-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DwHHtYf2Wmky9pB3NzHhcrwvT8ieL9EaZcMyCrGa2N/6DBiux5068s3YjZFRc6fd 5p7rZD1GU/jl7CXH6JzyhA== 0000892569-99-000823.txt : 19990402 0000892569-99-000823.hdr.sgml : 19990402 ACCESSION NUMBER: 0000892569-99-000823 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIDELITY NATIONAL FINANCIAL INC /DE/ CENTRAL INDEX KEY: 0000809398 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 860498599 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09396 FILM NUMBER: 99579476 BUSINESS ADDRESS: STREET 1: 17911 VON KARMAN AVE STREET 2: STE 300 CITY: IRVINE STATE: CA ZIP: 92614 BUSINESS PHONE: 9496225000 MAIL ADDRESS: STREET 1: MLISS JONES KANE STREET 2: 17911 VON KARMAN AVE STE 300 CITY: IRVINE STATE: CA ZIP: 92614 10-K405 1 FORM 10-K405 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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 92614 (949) 622-4333 IRVINE, CALIFORNIA (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER, (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, $.0001 PAR VALUE NEW YORK STOCK EXCHANGE LIQUID YIELD OPTION NOTES, DUE 2009, NEW YORK STOCK EXCHANGE ZERO COUPON, CONVERTIBLE SUBORDINATED
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [X] As of March 25, 1999, 32,414,000 shares of Common Stock ($.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 $433,580,000. The aggregate market value was computed with reference to the closing price on the New York Stock Exchange on such date. LOCATION OF EXHIBIT INDEX: The index to exhibits is contained in Part IV herein on page number 76. 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, 1998, to be filed within 120 days after the close of the fiscal year that is the subject of this Report. ================================================================================ 2 TABLE OF CONTENTS FORM 10-K
PAGE NO. -------- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 13 Item 3. Legal Proceedings........................................... 13 Item 4. Submission of Matters to a Vote of Security Holders......... 13 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters................................................... 14 Item 6. Selected Financial Data..................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 18 Item 7A. Quantitative and Qualitative Disclosures about the Market Risk of Financial Instruments............................. 29 Item 8. Financial Statements and Supplementary Data................. 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 75 PART III Item 10. Directors and Executive Officers of the Registrant.......... 75 Item 11. Executive Compensation...................................... 75 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 75 Item 13. Certain Relationships and Related Transactions.............. 75 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 76
3 PART I ITEM 1. BUSINESS Fidelity National Financial, Inc., through its principal subsidiaries (collectively, the "Company"), is one of the largest national underwriters engaged in the business of issuing title insurance policies and performing other real estate related services such as escrow, collection and trust activities, real estate information and technology services, trustee sale guarantees, credit reporting, attorney services, flood certification, tax monitoring, home warranty insurance, reconveyances, recordings, foreclosure publishing and posting services and exchange intermediary services in connection with real estate transactions. Title insurance services are provided through the Company's direct operations and otherwise through independent title insurance agents who issue title policies on behalf of the underwriting subsidiaries. Title insurance is generally accepted as the most efficient means of determining title to, and the priority of interests in, real estate in nearly all parts of the United States. Today, virtually all real property mortgage lenders require their borrowers to obtain a title insurance policy at the time a mortgage loan is made or to allow the sale of loans in the secondary market. The Company's principal subsidiaries consist of Fidelity National Title Insurance Company ("Fidelity Title"), Fidelity National Title Insurance Company of New York ("Fidelity New York"), Alamo Title Insurance ("Alamo Title"); (collectively, the "Insurance Subsidiaries"); its wholly-owned underwritten title companies (collectively, the "UTCs"); and its network of wholly-owned title-related ancillary service companies known as Fidelity National Lender Express Network ("FLEXNet"). The Company also originates, funds, purchases, sells, securitizes and services equipment leases for a broad range of businesses through its wholly-owned subsidiary Granite Financial, Inc. Fidelity Title was the parent company of Fidelity National Title Insurance Company of Tennessee ("Fidelity Tennessee"), Fidelity National Title Insurance Company of California ("Fidelity California") and Nations Title Insurance Company ("Nations Title"). Fidelity Tennessee, Fidelity California and Nations Title were merged into Fidelity Title on December 31, 1998, August 7, 1997 and December 29, 1997, respectively. Fidelity New York is the parent company of Nations Title Insurance of New York Inc. ("Nations New York") and National Title Insurance of New York Inc. ("National"). Fidelity National Title Insurance Company of Pennsylvania ("Fidelity Pennsylvania") was merged into Fidelity New York as of April 11, 1997, which in turn, was the parent company of American Title Insurance Company ("ATIC"), which was merged into Fidelity Pennsylvania as of November 21, 1996. Nations Title Insurance Company, Nations Title Insurance of New York Inc. and National Title Insurance of New York Inc. were acquired, along with Nations Title Inc. ("NTI," collectively, "Nations Title Inc."), in a transaction which closed on April 1, 1996. Certain of the ancillary service companies were acquired in separate transactions during 1996 and 1997. Granite Financial, Inc. and subsidiaries ("Granite") was acquired in a transaction which closed on February 26, 1998. Alamo Title was acquired in connection with the Company's acquisition of Alamo Title Holding Company and subsidiaries ("Alamo") in a transaction which closed August 20, 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments" and Note B of Notes to Consolidated Financial Statements. INDUSTRY OVERVIEW TITLE POLICIES. Title insurance policies state the terms and conditions upon which a title underwriter will insure title to real estate. The beneficiaries of title insurance policies are generally buyers of real property or mortgage lenders. Most mortgage lenders require title insurance as a condition to making loans secured by real estate. Title insurance is different from other types of insurance because it relates to past events which affect title to property at the time of closing and not unforeseen future events. Prior to issuing policies, underwriters can reduce or eliminate future losses by accurately performing searches and examinations. Title insurance policies are issued on the basis of a preliminary title report or commitment. These reports are prepared after a search 1 4 of public records, maps and other relevant documents to ascertain title ownership and the existence of easements, restrictions, rights of way, conditions, encumbrances or other matters affecting the title to, or use of, real property. A visual inspection or survey of the property may also be made prior to the issuance of certain title insurance policies. To facilitate the preparation of preliminary reports without the necessity of manually searching public records, copies of public records, maps and other relevant historical documents are compiled and indexed in a "title plant." Each title plant relates to a particular county and is kept current on a daily or other periodic basis by the continual addition of copies of recorded documents which affect real property in the particular county. Title companies often subscribe to independent title information services to assist in the updating of their title plants and the maintenance of title records. The premium for title insurance is due in full at the closing of the real estate transaction and is based upon the purchase price of the property insured or the amount of the mortgage loan. The major expense of a title company is the search and examination function in preparing preliminary title reports, commitments and title policies, and not from claim losses associated with the issuance of said policies. Claim losses generally result from errors or mistakes made in the title search and examination process, hidden defects such as fraud, forgery, incapacity, missing heirs or errors made in the escrow process. Coverage under the policy generally terminates upon resale or refinance of the property. The terms of coverage have become relatively standardized in accordance with forms approved by state or national trade associations. DIRECT AND AGENCY OPERATIONS. The Company's title reports and commitments are issued either directly, by the Insurance Subsidiaries or UTCs, or by independent agents working on behalf of the Insurance Subsidiaries. The terms and conditions upon which the real property will be insured are determined in accordance with the underwriting standards, policies and procedures of the title underwriter. In direct operations, the title underwriter issues the title insurance policy and retains the entire premium paid in connection with the transaction. In agency operations, the search and examination function is performed by an independent agent. The majority of the title premium collected is retained by the agent with the balance remitted to the title underwriter 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 be geographic region. THE TITLE POLICY PROCESS. A brief description of the process of issuing a title insurance policy, which usually occurs over a thirty to ninety day period, is as follows: (i) The customer, typically a real estate salesperson or broker, escrow agent or lender, places an order for a title policy. (ii) The specifics of the order are noted and a request is placed with the title department for a preliminary report. (iii) After the relevant historical data on the property is compiled, the title officer prepares a preliminary title report which documents (a) the current status of title and conditions affecting the property, (b) any exclusions, exceptions and/or limitations which the title underwriter might include in the policy and (c) specific issues which need to be addressed and resolved by the parties to the transaction before the title policy will be issued. The preliminary report is circulated to all the parties for satisfaction of any specific issues. (iv) After the specific issues identified in the preliminary report are satisfied, an escrow agent closes the transaction in accordance with the instructions of the parties and the title underwriter's conditions. (v) Once the transaction is closed and all monies have been released, the title underwriter issues the policies (a) to the owner and the lender on a new home sale or resale transaction or (b) to the lender only, on a refinance transaction. LOSSES AND RESERVES. The maximum amount of liability under a title insurance policy is usually the face amount of the policy plus the cost of defending the insured's title against an adverse claim. The reserve for claim losses is based upon known claims, as well as losses the insurer expects to incur based on historical 2 5 experience and other factors, including industry averages, claim loss history, legal environment, geographic considerations, expected recoupments and the types of policies written. The title underwriter establishes a reserve for each known claim based on a review and evaluation of potential liability. ECONOMIC FACTORS AFFECTING INDUSTRY. Title insurance revenue is closely related to the level of real estate activity and the average price of real estate sales. Real estate sales are directly affected by the availability of funds to finance purchases, i.e., mortgage interest rates. Other factors affecting real estate activity include demand, family income levels and general economic conditions. While the level of sales activity was relatively depressed in certain geographical areas during the period 1991 through mid-1993, lower mortgage interest rates beginning in the latter part of 1991 triggered an increase in refinancing activity which continued at then record levels through 1993 and into the first quarter of 1994. During 1994 and early 1995, steady interest rate increases caused by actions taken by the Federal Reserve Board, resulted in a significant decline in refinancing transactions and a stagnation in residential resales and new home sales. Since late 1995, decreases in mortgage interest rates and the resulting improvement in the real estate market have had a favorable effect on the level of real estate activity, including refinancing transactions, new home sales and resales. The overall economic environment, stable mortgage interest rates and strength in the real estate market, especially in California and on the West Coast, contributed to very positive conditions for the industry throughout 1996, 1997 and 1998. It is impossible to predict in what future direction interest rates and the real estate market may move or fluctuate. TITLE INSURANCE OPERATIONS The Insurance Subsidiaries are currently licensed to issue title insurance policies through direct operations and independent agents in all states (with the exception of Iowa, where title insurance is not legally permitted) the District of Columbia, the Virgin Islands and Puerto Rico. The Company maintains direct operations in Alabama, Arizona, California, Florida, Georgia, Hawaii, Nevada, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Texas and Washington. Direct operations are divided into approximately 90 branches consisting of more than 410 offices. Each branch processes title insurance transactions within its geographical area, which is usually a county boundary. Each branch is operated as a separate profit center. The Company also transacts title insurance business through a network of approximately 2,900 agents, primarily in those areas in which agents are the more accepted title insurance provider. The following table sets forth for the years 1998, 1997 and 1996, respectively, the approximate dollars and percentages of title insurance premium revenue by state according to records maintained by the Company:
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1998 1997 1996 ---------------- ---------------- ---------------- AMOUNT % AMOUNT % AMOUNT % -------- ----- -------- ----- -------- ----- (DOLLARS IN THOUSANDS) California.............................. $301,406 33.1% $202,848 32.9% $183,108 33.1% Texas................................... 178,407 19.6 128,298 20.8 116,704 21.1 New York................................ 88,899 9.8 60,022 9.7 45,938 8.3 Florida................................. 44,860 4.9 29,457 4.8 25,444 4.6 Pennsylvania............................ 38,893 4.3 26,318 4.3 25,441 4.6 Arizona................................. 32,555 3.6 24,431 4.0 23,865 4.4 All others.............................. 225,258 24.7 144,700 23.5 132,299 23.9 -------- ----- -------- ----- -------- ----- Totals........................ $910,278 100.0% $616,074 100.0% $552,799 100.0% ======== ===== ======== ===== ======== =====
For the entire title insurance industry, 12 states accounted for 72.4% of title premiums written in the United States in 1997. California represented the single largest state with 18.2%. The Company is licensed and has operations in all 12 of these states. 3 6 MARKETING. The Company markets and distributes its products and services to customers in the residential, institutional lender and commercial market sectors of the real estate industry. The Company attempts to increase the volume of its title insurance business primarily through customer solicitation by sales personnel. The Company actively encourages its personnel to develop new business relationships with persons in the real estate community, such as real estate sales agents and brokers, financial institutions, independent escrow companies and title agents, real estate developers, mortgage brokers and attorneys. The Company's marketing efforts are also assisted by general advertising. The Company believes customer service is the most important factor in attracting and retaining customers and measures customer service in terms of quality and timeliness in the delivery of services. DIRECT AND AGENCY OPERATIONS. Preliminary title reports and commitments to issue policies are prepared by title underwriters or wholly-owned underwritten title companies (direct operations) or by independent agents on behalf of the underwriters (agency operations). The terms and conditions upon which the real property will be insured are determined in accordance with the underwriting standards, policies and procedures of the title underwriter. In direct operations, the title underwriter issues the title insurance policy and retains the entire premium paid in connection with the transaction. In agency operations, the search and examination function is performed by an independent agent. The majority of the title premium collected is retained by the agent with the balance remitted to the title underwriter. Independent agents may select among several title underwriters based upon the amount of the premium "split" offered by the underwriter, the overall terms and conditions of the agency agreement and the scope of services offered to the agent. Premium splits vary by geographic region. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview, Revenue, Expenses and Recent Developments." Prior to the acquisition of the Nations Title Inc. group of companies, which was completed on April 1, 1996, the Company generated the majority of its revenue from its network of direct operations as opposed to agency relationships, the latter being more common in the title industry. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview and Recent Developments." The Company's direct operations generate higher margins than agency operations because the Company retains the entire premium from each transaction instead of paying commissions to agents and claim losses are less than in agency based operations because the Company controls the issuance of the title policy. Direct operations also provide additional sources of income, such as escrow fees, collection and trust fees, real estate information and technology service fees, trustee sale guarantee fees, credit reporting fees, attorney service fees, flood certification fees, tax monitoring fees, home warranty insurance premiums, reconveyance fees, recording fees, foreclosure publishing and posting service fees and exchange intermediary service fees in connection with real estate transactions. Effective July 1, 1997, the Company sold a majority interest (60%) of its subsidiary American Title Company ("ATC"), an underwritten title company, to certain members of ATC's management. ATC functions as an exclusive agent of the Company. As a result of a tax free reorganization of American National Financial, Inc. ("ANFI"), the parent company of ATC and its subsidiaries, in November 1998, the Company's interest in ATC was converted to an ownership interest of approximately 43% of ANFI. Subsequent to ANFI's initial public offering in February 1999, the Company's ownership interest in ANFI became approximately 31.5%. Additionally, on March 18, 1998, the Company announced that it had entered into an agreement to sell National Title Insurance of New York Inc. to ATC for $3.25 million, subject to regulatory approval and certain other conditions. National was acquired in April 1996, as part of the Nations Title Inc. acquisition, and has not been actively underwriting policies since the transaction closed. This transaction has not yet received regulatory approval. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments" and Notes C and L of Notes to Consolidated Financial Statements. The relationship between the Company and each agent is governed by an agency agreement which states the conditions under which the agent is authorized to issue a title insurance policy on behalf of the Company. The agency agreement also prescribes the circumstances under which the agent may be liable to the Company if a policy loss is attributable to errors made by the agent. The agency agreement typically is terminable upon 30 days' notice or immediately for cause. In determining whether to engage or retain an independent agent the 4 7 Company considers the agent's experience, financial condition and loss history. Loss history is an important consideration in the Company's decision to initiate or continue agency relationships. The Company maintains financial and loss experience records for each agent and conducts periodic audits of its agents. On April 1, 1996, the Company completed its acquisition of one hundred percent of Nations Title Inc. and its wholly-owned subsidiaries. The acquisition positioned the Company as the nation's fourth largest title insurance underwriter. The combination of the Company's direct operations and Nations Title Inc.'s strong agency network provides a balance to the Company's title premium revenue between direct and agency, as well as a hedge against future market downturns. The acquisition of Nations Title Inc. has also increased the Company's revenue and positively impacted its balance sheet and margins due to the operating economies of the combined companies. The acquisition has also increased market share in areas where the Company has had a limited presence, particularly in those areas where business is primarily agent driven, as well as in states where the Company has a strong market position. The acquisition of Alamo Title Holding Company and subsidiaries, which closed on August 20, 1998, provided additional balance between the Company's direct and agency operations with the strength of Alamo's direct and agency operations in the important Texas market. As a result of its acquisitions of Nations Title Inc. and Alamo, the Company has significantly expanded the national scope of its core title operations by expanding its direct operations in key markets and balancing the mix of its direct and agency operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview, Revenue and Recent Developments." ESCROW, TRUST AND OTHER TITLE-RELATED SERVICES. The Company holds funds and documents in real estate transactions for delivery upon closing pursuant to the instructions of the respective parties to an escrow. The Company derives revenue from other ancillary services generated from direct operations, such as collection and trust fees, real estate information and technology service fees, trustee sale guarantee fees, credit reporting fees, attorney service fees, flood certification fees, tax monitoring fees, home warranty insurance premiums, reconveyance fees, recording fees, foreclosure publishing and posting service fees and exchange intermediary service fees in connection with real estate transactions. In a few cases, the Company leases its title plants to independent agents for their examination of title records for a rental or usage fee. UNDERWRITING, LOSSES AND RESERVES. The Company believes that the level of risk undertaken pursuant to its underwriting standards is consistent with that of the industry. The maximum amount of liability under a title insurance policy is usually the face amount of the policy plus the cost of defending the insured's title against an adverse claim. The Company's reserve for claim losses includes known claims as well as losses the Company expects to incur, net of recoupments. Each known claim is reserved for on the basis of a review by the Company as to the estimated amount of the claim and the costs required to settle the claim. Reserves for claims which are incurred but not reported are provided for at the time premium revenue is recognized based on historical loss experience and other factors, including industry averages, claim loss history, legal environment, geographic considerations and types of policies written. The occurrence of a significant major claim (those greater than $500,000) in any given period could have a material adverse effect on the Company's financial condition and results of operations for such period. See "Reinsurance." If a loss is related to a policy issued by an independent agent, the Company may proceed against the independent agent pursuant to the terms of the agency agreement. In any event, the Company may proceed against third parties who are responsible for any loss sustained under the title insurance policy under rights of subrogation. The Company believes that its quality controls and underwriting standards have helped minimize its net title claims paid. The Company further reduces its losses by following aggressive recoupment procedures under rights of subrogation or warranties and by carefully reviewing all claims. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Expenses." There can be no assurance that the Company's current paid loss experience will continue at these levels. 5 8 Courts and juries sometimes award damages against insurance companies, including title insurance companies, in excess of policy limits. Such awards are typically based on allegations of fraud, misrepresentation, deceptive trade practices or other wrongful acts commonly referred to as "bad faith." Although the Company has not experienced damage awards materially in excess of policy limits, the possibility of such bad faith damage awards may cause the Company to experience increased costs and difficulty in settling title claims. The Company generally pays losses in cash. In some instances claims are settled by purchasing the interest of the insured in the real property or the interest of the adverse claimant. Such interests are generally recorded as an asset on the Company's books at the lower of cost or fair value less selling costs and any related indebtedness is carried as a liability. At December 31, 1998, the amount of these interests was $8.8 million. The Company also accrues reserves for losses arising from the escrow, closing and disbursement functions due to fraud or operational error based on historical experience. REINSURANCE. In the ordinary course of business, the Company reinsures certain risks with other title insurers for the purpose of limiting its maximum loss exposure and also assumes reinsurance for certain risks of other title insurers for the purpose of earning additional income. The Company cedes or assumes a portion of certain policy liabilities under agent fidelity, excess of loss and case-by-case reinsurance agreements. Reinsurance agreements provide that the reinsurer is liable for loss and loss adjustment expense payments exceeding the amount retained by the ceding company. However, the ceding company remains primarily liable in the event the reinsurer does not meet its contractual obligations. See Note A of Notes to Consolidated Financial Statements. COMPETITION. The title insurance industry is highly competitive. The number and size of competing companies varies in the different geographic areas in which the Company conducts its business. In the Company's principal markets, competitors include other major title underwriters such as Chicago Title Corporation, First American Financial 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 the Company competes. Also, the removal of regulatory barriers in the future might result in new competitors entering the title insurance business that have greater financial resources and other competitive advantages. Competition among the major title insurance companies, expansion by smaller regional companies and any new entrants could affect the Company's business operations and financial condition. Competition is based primarily on the quality and timeliness of service, since the parties to a real estate transaction are usually concerned with time schedules and costs associated with delays in closing the transaction. In those states where prices are not established by regulatory authorities the price of the title insurance policy is also a competitive factor. The Company believes that its competitive position is enhanced by its quality customer service and pricing. REGULATION. Title insurance companies, including underwriters, underwritten title companies and independent agents, are subject to extensive regulation under applicable state laws. Each insurance underwriter is usually subject to a holding company act in its state of domicile which regulates, among other matters, the ability to pay dividends and investment policies. The laws of most states in which the Company transacts business establish supervisory agencies with broad administrative powers relating to issuing and revoking licenses to transact business, regulating trade practices, licensing agents, approving policy forms, accounting principles, financial practices, establishing reserve and capital and surplus requirements, defining suitable investments for reserves, capital and surplus and approving rate schedules. 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 is currently evaluating the impact of the rules. Pursuant to statutory accounting requirements of the various states in which the Insurance Subsidiaries are licensed, they must defer a portion of premiums earned as an unearned premium reserve for the protection 6 9 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, 1998, the combined statutory unearned premium reserve required and reported for the Insurance Subsidiaries was $207.2 million. The Insurance Subsidiaries are regulated by the insurance commissioners of their respective states of domicile. Regulatory examinations usually occur at three year intervals. Examinations are currently in progress for Fidelity Title (1998, which was previously scheduled for 1997 but will now be as of 1998), Fidelity New York (1996), Nations New York (1996) and National (1996). The Company has not received preliminary reports of examination for Fidelity Title, Fidelity New York, Nations New York or National, as the examinations are currently ongoing. Additionally, the Auditor Division of the Controller of the State of California is currently conducting an audit of the funds due the State of California under various escheatment regulations for the years ended December 31, 1998 and prior. The Company has not yet received a preliminary report as the audit is ongoing. The Company does not believe that either the audits performed by the insurance regulators or the Controller of the State of California will have a material impact on its financial position, its results of operations or its combined statutory capital and surplus. Statutorily calculated net worth determines the maximum insurable amount under any single title insurance policy. As of January 1, 1999, the Company's self-imposed single policy maximum insurable amounts, which comply with all statutory limitations, for Fidelity Title, Fidelity New York and Alamo Title were $60.0 million, $90.0 million and $17.5 million, respectively. The self-imposed single policy maximum insurable amounts for Nations New York and National were $19.0 million and $5.0 million, respectively. The Insurance Subsidiaries are subject to regulations that restrict their ability to pay dividends or make other distributions of cash or property to their immediate parent company without prior approval from the Department of Insurance of their respective states of domicile. In the case of Fidelity Title, the total amount of dividends made in any twelve-month period may not exceed the greater of 10% of the surplus as regards policyholders as of the last day of the preceding year or net earnings for the twelve-month period ending the last day of the preceding year. In the case of Fidelity New York, the total amount of dividends and distributions is limited to surplus as regards policyholders, excluding capital stock and surplus resulting from unrealized gains on investments, less fifty percent of statutory premium reserve as of the last day of the preceding year and capital contributions received in the latest five-year period. In the case of Alamo Title, the total amount of dividends made in any twelve-month period may not exceed the greater of 20% of the surplus as regards policyholders as of the last day of the preceding year or net earnings for the twelve-month period ending the last day of the preceding year. As of January 1, 1999, Fidelity Title could pay dividends or make other distributions to the Company of $10,588,000, Fidelity New York could pay dividends or make other distributions to the Company of $13,325,000 and Alamo Title could pay dividends or make other distributions to the Company of $9,064,000. The combined statutory capital and surplus of the Insurance Subsidiaries was $164,953,000, $122,107,000 and $97,845,000 as of December 31, 1998, 1997 and 1996, respectively. The combined statutory earnings of the Insurance Subsidiaries were $37,771,000, $26,701,000 and $12,243,000 for the years ended December 31, 1998, 1997 and 1996, respectively. As a condition to continued authority to underwrite policies in the states in which the Insurance Subsidiaries conduct their business, the Insurance Subsidiaries are required to pay certain fees and file information regarding their officers, directors and financial condition. In addition, the Company's escrow and trust business is subject to regulation by various state banking authorities. Pursuant to statutory requirements of the various states in which the Insurance Subsidiaries are domiciled, they must maintain certain levels of minimum capital and surplus. Each of the Company's title underwriters have complied with the minimum statutory requirements as of December 31, 1998. See Note L of Notes to Consolidated Financial Statements. 7 10 The UTCs 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 and $2.5 million is required for Fidelity National Title Company ("FNTC") and Fidelity National Title Company of California ("FNCAL"), respectively. FNTC and FNCAL are in compliance with their respective minimum net worth requirements at December 31, 1998. RATINGS The Insurance Subsidiaries are regularly assigned ratings by independent agencies designed to indicate their financial condition and/or claims paying ability. Financial data and other information are supplied to the rating agencies and subjected to quantitative and qualitative analyses from which the ratings are derived. Ratings of the Company's principal Insurance Subsidiaries, as assigned during 1998 and 1999, are listed below:
DUFF & PHELPS STANDARD & POOR'S DEMOTECH, INC. CREDIT RATING CO. RATINGS SERVICES (FINANCIAL STABILITY RATING) (CLAIMS PAYING ABILITY) (FINANCIAL STRENGTH RATING) ---------------------------- ----------------------- --------------------------- Fidelity Title........ A A- A- Fidelity New York..... A A- A- Alamo Title........... A' A- A-
INVESTMENT POLICIES AND INVESTMENT PORTFOLIO The Company's investment policy is designed to maintain a high quality portfolio, maximize income, minimize interest rate risk and match the duration of the portfolio to the Company's liabilities. The Company also makes investments in certain equity securities in order to take advantage of perceived value and for strategic purposes. Most of the Company's investment assets qualify as "admitted assets" and for purposes of capital and surplus and unearned premium reserves as prescribed by various state insurance regulations. These investments are restricted by the state insurance regulations of their domiciliary states and are limited primarily to cash and cash equivalents, federal and municipal governmental securities, mortgage loans, certain investment grade debt securities, equity securities and real estate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." As of December 31, 1998 and 1997, the carrying amount, which approximates the fair value, of total investments was $510.5 million and $358.4 million, respectively. It is the practice of the Company to purchase investment grade fixed maturity securities, selected non-investment grade fixed maturity securities and equity securities. The securities in the Company's portfolio are subject to economic conditions and normal market risks and uncertainties. 8 11 The following table sets forth certain information regarding the investment ratings of the Company's fixed maturity portfolio at December 31, 1998 and 1997:
DECEMBER 31, --------------------------------------------------------------------------------------- 1998 1997 ------------------------------------------ ------------------------------------------ AMORTIZED % FAIR % AMORTIZED % FAIR % RATINGS(1) COST OF TOTAL VALUE OF TOTAL COST OF TOTAL VALUE OF TOTAL ---------- --------- -------- -------- -------- --------- -------- -------- -------- (DOLLARS IN THOUSANDS) AAA.................. $154,592 47.9% $158,301 48.0% $113,951 48.3% $115,474 48.2% AA................... 67,575 20.9 69,366 21.0 40,290 17.1 41,046 17.1 A.................... 74,917 23.2 77,022 23.3 73,123 31.0 73,664 30.7 Other................ 25,867 8.0 25,379 7.7 8,507 3.6 9,634 4.0 -------- ----- -------- ----- -------- ----- -------- ----- $322,951 100.0% $330,068 100.0% $235,871 100.0% $239,818 100.0% ======== ===== ======== ===== ======== ===== ======== =====
- --------------- (1) Ratings as assigned by Standard & Poor's Corporation The following table sets forth certain information regarding the Company's fixed maturity securities at December 31, 1998. 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 $47,491,000 and a fair value of $48,600,000 were callable at December 31, 1998:
DECEMBER 31, 1998 --------------------------------------------- AMORTIZED % FAIR % MATURITY COST OF TOTAL VALUE OF TOTAL -------- --------- -------- -------- -------- (DOLLARS IN THOUSANDS) One year or less........................... $ 5,836 1.8% $ 5,696 1.7% After one year through five years.......... 132,377 41.0 134,866 40.9 After five years through ten years......... 158,156 49.0 162,528 49.2 After ten years............................ 26,582 8.2 26,978 8.2 -------- ----- -------- ----- $322,951 100.0% $330,068 100.0% ======== ===== ======== =====
Equity securities at December 31, 1998 and 1997 consist of investments in various industry groups as follows:
DECEMBER 31, ---------------------------------------- 1998 1997 ------------------ ------------------ FAIR FAIR COST VALUE COST VALUE ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Banks, trust and insurance companies........ $ 1,874 $ 1,949 $ 517 $ 950 Industrial, miscellaneous and all other..... 35,878 48,242 41,154 76,603 ------- ------- ------- ------- $37,752 $50,191 $41,671 $77,553 ======= ======= ======= =======
The Company's investment results for the years ended December 31, 1998, 1997 and 1996 were as follows:
DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (DOLLARS IN THOUSANDS) Net investment income(1)(2)........................ $ 26,665 $ 20,672 $ 17,234 Average invested assets(1)......................... 482,530 375,100 303,910 Effective return on average invested assets(1)..... 5.5% 5.5% 5.7%
- --------------- (1) Excludes investments in real estate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Revenue." 9 12 (2) Net investment income as reported in the 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 on the sale of investments and other assets. Net realized capital gains totalled $17,190,000, $16,839,000 and $2,476,000 in 1998, 1997 and 1996, respectively. REAL ESTATE AND PROPERTY MANAGEMENT OPERATIONS The Company, principally through Manchester Development Corporation ("Manchester", currently doing business as Orion Realty Group), a wholly-owned subsidiary of the Company, previously invested in various real estate projects directly and through partnerships. Some of these partnerships involve related parties. See Notes F and G of Notes to Consolidated Financial Statements. Manchester currently assists in the identification and leasing of space for operating purposes and manages property owned by the Company. The Company's investments in real estate and partnerships represented approximately 0.5% of the Company's assets at December 31, 1998. EMPLOYEES As of December 31, 1998, the Company had approximately 7,400 full-time equivalent employees. The Company believes that its relations with employees are generally good. YEAR 2000 ISSUES Information technology is an integral part of the Company's business. The Company also recognizes the critical nature of and the technological challenges associated with the Year 2000 issue. The Year 2000 issue ("Y2K") results from computer programs and computer hardware that utilize only two digits to identify a year in the date field, rather than four digits. If such programs or hardware are not modified or upgraded information systems could fail, lock up, or in general fail to perform according to normal expectations. The Company has implemented a program and committed both personnel and other resources to determine the extent of potential Y2K issues. Included within the scope of this program are systems used in title plants, title policy processing, escrow production, claims processing, real estate related services, financial management, human resources, payroll and infrastructure. In addition to a review of internal systems, the Company has initiated formal communications with third parties with which it does business in order to determine whether or not they are Y2K compliant and the extent to which the Company may be vulnerable to third parties' failure to become Y2K compliant. The Company is in the process of identifying Y2K compliant issues in its systems, equipment and processes. The Company is making changes to such systems, updating or replacing such equipment, and modifying such processes to make them Y2K compliant. The Company has developed a four phase program to become Y2K compliant. Phase I is, "Plan Preparation and Identification of the Problem." This is an ongoing phase that will continue beyond the year 2000 itself. Phase II is, "Plan Execution and Remediation." Phase III is, "Testing." Phase IV is, "Maintaining Y2K Compliance." The Company anticipates that its systems processes will be substantially Y2K compliant by July 1999. The status of the Y2K compliance program is monitored by senior management of the Company and by the Audit Committee of the Company's Board of Directors. The costs of the Y2K related efforts incurred to date have not been material, and the estimate of remaining costs to be incurred is not considered to be material. Due to the complexities of estimating the cost of modifying applications to become Y2K compliant and the difficulties in assessing third parties', including various local governments upon which the Company relies upon to provide title-related data, ability to become Y2K compliant, estimates may be subject to change. Management of the Company believes that its electronic data processing and information systems will be Y2K compliant; however, there can be no assurance that all of the Company's systems will be Y2K compliant, that the costs to be Y2K compliant will not exceed management's current expectations, or that the failure of such systems to be Y2K compliant will not have a material adverse effect on the Company's business. The Company believes that functions currently performed with the assistance of electronic data processing 10 13 equipment could be performed manually or outsourced if certain systems were determined not to be Y2K compliant on or after January 1, 2000. The Company has not yet completed a contingency plan in the event that any systems are not Y2K compliant, but will do so once the Phase III process of its compliance program is begun. We expect this contingency plan to be complete by July 1999. This entire section "Year 2000 Issues" is hereby designated a "Year 2000 Readiness Disclosure", as defined in the Year 2000 Information and Readiness Disclosure Act. RISK FACTORS The risk factors listed in this section and other factors noted below could cause the Company's actual results to differ materially from those contained in any forward-looking statements. Risk factors include, but are not limited to: Real Estate Market and Interest Rate Sensitivity The level of title insurance and real estate related services activity is dependent upon, among other things, the volume of real estate transactions. The volume of real estate transactions nationally and within particular geographic regions has historically been influenced by such factors as the overall interest rate environment (which impacts the availability of capital for investment in real estate, particularly in the commercial refinancings as well as the number of sales), the strength of the national and/or regional economy and family income levels. Recently, historically low interest rates have resulted in an increased number of real estate sales, resales and refinancings. However, when interest rates increase, real estate activity typically declines and the title insurance industry tends to experience lower revenues. Moreover, a favorable interest rate environment or trend may not necessarily result in increased levels or continued high levels of real estate transactions if other market factors (such as a recessionary economy or increased unemployment) combine to depress the volume of real estate transactions. Accordingly, no assurance can be given that historical levels of premiums and fees previously received by the Company will be available in the future. Geographic Concentration Part of the Company's strategy has been to expand its market share and increase its title insurance premiums and other real estate related revenue in the key real estate markets of California, Texas, Florida and New York. Approximately 67.4% of the Company's title insurance premium revenue was generated from real estate transactions in those states in 1998. This geographic concentration makes the Company susceptible to the risk that adverse economic conditions or other factors affecting the real estate markets in these areas, even with a strong national economy, could have a more pronounced adverse affect on its premium and fee revenues than if its revenue base were more broadly dispersed across the country. Risks Associated With Acquisitions Part of the Company's strategy is to pursue opportunities to diversify and expand its operations by acquiring or making investments in other companies. Acquisitions involve a number of risks that could adversely effect the Company's operations, including the diversion of management's attention and the integration of the operations and personnel of the acquired companies. If the Company acquires other business operations, the Company cannot be certain that such businesses will be successful, that they will enhance the Company's existing business or that the Company will not incur significant expenses, including goodwill, relating to such acquisitions. The Company may be required to sell additional securities or borrow additional funds to complete any significant acquisitions. The sale of additional equity or debt securities may dilute stockholder interests in or increase the leverage of the Company. 11 14 Risks Associated With New Business Lines The Company has acquired, and may in the future acquire, businesses in industries with which management is less familiar than the title insurance industry. For example, in February 1998, the Company acquired Granite Financial, Inc., whose primary business is financing equipment leases. Also, in the last three years, the Company has expanded the range and amount of ancillary title and real estate related services it provides, began underwriting home warranty policies, invested in restaurant businesses, expanded its commercial title insurance business and considered acquiring underwriters of other lines of insurance products. These activities involve risks that could adversely affect the Company's 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. Competition The title insurance and real estate services industries are highly competitive. Competition is based primarily on the quality and timeliness of services. Where price is not regulated by governmental authorities, pricing can also be an important competitive factor. For larger commercial customers and mortgage originators the size and financial strength of the title insurer are important competitive factors. Our principal competitors include Chicago Title Corporation, First American Financial Corporation, LandAmerica Financial Group, Inc., Old Republic International Corporation and Stewart Information Services Corporation, each of whom has the size, capital base and distribution channels to compete effectively with the Company. The Company also competes with many smaller title insurance and real estate services companies that serve regional market areas. These smaller companies may expand into other markets in which the Company competes. Also, the removal of regulatory barriers in the future might result in new competitors entering the title insurance business that have greater financial resources and other competitive advantages. Competition among the major title insurance companies, expansion by smaller regional companies and any new entrants could adversely affect the Company's business operations and financial condition. Government Regulation Our title insurance business is subject to extensive regulation by state insurance authorities in each state in which the Company operates. These agencies have broad administrative and supervisory power relating to the following: - licensing requirements; - trade practices; - accounting and financing practices; - capital and surplus requirements; - investment practices; and - rate schedules. Most states also regulate insurance holding companies, like Fidelity National Financial, Inc., in a variety of matters such as acquisitions, change of control and terms of affiliate transactions. These regulations may impede, or impose burdensome conditions on rate increases or other actions that the Company may want to take to enhance its operating results, and could affect its ability to pay dividends on its common stock. In addition, the Company may incur significant costs to comply with regulatory requirements. No assurance can be given that future legislative or regulatory changes will not adversely affect the Company's business operations. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION The Company wishes to caution readers that the forward-looking statements contained in this Form 10-K under "Item 1. Business," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K involve known and unknown risks and uncertainties which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by any forward-looking statements 12 15 made by or on behalf of the Company. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is filing the following cautionary statements identifying important factors that in some cases have affected, and in the future could cause the Company's actual results to differ materially from those expressed in any such forward-looking statements. The factors that could cause the Company's results to differ materially include, but are not limited to, general economic and business conditions, including interest rate fluctuations; the impact of competitive products and pricing; success of operating initiatives; adverse publicity; changes in business strategy or development plans; quality of management; availability, terms, and deployment of capital; the results of financing efforts; the Year 2000 issue; business abilities and judgment of personnel; availability of qualified personnel; employee benefit costs and changes in, or the failure to comply with government regulations. ITEM 2. PROPERTIES During 1997, the Company sold its corporate home office building in Irvine, California, which housed the Company's corporate departments and certain operating subsidiaries, recording a net realized gain of $4.3 million, prior to applicable income taxes. Also during 1997, a subsidiary of the Company completed the purchase of a building in Santa Barbara, California, which houses certain of the Company's corporate departments. The majority of the branch offices of the Company are leased from third parties. The remainder are owned by the Company or leased from partnerships in which the Company has an interest or leased from affiliates. As of December 31, 1998, the Company leased office and storage spaces as follows:
NUMBER OF LOCATIONS --------- California.................................................. 202 Texas....................................................... 80 Florida..................................................... 36 Arizona..................................................... 26 Oregon...................................................... 17 Tennessee................................................... 10 Pennsylvania................................................ 9 New York and Washington..................................... 7 New Jersey and North Carolina............................... 6 Georgia, Nevada and New Mexico.............................. 5 Hawaii and Michigan......................................... 4 Alabama, Colorado, Connecticut, Kentucky, Maryland, South Carolina, Virginia........................................ 2 Illinois, Kansas, Massachusetts, Minnesota, Ohio, Rhode Island and Washington, D.C. .............................. 1
See Note K of Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of business, the Company is involved in various pending and threatened litigation matters related to its operations, some of which include claims for punitive or exemplary damages. Management believes that no actions depart from customary litigation incidental to the business of the Company and that resolution of all such litigation will not have a material adverse effect on the Company. See Note K of Notes to Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders in the fourth quarter of 1998. 13 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The following table sets forth the range of high and low closing prices for the common stock on the New York Stock Exchange. The high and low closing prices and the amount of dividends declared for the periods indicated have been retroactively adjusted for stock dividends and splits declared since the Company's inception.
