in the financial statements in the period enacted.
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.
The reserve for claim losses also includes reserves for losses arising from
the escrow, closing and disbursement functions due to fraud or operational error
based on historical experience.
If a loss is related to a policy issued by an independent agent, the
Company may proceed against the independent agent pursuant to the terms of the
agency agreement. In any event, the Company may proceed against third parties
who are responsible for any loss under the title insurance policy under rights
of subrogation. See Note I.
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 also cedes a portion of certain policy
and other liabilities under agent fidelity, excess of loss and case-by-case
reinsurance agreements. Reinsurance agreements provide that in the event of a
loss (including costs, attorneys' fees and expenses) exceeding the retained
amounts, the reinsurer is liable for the excess amount assumed. However, the
ceding company remains primarily liable in
39
42
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
the event the reinsurer does not meet its contractual obligations. The Company
has a $30.9 million reinsurance recoverable from Lloyds of London on claim loss
expense recoverables as of December 31, 2000.
Title Premiums, Escrow and Other Title Related Fees, Real Estate Related
Services and Other Income
Title insurance premiums and escrow and other title related fees are
recognized as revenue at the time of closing of the related transaction as the
earnings process is considered complete. Real estate related services and other
income are recognized over the period the related services are provided.
Other income represents revenue generated from the operations of Micro
General, FNF Capital and Express Network, Inc. ("ENI"), which was sold in the
second quarter of 2000.
Share and Per Share Restatement
On December 13, 1998, the Company declared a 10% stock dividend to
stockholders of record on December 28, 1998, distributed January 12, 1999. 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, 1998. 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 stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated by dividing net
earnings available to common stockholders plus the impact of assumed conversions
of dilutive potential securities. The Company has granted certain options 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.
The following table presents the computation of basic and diluted earnings
per share::
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net earnings, basic basis........................... $108,315 $70,853 $105,692
Plus: Impact of assumed conversion of the LYONS, net
of applicable income taxes.................... -- 263 2,463
-------- ------- --------
Diluted earnings.................................... $108,315 $71,116 $108,155
======== ======= ========
Weighted average shares outstanding during the year,
basic basis....................................... 58,821 29,811 27,921
Plus: Common stock equivalent shares assumed from
conversion of options......................... 2,116 1,172 1,859
Common stock equivalent shares assumed from
conversion of LYONS............................ -- 353 3,694
-------- ------- --------
Weighted average shares outstanding during the year,
diluted basis..................................... 60,937 31,336 33,474
======== ======= ========
Basic earnings per share............................ $ 1.84 $ 2.38 $ 3.79
======== ======= ========
Diluted earnings per share.......................... $ 1.78 $ 2.27 $ 3.23
======== ======= ========
40
43
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
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 1999 and 1998 Consolidated
Financial Statements to conform to the classifications used in 2000.
B. ACQUISITIONS
On March 20, 2000, Chicago Title Corporation ("Chicago Title") merged with
and into the Company pursuant to an Agreement and Plan of Merger, dated August
1, 1999, as amended on October 13, 1999. Pursuant to the merger agreement,
Chicago Title stockholders received aggregate merger consideration valued at
approximately $1.1 billion. The merger consideration was paid in the form of
1.7673 shares of Company common stock and $26.00 in cash for each share of
Chicago Title common stock, resulting in the issuance of approximately 38.8
million shares of Company common stock valued at an average price during the
applicable trading period of $13.1771 per share and the payment of approximately
$570.2 million in cash. The merger was accounted for as a purchase.
In connection with the merger, the Company entered into a syndicated credit
agreement. See Note G. Amounts borrowed under the credit agreement were used to
finance the cash portion of the merger consideration, to refinance previously
existing indebtedness, to pay fees and expenses incurred in connection with the
merger and to fund other general corporate purposes.
The assets acquired, including cost in excess of net assets acquired, which
is amortized over a period of 20 years, and liabilities assumed in the Chicago
Title merger were as follows (dollars in thousands):
Tangible assets acquired at fair value...................... $ 1,779,653
Cost in excess of net assets acquired....................... 755,551
Liabilities assumed at fair value........................... (1,428,744)
-----------
Total purchase price.............................. $ 1,106,460
===========
41
44
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
Selected unaudited pro forma combined results of operations for the years
ended December 31, 2000 and 1999, assuming the merger had occurred as of January
1, 2000 and January 1, 1999, and using actual general and administrative
expenses prior to the merger, are set forth below:
DECEMBER 31,
------------------------
2000 1999
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Total revenue............................................... $3,074,254 $3,382,331
Net earnings before merger-related expenses and
non-recurring charges..................................... $ 119,078 $ 128,931
Net earnings................................................ $ 85,290 $ 124,199
Basic net earnings per share before merger-related expenses
and non-recurring charges................................. $ 1.77 $ 1.88
Diluted net earnings per share before merger-related
expenses and non-recurring charges........................ $ 1.72 $ 1.83
Basic net earnings per share................................ $ 1.27 $ 1.81
Diluted net earnings per share.............................. $ 1.23 $ 1.76
C. INVESTMENTS
The carrying amounts and fair values of the Company's fixed maturity
securities at December 31, 2000 and 1999 are as follows:
DECEMBER 31, 2000
--------------------------------------------------------------
GROSS GROSS
CARRYING AMORTIZED UNREALIZED UNREALIZED
VALUE COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Fixed maturity investments (available
for sale):
U.S. government and agencies.......... $ 230,992 $ 226,000 $ 5,425 $ (433) $ 230,992
States and political subdivisions..... 501,625 492,584 9,200 (159) 501,625
Corporate securities.................. 250,634 247,980 5,824 (3,170) 250,634
Foreign government bonds.............. 3,150 3,085 65 -- 3,150
Mortgage-backed securities............ 202,280 196,662 5,963 (345) 202,280
---------- ---------- ------- ------- ----------
$1,188,681 $1,166,311 $26,477 $(4,107) $1,188,681
========== ========== ======= ======= ==========
DECEMBER 31, 1999
--------------------------------------------------------------
GROSS GROSS
CARRYING AMORTIZED UNREALIZED UNREALIZED
VALUE COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Fixed maturity investments (available
for sale):
U.S. government and agencies.......... $ 46,063 $ 48,049 $ 4 $(1,990) $ 46,063
States and political subdivisions..... 203,571 205,929 462 (2,820) 203,571
Corporate securities.................. 93,486 95,781 124 (2,419) 93,486
Foreign government bonds.............. 75 75 -- -- 75
Mortgage-backed securities............ 3,856 3,991 39 (174) 3,856
---------- ---------- ------- ------- ----------
$ 347,051 $ 353,825 $ 629 $(7,403) $ 347,051
========== ========== ======= ======= ==========
42
45
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
The change in unrealized gains (losses) on fixed maturities for the years
ended December 31, 2000, 1999, and 1998 was $29.1 million, ($13.9) million and
$3.2 million, respectively.
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.
The following table presents certain information regarding the Company's
fixed maturity securities at December 31, 2000:
DECEMBER 31, 2000
------------------------------------------------
AMORTIZED % FAIR %
MATURITY COST OF TOTAL VALUE OF TOTAL
-------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
One year or less........................ $ 102,891 8.8% $ 102,988 8.7%
After one year through five years....... 545,397 46.8 551,720 46.4
After five years through ten years...... 247,638 21.2 254,617 21.4
After ten years......................... 73,723 6.3 77,076 6.5
---------- ----------
969,649 986,401
Mortgage-backed securities.............. 196,662 16.9 202,280 17.0
---------- ----- ---------- -----
$1,166,311 100.0% $1,188,681 100.0%
========== ===== ========== =====
Subject to call....................... $ 81,421 7.0% $ 81,762 6.9%
========== ===== ========== =====
Fixed maturity securities valued at approximately $34.3 million and $16.3
million were on deposit with various governmental authorities at December 31,
2000 and 1999, respectively, as required by law.
Equity securities at December 31, 2000 and 1999 consist of investments in
various industry groups as follows:
DECEMBER 31,
----------------------------------------
2000 1999
------------------ ------------------
FAIR FAIR
COST VALUE COST VALUE
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Banks, trust and insurance companies........ $ 1,726 $ 2,037 $ 1,559 $ 1,628
Industrial, miscellaneous and all other..... 51,224 37,922 38,180 37,253
------- ------- ------- -------
$52,950 $39,959 $39,739 $38,881
======= ======= ======= =======
The carrying value of the Company's investment in equity securities is fair
value. As of December 31, 2000, gross unrealized gains and gross unrealized
losses on equity securities were $4.0 million and $17.0 million, respectively.
Gross unrealized gains and gross unrealized losses on equity securities were
$8.4 million and $9.2 million, respectively, as of December 31, 1999.
The change in unrealized gains (losses) on equity securities for the years
ended December 31, 2000, 1999 and 1998 was ($12.2) million, ($13.3) million and
($23.4) million, respectively.
43
46
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
Interest and investment income, including realized gains (losses), consists
of the following:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents............................. $ 4,194 $ 1,681 $ 2,798
Fixed maturity securities............................. 59,520 15,692 13,014
Equity securities..................................... 4,180 3,516 25,225
Short-term investments................................ 15,203 3,219 1,483
Notes receivable...................................... 4,822 3,569 1,913
Other................................................. (728) 4,368 69
------- ------- -------
$87,191 $32,045 $44,502
======= ======= =======
Net realized gains (losses) included in interest and investment income
amounted to ($201), ($76) and $17.2 million for the years ended December 31,
2000, 1999 and 1998, respectively. There were no individually significant net
realized gains or losses in 2000 or 1999. Net realized gains in 1998 include a
gain of approximately $9.7 million related to the conversion of the Company's
investment in Data Tree Corporation common stock to common stock of First
American Corporation. All amounts are before applicable income taxes.