DIVIDENDS HIGH LOW DECLARED ------ ------ --------- Year ended December 31, 1998 First quarter................................. $33.41 $24.27 $.064 Second quarter................................ 36.31 30.00 .064 Third quarter................................. 39.14 25.17 .064 Fourth quarter................................ 30.50 22.11 .070 Year ended December 31, 1997 First quarter................................. $12.81 $ 9.92 $.058 Second quarter................................ 13.95 9.50 .058 Third quarter................................. 19.63 13.13 .058 Fourth quarter................................ 28.41 16.94 .064
On March 25, 1999, the last reported sale price of the common stock on the New York Stock Exchange Composite Tape was $15.44 per share. As of March 25, 1999, the Company had approximately 925 stockholders of record. DIVIDEND POLICY AND RESTRICTIONS ON DIVIDEND PAYMENTS. Since the last quarter of 1987, the Company has consistently paid cash dividends on a quarterly basis, which payments have been made at the discretion of the Company's Board of Directors. On March 17, 1999, the Company's Board of Directors declared a cash dividend of $.07 per share which will be payable on May 28, 1999 to stockholders of record on April 9, 1999. The continued payment of dividends will depend upon operating results, business requirements, contractual restrictions, regulatory considerations and other factors. The Company anticipates the continued payment of dividends. See "Business -- Regulation" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." CONTRACTUAL RESTRICTIONS ON DIVIDEND PAYMENTS. The Company's ability to pay dividends on its common stock and make certain payments is restricted by provisions contained in the Company's various debt agreements. The Company believes that amounts to fund currently anticipated dividends and certain payments are available pursuant to the terms and conditions of its various debt agreements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note H of Notes to Consolidated Financial Statements. ITEM 6. SELECTED FINANCIAL DATA The historical operating results data, per share data and balance sheet data set forth below are derived from the historical financial statements of the Company, certain of which have been restated to reflect the Granite and Alamo mergers on the pooling-of-interests method of accounting. Per share data has been retroactively adjusted for stock dividends and splits since the Company's inception. Consolidated Balance Sheets at December 31, 1998 and 1997 and Consolidated Statements of Earnings, Comprehensive Earnings, Stockholders' Equity and Cash Flows for the years ended December 31, 1998, 1997 and 1996, and Notes thereto, audited by KPMG LLP, independent certified public accountants, are included elsewhere herein and 14 17 should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1998 1997 1996 1995 1994 (3)(4)(5)(6) (3)(4)(5)(6)(7) (3)(4)(5) (2)(4)(5) (1)(4)(5) ------------ --------------- ---------- ---------- ---------- (RESTATED) (RESTATED) (RESTATED) (RESTATED) (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA) OPERATING RESULTS DATA: Revenue: Title insurance premiums....................... $ 910,278 $616,074 $552,799 $351,510 $442,596 Escrow fees.................................... 130,299 86,033 71,122 53,132 55,622 Other fees and revenue......................... 208,301 125,146 91,647 66,819 69,325 Interest and investment income, including realized gains (losses)...................... 39,587 35,806 19,227 19,432 13,855 ---------- -------- -------- -------- -------- 1,288,465 863,059 734,795 490,893 581,398 ---------- -------- -------- -------- -------- Expenses: Personnel costs................................ 394,284 273,221 240,232 190,419 204,968 Other operating expenses....................... 257,080 189,226 176,524 143,494 148,776 Agent commissions.............................. 385,649 261,182 221,948 113,358 169,751 Provision for claim losses..................... 59,294 41,558 36,275 22,003 30,859 Interest expense............................... 17,024 12,269 11,590 10,137 9,078 ---------- -------- -------- -------- -------- 1,113,331 777,456 686,569 479,411 563,432 ---------- -------- -------- -------- -------- Earnings before income taxes and extraordinary item........................................... 175,134 85,603 48,226 11,482 17,966 Income tax expense............................... 69,442 36,595 18,985 2,716 4,789 ---------- -------- -------- -------- -------- Earnings before extraordinary item............. 105,692 49,008 29,241 8,766 13,177 Extraordinary item, net of income taxes.......... -- (1,700) -- (813) 2,400 ---------- -------- -------- -------- -------- Net earnings................................... $ 105,692 $ 47,308 $ 29,241 $ 7,953 $ 15,577 ========== ======== ======== ======== ======== Diluted net earnings........................... $ 108,155 $ 50,450 $ 32,437 $ 7,953 $ 18,633 ========== ======== ======== ======== ======== PER SHARE DATA: Basic earnings per share before extraordinary item........................................... $ 3.79 $ 2.10 $ 1.43 $ .47 $ 0.56 Extraordinary item, net of income taxes, basic basis.......................................... -- (0.07) -- (.04) 0.10 ---------- -------- -------- -------- -------- Basic earnings per share....................... $ 3.79 $ 2.03 $ 1.43 $ .43 $ 0.66 ========== ======== ======== ======== ======== Weighted average shares outstanding, basic basis.......................................... 27,921 23,355 20,426 18,732 23,525 Diluted earnings per share before extraordinary item........................................... $ 3.23 $ 1.76 $ 1.23 $ .45 $ .55 Extraordinary item, net of income taxes, diluted basis.......................................... -- (.06) -- (.04) .08 ---------- -------- -------- -------- -------- Diluted earnings per share..................... $ 3.23 $ 1.70 $ 1.23 $ .41 $ .63 ========== ======== ======== ======== ======== Weighted average shares outstanding, diluted basis.......................................... 33,474 29,599 26,431 19,351 29,439 Dividends per share.............................. $ .26 $ .24 $ .22 $ .20 $ .18 BALANCE SHEET DATA: Investments...................................... $ 510,515 $358,373 $254,577 $201,810 $235,067 Cash and cash equivalents........................ 51,309 72,887 81,108 58,518 45,289 Total assets..................................... 969,470 747,695 609,658 462,166 470,062 Notes payable.................................... 214,624 163,015 179,508 146,095 150,865 Reserve for claim losses......................... 224,534 201,674 196,527 153,207 158,876 Minority interest................................ 1,532 3,614 1,287 393 616 Stockholders' equity............................. 396,740 274,050 162,645 112,920 106,827 OTHER DATA: Orders opened by direct operations............... 987,000 621,000 575,000 489,000 N/A Orders closed by direct operations............... 670,000 436,000 430,000 331,000 N/A Provision for claim losses to title insurance premiums....................................... 6.5% 6.7% 6.6% 6.3% 7.0% Title-related revenue: Percentage direct operations................... 56.9% 56.9% 58.7% 67.6% 62.6% Percentage agency operations................... 43.1% 43.1% 41.3% 32.4% 37.4% Employees at year end............................ 7,400 6,000 5,200 4,700 4,000 Number of licensed states at year end............ 49 49 49 49 49 Return on average equity before extraordinary item(8)........................................ 31.5% 22.4% 21.2% 8.0% 10.5% Return on average equity including extraordinary item(8)........................................ 31.5% 21.7% 21.2% 7.2% 12.4%
15 18 - --------------- (1) During 1994, the Company recognized a $2.4 million extraordinary gain, net of related income taxes of $1.3 million, related to the early retirement of $48 million maturity value of the Company's Liquid Yield Option Notes (the "LYONs"). (2) During 1995, the Company recognized an $813,000 extraordinary loss, net of related income taxes of $437,000, related to the early retirement of its Senior Secured Notes. (3) The Company acquired Nations Title Inc. and its wholly-owned subsidiaries Nations Title, Nations New York and National on April 1, 1996. See Management's Discussion and Analysis of Financial Condition and Results of Operations. The selected financial data above includes the balance sheet accounts of Nations Title Inc. and subsidiaries at December 31, 1998, 1997 and 1996 and the results of its operations for the years ended December 31, 1998, 1997 and for the nine-month period ended December 31, 1996. (4) The selected financial data above includes the balance sheet accounts and results of operations of ATC as a wholly-owned subsidiary as of December 31, 1996, 1995 and 1994 and for the six-month period ended June 30, 1997 and for the years ended December 31, 1996, 1995 and 1994, and ATC's activities as an agent for the six-month period ended December 31, 1997 and for the year ended December 31, 1998. On July 3, 1997, the Company converted an outstanding note balance in conjunction with the exercise of warrants into a 51% ownership interest of National Alliance Marketing Group ("National Alliance"). The Company acquired the outstanding minority interest in National Alliance on August 14, 1998. The selected financial data above includes the Company's interest in the balance sheet accounts of National Alliance at December 31, 1998 and 1997 and the Company's interest in the results of operations for the year ended December 31, 1998 and for the period from July 3, 1997 through December 31, 1997. (5) The Company acquired Granite Financial, Inc. and subsidiaries ("Granite") on February 26, 1998. This acquisition has been accounted for as a pooling-of-interests. The selected financial data above includes the balance sheet accounts of Granite at December 31, 1998, 1997 and 1996 and the results of its operations for the years ended December 31, 1998, 1997 and 1996. Granite's financial position and results of operations for the years ended December 31, 1995 and prior were insignificant, and as such, the selected financial data above has not been restated for prior years. The Company acquired Alamo Title Holding Company and subsidiaries ("Alamo") on August 20, 1998. This acquisition has been accounted for as a pooling-of-interests. The selected financial data above includes the balance sheet accounts of Alamo at December 31, 1998, 1997, 1996, 1995 and 1994 and the results of its operations for the years ended December 31, 1998, 1997, 1996, 1995 and 1994. (6) The Company completed the sale of its wholly-owned subsidiary ACS Systems, Inc. ("ACS") to Micro General Corporation (OTCBB:MGEN) ("Micro General") on May 14, 1998. This transaction has been accounted for as a reverse merger of Micro General into the Company. The selected financial data above includes the balance sheet accounts of Micro General at December 31, 1998 and the results of its operations for the period from May 14, 1998 through December 31, 1998. The Company acquired Lexington Capital Corporation ("Lexington") effective September 1, 1998. The selected financial data above includes the balance sheet accounts of Lexington as of December 31, 1998 and the results of its operations for the four-month period September 1, 1998 through December 31, 1998. (7) During 1997, the Company recognized an extraordinary loss of $1.7 million, net of related income taxes of $1.1 million, related to the early retirement of $45 million maturity value of the Company's LYONs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations- Extraordinary Item and Recent Developments." (8) Percentage return on average equity is net earnings for the period divided by the simple average of total stockholders' equity as of the beginning and end of each year presented. N/A Meaningful information not available. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments" and Note B of Notes to Consolidated Financial Statements. 16 19 QUARTERLY FINANCIAL DATA Selected quarterly financial data is as follows:
QUARTER ENDED ------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 Revenue..................................... $262,213 $321,441 $329,416 $375,395 Earnings before income taxes................ 28,799 57,451 46,210 42,674 Net earnings, basic basis................... 16,680 33,439 26,801 28,772 Net earnings, diluted basis................. 17,304 34,038 27,461 29,352 Basic earnings per share.................... .62 1.21 .94 1.00 Diluted earnings per share.................. .53 1.02 .81 .87 Dividends paid per share.................... .06 .06 .06 .07 1997 Revenue..................................... $175,312 $206,096 $228,448 $253,203 Earnings before income taxes and extraordinary loss........................ 5,101 17,394 31,422 31,686 Earnings before extraordinary loss.......... 2,997 10,378 18,495 17,138 Extraordinary loss, net of income taxes..... -- -- -- (1,700) Net earnings, basic basis................... 2,997 10,378 18,495 15,438 Net earnings, diluted basis................. 3,805 11,185 19,313 16,147 Earnings per share before extraordinary item, basic basis......................... .14 .48 .79 .65 Extraordinary loss, net of income taxes, basic basis............................... -- -- -- (.06) Basic earnings per share.................... .14 .48 .79 .59 Earnings per share before extraordinary item, diluted basis....................... .14 .40 .64 .55 Extraordinary loss net of income taxes, diluted basis............................. -- -- -- (.05) Diluted earnings per share.................. .14 .40 .64 .50 Dividends paid per share.................... .06 .06 .06 .06
17 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to provide information to facilitate the understanding and assessment of significant changes and trends related to the financial condition and results of operations of the Company. The discussion and analysis below includes the results of operations of Granite Financial, Inc. (acquired February 26, 1998) and Alamo Title Holding Company (acquired August 20, 1998) for each of the years ended December 31, 1998, 1997 and 1996, as the acquisitions of Granite and Alamo have been accounted for as poolings-of-interests. This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto appearing elsewhere herein. OVERVIEW The following table sets forth certain financial and other data for the years indicated:
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 ---------- -------- -------- (DOLLARS IN THOUSANDS) Total revenue......................................... $1,288,465 $863,059 $734,795 ========== ======== ======== Total expenses........................................ $1,113,331 $777,456 $686,569 ========== ======== ======== Earnings before extraordinary item.................... $ 105,692 $ 49,008 $ 29,241 Extraordinary item -- loss on early retirement of debt, net of income taxes........................... -- (1,700) -- ---------- -------- -------- Net earnings................................ $ 105,692 $ 47,308 $ 29,241 ========== ======== ======== Return on average equity before extraordinary item(1)............................................. 31.5% 22.4% 21.2% Return on average equity including extraordinary item(1)............................................. 31.5% 21.7% 21.2%
- --------------- (1) Percentage return on average equity is net earnings for the period divided by the simple average of total stockholders' equity as of the beginning and end of each year presented. Title insurance revenue is closely related to the level of real estate activity and the average price of real estate sales. Real estate sales are directly affected by the availability of funds to finance purchases, i.e., mortgage interest rates. Other factors affecting real estate activity include demand, family income levels and general economic conditions. While the level of sales activity was relatively depressed in certain geographical areas during the period 1991 through mid-1993, lower mortgage interest rates beginning in the latter part of 1991 triggered an increase in refinancing activity which continued at then record levels through 1993 and into the first quarter of 1994. During 1994 and early 1995, steady interest rate increases caused by actions taken by the Federal Reserve Board resulted in a significant decline in refinancing transactions and a stagnation in residential resales and new home sales. Since late 1995, decreases in mortgage interest rates and the resulting improvement in the real estate market have had a favorable effect on the level of real estate activity, including refinancing transactions, new home sales and resales. The overall economic environment, stable mortgage interest rates and strength in the real estate market, especially in California and on the West Coast, contributed to very positive conditions for the industry throughout 1996, 1997 and 1998. It is impossible to predict in what future direction interest rates and the real estate market may move or fluctuate. During 1995 and prior, the majority of the Company's total title-related revenue was generated from direct operations. The Company traditionally focused on direct operations because it retains the entire premium from each transaction and is better able to generate additional revenues by promoting and cross- selling other title-related services. In 1996, the Company continued the implementation of its strategy to become a leading national title underwriter by expanding into other markets and diversifying its premium revenue base to a more balanced mix of direct and agency operations. On April 1, 1996, the Company completed its acquisition of the Nations Title Inc. group of companies. The acquisition positioned Fidelity National Financial, Inc. as the nation's fourth largest title insurance underwriter. Nations Title Inc. and its three wholly-owned underwriting subsidiaries, Nations Title Insurance 18 21 Company (which was subsequently merged into Fidelity Title), Nations Title Insurance of New York Inc. and National Title Insurance of New York Inc., expanded the Company's national agency network and increased its market share in the more traditional agency driven states. The Nations Title Inc. acquisition resulted in additional agency business and a shift in the mix of business from direct to agency during 1996. The revenue and expense information presented in Management's Discussion and Analysis of Financial Condition and Results of Operations includes the Nations Title Inc. group's results of operations for the nine-month period ended December 31, 1996 and for the years ended December 31, 1997 and 1998. In 1996, the total title-related revenue (excluding interest and investment income and non-title-related other fees and revenue) generated by agency operations increased to 41.3% from 32.4% in 1995. During 1997 the Company sold a majority interest of its subsidiary American Title Company ("ATC"), an underwritten title company, to certain members of ATC's management. See "Recent Developments" and Note B of Notes to Consolidated Financial Statements. ATC functions as an exclusive agent of the Company, and represents one of the Company's largest agents. Also, during 1996 and 1997, the Company acquired certain ancillary service companies in various separate transactions. See "Recent Developments" and Note B of Notes to Consolidated Financial Statements. The acquired ancillary service companies have been bundled with other existing lender services to form Fidelity National Lender Express Network ("FLEXNet"). FLEXNet provides a complete range of real estate transactional services, leading to a broader base of services provided and increased other fees and revenue. The acquisition of Alamo Title Holding Company and subsidiaries, which closed on August 20, 1998, provided additional balance between the Company's direct and agency operations with the strength of Alamo's direct and agency operations in the important Texas market. See "Recent Developments" and Note B of Notes to Consolidated Financial Statements. As a result of its acquisitions of Nations and Alamo, the Company has significantly expanded the national scope of its core title operations by expanding its direct operations in key markets and balancing the mix of its direct and agency operations. The Company also earns income from its non-title related operations and from its investment portfolio. The following table sets forth information regarding title-related revenue derived from direct and agency operations:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- % % % OF OF OF 1998 TOTAL 1997 TOTAL 1996 TOTAL ---------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Revenue from direct operations: Title insurance premiums.......... $ 425,551 37.9% $286,487 37.5% $272,132 40.0% Escrow fees....................... 130,299 11.6 86,033 11.3 71,122 10.5 Other title-related fees and revenue........................ 83,724 7.4 62,227 8.1 55,607 8.2 ---------- ----- -------- ----- -------- ----- Total..................... 639,574 56.9 434,747 56.9 398,861 58.7 Revenue from agency operations: Title insurance premiums.......... 484,727 43.1 329,587 43.1 280,667 41.3 ---------- ----- -------- ----- -------- ----- Total title-related revenue................. $1,124,301 100.0% $764,334 100.0% $679,528 100.0% ========== ===== ======== ===== ======== =====
The Company's strategies are to (i) maximize operating profits by increasing its share of the title insurance business in the markets it serves; (ii) effectively manage operating expenses through the real estate cycle; (iii) minimize net claim payments and (iv) continue to implement a value-added acquisition and diversification strategy. The Company intends to execute these strategies by continuing to implement the following elements: - expand into the commercial title insurance market while maintaining its strong position in the residential and institutional lender markets; 19 22 - generate an increasing portion of its revenue from the sale of ancillary services; - develop and integrate advanced proprietary technologies that respond to the needs of customers in each of its markets; - adhere to quality controls and strict monitoring of direct and agency operations to minimize title claims paid; - maintain a balance between direct and agency distribution to enable it to compete profitably on a national basis; - explore opportunities that are less interest rate sensitive; and - deliver quality customer service and provide its employees with extensive training and incentive and equity based compensation programs. RESULTS OF OPERATIONS REVENUE. The following table presents information regarding the components of the Company's revenue:
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- -------- -------- (DOLLARS IN THOUSANDS) Title insurance premiums.................. $ 910,278 $616,074 $552,799 Escrow fees............................... 130,299 86,033 71,122 Other fees and revenue.................... 208,301 125,146 91,647 Interest and investment income, including realized gains (losses)................. 39,587 35,806 19,227 ---------- -------- -------- Total revenue................... $1,288,465 $863,059 $734,795 ========== ======== ======== Orders opened by direct operations........ 987,000 621,000 575,000 Orders closed by direct operations........ 670,000 436,000 430,000
Favorable mortgage interest rates in the latter part of 1991 through early 1994 triggered refinancing activity at then record levels. Beginning in early 1994 through mid-1995, steady interest rate increases caused by actions taken by the Federal Reserve Board resulted in a significant decline in refinancing transactions and a stagnation in residential resales and new home sales. Title orders and requests for title-related services followed the market trend as expected. Since late 1995, decreases in mortgage interest rates and the resulting improvement in the real estate market have had a positive impact on the level of real estate activity, order counts and closed orders. The overall economic environment, stable mortgage interest rates in the seven percent range and strength in the real estate market, especially in California, the Company's strongest market, and on the West Coast, were positive factors through 1996, 1997 and 1998. Total revenue in 1998 increased 49.3% to $1,288.5 million from $863.1 million in 1997. Revenue in 1997 of $863.1 million reflected a 17.5% increase from 1996 revenue of $734.8. The increases in total revenue are primarily the result of strength in the Company's core title and real estate related 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 ancillary service companies and the integration of those service operations into the Company's core businesses, also contributed to the increased revenues. Results of operations in 1997 also include a full year of operations of Nations, which was acquired in April 1996. Title insurance premiums, increased by 47.8% to $910.3 million in 1998 from $616.1 million in 1997. In 1997, title premiums increased by 11.4% to $616.1 million from $552.8 million in 1996. The increases in title premiums reflect the favorable real estate market and a significant increase in title premiums from agency operations resulting primarily from the Nations Title Inc. acquisition in 1996. Prior to the acquisition of the Nations Title Inc. group of companies, which was completed on April 1, 1996, the Company generated the majority of its title premiums from its network of direct operations as opposed to agency relationships, the latter being more common in the title industry. The acquisition of the Nations group of companies increased 20 23 the Company's agency force to 2,000 at the end of 1996 from 1,100 at the end of 1995. The percentage of title insurance premiums generated by agency operations was 53.3%, 53.5% and 50.8% in 1998, 1997 and 1996, respectively. The Company's direct operations generate escrow fees from holding funds and documents in connection with the closing of real estate transactions, as well as real estate information and technology service fees, trustee sale guarantee fees, credit reporting fees, attorney service fees, flood certification fees, tax monitoring fees, home warranty insurance premiums, reconveyance fees, recording fees, foreclosure publishing and posting service fees and exchange intermediary service fees in connection with real estate transactions. The trends in escrow fees are primarily related to the title insurance activity generated by the Company's direct operations. Escrow fees have fluctuated during the 1998, 1997 and 1996 years in a pattern generally consistent with the fluctuation in title insurance premiums. Escrow fees increased $44.3 million to $130.3 million in 1998, a 51.5% increase from $86.0 million in 1997. This increase is consistent with the trend in title premiums, but is also due to the Company's focused efforts to expand its escrow market presence in certain areas, such as Southern California. Escrow fees increased $14.9 million to $86.0 million in 1997, a 21.0% increase from $71.1 million in 1996. See "Overview." Other fees and revenue trend closely with the level and mix of business, as well as the performance of certain of the Company's title-related subsidiaries. During 1996 and 1997, the Company acquired certain ancillary service companies in various separate transactions. See "Recent Developments" and Note B of Notes to Consolidated Financial Statements. The Company's strategy in making the ancillary service company acquisitions was to acquire previously existing entities in businesses it believed to be complementary to its core title and escrow businesses. Further, the Company sought to acquire companies with strong management and efficient operations in order to provide for a seamless transition from their being stand-alone operations to being subsidiaries of the Company and to prevent any disruption of the acquired companies' businesses, while minimizing integration costs. The integration of the ancillary service companies continues as expected and integration related costs have been negligible. The acquired ancillary service companies have been bundled with other existing lender services to form Fidelity National Lender Express Network ("FLEXNet"). Utilizing its extensive network of direct operations as its primary distribution channel and FLEXNet as the platform to provide a comprehensive network of real estate related services, the Company has made a concerted effort to develop the ancillary service contribution to title and real estate related revenue. The Company has been able to leverage its core title and escrow businesses, national presence and proprietary technology in successfully expanding the market presence of its ancillary service businesses. FLEXNet provides a complete range of real estate transactional services, leading to increased other fees and revenues in 1998 as compared to 1997 and in 1997 compared to 1996. 1998 other fees and revenue were $208.3 million, an increase of $83.2 million, or 66.4%, over 1997 other fees and revenue of $125.1 million. In 1997, other fees and revenue increased $33.5 million, or 36.6%, to $125.1 million from $91.6 million in 1996. The year over year increases are primarily attributable to the growth of the ancillary service businesses. Interest and investment income levels are primarily a function of securities markets, interest rates and the amount of cash available for investment. 1998 investment income increased $3.8 million, or 10.6%, to $39.6 million compared to $35.8 million in 1997. Average invested assets, excluding real estate, increased 28.6% to $482.5 million in 1998 from $375.1 million in 1997, while the tax equivalent yield remained at 5.5%. The increase in investment income in 1998 over 1997 is primarily the result of an increase in interest and dividend income generated by the increased invested asset base. Net realized gains from the sale of investment securities and other assets in 1998 were $17.2 million compared to $16.8 million in 1997. Included in 1998 net realized gains is a gain from the conversion of the Company's investment in Data Tree Corporation of approximately $9.7 million. The Company shifted the emphasis in its fixed income portfolio from taxable to non-taxable securities during 1997. During 1997, interest and investment income increased 86.2% to $35.8 million from $19.2 million in 1996. Average invested assets, excluding real estate, increased $71.2 million, or 23.4%, to $375.1 million in 1997 from $303.9 million in 1996. The difference in investment income is primarily attributable to increased capital gains in 1997 compared to 1996. During 1997, the Company recognized $16.8 million of capital gains compared to $2.5 million of capital gains recorded in 1996. The primary components of 1997 capital gains, prior to applicable income taxes, are the following: $10.4 million in 21 24 capital gains from the sale of investment securities and other assets, $4.3 million in capital gain from the sale of the Company's former home office building, $1.3 million from the sale of a majority interest in American Title Company and approximately $800,000 in capital gain from the sale of the Company's former small business investment company subsidiary, FNF Ventures, Inc. See "Recent Developments." EXPENSES. The following table presents the components of the Company's expenses:
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- -------- -------- (DOLLARS IN THOUSANDS) Personnel costs........................... $ 394,284 $273,221 $240,232 Other operating expenses.................. 257,080 189,226 176,524 Agent commissions......................... 385,649 261,182 221,948 Provision for claim losses................ 59,294 41,558 36,275 Interest expense.......................... 17,024 12,269 11,590 ---------- -------- -------- Total expenses.................. $1,113,331 $777,456 $686,569 ========== ======== ========
The Company's operating expenses primarily consist of personnel costs and other operating expenses which are incurred as orders are received and processed. Title insurance premiums, escrow fees and other fees and revenue are generally recognized as income at the time the underlying transaction closes. Certain other fees and revenue are recognized over the period the related services are provided. As a result, revenue lags approximately 60-90 days behind expenses and therefore gross margins may fluctuate. Personnel costs include base salaries, commissions and bonuses paid to employees and are the most significant operating expense incurred by the Company. These costs generally fluctuate with the level of orders opened and closed and with the mix of revenue. Personnel costs totalled $394.3 million, $273.2 million and $240.2 million for the years ended December 31, 1998, 1997 and 1996, respectively. See "Overview" and "Revenue." Personnel costs, as a percentage of total revenue, have decreased to 30.6% in 1998 from 31.7% in 1997, which had previously decreased from 32.7% in 1996. The Company has taken significant measures to maintain appropriate personnel levels and costs relative to the volume and mix of business and revenues. These fluctuations reflect a continuing emphasis on expense control and an increase in productivity resulting from the Company's automation and electronic commerce. The Company will not, however, compromise its customer service standards or quality controls in responding to market conditions. The Company continues to monitor the prevailing market conditions and will adjust personnel costs in accordance with activity. Other operating expenses consist of facilities expenses, title plant maintenance, premium taxes (which insurance underwriters are required to pay on title premiums and title-related revenue in lieu of franchise and other state taxes), escrow losses, postage and courier services, computer services, professional services, advertising expenses, general insurance, trade and notes receivable allowances and depreciation. In response to market conditions, the Company implemented aggressive cost control programs in order to maintain operating expenses at levels consistent with the levels of revenue; however, certain fixed costs are incurred regardless of revenue levels, resulting in year over year percentage fluctuations. Other operating expenses decreased as a percentage of total revenue to 20.0% in 1998 from 21.9% in 1997, which had previously decreased from 24.0% in 1996. The Company continues to be committed to cost control measures. The Company's cost control programs are designed to evaluate expenses, both current and budgeted, relative to existing and projected market conditions. Items considered include, but are not limited to, capital expenditures, service contracts, property requirements (e.g., renewal/termination of leases and relocation of offices), expected fluctuations in the number of personnel, the impact of technology and profitability. Additionally, the Company has centralized its purchasing function in order to obtain the most favorable prices/rates available for vendor provided services and products which also facilitates a highly structured requisition/approval process and cost analysis program. Total other operating expenses totalled $257.1 million, $189.2 million and $176.5 million in 1998, 1997 and 1996, respectively. See "Overview." The 1996 addition of Nations Title Inc. title premiums, which are primarily agency-related, has provided a balance between direct operation and agency revenue. In previous periods the majority of title premiums and 22 25 total revenue were generated by direct operations, which resulted in higher personnel costs and other operating expenses. Agent commissions represent the portion of premiums retained by agents pursuant to the terms of their respective agency contracts. The following table illustrates the relationship of agent premiums and agent commissions:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1998 1997 1996 ----------------- ----------------- ----------------- AMOUNT % AMOUNT % AMOUNT % -------- ----- -------- ----- -------- ----- (DOLLARS IN THOUSANDS) Agent premiums.................... $484,727 100.0% $329,587 100.0% $280,667 100.0% Agent commissions................. 385,649 79.6 261,182 79.2 221,948 79.1 -------- ----- -------- ----- -------- ----- Premiums retained by the Company...................... $ 99,078 20.4% $ 68,405 20.8% $ 58,719 20.9% ======== ===== ======== ===== ======== =====
Agent commissions and the resulting percentage of agent premiums retained by the Company vary according to regional differences in real estate closing practices and state regulations. During 1997, the Company sold a majority interest in its underwritten title company subsidiary ATC, resulting in the transfer of premiums from direct operations to agency operations and increased commission expense in 1997 compared to 1996, as well as a decrease in premiums retained by the Company on a year over year basis. Commission rates paid to ATC are higher than average commission rates paid to the 1996 agent base. The combination of higher agency commission rates and the significant agency revenue generated since the sale of ATC and by the Nations Title Inc. acquisition has resulted in higher overall commissions. The provision for claim losses includes an estimate of anticipated title claims and major claims. The estimate of anticipated title claims is accrued as a percentage of title premium revenue based on the Company's historical loss experience and other relevant factors. The Company monitors its claims experience on a continual basis and adjusts the provision for claim losses accordingly. Based on Company loss development studies, the Company believes that as a result of its underwriting and claims handling practices, as well as the refinancing business of prior years, the Company will maintain the trend of favorable claim loss experience. Based on this information, in 1998, 1997 and 1996, the Company recorded a provision for claim losses of 7.0% of title insurance premiums prior to major claim expense, net of recoupments and prior to the impact of premium rates and Company loss experience in the state of Texas. Premiums in Texas are all-inclusive and include a closing fee in addition to a risk-related premium, which differs from similar coverage in other states, while loss experience is comparable. As a result, the provision for claim losses in Texas is much lower than in states that do not have all-inclusive premiums. These factors resulted in a net provision for claim losses of 6.5%, 6.7% and 6.6% in 1998, 1997 and 1996, respectively. 23 26 A summary of the reserve for claim losses follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (DOLLARS IN THOUSANDS) Beginning balance.......................................... $201,674 $196,527 $153,207 Reserves assumed from First Title Corp................... -- 284 -- Reserves transferred due to the sale of American Title Company............................................... -- (160) -- Reserves assumed from Nations Title Inc. ................ -- -- 45,171 Title claim loss provision related to: Current year........................................ 59,294 39,301 35,478 Prior years......................................... -- 2,257 797 -------- -------- -------- Total title claim loss provision................. 59,294 41,558 36,275 Title claims paid, net of recoupments related to: Current year.......................................... (1,045) (3,385) (2,749) Prior years........................................... (35,389) (33,150) (35,377) -------- -------- -------- Total title claims paid, net of recoupments...... (36,434) (36,535) (38,126) -------- -------- -------- Ending balance............................................. $224,534 $201,674 $196,527 ======== ======== ======== Provision for title claim losses to title insurance premiums................................................. 6.5% 6.7% 6.6%
Interest expense is incurred by the Company in financing its capital asset purchases, lease originations, certain acquisitions and certain general corporate purposes. Interest expense consists of interest related to the Company's outstanding debt and the amortization of original issue discount and debt issuance costs related to the Liquid Yield Option Notes due 2009 ("LYONs") issued in February 1994. Interest expense on non-LYONs debt totalled $12.8 million, $7.0 million and $6.4 million for the years 1998, 1997 and 1996, respectively. The LYONs-related component of interest expense amounted to $4.2 million, $5.3 million and $5.2 million for 1998, 1997 and 1996, respectively. Included in 1998 interest expense is $4.7 million of interest relating to the settlement of an Internal Revenue Service examination for the tax years 1990 through 1994. Excluding the interest expense related to the tax examination, the fluctuation in interest expense can be attributed to an increase in non-LYONs debt outstanding offset by more favorable interest rates in 1998 than 1997, and improved rates in 1997 compared to 1996. See "Extraordinary Item" and "Recent Developments." Income tax expense for 1998, 1997 and 1996, as a percentage of earnings before income taxes, including the extraordinary losses in 1997 was 39.7%, 42.8% and 39.4%, respectively. See "Extraordinary Item." The fluctuations in income tax expense as a percentage of earnings before income taxes, including the extraordinary item, are attributable to the effect of state income taxes on the Company's wholly-owned underwritten title companies and ancillary service companies; a change in the amount and characteristics of net income, operating income versus investment income; and the tax treatment of certain items. See Note I of Notes to Consolidated Financial Statements for additional information regarding income taxes. EXTRAORDINARY ITEM. In an effort to reduce the leverage of the Company while taking advantage of the favorable environment relative to the Company's common stock, on October 17, 1997, the Company, in a private transaction, purchased $45 million aggregate principal amount at maturity of its outstanding Liquid Yield Option Notes due 2009 from Merrill Lynch, Pierce, Fenner & Smith Incorporated for an aggregate purchase price of $27.2 million (or $605 per $1,000 principal amount at maturity of LYONs), which exceeded the accreted value recorded by the Company pursuant to the LYONs Indenture at that date. The purchase price was paid in the form of 1,394,381 shares, $26.4 million, of the Company's common stock and $790,000 in cash. The purchase of the LYONs increased stockholders' equity by approximately $24.7 million while reducing outstanding debt by approximately $24.3 million. An extraordinary loss due to the early retirement of debt of approximately $1.7 million, net of applicable income taxes, related to this transaction has been recorded in the Consolidated Statement of Earnings for the year ended December 31, 1997. See "Recent Developments." 24 27 LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements include debt service, operating expenses, lease fundings, lease securitizations, taxes and dividends on its common stock. The Company believes that all anticipated cash requirements for current operations will be met from internally generated funds, through cash received from subsidiaries, cash generated by investment securities and bank borrowings through existing credit facilities. Two of the significant sources of the Company's funds are dividends and distributions from its subsidiaries. As a holding company, the Company receives cash from its subsidiaries in the form of dividends and as reimbursement for operating and other administrative expenses it incurs. The reimbursements are executed within the guidelines of various management agreements among the Company and its subsidiaries. Fluctuations in operating cash flows are primarily the result of increases or decreases in revenue. See "Overview." The Company's Insurance Subsidiaries and UTCs collect premiums and pay claims and operating expenses. The Insurance Subsidiaries also have cash flow sources derived from investment income, repayments of principal and proceeds from sales and maturities of investments and dividends from subsidiaries. Positive cash flow from the Insurance Subsidiaries is invested primarily in short-term investments and medium-term bonds. Short-term investments held by the Company's Insurance Subsidiaries provide liquidity for projected claims and operating expenses. The Insurance Subsidiaries are restricted by state regulations in their ability to pay dividends and make distributions. Each state of domicile regulates the extent to which the Company's title underwriters can pay dividends or make other distributions to the Company. The UTCs are also regulated by insurance regulatory or banking authorities. The Company's ancillary service and leasing subsidiaries collect revenue and pay operating expenses; however, they are not regulated by insurance regulatory or banking authorities. Positive cash flow from the UTCs and ancillary service subsidiaries is invested primarily in cash and cash equivalents. The short- and long-term liquidity requirements of the Company, Insurance Subsidiaries, UTCs, ancillary service and leasing subsidiaries are monitored regularly to match cash inflows with cash requirements. The Company, Insurance Subsidiaries, UTCs and ancillary service subsidiaries forecast their daily cash needs and periodically review their short- and long-term projected sources and uses of funds, as well as the asset, liability, investment and cash flow assumptions underlying these projections. For purposes of satisfying insurance regulatory requirements, the Company is required to maintain certain levels of readily marketable securities and other liquid assets. At December 31, 1998, the fair value of the Company's total investment securities was approximately $510.5 million, approximately $207.2 million of which have been designated to support statutory liabilities, primarily the combined unearned premium reserve. These investments consist of securities which the Company believes are readily marketable and could be liquidated if necessary. See "Business -- Investment Policies and Investment Portfolio." Effective August 1, 1998, the Company closed a $100 million credit agreement. Certain of the proceeds were utilized to refinance previously existing credit facilities. Additional amounts available under the new credit agreement are available for general corporate purposes. The Company believes that the terms and conditions of the $100 million credit agreement are significantly more favorable than those that existed previously. See Note H of Notes to Consolidated Financial Statements. The Company must comply with certain affirmative and negative covenants related to its bank revolving lines of credit and other debt facilities, which require, among other things, that the Company maintain certain financial ratios related to liquidity, net worth, capitalization, investments, acquisitions, restricted payments and certain dividend restrictions. The Company is in compliance with all of its debt covenants at December 31, 1998. In February 1994, the Company issued zero coupon, convertible subordinated Liquid Yield Option Notes due February 2009 at an interest rate of 5.5% with a principal amount at maturity of $235,750,000. Net proceeds to the Company were approximately $101,000,000. The proceeds were used for investment and general corporate purposes, including the repurchase of treasury shares. The amount of LYONs outstanding on December 31, 1998 was $124,113,000 of maturity value. On January 13, 1999, the Company announced that it was going to redeem, pursuant to the terms of the indenture, its outstanding Liquid Yield Option Notes 25 28 due 2009 for $581.25 per $1,000 maturity value on February 15, 1999. 