During the years ended December 31, 2000, 1999 and 1998, gross realized
gains on sales of fixed maturity securities considered available for sale were
$1.7 million, $384 and $700, respectively; and gross realized losses were $586,
$277 and $268, respectively. Gross proceeds from the sale of fixed maturity
securities considered available for sale amounted to $289.6 million, $38.2
million and $64.4 million during the years ended December 31, 2000, 1999 and
1998, respectively.
During the years ended December 31, 2000, 1999 and 1998, gross realized
gains on sales of equity securities considered available for sale were $8.9
million, $6.3 million and $32.6 million, respectively; and gross realized losses
were $9.4 million, $7.2 million and $11.0 million, respectively. Gross proceeds
from the sale of equity securities amounted to $50.4 million, $49.5 million and
$108.6 million during the years ended December 31, 2000, 1999 and 1998,
respectively.
D. LEASES AND RESIDUAL INTERESTS IN SECURITIZATIONS
Direct Financing Leases
Direct financing leases at December 31, 2000 and 1999 consist of the
following:
DECEMBER 31, 2000
------------------------------------
DIRECT FINANCING
DIRECT FINANCING LEASES ASSIGNED
LEASES TO LENDER
---------------- ----------------
(DOLLARS IN THOUSANDS)
Minimum lease payments receivable...................... $55,521 $102,628
Estimated residual values of leased property........... 2,455 2,542
Lease acquisition costs and broker commissions......... 1,714 5,310
Unearned income........................................ (9,801) (26,702)
Allowance for credit losses............................ (3,389) (3,514)
Security deposits...................................... (2,485) (2,025)
------- --------
$44,015 $ 78,239
======= ========
44
47
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
DECEMBER 31, 1999
------------------------------------
DIRECT FINANCING
DIRECT FINANCING LEASES ASSIGNED
LEASES TO LENDER
---------------- ----------------
(DOLLARS IN THOUSANDS)
Minimum lease payments receivable...................... $123,733 $ 2,527
Estimated residual values of leased property........... 5,179 395
Lease acquisition costs and broker commissions......... 3,221 11
Unearned income........................................ (25,876) (232)
Allowance for credit losses............................ (13,841) (120)
Security deposits...................................... (321) (42)
-------- --------
$ 92,095 $ 2,539
======== ========
Scheduled collections of minimum lease payments receivable are as follows:
DIRECT FINANCING
DIRECT FINANCING LEASES ASSIGNED
LEASES TO LENDER
---------------- ----------------
(DOLLARS IN THOUSANDS)
2001................................................... $ 17,554 $ 27,474
2002................................................... 14,479 26,669
2003................................................... 11,736 22,255
2004................................................... 7,764 17,103
2005................................................... 3,791 8,301
Thereafter............................................. 197 826
-------- --------
$ 55,521 $102,628
======== ========
At December 31, 2000, the weighted average implicit rate of interest is
approximately 12.5%.
The carrying value of the direct financing leases at December 31, 2000 and
1999 approximates fair value because of the short-term period that these leases
are held before sale or securitization or, in certain cases, because the
interest rate approximates current market rates. The fair value of the direct
financing leases assigned to lender at December 31, 2000 and 1999 approximated
the carrying value because the interest rate on the related Class A Lease-Backed
Term Notes approximates current market rates.
45
48
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
Lease Securitization and Residual Interests in Securitizations
The Company has completed eight securitization facilities that provide for
aggregate funding limits of approximately $646.0 million and $546.0 million as
of December 31, 2000 and 1999, respectively. Three of the securitization
facilities, GF Funding IV, GF Funding V and GF Funding VII, are revolving
facilities. GF Funding I and VI and FNF Funding IX are accounted for as
collateralized borrowings. GF Funding I matured during 2000, GF Funding VI was
redeemed during 2000 and GF Funding VII was closed during 2000. See Note G.
The following table presents certain information related to the Company's
securitization facilities at December 31, 2000 and 1999:
DECEMBER 31,
----------------------------------------------------------------------------
2000 1999
------------------------------------ ------------------------------------
NET NET
AVAILABLE OUTSTANDING RESIDUAL AVAILABLE OUTSTANDING RESIDUAL
CREDIT BALANCE INTEREST CREDIT BALANCE INTEREST
--------- ----------- -------- --------- ----------- --------
(DOLLARS IN THOUSANDS)
GF Funding II.............. $ -- $ 8,556 $ 4,774 $ -- $ 22,359 $ 6,239
GF Funding III............. -- 3,616 1,733 -- 9,150 2,060
GF Funding IV.............. -- 57,384 12,251 -- 97,033 22,330
GF Funding V............... -- 21,558 3,586 -- 38,703 6,065
GF Funding VIII............ -- 61,626 6,454 574 87,144 10,813
FNF Funding IX............. 34,826 65,378 -- -- -- --
------- -------- ------- ---- -------- -------
$34,826 $218,118 $28,798 $574 $254,389 $47,507
======= ======== ======= ==== ======== =======
E. NOTES RECEIVABLE
Notes receivable consist of the following:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Mortgage notes, secured by various deeds of trust,
installments due monthly including interest at rates
ranging from 8.0% to 12.5%, due through 2026.............. $ 858 $ 975
Promissory notes, secured by various assets and unsecured,
installments due monthly including interest at rates
ranging from 7.5% to 13.0%, due through 2011.............. 8,173 8,126
Officer and employee secured and unsecured notes receivable
at rates ranging from 7.0% to 11.5%, due through 2004..... 3,572 3,806
Loan Plan and Loan Program, unsecured notes receivable at
5.0% due through 2005..................................... 6,651 7,151
------- -------
19,254 20,058
Allowance for doubtful receivables.......................... (2,873) (1,754)
------- -------
$16,381 $18,304
======= =======
The allowance for doubtful receivables is primarily related to certain
promissory notes at December 31, 2000 and 1999. Interest income is not
recognized on the Company's non-performing notes receivable. There were no
non-performing notes receivable at December 31, 2000 or 1999.
46
49
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
On March 17, 1999, the Company's Board of Directors approved the adoption
of the Fidelity National Financial, Inc. Employee Stock Purchase Loan Plan
("Loan Plan") and the Non-Employee Director Stock Purchase Loan Program ("Loan
Program"). The purpose of the Loan Plan and Loan Program is to provide key
employees and directors with further incentive to maximize stockholder value.
The Company offered an aggregate of $8.7 million in loans. Loan Plan and Loan
Program funds must be used to make private or open market purchases of Company
common stock through a broker-dealer designated by the Company. All loans are
full recourse and unsecured, and have a five-year term. Interest accrues on the
loans at a rate of 5.0% per annum, due at maturity. These loans may be prepaid
any time without penalty. As of December 31, 1999, loans had been made in the
amount of $7.2 million to purchase 484,000 shares of Company common stock at an
average purchase price of $15.41 per share. There have been no significant
purchases since December 31, 1999. As of December 31, 2000 $6.7 million of loans
under these programs were outstanding.
The carrying value and estimated fair values of the Company's notes
receivable were as follows at December 31, 2000 and 1999:
DECEMBER 31,
------------------------------------------
2000 1999
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Mortgage notes.............................. $ 808 $ 808 $ 920 $ 920
Other promissory notes...................... 6,162 6,162 7,126 7,126
Affiliated notes............................ 2,760 2,760 3,107 3,107
Loan Plan and Loan Program.................. 6,651 6,651 7,151 7,151
------- ------- ------- -------
$16,381 $16,381 $18,304 $18,304
======= ======= ======= =======
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.
F. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Land........................................................ $ 19,209 $ 1,724
Buildings................................................... 24,499 3,921
Leasehold improvements...................................... 48,252 18,141
Furniture, fixtures and equipment........................... 214,909 142,717
--------- ---------
306,869 166,503
Accumulated depreciation and amortization................... (134,031) (111,050)
--------- ---------
$ 172,838 $ 55,453
========= =========
47
50
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
G. NOTES PAYABLE
Notes payable, excluding Lease-Backed notes payable, consist of the
following:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Syndicated credit agreement, unsecured, interest due
quarterly at LIBOR plus 1.125% (7.765% at December 31,
2000), unused portion of $100,500 at December 31, 2000.... $662,000 $ --
Receivable conduit facility, secured by security interests
in certain leases and underlying equipment, interest due
monthly at LIBOR plus .80% (6.38% at December 31, 2000),
due November 2001, unused portion of $34,826 at December
31, 2000.................................................. 65,174 --
Bank promissory notes, secured by equipment, principal and
interest due monthly with various interest rates and
maturities................................................ 23,646 36,672
Bank line of credit, secured by equipment, interest due
monthly at LIBOR plus 1.40% (8.06% at December 31, 2000),
unused portion of $3,739 and $8,638 at December 31, 2000
and 1999, due July 2001................................... 16,261 1,362
Bank promissory notes, secured by security interests in
certain leases and underlying equipment, interest due
monthly at various fixed rates (8.39% - 10.25% at December
31, 2000), due at various maturities...................... 11,869 --
Bank revolving credit facility, secured by common stock of
certain subsidiaries, interest due monthly at LIBOR plus
1.15%, unused portion of $25,500 at December 31, 1999, due
July 2001, repaid and terminated March 2000............... -- 124,500
Bank revolving credit facility, unsecured, interest due
monthly at LIBOR plus 1.15%, no unused portion at December
31, 1999, due September 2000, repaid and terminated March
2000...................................................... -- 25,000
Bank revolving line of credit, warehouse line, secured by
security interests in certain leases and underlying
equipment, interest due monthly at LIBOR plus 1.75%,
unused portion of $21,929 at December 31, 1999, due
November 2000, repaid and terminated November 2000........ -- 28,071
Other promissory notes with various interest rates and
maturities................................................ 12,480 2,812
-------- --------
$791,430 $218,417
======== ========
The carrying value of the Company's notes payable, excluding Lease-Backed
notes payable approximated estimated fair values, at December 31, 2000 and 1999.
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.
Also included in notes payable in the Consolidated Balance Sheets as of
December 31, 1999 were $2.1 million of Class A Lease-Backed Term Note due 2001.
See Note D. The GFI Class A Lease-Backed Note bears interest at 6.33% and was
paid in full in July 2000. The carrying value of the GFI Class A Lease-Backed
term note approximates fair value at December 31, 1999 since the interest rate
paid on the GFI Class A Lease-Backed Note approximates market rates.
Notes payable in the Consolidated Balance Sheet as of December 31, 1999
also included $3.0 million of GFVI Class A Certificates and the $2.8 million
Class B Certificates. See Note D. The Class A and Class B Certificates bear
interest at 6.20%, and were paid in full in July 2000. The carrying value of the
Class A and
48
51
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
Class B Certificates approximates fair value at December 31, 1999 since the
interest rate paid on the Class A and Class B Certificates approximates market
rates.
In connection with the Chicago Title merger, the Company entered into a
syndicated credit agreement. The credit agreement provides for three distinct
credit facilities:
- $100.0 million, 18 month revolving credit facility due September 30,
2001;
- $250.0 million, 6 year revolving credit facility due March 19, 2006; and
- $450.0 million term loan facility with a 6 year amortization period, due
March 19, 2006.
The credit agreement bears interest at a variable rate of interest based on
the debt ratings assigned to the Company by certain independent agencies, and is
unsecured. The current interest rate is LIBOR plus 1.125%. Amounts borrowed
under the credit agreement were used to pay the cash portion of the merger
consideration, to refinance previously existing indebtedness, to pay fees and
expenses incurred in connection with the merger and to fund other general
corporate purposes.
The credit agreement and other debt facilities impose certain affirmative
and negative covenants on the Company relating to current debt ratings, certain
financial ratios related to liquidity, net worth, capitalization, investments,
acquisitions and restricted payments, and certain dividend restrictions. The
Company is in compliance with all of its debt covenants as of December 31, 2000.
Subsequent to December 31, 2000, the Company issued 8,050,000 shares of its
common stock at a public offering price of $33.50 per share. Proceeds from this
offering, net of underwriting discounts and commissions and other related
expenses, were $256.2 million. Net proceeds of $100.0 million were used to repay
in full and terminate the $100.0 million, 18 month revolving credit facility and
net proceeds of $149.5 million were used to pay down in full the $250.0 million,
6 year revolving credit facility. The remainder of the cash proceeds are
available for general corporate purposes.
In February 1994, the Company issued zero coupon, convertible subordinated
Liquid Yield Option Notes ("LYONs") due February 2009 at an interest rate of
5.5% with a principal amount at maturity of $235.8 million. Net proceeds to the
Company were approximately $101.0 million. The proceeds were used for investment
and general corporate purposes. The amount of LYONs outstanding on December 31,
1998 was $124.1 million. On February 15, 1999, the Company redeemed, pursuant to
the terms of the LYONs indenture, its outstanding Liquid Yield Option Notes due
2009 for $581.25 per $1,000 maturity value. Additionally, the LYONs holders had
the right to convert the outstanding LYONs to 28.077 shares of Company common
stock per $1,000 maturity value of LYONs at any time. As of February 15, 1999,
$123.7 million maturity value of LYONs had converted to 3,473,000 shares of
common stock, adding approximately $70.0 million to equity while reducing
outstanding notes payable by a like amount. The remaining $432 of maturity value
was redeemed for cash of approximately $251.
49
52
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
Principal maturities, excluding the $249.5 million of syndicated credit
agreement borrowings repaid subsequent to December 31, 2000, are as follows
(dollars in thousands):
2001...................................................... $165,804
2002...................................................... 79,599
2003...................................................... 84,462
2004...................................................... 89,331
2005...................................................... 97,734
Thereafter................................................ 25,000
--------
$541,930
========
H. INCOME TAXES
Income tax expense consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
------- ------- --------
(DOLLARS IN THOUSANDS)
Current.............................................. $57,888 $49,383 $ 82,267
Deferred............................................. 27,937 (2,408) (12,825)
------- ------- --------
$85,825 $46,975 $ 69,442
======= ======= ========
The effective income tax rate differs from the statutory income tax rate as
follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
Statutory income tax rate................................... 35.0% 35.0% 35.0%
Tax exempt interest income.................................. (3.8) (2.9) (1.6)
Amortization of cost in excess of net assets acquired....... 7.0 2.1 0.6
Non-deductible expenses..................................... 2.0 1.8 1.1
State taxes, net of Federal deduction....................... 2.8 2.8 3.6
Other....................................................... 1.2 1.1 1.0
---- ---- ----
44.2% 39.9% 39.7%
==== ==== ====
50
53
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
The deferred tax assets and liabilities at December 31, 2000 and 1999
consist of the following:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Deferred Tax Assets:
Provision for claim losses in excess of statutory
amounts................................................ $116,998 $ 65,888
Employee benefit accruals................................. 48,030 11,314
Excess book over tax provision for bad debts.............. 1,939 3,560
Accrued liabilities....................................... 6,753 9,738
Deferred state income taxes............................... 3,072 2,450
Investment securities..................................... 10,768 3,157
Other assets.............................................. 30,723 823
Net operating loss carryovers............................. 2,707 5,324
Lease accounting.......................................... -- 116
Accelerated depreciation.................................. -- 415
-------- --------
220,990 102,785
Less: Valuation allowance................................. 4,817 4,817
-------- --------
Total deferred tax assets......................... 216,173 97,968
Deferred Tax Liabilities:
Statutory unearned premium reserve........................ 52,593 54,321
Section 338 (h)(10) gain deferral......................... 1,246 1,246
Lease accounting.......................................... 6,085 --
Other liabilities......................................... 35,536 8,251
Other..................................................... 1,734 2,571
-------- --------
Total deferred tax liabilities.................... 97,194 66,389
-------- --------
Net deferred tax asset................................. $118,979 $ 31,579
======== ========
Based upon the Company's current and historical pretax 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
planning or other strategies could be implemented, if necessary, to supplement
income from operations to fully realize recorded tax benefits.
The Company's 1995 and 1996 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 Company.
51
54
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
I. SUMMARY OF RESERVE FOR CLAIM LOSSES
A summary of the reserve for claim losses follows:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Beginning balance.............................. $239,962 $224,534 $201,674
Reserves assumed............................. 669,837(1) -- --
Reserves transferred......................... -- (4,310)(2) --
Claim loss provision related to:
Current year.............................. 108,985 57,321 59,294
Prior years............................... (11,663) (4,608) --
-------- -------- --------
Total claim loss provision........... 97,322 52,713 59,294
Claims paid, net of recoupments related to:
Current year.............................. (6,479) (1,229) (1,045)
Prior years............................... (93,160) (31,746) (35,389)
-------- -------- --------
Total claims paid, net of
recoupments........................ (99,639) (32,975) (36,434)
-------- -------- --------
Ending balance................................. $907,482 $239,962 $224,534
======== ======== ========
Provision for claim losses as a percentage of
title insurance premiums..................... 5.0% 5.6% 6.5%
======== ======== ========
- ---------------
(1) In connection with the Chicago Title merger on March 20, 2000, the Company
assumed Chicago Title's then outstanding reserve for claim losses.
(2) On March 18, 1998, the Company announced that it had entered into an
agreement to sell National Title Insurance of New York Inc. ("National") to
American Title Company, a wholly-owned subsidiary of American National
Financial, Inc. ("ANFI"), for $3.25 million, subject to regulatory approval
and certain other conditions. The purchase price was structured at a premium
to book value. As of December 31, 2000, the Company holds a 28.3% interest
in ANFI. National was acquired in April 1996, as part of the Nations Title
Inc. acquisition, and has not been actively underwriting policies since that
time. This transaction received regulatory approval on May 27, 1999 and
closed on June 10, 1999. The Company recognized a gain of approximately $1.2
million prior to applicable income taxes, in connection with the sale of
National. This gain has been reflected in the Consolidated Statement of
Earnings for the year ended December 31, 1999.
The favorable development on prior years loss reserves during 2000 and 1999
was attributable to lower than expected payment levels on recent issue years
which included a high proportion of refinance business.
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.
The Company has entered into various employment agreements with officers of
the Company. These agreements provide for a specified salary to be paid to the
officers and include incentive compensation
52
55
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
arrangements. The agreements contain non-compete provisions. The terms of the
agreements range from three to five years and normally contain extension
provisions.
In the ordinary course of business, the Company is involved in various
pending and threatened litigation matters related to its operations, some of
which include claims for punitive or exemplary damages. Management believes that
no actions, other than those listed below, depart from customary litigation
incidental to the business of the Company and that the resolution of all such
litigation will not have a material adverse effect on the Company.
The Company has been named as a defendant in five class action lawsuits
alleging irregularities and violations of title and escrow practices. One of
these suits was filed by the Attorney General of the State of California on
behalf of the California Controller and the California Department of Insurance
against the entire title and escrow industry in California. The other four were
filed by private law firms in State and Federal courts in San Francisco and in
Los Angeles. In February 2000 the Company reached a settlement of the lawsuit
filed by the California Department of Insurance. The settlement does not call
for any fine or penalty to be paid by the Company. Two of the other lawsuits
brought by private firms have been dismissed. The Company is vigorously
defending the remaining lawsuits. The Company does not believe that the
resolution of these lawsuits will have a material impact on the Company.
In conducting its operations, the Company routinely holds customers' assets
in trust, pending completion of real estate transactions. Certain of these
amounts are maintained in segregated bank accounts and have not been included in
the accompanying Consolidated Balance Sheets. The Company has a contingent
liability relating to proper disposition of these balances for its customers
which amounted to $2.9 billion at December 31, 2000.