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, $123,681,000 maturity value of LYONs had converted to 3,473,000 shares of common stock, adding approximately $70 million to equity while reducing outstanding notes payable by a like amount. The remaining $432,000 of maturity value was redeemed for cash of approximately $251,000. See Note H of Notes to Consolidated Financial Statements. In the normal course of business certain of the Company's subsidiaries enter into off-balance sheet credit risk associated with certain aspects of its title insurance policies and Manchester's real estate activities. This credit risk is in the form of standby letters of credit and general partnership guarantees. The Company believes that this credit risk is adequately secured by either legal remedies associated with settlement procedures or the underlying real estate assets. See Note K of Notes to Consolidated Financial Statements. SEASONALITY. Historically, the greatest volume of residential resale activity has occurred in the spring and summer months. However, events during the past five years, including numerous actions taken by the Federal Reserve Board, have caused unusual fluctuations in real estate activity, particularly in the seasonal pattern of resale and refinance activity. The Company cannot predict whether the historical pattern of resale and refinance activity will continue to be affected by such outside factors. INFLATION. To the extent real estate prices or mortgage interest rates increase due to inflationary factors, the Company's title insurance premium revenue generally increases because premiums are determined in part by the value of property or the amount of the mortgage loan. The Company's personnel costs and other operating expenses are also sensitive to inflation. RECENT DEVELOPMENTS. On April 4, 1996, the Company purchased 17% of the outstanding common stock of National Alliance Marketing Group, Inc. ("National Alliance"), a California corporation, for $566,667; together with a warrant to acquire an additional 14% of National Alliance common stock. In addition, the Company loaned $1,200,000 to National Alliance at closing at a rate of Prime plus one percent. Subsequently, the Company agreed to increase the credit facility from $1,200,000 to $1,700,000. In consideration for the increase in the credit facility National Alliance agreed to increase the warrant shares which the Company could purchase. If the entire $1,700,000 was borrowed the Company could purchase an additional 34% of the outstanding shares of National Alliance. After receiving approval of the transaction from the California Department of Insurance, the transaction closed on July 12, 1996. National Alliance is the parent company of Alliance Home Warranty Company ("Alliance"), a California insurance company. Alliance sells home warranty plans to buyers of resale homes, primarily in the Central and Southern California markets. A home warranty contract generally promises the repair or replacement of major operating systems and built-in appliances inside a home for a period of one year. On July 3, 1997, the Company converted the outstanding note balance in conjunction with the exercise of the warrants and then owned 51% of the outstanding common stock of National Alliance. The outstanding balance of the note receivable due from National Alliance at conversion was approximately $1.6 million. On August 14, 1998, the Company acquired the outstanding minority interest in National Alliance, 49%, for a purchase price of $3,320,000. The Company now owns 100% of National Alliance, which is now known as Fidelity National Home Warranty. The acquisition of National Alliance has been accounted for as a purchase. See Note B of Notes to Consolidated Financial Statements. Effective July 1, 1997, the Company sold a majority interest (60%) of its subsidiary American Title Company ("ATC"), an underwritten title company, to certain members of ATC's management. ATC functions as an exclusive agent of the Company. The sale price of the 60% interest was $6.0 million resulting in a realized gain of approximately $1.3 million before applicable income taxes. As a result of a tax free reorganization of American National Financial, Inc. ("ANFI"), the parent company of ATC and its subsidiaries, in November 1998, the Company's interest in ATC was converted to an ownership interest of approximately 43% of ANFI. Subsequent to ANFI's initial public offering in February 1999, the Company's ownership interest in ANFI became approximately 31.5%. The Company's investment in ANFI is accounted for under the equity method. Additionally, on March 18, 1998, the Company announced that it had entered into an agreement to sell National Title Insurance of New York Inc. to ATC for $3.25 million, subject to regulatory approval and certain other conditions. The purchase price is structured at a premium to book value. 26 29 National was acquired in April 1996, as part of the Nations Title Inc. acquisition, and has not been actively underwriting policies since the transaction closed. This transaction has not yet received regulatory approval. See Notes C and L of Notes to Consolidated Financial Statements. On July 22, 1997, the Company purchased 1,000,000 shares of common stock of GB Foods Corporation, now known as Santa Barbara Restaurant Group ("SBRG"), which represented approximately 15.5% of the outstanding common stock of SBRG for a purchase price of $5.0 million. Additionally, the Company purchased warrants to acquire an additional 3,500,000 shares of SBRG at various prices ranging from $5.00 - $7.50 for a purchase price of $800,000; 1,500,000 warrants exercisable at $5.00 per share, 1,000,000 warrants exercisable at $7.00 per share and 1,000,000 warrants exercisable at $7.50 per share. In conjunction with the common stock purchase, the Company gained control of three seats on the SBRG Board of Directors. During 1998, the Company exercised 1,000,000 of the $5.00 warrants in conjunction with an acquisition by SBRG in order to provide SBRG additional capital. In addition, on December 31, 1998, the Company exchanged certain investments in restaurant common stocks with a combined value of $9.45 million for an additional 2,478,000 shares of SBRG. The Company now owns approximately 31.1% of SBRG. The Company's investment in SBRG is accounted for under the equity method. See Note C of Notes to Consolidated Financial Statements. On October 17, 1997, the Company in a private transaction, purchased $45 million aggregate principal amount at maturity of its outstanding Liquid Yield Option Notes due 2009 from Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") for an aggregate purchase price of $27.2 million (or $605 per $1,000 principal amount at maturity of LYONs). The purchase price was paid in the form of 1,394,381 shares, $26.4 million, of the Company's common stock (the "Exchange Shares"). The Company also paid Merrill Lynch the excess of a base price of $19.53 per Exchange Share over the actual sales price (less $0.05 per share in commissions) realized by Merrill Lynch for sales of up to 607,881 Exchange Shares. The Company also paid Merrill Lynch, for each day, an amount in cash to be determined by multiplying the Net Carry Amount (number of Exchange Shares multiplied by $19.53) by the Applicable Rate (LIBOR plus 2.50%). The Company's payment obligations were subject to reduction for dividends on Exchange Shares received by Merrill Lynch during the period. The Company paid the foregoing amounts to Merrill Lynch in cash of approximately $790,000 on November 7, 1997. The purchase of the LYONs increased stockholders' equity by approximately $24.7 million while reducing outstanding debt by approximately $24.3 million. Additionally, an extraordinary loss due to the early retirement of debt of approximately $1.7 million, net of applicable income taxes, was recorded in the fourth quarter of 1997. The maturity value of LYONs outstanding at December 31, 1998 was approximately $124,113,000. On January 13, 1999, the Company announced that it was going to redeem, pursuant to the terms of the indenture, its outstanding Liquid Yield Option Notes due 2009 for $581.25 per $1,000 maturity value on February 15, 1999. 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, $123,681,000 maturity value of LYONs had converted to 3,473,000 shares of common stock, adding approximately $70 million to equity while reducing outstanding note payable by a like amount. The remaining $432,000 of maturity value was redeemed for cash of approximately $251,000. On April 17, 1998, the Company announced it had acquired an approximate 19.9% interest in Cruttenden Roth, a privately held investment banking firm located in Newport Beach, California, for a purchase price of $5,800,000, payable $3,750,000 in Company common stock (117,857 shares) and $2,050,000 in cash. The Company also acquired an option to increase its ownership to 25.6%. In connection with the acquisition, the Company also provided Cruttenden Roth working capital in the amount of $3,500,000 in exchange for a note. Effective August 1, 1998, the Company closed a $100 million credit agreement. Certain of the proceeds were utilized to refinance previously existing credit facilities. Additional amounts available under the new credit agreement are available for general corporate purposes. The Company believes that the terms and conditions of the $100 million credit agreement are significantly more favorable than those that existed previously. See Note H of Notes to Consolidated Financial Statements. 27 30 The Company completed the sale of its wholly-owned subsidiary ACS Systems, Inc. ("ACS") to Micro General Corporation (OTCBB:MGEN) ("Micro General") for 4.6 million shares of Micro General common stock, valued at $1,297,000, on May 14, 1998. ACS provides small to medium size businesses within the real estate industry with software, systems integration and communication services including telecommunications hardware, long distance reselling, computer hardware and system software reselling, consulting services, technical services, internet services, electronic commerce and title and escrow software applications. ACS will continue to provide the above listed services to the Company at preferred customer rates. This transaction has been accounted for as a reverse merger of Micro General into the Company. The Company currently owns 70.6% of Micro General Corporation. See Note B of Notes to Consolidated Financial Statements. Additionally, on November 17, 1998, Micro General acquired LDExchange.com, Inc. ("LDX"), for a purchase price of $3.1 million, payable $1.1 million in cash and $2.0 million in Micro General common stock (1,000,000 shares). LDX is a facilities based, wholesale carrier providing international telecommunication services. On June 3, 1998, the Company announced that as a result of the closing of the merger of Data Tree Corporation ("Data Tree") with Image Acquisition Corporation, a wholly-owned subsidiary of First American Financial Corporation (NYSE:FAF), the Company's 27.9% ownership position in Data Tree was converted into approximately 176,600 shares of First American Financial Corporation common stock, resulting in a gain of $9.7 million, before applicable income taxes. The Company's investment in Data Tree was approximately $3.0 million, including its percentage equity in Data Tree's earnings. The gain on conversion has been reflected in the Consolidated Statements of Earnings for the year ended December 31, 1998. Effective September 1, 1998, the Company acquired 100% of Lexington Capital Corporation ("Lexington"), a financial services company specializing in financing national and regional franchisee accounts, headquartered in Deerfield, Illinois, for a purchase price of $3.5 million, payable in $3.0 million in cash and $500,000 in restricted common stock of the Company (15,129 shares). This transaction has been accounted for as a purchase. See Note B of Notes to Consolidated Financial Statements. The Company's Board of Directors declared a cash dividend of $.07 per share on March 17, 1999, which will be payable on May 28, 1999 to stockholders of record on April 9, 1999. 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 new authorization will permit the Company to purchase up to 4.0 million shares. Through March 25, 1999, the Company has purchased 1,202,050 shares at an average purchase price of $16.61 per share totalling $19,960,000. 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. Also 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"). The purpose of the Loan Plan is to provide key employees with further incentive to maximize shareholder value. The Company intends to offer an aggregate of $7,750,000 in loans. Loan Plan 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 will be full recourse and unsecured, and will have a five year term. Interest will accrue on the loans at a rate of 5% per annum due at maturity. Loans may be prepaid at any time without penalty. Through March 25, 1999, loans have been made in the amount of $5,700,000 to purchase 382,650 shares of Company common stock at an average purchase price of $14.90 per share. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 requires all items that are necessary to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial 28 31 statement, but requires that an enterprise display an amount representing total comprehensive earnings for the period covered by that financial statement. SFAS 130 requires an enterprise to (a) classify items of other comprehensive earnings by their nature in a financial statement and (b) display the accumulated balance of other comprehensive earnings separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 became effective for fiscal years beginning after December 15, 1997. The adoption of SFAS 130 has not had a material impact on the Company's financial reporting. Also in June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the revenues derived from the enterprise's products or services and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 became effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. The adoption of SFAS 131 has not had a material impact on the Company's financial reporting. In June 1998, the FASB 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, including certain derivative instruments embedded in other contracts, (collectively, "derivatives") and for 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. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. It requires changes in the fair value of a derivative instrument and the changes in fair value of assets or liabilities hedged by that instrument to be included in earnings. To the extent that the hedge transaction is effective, earnings are equally offset by both investments. Currently the changes in fair value of derivative instruments and hedged items are reported in net unrealized gain (loss) on securities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of this Statement should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of this Statement. Earlier application of all of the provisions of SFAS 133 is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance of this statement. The Company does not believe the adoption of SFAS 133 will have a material impact on its financial reporting. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT THE MARKET RISK OF FINANCIAL INSTRUMENTS The Company's 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." The 29 32 following sections address the significant market risks associated with the Company's financial activities as of year end 1998. Interest Rate Risk The Company's 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 the Company's 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 insurance liabilities (representing 39.3% of total liabilities) are not included in the hypothetical effects. The LYONs are also excluded as they have been converted or redeemed. See "Recent Developments" and Note H of Notes to Consolidated Financial Statements. 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, 1998: a. An approximate $12.1 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 $10.0 million net increase (decrease) in the fair value of equity securities would have occurred if there was a 20% price increase (decrease) in market prices. 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 outstanding debt would have increased (decreased) approximately $1.0 million, if interest rates increased (decreased) 100 basis points. 30 33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES INDEX TO FINANCIAL INFORMATION
PAGE NO. -------- Independent Auditors' Report................................ 32 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... 33 Consolidated Statements of Earnings for the years ended December 31, 1998, 1997 and 1996.......................... 34 Consolidated Statements of Comprehensive Earnings for the years ended December 31, 1998, 1997 and 1996.............. 35 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996.............. 36 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.......................... 37 Notes to Consolidated Financial Statements.................. 38
31 34 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Fidelity National Financial, Inc.: We have audited the Consolidated Balance Sheets of Fidelity National Financial, Inc. and subsidiaries as of December 31, 1998 and 1997 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, 1998. These Consolidated Financial Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the consolidated financial position of Fidelity National Financial, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG LLP Los Angeles, California February 17, 1999, except as to Note Q to the Consolidated Financial Statements, which is as of March 25, 1999 32 35 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS
DECEMBER 31, --------------------- 1998 1997 -------- ---------- (RESTATED) Investments: Fixed maturities available for sale, at fair value........ $330,068 $239,818 Equity securities, at fair value.......................... 50,191 77,553 Other long-term investments, at cost, which approximates fair value............................................. 40,278 18,008 Short-term investments, at cost, which approximates fair value.................................................. 85,305 17,793 Investments in real estate and partnerships, net.......... 4,673 5,201 -------- -------- Total investments...................................... 510,515 358,373 Cash and cash equivalents................................... 51,309 72,887 Leases and residual interests in securitizations............ 93,507 53,782 Trade receivables (less allowance of $6,733 in 1998 and $5,153 in 1997)........................................... 75,940 53,454 Notes receivable, net (including $1,798 in 1998 and $1,421 in 1997 with affiliated parties).................................. 10,761 10,163 Prepaid expenses and other assets........................... 111,471 96,352 Title plants................................................ 58,932 57,971 Property and equipment, net................................. 46,070 44,713 Deferred tax asset.......................................... 10,965 -- -------- -------- $969,470 $747,695 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities.................. $123,357 $ 78,023 Notes payable............................................. 214,624 163,015 Reserve for claim losses.................................. 224,534 201,674 Deferred income taxes..................................... -- 16,510 Income taxes payable...................................... 8,683 10,809 -------- -------- 571,198 470,031 Minority interests........................................ 1,532 3,614 Stockholders' equity: Preferred stock, $.0001 par value; authorized, 3,000,000 shares; issued and outstanding, none........................... -- -- Common stock, $.0001 par value; authorized, 50,000,000 shares in 1998 and 1997; issued, 35,540,036 in 1998 and 33,362,204 in 1997..................................... 3 3 Additional paid-in capital................................ 173,888 137,569 Retained earnings......................................... 265,567 167,222 -------- -------- 439,458 304,794 Accumulated other comprehensive earnings.................. 11,657 23,631 Less treasury stock, 6,645,487 shares in 1998 and 1997, at cost................................................... 54,375 54,375 -------- -------- 396,740 274,050 Commitments and contingencies............................. Subsequent events......................................... -------- -------- $969,470 $747,695 ======== ========
See Notes to Consolidated Financial Statements. 33 36 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- (RESTATED) (RESTATED) REVENUE: Title insurance premiums.................................. $ 910,278 $616,074 $552,799 Escrow fees............................................... 130,299 86,033 71,122 Other fees and revenue.................................... 208,301 125,146 91,647 Interest and investment income, including realized gains (losses)............................................... 39,587 35,806 19,227 ---------- -------- -------- 1,288,465 863,059 734,795 ---------- -------- -------- EXPENSES: Personnel costs........................................... 394,284 273,221 240,232 Other operating expenses.................................. 257,080 189,226 176,524 Agent commissions......................................... 385,649 261,182 221,948 Provision for claim losses................................ 59,294 41,558 36,275 Interest expense.......................................... 17,024 12,269 11,590 ---------- -------- -------- 1,113,331 777,456 686,569 ---------- -------- -------- Earnings before income taxes and extraordinary item....... 175,134 85,603 48,226 Income tax expense........................................ 69,442 36,595 18,985 ---------- -------- -------- Earnings before extraordinary item..................... 105,692 49,008 29,241 Extraordinary item -- loss on early retirement of debt, net of applicable income tax benefit of $1,180......... -- (1,700) -- ---------- -------- -------- Net earnings........................................... $ 105,692 $ 47,308 $ 29,241 ========== ======== ======== Basic net earnings........................................ $ 105,692 $ 47,308 $ 29,241 ========== ======== ======== Basic earnings per share before extraordinary item........ $ 3.79 $ 2.10 $ 1.43 Extraordinary item -- loss on early retirement of debt, net of applicable income tax benefit, basic basis...... -- (0.07) -- ---------- -------- -------- Basic net earnings per share.............................. $ 3.79 $ 2.03 $ 1.43 ========== ======== ======== Weighted average shares outstanding, basic basis.......... 27,921 23,355 20,426 ========== ======== ======== Diluted net earnings...................................... $ 108,155 $ 50,450 $ 32,437 ========== ======== ======== Diluted net earnings per share before extraordinary item................................................... $ 3.23 $ 1.76 $ 1.23 Extraordinary item -- loss on early retirement of debt, net of applicable income tax benefit, diluted basis.... -- (0.06) -- ---------- -------- -------- Diluted net earnings per share............................ $ 3.23 $ 1.70 $ 1.23 ========== ======== ======== Weighted average shares, diluted basis.................... 33,474 29,599 26,431 ========== ======== ========
See Notes to Consolidated Financial Statements. 34 37 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 -------- ---------- ---------- Net earnings............................................... $105,692 $47,308 $29,241 -------- ------- ------- Other comprehensive earnings (loss): Unrealized gains (losses) on investments, net(1)......... (1,608) 20,333 7,798 Reclassification adjustments for gains included in net earnings(2)........................................... (10,366) (9,632) (1,501) -------- ------- ------- Other comprehensive earnings (loss)........................ (11,974) 10,701 6,297 -------- ------- ------- Comprehensive earnings..................................... $ 93,718 $58,009 $35,538 ======== ======= =======
- --------------- (1) Net of income tax expense (benefit) of ($1,059), $15,214, and $5,070 for 1998, 1997 and 1996, respectively. (2) Net of income tax expense of $6,824, $7,207, and $975 for 1998, 1997 and 1996, respectively. See Notes to Consolidated Financial Statements. 35 38 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK ADDITIONAL ACCUMULATED TREASURY STOCK --------------- PAID-IN RETAINED COMPREHENSIVE ----------------------- SHARES AMOUNT CAPITAL EARNINGS EARNINGS SHARES AMOUNT ------ ------ ---------- -------- ------------- ------ -------------- Balance, December 31, 1995 (Restated).... 25,302 $2 $ 62,413 $100,164 $ 6,633 6,880 $(56,292) Exercise of stock options.............. 118 -- 720 -- -- -- -- Common stock awards.................... 11 -- 135 -- Other comprehensive earnings -- unrealized gain on investments...... -- -- -- -- 6,297 -- -- Acquisitions........................... 210 -- 2,733 -- -- (235) 1,917 Incorporation of Granite Financial, Inc................................. 1,544 -- 2,260 -- -- -- -- Issuance of common stock pursuant to Granite Financial, Inc. initial public offering, net of offering costs............................... 1,331 1 10,734 -- -- -- -- Cash dividends......................... -- -- -- (4,313) -- -- -- Net earnings........................... -- -- -- 29,241 -- -- -- ------ -- -------- -------- -------- ----- -------- Balance, December 31, 1996 (Restated).... 28,516 3 78,995 125,092 12,930 6,645 (54,375) ------ -- -------- -------- -------- ----- -------- Exercise of stock options.............. 161 -- 1,424 -- -- -- -- Common stock awards.................... 6 -- 109 -- Other comprehensive earnings -- unrealized gain on investments...... -- -- -- -- 10,701 -- -- Acquisitions........................... 1,386 -- 12,450 -- -- -- -- Retirement and conversion of LYONs..... 1,455 -- 27,351 -- -- -- -- Nations Title Inc. purchase price adjustment.......................... (29) -- (749) -- -- -- -- Issuance of common stock pursuant to Granite Financial, Inc. secondary public offering, net of offering costs............................... 1,867 -- 17,989 -- -- -- -- Cash dividends......................... -- -- -- (5,178) -- -- -- Net earnings........................... -- -- -- 47,308 -- -- -- ------ -- -------- -------- -------- ----- -------- Balance, December 31, 1997 (Restated).... 33,362 3 137,569 167,222 23,631 6,645 (54,375) ------ -- -------- -------- -------- ----- -------- Exercise of stock options.............. 1,583 -- 22,868 -- -- -- -- Other comprehensive loss -- unrealized loss on investments................. -- -- -- -- (11,974) -- -- Acquisitions........................... 133 -- 4,250 -- -- -- -- Conversion of LYONs.................... 462 -- 9,201 -- -- -- -- Cash dividends......................... -- -- -- (7,347) -- -- -- Net earnings........................... -- -- -- 105,692 -- -- -- ------ -- -------- -------- -------- ----- -------- Balance, December 31, 1998............... 35,540 $3 $173,888 $265,567 $ 11,657 6,645 $(54,375) ====== == ======== ======== ======== ===== ========
See Notes to Consolidated Financial Statements. 36 39 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 --------- ---------- ---------- (RESTATED) (RESTATED) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings.............................................. $ 105,692 $ 47,308 $ 29,241 Adjustments to reconcile net earnings to net cash provided by operating activities: Extraordinary item: loss on early retirement of LYONs............................................... -- 2,880 -- Depreciation and amortization........................ 21,373 18,175 15,255 Net increase (decrease) in reserve for claim losses.............................................. 22,860 5,028 (1,852) Amortization of LYONs original issue discount and other debt issuance costs........................... 4,432 5,939 5,295 Provision for losses on real estate and notes receivable.......................................... 582 2,714 999 Equity in (gains) losses of unconsolidated partnerships........................................ (4,361) (488) 520 Gain on sales of investments......................... (19,679) (10,801) (3,828) (Gain) loss on sale of real estate and other assets.............................................. 2,489 (6,038) 1,352 Changes in assets and liabilities, net of effects from acquisitions: Net increase in lease and lease securitization residual interest................................... (39,725) (22,540) -- Net (increase) decrease in trade receivables......... (22,486) 2,177 (7,369) Net increase in prepaid expenses and other assets.... (17,703) (17,601) (14,400) Net increase in accounts payable and accrued liabilities......................................... 39,568 12,336 2,553 Net increase (decrease) in income taxes.............. (21,280) 19,820 2,092 --------- --------- --------- Net cash provided by operating activities......... 71,762 58,909 29,858 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from investment securities available for sale.... 179,668 263,179 188,375 Proceeds from sales of other assets....................... 6,848 17,673 3,731 Proceeds from sales of real estate........................ -- 6,407 917 Collections of notes receivable........................... 9,372 14,094 18,934 Additions to title plants................................. (1,480) (1,792) (777) Additions to property and equipment....................... (22,393) (23,174) (16,197) Additions to notes receivable............................. (11,717) (3,868) (9,403) Purchases of investment securities available for sale..... (324,540) (344,709) (194,560) Leases assigned to lender................................. -- -- (24,793) Investments in real estate and partnerships............... -- (1,048) -- Sale of subsidiary, net of cash........................... -- 5,934 -- Acquisitions of businesses, net of cash acquired.......... (1,036) (10,866) (10,138) --------- --------- --------- Net cash used in investing activities............. (165,278) (78,170) (43,911) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings................................................ 84,287 21,570 53,705 Debt service payments..................................... (28,877) (25,241) (26,793) Dividends paid............................................ (6,340) (4,703) (3,738) Stock offering proceeds, net.............................. -- 17,990 10,832 Exercise of stock options................................. 22,868 1,424 720 Issuance of treasury stock, net........................... -- -- 1,917 --------- --------- --------- Net cash provided by financing activities......... 71,938 11,040 36,643 --------- --------- --------- Net increase (decrease) in cash and cash equivalents...... (21,578) (8,221) 22,590 Cash and cash equivalents at beginning of year............ 72,887 81,108 58,518 --------- --------- --------- Cash and cash equivalents at end of year.................. $ 51,309 $ 72,887 $ 81,108 ========= ========= =========
See Notes to Consolidated Financial Statements. 37 40 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following describes the significant accounting policies of Fidelity National Financial, Inc. ("Fidelity Financial") and its subsidiaries (collectively, the "Company") which have been followed in preparing the accompanying Consolidated Financial Statements. Description of business Fidelity National Financial, Inc., through its principal subsidiaries (collectively, the "Company"), is one of the largest national underwriters engaged in the business of issuing title insurance policies and performing other real estate related services such as escrow, collection and trust activities, real estate information and technology services, trustee sale guarantees, credit reporting, attorney services, flood certification, tax monitoring, home warranty insurance, reconveyances, recordings, foreclosure publishing and posting services and exchange intermediary services in connection with real estate transactions. Title insurance services are provided through the Company's direct operations and otherwise through independent title insurance agents who issue title policies on behalf of the underwriting subsidiaries. Title insurance is generally accepted as the most efficient means of determining title to, and the priority of interests in, real estate in nearly all parts of the United States. Today, virtually all real property mortgage lenders require their borrowers to obtain a title insurance policy at the time a mortgage loan is made or to allow the sale of loans in the secondary market. The Company's principal subsidiaries consist of Fidelity National Title Insurance Company ("Fidelity Title"), Fidelity National Title Insurance Company of New York ("Fidelity New York"), Alamo Title Insurance ("Alamo Title"); (collectively, the "Insurance Subsidiaries"); its wholly-owned underwritten title companies (collectively, the "UTCs"); and its network of wholly-owned title-related ancillary service companies known as Fidelity National Lender Express Network ("FLEXNet"). The Company also originates, funds, purchases, sells, securitizes and services equipment leases for a broad range of businesses through its wholly-owned subsidiary Granite Financial, Inc. Fidelity Title was the parent company of Fidelity National Title Insurance Company of Tennessee ("Fidelity Tennessee"), Fidelity National Title Insurance Company of California ("Fidelity California") and Nations Title Insurance Company ("Nations Title"). Fidelity Tennessee, Fidelity California and Nations Title were merged into Fidelity Title on December 31, 1998, August 7, 1997 and December 29, 1997, respectively. Fidelity New York is the parent company of Nations Title Insurance of New York Inc. ("Nations New York") and National Title Insurance of New York Inc. ("National"). Fidelity National Title Insurance Company of Pennsylvania ("Fidelity Pennsylvania") was merged into Fidelity New York as of April 11, 1997, which in turn, was the parent company of American Title Insurance Company ("ATIC"), which was merged into Fidelity Pennsylvania as of November 21, 1996. Nations Title Insurance Company, Nations Title Insurance of New York Inc. and National Title Insurance of New York Inc. were acquired, along with Nations Title Inc. ("NTI," collectively, "Nations Title Inc."), in a transaction which closed on April 1, 1996. Certain of the ancillary service companies were acquired in separate transactions during 1996 and 1997. Granite Financial, Inc. and subsidiaries ("Granite") was acquired in a transaction which closed on February 26, 1998. Alamo Title was acquired in connection with the Company's acquisition of Alamo Title Holding Company and subsidiaries ("Alamo") in a transaction which closed August 20, 1998. 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 38 41 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) have been eliminated. The Company's investments in non-majority-owned partnerships and subsidiaries are accounted for on the equity method. On February 26, 1998, the Company, in exchange for approximately 5.0 million shares of Company common stock plus cash in lieu of fractional shares, acquired the common stock of Granite Financial, Inc. and subsidiaries. Fidelity National Financial, Inc. common stock, as reported by the New York Stock Exchange, closed at $26.08 on February 26, 1998. The transaction has been accounted for as a pooling-of-interests. Accordingly, the Consolidated Balance Sheet as of December 31, 1997 and the related Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for each of the years in the two-year period ended December 31, 1997 and the related Notes to Consolidated Financial Statements, have been restated to reflect the inclusion of Granite. The Company acquired the common stock of Alamo Title Holding Company and subsidiaries on August 20, 1998, in exchange for approximately 2.2 million shares of Company common stock plus cash in lieu of fractional shares. Fidelity National Financial, Inc. common stock, as reported by the New York Stock Exchange, closed at $33.13 on August 20, 1998. The transaction has been accounted for as a pooling-of-interests. Accordingly, the Consolidated Balance Sheet as of December 31, 1997 and the related Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for each of the years in the two-year period ended December 31, 1997 and the related Notes to Consolidated Financial Statements, have been restated to reflect the inclusion of Alamo. The results of operations of Fidelity, Granite and Alamo separately and the combined amounts presented in the Consolidated Financial Statements for the two years prior to the consummation of the poolings-of-interests are summarized below:
YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- (DOLLARS IN THOUSANDS) Revenue: Fidelity.......................................... $746,712 $636,913 Granite........................................... 16,469 5,464 Alamo............................................. 99,878 92,418 -------- -------- Combined.......................................... $863,059 $734,795 ======== ======== Earnings: Fidelity Earnings before extraordinary item....... $ 41,471 $ 24,337 Extraordinary item.............................. (1,700) -- -------- -------- Earnings after extraordinary item............... 39,771 24,337 Granite........................................... 3,326 1,190 Alamo............................................. 4,211 3,714 -------- -------- Combined.......................................... $ 47,308 $ 29,241 ======== ========
Effective as of October 1, 1997, the Company acquired Bron Research, Inc. ("BRON"), a flood certification company headquartered in Austin, Texas. The purchase price paid by the Company for the acquisition was $9.85 million, paid in 575,599 shares of Company common stock. BRON now operates as Fidelity National Flood, Inc. This transaction has been accounted for as a pooling-of-interests. Prior to 1997, BRON's financial position and results of operations were insignificant, and as such, the 1996 Consolidated Statement of Earnings and Related Notes to Consolidated Financial Statements have not been restated to reflect the inclusion of BRON. 39 42 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) There have been no adjustments to the total net assets or stockholders' equity of the combining companies as a result of the poolings-of-interests. Certain reclassifications have been made to conform the financial statements of the combining companies to the Consolidated Financial Statements of the Company. Granite previously reported its results of operations based on a fiscal year ended June 30. Granite's fiscal year has been converted to a calendar year in order to conform to that of the Company. Cash and cash equivalents For purposes of reporting cash flows, highly liquid instruments purchased with original maturities of three months or less are considered cash equivalents. The carrying amounts reported in the Consolidated Balance Sheets for these instruments approximate their fair value. Investments Fixed maturity securities are purchased to support the investment strategies of the Company, which are developed based on many factors including rate of return, maturity, credit risk, tax considerations and regulatory requirements. Fixed maturity securities which may be sold prior to maturity to support the Company's investment strategies are carried at fair value and are classified as available for sale as of the balance sheet dates. Fair values for fixed maturity securities are principally a function of current interest rates and are based on quoted market prices. Equity securities are considered to be available for sale and carried at fair value as of the balance sheet dates. Fair values are based on quoted market prices. Other long-term investments, which consist of a limited partnership investment in an investment fund, as well as certain other debt instruments and equity investments, are carried at cost or on the equity method, as appropriate, which approximates fair value. Short-term investments, which consist primarily of securities purchased under agreements to resell, commercial paper and money market instruments, which have an original maturity of one year or less, are carried at amortized cost, which approximates fair value. Investments in real estate and partnerships are generally held for investment purposes and are carried at cost in the absence of any other than temporary impairment in value. Investments in real estate which are held for sale, including real estate acquired through foreclosure of properties in satisfaction of commercial and real estate loans, are carried at the lower of cost or fair value less estimated costs to sell. Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income on a trade date basis. Unrealized gains or losses on bonds and common stocks which are classified as available for sale, net of applicable deferred income taxes (benefits), are excluded from income and credited or charged directly to a separate component of stockholders' equity. If any unrealized losses on bond or common stocks 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. See Note D. 40 43 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Direct Financing Leases Granite has entered into various lease agreements which, in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 13, "Accounting for Leases," meet the criteria of capitalization and 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. Any permanent reduction in the estimated residual equipment value of leased property is charged to operations in the period it occurs. See Note D. Sales of Leases Gains or losses resulting from sales of leases are recognized in the accompanying Consolidated Statements of Earnings at the date of sale and are based on the difference between the selling price of the sales and the carrying value of the related leases sold. Nonrefundable fees and direct costs associated with the origination of leases are deferred and recognized when the leases are sold. On January 1, 1997, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). Under SFAS 125, 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 must be measured by allocating the previous carrying value between the asset sold and the interest retained, if any, based on their relative fair values at the date of transfer. Direct Financing Leases Assigned to Lender SFAS 125 prohibits early application. Prior to January 1, 1997, direct financing leases sold prior to that date as part of a securitization to a special-purpose entity that issued debt securities were accounted for as collateralized borrowings. The leases collateralizing the debt are recorded as direct financing leases assigned to lender. The leases and related debt are reflected in the Consolidated Balance Sheets. See Notes D and H. Residual Interests in Securitizations Residual interests in securitizations ("Residuals") of lease receivables in 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 (the "Trust"), and the Trust in turn issues interest-bearing asset-backed securities (the "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. 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 which is accounted for as a sale the Company removes from its balance sheet the lease receivables held for sale and adds to its balance sheet (i) the cash received and (ii) the allocated cost of the Residuals which consists of (a) cash collateral account and (b) net excess cash flows. 41 44 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) The excess of the cash received by the Company 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 (the Bonds and Certificates) and the portion retained (the Residuals) based on the relative fair values of those portions on the date of the sale. The Company may recognize unrealized gains or losses through stockholders' equity attributable to the change in the fair value of the Residuals, which are recorded at estimated fair value and accounted for as available for sale securities. 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 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 Bonds 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 Agreement 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 has used 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 estimates the timing of the receipt of such prepayments in its estimate of cash flows. The Company's loss estimate is 1.5% to 2.0% of the gross lease payment, which is based on historical loss data for comparable leases and the specific characteristics of the leases originated by the Company. The Company's prepayment and 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 estimated fair value of the Residuals if the actual performance of the lease receivables is higher than the original estimate. If the actual performance of the lease receivables is lower than the original estimate, then an adjustment to the carrying value of the Residuals may be required if the estimated fair value of the Residuals is less than its carrying value. The Bond and Certificate holders and their securitization trusts have no recourse to the Company's other assets for failure of lessees to pay when due. The Company's Residuals are subordinate to the Bonds and Certificates until the Bond and Certificate holders are fully paid. 42 45 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Allowance for Losses on Leases The Company establishes an allowance for losses to provide for expected losses in the Company's existing portfolio of leases and leases transferred on a recourse basis. The allowance for 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 the equipment under lease, and 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 Acquisition Costs and Broker Commissions Lease acquisition costs consist of broker bonuses and commissions paid upon the origination of the lease contracts. The costs are included in direct financing leases and are amortized to expense over the life of the related lease contracts on 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. See Notes C, D, E and H. 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. 43 46 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Cost in excess of net assets acquired and other intangible assets Intangible assets include cost in excess of net assets acquired, capitalized software costs, capitalized licensing costs and capitalized debt offering costs and are amortized on a straight line basis over three to forty years. Intangible assets at December 31, 1998 consist of cost in excess of net assets acquired of $60,830,000 less accumulated amortization of $6,916,000, capitalized licensing costs of $2,500,000 less accumulated amortization of $221,000, capitalized software of $13,515,000 less accumulated amortization of $7,085,000 and capitalized debt offering costs of $4,536,000 less accumulated amortization of $2,500,000. At December 31, 1997, intangible assets consist of cost in excess of net assets acquired of $48,026,000 less accumulated amortization of $4,608,000, capitalized licensing costs of $2,500,000 less accumulated amortization of $159,000, capitalized software of $12,326,000 less accumulated amortization of $4,636,000 and capitalized debt offering costs of $6,883,000 less accumulated amortization of $3,625,000. Impairment of intangible assets is monitored on a continual basis, and is assessed based on an analysis of the cash flows generated by the underlying assets. No impairment of intangible assets has been noted. Income taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 provides that deferred tax assets and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and expected benefits of utilizing net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period enacted. Reserve for claim losses The Company's reserve for claim losses includes known claims as well as losses the Company expects to incur, net of recoupments. Each known claim is reserved for on the basis of a review by the Company as to the estimated amount of the claim and the costs required to settle the claim. Reserves for claims which are incurred but not reported are provided for at the time premium revenue is recognized based on historical loss experience and other factors, including industry averages, claim loss history, current legal environment, geographic considerations and type of policy written. The occurrence of a significant major claim (those greater than $500,000) in any given period could have a material adverse effect on the Company's financial condition and results of operations for such period. See Note J. 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. The Company also accrues reserves for losses arising from the escrow, closing and disbursement functions due to fraud or operational error based on historical experience. Reinsurance In the ordinary course of business, the Company reinsures certain risks with other insurers for the purpose of limiting its maximum loss exposure and also assumes reinsurance for certain risks of other insurers for the purpose of earning additional revenue. The Company cedes or assumes a portion of certain policy liabilities 44 47 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) under agent fidelity, excess of loss and case-by-case reinsurance agreements. Reinsurance agreements provide that in the event of a loss (including costs, attorneys' fees and expenses) exceeding the retained amounts, the reinsurer is liable for the excess amount assumed. However, the ceding company remains primarily liable in the event the reinsurer does not meet its contractual obligations. Reinsurance activity is not considered significant. Title premiums, escrow fees, other fees and revenue and agent commissions Title insurance premiums, escrow fees and certain other fees and revenue are recognized as revenue at the time of closing of the related transaction as the earnings process is considered complete. Certain other fees and revenue are recognized over the period the related services are provided. Title insurance commissions earned by the Company's agents are recognized as an expense concurrently with premium recognition. Other fees and revenue includes revenue derived from Granite's operations, as well as non-title related revenue from other subsidiaries and other title-related revenue not included in title insurance premiums or escrow fees. Share and per share restatement On December 11, 1996, the Company declared a 10% stock dividend to shareholders of record on December 23, 1996, distributed January 7, 1997. The Company declared a 10% stock dividend on December 17, 1997 to shareholders of record on December 29, 1997, distributed January 14, 1998. On December 13, 1998, the Company declared a 10% stock dividend to shareholders 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 dividends was credited to common stock and a like amount charged to retained earnings as of December 31, 1998, 1997 and 1996, respectively. 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. Additionally, all data impacted has been restated to reflect the acquisitions of Granite, Alamo and BRON. Earnings per share In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), effective for fiscal years ending after December 15, 1997. The Company retroactively adopted SFAS 128 in 1997. Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the period. Dilutive earnings per share is calculated by dividing net earnings available to common shareholders 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. 45 48 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) The following table sets forth the calculation of basic and diluted earnings per share for each of the years in the three-year period ended December 31, 1998:
YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1997 1996 ----------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Basic earnings per share calculation: Earnings before extraordinary loss................. $105,692 $49,008 $29,241 Extraordinary loss, net of applicable income tax benefit of $1,180............................... -- (1,700) -- -------- ------- ------- Net earnings....................................... $105,692 $47,308 $29,241 ======== ======= ======= Weighted average shares.................... 27,921 23,355 20,426 ======== ======= ======= Basic earnings per share Earnings before extraordinary loss................. $ 3.79 $ 2.10 $ 1.43 Extraordinary loss................................. -- (.07) -- -------- ------- ------- Net earnings....................................... $ 3.79 $ 2.03 $ 1.43 ======== ======= ======= Diluted earnings per share calculation: Earnings before extraordinary loss................. $105,692 $49,008 $29,241 Plus: Impact of assumed conversion of LYONs........ 2,463 3,142 3,196 -------- ------- ------- Earnings before extraordinary loss plus assumed conversion...................................... 108,155 52,150 32,437 Extraordinary loss, net of applicable income tax benefit of $1,180............................... -- (1,700) -- -------- ------- ------- Net earnings plus assumed conversions.............. $108,155 $50,450 $32,437 ======== ======= ======= Weighted average shares............................ 27,921 23,355 20,426 Plus: Incremental shares from assumed conversions LYONs...................................... 3,694 5,008 5,272 Options.................................... 1,859 1,236 733 -------- ------- ------- Dilutive potential shares.......................... 33,474 29,599 26,431 ======== ======= ======= Diluted earnings per share Earnings before extraordinary loss plus assumed conversions..................................... $ 3.23 $ 1.76 $ 1.23 Extraordinary loss................................. -- (0.06) -- -------- ------- ------- Net earnings....................................... $ 3.23 $ 1.70 $ 1.23 ======== ======= =======
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. 46 49 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Certain reclassifications Certain reclassifications have been made in the 1997 and 1996 Consolidated Financial Statements to conform to the classifications used in 1998. B. ACQUISITIONS On April 4, 1996, the Company purchased 17% of the outstanding common stock of National Alliance Marketing Group, Inc. ("National Alliance"), a California corporation, for $567,000; together with a warrant to acquire an additional 14% of National Alliance common stock. In addition, the Company loaned $1,200,000 to National Alliance at closing at a rate of Prime plus one percent. Subsequently, the Company agreed to increase the credit facility from $1,200,000 to $1,700,000. In consideration for the increase in the credit facility National Alliance agreed to increase the warrant shares which the Company could purchase. If the entire $1,700,000 was borrowed the Company could purchase an additional 34% of the outstanding shares of National Alliance. After receiving approval of the transaction from the California Department of Insurance, the transaction closed on July 12, 1996. National Alliance is the parent company of Alliance Home Warranty Company ("Alliance"), a California insurance company. Alliance sells home warranty plans to buyers of resale homes, primarily in the Central and Southern California markets. A home warranty contract generally promises the repair or replacement of major operating systems and built-in appliances inside a home for a period of one year. On July 3, 1997, the Company converted the outstanding note balance in conjunction with the exercise of the warrants and then owned 51% of the outstanding common stock of National Alliance. The outstanding balance of the note receivable due from National Alliance at conversion was approximately $1.6 million. On August 14, 1998, the Company acquired the outstanding minority interest in National Alliance, 49%, for a purchase price of $3,320,000. The Company now owns 100% of National Alliance, which is now known as Fidelity National Home Warranty. Prior to the conversion of the convertible note in July 1997, the Company accounted for its investment in National Alliance on the equity method. Since that time the Company has accounted for National Alliance as a purchase and has consolidated its interest in National Alliance's financial position and results of operations with those of the Company. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the National Alliance acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value..................... $ 4,467 Cost in excess of net assets acquired...................... 4,553 Liabilities assumed at fair value.......................... (3,383) ------- Total purchase price............................. $ 5,637 =======
Alamo acquired substantially all of the assets of Southwest Land Title Company of Angleton effective January 31, 1997 for $1.1 million cash, and created a new corporation, Alamo Title Company of Brazoria, Inc. ("Brazoria") into which the acquired assets were placed. This transaction has been accounted for as a purchase. The assets acquired, including cost in excess of assets acquired, in the Brazoria acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value...................... $ 850 Cost in excess of net assets acquired....................... 250 ------ Total purchase price.............................. $1,100 ======
On March 31, 1997, Granite acquired the assets and liabilities of Global Finance & Leasing, Inc. ("Global"), a micro-ticket leasing company, for a purchase price of $2.3 million in cash. The acquisition 47 50 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) agreement provides for additional contingent consideration of $916,000 based on the collection of certain receivables. Granite believes the collection of these receivables is remote. Therefore, no liability has been recorded in the Company's Consolidated Financial Statements. This transaction has been accounted for as a purchase. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Global acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value..................... $ 3,545 Cost in excess of net assets acquired...................... 3,297 Liabilities assumed at fair value.......................... (4,508) ------- Total purchase price............................. $ 2,334 =======
On June 20, 1997, Granite acquired certain assets and liabilities of SFR Funding, Inc. ("SFR"), a small ticket equipment leasing company, for cash of $300,000, a note payable of $250,000 and the assumption of certain liabilities. The SFR transaction resulted in cost in excess of net assets acquired of $681,000. Neither the financial position nor the results of operations of SFR have been significant to the Company or Granite since acquisition. This transaction has been accounted for as a purchase. On August 22, 1997, the Company acquired the common stock of First Title Corporation ("First Title"), a title company with fourteen offices throughout the southeastern United States. First Title has been merged into a subsidiary of the Company. First Title was acquired for $4.7 million; payable in 80% common stock of the Company (278,738 shares or $3.8 million) and 20% cash (approximately $900,000). This transaction has been accounted for as a purchase. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the First Title Corporation acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value...................... $1,294 Cost in excess of net assets acquired....................... 4,033 Liabilities assumed at fair value........................... (627) ------ Total purchase price.............................. $4,700 ======
On September 18, 1997, the Company acquired the common stock of Ifland Credit Services ("ICS"), a credit reporting company headquartered in Lexington, Kentucky, for a purchase price of $3.75 million. ICS has been merged with Credit Reports, Inc. ("CRI") and Classified Credit Data, Inc. ("CCD") in order to form Fidelity National Credit Services. The purchase price was payable 80% in common stock of the Company (187,170 shares or $3.0 million) and 20% cash ($750,000). This transaction has been accounted for as a purchase. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Ifland Credit Services acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value...................... $ 618 Cost in excess of net assets acquired....................... 3,517 Liabilities assumed at fair value........................... (385) ------ Total purchase price.............................. $3,750 ======
On October 9, 1997, the Company acquired the common stock of Credit Reports, Inc., a credit reporting company headquartered in Scottsdale, Arizona, with operations in California, Colorado, Nevada and Oregon. 48 51 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) CRI has been merged with ICS and CCD in order to form Fidelity National Credit Services. The purchase price for CRI was $200,000, subject to certain purchase price adjustments based on the combined equity of CRI and Express Network, Inc., its affiliate, payable in 12,601 shares of Company common stock. This transaction has been accounted for as a purchase. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Credit Reports, Inc. acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value..................... $ 2,559 Cost in excess of net assets acquired...................... 139 Liabilities assumed at fair value.......................... (2,498) ------- Total purchase price............................. $ 200 =======
Also on October 9, 1997, the Company acquired the common stock of Express Network, Inc. ("ENI"), a provider of attorney services such as courier, messenger, courthouse filing, process serving, investigation and reprographics. ENI provides services to legal firms in Los Angeles, Orange County, San Diego, Riverside and San Francisco, California. The purchase price for ENI was $10.55 million; subject to certain purchase price adjustments based on the combined equity of ENI and CRI, its affiliate, payable in 50% common stock of the Company (332,374 shares or $5.275 million) and 50% cash (approximately $5.275 million). Approximately $2.8 million of the cash portion of the purchase price will be paid in equal installments over a four-year period. This transaction has been accounted for as a purchase. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Express Network, Inc. acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value..................... $ 3,018 Cost in excess of net assets acquired...................... 9,640 Liabilities assumed at fair value.......................... (2,108) ------- Total purchase price............................. $10,550 =======
On October 21, 1997, the Company acquired 100% of the common stock of Classified Credit Data, Inc., a credit reporting company headquartered in Orange County, California, for a purchase price of $300,000, which was paid in cash. CCD was merged with ICS and CRI in order to form Fidelity National Credit Services. This transaction has been accounted for as a purchase. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Classified Credit Data acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value...................... $ 385 Cost in excess of net assets acquired....................... 386 Liabilities assumed at fair value........................... (471) ----- Total purchase price.............................. $ 300 =====
On December 30, 1997, Granite completed the acquisition of 84% of the common stock of North Pacific Funding, Inc. dba C&W Leasing and its wholly-owned subsidiary CKC Corporation dba US Funding (collectively, "C&W Leasing"). The purchase price for this transaction was $5.1 million, in the form of notes payable to the former stockholders. This transaction has been accounted for as a purchase. The remaining 16% of the common stock of C&W Leasing was purchased on January 5, 1998 for additional consideration of $900,000 in promissory notes payable. 49 52 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the C&W Leasing acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value..................... $ 1,003 Cost in excess of net assets acquired...................... 5,821 Liabilities assumed at fair value.......................... (1,724) ------- Total purchase price............................. $ 5,100 =======
The Company completed the sale of its wholly-owned subsidiary ACS Systems, Inc. ("ACS") to Micro General Corporation (OTCBB:MGEN) ("Micro General") for 4.6 million shares of Micro General common stock, valued at $1,297,000, on May 14, 1998. ACS provides small to medium size businesses within the real estate industry with software, systems integration and communication services including telecommunications hardware, long distance reselling, computer hardware and system software reselling, consulting services, technical services, internet services, electronic commerce and title and escrow software applications. ACS will continue to provide the above listed services to the Company at preferred customer rates. The Company currently owns 70.6% of Micro General Corporation. This transaction has been accounted for as a reverse merger of Micro General into the Company. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Micro General acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value..................... $ 1,484 Cost in excess of net assets acquired...................... 5,161 Liabilities assumed at fair value.......................... (4,812) Minority interest.......................................... (536) ------- Total purchase price............................. $ 1,297 =======
Additionally, on November 17, 1998, Micro General acquired LDExchange.com, Inc. ("LDX"), for a purchase price of $3.1 million, payable $1.1 million in cash and $2.0 million in Micro General common stock (1,000,000 shares). LDX is a facilities based, wholesale carrier providing international telecommunication services. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the LDX acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value..................... $ 2,325 Cost in excess of net assets acquired...................... 2,739 Liabilities assumed at fair value.......................... (1,964) ------- Total purchase price............................. $ 3,100 =======
Effective September 1, 1998, the Company acquired 100% of Lexington Capital Corporation ("Lexington"), a financial services company specializing in financing national and regional franchisee accounts, for a purchase price of $3.5 million, payable in $3.0 million in cash and $500,000 in restricted common stock of the Company (15,129 shares). The acquisition of Lexington resulted in $3,500,000 of cost in excess of net assets acquired. Neither the financial position or the results of operations of Lexington have been material to the Company since acquisition. This transaction has been accounted for as a purchase. Selected unaudited pro forma combined results of operations for the years ended December 31, 1998, 1997 and 1996, assuming the National Alliance (51%), Brazoria, Global, SFR, First Title, ICS, CRI, ENI, CCD and C&W Leasing acquisitions occurred on January 1, 1997 and 1996, and assuming the Micro General, 50 53 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) LDX, National Alliance (49%) and Lexington acquisitions occurred January 1, 1998 and 1997, are presented as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenue..................................... $1,315,624 $908,244 $826,060 Basic earnings before extraordinary item.......... 106,055 49,558 27,699 Basic net earnings................................ 106,055 47,858 27,699 Basic earnings per share.......................... 3.80 2.00 1.30 Diluted earnings before extraordinary item........ 108,518 52,700 30,895 Diluted net earnings.............................. 108,518 51,000 30,895 Diluted earnings per share........................ 3.24 1.69 1.13
C. INVESTMENTS The carrying amounts and fair values of the Company's fixed maturity securities at December 31, 1998 and 1997 are as follows:
DECEMBER 31, 1998 --------------------------------------------------------- GROSS GROSS CARRYING AMORTIZED UNREALIZED UNREALIZED FAIR VALUE COST GAINS LOSSES VALUE -------- --------- ---------- ---------- -------- (DOLLARS IN THOUSANDS) Fixed maturity investments (available for sale): U.S. government and agencies.............. $ 50,699 $ 49,949 $ 932 $(182) $ 50,699 States and political subdivisions......... 188,703 183,299 5,405 (1) 188,703 Corporate securities...................... 86,027 85,179 1,491 (643) 86,027 Foreign government bonds.................. 75 75 -- -- 75 Mortgage-backed securities................ 4,564 4,449 115 -- 4,564 -------- -------- ------ ----- -------- $330,068 $322,951 $7,943 $(826) $330,068 ======== ======== ====== ===== ========
DECEMBER 31, 1997 --------------------------------------------------------- GROSS GROSS CARRYING AMORTIZED UNREALIZED UNREALIZED FAIR VALUE COST GAINS LOSSES VALUE -------- --------- ---------- ---------- -------- (DOLLARS IN THOUSANDS) Fixed maturity investments (available for sale): U.S. government and agencies.............. $ 39,106 $ 38,720 $ 429 $ (43) $ 39,106 States and political subdivisions......... 142,655 139,635 3,028 (8) 142,655 Corporate securities...................... 52,810 52,308 532 (30) 52,810 Foreign government bonds.................. 89 90 -- (1) 89 Mortgage-backed securities................ 5,158 5,118 60 (20) 5,158 -------- -------- ------ ----- -------- $239,818 $235,871 $4,049 $(102) $239,818 ======== ======== ====== ===== ========
The change in unrealized gains (losses) on fixed maturities for the years ended December 31, 1998, 1997, and 1996 was $3,170,000, $5,263,000 and ($3,482,000), respectively. The amortized cost and estimated fair value of fixed maturity securities, which are classified as available for sale at December 31, 1998, by contractual maturity, are shown as follows. Expected maturities may differ 51 54 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties:
DECEMBER 31, 1998 --------------------------------------------- AMORTIZED % FAIR % COST OF TOTAL VALUE OF TOTAL --------- -------- -------- -------- (DOLLARS IN THOUSANDS) Maturity One year or less......................... $ 5,836 1.8% $ 5,696 1.7% After one year through five years........ 132,377 41.0 134,866 40.9 After five years through ten years....... 158,156 49.0 162,528 49.2 After ten years.......................... 26,582 8.2 26,978 8.2 -------- ----- -------- ----- $322,951 100.0% $330,068 100.0% ======== ===== ======== ===== Subject to call............................ $ 47,491 14.7% $ 48,600 14.7%
Fixed maturity securities valued at approximately $18,041,000 and $19,125,000 were on deposit with various governmental authorities at December 31, 1998 and 1997, respectively, as required by law. Equity securities at December 31, 1998 and 1997 consist of investments in various industry groups as follows:
DECEMBER 31, ---------------------------------------- 1998 1997 ------------------ ------------------ FAIR FAIR COST VALUE COST VALUE ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Banks, trust and insurance companies........ $ 1,874 $ 1,949 $ 517 $ 950 Industrial, miscellaneous and all other..... 35,878 48,242 41,154 76,603 ------- ------- ------- ------- $37,752 $50,191 $41,671 $77,553 ======= ======= ======= =======
The carrying value of the Company's investment in equity securities is fair value. As of December 31, 1998, gross unrealized gains and gross unrealized losses on equity securities were $22,464,000 and $10,025,000, respectively. Gross unrealized gains and gross unrealized losses on equity securities were $38,464,000 and $2,582,000, respectively, as of December 31, 1997. The change in unrealized gains and losses on equity securities for the years ended December 31, 1998, 1997 and 1996 was ($23,443,000), $12,756,000 and $15,214,000, respectively. Included in equity securities is an investment in a certain equity security, CKE Restaurants, Inc., with a cost basis of $2,341,000 and a fair value of $18,462,000 at December 31, 1998 and a cost basis of $3,366,000 and a fair value of $31,404,000 at December 31, 1997. On July 22, 1997, the Company purchased 1,000,000 shares of common stock of GB Foods Corporation, now known as Santa Barbara Restaurant Group ("SBRG"), which represented approximately 15.5% of the outstanding common stock of SBRG for a purchase price of $5.0 million. Additionally, the Company purchased warrants to acquire an additional 3,500,000 shares of SBRG at various prices ranging from $5.00 -- $7.50 for a purchase price of $800,000; 1,500,000 warrants exercisable at $5.00 per share, 1,000,000 warrants exercisable at $7.00 per share and 1,000,000 warrants exercisable at $7.50 per share. In conjunction with the common stock purchase, the Company gained control of three seats on the SBRG Board of Directors. During 1998, the Company exercised 1,000,000 of the $5.00 warrants in conjunction with an acquisition by SBRG in order to provide SBRG additional capital. In addition, on December 31, 1998, the Company exchanged certain investments in restaurant common stocks with a combined value of $9.45 million for an additional 52 55 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) 2,478,000 shares of SBRG. The Company now owns approximately 31.1% of SBRG. The Company's investment in SBRG is accounted for under the equity method. Effective July 1, 1997, the Company sold a majority interest (60%) of its subsidiary American Title Company ("ATC"), an underwritten title company, to certain members of ATC's management. ATC functions as an exclusive agent of the Company. The sale price of the 60% interest was $6.0 million resulting in a realized gain of approximately $1.3 million before applicable income taxes. As a result of a tax free reorganization of American National Financial, Inc. ("ANFI"), the parent company of ATC and its subsidiaries, in November 1998, the Company's interest in ATC was converted to an ownership interest of approximately 43% of ANFI. Subsequent to ANFI's initial public offering in February 1999, the Company's ownership interest in ANFI became approximately 31.5%. The Company's investment in ANFI is accounted for under the equity method. Interest and investment income, including realized gains (losses), consists of the following:
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (DOLLARS IN THOUSANDS) Cash and cash equivalents..................... $ 2,798 $ 1,370 $ 1,967 Fixed maturity securities..................... 13,014 11,256 10,384 Equity securities............................. 22,867 12,062 5,094 Short-term investments........................ 1,483 1,891 165 Notes receivable.............................. 1,913 2,486 2,801 Other......................................... (2,488) 6,741 (1,184) ------- ------- ------- $39,587 $35,806 $19,227 ======= ======= =======
Net realized gains included in interest and investment income amounted to $17,190,000, $16,839,000 and $2,476,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 1998 net realized gains include a gain of approximately $9,700,000 related to the conversion of the Company's investment in Data Tree Corporation common stock to common stock of First American Financial Corporation. Included in net realized gains for the year ended December 31, 1997, are net realized gains from the sales of investments of approximately $10,500,000, a net realized gain from the sale of the Company's former home office building of approximately $4,300,000, and net realized gains on the sale of 60% of American Title Company, a former wholly-owned underwritten title company subsidiary, and the sale of FNF Ventures, Inc., a small business investment company subsidiary of approximately $1,300,000 and $800,000, respectively. All amounts are before applicable income taxes. During the years ended December 31, 1998, 1997 and 1996, gross realized gains on sales of fixed maturity securities considered available for sale were $700,000, $798,000 and $453,000, respectively; and gross realized losses were $268,000, $468,000 and $719,000, respectively. Gross proceeds from the sale of fixed maturity securities considered available for sale amounted to $71,114,000, $143,085,000 and $94,214,000, during the years ended December 31, 1998, 1997 and 1996, respectively. During the years ended December 31, 1998, 1997 and 1996, gross realized gains on sales of equity securities considered available for sale were $32,603,000, $12,986,000 and $6,186,000, respectively; and gross realized losses were $10,999,000, $2,515,000 and $2,091,000, respectively. Gross proceeds from the sale of equity securities amounted to $108,554,000, $120,094,000 and $94,161,000 during the years ended December 31, 1998, 1997 and 1996, respectively. 53 56 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) D. LEASES AND RESIDUAL INTERESTS IN SECURITIZATIONS Direct Financing Leases Granite's direct financing leases at December 31, 1998 and 1997 consist of the following:
DECEMBER 31, 1998 ----------------------- DIRECT FINANCING DIRECT LEASES FINANCING ASSIGNED TO LEASES LENDER --------- ----------- (DOLLARS IN THOUSANDS) Minimum lease payments receivable....................... $ 57,501 $ 6,398 Estimated residual values of leased property............ 5,424 518 Lease acquisition costs and broker commissions.......... 3,046 45 Unearned income......................................... (16,300) (818) Allowance for credit losses............................. (10,221) (261) Security deposits....................................... (393) (64) -------- ------- $ 39,057 $ 5,818 ======== =======
DECEMBER 31, 1997 ----------------------- DIRECT FINANCING DIRECT LEASES FINANCING ASSIGNED TO LEASES LENDER --------- ----------- (DOLLARS IN THOUSANDS) Minimum lease payments receivable....................... $ 25,832 $13,525 Estimated residual values of leased property............ 3,480 709 Lease acquisition costs and broker commissions.......... 2,194 215 Unearned income......................................... (9,451) (2,232) Allowance for credit losses............................. (2,440) (200) Security deposits....................................... (275) (115) -------- ------- $ 19,340 $11,902 ======== =======
Scheduled collections of minimum lease payments receivable are as follows:
DIRECT FINANCING DIRECT LEASES FINANCING ASSIGNED TO LEASES LENDER --------- ----------- (DOLLARS IN THOUSANDS) Year Ending December 31, 1999.................................................. $ 15,782 $ 3,659 2000.................................................. 14,212 2,371 2001.................................................. 12,048 284 2002.................................................. 8,677 80 2003.................................................. 5,150 4 Thereafter............................................ 1,632 -- -------- ------- $ 57,501 $ 6,398 ======== =======
At December 31, 1998, the weighted average implicit rate of interest is approximately 13.0%. 54 57 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) The carrying value of the direct financing leases at December 31, 1998 and 1997 approximated 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, 1998 and 1997 approximated the carrying value because the interest rate on the related Class A Term Note approximates current market rates. Asset Securitization The Company has completed six securitization facilities that provide for aggregate funding limits of approximately $354,000,000. Two of the securitization facilities, GF Funding IV and GF Funding V, are revolving facilities. In April 1996, the Company's wholly-owned subsidiary, GF Funding I, issued $21,689,000 of 6.33% Class A Lease-Backed Term Note ("GFI Note") due November 20, 2001 in a private placement. The GFI Note is collateralized by (i) payments to be made under leases contributed by Granite Financial, LLC to GF Funding I, (ii) all of GF Funding I's rights and interest in the leased equipment, (iii) a cash collateral account (which generally does not increase the overall level of credit enhancement, but rather accommodates changes that may occur from time to time in the form of credit enhancement from excess implicit principal balance of lease receivables to cash) and (iv) a financial guaranty insurance policy. Under the terms of the insurance policy, the monthly payments of interest and final payment of principal and maturity are unconditionally guaranteed. As this securitization was completed through the issuance of a debt security prior to the adoption of SFAS 125, the transaction is accounted for as a collateralized borrowing. Accordingly, the underlying lease assets, recorded as direct financing leases assigned to lender, and the related limited recourse note payable are reflected in the consolidated balance sheet. The underlying assets are comprised of the Company's net investment in the leases of $5,818,000 and $11,902,000 as of December 31, 1998 and 1997, respectively. The related limited recourse note payable was $5,930,000 and $11,719,000 as of December 31, 1998 and 1997, respectively. See Note H. In November 1996, GF Funding II was formed to establish the Company's second securitization facility. The facility provided for the issuance of up to $65 million in aggregate principal amount of Class A Lease-Backed Certificates due June 20, 2003 (the "1996 Certificates") in a private placement. For purposes of computing interest, the 1996 Certificates are issued in two tranches, consisting of the Floating Rate Tranche and the Fixed Rate Tranche. The principal amount of the Floating Rate Tranche will generally convert to the Fixed Rate Tranche on a quarterly basis. The Floating Rate Tranche bears interest at an annual rate equal to the LIBOR Rate, as adjusted from time to time, plus .50%. The Fixed Rate Tranche bears interest at an annual rate equal to the Treasury Rate, as adjusted form time to time, plus .70%. The annual interest rate on each tranche is subject to a maximum annual rate of 10%. The 1996 Certificates represent an undivided interest in a trust estate created by GF Funding II comprised of (i) payments to be made under leases contributed to GF Funding II, (ii) all of GF Funding II's right and interest in the leased equipment, (iii) a cash collateral account and (iv) a financial guaranty insurance policy. The securitization was fully funded in December 1997. The Company has recorded gains from the sales of leases with respect to this securitization of $5,656,000 and $864,000, respectively, during the years ended December 31, 1997 and 1996. In March 1997, GF Funding III was formed to establish the Company's third securitization facility. The facility provides for the issuance of up to $27,500,000 in the aggregate principal amount of 6.82% Class A Lease-Backed Certificates due December 20, 2002 (the "1997 Certificates") in a private placement. The 1997 Certificates represent an undivided interest in a trust estate created by GF Funding III comprised of (i) payments to be made under leases contributed to GF Funding III, (ii) all of GF Funding III's right and interest in the leased equipment, (iii) a cash collateral account, a capitalized interest account, a prefunding account and a collection account and (iv) a financial guaranty insurance policy. This securitization was fully 55 58 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) funded in June 1997. The Company has recorded gains from the sales of leases with respect to this securitization of $1,670,000 during the year ended December 31, 1997. In December 1997, GF Funding IV was formed to establish the Company's fourth securitization facility. The facility provides for the issuance of up to $150 million in aggregate principal amount of Class A Lease-Backed Certificates due September 2004 (the "GFIV Certificates") in a private placement. For purposes of computing interest, the GFIV Certificates are issued in two tranches, consisting of the Floating Rate Tranche and the Fixed Rate Tranche. The principal amount of the Floating Rate Tranche will generally convert to the Fixed Rate Tranche on a quarterly basis. The Floating Rate Tranche bears interest at an annual rate equal to the LIBOR Rate, as adjusted from time to time, plus .50%. The Fixed Rate Tranche bears interest at an annual rate equal to the Treasury Rate, as adjusted from time to time, plus .35%. The GFIV Certificates represent an undivided interest in a trust estate created by GF Funding IV comprised of (i) payments to be made under leases contributed to GF Funding IV, (ii) all of GF Funding IV's rights and interests in the lease equipment and (iii) a financial guaranty insurance policy. The Company is required to sell a minimum of $10,000,000 in leases to the securitization facility per quarter. The Company has recorded gains from the sales of leases with respect to this securitization of $6,456,000 and $1,418,000 during the years ended December 31, 1998 and 1997, respectively. In March 1998, GF Funding V was formed to establish the Company's fifth securitization facility. The facility provides for the issuance of up to $65 million in aggregate principal amount of Class A Lease-Backed Certificates due April 2005 (the "GFV Certificates") in a private placement. For purposes of computing interest, the GFV Certificates are issued in Fixed Rate Tranches which bear interest at an annual rate equal to the Treasury Rate, as adjusted form time to time, plus 1.20%. The GFV Certificates represent an undivided interest in a trust estate created by GF Funding V comprised of (i) payments to be made under leases contributed to GF Funding V and (ii) all of GF V's rights and interest in the leased equipment. The Company is required to sell a minimum of $15,000,000 in leases to the securitization facility per quarter. The Company has recorded gains from the sales of leases with respect to this securitization of $2,817,000 during the year ended December 31, 1998. In October 1998, GF Funding VI was formed to establish the Company's sixth securitization facility. The facility provides for the issuance of $30.3 million in Lease-Backed Certificates (the "GFVI Certificates"). The GFVI Certificates represent an undivided interest in a trust estate created by GFVI which is comprised of (i) all rights, title and interest in the subordinated interest in GF Funding I, GF Funding II, GF Funding III, GF Funding IV and GF Funding V, and the related purchase agreements, (ii) a cash collection account and (iii) a cash reserve account. The issuance of the GFVI Class A and Class B Certificates is accounted for as a collateralized borrowing. Accordingly, the subordinated interest, recorded as a residual interest in securitization, and the related Class A and B are reflected in the Company's Consolidated Balance Sheet. The outstanding Class A and B Certificates were $16,006,000 at December 31, 1998. The amounts due related to the Lease-Backed Notes and Certificates approximate fair value at December 31, 1998 and 1997 due to the fact that the interest rate paid on the Lease-Backed Notes and Certificates approximates market rates. Sale of Leases The Company entered into agreements with certain financial institutions to sell, on an ongoing basis, certain leases either on a recourse or non-recourse basis. The purchase price of the leases is determined on a transaction by transaction basis. A gain on sale is recognized on the date of sale based upon the present value of the payments to be received under the lease. The Company retains servicing of all leases under the agreements. During the years ended December 31, 1998, 1997 and 1996, the Company recognized a net gain on sale of leases of $857,000, $1,559,000 and $1,483,000, respectively. 56 59 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Servicing Asset The Company has not established any servicing asset or liability, although the Company retained the servicing rights on the leases securitized because management has determined that revenues from contractually specified servicing fees and ancillary services are just adequate to compensate the Company for its servicing responsibilities E. NOTES RECEIVABLE Notes receivable consist of the following:
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Mortgage notes, secured by various deeds of trust, installments due monthly including interest at rates ranging from 7.0% to 10.0%, due through 2022........... $ 1,316 $ 426 Promissory notes, secured by various assets and unsecured, installments due monthly including interest at rates ranging from 6.0% to 13.0%, due through 2014................................................... 9,711 10,074 Officer and employee secured and unsecured notes receivable at rates ranging from 7.0% to 10.0%, due through 2004........................................... 1,798 1,421 ------- ------- 12,825 11,921 Allowance for doubtful receivables....................... (2,064) (1,758) ------- ------- $10,761 $10,163 ======= =======
The allowance for doubtful receivables is primarily related to certain promissory notes at December 31, 1998 and 1997. Interest income is not recognized on the Company's non-performing notes receivable. There were no non-performing notes receivable at December 31, 1998. The carrying value and estimated fair values of the Company's notes receivable were as follows at December 31, 1998 and 1997 (dollars in thousands):
DECEMBER 31, ------------------------------------------ 1998 1997 ------------------- ------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Mortgage notes.............................. $ 1,199 $ 1,199 $ 426 $ 426 Other promissory notes...................... 7,999 7,999 8,563 8,563 Affiliated notes............................ 1,563 1,563 1,174 1,174 ------- ------- ------- ------- $10,761 $10,761 $10,163 $10,163 ======= ======= ======= =======
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. 57 60 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) F. INVESTMENTS IN REAL ESTATE AND PARTNERSHIPS At December 31, 1998 and 1997, the Company had financial interests ranging from 22% to 50% in three real estate partnerships which were accounted for under the equity method. These partnerships are involved in the ownership and management of commercial office buildings, retail facilities and have acquired specific parcels of real property for investment purposes. The Company, through Manchester Development Corporation ("Manchester"), a wholly-owned subsidiary, had a general partnership interest in one of the three real estate partnerships at December 31, 1998 and 1997. Two of these partnerships, representing raw land investments, also have officers and directors of the Company as partners with ownership interests that are based on cash contributions. These two partnerships require that all of the partners, including the Company, make pro-rata capital contributions should the partnerships require additional funds to pay liabilities. The carrying value of the Company's interests in these partnerships totalled $1,214,000 and $1,208,000 at December 31, 1998 and 1997, respectively. Summarized combined financial information of the unconsolidated partnerships is as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ------ ------ ------ (DOLLARS IN THOUSANDS) Total assets, primarily land, development and improvement costs.................................................. $4,127 $3,922 $3,960 Total liabilities, primarily notes and mortgages payable................................................ 6 819 841 ------ ------ ------ Partners' equity......................................... $4,121 $3,103 $3,119 ====== ====== ====== Revenue.................................................. $1,094 $ 47 $ 378 ====== ====== ====== Net income (loss)........................................ $ 205 $ 22 $ (73) ====== ====== ======
At December 31, 1998, the Company had a 92.5% interest in a real estate partnership which is consolidated with the Company. At December 31, 1997, the Company had a 92.5% and 76.3% interest in real estate partnerships consolidated with the Company. Manchester is also presently a partner with Sussex Holdings, Ltd. (an affiliate of Folco) in Folco Mission Valley Partners Limited Partnership, a California limited partnership. Manchester owns a 22% limited partnership interest and Sussex Holdings, Ltd. owns a 78% general partnership interest. Fidelity Title is the sole tenant in the building and received an approximate 30% decrease in its annual rental rate based upon its lease with Folco Mission Valley. Manchester's carrying value of this partnership interest was $224,000 and $3,000 at December 31, 1998 and 1997, respectively. 58 61 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Investments in real estate and partnerships consist of the following:
DECEMBER 31, ---------------- 1998 1997 ------ ------ (DOLLARS IN THOUSANDS) Investments in real estate: Land..................................................... $4,337 $4,337 Commercial buildings, net of accumulated depreciation of $18 and $67........................................... 653 664 Investments in unconsolidated partnerships................. 1,435 1,714 ------ ------ 6,425 6,715 Valuation allowance........................................ (1,752) (1,514) ------ ------ $4,673 $5,201 ====== ======
During 1997 and 1996, the Company sold investments in real estate to third parties at an aggregate purchase price of $6.4 million and $917,000, respectively, which approximated the carrying value of the investments sold. There were no sales in 1998. G. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Land................................................... $ 1,724 $ 4,897 Buildings.............................................. 3,754 7,230 Leasehold improvements................................. 14,596 12,729 Furniture, fixtures and equipment...................... 121,272 102,517 -------- -------- 141,346 127,373 Accumulated depreciation and amortization.............. (95,276) (82,660) -------- -------- $ 46,070 $ 44,713 ======== ========
H. NOTES PAYABLE Notes payable consist of the following (dollars in descriptions in thousands):
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Bank revolving credit facility secured by common stock of certain Insurance Subsidiaries and a certain UTC, interest due monthly at LIBOR plus 1.15% (6.21% at December 31, 1998), unused portion of $53,698 at December 31, 1998, due September 2001............................................ $ 46,302 $ -- Bank revolving line of credit, warehouse line, secured by security interest in certain leases and the underlying equipment, interest due monthly at LIBOR plus 1.75% (6.81% at December 31, 1998), unused portion of $27,700 at December 31, 1998, due March 2000......................... 7,300 -- Bank revolving credit facility, unsecured, interest due monthly at LIBOR plus 1.15% (6.21% at December 31, 1998), no unused portion at December 31, 1998, due May 1999...... 25,000 --
59 62 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED)
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Credit agreement, secured by common stock of certain Insurance Subsidiaries, principal due quarterly, interest due monthly at LIBOR plus 2.0%, due September 2001, paid and terminated in March 1998.............................. $ -- $ 15,250 Bank revolving credit facility, secured by common stock of certain Insurance Subsidiaries, interest due quarterly at LIBOR plus 2.0%, principal due quarterly beginning April 1998, due September 2001, paid and terminated in March 1998...................................................... -- 5,000 Bank revolving line of credit, warehouse line, secured by security interest in certain leases and the underlying equipment, interest due monthly at Prime plus .625%, unused portion of $33,200 at December 31, 1997, subsequent to year end line of credit increased to $46,000 and maturity date extended, paid and terminated in October 1998...................................................... -- 2,784 Equipment line of credit, secured by equipment, interest due monthly at LIBOR plus 1.40% (6.46% at December 31, 1998), unused portion of $143 and $3,970 at December 31, 1998 and 1997, due May 1999........................................ 9,857 4,030 Bank revolving credit facility, secured by common stock of certain UTCs, semi-annual principal installments of $750 and interest due quarterly at LIBOR plus 1.0%, due June 2000, paid and terminated in December 1998................ -- 3,750 Bank revolving credit facility, secured by common stock of certain UTCs, principal installments of $35 and interest due quarterly at LIBOR plus 1%, due December 2001, paid and terminated in December 1998........................... -- 560 Bank line of credit, unsecured, interest due monthly at Bank's Reference Rate plus .75% (8.50% at December 31, 1998), no unused portion at December 31, 1998, paid and terminated January 1999................................... 3,000 3,000 Bank promissory note, secured by equipment, principal and interest due monthly at LIBOR plus 1.77% (6.83% at December 31, 1998) due July 2002.......................... 8,903 -- Bank promissory note, secured by equipment, principal and interest due monthly at LIBOR plus 1.77%, paid in September 1998............................................ -- 2,134 Bank promissory note, secured by equipment, principal and interest due monthly at LIBOR plus 2.10% (7.16% at December 31, 1998), due June 1999......................... 718 2,052 Bank promissory note, secured by equipment, principal and interest due monthly at 30 day commercial paper rate plus 2.44% (6.61% at December 31, 1998), due September 2000.... 3,281 5,000 Bank promissory note, secured by equipment, principal and interest due monthly at LIBOR plus 1.84% (6.90% at December 31, 1998), due May 2001.......................... 2,902 4,042 Bank promissory note, secured by equipment, principal and interest due monthly at LIBOR plus 1.84% (6.90% at December 31, 1998), due September 2001.................... 4,337 5,784 Promissory note, secured by real estate, principal and interest due monthly at 9.875%, paid in June 1998......... -- 1,693
60 63 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED)
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Note payable to bank, secured by common stock of certain subsidiaries, principal and interest due monthly at LIBOR plus 3.50% (9.468% at December 31, 1997), due within 30 days of change in control or April 1998................... $ -- $ 8,000 Note payable secured by certain leases and a security interest in underlying equipment, principal and interest due monthly at 9.80%, due January 2000.................... 347 638 Note payable to bank, secured by all tangible and intangible property of a certain subsidiary, principal and interest due monthly at 8.72%, due May 1999........................ 926 1,292 Promissory notes, unsecured, interest due quarterly at 8.00%, principal due at various dates through July 1999... 2,982 5,100 Convertible notes, secured by assets of a subsidiary, with interest of 9.5%; principal and interest due quarterly, due July 2001............................................. 2,900 -- Liquid Yield Option Notes, zero coupon, convertible subordinated notes due 2009 with interest at 5.5%, converted or redeemed in February 1999.................... 71,307 76,635 Other promissory notes with various interest rates and maturities................................................ 2,626 4,552 -------- -------- $192,688 $151,296 ======== ========
Principal maturities, including accretion of original issue discount, are as follows (dollars in thousands): 1999...................................................... $ 51,174 2000...................................................... 15,864 2001...................................................... 51,477 2002...................................................... 1,877 2003...................................................... 323 Thereafter................................................ 71,973 -------- $192,688 ========
Also included in notes payable in the Consolidated Balance Sheets as of December 31, 1998 and 1997 is the Class A Lease-Backed Term Note due 2001. See Note D. The amount due related to the GFI Class A Lease-Backed Term Note was $5,930,000 and $11,719,000 at December 31, 1998 and 1997, respectively. The GFI note bears interest at 6.33% and is due November 2001. The carrying value of the GFI Class A Lease-Backed term note approximates fair value at December 31, 1998 and 1997 due to the fact that 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, 1998 also includes the GFVI Class A Certificates in the amount of $7,878,000 and the Class B Certificates in the amount of $8,128,000. See Note D. The Class A and Class B Certificates bear interest at 6.20%, and are due in September 2005 and December 2005, respectively. The carrying value of the Class A and Class B Certificates approximates fair value at December 31, 1998 due to the fact that the interest rate paid on the Class A and Class B Certificates approximates market rates. 61 64 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) The carrying value and estimated fair values of the Company's notes payable were as follows at December 31, 1998 and 1997:
DECEMBER 31, -------------------------------------------- 1998 1997 -------------------- -------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Short-term borrowings................... $ 13,400 $ 13,400 $ 19,483 $ 19,483 Long-term borrowings, variable rate..... 99,900 99,900 44,456 44,456 Long-term borrowings, fixed rate........ 79,388 97,443 87,357 122,477 -------- -------- -------- -------- $192,688 $210,743 $151,296 $186,416 ======== ======== ======== ========
Short-term borrowings approximate their fair value. The fair value of the Company's fixed rate and variable rate notes payable is estimated using discounted cash flow analyses based on current market interest rates and comparison of interest rates being paid to the Company's current incremental borrowing rates for similar types of borrowing arrangements. The LYON's fair value is calculated based on quoted market prices. The Company's credit agreement, dated as of September 21, 1995, included a $22 million term loan and a $13 million revolving credit facility, was secured by the common stock of certain Insurance Subsidiaries. This credit facility was terminated and paid in 1998 with the proceeds from a new revolving credit facility secured by the common stock of certain Insurance Subsidiaries and a certain UTC. Additionally, the Company must comply with certain affirmative and negative covenants related to its bank revolving lines of credit and other debt facilities, which require, among other things, that the Company maintain certain financial ratios related to liquidity, net worth, capitalization, investments, acquisitions, restricted payments and certain dividend restrictions. In February 1994, the Company issued zero coupon, convertible subordinated Liquid Yield Options Notes due February 2009 ("LYONs") at an interest rate of 5.5% with a principal amount at maturity of $235,750,000. Net proceeds to the Company were approximately $101,000,000. The proceeds were used for investment and general corporate purposes, including the repurchase of treasury shares. The conversion rate of the LYONs is 28.077 shares of common stock per $1,000 maturity value of LYONs. Conversion is at the option of the holder, at any time on or prior to maturity. Each holder, at its option, may put the LYONs to the Company as of February 15, 1999 and February 15, 2004 for a purchase price per LYON of $581.25 and $762.40, respectively. The Company at its option, may elect to pay the put in cash or shares of its common stock. The LYONs are redeemable by the Company for cash on or after February 15, 1999 at a price equal to the issue price of $441.31 plus accrued original issue discount through the date of redemption. The maturity value of LYONs outstanding at December 31, 1998 was approximately $124,113,000. On October 17, 1997, the Company in a private transaction, purchased $45 million aggregate principal amount at maturity of its outstanding Liquid Yield Option Notes due 2009 from Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") for an aggregate purchase price of $27.2 million (or $605 per $1,000 principal amount at maturity of LYONs). The purchase price was paid in the form of 1,394,381 shares, $26.4 million, of the Company's common stock (the "Exchange Shares"). The Company also paid Merrill Lynch the excess of a base price of $19.53 per Exchange Share over the actual sales price (less $0.05 per share in commissions) realized by Merrill Lynch for sales of up to 607,881 Exchange Shares. The Company also paid Merrill Lynch, for each day, an amount in cash to be determined by multiplying the Net Carry Amount (number of Exchange Shares multiplied by $19.53) by the Applicable Rate (LIBOR plus 2.50%). The Company's payment obligations were subject to reduction for dividends on Exchange Shares received by Merrill Lynch during the period. The Company paid the foregoing amounts to Merrill Lynch in cash of approximately $790,000 on November 7, 1997. The purchase of the LYONs increased stockholders' 62 65 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) equity by approximately $24.7 million while reducing outstanding debt by approximately $24.3 million. Additionally, an extraordinary loss due to the early retirement of debt of approximately $1.7 million, net of applicable income taxes, was recorded in the fourth quarter of 1997. On January 13, 1999, the Company announced that it was going to redeem, pursuant to the terms of the indenture, its outstanding Liquid Yield Option Notes due 2009 for $581.25 per $1,000 maturity value on February 15, 1999. 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, $123,681,000 maturity value of LYONs had converted to 3,473,000 shares of common stock, adding approximately $70 million to equity while reducing outstanding note payable by a like amount. The remaining $432,000 of maturity value was redeemed for cash of approximately $251,000. I. INCOME TAXES Income tax expense (benefit) consists of the following:
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- ------- ------- (DOLLARS IN THOUSANDS) Current.............................................. $ 82,267 $33,729 $10,373 Deferred............................................. (12,825) 1,686 8,612 -------- ------- ------- $ 69,442 $35,415 $18,985 ======== ======= =======
Total income tax expense (benefit) for the years ended December 31, 1998, 1997 and 1996 was allocated as follows:
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (DOLLARS IN THOUSANDS) Income from continuing operations..................... $69,442 $36,595 $18,985 Extraordinary gain (loss)............................. -- (1,180) -- ------- ------- ------- $69,442 $35,415 $18,985 ======= ======= =======
The effective tax rate differs from the statutory income tax rate as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 ----- ----- ----- Statutory income tax rate................................... 35.0% 35.0% 35.0% Tax exempt interest income.................................. (1.6) (1.7) (1.1) Non-deductible expenses..................................... 1.7 5.8 2.4 State taxes, net of Federal deduction....................... 3.6 3.1 2.3 Other....................................................... 1.0 .6 .8 ---- ---- ---- 39.7% 42.8% 39.4% ==== ==== ====
63 66 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) The deferred tax assets and liabilities at December 31, 1998 consist of the following:
DEFERRED DEFERRED TAX TAX ASSETS LIABILITIES ---------- ------------ (DOLLARS IN THOUSANDS) Provision for claim losses in excess of statutory amounts.......................................... $65,191 $ -- Employee benefit accruals.......................... 11,339 -- Excess book over tax provision for bad debts....... 4,511 -- Accrued liabilities................................ 8,264 -- Deferred state income taxes........................ 5,423 -- Other assets....................................... 112 -- Statutory unearned premium reserve................. -- 60,024 Accelerated depreciation........................... -- 3,433 Investment securities.............................. -- 8,101 Investments in partnerships........................ -- 389 Investments in real estate......................... -- 153 Section 338(h)(10) gain deferral................... -- 1,670 Other acquisition accruals......................... -- 5,563 Lease accounting................................... -- 1,786 Other liabilities.................................. -- 4,995 Net operating loss available for carryovers........ 4,539 -- ------- ------- 99,379 86,114 Less: valuation allowance.......................... 2,300 -- ------- ------- Total deferred taxes..................... $97,079 $86,114 ======= =======
The deferred tax assets and liabilities at December 31, 1997 consist of the following:
DEFERRED DEFERRED TAX TAX ASSETS LIABILITIES ---------- ------------ (DOLLARS IN THOUSANDS) Provision for claim losses in excess of statutory amounts.......................................... $50,275 $ -- Employee benefit accruals.......................... 8,365 -- Excess book over tax provision for bad debts....... 4,217 -- Other assets....................................... 2,301 -- Statutory unearned premium reserve................. -- 52,411 Accelerated depreciation........................... -- 875 Investment securities.............................. -- 16,156 Investments in partnerships........................ -- 392 Investments in real estate......................... -- 154 Section 338(h)(10) gain deferral................... -- 2,046 Other acquisition accruals......................... -- 5,509 Lease accounting................................... -- 3,214 Other liabilities.................................. -- 2,012 Net operating loss available for carryover......... 1,812 -- ------- ------- 66,970 82,769 Less: valuation allowance.......................... 711 -- ------- ------- Total deferred taxes..................... $66,259 $82,769 ======= =======
64 67 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) 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 financial condition or results of operations of the Company. J. SUMMARY OF RESERVE FOR CLAIM LOSSES A summary of the reserve for claim losses follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (DOLLARS IN THOUSANDS) Beginning balance.................................. $201,674 $196,527 $153,207 Reserves assumed from First Title Corp. ......... -- 284 -- Reserves transferred due to the sale of American Title Company................................. -- (160) -- Reserves assumed from Nations Title Inc.......... -- -- 45,171 Title claim loss provision related to: Current year.................................. 59,294 39,301 35,478 Prior years................................... -- 2,257 797 -------- -------- -------- Total title claim loss provision................. 59,294 41,558 36,275 Title claims paid, net of recoupments related to: Current year.................................. (1,045) (3,385) (2,749) Prior years................................... (35,389) (33,150) (35,377) -------- -------- -------- Total title claims paid, net of recoupments...... (36,434) (36,535) (38,126) -------- -------- -------- Ending balance..................................... $224,534 $201,674 $196,527 ======== ======== ========
The provision for claim losses includes an estimate of anticipated title claims and major claims. The estimate of anticipated title claims is accrued as a percentage of title premium revenue based on the Company's historical loss experience and other relevant factors. The Company monitors its claims experience on a continual basis and adjusts the provision for claim losses accordingly. K. 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 65 68 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) 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 depart from customary litigation incidental to the business of the Company and that resolution of all such litigation will not have a material adverse effect on the Company. In conducting its operations, the Company routinely holds customers' assets in trust, pending completion of real estate transactions. Such amounts are maintained in segregated bank accounts and have not been included in the accompanying Consolidated Balance Sheets. The Company has a contingent liability relating to proper disposition of these balances for its customers which amounted to $532.2 million at December 31, 1998. 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): 1999...................................................... $ 29,999 2000...................................................... 24,776 2001...................................................... 20,418 2002...................................................... 14,856 2003...................................................... 9,992 Thereafter................................................ 24,590 -------- Total future minimum operating lease payments... $124,631 ========
Rent expense incurred under operating leases during the years ended December 31, 1998, 1997 and 1996 was $32,609,000, $29,730,000 and $28,117,000, respectively. Included in rent expense for 1998, 1997 and 1996 is $485,000, $523,000 and $523,000, respectively paid to related parties. L. STOCKHOLDERS' EQUITY Title insurance companies, including underwriters, underwritten title companies and independent agents, are subject to extensive regulation under applicable state laws. Each insurance underwriter is usually subject to a holding company act in its state of domicile which regulates, among other matters, the ability to pay dividends and investment policies. The laws of most states in which the Company transacts business establish supervisory agencies with broad administrative powers relating to issuing and revoking licenses to transact business, regulating trade practices, licensing agents, approving policy forms, accounting principles, financial practices, establishing reserve and capital and surplus requirements, defining suitable investments for reserves, capital and surplus and approving rate schedules. 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 is currently evaluating the impact of the rules. Pursuant to statutory accounting requirements of the various states in which the 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 66 69 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) 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, 1998, the combined statutory unearned premium reserve required and reported for the Insurance Subsidiaries was $207.2 million. The Insurance Subsidiaries are regulated by the insurance commissioners of their respective states of domicile. Regulatory examinations usually occur at three year intervals. Examinations are currently in progress for Fidelity Title (1998, which was previously scheduled for 1997 but will now be as of 1998), Fidelity New York (1996), Nations New York (1996) and National (1996). The Company has not received preliminary reports of examination for Fidelity Title, Fidelity New York, Nations New York or National, as the examinations are currently ongoing. Additionally, the Auditor Division of the Controller of the State of California is currently conducting an audit of the funds due the State of California under various escheatment regulations for the years ended December 31, 1998 and prior. The Company does not believe that either the audits performed by the insurance regulators or the Controller of the State of California will have a material impact on its financial position, its results of operations or its combined statutory capital and surplus. Statutorily calculated net worth determines the maximum insurable amount under any single title insurance policy. As of January 1, 1999, the Company's self-imposed single policy maximum insurable amounts, which comply with all statutory limitations, for Fidelity Title, Fidelity New York and Alamo Title were $60.0 million, $90.0 million and $17.5 million, respectively. The self-imposed single policy maximum insurable amounts for Nations New York and National were $19.0 million and $5.0 million, respectively. The Insurance Subsidiaries are subject to regulations that restrict their ability to pay dividends or make other distributions of cash or property to their immediate parent company without prior approval from the Department of Insurance of their respective states of domicile. In the case of Fidelity Title, the total amount of dividends made in any twelve-month period may not exceed the greater of 10% of the surplus as regards policyholders as of the last day of the preceding year or net earnings for the twelve-month period ending the last day of the preceding year. In the case of Fidelity New York, the total amount of dividends and distributions is limited to surplus as regards policyholders, excluding capital stock and surplus resulting from unrealized gains on investments, less fifty percent of statutory premium reserve as of the last day of the preceding year and capital contributions received in the latest five-year period. In the case of Alamo Title, the total amount of dividends made in any twelve-month period may not exceed the greater of 20% of the surplus as regards policyholders as of the last day of the preceding year or net earnings for the twelve-month period ending the last day of the preceding year. As of January 1, 1999, Fidelity Title could pay dividends or make other distributions to the Company of $10,588,000, Fidelity New York could pay dividends or make other distributions to the Company of $13,325,000 and Alamo Title could pay dividends or make other distributions to the Company of $9,064,000. The combined statutory capital and surplus of the Insurance Subsidiaries was $164,953,000, $122,107,000 and $97,845,000 as of December 31, 1998, 1997 and 1996, respectively. The combined statutory earnings of the Insurance Subsidiaries were $37,771,000, $26,701,000 and $12,243,000 for the years ended December 31, 1998, 1997 and 1996, respectively. As a condition to continued authority to underwrite policies in the states in which the Insurance Subsidiaries conduct their business, the Insurance Subsidiaries are required to pay certain fees and file information regarding their officers, directors and financial condition. In addition, the Company's escrow and trust business is subject to regulation by various state banking authorities. Pursuant to statutory requirements of the various states in which the Insurance Subsidiaries are domiciled, they must maintain certain levels of minimum capital and surplus. Each of the Company's title underwriters have complied with the minimum statutory requirements as of December 31, 1998. 67 70 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) On March 18, 1998, the Company announced that it had entered into an agreement to sell National Title Insurance of New York Inc. to ATC for $3.25 million, subject to regulatory approval and certain other conditions. The purchase price is structured at a premium to book value. National was acquired in April 1996, as part of the Nations Title Inc. acquisition, and has not been actively underwriting policies since the transaction closed. This transaction has not yet received regulatory approval. See also Note C. The UTCs 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 and $2.5 million is required for Fidelity National Title Company ("FNTC") and Fidelity National Title Company of California ("FNCAL"), respectively. FNTC and FNCAL are in compliance with their respective minimum net worth requirements at December 31, 1998. M. EMPLOYEE BENEFIT PLANS Employee benefits include an employee stock purchase plan, three stock option plans and a 401(k) plan. In 1987, stockholders approved the adoption of an Employee Stock Purchase Plan ("ESPP"). Under the terms of the ESPP and subsequent amendments, there are 8,785,000 shares of the Company's common stock available for purchase at current market prices by Company employees who meet certain vesting requirements. Pursuant to the ESPP, Company employees may contribute an amount between 5% and 15% of their base salary and certain commissions. The Company contributes varying amounts as specified in the ESPP. During the years ended December 31, 1998, 1997 and 1996, 282,216, 353,594 and 371,852 shares, respectively, were purchased and allocated to employees, based upon their contributions, at an average price of $29.42, $13.73 and $11.32 per share, respectively. The Company contributed $2.0 million or the equivalent of 67,407 shares for the year ended December 31, 1998, $1.7 million or the equivalent of 122,740 shares for the year ended December 31, 1997 and $1.2 million or the equivalent of 107,218 shares for the year ended December 31, 1996 in accordance with the employer's matching contribution. A total of 7,526,473 shares have been purchased by both the ESPP and employees since the adoption of the ESPP. In 1987, stockholders also approved the adoption of a Stock Option Plan ("1987 Option Plan"). Under the terms of the 1987 Option Plan, the Company may grant stock options to certain key employees and non-employee directors or officers. The number of shares issuable under the 1987 Option Plan is 1,812,000 shares of common stock at not less than fair market value on the date of grant. Employees are eligible to receive incentive stock options or non-qualified stock options and non-employee directors are eligible to receive non-qualified stock options. Options available to directors or officers may not exceed one-half of the aggregate number of shares available for grant. All options granted become exercisable at the discretion of the Board of Directors and expire five to eleven years from the date of grant. Options that lapse or are cancelled prior to exercise are added to the shares authorized for future grants. The 1987 Option Plan expired December 31, 1997. In 1992, stockholders approved the adoption of the 1991 Stock Option Plan ("1991 Option Plan"). Under the terms of the 1991 Option Plan, options may be granted to officers and key employees of the Company or any or all of its present or future subsidiaries. The number of shares reserved for issuance under the 1991 Option Plan and subsequent amendments is 1,953,000 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. 68 71 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) This plan allows for exercise prices with a fixed discount from the quoted market price. 115,169 options were granted in 1996 at an exercise price of $9.39 to key employees of the Company who applied deferred bonuses expensed in 1995 amounting to $433,000 to the exercise price, reducing it to $5.64 if exercised within the first year of the grant. The exercise price of these options decreases approximately 5.0% per year through 2001 and $.16 per share from 2002 through 2007, at which time the exercise price will be $3.31. In 1997, 201,169 options were granted at an exercise price of $10.44 to key employees of the Company who applied deferred bonuses expensed in 1996 amounting to $876,000 to the exercise price, reducing it to $6.30 if exercised within the first year of the grant. The exercise price of these options decreases approximately 7% per year through 2002 and $.18 per share from 2003 through 2008, at which time the exercise price will be $3.74. In 1998, 388,123 options were granted at an exercise price of $24.26 to key employees of the Company who applied deferred bonuses expensed in 1997 amounting to $1,764,000 to the exercise price, reducing it to $19.72 if exercised within the first year of the grant. The exercise price of these options decreases approximately 7% per year through 2003 and $.20 per share from 2004 through 2009, at which time the exercise price will be $16.90. Additionally, the Company recorded compensation expense relating to the price decrease of $282,000, 194,000 and $111,000, for the years ended December 31, 1998, 1997 and 1996, respectively. In 1994, stockholders approved the adoption of the 1993 Stock Plan ("1993 Plan"). Under the terms of the 1993 Plan, options may be granted to officers, key employees and non-employee directors of the Company. The number of shares of common stock reserved for issuance under the 1993 Plan is 1,098,000. 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 ten years following the grant date. In 1996, Granite adopted a Stock Option Plan ("Granite Plan", now issuable in Company common stock) allowing for the issuance of qualified and non-qualified stock options to purchase an aggregate of 347,000 shares of common stock to directors, officers, employees, agents and consultants of Granite. The Granite Plan is administered by the Board of Directors. The Granite Plan provides that qualified stock options be granted at an exercise price equal to fair market value of the common shares of Granite on the date of the grant, and must be at least 110% of fair market value when granted to a 10% or more shareholder. The term of all qualified stock options granted under the Granite Plan may not exceed ten years, except the term of qualified stock options granted to a 10% or more shareholder, 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 of the common shares of Granite on the date of grant. The term of all non-qualified stock options granted under the Granite Plan may not exceed ten years, except the term of non-qualified stock options granted to a 10% or more shareholder, which may not exceed five years. In April 1997, the Granite Plan was amended and restated in order to make certain technical modifications thereto and was further amended in June 1997 to increase the shares of common stock reserved for issuance to 695,000. During 1998, stockholders approved the adoption of the 1998 Stock Incentive Plan ("1998 Plan"). The 1998 Plan authorizes up to 1,100,000 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 authorized number of shares is subject to adjustment in the event of stock splits, stock dividends or certain other similar changes in the capital structure of the Company. The 1998 Plan provides for grants of "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), non-qualified stock options and rights to purchase shares of common stock ("Purchase Rights"). Incentive stock options, non-qualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates. Non-qualified stock options and 69 72 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates, non-employee directors and officers, consultants and other service providers. The Board of Directors, or a committee consisting of two or more members of the Board of Directors, will administer the 1998 Plan (the "Administrator"). The Administrator will have the full power and authority to interpret the 1998 Plan, select the recipients of options and Purchase Rights, determine and authorize the type, terms and conditions of, including vesting provisions, and the number of shares subject to, grants under the 1998 Plan, and adopt, amend and rescind rules relating to the 1998 Plan. The term of options may not exceed 10 years from the date of grant (5 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 options 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 Administrator. The maximum number of shares for which options or Purchase Rights may be granted to any one person during any one calendar year under the 1998 Plan is 300,000 and in no event shall the aggregate number of shares subject to incentive stock options exceed 1,000,000. The aggregate fair market value of the common stock (determined as of the date of grant) with respect to incentive stock options granted under the 1998 Plan or any other stock option plan of the Company that become exercisable for the first time by any optionee during any calendar year may not exceed $100,000. A summary of the Company's stock option activity, and related information for the years ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996 ---------------------- --------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE ---------- --------- --------- --------- --------- --------- Stock options outstanding, beginning of year.............. 4,089,410 $ 7.49 3,254,645 $ 6.77 2,710,202 $ 6.25 Stock options granted............ 1,730,043 23.46 993,867 9.90 725,651 8.64 Stock options exercised.......... (1,290,640) 7.12 (159,101) 7.85 (67,412) 3.87 Stock options cancelled.......... -- -- (1) 5.31 (113,796) 8.11 ---------- ------ --------- ------ --------- ------ Stock options outstanding, end of year.................... 4,528,813 $13.72 4,089,410 $ 7.49 3,254,645 $ 6.77 Exercisable at end of year....... 3,180,984 9.31 3,451,363 6.98 2,831,914 6.37 Weighted-average fair value of options granted during the year........................... -- $26.63 -- $10.73 -- $10.11
The weighted average remaining contractual life of the options outstanding at December 31, 1998 is 7.68 years. 70 73 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) The following table sets forth options outstanding and exercisable by price range as of December 31, 1998:
DECEMBER 31, 1998 - ----------------------------------------------------------------------------- OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------- --------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OF SHARES LIFE PRICE OF SHARES PRICE - --------------- --------- ----------- --------- --------- --------- $ 0.48 - 5.31 472,159 7.24 $ 4.19 472,159 $ 4.19 6.01 - 6.49 524,269 7.18 6.34 524,269 6.34 6.83 - 9.48 687,834 6.00 7.88 687,834 7.88 9.58 - 10.02 485,973 7.60 9.72 385,140 9.64 10.13 - 10.43 646,840 6.44 10.41 646,840 10.41 10.85 - 19.40 475,042 9.13 17.96 454,742 17.98 24.26 - 24.26 706,200 9.03 24.26 -- -- 25.97 - 28.64 461,746 9.19 26.24 10,000 28.64 29.43 - 31.53 63,250 9.65 31.26 -- -- 34.77 - 34.77 5,500 9.30 34.77 -- -- - -------------- --------- ---- ------ --------- ------ $ 0.48 - 34.77 4,528,813 7.68 $13.72 3,180,984 $ 9.31
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 1998, 1997 and 1996 were 5.7%, 6.0% and 6.5%, respectively. A volatility factor for the expected market price of the common stock of 50% was used for options granted in 1998, 1997 and 1996. The expected dividend yield used for 1998, 1997 and 1996 was 1.0%, 1.0% and 2.0%, respectively. A weighted average expected life of seven years was used in all years as the Company has little history of options being exercised. 71 74 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) 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, ----------------------------- 1998 1997 1996 ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Pro forma basic net earnings.................. $94,982 $44,056 $26,334 Pro forma diluted net earnings................ 97,445 47,198 29,530 Pro forma earnings per share Basic....................................... $ 3.40 $ 1.89 $ 1.29 Diluted..................................... 2.91 1.59 1.12
The Company also offers the Fidelity National Financial, Inc. 401(k) Profit Sharing Plan, a qualified voluntary contributory savings plan, available to substantially all employees. Eligible employees may contribute up to 15% of their pretax annual compensation, up to the amount allowed pursuant to the Internal Revenue Code. The Company may elect to make matching contributions. The Company has historically not made matching contributions. N. 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. See Notes B, H and I.
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (DOLLARS IN THOUSANDS) Cash paid during the year: Interest.................................... $ 8,153 $ 6,923 $ 6,887 ======= ======= ======= Income taxes................................ $77,277 $17,325 $18,403 ======= ======= ======= Non-cash investing and financing activities: Dividends declared and unpaid............... $ 2,270 $ 1,254 $ 975 ======= ======= ======= Acquisitions................................ $ 6,250 $24,377 $ 4,650 ======= ======= ======= Retirement of LYONs......................... $ -- $26,422 $ -- ======= ======= ======= Conversion of LYONs......................... $ 9,202 $ 888 $ -- ======= ======= =======
O. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF RISK The Company generates a significant amount of title insurance premiums in California and Texas, 33.1% and 19.6% in 1998, 32.9% and 20.8% in 1997, and 33.1% and 21.1% in 1996, respectively. Granite's leases are originated through a network of approximately 73 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, 1998 and 1997. Transactions generated by the Company's ten largest independent lease originators accounted for approximately 26.0% and 53.9% of leases funded during the years ended December 31, 1998 and 1997. Granite approved contingent fundings of approximately $67,900,000 and $73,200,000 in leases at December 31, 1998 and 1997, respectively. 72 75 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) 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 A1, P1 or better. Concentrations of credit risk with respect to trade receivables are limited because a large number of geographically diverse customers make up the Company's customer base, thus spreading the trade receivables credit risk. The Company controls credit risk through monitoring procedures. Concentrations of credit risk with respect to notes receivable are limited because a number of diverse entities make up the Company's notes receivable base, thus spreading the credit risk. The Company controls credit risk through credit approvals, credit limits and monitoring procedures. The Company performs in-depth credit evaluations for all notes and requires guarantees and/or collateral, if deemed necessary. P. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 requires all items that are necessary to be recognized under accounting standards as components of comprehensive earnings to be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial statement, but requires that an enterprise display an amount representing total comprehensive earnings for the period covered by that financial statement. SFAS 130 requires an enterprise to (a) classify items of other comprehensive earnings by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 became effective for fiscal years beginning after December 15, 1997. The adoption of SFAS 130 has not had a material impact on the Company's financial reporting. Also in June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the revenues derived from the enterprise's products or services and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 became effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial 73 76 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) statements for interim periods in the second year of application. The adoption of SFAS 131 has not had a material impact on the Company's financial reporting. In June 1998, the FASB 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, including certain derivative instruments embedded in other contracts, (collectively, "derivatives") and for 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. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. It requires changes in the fair value of a derivative instrument and the changes in fair value of assets or liabilities hedged by that instrument to be included in earnings. To the extent that the hedge transaction is effective, earnings are equally offset by both investments. Currently the changes in fair value of derivative instruments and hedged items are reported in net unrealized gain (loss) on securities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of this Statement should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of this Statement. Earlier application of all of the provisions of SFAS 133 is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance of this statement. The Company does not believe the adoption of SFAS 133 will have a material impact on its financial reporting. Q. SUBSEQUENT EVENTS The Company's Board of Directors declared a cash dividend of $.07 per share on March 17, 1999, which will be payable on May 28, 1999 to stockholders of record on April 9, 1999. 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 new authorization will permit the Company to purchase up to 4.0 million shares. Through March 25, 1999, the Company has purchased 1,202,050 shares at an average purchase price of $16.61 per share totalling $19,960,000. 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. Also 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"). The purpose of the Loan Plan is to provide key employees with further incentive to maximize shareholder value. The Company intends to offer an aggregate of $7,750,000 in loans. Loan Plan 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 will be full recourse and unsecured, and will have a five year term. Interest will accrue on the loans at a rate of 5% per annum due at maturity. Loans may be prepaid at any time without penalty. Through March 25, 1999, loans have been made in the amount of $5,700,000 to purchase 382,650 shares of Company common stock at an average purchase price of $14.90 per share. 74 77 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. THROUGH 13. Within 120 days after the close of its fiscal year, the Company intends to file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 as amended, which will include the election of directors, the report of compensation committee on annual compensation, certain relationships and related transactions and other business. 75 78 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, 1998 and 1997 (Restated). Consolidated Statements of Earnings for the years ended December 31, 1998, 1997 (Restated) and 1996 (Restated). Consolidated Statements of Comprehensive Earnings for the year ended December 31, 1998, 1997, and 1996. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 (Restated) and 1996 (Restated) Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 (Restated) and 1996 (Restated) 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. (a)(3) The following exhibits are incorporated by reference or are set forth on pages to this Form 10-K:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3 Charter and Bylaws of the Issuer. 3.1 Certificate of Incorporation of Registrant, with Amendments, incorporated by reference from Form S-1, Registration No. 33-11321. 3.1.1 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated February 2, 1989 and approved by the stockholders of the Company on March 24, 1989, incorporated by reference from Form 10-K filed January 29, 1990. 3.1.2 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated June 10, 1992 and approved by the stockholders of the Company on July 15, 1992, incorporated by reference from Proxy Statement on Schedule 14A dated June 17, 1992. 3.1.3 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated June 15, 1993 and approved by the stockholders of the Company on June 15, 1993, incorporated by reference from Proxy Statement on Schedule 14A dated May 5, 1993. 3.1.4 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated June 14, 1994 and approved by the stockholders of the Company on June 14, 1994, incorporated by reference from Proxy Statement on Schedule 14A dated May 11, 1994. 3.2 Bylaws of Registrant with Amendments, incorporated by reference from Form S-1, Registration No. 33-11321.
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.2.1 Amendment to Article VII, Section 7 of the Bylaws of Registrant dated April 22, 1988, incorporated by reference from Form 10-K filed January 29, 1990. 3.2.2 Amendment to Article III, Section 3(d) of the Bylaws of Registrant dated September 14, 1991, incorporated by reference from Form 10-K filed March 29, 1993. 3.2.3 Amendment to Article II, Section 1(b) of the Bylaws of Registrant dated October 29, 1991, incorporated by reference from Form 10-K filed March 29, 1993. 3.2.4 Amendment to Article II, Section 1(b) of the Bylaws of Registrant dated December 10, 1991, incorporated by reference from Form 10-K filed March 29, 1993. 3.2.5 Amendment to Article IV, Sections 1(a) and (b) and Section 4 of the Bylaws of Registrant dated June 9, 1992, incorporated by reference from Form 10-K filed March 29, 1993. 4 Instruments Defining Rights of Security Holders. 4.1 Specimen Certificate, incorporated by reference from Form S-1, Registration No. 33-11321. 4.2 Articles FOURTH and EIGHTH of Certificate of Incorporation of Registrant, with Amendments, incorporated by reference from Form S-1, Registration No. 33-11321. 4.2.1 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated February 2, 1989 and approved by the stockholders of the Company on March 24, 1989, incorporated by reference from Form 10-K filed January 29, 1990. 4.2.2 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated June 10, 1992 and approved by the stockholders of the Company on July 15, 1992, incorporated by reference from Proxy Statement on Schedule 14A dated June 17, 1992. 4.2.3 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated June 14, 1994 and approved by the stockholders of the Company on June 14, 1994, incorporated by reference from Proxy Statement on Schedule 14A dated May 11, 1994. 4.3 Articles II and IV of the Bylaws of the Registrant with Amendments, incorporated by reference from Form S-1, Registration No. 33-11321. 4.4 Subscription Documents, incorporated by reference from Form S-1, Registration No. 33-11321. 10 Material Contracts. 10.1 Employment Agreement effective as of April 1, 1991, between William P. Foley, II and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 23, 1992. 10.1.1 First amendment to Employment Agreement between William P. Foley, II and Fidelity National Financial, Inc., effective as of January 1, 1996, incorporated by reference from Form 10-K filed March 31, 1997. 10.1.2 Employment Agreements effective as of January 1, 1996 between four key executives and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 31, 1997. 10.1.2.1 First amendments and revisions to Employment Agreements between four key executives and Fidelity National Financial, Inc., effective January 1, 1997 and April 1, 1997, incorporated by reference from Form 10-K filed March 30, 1998.
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.1.3 Employment Agreement effective as of September 15, 1997 between a key executive and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 30, 1998. 10.1.4 Employment Agreement effective as of October 1, 1998 between a key executive and Fidelity National Financial, Inc. 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.
78 81
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.10 Agreement of Limited Partnership of Folco Mission Valley Partners Limited Partnership, a California limited partnership, dated August 8, 1991, by Folco Development Corporation, an Arizona corporation, as general partner, and Fidelity National Title Insurance Company, an Arizona corporation, as limited partner, incorporated by reference from Form 10-K filed March 23, 1992. 10.10.2 Office Building Lease dated October 1, 1991 between Folco Mission Valley Partners Limited Partnership, a California limited partnership, as Landlord, and Fidelity National Title Insurance Company, an Arizona corporation, as Tenant, incorporated by reference from Form 10-K filed March 23, 1992. 10.12 Form of First Amendment to Office Building Lease between Folco Development Corporation, an Arizona corporation, as Landlord, and Fidelity National Title Insurance Company, an Arizona corporation, as Tenant, with respect to nine office buildings, and the schedule of such buildings, incorporated by reference from Form 10-K filed March 23, 1992. 10.14 Goodyear Investors Number II Partnership Agreement dated October 7, 1986 among Manchester Development Corporation, Folco Development Corporation Defined Benefit Pension Plan, Enfield Construction Company, et al., incorporated by reference from Form S-1, Registration No. 33-11321. 10.16 Agreement of Limited Partnership of Prospect Office Partners, a California limited partnership, dated September 1, 1988 by and among William P. Foley, II, Frank P. Willey, Max F. Hickman, Manchester Development Corporation, and James G. Watt Partnership, incorporated by reference from Form 10-K filed January 29, 1989. 10.16.1 Promissory Note dated October 1, 1988 in the original principal amount of $850,000 to Manchester Development Corporation by Prospect Office Partners, incorporated by reference from Form 10-K filed March 29, 1993. 10.16.2 Modification Agreement dated November 30, 1992 between Manchester Development Corporation and Prospect Office Partners, incorporated by reference from Form 10-K filed March 29, 1993. 10.18 Wilmac III Limited Partnership Certificate and Agreement of Limited Partnership, dated December 31, 1987 by and among Manchester Development Corporation, Stephen L. McCartney, Frank P. Willey and Robert P. Coluccio, incorporated by reference from Form 10-K filed January 29, 1989. 10.19 Agreement of Limited Partnership of Tustin Retail, a California limited partnership, dated April 1988 by and among Manchester Development Corporation and Vistar Financial Inc., incorporated by reference from Form 10-K filed January 29, 1989. 10.19.1 Amendment to Agreement of Limited Partnership of Tustin Retail by and among Manchester Development Corporation, Vistar Financial, Inc., William P. Foley, II, Frank P. Willey, John E. Hock, Robert A. Diemer, Gerald S. Misurek and Stuart R. Boesche, incorporated by reference from Form 10-K filed March 29, 1993. 10.19.2 Promissory Note dated May 1, 1988 in the original principal amount of $700,000 to Manchester Development Corporation by Tustin Retail, incorporated by reference from Form 10-K filed March 29, 1993. 10.19.3 Fixed Rate Promissory Note dated March 1, 1992 in the original principal amount of $303,500 to Manchester Development Corporation by Tustin Retail, incorporated by reference from Form 10-K filed March 29, 1993.
79 82
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.19.4 Modification Agreement dated November 30, 1992 between Manchester Development Corporation and Tustin Retail, incorporated by reference from Form 10-K filed March 29, 1993. 10.35 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. 10.43 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. 10.46 Stock Purchase and Loan Agreement by and among ATC Holdings, Inc., Fidelity National Financial, Inc. and American Title Company, incorporated by reference from Form 10-K filed March 30, 1998. 10.47 Agreement and Plan of Reorganization dated as of August 15, 1997 by and among Fidelity National Financial, Inc., First Title Corporation, Ernest N. Moore, Jeanene S. Moore and T. Frank Jordan and First Title Acquisition Corporation, incorporated by reference from Form 10-K filed March 30, 1998. 10.48 Agreement and Plan of Reorganization dated September 1997 by and among Fidelity National Financial, Inc., ICS Ifland Credit Services, Inc., Rick W. Ifland and ICS Acquisition Corporation, incorporated by reference from Form 10-K filed March 30, 1998. 10.49 Agreement and Plan of Reorganization by and among Fidelity National Financial, Inc.; Bron Acquisition Corporation, Bron Research, Inc., and the Shareholders of Bron Research, Inc., dated as of September 24, 1997, incorporated by reference from Form 10-K filed March 30, 1998. 10.50 Agreement and Plan of Reorganization dated as of September 12, 1997, by and among Fidelity National Financial, Inc., Credit Reports, Inc., Colin Howard Friedman and Hedy Kramer Friedman, as trustees of the Friedman Family Trust UDT, dated July 23, 1987, Colin H. Friedman, Farid Meshkatai and CRI Acquisition Corporation, incorporated by reference from Form 10-K filed March 30, 1998, 10.51 Agreement and Plan of Reorganization dated as of September 12, 1997 by and among Fidelity National, Inc., Express Network, Inc., Colin Howard Friedman and Hedy Kramer Friedman, as trustees of the Friedman Family Trust UDT, dated July 23, 1987, Farid Meshkatai, and Anita Kramer Meshkatai, as Trustee of the Anita Kramer Living Trust, dated July 23, 1987, Colin H. Friedman, and ENI Acquisition Corporation, incorporated by reference from Form 10-K filed March 30, 1998.
80 83
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.52 Fidelity National Financial, Inc. Liquid Yield Option Notes, due 2009 (zero coupon-subordinated) Exchange Agreement dated October 17, 1997, incorporated by reference from Form 10-K filed March 30, 1998. 10.53 Stock and Asset Purchase Agreement dated as of May 22, 1997, by and between Randall F. Zurbach and John C. Wilbur, Jr. and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 30, 1998. 10.54 Agreement and Plan of Merger, dated November 17, 1997 by and among Fidelity National Financial, Inc.; Granite Acquisition Corporation and Granite Financial, Inc., incorporated by reference from Form S-4, Registration No. 333-44153. 10.55 Securities Purchase Agreement, dated April 8, 1998, by and among Walter W. Cruttenden, III, Cruttenden Roth Incorporated, and Fidelity National Financial, Inc. 10.56 Agreement and Plan of Merger, dated May 6, 1998 by and among Fidelity National Financial, Inc.; AT Merger, Inc. and Alamo Title Holding Company, incorporated by reference from Form S-4, Registration No. 333-58573. 10.57 Agreement and 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. 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. 10.58 Credit Agreement, dated as of August 1, 1998, by and among Fidelity National Financial, Inc., Sanwa Bank California as the Agent and the Lenders from time to time party thereto. 10.58.1 First Amendment, dated as of December 31, 1998, to the Credit Agreement, dated as of August 1, 1998, by and among Fidelity National Financial, Inc., Sanwa Bank California as the Agent and the Lenders from time to time party thereto. 10.59 Stock Purchase Agreement, dated as of August 31, 1998, by and among Granite Financial, Inc., Fidelity National Financial, Inc., Lexington Capital Corporation, and the Shareholders of Lexington Capital Corporation. 11 Computation of Basic and Diluted Earnings per Share. 21 List of Subsidiaries. 23 Independent Auditors' Consent. 27 Financial Data Schedule -- December 31, 1998. 27.1 Financial Data Schedule -- September 30, 1998 (Restated). 27.2 Financial Data Schedule -- June 30, 1998 (Restated). 27.3 Financial Data Schedule -- March 31, 1998 (Restated). 27.4 Financial Data Schedule -- December 31, 1997 (Restated). 27.5 Financial Data Schedule -- September 30, 1997 (Restated). 27.6 Financial Data Schedule -- June 30, 1997 (Restated).
81 84
EXHIBIT NUMBER DESCRIPTION ------- ----------- 27.7 Financial Data Schedule -- March 31, 1997 (Restated). 27.8 Financial Data Schedule -- December 31, 1996 (Restated).