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):
2001...................................................... $ 76,712
2002...................................................... 64,255
2003...................................................... 49,481
2004...................................................... 32,754
2005...................................................... 23,384
Thereafter................................................ 39,529
--------
Total future minimum operating lease payments... $286,115
========
Rent expense incurred under operating leases during the years ended
December 31, 2000, 1999 and 1998 was $86.5 million, $36.2 million and $32.6
million, respectively. Included in rent expense for 2000, 1999 and 1998 is $0,
$88 and $485, respectively, paid to related parties.
K. REGULATION AND 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
53
56
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
business, regulating trade practices, licensing agents, approving policy forms,
accounting principles, financial practices, establishing reserve and capital and
surplus as regards policyholders ("capital and surplus") requirements, defining
suitable investments for reserves and capital and surplus and approving rate
schedules. In 1998, the National Association of Insurance Commissioners approved
codified accounting practices that changed the definition of what constitutes
prescribed statutory accounting practices and will result in changes to the
accounting policies that insurance enterprises use to prepare their statutory
financial statements commencing in 2001. The Company has evaluated the impact of
these rules and believes that the rules do not have a material effect on the
statutory capital and surplus of its insurance subsidiaries.
Pursuant to statutory accounting requirements of the various states in
which the Company's title insurance subsidiaries are licensed, they must defer a
portion of premiums earned as an unearned premium reserve for the protection of
policyholders and must maintain qualified assets in an amount equal to the
statutory requirements. The level of unearned premium reserve required to be
maintained at any time is determined on a quarterly basis by statutory formula
based upon either the age, number of policies and dollar amount of policy
liabilities underwritten or the age and dollar amount of statutory premiums
written. As of December 31, 2000, the combined statutory unearned premium
reserve required and reported for the Company's title insurance subsidiaries was
$698.7 million.
The insurance commissioners of their respective states of domicile regulate
the Company's title insurance subsidiaries. Regulatory examinations usually
occur at three-year intervals, and certain of these examinations are currently
ongoing. The Auditor Division of the Controller of the State of California is
currently conducting an examination of the funds due the State of California
under various escheatment regulations for the years ended on and prior to
December 31, 1998. The Company has received a preliminary copy of the report and
is continuing discussions with the Auditor Division of the Controller of the
State of California to quantify amounts due, if any. Management does not believe
that the examinations performed by the insurance regulators or the Auditor
Division of the Controller of the State of California will have a material
impact on the Company's financial position, results of operations, or combined
capital and surplus.
The Company's title 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. During 2001, the
Company's title insurance subsidiaries could pay dividends or make other
distributions to the Company of $107.5 million.
The combined statutory capital and surplus of the Company's title insurance
subsidiaries was $463.1 million, $163.5 million and $164.3 million as of
December 31, 2000, 1999 and 1998, respectively. The combined statutory earnings
of the Company's title insurance subsidiaries were $88.9 million, $43.6 million
and $37.8 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
As a condition to continued authority to underwrite policies in the states
in which the Company's title insurance subsidiaries conduct their business, they
are required to pay certain fees and file information regarding their officers,
directors and financial condition. In addition, the Company's escrow and trust
business is subject to regulation by various state banking authorities.
Pursuant to statutory requirements of the various states in which the
Company's title insurance subsidiaries are domiciled, they must maintain certain
levels of minimum capital and surplus. Each of the Company's title underwriters
has complied with the minimum statutory requirements as of December 31, 2000.
The Company's underwritten title companies are also subject to certain
regulation by insurance regulatory or banking authorities, primarily relating to
minimum net worth. Minimum net worth of $7.5 million, $2.5 million and $3.0
million is required for Fidelity National Title Company, Fidelity National
54
57
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
Title Company of California and Chicago Title Company, respectively. The Company
is in compliance with all of its respective minimum net worth requirements at
December 31, 2000.
On March 17, 1999, the Company's Board of Directors approved an increase to
the number of shares of outstanding Company common stock authorized for purchase
under the Company's previously announced purchase program. The additional
authorization permitted the Company to purchase up to 4.0 million shares. On
September 13, 1999, the Company announced that its Board of Directors had
approved a second increase of 2.0 million shares, bringing the total number of
shares of outstanding Company common stock authorized for purchase to 6.0
million. As of December 31, 1999, the Company had purchased 5.4 million shares
at an average purchase price of $15.19 per share totaling $81.9 million.
Purchases may be made from time to time by the Company in the open market or in
block purchases or in privately negotiated transactions depending on market
conditions and other factors.
In January 2000 the Company purchased another 39,200 shares of its common
stock at an average purchase price of $14.04 per share totaling $551. In March
2000, the Company retired all of its 12.1 million shares held as treasury stock
totaling $136.8 million.
Subsequent to December 31, 2000, the Company issued 8,050,000 shares of its
common stock at a public offering price of $33.50 per share. Proceeds from this
offering, net of underwriting discounts and commissions and other related
expenses, were $256.2 million. Net proceeds were primarily used to pay down
existing indebtedness. See Note G.
L. EMPLOYEE BENEFIT PLANS
Stock Purchase Plan
In 1987, stockholders approved the adoption of an Employee Stock Purchase
Plan ("ESPP"). Under the terms of the ESPP and subsequent amendments, eligible
employees may voluntarily purchase, at current market prices, shares of the
Company's common stock through payroll deductions. Pursuant to the ESPP,
employees may contribute an amount between 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, 2000, 1999 and 1998, 593,997, 631,596
and 282,216 shares, respectively, were purchased and allocated to employees,
based upon their contributions, at an average price of $18.16, $16.77 and $29.42
per share, respectively. The Company contributed $4.0 million or the equivalent
of 219,326 shares for the year ended December 31, 2000; $3.3 million or the
equivalent of 193,923 shares for the year ended December 31, 1999 and $2.0
million or the equivalent of 67,407 shares for the year ended December 31, 1998
in accordance with the employer's matching contribution.
401(k) Profit Savings Plan
The Company offers the Fidelity National Financial, Inc. 401(k) Profit
Sharing Plan ("401(k) Plan"), a qualified voluntary contributory savings plan,
available to substantially all Fidelity employees. Eligible employees may
contribute up to 15% of their pretax annual compensation, up to the amount
allowed pursuant to the Internal Revenue Code. Beginning in April 2000, the
Company began matching 50% of each dollar of employee contribution up to six
percent of the employee's total compensation. The Company's cost for the 401(k)
Plan for the year ended December 31, 2000 was $5.0 million.
In connection with the Chicago Title merger, the Company assumed Chicago
Title's contributory defined contribution savings and profit sharing plan for
eligible Chicago Title employees. Eligible employees may contribute up to 13% of
their pretax annual compensation, up to the amount allowed pursuant to the
Internal Revenue Code. The Company will match employee contributions from a
minimum of $0.25 up to a maximum
55
58
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
of $1.50 for each dollar of employee contribution up to six percent of the
employee's base salary, subject to the Company's return on equity for the year.
The Company's cost for this plan was $8.2 million for the period from April 1,
2000 to December 31, 2000. Effective January 1, 2001, this plan was merged with
and into the 401(k) Plan.
Stock Option Plans
The Company's 1987 Stock Option Plan ("1987 Option Plan") expired in
December 1997. Options generally had a term of five to 11 years from date of
grant, became exercisable at the discretion of the Board of Directors and were
priced at not less than the fair market value on the date of grant. A total of
1,811,824 shares were available for grants of options under this plan.
In 1992, stockholders approved the adoption of the 1991 Stock Option Plan
("1991 Option Plan"). The number of shares reserved for issuance under the 1991
Option Plan and subsequent amendments is 4,148,776 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. This plan allows for
exercise prices with a fixed discount from the quoted market price.
In 1998, options were granted at an exercise price of $19.72 to key
employees of the Company who applied deferred bonuses expensed in 1997 amounting
to $1.8 million to the exercise price. The exercise price of these options
decreases approximately $.32 per year through 2003 and $.20 per share from 2004
through 2009, at which time the exercise price will be $16.90. Options were
granted in 1999 at an exercise price of $9.63 to key employees of the Company
who applied deferred bonuses expensed in 1998 amounting to $4.9 million to the
exercise price. The exercise price of these options decreases approximately $.35
per year through 2004 and $.22 per share from 2005 through 2010, at which time
the exercise price will be $6.53. In 2000, options were granted at an exercise
price of $6.75 to key employees of the Company who applied deferred bonuses
expensed in 1999 amounting to $4.4 million to the exercise price. The exercise
price of these options decreases approximately $.35 per year through 2005 and
$.22 per share from 2006 through 2011, at which time the exercise price will be
$3.65. Additionally, the Company recorded compensation expense relating to the
price decrease of $473, $460 and $282, for the years ended December 31, 2000,
1999 and 1998, respectively.
In 1994, stockholders approved the adoption of the 1993 Stock Plan ("1993
Plan"). The number of shares of common stock reserved for issuance under the
1993 Plan is 1,098,075. 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 later than 10 years following the grant date.
In connection with the 1998 acquisition of FNF Capital (formerly known as
"Granite"), which was accounted for as a pooling-of-interests, the Company
assumed 685,714 options outstanding under Granite's existing stock option plan
("Granite Plan"). The Granite Plan provides that qualified stock options be
granted at an exercise price equal to fair market value on the date of the
grant, and must be at least 110% of fair market value when granted to a 10% or
more stockholder. The term of all qualified stock options granted under the
Granite Plan may not exceed 10 years, except the term of qualified stock options
granted to a 10% or
56
59
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
more stockholder, which may not exceed five years. The Granite Plan provides
that non-qualified stock options be granted at an exercise price not less than
85% of the fair market value on the date of grant. The term of all non-qualified
stock options granted under the Granite Plan may not exceed 10 years, except the
term of non-qualified stock options granted to a 10% or more stockholder, which
may not exceed five years.