(b) REPORTS ON FORM 8-K. The Company filed reports on Form 8-K during the fourth quarter ending December 31, 1998 as follows: Current report on Form 8-K dated October 22, 1998, relating to the combined financial results of Fidelity National Financial, Inc. and Alamo Title Holding Company for the quarter ended September 30, 1998. 82 85 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 17, 1999 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 March 17, 1999 - ----------------------------------------------------- Chief Executive Officer William P. Foley, II (Principal Executive Officer) /s/ FRANK P. WILLEY President and Director March 17, 1999 - ----------------------------------------------------- Frank P. Willey /s/ ALLEN D. MEADOWS Executive Vice President and March 17, 1999 - ----------------------------------------------------- Chief Financial Officer Allen D. Meadows /s/ ALAN L. STINSON Executive Vice President, March 17, 1999 - ----------------------------------------------------- Financial Operations (Chief Alan L. Stinson Accounting Officer) /s/ WILLIAM A. IMPARATO Director March 17, 1999 - ----------------------------------------------------- William A. Imparato /s/ DONALD M. KOLL Director March 17, 1999 - ----------------------------------------------------- Donald M. Koll /s/ DANIEL D. (RON) LANE Director March 17, 1999 - ----------------------------------------------------- Daniel D. (Ron) Lane /s/ GENERAL WILLIAM LYON Director March 17, 1999 - ----------------------------------------------------- General William Lyon /s/ J. THOMAS TALBOT Director March 17, 1999 - ----------------------------------------------------- J. Thomas Talbot /s/ CARY H. THOMPSON Director March 17, 1999 - ----------------------------------------------------- Cary H. Thompson
83 86 INDEPENDENT AUDITORS' REPORT The Board of Directors Fidelity National Financial, Inc.: Under date of February 17, 1999, we reported on the Consolidated Balance Sheets of Fidelity National Financial, Inc. and subsidiaries as of December 31, 1998 and 1997, 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, 1998 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 17, 1999, except as to Note Q to the Consolidated Financial Statements, which is as of March 29, 1999. 84 87 SCHEDULE II FIDELITY NATIONAL FINANCIAL, INC. (PARENT COMPANY) BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS
DECEMBER 31, ---------------------- 1998 1997 -------- ---------- (RESTATED) Cash........................................................ $ 2,751 $ -- Investment securities available for sale, at fair value..... 51,950 46,811 Trade receivables, net...................................... -- 20 Leases receivable, net...................................... 14,265 -- Notes receivable, net....................................... 1,770 2,500 Investment in subsidiaries.................................. 458,975 357,799 Investments in real estate and partnerships, net............ 1,435 1,435 Deferred income taxes....................................... 10,965 -- Prepaid expenses and other assets........................... 5,063 4,290 -------- -------- $547,174 $412,855 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities.................. $ 19,858 $ 7,466 Notes payable............................................. 117,609 96,885 Accounts payable to subsidiaries.......................... 4,284 7,135 Deferred income taxes..................................... -- 16,510 Income taxes payable...................................... 8,683 10,809 -------- -------- 150,434 138,805 -------- -------- Stockholders' Equity: Preferred stock, $.0001 par value; authorized 3,000,000 shares; issued and outstanding, none................... -- -- Common stock, $.0001 par value; authorized, 50,000,000 shares in 1998 and 1997; issued 35,540,036 in 1998 and 33,362,204 in 1997..................................... 3 3 Additional paid-in capital................................ 173,888 137,569 Retained earnings......................................... 265,567 167,222 -------- -------- 439,458 304,794 Accumulated other comprehensive earnings.................. 11,657 23,631 Less treasury stock, 6,645,487 shares in 1998 and 1997, at cost................................................... 54,375 54,375 -------- -------- 396,740 274,050 Commitments and contingencies............................. Subsequent events......................................... -------- -------- $547,174 $412,855 ======== ========
See Notes to Financial Statements. (Schedule continued on following page.) 85 88 FIDELITY NATIONAL FINANCIAL, INC. (PARENT COMPANY) STATEMENTS OF EARNINGS AND RETAINED EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 -------- ---------- ---------- (RESTATED) (RESTATED) REVENUE: Other fees and revenue................................... $ 2 $ 13 $ 1,617 Interest and investment income........................... 13,315 1,868 227 -------- -------- -------- 13,317 1,881 1,844 -------- -------- -------- EXPENSES: Other operating expenses................................. 7,866 9,645 2,288 Interest expense......................................... 7,556 7,163 7,177 -------- -------- -------- 15,422 16,808 9,465 -------- -------- -------- Losses before income tax benefit, equity in earnings of subsidiaries and extraordinary item...................... (2,105) (14,927) (7,621) Income tax benefit......................................... 835 6,493 3,048 -------- -------- -------- Losses before equity in earnings of subsidiaries and extraordinary item....................................... (1,270) (8,434) (4,573) Equity in earnings of subsidiaries......................... 106,962 57,442 33,814 -------- -------- -------- Earnings before extraordinary item......................... 105,692 49,008 29,241 Extraordinary item -- loss on early retirement of debt, net of applicable income tax benefit of $1,180 in 1997....... -- (1,700) -- -------- -------- -------- Net earnings............................................... $105,692 $ 47,308 $ 29,241 ======== ======== ======== Basic net earnings......................................... $105,692 $ 47,308 $ 29,241 ======== ======== ======== Basic earnings per share before extraordinary item......... $ 3.79 $ 2.10 $ 1.43 Extraordinary item -- loss on early retirement of debt, net of applicable income tax benefit......................... -- (.07) -- -------- -------- -------- Basic net earnings per share............................... $ 3.79 $ 2.03 $ 1.43 ======== ======== ======== Weighted average shares outstanding, basic basis........... 27,921 23,355 20,426 ======== ======== ======== Diluted net earnings....................................... $108,155 $ 50,540 $ 32,437 ======== ======== ======== Diluted net earnings per share before extraordinary item... $ 3.23 $ 1.76 $ 1.23 Extraordinary item -- loss on early retirement of debt, net of applicable income tax benefit......................... -- (.06) -- -------- -------- -------- Diluted net earnings per share............................. $ 3.23 $ 1.70 $ 1.23 ======== ======== ======== Weighted average shares, diluted basis..................... 33,474 29,599 26,431 ======== ======== ======== Retained earnings, beginning of year....................... $167,222 $125,092 $100,164 Dividends declared....................................... (7,347) (5,178) (4,313) Net earnings............................................. 105,692 47,308 29,241 -------- -------- -------- Retained earnings, end of year............................. $265,567 $167,222 $125,092 ======== ======== ========
See Notes to Financial Statements. (Schedule continued on following page.) 86 89 FIDELITY NATIONAL FINANCIAL, INC. (PARENT COMPANY) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 --------- ---------- ---------- (RESTATED) (RESTATED) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings............................................ $ 105,692 $ 47,308 $ 29,241 Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: Extraordinary item: Loss on early retirement of LYONs.............................................. -- 2,880 -- Depreciation and amortization........................ -- -- 90 Amortization of LYONs original issue discount and issuance costs..................................... 4,432 5,939 5,295 Provision for losses on notes receivable............. 240 195 240 Net equity in earnings of subsidiaries............... (106,962) (57,442) (33,814) (Gain) loss on sale of investments................... (8,381) (746) 1,625 Net increase (decrease) in income taxes.............. (21,280) 19,820 2,092 Net (increase) decrease in prepaid expenses and other assets............................................. (1,245) (99) (1,470) Net increase (decrease) in accounts payable and accrued liabilities................................ 6,769 1,748 (381) --------- -------- -------- Net cash (used in) provided by operating activities.................................... (20,735) 19,603 2,918 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investments...................... 6,645 7,491 8,699 Purchase of investments................................. (21,930) (12,217) (8,814) Additions to notes receivable........................... -- -- (4,350) Collections on notes receivable......................... 490 1,590 393 Additions to investment in subsidiaries................. (5,050) (7,055) (10,699) --------- -------- -------- Net cash used in investing activities........... (19,845) (10,191) (14,771) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings.............................................. 46,236 -- 5,000 Debt service payments................................... (20,250) (3,000) (3,000) Dividends paid.......................................... (6,340) (4,703) (3,738) Issuance of treasury stock, net......................... -- -- 1,917 Exercise of stock options............................... 22,868 1,424 720 Net borrowings from (payments to) subsidiaries.......... 817 (6,055) 12,498 --------- -------- -------- Net cash (used in) provided by financing activities.................................... 43,331 (12,334) 13,397 --------- -------- -------- Net increase (decrease) in cash and cash equivalents...... 2,751 (2,922) 1,544 Cash and cash equivalents at beginning of year............ -- 2,922 1,378 --------- -------- -------- Cash and cash equivalents at end of year.................. $ 2,751 $ -- $ 2,922 ========= ======== ========
See Notes to Financial Statements. (Schedule continued on following page.) 87 90 FIDELITY NATIONAL FINANCIAL, INC. (PARENT COMPANY) NOTES TO FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) 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. On February 26, 1998, the Company, in exchange for approximately 5.0 million shares of Company common stock plus cash in lieu of fractional shares, acquired the common stock of Granite Financial, Inc. and subsidiaries. Fidelity National Financial, Inc. common stock, as reported by the New York Stock Exchange, closed at $26.08 on February 26, 1998. The transaction has been accounted for as a pooling-of-interests. Accordingly, the Consolidated Balance Sheet as of December 31, 1997 and the related Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for each of the years in the two-year period ended December 31, 1997 and the related Notes to Consolidated Financial Statements, have been restated to reflect the inclusion of Granite. The Company acquired the common stock of Alamo Title Holding Company and subsidiaries on August 20, 1998, in exchange for approximately 2.2 million shares of Company common stock plus cash in lieu of fractional shares. Fidelity National Financial, Inc. common stock, as reported by the New York Stock Exchange, closed at $33.13 on August 20, 1998. The transaction has been accounted for as a pooling-of-interests. Accordingly, the Consolidated Balance Sheet as of December 31, 1997 and the related Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for each of the years in the two-year period ended December 31, 1997 and the related Notes to Consolidated Financial Statements, have been restated to reflect the inclusion of Alamo. B. NOTES PAYABLE Notes payable consist of the following:
DECEMBER 31, ----------------------- 1998 1997 ---------- --------- (DOLLARS IN THOUSANDS) Credit agreement, bank revolving credit facility ($100 million), secured by common stock of certain Insurance Subsidiaries and a certain UTC, interest due monthly at LIBOR plus 1.15% (6.21% at December 31, 1998), due July 2001...................................................... $ 46,302 $ -- Credit agreement ($35 million), secured by common stock of certain Insurance Subsidiaries, principal due quarterly and interest due monthly at LIBOR rate plus 2.0%, due September 2001, paid and terminated in 1998............... -- 15,250 Bank revolving credit facility, secured by common stock of certain Insurance Subsidiaries, interest due quarterly at LIBOR plus 2.0%, principal due quarterly beginning April 1998, due September 2001, unused portion of $8 million at December 31, 1997, paid and terminated in 1998............ -- 5,000 Liquid Yield Option Notes, zero coupon, convertible subordinated notes due 2009 with interest at 5.5%, converted or redeemed in February 1999.................... 71,307 76,635 -------- ------- $117,609 $96,885 ======== =======
The Company guarantees the bank revolving line of credit of a certain subsidiary in the amount of $25.0 million. 88 91 FIDELITY NATIONAL FINANCIAL, INC. (PARENT COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Principal maturities, including accretion of original issue discount, are as follows (dollars in thousands): 1999.................................................... $ -- 2000.................................................... -- 2001.................................................... 46,302 2002.................................................... -- 2003.................................................... -- Thereafter.............................................. 71,307 -------- $117,609 ========
C. SUPPLEMENTARY CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (DOLLARS IN THOUSANDS) Cash paid (refunded) during the year: Interest............................................ $ 1,691 $ 1,931 $ 1,953 ======= ======= ======= Income taxes........................................ $77,277 $17,325 $18,403 ======= ======= ======= Non-cash investing and financing activities: Dividends declared and unpaid....................... $ 2,270 $ 1,254 $ 975 ======= ======= ======= Acquisitions........................................ $ 6,250 $24,377 $ 4,650 ======= ======= ======= Retirement of LYONs................................. $ -- $26,422 $ -- ======= ======= ======= Conversion of LYONs................................. $ 9,202 $ 888 $ -- ======= ======= =======
89 92 SCHEDULE V FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) (DOLLARS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E ------ ------ ------ ------ ------ ADDITIONS ----------------------- BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND OTHER DEDUCTIONS AT END DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) OF PERIOD ----------- ---------- ---------- ---------- ---------- --------- Year ended December 31, 1998: Reserve for claim losses..................... $201,674 $59,294 $ -- $36,434(2) $224,534 Allowance on: Leases and lease securitization residual interests............................... 2,640 19,111 -- 10,971(3) 10,780 Trade receivables......................... 5,153 3,287 -- 1,707(3) 6,733 Notes receivable.......................... 1,758 344 -- 38(3) 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 3,693 -- -- 16,721 Year ended December 31, 1997: Reserve for claim losses..................... $196,527 $41,558 $ 124(1) $36,535(2) $201,674 Allowance on: Leases and lease securitization residual interests............................... 355 2,114 3,130(1) 2,959(3) 2,640 Trade receivables......................... 6,831 1,920 204(1) 3,802(3) 5,153 Notes receivable.......................... 2,662 2,384 (153)(1) 3,135(3) 1,758 Real estate allowance........................ 4,467 330 -- 3,283(4) 1,514 Amortization of cost in excess of net assets acquired and other intangible assets...... 8,322 4,706 -- -- 13,028 Year ended December 31, 1996: Reserve for claim losses..................... $153,207 $36,275 $45,171 $38,126(2) $196,527 Allowance on: Leases and lease securitization residual interests............................... 20 224 660(1) 549(3) 355 Trade Receivables......................... 3,480 2,644 3,091(1) 2,384(3) 6,831 Notes Receivable.......................... 2,941 999 153(1) 1,431(3) 2,662 Real estate allowance........................ 3,467 -- 1,000(1) -- 4,467 Amortization of cost in excess of net assets acquired and other intangible assets...... 5,232 3,090 -- -- 8,322
- --------------- (1) Represents net reserve for claim losses and other allowances assumed from sales and acquisitions during the year. (2) Represents payments of claim losses, net of recoupments. (3) Represents uncollectible accounts written off, change in reserve due to reevaluation of specific items and change in reserve due to sale of certain assets. (4) Represents reduction in the reserve balance due to the sale of a real estate property. 90 93 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------- ----------- ------------- 3 Charter and Bylaws of the Issuer............................ 3.1 Certificate of Incorporation of Registrant, with Amendments, incorporated by reference from Form S-1, Registration No. 33-11321.................................................... 3.1.1 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated February 2, 1989 and approved by the stockholders of the Company on March 24, 1989, incorporated by reference from Form 10-K filed January 29, 1990.......... 3.1.2 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated June 10, 1992 and approved by the stockholders of the Company on July 15, 1992, incorporated by reference from Proxy Statement on Schedule 14A dated June 17, 1992.................................................... 3.1.3 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated June 15, 1993 and approved by the stockholders of the Company on June 15, 1993, incorporated by reference from Proxy Statement on Schedule 14A dated May 5, 1993..................................................... 3.1.4 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated June 14, 1994 and approved by the stockholders of the Company on June 14, 1994, incorporated by reference from Proxy Statement on Schedule 14A dated May 11, 1994.................................................... 3.2 Bylaws of Registrant with Amendments, incorporated by reference from Form S-1, Registration No. 33-11321.......... 3.2.1 Amendment to Article VII, Section 7 of the Bylaws of Registrant dated April 22, 1988, incorporated by reference from Form 10-K filed January 29, 1990....................... 3.2.2 Amendment to Article III, Section 3(d) of the Bylaws of Registrant dated September 14, 1991, incorporated by reference from Form 10-K filed March 29, 1993............... 3.2.3 Amendment to Article II, Section 1(b) of the Bylaws of Registrant dated October 29, 1991, incorporated by reference from Form 10-K filed March 29, 1993......................... 3.2.4 Amendment to Article II, Section 1(b) of the Bylaws of Registrant dated December 10, 1991, incorporated by reference from Form 10-K filed March 29, 1993............... 3.2.5 Amendment to Article IV, Sections 1(a) and (b) and Section 4 of the Bylaws of Registrant dated June 9, 1992, incorporated by reference from Form 10-K filed March 29, 1993............ 4 Instruments Defining Rights of Security Holders............. 4.1 Specimen Certificate, incorporated by reference from Form S-1, Registration No. 33-11321.............................. 4.2 Articles FOURTH and EIGHTH of Certificate of Incorporation of Registrant, with Amendments, incorporated by reference from Form S-1, Registration No. 33-11321....................
94
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------- ----------- ------------- 4.2.1 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated February 2, 1989 and approved by the stockholders of the Company on March 24, 1989, incorporated by reference from Form 10-K filed January 29, 1990.......... 4.2.2 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated June 10, 1992 and approved by the stockholders of the Company on July 15, 1992, incorporated by reference from Proxy Statement on Schedule 14A dated June 17, 1992.................................................... 4.2.3 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated June 14, 1994 and approved by the stockholders of the Company on June 14, 1994, incorporated by reference from Proxy Statement on Schedule 14A dated May 11, 1994.................................................... 4.3 Articles II and IV of the Bylaws of the Registrant with Amendments, incorporated by reference from Form S-1, Registration No. 33-11321................................... 4.4 Subscription Documents, incorporated by reference from Form S-1, Registration No. 33-11321.............................. 10 Material Contracts.......................................... 10.1 Employment Agreement effective as of April 1, 1991, between William P. Foley, II and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 23, 1992........................................................ 10.1.1 First amendment to Employment Agreement between William P. Foley, II and Fidelity National Financial, Inc., effective as of January 1, 1996, incorporated by reference from Form 10-K filed March 31, 1997................................... 10.1.2 Employment Agreements effective as of January 1, 1996 between four key executives and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 31, 1997.................................................... 10.1.2.1 First amendments and revisions to Employment Agreements between four key executives and Fidelity National Financial, Inc., effective January 1, 1997 and April 1, 1997, incorporated by reference from Form 10-K filed March 30, 1998........................................................ 10.1.3 Employment Agreement effective as of September 15, 1997 between a key executive and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 30, 1998.................................................... 10.1.4 Employment Agreement effective as of October 1, 1998 between a key executive and Fidelity National Financial, Inc. ...... 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....................
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SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------- ----------- ------------- 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...... 10.10 Agreement of Limited Partnership of Folco Mission Valley Partners Limited Partnership, a California limited partnership, dated August 8, 1991, by Folco Development Corporation, an Arizona corporation, as general partner, and Fidelity National Title Insurance Company, an Arizona corporation, as limited partner, incorporated by reference from Form 10-K filed March 23, 1992......................... 10.10.2 Office Building Lease dated October 1, 1991 between Folco Mission Valley Partners Limited Partnership, a California limited partnership, as Landlord, and Fidelity National Title Insurance Company, an Arizona corporation, as Tenant, incorporated by reference from Form 10-K filed March 23, 1992........................................................ 10.12 Form of First Amendment to Office Building Lease between Folco Development Corporation, an Arizona corporation, as Landlord, and Fidelity National Title Insurance Company, an Arizona corporation, as Tenant, with respect to nine office buildings, and the schedule of such buildings, incorporated by reference from Form 10-K filed March 23, 1992............ 10.14 Goodyear Investors Number II Partnership Agreement dated October 7, 1986 among Manchester Development Corporation, Folco Development Corporation Defined Benefit Pension Plan, Enfield Construction Company, et al., incorporated by reference from Form S-1, Registration No. 33-11321..........
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SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------- ----------- ------------- 10.16 Agreement of Limited Partnership of Prospect Office Partners, a California limited partnership, dated September 1, 1988 by and among William P. Foley, II, Frank P. Willey, Max F. Hickman, Manchester Development Corporation, and James G. Watt Partnership, incorporated by reference from Form 10-K filed January 29, 1989............................ 10.16.1 Promissory Note dated October 1, 1988 in the original principal amount of $850,000 to Manchester Development Corporation by Prospect Office Partners, incorporated by reference from Form 10-K filed March 29, 1993............... 10.16.2 Modification Agreement dated November 30, 1992 between Manchester Development Corporation and Prospect Office Partners, incorporated by reference from Form 10-K filed March 29, 1993.............................................. 10.18 Wilmac III Limited Partnership Certificate and Agreement of Limited Partnership, dated December 31, 1987 by and among Manchester Development Corporation, Stephen L. McCartney, Frank P. Willey and Robert P. Coluccio, incorporated by reference from Form 10-K filed January 29, 1989............. 10.19 Agreement of Limited Partnership of Tustin Retail, a California limited partnership, dated April 1988 by and among Manchester Development Corporation and Vistar Financial Inc., incorporated by reference from Form 10-K filed January 29, 1989...................................... 10.19.1 Amendment to Agreement of Limited Partnership of Tustin Retail by and among Manchester Development Corporation, Vistar Financial, Inc., William P. Foley, II, Frank P. Willey, John E. Hock, Robert A. Diemer, Gerald S. Misurek and Stuart R. Boesche, incorporated by reference from Form 10-K filed March 29, 1993................................... 10.19.2 Promissory Note dated May 1, 1988 in the original principal amount of $700,000 to Manchester Development Corporation by Tustin Retail, incorporated by reference from Form 10-K filed March 29, 1993........................................ 10.19.3 Fixed Rate Promissory Note dated March 1, 1992 in the original principal amount of $303,500 to Manchester Development Corporation by Tustin Retail, incorporated by reference from Form 10-K filed March 29, 1993............... 10.19.4 Modification Agreement dated November 30, 1992 between Manchester Development Corporation and Tustin Retail, incorporated by reference from Form 10-K filed March 29, 1993........................................................ 10.35 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.................................................... 10.43 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..............................................
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SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------- ----------- ------------- 10.45 Agreement for purchase and sale of stock dated November 4, 1996 by and between Fidelity National Financial, Inc. and the stockholders of CRM, Inc., incorporated by reference from Form 10-K filed March 31, 1997......................... 10.46 Stock Purchase and Loan Agreement by and among ATC Holdings, Inc., Fidelity National Financial, Inc. and American Title Company, incorporated by reference from Form 10-K filed March 30, 1998.............................................. 10.47 Agreement and Plan of Reorganization dated as of August 15, 1997 by and among Fidelity National Financial, Inc., First Title Corporation, Ernest N. Moore, Jeanene S. Moore and T. Frank Jordan and First Title Acquisition Corporation, incorporated by reference from Form 10-K filed March 30, 1998........................................................ 10.48 Agreement and Plan of Reorganization dated September 1997 by and among Fidelity National Financial, Inc., ICS Ifland Credit Services, Inc., Rick W. Ifland and ICS Acquisition Corporation, incorporated by reference from Form 10-K filed March 30, 1998.............................................. 10.49 Agreement and Plan of Reorganization by and among Fidelity National Financial, Inc.; Bron Acquisition Corporation, Bron Research, Inc., and the Shareholders of Bron Research, Inc., dated as of September 24, 1997, incorporated by reference from Form 10-K filed March 30, 1998......................... 10.50 Agreement and Plan of Reorganization dated as of September 12, 1997, by and among Fidelity National Financial, Inc., Credit Reports, Inc., Colin Howard Friedman and Hedy Kramer Friedman, as trustees of the Friedman Family Trust UDT, dated July 23, 1987, Colin H. Friedman, Farid Meshkatai and CRI Acquisition Corporation, incorporated by reference from Form 10-K filed March 30, 1998.............................. 10.51 Agreement and Plan of Reorganization dated as of September 12, 1997 by and among Fidelity National, Inc., Express Network, Inc., Colin Howard Friedman and Hedy Kramer Friedman, as trustees of the Friedman Family Trust UDT, dated July 23, 1987, Farid Meshkatai, and Anita Kramer Meshkatai, as Trustee of the Anita Kramer Living Trust, dated July 23, 1987, Colin H. Friedman, and ENI Acquisition Corporation, incorporated by reference from Form 10-K filed March 30, 1998.............................................. 10.52 Fidelity National Financial, Inc. Liquid Yield Option Notes, due 2009 (zero coupon-subordinated) Exchange Agreement dated October 17, 1997, incorporated by reference from Form 10-K filed March 30, 1998........................................ 10.53 Stock and Asset Purchase Agreement dated as of May 22, 1997, by and between Randall F. Zurbach and John C. Wilbur, Jr. and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 30, 1998............... 10.54 Agreement and Plan of Merger, dated November 17, 1997 by and among Fidelity National Financial, Inc.; Granite Acquisition Corporation and Granite Financial, Inc., incorporated by reference from Form S-4, Registration No. 333-44153......... 10.55 Securities Purchase Agreement, dated April 8, 1998, by and among Walter W. Cruttenden, III, Cruttenden Roth Incorporated, and Fidelity National Financial, Inc. ........ 10.56 Agreement and Plan of Merger, dated May 6, 1998 by and among Fidelity National Financial, Inc.; AT Merger, Inc. and Alamo Title Holding Company, incorporated by reference from Form S-4, Registration No. 333-58573.............................
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SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------- ----------- ------------- 10.57 Agreement and 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..................... 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........................................ 10.58 Credit Agreement, dated as of August 1, 1998, by and among Fidelity National Financial, Inc., Sanwa Bank California as the Agent and the Lenders from time to time party thereto... 10.58.1 First Amendment, dated as of December 31, 1998, to the Credit Agreement, dated as of August 1, 1998, by and among Fidelity National Financial, Inc., Sanwa Bank California as the Agent and the Lenders from time to time party thereto... 10.59 Stock Purchase Agreement, dated as of August 31, 1998, by and among Granite Financial, Inc., Fidelity National Financial, Inc., Lexington Capital Corporation, and the Shareholders of Lexington Capital Corporation............... 11 Computation of Basic and Diluted Earnings per Share......... 21 List of Subsidiaries........................................ 23 Independent Auditors' Consent............................... 27 Financial Data Schedule -- December 31, 1998................ 27.1 Financial Data Schedule -- September 30, 1998 (Restated).... 27.2 Financial Data Schedule -- June 30, 1998 (Restated)......... 27.3 Financial Data Schedule -- March 31, 1998 (Restated)........ 27.4 Financial Data Schedule -- December 31, 1997 (Restated)..... 27.5 Financial Data Schedule -- September 30, 1997 (Restated).... 27.6 Financial Data Schedule -- June 30, 1997 (Restated)......... 27.7 Financial Data Schedule -- March 31, 1997 (Restated)........ 27.8 Financial Data Schedule -- December 31, 1996 (Restated).....
EX-10.1.4 2 EMPLOYMENT AGREEMENT OCT 1,98 ALAN L. STINSON 1 Exhibit 10.1.4 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is effective as of October 1, 1998 (the "Effective Date"), by and between FIDELITY NATIONAL FINANCIAL, INC., a Delaware corporation (the "Company"), and ALAN L. STINSON (the "Employee"), and supersedes any and all prior employment agreements or understandings entered into between the parties and/or Alamo Title Holding Company, a Texas corporation ("Alamo"). In consideration of the mutual covenants and agreements set forth herein, the parties agree as follows: 1. Employment and Duties. Subject to the terms and conditions of this Agreement, the Company employs the Employee to serve in an executive and managerial capacity as Executive Vice President -- Financial Operations of the Company (or such other title as the Company may designate), and the Employee accepts such employment and agrees to perform such reasonable responsibilities and duties commensurate with the aforesaid positions as directed by the Company's Board of Directors, its Chief Executive Officer or its President, or as set forth in the Articles of Incorporation and the Bylaws of the Company. 2. Term. The term of this Agreement shall commence on the Effective Date and shall continue for a period of three (3) years ending September 30, 2001, subject to prior termination as set forth in Section 7, below (the "Term"). The Term may be extended at any time upon mutual agreement of the parties. 3. Salary. During the Term, the Company shall pay the Employee a minimum base annual salary, before deducting all applicable withholdings, of $225,000 per year, payable at the times and in the manner dictated by the Company's standard payroll policies. Such minimum base annual salary may be periodically reviewed and increased at the discretion of the Chief Executive Officer and/or the Compensation Committee of the Board of Directors to reflect, among other matters, cost of living increases and performance results. 4. Other Compensation and Fringe Benefits. In addition to any executive bonus, pension, deferred compensation and stock option plans which the Company may from time to time make available to the Employee upon mutual agreement, the Employee shall be entitled to the following: (a) The standard Company benefits enjoyed by the Company's other top executives; (b) Payment by the Company of the Employee's initiation and membership dues in a social and/or recreational club as deemed necessary and appropriate by the Employee (and pre- 2 Stinson Employment Agreement (page 2) approved by the Company) to maintain various business relationships on behalf of the Company; provided, however, that the Company shall not be obligated to pay for any of the Employee's personal purchases and expenses at such club; (c) Provision by the Company during the Term and any extensions thereof to the Employee and his dependents of the medical and other insurance coverage provided by the Company to its other executives; (d) Provision by the Company of supplemental disability insurance sufficient to provide two-thirds of the Employee's pre-disability minimum base annual salary; (e) An annual bonus equal to $9,000 for each full percentage point the Company's return on equity exceeds 10%. Return on equity shall be determined by dividing net income before extraordinary items by stockholders' equity as of the beginning of the year being measured. Any fractional percentage point increase shall be applied to $9,000 to determine the amount of such bonus (for example, an 11.5% return on equity would result in a $13,500 bonus). The annual bonus shall be paid no later than March 31st of the following year and is fully vested in the event of a non-renewal of this Agreement by the Company. Subject to Section 7 below, the annual bonus shall be pro-rated for any partial employment year (for example, the Employee shall only be entitled to 1/4 of the 1998 annual bonus he would otherwise have received if he had been employed by the Company for the entire calendar year 1998). The Employee shall also be entitled to receive his pro-rated bonus for the period commencing January 1, 1998 through September 30, 1998, under the terms and conditions of his prior Employment Agreement with Alamo. In addition to the above, the Board of Directors of the Company may, in its sole discretion, grant to the Employee an annual merit bonus based upon the Employee's performance during the preceding year and any other factors the Board deems relevant; (f) A grant under the Company's Executive Stock Option Plan of options to purchase 30,000 shares of the Company's Common Stock. The exercise price for such options shall be the closing price on the Effective Date of the Company's Common Stock traded on the New York Stock Exchange, as reported by the Wall Street Journal. Such options shall vest as follows: (i) 10,000 shares on the Effective Date; (ii) 10,000 shares on the first anniversary of the Effective Date; and (iii) 10,000 shares on the second anniversary of the Effective Date; (g) Payment by the Company of the expenses of moving the Employee's personal belongings from San Antonio, Texas to Santa Barbara, California, charged by a moving company selected by the Company; and (h) Reimbursement by the Company of the Employee's (i) rental payments on his apartment in San Antonio, Texas, for the months of October, November, and December, 1998; and (ii) reasonable personal travel expenses for a reasonable number of trips back and forth between 3 Stinson Employment Agreement (page 3) Santa Barbara, California and San Antonio, Texas during the months of October, November and December, 1998; provided, however, that the Employee shall use good faith efforts to schedule such personal trips at such times as the Company's corporate aircraft are traveling to and from Santa Barbara and San Antonio, and to utilize such aircraft at such times. The Company shall deduct from all compensation payable under this Agreement to the Employee any taxes or withholdings the Company is required to deduct pursuant to state and federal laws or by mutual agreement between the parties. 5. Vacation. For and during each year of the Term and any extensions thereof, the Employee shall be entitled to reasonable paid vacation periods consistent with his positions with the Company and in accordance with the Company's standard policies, or as the Company's Board of Directors may approve. In addition, the Employee shall be entitled to such holidays consistent with the Company's standard policies or as the Company's Board of Directors may approve. 6. Expense Reimbursement. In addition to the compensation and benefits provided herein, the Company shall, upon receipt of appropriate documentation, reimburse the Employee each month for his reasonable travel, lodging, entertainment, promotion and other ordinary and necessary business expenses. 7. Termination. (a) For Cause. The Company may terminate this Agreement immediately for cause upon written notice to the Employee, in which event the Company shall be obligated to pay the Employee that portion of the minimum base annual salary due him through the date of termination. Cause shall be limited to (i) the failure to perform duties consistent with a commercially reasonable standard of care; (ii) the willful neglect of duties; or (iii) criminal or other illegal activities as determined by a court of competent jurisdiction. (b) Without Cause. Either party may terminate this Agreement immediately without cause by giving written notice to the other. If the Company terminates under this Section 7(b), then it shall continue to pay to the Employee an amount equal to the product of (i) the Employee's minimum annual base salary in effect as of the date of termination, plus the total annual bonus paid or payable to the Employee for the most recently ended calendar year, multiplied by (ii) the number of years (including partial years) remaining in the Term. Such payment to be made in a lump sum on or before the fifth day following the date of termination, or as otherwise directed by the Employee. In addition, the Company shall maintain in full force and effect for the continued benefit of the Employee for the number of years (including partial years) remaining in the Term, all employee benefit plans and programs in which the Employee was entitled to participate immediately prior to the date of termination, provided that the Employee's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Employee's 4 Stinson Employment Agreement (page 4) participation in any such plan or program is prohibited, the Company shall, at its expense, arrange to provide the Employee with benefits substantially similar to those which the Employee would otherwise have been entitled to receive under such plans and programs from which his continued participation is prohibited. If the Employee terminates under this Section 7(b), then the Company shall be obligated to pay the Employee the minimum annual base salary due him through the date of termination. (c) Disability. If the Employee fails to perform his duties hereunder on account of illness or other incapacity for a period of six consecutive months, then the Company shall have the right upon written notice to the Employee to terminate this Agreement without further obligation by paying the Employee the minimum base annual salary, without offset, for the remainder of the Term in a lump sum or as otherwise directed by the Employee. (d) Death. If the Employee dies during the Term, then this Agreement shall terminate immediately and the Employee's legal representatives shall be entitled to receive the minimum annual base salary for the remainder of the Term in a lump sum or as otherwise directed by the Employee's legal representative. (e) Effect of Termination. Termination for any reason or for no reason shall not constitute a waiver of the Company's rights under this Agreement nor a release of the Employee from any obligation hereunder except his obligation to perform his day-to-day duties as an employee. 8. Severance payment. (a) The Employee may terminate his employment hereunder for "Good Reason,"which for purposes of this Agreement shall mean a "change in control of the Company." A "change in control of the Company" shall, for purposes of this Agreement, be deemed to have occurred if (i) there shall be consummated (x) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation, or pursuant to which shares of the Company's Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's Common Stock immediately prior to the merger have the same proportionate ownership of Common Stock of the surviving corporation immediately after the merger, or (y) any sale, lease exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (ii) the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company, or (iii) any "person" (such as that term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")), other than the Company or any "person" who, on the date hereof, is a director or officer of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities, or (iv) during any period of two (2) consecutive years during the Term or any extensions 5 Stinson Employment Agreement (page 5) thereof, individuals, who, at the beginning of such period, constitute the Board of Directors, cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. The Employee may only terminate this Agreement due to a change in control of the Company during the period commencing 60 days and expiring 365 days after such change in control. (b) If the Employee terminates his employment for Good Reason, or, if after a change in control of the Company, the Company shall terminate the Employee's employment in breach of this Agreement or pursuant to Section 7(b), then: (i) the Company shall pay the Employee his minimum base annual salary due him through the date of termination: (ii) in lieu of any further salary and bonus payments or other payments due to the Employee for periods subsequent to the date of termination, the Company shall pay, as severance to the Employee, an amount equal to the product of (A) the Employee's minimum base annual salary in effect as of the date of termination plus the total bonus paid or payable to the employee for the most recently ended calendar year, multiplied by (B) the number 2, such payment to be made in a lump sum on or before the fifth day following the date of termination; and (iii) the Company shall maintain in full force and effect, for the continued benefit of the Employee for the number of years (including partial years) remaining in the Term, all employee benefit plans and programs in which the Employee was entitled to participate immediately prior to the date of termination, provided that the Employee's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Employee's participation in any such plan or program is prohibited, the Company shall, at it's expense, arrange to provide the Employee with benefits substantially similar to those which the Employee would otherwise have been entitled to receive under such plans and programs from which his continued participation is prohibited. (c) The Employee shall not be required to mitigate the amount of any payment provided for in this Section 8 or Section 7(b), above, by seeking other employment or otherwise, nor shall any compensation or other payments received by the Employee after the date of termination reduce any payments due under this Section 8 or Section 7(b), above. (d) Notwithstanding anything to the contrary herein, if any payment pursuant to this Section 8 would be a "parachute payment" (as defined in Section 280G of the Internal Revenue Code of 1986, as amended), such payment shall be limited to the largest portion of such payment as can be paid without being deemed a "parachute payment." 6 Stinson Employment Agreement (page 6) 9. Non-Delegation of Employee's Rights. The obligations, rights and benefits of the Employee hereunder are personal and may not be delegated, assigned or transferred in any manner whatsoever, nor are such obligations, rights or benefits subject to involuntary alienation, assignment or transfer. 10. Confidential Information. The Employee acknowledges that in his capacity as an employee of the Company he will occupy a position of trust and confidence and he further acknowledges that he will have access to and learn substantial information about the Company and its operations that is confidential or not generally known in the industry including, without limitation, information that relates to purchasing, sales, customers, marketing, and the Company's financial position and financing arrangements. The Employee agrees that all such information is proprietary or confidential, or constitutes trade secrets and is the sole property of the Company. The Employee will keep confidential, and will not reproduce, copy or disclose to any other person or firm, any such information or any documents or information relating to the Company's methods, processes, customers, accounts, analyses, systems, charts, programs, procedures, correspondence or records, or any other documents used or owned by the Company, nor will the Employee advise, discuss with or in any way assist any other person, firm or entity in obtaining or learning about any of the items described in this Section 10. Accordingly, the Employee agrees that during the Term and at all times thereafter he will not disclose, or permit or encourage anyone else to disclose, any such information, nor will he utilize any such information, either alone or with others, outside the scope of his duties and responsibilities with the Company. 11. Non-Competition During Employment Term. The Employee agrees that, during the Term and any extensions thereof, he will devote substantially all his business time and effort, and give undivided loyalty, to the Company. He will not engage in any way whatsoever, directly or indirectly, in any business that is competitive with the Company or its affiliates, nor solicit, or in any other manner work for or assist any business which is competitive with the Company or its affiliates. In addition, during the Term and any extensions thereof, the Employee will undertake no planning for or organization of any business activity competitive with the work he performs as an employee of the Company, and the Employee will not combine or conspire with any other employee of the Company or any other person for the purpose of organizing any such competitive business activity. 12. Non-Competition After Employment Term. The parties acknowledge that the Employee will acquire substantial knowledge and information concerning the business of the Company and its affiliates as a result of his employment. The parties further acknowledge that the scope of business in which the Company is engaged as of the Effective Date is national and very competitive and one in which few companies can successfully compete. Competition by the Employee in that business after this Agreement is terminated would severely injure the Company. Accordingly, for a period of two years after this Agreement is terminated or the Employee leaves the employment of the Company for any reason whatsoever, except as otherwise stated hereinbelow, 7 Stinson Employment Agreement (page 7) the Employee agrees (i) not to become an employee, consultant, advisor, principal, partner or substantial shareholder of any firm or business that in any way competes with the Company or its affiliates in any of their presently-existing or then-existing products and markets; and (ii) not to solicit any person or business that was at the time of such termination and remains a customer or prospective customer, or an employee of the Company or any of its affiliates. Notwithstanding any of the foregoing provisions to the contrary, the Employee shall not be subject to the restrictions set forth in this Section 12 under the following circumstances: (a) If the Employee's employment with the Company is terminated by the Company without cause; (b) If the Employee's employment with the Company is terminated as a result of the Company's unwillingness to extend the Term of this Agreement; or (c) If the Employee leaves the employment of the Company for Good Reason pursuant to Section 8, above. 13. Return of Company Documents. Upon termination of this Agreement, Employee shall return immediately to the Company all records and documents of or pertaining to the Company and shall not make or retain any copy or extract of any such record or document. 14. Location. Prior to October 1, 1998, the Employee shall move to Santa Barbara County, California, to perform his duties hereunder. The Employee shall not be required to move from Santa Barbara County, California, to perform his duties hereunder during the Term without his written consent. 15. Improvements and Inventions. Any and all improvements or inventions which the Employee may conceive, make or participate in during the period of his employment shall be the sole and exclusive property of the Company. The Employee will, whenever requested by the Company, execute and deliver any and all documents which the Company shall deem appropriate in order to apply for and obtain patents for improvements or inventions or in order to assign and convey to the Company the sole and exclusive right, title and interest in and to such improvements, inventions, patents or applications. 16. Actions. The parties agree and acknowledge that the rights conveyed by this Agreement are of a unique and special nature and that the Company will not have an adequate remedy at law in the event of a failure by the Employee to abide by its terms and conditions nor will money damages adequately compensate for such injury. It is therefore agreed between the parties that, in the event of a breach by the Employee of any of his obligations contained in this Agreement, the Company shall have the right, among other rights, to damages sustained thereby and to obtain an injunction or decree of specific performance from any court of competent jurisdiction to restrain 8 Stinson Employment Agreement (page 8) or compel the Employee to perform as agreed herein. The Employee agrees that this Section 16 shall survive the termination of his employment and he shall be bound by its terms at all time subsequent to the termination of his employment for so long a period as Company continues to conduct the same business or businesses as conducted during the Term or any extensions thereof. Nothing herein contained shall in any way limit or exclude any other right granted by law or equity to the Company. 17. Amendment. This Agreement contains, and its terms constitute, the entire agreement of the parties, and it may be amended only by a written document signed by both parties to this Agreement. 18. Governing Law. California law shall govern the construction and enforcement of this Agreement and the parties agree that any litigation pertaining to this Agreement shall be adjudicated in courts located in California. 19. Attorneys' Fees. If any party finds it necessary to employ legal counsel or to bring an action at law or other proceedings against the other party to enforce any of the terms hereof, the party prevailing in any such action or other proceeding shall be paid by the other party its reasonable attorneys' fees as well as court costs, all as determined by the court and not a jury. 20. Severability. If any section, subsection or provision hereof is found for any reason whatsoever, to be invalid or inoperative, that section, subsection or provision shall be deemed severable and shall not affect the force and validity of any other provision of this Agreement. If any covenant herein is determined by a court to be overly broad thereby making the covenant unenforceable, the parties agree and it is their desire that such court shall substitute a reasonable judicially enforceable limitation in place of the offensive part of the covenant and that as so modified the covenant shall be as fully enforceable as if set forth herein by the parties themselves in the modified form. The covenants of the Employee in this Agreement shall each be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of the Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants in this Agreement. 21. Notices. Any notice, request, or instruction to be given hereunder shall be in writing and shall be deemed given when personally delivered or three (3) days after being sent by United States certified mail, postage prepaid, with return receipt requested, to the parties at their respective addresses set for the below: 9 Stinson Employment Agreement (page 9) To the Company: Fidelity National Financial, Inc. 3916 State Street Santa Barbara, CA 93105 Attention: Frank P. Willey, President To the Employee: Alan L. Stinson 1133 Nirvana Road Santa Barbara, California 22. Waiver of Breach. The waiver by any party of any provisions of this Agreement shall not operate or be construed as a waiver of any prior or subsequent breach by the other party. IN WITNESS WHEREOF the parties have executed this Agreement to be effective as of the date first set forth above. FIDELITY NATIONAL FINANCIAL, INC. By: William P. Foley, II Its: Chairman and Chief Executive Officer ALAN L. STINSON /s/ Alan L. Stinson EX-10.55 3 SECURITIES PURCHASE AGREEMENT 1 Exhibit 10.55 SECURITIES PURCHASE AGREEMENT By and Among: WALTER W. CRUTTENDEN III (the "Seller"), CRUTTENDEN ROTH INCORPORATED (the "Company"), and FIDELITY NATIONAL FINANCIAL, INC. (the "Purchaser"). April 8, 1998 2 TABLE OF CONTENTS
PAGE 1. DEFINITIONS..........................................................................1 2. PURCHASE AND SALE OF THE SHARES AND OPTION...........................................3 2.1 Authorization.................................................................3 2.2 Purchase of Securities; Purchase Price........................................3 3. CLOSING..............................................................................4 3.1 Time and Place................................................................4 3.2 Deliveries....................................................................4 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SELLER.............................4 4.1 Organization and Good Standing................................................4 4.2 Capitalization................................................................4 4.3 Authorization.................................................................5 4.4 Due Execution and Delivery; Binding Obligations...............................5 4.5 No Violation..................................................................5 4.6 Governmental Consents.........................................................5 4.7 Financial Statements..........................................................5 4.8 Material Liabilities..........................................................5 4.9 Changes.......................................................................5 4.10 Labor Agreements and Actions..................................................6 4.11 Employee Benefit Plans; ERISA.................................................6 4.12 Taxes.........................................................................6 4.13 Compliance with Charter, Applicable Laws and Material Contracts...............7 4.14 Litigation; Adverse Facts.....................................................7 4.15 Licenses, Permits and Authorizations..........................................7 4.16 Leases........................................................................7 4.17 Powers of Attorney............................................................8 4.18 Insurance.....................................................................8 4.19 Books and Records.............................................................8 4.20 Outstanding Indebtedness......................................................8 4.21 Employment and Agency Agreements..............................................8 4.22 Net Capital...................................................................8 4.23 Disclosure....................................................................9 5. REPRESENTATIONS AND WARRANTIES OF THE SELLER.........................................9 5.1 Ownership.....................................................................9 5.2 Authorization.................................................................9 5.3 Due Execution and Delivery; Binding Obligations...............................9 5.4 No Violation..................................................................9 5.5 Governmental Consents.........................................................9 5.6 Investment Representations....................................................9 5.7 Disclosure...................................................................11