During 1998, stockholders approved the adoption of the 1998 Stock Incentive
Plan ("1998 Plan"). The 1998 Plan authorizes up to 3,320,000 shares of common
stock, plus an additional 220,000 shares of common stock on the date of each
annual meeting of the stockholders of the Company, for issuance under the terms
of the 1998 Plan. The 1998 Plan provides for grants of "incentive stock options"
as defined in Section 422 of the Internal Revenue Code of 1986, as amended,
non-qualified stock options and rights to purchase shares of common stock
("Purchase Rights"). The term of options may not exceed 10 years from the date
of grant (five years in the case of a person who owns or is deemed to own more
than 10% of the total combined voting power of all classes of stock of the
Company). The option exercise price for each share granted pursuant to an
incentive stock option may not be less than 100% of the fair market value of a
share of common stock at the time such option is granted (110% of fair market
value in the case of an incentive stock option granted to a person who owns more
than 10% of the combined voting power of all classes of stock of the Company).
There is no minimum purchase price for shares of common stock purchased pursuant
to a Purchase Right, and any such purchase price shall be determined by the
Board of Directors.
In connection with the merger of Chicago Title, the Company assumed the
options outstanding under Chicago Title's existing stock option plans: the 1998
Long-Term Incentive Plan and the Director's Stock Option Plan. Pursuant to the
terms of the merger, options under these plans, totaling 3,175,299, became fully
vested on March 20, 2000. The options granted in accordance with these two plans
generally have a term of five to 10 years.
Transactions under all stock option plans, including stock options granted
by the Company's Board of Directors which are outside of the Company's stock
option plans, are as follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISABLE
---------- ---------------- -----------
Balance, December 31, 1997.................. 4,057,946 $ 7.41 3,451,359
Granted................................... 1,730,043 23.32
Exercised................................. (1,290,640) 7.12
Cancelled................................. (274,883) 26.08
----------
Balance, December 31, 1998.................. 4,222,466 $12.85 3,149,520
Granted................................... 1,764,302 13.05
Exercised................................. (211,542) 9.08
Cancelled................................. (239,156) 25.42
----------
Balance, December 31, 1999.................. 5,536,070 $12.53 4,540,090
Options assumed in Chicago Title merger... 3,175,299 12.43
Granted................................... 2,798,738 13.48
Exercised................................. (3,588,868) 11.46
Cancelled................................. (181,569) 16.61
----------
Balance, December 31, 2000.................. 7,739,670 $13.29 5,732,672
==========
57
60
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
The following table summarizes information related to stock options
outstanding and exercisable as of December 31, 2000:
DECEMBER 31, 2000
- -------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES CONTRACTUAL LIFE PRICE OF SHARES PRICE
- --------------- --------- ---------------- -------- --------- --------
$ 0.43 - 6.75.. 1,056,975 7.76 $ 5.71 1,056,975 $ 5.71
6.83 - 7.71.. 400,570 4.30 6.95 400,570 6.95
9.28 - 9.28.. 713,303 9.22 9.28 713,303 9.28
9.48 - 10.42.. 902,239 4.02 9.85 902,239 9.85
10.43 - 11.75.. 1,048,877 8.13 11.29 390,377 10.52
11.84 - 15.94.. 1,481,276 8.01 13.57 1,276,527 13.36
16.72 - 18.76.. 343,280 8.95 18.51 282,281 18.58
20.13 - 20.13.. 960,000 9.79 20.13 150,000 20.13
23.81 - 25.31.. 712,900 7.28 24.48 462,900 24.43
25.97 - 34.77.. 120,250 7.75 28.90 97,500 28.81
--------- ---------
$ 0.43 - 34.77.. 7,739,670 7.64 $13.29 5,732,672 $11.84
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" ("SFAS 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.
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.
Pro forma information regarding net earnings and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions. The risk free interest rates used in the calculation is the rate on
the date the options were granted. The risk free interest rate used for options
granted during 2000, 1999 and 1998 were 5.1%, 6.5% and 5.7%, respectively. A
volatility factor for the expected market price of the common stock of 50% was
used for options granted in 2000, 1999 and 1998. The expected dividend yield
used for 2000, 1999 and 1998 was 1.2%, 2.0% and 1.0%, respectively. A weighted
average expected life of five years was used for 2000 and seven years was used
in 1999 and 1998. The weighted average fair value of each option granted during
2000, 1999 and 1998 was $7.34, $8.68 and $14.15, respectively.
58
61
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
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,
---------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Pro forma basic net earnings.............................. $99,555 $62,641 $96,516
Pro forma diluted net earnings............................ $99,555 $62,904 $98,979
Pro forma earnings per share:
Basic................................................... $ 1.69 $ 2.10 $ 3.46
Diluted................................................. $ 1.63 $ 2.01 $ 2.96
Pension Plans
In connection with the Chicago Title merger, the Company also assumed
Chicago Title's noncontributory defined contribution plan and noncontributory
defined benefit pension plan (the "Pension Plan").
Contributions to the noncontributory defined contribution plan are based
upon salary and length of service with the Company. Contributions are invested
in a group of mutual funds as directed by the employee. The Company's cost for
this plan was $2.0 million for the period from April 1, 2000 to December 31,
2000. Effective January 1, 2001, this plan was terminated.
The Pension Plan covers certain Chicago Title employees. The benefits are
based on years of service and the employee's average monthly compensation in the
highest 60 consecutive calendar months during the 120 months ending at
retirement or termination. The Company's funding policy is to contribute
annually at least the minimum required contribution under the Employee
Retirement Income Security Act (ERISA). Contributions are intended to provide
not only for benefits accrued to date, but also for those expected to be earned
in the future. The Company made no contribution for the period from April 1,
2000 to December 31,
59
62
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
2000. Effective January 1, 2001, the Pension Plan was frozen and future
contributions of Pension Plan benefits will terminate.
The following table sets forth the funded status of the Pension Plan and
amounts reflected in the Company's Consolidated Balance Sheet as of December 31,
2000:
2000
----------------------
(DOLLARS IN THOUSANDS)
Change in Benefit Obligation:
Net benefit obligation as of April 1, 2000................ $108,101
Service cost.............................................. 3,095
Interest cost............................................. 6,449
Actuarial loss............................................ 483
Gross benefits paid....................................... (19,217)
--------
Net benefit obligation at end of year.................. $ 98,911
========
Change in Pension Plan Assets:
Fair value of plan assets as of April 1, 2000............. $106,171
Adjustment to assets at beginning of period............... 536
Actual return on plan assets.............................. 3,672
Gross benefits paid....................................... (19,217)
--------
Fair value of plan assets at end of year............... $ 91,162
========
Funded status at end of year.............................. $ (7,749)
Unrecognized net actuarial gain........................... (4,518)
--------
Net pension liability included in accounts payable and
accrued liabilities................................... $(12,267)
========
Under Statement of Financial Accounting Standards No. 87, "Employers'
Accounting for Pensions," the measurement date shall be as of the date of the
financial statements, or if used consistently from year to year, as of a date
not more than three months prior to that date. The Company's measurement date is
September 30.
The principal weighted average assumptions used in the actuarial
calculations of projected benefit obligations and net periodic pension expense
for 2000 are as follows: discount rate of 7.25%; expected return on Pension Plan
assets of 9.0%; and rate of compensation increase of 4.5%.
The components of net periodic pension expense included in the results of
operations for 2000 are as follows:
2000
----------------------
(DOLLARS IN THOUSANDS)
Service cost................................................ $ 3,095
Interest cost............................................... 6,449
Expected return on assets................................... (6,714)
-------
Total net periodic benefit cost................... $ 2,830
=======
60
63
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
Postretirement Plans
The Company assumed certain health care and life insurance benefits for
retired Chicago Title employees in connection with the Chicago Title merger. The
costs of these benefit plans are accrued during the periods the employees render
service.
The Company is self-insured for its postretirement health care and life
insurance benefit plans, and the plans are not funded. The health care plans
provide for insurance benefits after retirement and are generally contributory,
with contributions adjusted annually. Postretirement life insurance benefits are
noncontributory, with coverage amounts declining with increases in a retiree's
age.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 5.5% in 2000, declining to 5.0% in 2002.
The discount rate used was 7.75% in 2000. If the health care cost trend rate
assumptions were increased 1.0%, the accumulated postretirement benefit
obligation as of December 31, 2000 would increase by $3.3 million. The effect of
this change on the sum of the service and interest cost would be an increase of
$590. If the health care costs trend rate assumptions were decreased 1.0%, the
accumulated post retirement benefit obligation as of December 31, 2000 would
decrease by $2.8 million. The effect of this change on the sum of the service
and interest cost would be a decrease of $480.
The accrued cost of the accumulated postretirement benefit obligation
included in the consolidated balance sheet at December 31, 2000 is as follows:
2000
----------------------
(DOLLARS IN THOUSANDS)
Change in Benefit Obligation:
Net benefit obligation as of April 1, 2000................ $ 25,645
Service cost.............................................. 490
Interest cost............................................. 1,531
Plan participants' contributions.......................... 1,537
Actuarial gain............................................ (1,131)
Gross benefits paid....................................... (3,069)
--------
Net benefit obligation at end of year.................. $ 25,003
========
Change in Plan Assets:
Fair value of plan assets as of April 1, 2000............. $ --
Employer contributions.................................... 1,532
Plan participants' contributions.......................... 1,537
Gross benefits paid....................................... (3,069)
--------
Fair value of plan assets at end of year............... $ --
========
Funded status at end of year.............................. $(25,003)
Unrecognized net actuarial gain........................... (1,131)
Unrecognized prior service cost........................... (1,013)
--------
Net accrued cost of accumulated postretirement benefit
obligation included in accounts payable and accrued
liabilities............................................ $(27,147)
========
Under Statement of Financial Accounting Standards No. 106, "Accounting for
Postretirement Benefits Other Than Pensions," the measurement date shall be as
of the date of the financial statements, or if used
61
64
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
consistently from year to year, as of a date not more than three months prior to
that date. The Company's measurement date is December 31.
The Company's postretirement health care and life insurance costs included
in the results of operations from the period April 1, 2000 to December 31, 2000
are as follows:
2000
----------------------
(DOLLARS IN THOUSANDS)
Service cost................................................ $ 490
Interest cost............................................... 1,531
------
Total net periodic benefit cost................... $2,021
======
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,
---------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Cash paid during the year:
Interest.................................................. $57,776 $19,676 $ 8,153
======= ======= =======
Income taxes.............................................. $59,091 $62,128 $77,277
======= ======= =======
Non-cash investing and financing activities:
Dividends declared and unpaid............................. $ 6,981 $ 2,712 $ 2,270
======= ======= =======
Acquisitions.............................................. $ -- $ -- $ 6,250
======= ======= =======
Conversion of LYONs....................................... $ -- $70,286 $ 9,201
======= ======= =======
Acquisition by majority-owned subsidiary.................. $ -- $ 297 $ --
======= ======= =======
Conversion of majority-owned subsidiary debt.............. $ -- $ 2,900 $ --
======= ======= =======
N. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION OF RISK
In the normal course of business the Company and certain of its
subsidiaries enter into off-balance sheet credit risk associated with certain
aspects of its title insurance business and other activities. This credit risk
is in the form of guarantees and support agreements.
The Company generates a significant amount of title insurance premiums in
California and Texas. In 2000, on an unaudited pro forma basis, assuming the
Chicago Title merger had been consummated on January 1, 2000, the Company
generated 21.4% and 15.5% of its total title premiums in California and Texas,
respectively. In 1999 and 1998 California and Texas accounted for 30.8% and
19.1% and 33.1% and 19.6% of total title premiums, respectively.
FNF Capital's leases are originated through a network of approximately 50
independent lease originators located throughout the United States. No single
lease originator accounted for more than 10% of the leases funded by the Company
during the years ended December 31, 2000 and 1999. Transactions generated by the
Company's ten largest independent lease originators accounted for approximately
36.0% and 24.0% of leases funded during the years ended December 31, 2000 and
1999, respectively.
62
65
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
FNF Capital approved contingent fundings of approximately $55.3 million and
$60.0 million in leases at December 31, 2000 and 1999, respectively.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments, leases, residual interests in securitizations, trade receivables
and notes receivable.
The Company places its cash equivalents and short-term investments with
high credit quality financial institutions and, by policy, limits the amount of
credit exposure with any one financial institution. Investments in commercial
paper of industrial firms and financial institutions are rated investment grade
by nationally recognized rating agencies.
Concentrations of credit risk with respect to trade receivables are limited
because a large number of geographically diverse customers make up the Company's
customer base, thus spreading the trade receivables credit risk. The Company
controls credit risk through monitoring procedures.
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.
O. SEGMENT INFORMATION
During 2000, as a result of the merger with Chicago Title, the Company
restructured its business segments to more accurately reflect a change in the
Company's current operating structure. All previously reported segment
information has been restated to be consistent with the current presentation.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The amounts reported for Chicago Title
reflect only the period from March 20, 2000, the merger date, through December
31, 2000. Reportable segments are determined based on the organizational
structure and types of products and services from which each reportable segment
derives its revenue.
As of and for the year ended December 31, 2000 (dollars in thousands):
REAL ESTATE
TITLE INFORMATION CORPORATE
INSURANCE SERVICES AND OTHER TOTAL
---------- ----------- --------- ----------
Total revenue............................. $2,486,703 $168,161 $ 87,130 $2,741,994
========== ======== ======== ==========
Operating earnings (loss)................. $ 248,468 $ 24,296 $(11,014) $ 261,750
Interest and investment income, including
realized gains and losses............... 81,423 1,443 4,325 87,191
Depreciation and amortization............. 77,978 2,878 14,571 95,427
Interest expense.......................... 4,990 24 54,360 59,374
---------- -------- -------- ----------
Earnings (loss) before income taxes....... 246,923 22,837 (75,620) 194,140
Income tax expense (benefit).............. 109,160 10,096 (33,431) 85,825
---------- -------- -------- ----------
Net earnings (loss)....................... $ 137,763 $ 12,741 $(42,189) $ 108,315
========== ======== ======== ==========
Assets.................................... $3,159,368 $172,858 $501,759 $3,833,985
========== ======== ======== ==========
63
66
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
As of and for the year ended December 31, 1999 (dollars in thousands):
REAL ESTATE
TITLE INFORMATION CORPORATE
INSURANCE SERVICES AND OTHER TOTAL
---------- ----------- --------- ----------
Total revenue............................. $1,169,078 $68,229 $118,547 $1,355,854
========== ======= ======== ==========
Operating earnings (loss)................. $ 145,079 $ (115) $(13,587) $ 131,377
Interest and investment income, including
realized gains and losses............... 23,056 385 8,604 32,045
Depreciation and amortization............. 19,595 153 10,220 29,968
Interest expense.......................... 2,429 21 13,176 15,626
---------- ------- -------- ----------
Earnings (loss) before income taxes....... 146,111 96 (28,379) 117,828
Income tax expense (benefit).............. 58,251 38 (11,314) 46,975
---------- ------- -------- ----------
Net earnings (loss)....................... $ 87,860 $ 58 $(17,065) $ 70,853
========== ======= ======== ==========
Assets.................................... $ 696,362 $54,039 $292,145 $1,042,546
========== ======= ======== ==========
As of and for the year ended December 31, 1998 (dollars in thousands):
REAL ESTATE
TITLE INFORMATION CORPORATE
INSURANCE SERVICES AND OTHER TOTAL
---------- ----------- --------- ----------
Total revenue............................. $1,161,709 $70,505 $ 61,166 $1,293,380
========== ======= ======== ==========
Operating earnings (loss)................. $ 172,266 $ 9,814 $(13,051) $ 169,029
Interest and investment income, including
realized gains and losses............... 36,177 535 7,790 44,502
Depreciation and amortization............. 11,906 1,332 8,135 21,373
Interest expense.......................... 5,663 8 11,353 17,024
---------- ------- -------- ----------
Earnings (loss) before income taxes....... 190,874 9,009 (24,749) 175,134
Income tax expense (benefit).............. 75,683 3,572 (9,813) 69,442
---------- ------- -------- ----------
Net earnings (loss)....................... $ 115,191 $ 5,437 $(14,936) $ 105,692
========== ======= ======== ==========
Assets.................................... $ 693,222 $46,562 $229,686 $ 969,470
========== ======= ======== ==========
The activities of the reportable segments include the following:
Title Insurance
This segment, consisting of title insurance underwriters and wholly-owned
title insurance agencies, provides core title insurance and escrow services,
including document preparation, collection and trust activities. This segment
coordinates its activities with those of the real estate related services
segment described below in order to offer the full range of real estate products
and services required to execute and close a real estate transaction.
Real Estate Related Services
This segment, consisting of various real estate related and ancillary
service subsidiaries, offers the complementary specialized products and services
required to execute and close a real estate transaction that are not offered by
the title insurance segment described above. These services include document
recording services on a nationwide basis, tax qualifying property exchange
services, property appraisal services, tax monitoring services, home warranty
insurance, credit reporting, real estate referral services, flood monitoring
64
67
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
and foreclosure publishing and posting. These services require specialized
expertise and have been centralized for efficiency and management purposes.
Corporate and Other
The corporate segment consists of the operations of the parent holding
company, as well as the operations of Micro General Corporation, FNF Capital,
Inc. and Express Network, Inc., which was sold in the second quarter of 2000, as
well as the issuance and repayment of corporate debt obligations. The
non-recurring charges of $13.4 million that were recorded during the first
quarter of 2000 primarily relate to the corporate segment.
The accounting policies of the segments are the same as those described in
Note A. Intersegment sales or transfers which occurred in the ordinary course of
consolidated operations, have been eliminated from the segment information
provided.
P. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, contracts and hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value.
SFAS 133 was amended by Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB No. 133" ("SFAS 137"). SFAS 137 defers the
effective date to all fiscal quarters of fiscal years beginning after June 15,
2000. SFAS 133, as amended by SFAS 137 and Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Hedging
Activities -- an amendment of SFAS 133." ("SFAS 138"), is effective for the
Company's first quarter in the fiscal year ending December 31, 2001, and does
not have a material effect on the Company's financial position or results of
operations.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," ("SFAS
140"). SFAS 140 revises the accounting standards for securitizations and other
transfers of financial assets and collateral and requires certain disclosures.
SFAS 140 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after March 31, 2001. Adoption of SFAS
140 will not have a material effect on the Company's financial statements.
Emerging Issues Task Force No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets", ("EITF 99-20") sets forth the rules for recognizing interest
income on all credit-sensitive mortgage and asset-backed securities and certain
prepayment-sensitive securities including agency Interest-only strips, whether
purchased or retained in securitization, and determining when these securities
must be written down to fair value because of impairment. EITF 99-20 is
effective for all fiscal quarters beginning after March 15, 2001. Early adoption
is permitted. The Company has decided not to early adopt EITF 99-20. Application
of provisions of the EITF are to be adopted prospectively. Adoption of EITF
99-20 will require impairments to the valuation of residual interest in
securitizations to be recorded as a reduction to the carrying value of the
residual interests through a charge to earnings. The initial potential impact of
adoption would be a charge to earnings of approximately $3.2 million in 2001.