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PAGE 6. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.....................................11 6.1 Organization and Good Standing...............................................11 6.2 Authorization................................................................11 6.3 Due Execution and Delivery; Binding Obligations..............................11 6.4 No Violation.................................................................11 6.5 Investment Intent............................................................11 6.6 Accredited Investor Status; No Reliance......................................11 6.7 Governmental Consents........................................................12 6.8 Litigation; Adverse Facts....................................................12 6.9 Brokers......................................................................12 6.10 Issuance of Fidelity Shares..................................................12 6.11 Reports......................................................................12 6.12 Disclosure...................................................................12 7. CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER......................................13 7.1 Representations and Warranties...............................................13 7.2 Purchase Permitted by Applicable Laws........................................13 7.3 No Material Adverse Changes..................................................13 7.4 No Material Judgment or Order................................................13 7.5 Securities...................................................................13 7.6 Shareholders' Agreement......................................................13 7.7 CRI Registration Rights Agreement............................................13 7.8 Payment of Taxes.............................................................14 7.9 Escrow Instructions..........................................................14 7.10 Financial Statements.........................................................14 7.11 Third Party Consents.........................................................14 8. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE SELLER.........................14 8.1 Representations and Warranties...............................................14 8.2 Purchase Permitted by Applicable Laws........................................14 8.3 No Material Judgment or Order................................................14 8.4 Third Party Consents.........................................................15 8.5 Fidelity Registration Rights Agreement.......................................15 8.6 Escrow Instructions..........................................................15 9. TERMINATION.........................................................................15 9.1 Failure of Condition.........................................................15 9.2 Effect of Termination........................................................15 10. POST-CLOSING OBLIGATIONS............................................................15 10.1 Use of Proceeds..............................................................15 10.2 Disclosure of Subsequent Events..............................................16
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PAGE 11. MISCELLANEOUS.......................................................................16 11.1 Indemnification..............................................................16 11.2 Attorneys' Fees..............................................................17 11.3 Entire Agreement.............................................................17 11.4 Headings.....................................................................17 11.5 Successors and Assigns.......................................................17 11.6 Parties in Interest..........................................................17 11.7 Amendments, Waivers and Consents.............................................17 11.8 Notice.......................................................................17 11.9 Transaction Fees and Expenses................................................18 11.10 Severability.................................................................19 11.11 Counterparts.................................................................19 11.12 Waiver of Jury Trial.........................................................19
-iii- 5 Exhibits PAGE Exhibit A - Form of Option Exhibit B - Form of Escrow Instructions Exhibit C - Form of Shareholders' Agreement Exhibit D - Form of CRI Registration Rights Agreement Exhibit E - Form of Fidelity Registration Rights Agreement Schedules Schedule 4.2 - Capitalization Schedule 4.9 - Changes Schedule 4.13 - Compliance with Charters, Applicable Laws and Material Contracts Schedule 4.14 - Litigation; Adverse Facts Schedule 4.20 - Outstanding Indebtedness Schedule 4.21 - Employment and Agency Agreements 6 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is made and entered into this 8th day of April, 1998, by and among WALTER W. CRUTTENDEN III (the "Seller"), CRUTTENDEN ROTH INCORPORATED, a California corporation (the "Company"), and FIDELITY NATIONAL FINANCIAL, INC., a Delaware corporation (the "Purchaser"). R E C I T A L S A. Seller owns and holds of record in excess of 750,000 shares of the Company's Common Stock, no par value (the "Common Stock"). B. The Purchaser has agreed to purchase from Seller, and Seller has agreed to offer for sale and sell to the Purchaser, on the terms set forth in this Agreement, (i) an aggregate of 580,000 shares (the "Shares") of Common Stock, (ii) an Option to purchase an aggregate of 170,000 shares of the Common Stock, at an exercise price of Ten Dollars ($10.00) per share (subject to adjustment as provided in the Option), which Option shall be in the form of Exhibit A attached hereto (as it may be amended, modified, restated, supplemented, extended or reduced, the "Option"), and (iii) the Common Stock issuable upon exercise of the Option. AGREEMENT In consideration of the mutual covenants and agreements set forth herein, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings specified with respect thereto below: "Applicable Laws" means any Federal, state or local statute, law, rule, regulation or ordinance applicable to the Company or its business, including, without limitation, the Securities Act of 1933, the Securities Exchange Act of 1934, the rules and regulations under those acts or of any self-regulatory organization given regulatory authority under those acts, the California Corporate Securities Law of 1968, Federal Reserve Board Regulation T and any other laws or regulations applicable to the Company, including laws relating to the operation of securities brokerages and laws relating to franchise, building, zoning, health, sanitation, safety or labor relations, and any order, ruling, judgment or decree of any court, governmental agency or authority or self-regulatory agency which is binding on the Company or its properties. "Board of Directors" means the board of directors of any Person. "Business Day" means any day except Saturday, Sunday and any day which either is a legal holiday under the laws of the State of California or is a day on which banking institutions located in such state are authorized or required by law or other governmental action to close. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder, all as the same shall be in effect at the time. 7 "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder, all as the same shall be in effect at the time. "Financial Statements" shall have the meaning set forth in Section 4.7 below. "GAAP" means generally accepted accounting principles and practices set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession that are applicable to the circumstances as of the date hereof, applied on a consistent basis. "Indebtedness" means (without duplication), when used with reference to any Person, (i) any indebtedness, contingent or otherwise, in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), or evidenced by bonds, note, debentures or similar instruments or letters of credit or representing the unpaid balance of the purchase price of any property, but not including any other indebtedness, amount or obligation incurred in the ordinary course of the broker-dealer business consistent with past practice (e.g., unsettled trades), (ii) the principal component of any capital lease obligations of such Person, (iii) the maximum fixed repurchase price of any redeemable stock of such Person, (iv) the maximum amount payable under any earnout agreement, contingent payment obligation, deferred financing fee or similar deferred or contingent obligation, and (v) obligations secured by a Lien to which any property or asset, including leasehold interests and any other tangible or intangible property rights, owned by such Person is subject, whether or not the obligations secured thereby have been assumed by such Person. "Licenses and Permits" means all licenses, franchises, certificates, permits, consents, registrations, certificates, memberships and other approvals of all governmental or regulatory agencies or self-regulatory organizations, whether Federal, state or local, necessary to the conduct of its business, including, without limitation, licenses or certificates issued under Sections 25210 and 25211 of the California Corporate Securities Law of 1968 or similar laws in each of the states where the Company's activities would require such licensing, compliance with all bonding requirements of any state or municipality and any licenses, permits, registrations or approvals required to comply with or obtain exemptions from the usury laws of any state. "Lien" means any lien, pledge, mortgage, claim, covenant, restriction, security interest, charge or encumbrance of any kind, including the interest of a lessor under a capital lease obligation having substantially the same economic effect. "Material Adverse Effect" means, with respect to any Person, a material adverse effect on the condition (financial or otherwise), business, results of operations, prospects or properties of such Person. "Net Capital" shall have the meaning assigned to that term in clause (c) of Rule 15c3-1 under the Exchange Act. "Person" means any individual, trustee, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, limited liability partnership, public benefit corporation, institution, entity or government (whether Federal, state, -2- 8 county, city or otherwise, including without limitation, any instrumentality, political subdivision, agency, body or department thereof). "Related Agreements" means the Option, the Shareholders' Agreement, the CRI Registration Rights Agreement, the Fidelity Registration Rights Agreement and any and all other documents contemplated herein or therein. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder, all as the same shall be in effect at the time. "Taxes" means any income, excise, sales, use, stamp or franchise taxes and any other taxes, fees, duties, levies, withholdings or other charges of any nature whatsoever imposed by any taxing authority, whether Federal, state, local or foreign, together with any interest and penalties and additions to tax. "Transferee" means any direct or indirect transferee of all or any part of the Option. 2. PURCHASE AND SALE OF THE SHARES AND OPTION. 2.1 Authorization. Seller is fully authorized and is not subject to any restrictions effecting (i) the sale and transfer to the Purchaser of the Shares, (ii) the sale and delivery to the Purchaser of the Option, and (iii) the reservation for issuance of the Common Stock issuable upon exercise of the Option. The Shares and the Option, and the certificates and other instruments from time to time evidencing the same, are herein sometimes collectively referred to as the "Securities." 2.2 Purchase of Securities; Purchase Price. Subject to the terms and conditions contained herein, and in reliance upon the representations, warranties and agreements contained herein, the Seller shall sell, transfer and/or deliver to the Purchaser, the Securities. At the Closing (as defined below), Purchaser shall pay Seller an aggregate combined purchase price for the Securities equal to $5,800,000 (the "Purchase Price"), as follows: (i) an aggregate of $2,050,000 shall be paid to Seller by delivery of cashier's check(s) or wire transfer(s) to the accounts designated by Seller (the "Cash Payment"), and (ii) an additional aggregate of $3,750,000 of the Purchase Price shall be paid by delivery of certificate(s) in such name(s) designated by Seller and representing an aggregate of One Hundred Seven Thousand One Hundred Forty-Three (107,143) shares of Common Stock of the Purchaser ("Fidelity Shares"), based on a per share value of $35.00. -3- 9 3. CLOSING. 3.1 Time and Place. The sale of the Securities shall be consummated at a closing (the "Closing") to be held at the offices of Stradling Yocca Carlson & Rauth (SYC&R), 660 Newport Center Drive, Suite 1600, Newport Beach, California 92660, at 10:00 a.m. on the first business day immediately following the waiver or satisfaction of all of the conditions precedent to the obligations of the respective parties to the Agreement, or at such other time and date as shall be agreed upon by the parties in writing (the "Closing Date"). 3.2 Deliveries. At the Closing, Seller shall deliver (i) to the Purchaser (A) his certificate or certificates representing the Shares, together with a duly executed assignment separate from certificate with respect to each such certificate, and (B) the Option, duly executed by Seller; and (ii) to SYC&R, executed escrow instructions, substantially in the form of Exhibit B hereto (the "Escrow Instructions"), appointing SYC&R as escrow agent with respect to the Option, and his certificate representing the shares of Common Stock initially issuable upon exercise of the Option, together with a duly executed assignment separate from certificate with respect to such certificate. At the Closing, the Purchaser shall deliver (i) to the Seller the Purchase Price (in the manner set forth in Section 2 hereof); and (ii) to SYC&R, the Escrow Instructions, duly executed by or on behalf of Purchaser. Thereafter, each party, at the request of any other party, shall execute and deliver such additional or confirmatory instruments, documents of conveyance, and acknowledgements and shall take all such other actions and execute such other documents as such requesting party may reasonably require to effect the transactions contemplated hereunder. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SELLER. The Company and Seller, to his best knowledge, hereby jointly and severally represent and warrant to the Purchaser that, except as set forth in the disclosure schedules attached hereto (the "Disclosure Schedules"), the following statements are true and correct as of the date hereof (it being understood that wherever, in this Agreement, reference is made to a matter being to the "knowledge" of the Company, the term "knowledge" shall mean that the officer(s) of the Company negotiating and entering into this Agreement on its behalf actually knew or, with reasonable inquiry, should have known, about the matter in question): 4.1 Organization and Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, and has all requisite corporate power and authority to own (or hold under lease) and operate its properties, to carry on its business as now conducted, to enter into this Agreement and each Related Agreement, and to consummate the transactions contemplated hereby and thereby. The Company is duly qualified as a foreign corporation to do business and is in good standing wherever necessary to carry on its present business and operations, except where the failure to so qualify would not have a Material Adverse Effect. 4.2 Capitalization. The authorized capital stock of the Company consists of 20,000,000 shares of Common Stock, par value no par value per share, of which 2,933,372 shares are issued and outstanding, and 10,000,000 shares of Preferred Stock, par value $10 per share, of which 79,630 shares are designated Series C Preferred Stock, of which 79,630 shares are issued and outstanding. All presently outstanding shares of the Company's capital stock are duly authorized, validly issued and outstanding, fully paid and nonassessable, and are not subject to any preemptive -4- 10 rights in respect thereof. Except for outstanding options to purchase 706,500 shares of Common Stock, there are no outstanding options, warrants, or other rights to subscribe for or purchase, from the Company, any securities or obligations that are convertible into or exchangeable for, or any contracts or commitments providing for the issuance of or the granting of rights to acquire, any Common Stock or any other capital stock, or other ownership interest, in the Company. Schedule 4.2 attached hereto sets forth the names of the holders of the Company's Common Stock, and the number of shares of Common Stock held by each such holder. 4.3 Authorization. The execution, delivery and performance of this Agreement and of each of the Related Agreements, and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company. 4.4 Due Execution and Delivery; Binding Obligations. This Agreement has been duly executed and delivered by the Company. This Agreement is, and at the time of the Closing each of the Related Agreements will be, legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or conveyance or similar law, relating to or limiting creditors' rights generally or by equitable principles relating to enforceability and except as rights of indemnity or contribution may be limited by Federal or state securities or other law, or the public policy underlying such laws. 4.5 No Violation. The execution, delivery and performance by the Company of this Agreement and of each of the Related Agreements, and the consummation of the transactions contemplated hereby and thereby do not violate (i) the charter or bylaws of the Company, (ii) to the knowledge of the Company, any material law, rule, regulation or ordinance applicable to the Company, (iii) any order, ruling, judgment or decree of any court or other governmental agency binding on the Company, (iv) any material term of any indenture or mortgage to which the Company is a party, or (v) any term of any material lease, agreement or instrument to which the Company is a party. 4.6 Governmental Consents. The execution and delivery by the Company of this Agreement and of each of the Related Agreements, and the consummation of the transactions contemplated hereby and thereby, do not and will not require as of the Closing any authorization, registration or filing with, or consent or approval of, any Federal, state or other governmental authority or regulatory body. 4.7 Financial Statements. The Company has delivered to the Purchaser copies of (i) the audited balance sheets of the Company as of June 30, 1995, 1996 and 1997 and the related audited statements of operations, shareholders' equity, and cash flows for the years ended June 30, 1995, 1996 and 1997, together with the unqualified report thereon of the Company's auditors and (ii) the unaudited balance sheet of the Company as of December 31, 1997 and the related unaudited income statements for the six-month period then ended (collectively, the "Financial Statements"). The Financial Statements (i) were prepared in accordance with the books and records of the Company, (ii) present fairly the financial position of the Company as of the dates indicated and its results of operations for the periods indicated, and (iii) have been prepared in conformity with GAAP. Since June 30, 1997, there has been no material adverse change in the financial condition, assets, liabilities, earnings, business or prospects of the Company. -5- 11 4.8 Material Liabilities. The Company has no material liabilities or obligations, absolute or contingent (individually or in the aggregate), except (i) liabilities and obligations reflected in the Financial Statements and the related Notes thereto, (ii) liabilities and obligations which have been incurred subsequent to June 30, 1997 in the ordinary course of business and (iii) liabilities and obligations which would not have a Material Adverse Effect on the Company. 4.9 Changes. Except in the ordinary course of the Company's business or as set forth on Schedule 4.9, since June 30, 1997 there has not been (a) any material damage, destruction or loss to any material asset of the Company, whether or not covered by insurance; (b) any waiver by the Company of a valuable right or of a debt owed to it; (c) any satisfaction or discharge of any Lien or payment of any material obligation by the Company; (d) any change or amendment to any material contract or arrangement by which the Company or any of its properties or assets is bound or subject; (e) any material adverse change in the assets, liabilities, financial condition or operations of the Company; (f) any declaration or payment of any dividend or other distribution of assets of the Company to its shareholders as a group, or the adoption or consideration of any plan or arrangement with respect thereto; (g) any resignation or termination of employment of any director or key employee of the Company or any notice or indication that any resignation or termination is anticipated; (h) any investment by the Company in the capital stock of a Person, except as a result of underwriting, investment banking and market making activities in the ordinary course of business and consistent with past practice; (i) any offer, issuance or sale of shares of capital stock; (j) any material change in the Company's accounting methods, procedures or policies; (k) any incurrence of Indebtedness; (l) any other event or condition of any character which has or could reasonably be expected to have a Material Adverse Effect; or (m) any agreement or commitment to do any of the foregoing. 4.10 Labor Agreements and Actions. The Company is not bound by or subject to any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute, including, but not limited to, any unfair labor practice, charge or other proceeding before the National Labor Relations Board, involving the Company pending or, to the Company's knowledge, threatened. To the Company's knowledge, there is no labor organization activity involving the employees of the Company and no officer or key employee, or any group of officers or key employees, intends to terminate his or her or their employment with the Company. Except as disclosed in Schedule 4.14, the Company is not aware of any claims, actions, proceedings or threats relating to sexual harassment, wrongful termination, discrimination or any other employment related matter. To the Company's knowledge there is no fact or circumstance which is reasonably expected to, with the passage of time or otherwise, cause this representation and warranty to be no longer true and correct. To the Company's knowledge, the Company is in compliance with all provisions of the Fair Labor Standards Act, all state wage and hour laws and all workers' compensation laws. 4.11 Employee Benefit Plans; ERISA. All pension, retirement, bonus, profit sharing, stock option, employee and other benefit or welfare plans or arrangements maintained by the Company, or to which the Company contributes or is required to contribute, to the extent required, materially comply with the provisions of and have been administered and maintained in material compliance with the provisions of ERISA and all other applicable laws. The Company does not currently maintain any, nor in the past has ever maintained any, "employee pension benefit plan" within the meaning of Section 3(2) of ERISA, and the Company does not currently contributes to, nor -6- 12 in the past has ever contributed to, any "Multiemployer Plan," as defined in Section 4001(a)(3) of ERISA. All unpaid liabilities of the Company with respect to, and all unfunded benefits (whether vested or not) under, each employee welfare benefit plan as defined in Section 3(1) of ERISA maintained by the Company have been calculated and are reflected in the Company's financial statements in accordance with GAAP, and any such liabilities incurred after the date of such financial statements will be incurred in the ordinary course of business, determined in a manner substantially similar to that used in such financial statements. 4.12 Taxes. The Company has timely filed within required time periods, including permitted extensions, all Federal, state and other Tax returns required to have been filed and has paid all Taxes which have become due and payable except (i) such as are being contested in good faith by appropriate proceedings (to the extent that any such proceedings are required) and (ii) as may be determined to be owed upon completion of any Tax return not yet filed based upon an extension of time to file provided all periodic estimated Tax payments have been made. The Company has withheld and paid all Taxes required to be withheld and paid in connection with amounts paid or owing to any employee, creditor, shareholder or other third party. The Company has not been advised that any Tax returns, Federal, state or other, have been or are being audited. There are no agreements, waivers or other arrangements providing for an extension of time with respect to the assessment of any Taxes or deficiency against the Company, nor are there any actions, suits, proceedings or claims now pending against the Company in respect of any Taxes or assessments. There is no pending or threatened investigation of the Company by any Federal, state, foreign or local authority relating to any Taxes or assessments, or any claims for additional taxes or assessments asserted by any such authority. The Company is not a party to or bound by any tax sharing, tax indemnity or tax allocation agreement or other similar arrangement. 4.13 Compliance with Charter, Applicable Laws and Material Contracts. Except as set forth on Schedule 4.13, the Company has been, and is, in compliance with, and is not in violation of the terms of: (i) its charter or bylaws as in effect on the date hereof, (ii) to the Company's knowledge, any Applicable Law, the noncompliance with which would have a Material Adverse Effect on the Company, or (iii) any material indenture, mortgage, deed of trust, bank loan, credit agreement, lease, agreement or instrument to which the Company is a party and, in each case, there does not exist any event or circumstance, that, individually or in the aggregate, with the giving of notice or the lapse of time or both, would constitute any such noncompliance or violation and would have a Material Adverse Effect. 4.14 Litigation; Adverse Facts. To the Company's knowledge, except as set forth on Schedule 4.14 or disclosed in the Financial Statements and the related Notes thereto, there are no actions, suits, proceedings or investigations at law or in equity of which the Company has received notice or otherwise has knowledge pending before or by any Federal, state, municipal, governmental or self-regulatory department, court, board, bureau, agency, instrumentality or organization or, to the Company's knowledge, threatened against or affecting the Company, nor is there any judgment, decree, injunction, ruling or order of any public body against the Company. To the Company's knowledge, there is no fact or circumstance which could give rise to any action, suit, proceeding or investigation which could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. -7- 13 4.15 Licenses, Permits and Authorizations. The Company has all Licenses and Permits necessary to the conduct of its business, except where the failure to have such Licenses and Permits, individually or in the aggregate, would not have a Material Adverse Effect. All such Licenses and Permits are in full force and effect. The properties, assets, operations and business of the Company are, and at all times have been maintained and conducted, in compliance with all Licenses and Permits. 4.16 Leases. With respect to each lease and sublease necessary in any material respect for the operation of the Company's business, (a) each such lease or sublease is legal, valid, binding, enforceable and in full force and effect; (b) to the Company's knowledge, no party to the lease or sublease is in breach or default, and no event has occurred which, with notice or lapse of time, would constitute a breach or default or permit termination, modification or acceleration thereunder; (c) there are no disputes, oral agreements or forbearance programs in effect as to the lease or sublease; (d) the Company has not assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the leasehold or subleasehold; and (e) there are no restrictions in the lease or sublease which prohibit the sale, transfer and delivery of the Securities, prohibit or restrict any merger, sale of assets or other event which could cause a change in control of the Company, or otherwise restrict or prohibit any other financings by the Company, including, without limitation, any public or private debt or equity financings. 4.17 Powers of Attorney. There are no outstanding powers of attorney executed on behalf of the Company. 4.18 Insurance. The Company is covered by insurance in scope and amount customary and reasonable for the businesses in which it is engaged and will be so covered after consummation of the transactions contemplated hereby. All such policies are in full force and effect. 4.19 Books and Records. The minute books and other similar records of the Company contain true and complete records, in all material respects, of all actions taken at any meetings of its shareholders, Board of Directors or any committees thereof and of all written consents executed in lieu of the holding of any such meeting. The books and records of the Company accurately reflect the assets, liabilities, business, financial condition and results of operations of the Company, in all material respects, and have been maintained in accordance with good business, accounting and bookkeeping practices. 4.20 Outstanding Indebtedness. Except as otherwise disclosed on Schedule 4.20, the Company is not in monetary or other material default in the performance or observance of any of the terms, covenants or conditions contained in any instrument or agreement evidencing the Indebtedness of the Company or pursuant to which such Indebtedness was issued or secured and has not requested any waiver in respect of any default and no event has occurred and is continuing which, with notice or the lapse of time or both, would constitute such a default. 4.21 Employment and Agency Agreements. Schedule 4.21 attached hereto sets forth a summary description of the current terms of employment for each of the Company's executive officers. To the Company's knowledge, each material employment, agency, independent contractor and sales representative agreement and each noncompetition, nondisclosure and confidentiality agreement to which the Company is a party constitutes a valid and binding agreement enforceable in accordance with its terms, and, to the Company's knowledge, no party to any such agreement is in -8- 14 breach of, or in default with respect to, its obligations under such agreement nor is the Company aware of any facts or circumstances which might reasonably be expected to give rise to a breach or default thereunder. 4.22 Net Capital. The Company is now, and has at all times since January 1, 1992 been, in compliance with applicable Net Capital and other regulatory requirements as they pertain to the Company's operations. 4.23 Disclosure. No representation, warranty or other statement of the Company to the Purchaser included in this Agreement or any Related Agreement or in any Exhibit or other Schedule thereto is, or will be at the Closing, untrue with respect to any material fact or omits, or will omit, to state a material fact necessary in order to make the statement made herein or therein in light of the circumstances in which such statement was made, not misleading. 5. REPRESENTATIONS AND WARRANTIES OF THE SELLER. Seller hereby represents and warrants to the Purchaser that the following statements are true and correct as of the date hereof: 5.1 Ownership. Seller is the record and beneficial owner of the Shares. All of such Shares and held free and clear of all liens, encumbrances, claims, security interests, options and charges of any kind created by or under the Seller. Upon the Closing, the Purchaser shall receive the Securities free and clear of all liens, encumbrances, claims, security interests, options and charges of any kind. 5.2 Authorization. Seller has the full right, power and authority to sell, transfer and deliver the Securities and has duly authorized the execution, delivery and performance of this Agreement and of each of the Related Agreements, the sale, transfer and delivery of the Securities, and the consummation of the transactions contemplated hereby and thereby. 5.3 Due Execution and Delivery; Binding Obligations. This Agreement has been duly executed and delivered by Seller. This Agreement is, and at the time of the Closing each of the Related Agreements will be, legal, valid and binding obligations of Seller enforceable against Seller in accordance with their respective terms except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or conveyance or similar law, relating to or limiting creditors' rights generally or by equitable principles relating to enforceability and except as rights of indemnity or contribution may be limited by Federal or state securities or other law, or the public policy underlying such laws. 5.4 No Violation. The execution, delivery and performance by Seller of this Agreement and of each of the Related Agreements, the sale, transfer and delivery of the Securities, and the consummation of the transactions contemplated hereby and thereby do not violate (i) to the knowledge of Seller, any material law, rule, regulation or ordinance applicable to Seller, (ii) any order, ruling, judgment or decree of any court or other governmental agency binding on Seller, (iii) any material term of any agreement or instrument to which Seller is a party. 5.5 Governmental Consents. The execution and delivery by Seller of this Agreement and of each of the Related Agreements, the sale, transfer and delivery of the Securities, and the consummation of the transactions contemplated hereby and thereby, do not and will not require as -9- 15 of the Closing any authorization, registration or filing with, or consent or approval of, any Federal, state or other governmental authority or regulatory body. 5.6 Investment Representations. 5.6.1 Seller is acquiring the Fidelity Shares for his own account, not as nominee or agent, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act. 5.6.2 Seller understands that (A) the Fidelity Shares have not been registered under the Securities Act by reason of a specific exemption therefrom, that they must be held by it indefinitely, and that it must, therefore, bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration; (B) each certificate representing the Fidelity Shares will be endorsed with the following legend: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "SECURITIES ACT") AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT COVERING SUCH SECURITIES OR IF THE PURCHASER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO PURCHASER, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT." and (C) Purchaser will instruct any transfer agent not to register the transfer of any of the Fidelity Shares unless the conditions specified in the foregoing legend are satisfied; provided, however, that no such opinion of counsel shall be necessary if the sale, transfer or assignment is made pursuant to Rule 144 of the Securities Act and such Seller provides Purchaser with evidence reasonably satisfactory to Purchaser and its counsel that the proposed transaction satisfies the requirements of Rule 144. Purchaser agrees to remove the foregoing legend from any securities if the requirements of Rule 144(k) of the Securities Act (or any successor rule or regulation) apply with respect to such securities and Purchaser and its counsel are provided with reasonably satisfactory evidence that the requirements of Rule 144(k) apply. 5.6.3 Seller can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Fidelity Shares. 5.6.4 Seller is an "accredited investor" within the meaning of Rule 501 of Regulation D of the Securities Act, as presently in effect. 5.6.5 Seller understands that the Fidelity Shares are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from Purchaser in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act, only in certain -10- 16 limited circumstances, and such Seller represents that he is familiar with Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. 5.6.6 Seller's principal address is as set forth in Section 11.8 hereof, and Seller does not reside in any state of the United States other than the state specified in its address thereon. 5.7 Disclosure. No representation, warranty or other statement of Seller included in this Agreement or any Related Agreement or in any Exhibit or other Schedule thereto is, or will be at the Closing, untrue with respect to any material fact or omits, or will omit, to state a material fact necessary in order to make the statement made herein or therein in light of the circumstances in which such statement was made, not misleading. 6. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby represents and warrants to the Company and to Seller that the following statements are true and correct as of the date hereof: 6.1 Organization and Good Standing. The Purchaser is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite power and authority to enter into this Agreement and each Related Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby. 6.2 Authorization. The execution, delivery and performance of this Agreement and of each of the Related Agreements to which the Purchaser is a party, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary action on the part of the Purchaser. 6.3 Due Execution and Delivery; Binding Obligations. This Agreement has been duly executed and delivered by the Purchaser. This Agreement is, and at the time of the Closing the Related Agreements to which the Purchaser is a party will be, legal, valid and binding obligations of the Purchaser enforceable against the Purchaser in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or conveyance or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability and except as rights of indemnity or contribution may be limited to Federal or state securities or other laws or the public policy underlying such laws. 6.4 No Violation. The execution, delivery and performance by the Purchaser of this Agreement, and of each of the Related Agreements to which the Purchaser is a party, and the consummation of the transactions contemplated hereby and thereby do not violate (i) the charter and bylaws of the Purchaser as in effect on the date hereof, (ii) any law, rule, regulation or ordinance applicable to the Purchaser, (iii) any order, ruling, judgment or decree of any court or other governmental agency binding on the Purchaser, or (iv) any term of any material indenture, mortgage, lease, agreement or instrument to which the Purchaser is a party. 6.5 Investment Intent. The Purchaser is acquiring the Securities for its own account, for investment purposes, and not with a view to or for sale in connection with any distribution thereof. The foregoing notwithstanding, the disposition of the Securities shall at all times be and -11- 17 remain within the Purchaser's control, so long as such disposition complies with applicable laws and regulations. 6.6 Accredited Investor Status; No Reliance. The Purchaser is an "accredited investor" (as such term is defined in Rule 501 of Regulation D under the Securities Act). By reason of its business and financial experience, the Purchaser has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the investment in the Securities and is able to bear the economic risk of such investment. The Purchaser confirms that the Company has made available to the Purchaser the opportunity to ask questions of the officers and management of the Company and to acquire additional information about the business, assets and financial condition of the Company. Notwithstanding the foregoing, the Purchaser confirms that in entering into this Agreement and in consummating the transactions contemplated hereby it has not relied upon any representation, warranty or other statement, whether written or oral and whether included in any materials, documents, instruments or financial or other projections provided to the Purchaser, relating to the Company's business, financial condition or results of operations, other than those representations and warranties expressly made by the Company in this Agreement or any Related Agreement or in any Exhibit or Schedule hereto or thereto. 6.7 Governmental Consents. The execution and delivery by the Purchaser of this Agreement and each of the Related Agreements to which it is a party, and the consummation of the transactions contemplated hereby, do not and will not require any authorization, registration or filing with, or consent or approval of, any Federal, state or other governmental authority or regulatory body. 6.8 Litigation; Adverse Facts. There are no actions, suits, proceedings or investigations at law or in equity pending before or by any Federal, state, municipal, governmental or self regulatory department, court, board, bureau, agency, instrumentality or organization threatened against or affecting the Purchaser which could reasonably be expected to adversely affect the Purchaser's ability to perform its obligations under this Agreement or consummate any of the transactions contemplated hereby. The Purchaser is not aware of any fact or circumstance which could give rise to any action, suit, proceeding or investigation which could reasonably be expected to adversely affect the Purchaser's ability to perform its obligations under this Agreement or consummate any of the transactions contemplated hereby. 6.9 Brokers. The Purchaser has not paid or become obligated to pay any fee or commission to any broker, finder, investment banker or other intermediary in connection with this Agreement or any Related Agreement. 6.10 Issuance of Fidelity Shares. The Fidelity Shares will be fully paid and non-assessable and issued to the Seller free and clear of all liens, encumbrances, claims, security interests, options and charges of any kind. 6.11 Reports. No reports, schedules, forms, statements, exhibits and other documents filed by the Purchaser with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (copies of which have been made available by the Purchaser to the Seller prior to the date hereof) contains any untrue statement of a material fact, nor omits nor misstates any material fact, except as qualified or modified by subsequent reports filed by the Purchaser with the Securities and Exchange Commission or by other public disclosures. -12- 18 6.12 Disclosure. No representation, warranty or other statement of the Purchaser to the Company included in this Agreement or any Related Agreement or in any Exhibit or Schedule hereto or thereto or in any other document or instrument delivered at any time prior to the Closing in connection herewith or therewith is, or will be at the Closing, untrue with respect to any material fact or omits, or will omit, to state a material fact necessary in order to make the statement made herein or therein in light of the circumstances in which such statement was made, not misleading. 7. CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER. The obligation of the Purchaser to consummate the transactions contemplated hereby is subject to the satisfaction, prior to or at the Closing, of the following conditions; provided, however, that any or all of the following conditions may be waived, in whole or in part, by the Purchaser in its sole and absolute discretion: 7.1 Representations and Warranties. The representations and warranties of the Company and the Seller, respectively, contained in this Agreement and the Related Agreements shall be true and correct in all material respects at and as of the Closing Date, as if made on and as of such date; the Company and the Seller shall have performed or satisfied, in all material respects, all of their respective covenants and agreements hereunder and thereunder to be performed or satisfied on or prior to the Closing Date. The Company and the Seller shall each have delivered to the Purchaser a certificate signed, in the case of the Company, by the President and the Chief Financial Officer of the Company, and, in the case of the Seller, by the Seller, each dated the Closing Date, to such effect and to the effect that each of the conditions set forth in Section 7 has been fulfilled. 7.2 Purchase Permitted by Applicable Laws. The consummation of the transactions contemplated hereby and by the Related Agreements shall not be prohibited by or violate any law, governmental or self-regulatory rule or regulation or similar constraint and shall not subject any party to any Tax, penalty or liability, under or pursuant to any, applicable law or governmental regulation, and shall not be enjoined (temporarily or permanently) under, or prohibited by or contrary to, any injunction, order or decree. Without limiting the generality of the foregoing, the consummation of the transactions contemplated hereby and by the Related Agreements shall otherwise comply with all applicable requirements of Federal and state securities laws. 7.3 No Material Adverse Changes. There shall not have occurred any material adverse change in the condition (financial or otherwise), business, results of operations, prospects, assets or properties of the Company. 7.4 No Material Judgment or Order. There shall not be any judgment or order of a court of competent jurisdiction or any ruling of any agency of the Federal or any state or local government or self-regulatory organization which, in the judgment of the Purchaser, would prohibit the delivery of the Securities or subject the Purchaser to any penalty if the Securities were to be delivered hereunder. 7.5 Securities. The Company shall have duly authorized, executed and delivered to the Purchaser the Securities in favor of the Purchaser. 7.6 Shareholders' Agreement. The Company, the Purchaser and certain other holders of the Company's Common Stock shall have duly entered into the Shareholders' Agreement in substantially the form attached as Exhibit C hereto (the "Shareholders' Agreement"). -13- 19 7.7 CRI Registration Rights Agreement. The Company, the Purchaser and certain other holders of the Company's Common Stock shall have duly entered into the Cruttenden Roth Incorporated Registration Rights Agreement in substantially the form attached as Exhibit D hereto (the "CRI Registration Rights Agreement"). 7.8 Payment of Taxes. The Company shall have paid all Taxes due and payable by the Company prior to the Closing, except such as are being contested in good faith by appropriate proceedings (to the extent that any such proceedings are required) and such Taxes as the failure to pay would not have a Material Adverse Effect. 7.9 Escrow Instructions. The Company shall have duly authorized, executed and delivered to SYC&R the Escrow Instructions. 7.10 Financial Statements. The Company shall have furnished to the Purchaser a copy of the Company's audited financial statements as of and for the fiscal year ended June 30, 1997, accompanied by a copy of an unqualified audit report of the Company's independent certified public accounts and a copy of the Company's unaudited financial statements as of and for the six-month period ended December 31, 1997. 7.11 Third Party Consents. The Company shall have obtained from third parties such material consents, approvals and authorizations which the Company is required to obtain under the provisions of any agreement, contract or undertaking to which the Company is a party or by which its assets and properties are bound in order to consummate each of the transactions contemplated by this Agreement and the Related Agreements, including, without limitation, appropriate waivers of all lessors under real property leases and consents of lessors under personal property leases, to the extent required. 8. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE SELLER. The respective obligations of the Company and the Seller to consummate the transactions contemplated hereby is subject to the satisfaction, prior to or at the Closing, of the following conditions; provided, however, that any or all of the following conditions may be waived, in whole or in part, by the Company in its sole and absolute discretion: 8.1 Representations and Warranties. The representations and warranties of the Purchaser contained in this Agreement shall be true in all material respects at and as of the Closing Date after giving effect to the transactions contemplated by this Agreement, as if made on and as of such date, and the Purchaser shall have performed or satisfied all of its covenants and agreements hereunder to be performed or satisfied on or prior to the Closing Date. 8.2 Purchase Permitted by Applicable Laws. The consummation of the transaction contemplated hereby shall not be prohibited by or violate any law, governmental regulation or similar constraint and shall not subject any party to any Tax, penalty or liability, under or pursuant to any applicable law or governmental regulation, and shall not be enjoined (temporarily or permanently) under, or prohibited by or contrary to, any injunction, order or decree. Without limiting the generality of the foregoing, the consummation of the transactions contemplated hereby shall otherwise comply with all applicable requirements of Federal and state securities laws. -14- 20 8.3 No Material Judgment or Order. There shall not be any judgment or order of a court of competent jurisdiction or any ruling of any agency of the Federal or any state or local government or self-regulatory organization which, in the reasonable judgment of the Company, would prohibit the delivery of the Securities or subject the Company to any material penalty if the Securities were to be delivered hereunder. 8.4 Third Party Consents. The Purchaser shall have obtained from third parties such material consents, approvals and authorizations which the Purchaser is required to obtain under the provisions of any agreement, contract or undertaking to which the Purchaser is a party or by which its assets and properties are bound in order to consummate each of the transactions contemplated by this Agreement and the Related Agreements, including, without limitation, appropriate waivers of all lessors under real property leases and consents of lessors under personal property leases, to the extent required. 8.5 Fidelity Registration Rights Agreement. The Purchaser and the Seller shall have duly entered into the Fidelity National Financial, Inc. Registration Rights Agreement in substantially the form attached as Exhibit E hereto (the "Fidelity Registration Rights Agreement"). 8.6 Escrow Instructions. The Purchaser shall have duly authorized, executed and delivered to SYC&R the Escrow Instructions. 9. TERMINATION. 9.1 Failure of Condition. If any of the conditions precedent to the parties respective obligations hereunder is not met and is not waived on or prior to the Closing Date, the Purchaser or the Company and the Seller, as the case may be, at their respective options, without prejudice to any rights they may have to recover damages for breach of this Agreement, may terminate this Agreement by delivering written notice of termination to the other party. 9.2 Effect of Termination. Upon the termination of this Agreement pursuant to this Section 9, all further obligations of the parties to this Agreement and the other agreements contemplated hereby shall terminate without further liability of any party to any other party hereto, provided that (i) termination of this Agreement shall not relieve any party of any liability for a breach of this Agreement or for any intentional misrepresentation or intentional failure to comply with any agreement or covenant hereunder, and (ii) such termination shall not be deemed a waiver of any available remedy for any such breach, intentional misrepresentation or intentional failure to comply with any agreement or covenant. 10. POST-CLOSING OBLIGATIONS. 10.1 Use of Proceeds. Seller covenants that, as soon as practicable after the Closing and receipt of the Purchase Price, Seller shall disburse or cause to be disbursed to the Company from the proceeds of the sale of Securities hereunder the following amounts: 10.1.1 approximately $93,000, to discharge Seller's obligations for principal and interest due on the Promissory Note dated January 30, 1996 issued by Seller in favor of the Company; -15- 21 10.1.2 approximately $205,000, to discharge Seller's obligations for the unpaid balance of the amount due under the Subscription and Security Agreement dated March 29, 1996; and 10.1.3 approximately $563,500, representing the aggregate purchase price in connection with the exercise by Seller of his outstanding options (the "Outstanding Options") to acquire 230,000 shares of the Company's Common Stock, in accordance with the terms and conditions applicable thereto, at the original exercise price of $2.63 for 200,000 of the Outstanding Options and $1.25 for 30,000 of the Outstanding Options, plus an amount equal to the withholding taxes due on the 200,000 Outstanding Options constituting nonqualified options under the Internal Revenue Code. The Company represents that the Outstanding Options shall be fully vested at the Closing Date and, upon exercise of the Outstanding Options and payment therefor by Seller, the Company shall issue shares of Common Stock underlying the Outstanding Options to Seller, all of which shares shall be duly and validly issued, fully paid and nonassessable shares, free and clear of any claims, mortgages, pledges, liens, charges or other encumbrances caused or created by the Company. 10.2 Disclosure of Subsequent Events. Subsequent to the execution and delivery of this Agreement and prior to the exercise in full of the Option, the Company shall notify the Purchaser in writing in the event that that any of the representations and warranties contained in this Agreement or made in connection herewith is no longer accurate or complete as a result of a new fact or changed circumstance. 11. MISCELLANEOUS. 11.1 Indemnification. Each party hereto (the "Indemnifying Party" herein) agrees to defend (with counsel reasonably satisfactory to such party), protect, indemnify and hold harmless the other party, each affiliate or subsidiary of such other party, and each of its respective officers, directors, employees, attorneys and agents (each an "Indemnified Party" herein) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature (including, without limitation, the disbursements and the reasonable fees of counsel for each Indemnified Party in connection with any investigative, administrative or judicial proceeding, whether or not the Indemnified Party shall be designated a party thereto), which may be imposed on, incurred by, or asserted against, any Indemnified Party (whether direct, indirect or consequential and whether based on any federal, state or local laws or regulations including, without limitation, securities, environmental and commercial laws and regulations, under common law or in equity, or based on contract or otherwise) in any manner relating to or arising out of this Agreement, the Related Agreements, or any other agreement, act, event or transaction related or attendant hereto or thereto; provided, however, that the Indemnifying Party shall have no obligation hereunder to any Indemnified Party with respect to matters caused by or resulting from the willful misconduct or gross negligence of such Indemnified Party. To the extent that the undertaking to indemnify set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Indemnifying Party shall satisfy such undertaking to the maximum extent permitted by applicable law. Any liability, obligation, loss, damage, penalty, cost or expense covered by this indemnity shall be paid to each Indemnified Party on demand, and, failing prompt payment, shall accrue interest thereon from the date incurred by each Indemnified Party until paid. The provisions of this Section 11.1 shall survive the satisfaction of the other obligations herein and the termination of this Agreement. -16- 22 11.2 Attorneys' Fees. In the event of any litigation between the parties hereto arising out of or relating to this Agreement, or the breach thereof, the prevailing party shall be entitled to recover from the other party, in addition to whatever other remedies such prevailing party may be entitled, reasonable attorneys' fees, expenses and costs. 11.3 Entire Agreement. Except as otherwise set forth herein, this Agreement embodies the entire agreement and understanding of the parties hereto with respect to the subject matter contained herein. There are no restrictions, promises, warranties, covenants, or undertakings, other than those expressly set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 11.4 Headings. The subject headings of the sections and subsections of this Agreement are included for purposes of convenience only and shall not affect the construction or interpretation of any of its provisions. 11.5 Successors and Assigns. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. 11.6 Parties in Interest. Nothing in this Agreement is intended to confer any rights or remedies under or by reason of this Agreement on any persons other than the parties to it and their respective successors and permitted assigns. Nothing in this Agreement is intended to relieve or discharge the obligation or liability of any third persons into any party to this Agreement. No provision of this Agreement shall give any third person any right of subrogation or action over or against any party to this Agreement. 11.7 Amendments, Waivers and Consents. This Agreement shall not be amended except in a writing signed by the parties hereto. No waiver or consent shall be binding except in a writing signed by the party making the waiver or giving the consent. No waiver of any provision or consent of any action shall constitute a waiver of any other provision or consent of any other action, whether or not similar. No waiver or consent shall constitute a continuing waiver or consent except to the extent specifically set forth in writing. 11.8 Notice. Any notice, instruction or communication required or permitted to be given under this Agreement to any party shall be in writing (which may include telex, telegram, telecopier or other similar form of reproduction) and shall be deemed given when actually received by the applicable party at the addresses indicated below: If to the Company: Cruttenden Roth Incorporated 18301 Von Karman, Suite 100 Irvine, California 92715 Attention: Byron C. Roth, President Telecopy: (714) 852-9719 -17- 23 with a copy to: Stradling Yocca Carlson & Rauth 660 Newport Center Drive, Suite 1600 Newport Beach, California 92660-6441 Attention: Nick E. Yocca, Esq. Telecopy: (714) 725-4100 If to the Seller: Walter W. Cruttenden III 3 Bodega Bay Drive Corona Del Mar, California 92625 with a copy to: David L. Keligian, Esq. The Busch Firm 2532 Dupont Drive Irvine, California 92612 Telecopy: (714) 474-7732 If to the Purchaser: Fidelity National Financial, Inc. 3916 State Street, Suite 300 Santa Barbara, California 93105 Attention: Andrew F. Puzder, Executive Vice President Telecopy: (805) 898-7149 with a copy to: Stradling Yocca Carlson & Rauth 660 Newport Center Drive, Suite 1600 Newport Beach, California 92660-6441 Attention: C. Craig Carlson, Esq. Telecopy: (714) 725-4100 A party may change his or its address for purposes of this section by giving the other party written notice of the new address in the manner set forth above. 11.9 Transaction Fees and Expenses. Except as stated herein, each party hereto agrees to pay its own costs and expenses in connection with the preparation, execution and delivery of this Agreement and the transactions contemplated hereby. Notwithstanding the foregoing, the Company will pay directly (in accordance with statements delivered on or prior to the Closing by third party service providers who have represented the Sellers in connection with this transaction) or reimburse the Sellers upon demand for all out-of-pocket costs and expenses (including fees and expenses of counsel) in connection with the preparation, execution and delivery of this Agreement and -18- 24 the consummation of the transactions contemplated hereby; provided that, the amounts paid and reimbursed shall not, in the aggregate, exceed $5,000. 11.10 Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 11.11 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. 11.12 Waiver of Jury Trial. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION AND UNDERSTANDING THEY ARE WAIVING A CONSTITUTIONAL RIGHT, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER IN CONTRACT, TORT OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO, THIS AGREEMENT, THE SECURITIES AND/OR ANY RELATED AGREEMENT OR THE TRANSACTIONS COMPLETED HEREBY OR THEREBY. -19- 25 IN WITNESS WHEREOF, the parties to this Agreement have duly executed it on the day and year first above written. "SELLER" /s/ Walter W. Cruttenden III ------------------------------------------- Walter W. Cruttenden III "COMPANY" CRUTTENDEN ROTH, INCORPORATED, a California corporation By: /s/ Byron C. Roth -------------------------------------- Byron C. Roth, President "PURCHASER" FIDELITY NATIONAL FINANCIAL, INC. a Delaware corporation By: /s/ Andrew F. Puzder -------------------------------------- Andrew F. Puzder, Executive Vice President -20- EX-10.57 4 AGREEMENT OF MERGER 1 EXHIBIT 10.57 AGREEMENT AND PLAN OF REORGANIZATION dated as of May 14, 1998 among MICRO GENERAL CORPORATION, ACS MERGER, INC., ACS SYSTEMS, INC. and FIDELITY NATIONAL FINANCIAL, INC. 2 TABLE OF CONTENTS