65
68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 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, 2000 and 1999
Consolidated Statements of Earnings for the years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Comprehensive Earnings for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES. The following is a list of financial
statement schedules filed as part of this annual report on Form 10-K:
Schedule II: Fidelity National Financial, Inc. (Parent Company Financial
Statements)
Schedule V: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
66
69
(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 Restated Certificate of Incorporation of Registrant,
incorporated by reference from Form S-4, Registration No.
333-89163
3.2 Restated Bylaws of Registrant, incorporated by reference
from Form S-4, Registration No. 333-89163
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
10.7.3 Amendment to Fidelity National Financial, Inc. 1991 Stock
Option Plan and the 1998 Stock Option Plan, approved by the
stockholders of the Company on June 17, 1998, incorporated
by reference from Form S-8, Registration No. 333-61111
10.8 1996 Omnibus Stock Option Plan (Granite), incorporated by
reference from Form S-8, Registration No. 333-48411
10.9 Two Stock Option Agreements and Amended Stock Award
Agreement (Alamo), incorporated by reference from Form S-8,
Registration No. 333-64229
67
70
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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
10.57 Agreement of Plan of Reorganization, dated May 14, 1998, by
and among ACS Systems, Inc., a California Corporation, ACS
Merger, Inc., a Delaware Corporation, Micro General
Corporation, a Delaware Corporation, and Fidelity National
Financial, Inc., a Delaware Corporation, incorporated by
reference from Form 10-K filed March 31, 1999
10.57.1 Agreement of Merger, dated May 14, 1998, by and among ACS
Systems, Inc., a California Corporation, ACS Merger, Inc., a
Delaware Corporation, Micro General Corporation, a Delaware
Corporation, and Fidelity National Financial, Inc., a
Delaware Corporation, incorporated by reference from Form
10-K filed March 31, 1999
10.60 Agreement and Plan of Merger, dated as of August 1, 1999, by
and between Fidelity National Financial, Inc. and
Chicago Title Corporation and amended as of October 13,
1999, incorporated by reference from Form S-4, Registration
No. 333-89163
10.61 Credit Agreement, dated as of February 10, 2000, among
Fidelity National Financial, Inc., as borrower, Bank of
America, N.A., Chase Securities Inc., Morgan Stanley Senior
Funding, Inc., and various Financial Institutions, as
Lenders, incorporated by reference from Form 8-K, dated
February 9, 2000 and filed February 15, 2000
10.62 Granite Financial, Inc. Omnibus Stock Plan of 1996, Amended
and Restated as of April 24, 1997 and June 14, 1997,
incorporated by reference from Form S-8, Registration No.
333-48111
10.63 Fidelity National Financial, Inc., 1998 Stock Incentive
Plan, approved by the stockholders of the Company on June
17, 1998, incorporated by reference from Form S-8,
Registration No. 333-61111
10.64 Chicago Title Corporation 1998 Long-Term Incentive Plan and
Chicago Title Corporation Directors Stock Option Plan,
incorporated by reference from Form S-8, Registration No.
333-32806
10.65 Amendment to Fidelity National Financial, Inc. 1991 Stock
Option Plan, approved by the stockholders of the Company on
June 12, 2000, incorporated by reference from Form S-8,
Registration No. 333-52744
10.66 Amendment to Fidelity National Financial, Inc. 1998 Stock
Incentive Plan, approved by the stockholders of the Company
on June 12, 2000, incorporated by reference from Form S-8,
Registration No. 333-52744
10.67 Underwriting Agreement, dated January 24, 2001, by and among
Fidelity National Financial, Inc., and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear
Stearns & Co., Inc., Lehman Brothers Inc. and U.S. Bancorp
Piper Jaffray Inc., as representatives of the underwriters
named therein
21 List of Subsidiaries
23 Independent Auditors' Consent
(b) REPORTS ON FORM 8-K. The Company filed reports on Form 8-K during the
quarter ending December 31, 2000 as follows:
None
68
71
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 27, 2001
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 27, 2001
- ----------------------------------------------------- Executive Officer (Principal
William P. Foley, II Executive Officer)
/s/ FRANK P. WILLEY Vice Chairman and Director March 27, 2001
- -----------------------------------------------------
Frank P. Willey
/s/ ALAN L. STINSON Executive Vice President and March 27, 2001
- ----------------------------------------------------- Chief Financial Officer
Alan L. Stinson (Principal Financial and
Accounting Officer)
/s/ JOHN J. BURNS, JR. Director March 27, 2001
- -----------------------------------------------------
John J. Burns, Jr.
/s/ JOHN F. FARRELL, JR. Director March 27, 2001
- -----------------------------------------------------
John F. Farrell, Jr.
/s/ PHILLIP G. HEASLEY Director March 27, 2001
- -----------------------------------------------------
Phillip G. Heasley
/s/ WILLIAM A. IMPARATO Director March 27, 2001
- -----------------------------------------------------
William A. Imparato
/s/ DONALD M. KOLL Director March 27, 2001
- -----------------------------------------------------
Donald M. Koll
/s/ DANIEL D. (RON) LANE Director March 27, 2001
- -----------------------------------------------------
Daniel D. (Ron) Lane
/s/ GENERAL WILLIAM LYON Director March 27, 2001
- -----------------------------------------------------
General William Lyon
/s/ J. THOMAS TALBOT Director March 27, 2001
- -----------------------------------------------------
J. Thomas Talbot
/s/ CARY H. THOMPSON Director March 27, 2001
- -----------------------------------------------------
Cary H. Thompson
/s/ RICHARD P. TOFT Director March 27, 2001
- -----------------------------------------------------
Richard P. Toft
69
72
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Fidelity National Financial, Inc.:
Under date of February 14, 2001, we reported on the accompanying
Consolidated Balance Sheets of Fidelity National Financial, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the related Consolidated
Statements of Earnings, Comprehensive Earnings, Stockholders' Equity and Cash
flows for each of the years in the three-year period ended December 31, 2000
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 LLP
Los Angeles, California
February 14, 2001
70
73
SCHEDULE II
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
DECEMBER 31,
-----------------------
2000 1999
---------- ---------
Cash........................................................ $ 21,717 $ 1,972
Investment securities available for sale, at fair value..... 84,734 42,405
Leases receivable, net...................................... 9,414 11,953
Notes receivable, net....................................... 8,248 9,126
Investment in subsidiaries.................................. 1,706,294 549,881
Property and equipment, net................................. 6,500 --
Investments in real estate and partnerships, net............ 696 696
Prepaid expenses and other assets........................... 14,997 7,319
Income taxes receivable..................................... 22,343 --
Deferred tax asset.......................................... 118,979 31,579
---------- ---------
$1,993,922 $ 654,931
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $ 40,130 $ 24,762
Notes payable............................................. 662,000 124,500
Accounts payable to subsidiaries.......................... 185,055 70,000
Income taxes payable...................................... -- 3,175
---------- ---------
887,185 222,437
Stockholders' Equity:
Preferred stock, $.0001 par value; authorized 3,000,000
shares; issued and outstanding none.................... -- --
Common stock, $.0001 par value; authorized, 100,000,000
shares as of December 31, 2000 and 50,000,000 shares as
of December 31, 1999; issued 69,499,409 as of December
31, 2000 and 39,224,169 as of December 31, 1999........ 7 4
Additional paid-in capital................................ 695,141 246,959
Retained earnings......................................... 409,216 327,785
---------- ---------
1,104,364 574,748
Accumulated other comprehensive earnings (loss)........... 2,373 (5,975)
Less treasury stock, cancelled in 2000 and 12,036,102
shares as of December 31, 1999, at cost................ -- (136,279)
---------- ---------
1,106,737 432,494
---------- ---------
$1,993,922 $ 654,931
========== =========
See Notes to Financial Statements.
71
74
SCHEDULE II (CONTINUED)
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
REVENUE:
Other fees and revenue.................................... $ 250 $ (427) $ 2
Interest and investment income............................ 2,916 7,937 10,876
-------- -------- --------
3,166 7,510 10,878
-------- -------- --------
EXPENSES:
Other operating expenses.................................. 10,171 1,190 7,866
Interest expense.......................................... 47,122 7,282 7,556
-------- -------- --------
57,293 8,472 15,422
-------- -------- --------
Loss before income tax benefit and equity in earnings of
subsidiaries.............................................. (54,127) (962) (4,544)
Income tax benefit.......................................... (23,928) (384) (1,802)
-------- -------- --------
Loss before equity in earnings of subsidiaries.............. (30,199) (578) (2,742)
Equity in earnings of subsidiaries.......................... 138,514 71,431 108,434
-------- -------- --------
Net earnings................................................ $108,315 $ 70,853 $105,692
======== ======== ========
Basic net earnings per share................................ $ 1.84 $ 2.38 $ 3.79
======== ======== ========
Weighted average shares outstanding, basic basis............ 58,821 29,811 27,921
======== ======== ========
Diluted net earnings per share.............................. $ 1.78 $ 2.27 $ 3.23
======== ======== ========
Weighted average shares outstanding, diluted basis.......... 60,937 31,336 33,474
======== ======== ========
Retained earnings, beginning of year........................ $327,785 $265,567 $167,222
Dividends declared........................................ (26,884) (8,635) (7,347)
Net earnings.............................................. 108,315 70,853 105,692
-------- -------- --------
Retained earnings, end of year.............................. $409,216 $327,785 $265,567
======== ======== ========
See Notes to Financial Statements.
72
75
SCHEDULE II (CONTINUED)
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
--------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 108,315 $ 70,853 $ 105,692
Adjustments to reconcile net earnings to net cash used in
operating activities:
Amortization of LYONs original issue discount and other
debt issuance costs.................................. 1,404 602 4,432
Provision for losses on notes receivable............... 412 190 240
Equity in earnings of subsidiaries..................... (138,514) (71,431) (108,434)
Gain on sales of investments........................... (2,096) (3,248) (8,381)
Tax benefit associated with the exercise of stock
options.............................................. 17,000 -- 11,763
Net decrease in income taxes........................... (12,081) (16,303) (21,280)
Loss on sales of real estate........................... -- 156 --
Net increase in prepaid expenses and other assets...... (9,082) (3,879) (1,245)
Net increase in accounts payable and accrued
liabilities.......................................... 9,203 3,974 6,769
--------- -------- ---------
Net cash used in operating activities............. (25,439) (19,086) (10,444)
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments........................ 12,897 1,950 6,645
Purchases of investments.................................. (5,767) (4,024) (8,825)
Net purchases from short-term investing activities........ (50,280) 5,105 (13,105)
Proceeds from sales of real estate........................ -- 433 --
Collections of notes receivable........................... 2,977 1,405 490
Additions to notes receivable............................. (2,511) (8,801) --
Additions to investment in subsidiaries................... (694,851) (516) (5,050)
Lease sales............................................... -- 13,606 --
--------- -------- ---------
Net cash provided by (used in) investing
activities...................................... (737,535) 9,158 (19,845)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings................................................ 715,000 105,216 46,236
Principal payments........................................ (177,500) (27,018) (20,250)
Dividends paid............................................ (22,615) (8,192) (6,340)
Purchases of treasury stock............................... (551) (81,904) --
Exercise of stock options................................. 46,521 2,488 11,105
Net borrowings and dividends from subsidiaries............ 221,864 18,559 2,289
--------- -------- ---------
Net cash provided by financing activities......... 782,719 9,149 33,040
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 19,745 (779) 2,751
Cash and cash equivalents at beginning of year.............. 1,972 2,751 --
--------- -------- ---------
Cash and cash equivalents at end of year.................... $ 21,717 $ 1,972 $ 2,751
========= ======== =========
See Notes to Financial Statements.
73
76
SCHEDULE II (CONTINUED)
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fidelity National Financial, Inc. (the "Company") transacts substantially
all of its business through its subsidiaries. The Parent Company Financial
Statements should be read in connection with the aforementioned Consolidated
Financial Statements and Notes thereto included elsewhere herein.
B. NOTES PAYABLE
Notes payable consist of the following:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Syndicated credit agreement, unsecured, interest due
quarterly at LIBOR plus 1.125% (7.765% at December 31,
2000), unused portion of $100,500 at December 31, 2000.... $662,000 $ --
Bank revolving credit facility, secured by common stock of
certain subsidiaries, interest due monthly at LIBOR plus
1.15%, unused portion of $25,500 at December 31, 1999, due
July 2001, repaid and terminated March 2000............... -- 124,500
-------- --------
$662,000 $124,500
======== ========
In the normal course of business the Company enters into off-balance sheet
credit risk. This credit risk is in the form of guarantees and support
agreements. As of December 31, 2000, subsidiary debt in the amount of $65.2
million was guaranteed by the Company.
C. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Cash paid during the year:
Interest............................................ $45,833 $ 8,865 $ 1,691
======= ======= =======
Income taxes........................................ $59,091 $62,128 $77,277
======= ======= =======
Non-cash investing and financing activities:
Dividends declared and unpaid....................... $ 6,981 $ 2,712 $ 2,270
======= ======= =======
Acquisitions........................................ $ -- $ -- $ 6,250
======= ======= =======
Conversion of LYONs................................. $ -- $70,286 $ 9,201
======= ======= =======
D. CASH DIVIDENDS RECEIVED
The Company has received cash dividends from subsidiaries and affiliates of
$167.3 million, $20.5 million and $14.2 million in 2000, 1999 and 1998,
respectively.
74
77
SCHEDULE V
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ----------------------- ----------- ----------
ADDITIONS
-----------------------
CHARGE TO
BALANCE AT COSTS BALANCE AT
BEGINNING AND OTHER DEDUCTION END OF
DESCRIPTION OF PERIOD EXPENSES (DESCRIBED) (DESCRIBED) PERIOD
----------- ---------- --------- ----------- ----------- ----------
Year ended December 31, 2000:
Reserve for claim losses............. $239,962 $97,322 $669,837(1) $ 99,639(3) $907,482
Allowance on:
Leases and residual interests in
securitizations................. 13,961 4,553 (1,505)(2) 11,010(4) 5,999
Trade receivables................. 5,397 4,541 10,303(1) 581(4) 19,660
Notes receivable.................. 1,754 796 494(1) 171(4) 2,873
Real estate allowance................ 1,202 -- 518(1) 799(5) 921
Amortization of cost in excess of net
assets acquired and other
intangible assets................. 24,810 48,555 -- -- 73,365
Year ended December 31, 1999:
Reserve for claim losses............. $224,534 $52,713 $ (4,310)(2) $ 32,975(3) $239,962
Allowance on:
Leases and residual interests in
securitizations................. 10,482 20,628 -- 17,149(4) 13,961
Trade receivables................. 6,733 581 -- 1,917(4) 5,397
Notes receivable.................. 2,064 -- -- 310(4) 1,754
Real estate allowance................ 1,752 155 (275)(2) 430(5) 1,202
Amortization of cost in excess of net
assets acquired and other
intangible assets................. 16,722 8,088 -- -- 24,810
Year ended December 31, 1998:
Reserve for claim losses............. $201,674 $59,294 $ -- $ 36,434(3) $224,534
Allowance on:
Leases and residual interests in
securitizations.............. 2,640 18,813 -- 10,971(4) 10,482
Trade receivables............... 5,153 3,287 -- 1,707(4) 6,733
Notes receivable................ 1,758 344 -- 38(4) 2,064
Real estate allowance................ 1,514 238 -- -- 1,752
Amortization of cost in excess of net
assets acquired and other
intangible assets................. 13,028 3,694 -- -- 16,722
- ---------------
(1) Represents balance assumed in connection with the Chicago Title merger on
March 20, 2000.
(2) Represents net reserve for claim losses and other allowances assumed and
relieved from sales and acquisitions during the year.
(3) Represents payments of claim losses, net of recoupments.
(4) Represents uncollectible accounts written-off, change in reserve due to
reevaluation of specific items and change in reserve due to sale of certain
assets.
(5) Represents reduction in the reserve balance due to the sale of real estate
property.
75
78
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3 Charter and Bylaws of the Issuer
3.1 Restated Certificate of Incorporation of Registrant,
incorporated by reference from Form S-4, Registration No.
333-89163
3.2 Restated Bylaws of Registrant, incorporated by reference
from Form S-4, Registration No. 333-89163
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
10.7.3 Amendment to Fidelity National Financial, Inc. 1991 Stock
Option Plan and the 1998 Stock Option Plan, approved by the
stockholders of the Company on June 17, 1998, incorporated
by reference from Form S-8, Registration No. 333-61111
10.8 1996 Omnibus Stock Option Plan (Granite), incorporated by
reference from Form S-8, Registration No. 333-48411
10.9 Two Stock Option Agreements and Amended Stock Award
Agreement (Alamo), incorporated by reference from Form S-8,
Registration No. 333-64229
10.35 Fidelity National Financial, Inc. 1993 Stock Plan, approved
by stockholders of the Company on June 14, 1994,
incorporated by reference from Form S-8, Registration No.
33-83026
79
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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., incorporated 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
10.57 Agreement of Plan of Reorganization, dated May 14, 1998, by
and among ACS Systems, Inc., a California Corporation, ACS
Merger, Inc., a Delaware Corporation, Micro General
Corporation, a Delaware Corporation, and Fidelity National
Financial, Inc., a Delaware Corporation, incorporated by
reference from Form 10-K filed March 31, 1999
10.57.1 Agreement of Merger, dated May 14, 1998, by and among ACS
Systems, Inc., a California Corporation, ACS Merger, Inc., a
Delaware Corporation, Micro General Corporation, a Delaware
Corporation, and Fidelity National Financial, Inc., a
Delaware Corporation, incorporated by reference from Form
10-K filed March 31, 1999
10.60 Agreement and Plan of Merger, dated as of August 1, 1999, by
and between Fidelity National Financial, Inc. and Chicago
Title Corporation and amended as of October 13, 1999,
incorporated by reference from Form S-4, Registration No.
333-89163
10.61 Credit Agreement, dated as of February 10, 2000, among
Fidelity National Financial, Inc., as borrower, Bank of
America, N.A., Chase Securities Inc., Morgan Stanley Senior
Funding, Inc., and various Financial Institutions, as
Lenders, incorporated by reference from Form 8-K, dated
February 9, 2000 and filed February 15, 2000
10.62 Granite Financial, Inc. Omnibus Stock Plan of 1996, Amended
and Restated as of April 24, 1997 and June 14, 1997,
incorporated by reference from Form S-8, Registration No.
333-48111
10.63 Fidelity National Financial, Inc., 1998 Stock Incentive
Plan, approved by the stockholders of the Company on June
17, 1998, incorporated by reference from Form S-8,
Registration No. 333-61111
10.64 Chicago Title Corporation 1998 Long-Term Incentive Plan and
Chicago Title Corporation Directors Stock Option Plan,
incorporated by reference from Form S-8, Registration No.
333-32806
10.65 Amendment to Fidelity National Financial, Inc. 1991 Stock
Option Plan, approved by the stockholders of the Company on
June 12, 2000, incorporated by reference from Form S-8,
Registration No. 333-52744
10.66 Amendment to Fidelity National Financial, Inc. 1998 Stock
Incentive Plan, approved by the stockholders of the Company
on June 12, 2000, incorporated by reference from Form S-8,
Registration No. 333-52744
10.67 Underwriting Agreement, dated January 24, 2001, by and among
Fidelity National Financial, Inc., and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear
Stearns & Co., Inc., Lehman Brothers Inc. and U.S. Bancorp
Piper Jaffray Inc., as representatives of the underwriters
named therein
21 List of Subsidiaries
23 Independent Auditors' Consent