PAGE ARTICLE I THE MERGER 1.1 The Merger...........................................................................1 1.2 Closing..............................................................................1 1.3 Effective Time of the Merger.........................................................2 1.4 Effects of the Merger................................................................2 ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS 2.1 Conversion of Shares.................................................................2 2.2 Surrender and Payment................................................................2 ARTICLE III THE SURVIVING CORPORATION 3.1 Articles of Incorporation............................................................3 3.2 Bylaws...............................................................................3 3.3 Directors; Officers..................................................................3 ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Representations and Warranties of the Company........................................3 (a) Organization, Standing and Corporate Power.............................3 (b) Subsidiaries...........................................................3 (c) Capital Structure......................................................3 (d) Authority; Noncontravention............................................4 (e) SEC Documents; Financial Statements; No Undisclosed Liabilities........4 (f) Licenses, Approvals, etc...............................................5 (g) Absence of Certain Changes or Events...................................5 (h) Litigation.............................................................5 (i) Regulatory Matters; Compliance with Laws...............................5 (j) Taxes..................................................................6 (k) Contracts; Debt Instruments............................................6 (l) Proprietary Rights.....................................................7 (m) Insurance..............................................................7 (n) Brokers................................................................8 (o) Disclosure.............................................................8 4.2 Representations and Warranties of Parent and Merger Subsidiary.......................8
-i- 3 TABLE OF CONTENTS (CONTINUED)
(a) Organization, Standing and Corporate Power.............................8 (b) Authority; Noncontravention............................................8 (c) SEC Documents; Financial Statements; No Undisclosed Liabilities........9 (d) Brokers...............................................................10 (e) Insurance.............................................................10 (f) Licenses, Approvals, etc..............................................10 (g) Proprietary Rights....................................................10 (h) Disclosure............................................................11 ARTICLE V COVENANTS OF THE COMPANY 5.1 Conduct of Business.................................................................11 5.2 Access to Information...............................................................12 5.3 Pooling of Interests; Tax Treatment.................................................12 5.4 Confidentiality.....................................................................12 ARTICLE VI COVENANTS OF PARENT 6.1 Confidentiality.....................................................................13 6.2 Obligations of Merger Subsidiary....................................................13 6.3 Access to Information...............................................................13 6.4 Tax Treatment.......................................................................14 6.5 Securities Reports..................................................................14 6.6 Implement Employee Benefits.........................................................14 ARTICLE VII COVENANTS OF PARENT AND THE COMPANY 7.1 Regulatory Applications; Reasonable Efforts; Notification...........................14 7.2 Press Releases......................................................................15 7.3 Due Diligence.......................................................................15 7.4 Indemnification.....................................................................16 (a) Indemnification of Parent.............................................16 (b) Limitations...........................................................16 (c) Indemnification of Fidelity...........................................16 (d) Claims Procedure......................................................16
-ii- 4 TABLE OF CONTENTS (CONTINUED)
ARTICLE VIII CONDITIONS TO THE MERGER 8.1 Conditions to the Obligations of Each Party.........................................17 8.2 Conditions to the Obligations of Parent and Merger Subsidiary.......................18 8.3 Conditions to the Obligations of the Company........................................18 ARTICLE IX CONDITIONS FOLLOWING THE CLOSING 9.1 Increase Stock Option Plan..........................................................19 9.2 Fidelity Financing..................................................................20 ARTICLE X TERMINATION 10.1 Termination.........................................................................20 10.2 Effect of Termination...............................................................20 ARTICLE XI MISCELLANEOUS 11.1 Notices.............................................................................21 11.2 Survival of Representations and Warranties..........................................22 11.3 Amendments; No Waivers..............................................................22 11.4 Fees and Expenses...................................................................22 11.5 Successors and Assigns; Parties in Interest.........................................22 11.6 Severability........................................................................22 11.7 Governing Law.......................................................................23 11.8 Entire Agreement....................................................................23 11.9 Counterparts; Effectiveness; Interpretation.........................................23 11.10 Effect of Disclosure Schedule.......................................................23
-iii- 5 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement"), is entered into as of May 14, 1998, among ACS SYSTEMS, INC., a California corporation (the "Company"), MICRO GENERAL CORPORATION, a Delaware corporation ("Parent"), ACS MERGER, INC., a Delaware corporation and a wholly-owned subsidiary of Parent ("Merger Subsidiary") and FIDELITY NATIONAL FINANCIAL, INC., a Delaware corporation and the indirect parent corporation of the Company ("Fidelity"). WHEREAS, the respective Boards of Directors of Parent, Merger Subsidiary, the Company and Fidelity have approved the merger of Merger Subsidiary into the Company as set forth below (the "Merger"), upon the terms and subject to the conditions set forth in this Agreement and the California General Corporation Law (the "CGCL"), whereby each issued and outstanding share of common stock, no par value, of the Company (the "Shares"), all of which Shares are held by Fidelity, shall be converted into the Merger Consideration (as defined herein); WHEREAS, the Board of Directors of Parent has unanimously (i) determined that this Agreement and the transactions contemplated hereby, including the Merger, are fair to and in the best interests of the stockholders of Parent and (ii) approved this Agreement and the transactions contemplated hereby, including the Merger; WHEREAS, it is intended that the Merger be (i) treated as a tax-free reorganization pursuant to the provisions of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, Parent, Merger Subsidiary, the Company and Fidelity desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to consummation thereof. NOW, THEREFORE, in consideration of the foregoing and the mutual promises, representations, warranties, covenants and agreements herein contained, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE I THE MERGER 1.1 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the CGCL, Merger Subsidiary shall be merged with and into the Company at the Effective Time (as defined herein). At the Effective Time, (i) the separate corporate existence of Merger Subsidiary shall cease, and (ii) the Company shall continue as the surviving corporation as a direct wholly-owned subsidiary of Parent (Merger Subsidiary and the Company are sometimes hereinafter referred to as "Constituent Corporations" and, as the context requires, the Company, after giving effect to the Merger, is sometimes hereinafter referred to as the "Surviving Corporation"). 6 1.2 Closing. The closing of the Merger (the "Closing") shall take place as soon as practicable, but in any case on or prior to the third business day after which all of the conditions set forth in Article VIII hereof shall be fulfilled or waived in accordance with this Agreement (the "Closing Date"). At the time of the Closing, the Company and Merger Subsidiary will file an agreement of merger and required officers certificates with the Secretary of State of the State of California (the "Agreement of Merger") and make all other filings or recordings required by the CGCL in connection with the Merger. 1.3 Effective Time of the Merger. The Merger shall, subject to the CGCL, become effective as of such time as the Agreement of Merger is duly filed with the Secretary of State of the State of California or at such later time as is specified in the Agreement of Merger (the "Effective Time"). 1.4 Effects of the Merger. From and after the Effective Time, the Surviving Corporation shall possess all the rights, privileges, powers and franchises and be subject to all of the restrictions, disabilities, duties and liabilities of the Company and Merger Subsidiary, all as provided under the CGCL. ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS 2.1 Conversion of Shares. At the Effective Time, by virtue of the Merger and without any action on the part of Fidelity or Parent: (a) each share of common stock of Merger Subsidiary outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of common stock of the Surviving Corporation and such share shall constitute the only outstanding shares of capital stock of the Surviving Corporation; and (b) all Shares outstanding immediately prior to the Effective Time shall be converted into the right to receive an aggregate of 4,600,000 shares of Parent's common stock, par value $.05 per share, (the "Parent Common Stock"), without interest (the "Merger Consideration"). The parties hereby expressly agree that the aggregate Merger Consideration is valued at $6,900,000 and the number of shares of Parent Common Stock to be converted in accordance with this Section 2.1(b) is calculated by dividing such aggregate value by $1.50 per share. The parties hereby further expressly agree that the Closing is subject to the satisfaction of all closing conditions set forth in Article VIII hereof including, without limitation, the delivery of each of the Fairness Opinions (as defined in Article VIII below). 2.2 Closing; Surrender and Delivery. On the day of the Closing, the Company shall surrender to Parent a certificate representing the Shares in exchange for delivery by Parent to the Company of the Merger Consideration. The Closing shall take place at a time mutually agreed upon by the Company and Parent, and shall be located at the offices of Stradling Yocca Carlson & Rauth, 660 Newport Center Drive, Suite 1600, Newport Beach, California, 92660, or such other location as the Company and Parent shall mutually agree upon prior to the Closing. -2- 7 ARTICLE III THE SURVIVING CORPORATION 3.1 Articles of Incorporation. The Articles of Incorporation of the Company in effect at the Effective Time shall be the Articles of Incorporation of the Surviving Corporation until amended in accordance with applicable law. 3.2 Bylaws. The Bylaws of the Company in effect at the Effective Time shall be the Bylaws of the Surviving Corporation until amended in accordance with applicable law. 3.3 Directors; Officers. Upon the Effective Time, the Board of Directors of the Surviving Corporation shall consist of two (2) members, and the initial directors of the Surviving Corporation shall, until successors are duly elected and qualified in accordance with applicable law, include the following individuals: William P. Foley, II and Carl A Strunk. ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Representations and Warranties of the Company. The Company and Fidelity represent and warrant to Parent and Merger Subsidiary, subject to the exceptions and qualifications set forth in the disclosure schedule ("Disclosure Schedule") attached hereto, as follows (whenever the representations or warranties of the Company and Fidelity are qualified by the knowledge of the Company and Fidelity, knowledge shall mean knowledge of the executive officers of the Company and Fidelity): (a) Organization, Standing and Corporate Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has the requisite corporate power and authority to carry on its business as now being conducted. The Company is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed (individually or in the aggregate) could not reasonably be expected to (i) have a material adverse effect on the value, condition (financial or otherwise), prospects, business, or results of operations of the Company as a whole, (ii) impair the ability of any party hereto to perform its obligations under this Agreement or (iii) prevent or materially delay consummation of any of the transactions contemplated by this Agreement (a "Material Adverse Effect"). The Company will deliver to Parent with the Disclosure Schedule complete and correct copies of its Articles of Incorporation and Bylaws. (b) Subsidiaries. The Company does not own, directly or indirectly, any capital stock or other equity interest in any other Corporation, joint venture, partnership, limited liability company or other entity or person. (c) Capital Structure. The authorized capital stock of the Company consists of 300,000 Shares of Common Stock, no par value per share. As of the date of this Agreement, (i) 3,000 Shares of Common Stock were issued and outstanding and (ii) no Shares were held by the -3- 8 Company. Except as set forth above, no shares of capital stock or other equity or voting securities of the Company are issued, reserved for issuance or outstanding. All outstanding shares of capital stock of the Company are, and all Shares which may be issued pursuant to the Company Options (as defined below) will, when issued, be duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. There are no bonds, debentures, notes or other indebtedness or securities of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which stockholders of the Company may vote. There are no securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which the Company is a party or by which the Company is bound obligating it to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other equity or voting securities of the Company or obligating the Company to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking. (d) Authority; Noncontravention. The Company has the requisite corporate power and authority to enter into this Agreement required in connection with the consummation of the Merger, to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation of any obligation or to a loss of a material benefit under, (i) the Articles of Incorporation or Bylaws of the Company, (ii) except as disclosed in Section 4.1(d) of the Disclosure Schedule, any loan or credit agreement, note, instrument of debt, lien, lease or any other contract, agreement, instrument, permit or license applicable to the Company or its respective properties or assets, except for conflicts, violations, or defaults individually or in the aggregate which would not have a Material Adverse Effect, or (iii) subject to the governmental filings and other matters referred to in the following sentence, any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company or its properties or assets. No consent, approval, order, license, permit, waiver or authorization of, or registration, declaration or filing with or exemption, notice, certification or application by or to (collectively, "Consents") any federal, state or local government or any arbitrable panel or any court, administrative or regulatory agency or other governmental authority (a "Governmental Entity"), is required by or with respect to the Company in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated by this Agreement, except for (A) the required consents listed on Section 4.1(d) of the Disclosure Schedule, (B) the filing of the Agreement of Merger in accordance with the CGCL and similar documents with the relevant authorities of other states in which the Company is qualified to do business, and (C) such other Consents as to which the failure to obtain or make, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. (e) Financial Statements; No Undisclosed Liabilities. The Company's audited balance sheets as of December 31, 1997 and December 31, 1996 and the Company's audited statements of income, cash flow and shareholders' equity for the periods then ended which are -4- 9 attached to Section 4.1(e) of the Disclosure Schedule, have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis throughout the periods involved ("GAAP") (except as may be indicated in the notes thereto) and fairly present the consolidated financial position of the Company as of the dates thereof and the results of its operations and cash flow for the periods then ended. Except as set forth in Section 4.1(e) of the Disclosure Schedule, the Company has no liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise), except for liabilities and obligations which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. (f) Licenses, Approvals, etc. The Company possesses or has been granted all registrations, filings, applications, certifications, notices, consents, licenses, permits, approvals, certificates, franchises, orders, qualifications, authorizations and waivers of any Governmental Entity (federal, state and local) necessary to entitle it to conduct its business in the manner in which it is presently being conducted (the "Licenses"), except for Licenses as to which the failure to possess, individually or in the aggregate, would not have a Material Adverse Effect. Except as described in Section 4.1(f) of the Disclosure Schedule, no Action (as defined herein) is pending or, to the knowledge of the Company, threatened seeking the revocation or limitation of any of the Licenses. (g) Absence of Certain Changes or Events. Except as contemplated by this Agreement or disclosed in Section 4.1(g) of the Disclosure Schedule, since March 31, 1998, the Company has conducted its business only in the ordinary course consistent with past practice, and there has not been (i) any event, occurrence or development which, individually or in the aggregate, has had or could reasonably be expected to have a Material Adverse Effect, (ii) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to any of the Company's capital stock or any repurchase, redemption or other acquisition by the Company of any outstanding shares of capital stock or other securities of the Company, (iii) any damage, destruction or loss, whether or not covered by insurance, that has had or could have a Material Adverse Effect, (iv) any amendment, waiver or modification of any material term of any outstanding security of the Company, (v) any incurrence, assumption or guarantee by the Company of any material indebtedness for borrowed money or other material obligations, other than in the ordinary course of business consistent with past practice, (vi) any creation or assumption by the Company of any lien on any asset, other than in the ordinary course of business consistent with past practice, or (vii) any making of any lease, loan, advance or capital contributions to or investment in any person other than in the ordinary course of business consistent with past practice and other than investments in cash equivalents made in the ordinary course of business consistent with past practice. (h) Litigation. Except as disclosed in Section 4.1(h) of the Disclosure Schedule, there are no Actions or proceedings pending or, to the knowledge of the Company, threatened against the Company which, if determined adversely, would have a Material Adverse Effect. (i) Regulatory Matters; Compliance with Laws. Neither the Company nor any of its properties is a party to or is subject to any order, decree, agreement, memorandum of understanding or similar arrangement with, or a commitment letter or similar submission to, or extraordinary supervisory letter from, any Governmental Entity. The conduct by the Company of its business is and has been in compliance with all applicable federal, state, local and foreign statutes, -5- 10 laws, regulations, ordinances, rules, and judgments, orders or decrees, except for violations or failures to so comply, if any, that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. (j) Taxes. For purposes of this Agreement, (A) the term "Returns" shall mean all returns, declarations, reports, statements, and other documents required to be filed with respect to federal, state, local and foreign Taxes (as defined below) or for information purposes, and the term "Return" means any one of the foregoing Returns, and (B) the term "Taxes" shall mean all federal, state, local and foreign net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties, or other taxes, together with any interest and any penalties, additions to tax, or additional amounts with respect thereto, and the term "Tax" means any one of the foregoing Taxes. (i) The Company does not file individual Returns. All of its properties, income and operations are aggregated with Fidelity for tax purposes. Except as set forth in Section 4.1(j)(i) of the Disclosure Schedule, all federal, state, local and foreign Returns which were required to be filed with respect to the Company or any of its properties, income and/or operations were duly prepared and filed by Fidelity. As of the time they were filed, such Returns accurately reflected the material facts regarding the income, business, assets, operations, activities and status of the Company, and any other information required to be shown thereon. (ii) Except as disclosed in Section 4.1(j)(ii) of the Disclosure Schedule, with respect to all amounts in respect of Taxes imposed on the Company or for which the Company is or could be liable, whether to taxing authorities or to other Persons, all amounts required to be paid by or on behalf of the Company to taxing authorities or others have been paid. (iii) Except as disclosed in Section 4.1(j)(iii) of the Disclosure Schedule, there is no review or audit by any taxing authority of any Tax liability of the Company currently in progress. Except as disclosed in Section 4.1(j)(iii) of the Disclosure Schedule, the Company has not received any written notice of any pending or threatened audit by the Internal Revenue Service or any state, local or foreign agency of any Returns or Tax liability of the Company for any period. The Company currently has no unpaid deficiencies assessed by the Internal Revenue Service or any state, local or foreign taxing authority arising out of any examination of any of the Returns of the Company, nor, to the knowledge of the Company, is there reason to believe that any material deficiency will be assessed. (k) Contracts; Debt Instruments. (i) Except as otherwise disclosed in Section 4.1(k)(i) of the Disclosure Schedule or otherwise disclosed to Parent during the Disclosure Period, the Company is not a party to or subject to: (A) any collective bargaining or other agreements with labor unions, trade unions, employee representatives, work committees, guilds or associations representing employees of the Company; -6- 11 (B) any employment, consulting, severance, termination, or indemnification agreement, contract or arrangement, including any oral agreement, contract or arrangement which requires the payment of over $25,000, with any current or former officer, consultant, director or employee; (C) except as imposed by applicable regulators, any agreement, contract, policy, License, document, instrument, arrangement or commitment that materially limits the freedom of the Company to compete in any line of business or with any person or in any geographic area or which would so materially limit the freedom of the Company after the Effective Time, or by virtue of the transaction contemplated by this Agreement, Parent, Merger Subsidiary or any of their subsidiaries after the Effective Time; or (D) any agreement or contract relating to any outstanding commitment for capital expenditures, or any partially or fully executory agreement or contract relating to the acquisition or disposition of rights or assets other than those entered into in the ordinary course consistent with past practices. (ii) Neither the Company nor, to the knowledge of the Company, any of the other parties to any of the contracts and agreements identified in Section 4.1(k)(i) of the Disclosure Schedule is in default under or has terminated any such contract or agreement, or in any way expressed to the Company an intent to materially reduce or terminate the amount of its business with the Company in the future. (l) Proprietary Rights. (i) "Company Proprietary Rights" shall be defined as all copyrights, copyright registrations, copyrights applications, trade and division or other names used in the operation of the Company, and all other material intellectual properties derived from or used in the conduct of operations of the Company; and permits, licenses or other agreements to or from third parties regarding the foregoing or that are related to the Company's products or business. (ii) All of the Company Proprietary Rights are listed in Schedule 4.1(l). Except as disclosed therein, the Company owns and possesses all right, title and interest in the Company Proprietary Rights. The Company has taken all necessary action to protect the Company Proprietary Rights and the transactions contemplated by this Agreement will have no Material Adverse Effect. (iii) No claim by any third party contesting the validity, enforceability, use or ownership of any Company Proprietary Right has been made, is currently pending or, to the best knowledge of Fidelity and the Company, is threatened. The Company has not received any notice of, nor is it aware of any fact which indicates a likelihood of any infringement or misappropriation by any third party with respect to any of the Company Proprietary Rights. The Company has not infringed or misappropriated any rights of any third parties, nor is it aware of any infringement or misappropriation which will occur as a result of the continued operation of the Company as now conducted. -7- 12 (m) Insurance. The Company is covered by valid and currently effective insurance policies that are customary for companies of similar size and financial condition which conduct similar businesses. All such policies are in full force and effect, all premiums due thereon have been paid and the Company has complied with the provisions of such policies. The Company has not received any written notice from or on behalf of any insurance carrier issuing policies or binders relating to or covering the Company that there will be a cancellation or non-renewal of existing policies or binders, or material modification of any of the methods of doing business, will be required. (n) Brokers. No broker, investment banker, financial advisor or other person is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. (o) Disclosure. The representations and warranties of the Company contained in this Agreement are true and correct in all material respects and do not omit any material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. There is no fact known to the Company which has not been disclosed to Parent in the Disclosure Schedule which, if taken as a whole, has had, or would reasonably be expected to have, a Material Adverse Effect. (p) Title to the Shares. Fidelity is, and at the Closing will be, the sole owner, beneficially and of record, of the Shares. The Shares are and will be transferred free and clear of all liens, claims, encumbrances, security interests, pledges, equities, options, charges, restrictions and defects in title of any nature whatsoever, other than restrictions imposed by federal and applicable state securities laws which do not constitute an impediment to the transactions described in this Agreement. 4.2 Representations and Warranties of Parent and Merger Subsidiary. Parent and Merger Subsidiary represent and warrant to Fidelity subject to the exceptions and qualifications set forth in the disclosure schedule attached hereto (the "Parent Disclosure Schedule") as follows (whenever the representations or warranties of Parent and Merger Subsidiary are qualified by the knowledge of Parent and Merger Subsidiary, knowledge shall mean knowledge of the executive officers of Parent and Merger Subsidiary): (a) Organization, Standing and Corporate Power. Each of Parent and Merger Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its respective state of incorporation and has the requisite corporate power and authority to carry on its business as now being conducted. Each of the Parent and its subsidiaries is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed (individually or in the aggregate) could not reasonably be expected to have a material adverse effect on the value, condition (financial or otherwise), prospects, business, or results of operations of the Parent and its subsidiaries as a whole, (ii) impair the ability of any party hereto to perform its obligations under this Agreement or (iii) prevent or materially delay consummation of any of he transactions contemplated by this Agreement (a "Parent Material Adverse Effect"). Parent will deliver to the Company with the Parent -8- 13 Disclosure Schedule complete and correct copies of the Certificate of Incorporation and Bylaws of Parent and Merger Subsidiary, as amended to the date of this Agreement. (b) Authority; Noncontravention. Parent and Merger Subsidiary have all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of Parent and Merger Subsidiary. This Agreement has been duly executed and delivered by Parent and Merger Subsidiary and constitutes a valid and binding obligation of such party, enforceable against such party in accordance with its terms. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement will not, conflict with, or result in any violation of, or default under, or give rise to a right of termination, cancellation, modification or acceleration of any obligation or to a loss of a material benefit under, (i) the Certificate of Incorporation or Bylaws of Parent or Merger Subsidiary, (ii) except as disclosed in Section 4.2(b) of the Parent's Disclosure Schedule, any loan or credit agreement, note, instrument of debt, lien, lease or any other contract, agreement, instrument, permit or license applicable to Parent or Merger Subsidiary or their respective properties or assets or (iii) subject to the governmental filings and other matters referred to in the following sentence, any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Parent, Merger Subsidiary or any other subsidiary of Parent or their respective properties or assets, other than, in the case of clause (ii) or (iii), any such conflicts, violations, defaults, rights, losses or liens that individually or in the aggregate would not impair the ability of Parent and Merger Subsidiary to perform their respective obligations under this Agreement or prevent the consummation of any of the transactions contemplated by this Agreement (a "Parent Material Adverse Effect"). Other than those Consents referred to in the Disclosure Schedule on the part of the Company, no Consent of any Governmental Entity is required by or with respect to Parent, Merger Subsidiary or any other subsidiary of Parent in connection with the execution and delivery of this Agreement or the consummation by Parent or Merger Subsidiary, as the case may be, of any of the transactions contemplated by this Agreement, except for (i) the consents disclosed in Section 4.2(b) of the Parent Disclosure Schedule, (ii) the filing of the Agreement of Merger in accordance with the CGCL and similar documents with the relevant authorities of other states in which the Company is qualified to do business, (iii) compliance with applicable requirements of the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "Securities Act"), and applicable state blue sky laws and (iv) such other Consents as to which the failure to obtain or make, individually or in the aggregate, could not reasonably be expected to have a Parent Material Adverse Effect. (c) SEC Documents; Financial Statements; No Undisclosed Liabilities. Parent has provided or made available to the Company true and correct copies of all reports, schedules, forms, statements, exhibits and other documents filed with the Securities and Exchange Commission (the "SEC") by Parent under or pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the "Exchange Act") since January 1, 1996 (the "Parent SEC Documents"), all of which were timely filed with the SEC. As of their respective dates, or as subsequently amended prior to the date of this Agreement, the Parent SEC Documents complied in all material respects with the requirements of the Exchange Act applicable to such Parent SEC Documents, and none of the Parent SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the -9- 14 statements therein, in light of the circumstances under which they were made, not misleading. The Parent SEC Documents include all contracts and other documents which are required by the Securities Act or the Exchange Act to be filed as exhibits thereto. The financial statements of the Parent included in the Parent SEC Documents comply in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP (except as may be indicated in the notes thereto) and fairly present the consolidated financial position of the Parent and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the Parent SEC Documents, neither the Parent nor any of its subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise), except for liabilities and obligations which, individually or in the aggregate, could not reasonably be expected to have a Parent Material Adverse Effect. (d) Brokers. No broker, investment banker, financial advisor or other person is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Parent or any of its subsidiaries. (e) Insurance. The Parent and its subsidiaries are covered by valid and currently effective insurance policies in favor of the Parent that are customary for companies of similar size and financial condition which conduct similar businesses. All such policies are in full force and effect, all premiums due thereon have been paid and the Parent has complied with the provisions of such policies with respect to which the failure to comply with would result in a cancellation of such policies. The Parent has not received any written notice from or on behalf of any insurance carrier issuing policies or binders relating to or covering the Parent and its subsidiaries that there will be a cancellation or non-renewal of existing policies or binders, or material modification of any of the methods of doing business, will be required. (f) Licenses, Approvals, etc. Each of the Parent and its subsidiaries possesses or has been granted all Licenses, except for Licenses as to which the failure to possess, individually or in the aggregate, would not have a Parent Material Adverse Effect. Except as described in Section 4.2(f) of the Parent Disclosure Schedule, no Action (as defined herein) is pending or, to the knowledge of the Company, threatened seeking the revocation or limitation of any of the Licenses. (g) Proprietary Rights. (i) "Parent Proprietary Rights" shall be defined as all patents, patent registrations, patent applications, copyrights, copyright registrations, copyrights applications, trade and division or other names used in the operation of Parent, and all other material intellectual properties derived from or used in the conduct of operations of Parent; and permits, licenses or other agreements to or from third parties regarding the foregoing or that are related to Parent's products or business. (ii) All of the Parent Proprietary Rights are listed in Schedule 4.2(g). Except as disclosed therein, Parent owns and possesses all right, title and interest in the Parent Proprietary Rights. Parent has taken all necessary action to protect the Parent Proprietary Rights -10- 15 and the transactions contemplated by this Agreement will have no Parent Material Adverse Effect on Parent's right, title and interest in the Parent Proprietary Rights. (iii) No claim by any third party contesting the validity, enforceability, use or ownership of any Parent Proprietary Right has been made, is currently pending or, to the best knowledge of Parent, is threatened. Parent has not received any notice of, nor is it aware of any fact which indicates a likelihood of any infringement or misappropriation by any third party with respect to any of the Parent Proprietary Rights. Parent has not infringed or misappropriated any rights of any third parties, nor is it aware of any infringement or misappropriation which will occur as a result of the continued operation of Parent as now conducted. (h) Disclosure. The representations and warranties of the Parent contained in this Agreement are true and correct in all material respects, and do not omit any material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. There is no fact known to the Parent which has not been disclosed to the Company in the Parent Disclosure Schedule and the Parent SEC Documents, taken as a whole, which has had, or would reasonably be expected to have, a Parent Material Adverse Effect. ARTICLE V COVENANTS OF THE COMPANY The Company agrees that: 5.1 Conduct of Business. During the period from the date of this Agreement to the Effective Time, the Company shall carry on its businesses in the ordinary course of business in substantially the same manner as heretofore conducted and, to the extent consistent therewith, use all reasonable efforts to preserve intact its current business organizations, keep available the services of its current officers and employees (as a group) and preserve its relationships with customers, suppliers, licensors, licensees, distributors and others having business dealings with them. Without limiting the generality of the foregoing, during the period from the date of this Agreement to the Effective Time, except as contemplated by this Agreement the Company shall not, and shall not permit any of its subsidiaries to, without the prior written approval of Parent (which approval will not be unreasonably withheld): (a) (i) declare, set aside or pay any dividends on, or make any other distributions (whether in cash, stock or property) in respect of, any of its capital stock; (ii) adjust, split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (iii) purchase, redeem or otherwise acquire any shares of capital stock of the Company or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (b) issue, deliver, sell, pledge or otherwise encumber any shares of its capital stock, any other voting securities or any securities convertible into, or any rights, warrants or options, to acquire, any such shares, voting securities or convertible securities (other than the issuance of Shares upon the exercise of Company Options outstanding as of the date hereof in each case in accordance with the terms and provisions thereof); -11- 16 (c) Amend its Articles of Incorporation, Bylaws or other comparable charter or organizational documents; (d) mortgage or otherwise encumber or subject to any lien or sell, lease, license, transfer or otherwise dispose of any material properties or assets, except in the ordinary course of business consistent with past practice or pursuant to existing contracts or commitments; (e) amend, modify or waive any material term of any outstanding security of the Company; (f) incur, assume, guarantee or become obligated with respect to any indebtedness other than in the ordinary course of business, consistent with past practice and in accordance with the terms thereof, or incur, assume, guarantee or become obligated with respect to any other material obligations other than in the ordinary course of business and consistent with past practice; (g) make any material tax election or take any material tax position (unless required by law) or change its fiscal year or accounting methods, policies or practices (except as required by changes in GAAP) or settle or compromise any material income tax liability; (h) enter into any, or commit to enter into, any lease, loan, advance or capital contributions to or investment in any person other than in the ordinary course of business consistent with past practice; (i) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction thereof, in the ordinary course of business consistent with past practice and in accordance with their terms or the settlement or other disposition of litigation matters by a payment or payments not exceeding $10,000, or release or waive any material rights or claims, or waive the benefits of, or agree to modify in any manner, any confidentiality, standstill or similar agreement to which the Company is a party; (j) authorize any of, or commit or agree to take any of, the foregoing actions. 5.2 Access to Information. From the date hereof until the Effective Time, the Company will give Parent, its counsel, financial advisors, auditors and other authorized representatives full access (during normal business hours and upon reasonable notice) to the offices, properties, officers, employees, accountants, auditors, counsel and other representatives, books and records of the Company (including to perform any environmental studies), will furnish to Parent, its counsel, financial advisors, auditors and other authorized representatives such financial, operating and property related data and other information as such persons may reasonably request, and will instruct the Company's employees, counsel and financial advisors to cooperate with Parent in its investigation of the business of the Company. 5.3 Tax Treatment. The Company shall not take any action which would disqualify the Merger as a "reorganization" that would be tax free to Parent pursuant to Section 368(a) of the Code. -12- 17 5.4 Confidentiality. Prior to the Effective Time and after any termination of this Agreement, the Company will hold, and will use its reasonable best efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by judicial or administrative process or by other requirements of law, all confidential documents and information concerning Parent and its subsidiaries furnished to the Company in connection with the transactions contemplated by this Agreement except to the extent that such information can be shown to have been (i) previously known on a nonconfidential basis by the Company, (ii) in the public domain through no fault of the Company or (iii) later lawfully acquired by the Company from sources other than Parent; provided that the Company may disclose such information to its officers, directors, employees, accountants, counsel, consultants, advisors and agents in connection with the transactions contemplated by this Agreement so long as such persons have a need to know such information, are informed by the Company of the confidential nature of such information and are directed by the Company to treat such information confidentially. The Company's obligation to hold any such information in confidence shall be satisfied if it exercises the same care with respect to such information as it would take to preserve the confidentiality of its own similar information. If this Agreement is terminated, the Company will, and will use its best efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to, deliver to Parent, upon request, or, at the election of the Company, destroy, all documents and other materials and all copies thereof, obtained by the Company or on its behalf from Parent in connection with this Agreement that are subject to such confidentiality. ARTICLE VI COVENANTS OF PARENT Parent agrees that: 6.1 Confidentiality. Prior to the Effective Time and after any termination of this Agreement, Parent will hold, and will use its reasonable best efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by judicial or administrative process or by other requirements of law, all confidential documents and information concerning the Company furnished to Parent in connection with the transactions contemplated by this Agreement except to the extent that such information can be shown to have been (i) previously known on a nonconfidential basis by Parent, (ii) in the public domain through no fault of Parent or (iii) later lawfully acquired by Parent from sources other than the Company; provided that Parent may disclose such information to its officers, directors, employees, accountants, counsel, consultants, advisors and agents in connection with the transactions contemplated by this Agreement so long as such persons have a need to know such information, are informed by Parent of the confidential nature of such information and are directed by Parent to treat such information confidentially. Parent's obligation to hold any such information in confidence shall be satisfied if it exercises the same care with respect to such information as it would take to preserve the confidentiality of its own similar information. If this Agreement is terminated, Parent will, and will use its best efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to, deliver to the Company, upon request, or, at the election of Parent, destroy, all documents and other materials and all copies thereof, obtained by Parent or on its behalf from the Company in connection with this Agreement that are subject to such confidentiality. -13- 18 6.2 Obligations of Merger Subsidiary. Parent will take all action necessary to cause Merger Subsidiary to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement. 6.3 Access to Information. From the date hereof until the Effective Time, the Parent will give the Company, its counsel, financial advisors, auditors and other authorized representatives full access (during normal business hours and upon reasonable notice) to the offices, properties, officers, employees, accountants, auditors, counsel and other representatives, books and records of the Parent and its subsidiaries, will furnish to the Company, its counsel, financial advisors, auditors and other authorized representatives such financial, operating and property related data and other information as such persons may reasonably request, and will instruct the Parent's and its subsidiaries' employees, counsel and financial advisors to cooperate with the Company in its investigation of the business of the Parent and its subsidiaries; provided that no investigation pursuant to this Section 6.3 shall affect any representation or warranty given by the Parent hereunder. 6.4 Tax Treatment. The Parent shall not take any action which would disqualify the Merger as a "reorganization" that would be tax free to Fidelity pursuant to Section 368(a) of the Code. 6.5 Securities Reports. Parent agrees to timely file all reports required to be filed by it pursuant to the Exchange Act. Parent agrees to provide to the Company copies of all reports and other documents filed under the Securities Act or Exchange Act with the SEC by it between the date hereof and the Effective Time within five days after the date such reports or other documents are filed with the SEC. 6.6 Implement Employee Benefits. Parent shall, as of the Effective Time, provide all employees of the Company with comparable employee benefits to those which such Company employees receive from the Company as of the date hereof, including, without limitation, comparable medical, dental, vision, chiropractic, psychiatric, psychological and any other health care plans, cafeteria or flexible credit plans, profit-sharing plans and any plan providing for the purchase of equity securities by the employees of the Company. ARTICLE VII COVENANTS OF PARENT AND THE COMPANY The parties hereto agree that: 7.1 Approvals; Reasonable Efforts; Notification. (a) Each of Parent and the Company shall (i) promptly prepare and make or cause to be made all filings required of such party or any of its subsidiaries and obtain all permits, consents, approvals, and authorizations of all third parties, Regulatory Authorities and Governmental Entities necessary to consummate the transactions contemplated by this Agreement, (ii) comply at the earliest practicable date with any request for additional information, documents, or other material received by such party or any of its subsidiaries from any Regulatory Authority or other Governmental Entity in respect of such filings or such transactions, and (iii) cooperate with the other party in connection with any such filing, and in connection with resolving any investigation or other -14- 19 inquiry of any such Regulatory Authority or other Governmental Entity. Each party shall promptly inform the other party of any communication with, and any proposed understanding, undertaking, or agreement with, any Regulatory Authority or Governmental Entity regarding any such filings or any such transaction. Neither party shall participate in any meeting, with any Regulatory Authority or Governmental Entity in respect of any such filings, investigation, or other inquiry without giving the other party notice of the meeting and, to the extent permitted by such Regulatory Authority or Governmental Entity, the opportunity to attend and participate. (b) Each of the parties agrees to use all reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement, including (i) the obtaining of all other necessary actions or nonactions, waivers, consents and approvals from Regulatory Authorities or Governmental Entities and the making of all other necessary registrations and filings (including other filings with Regulatory Authorities or Governmental Entities, if any), (ii) the obtaining of all necessary consents, approvals or waivers from third parties and (iii) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement. (c) Each party shall give prompt notice to the other party of (i) any representation or warranty made by it contained in this Agreement becoming untrue or inaccurate in any respect or (ii) the failure by it to comply with or satisfy in any respect any covenant, condition or agreement to be compiled with or satisfied by it under this Agreement; provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement. (d) The Company shall give prompt notice to Parent, and Parent or Merger Subsidiary shall give prompt notice to the Company, of: (i) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with the transactions contemplated by this Agreement; (ii) any notice or other communication from any Governmental Entity in connection with the transactions contemplated by this Agreement; and (iii) any actions, suits, claims, investigations or proceedings commenced or, to the best of its knowledge threatened against, relating to or involving or otherwise affecting it or, in the case of Parent, any of its subsidiaries which, if pending on the date of this Agreement would have been required to have been disclosed pursuant to Section 4.1(h), 4.1(i), 4.1(j), 4.1(k) or 4.1(l) or Section 4.2(g) or which relate to the consummation of the transactions contemplated by this Agreement. 7.2 Press Releases. Parent and Fidelity shall agree with each other as to the form and substance of any press release related to this Agreement or the transactions contemplated hereby, and shall consult with each other as to the form and substance of other public disclosures which may -15- 20 relate to the transactions contemplated by this Agreement; provided, however, that nothing contained herein shall prohibit either party, following notification to the other party and reasonable opportunity to comment, from making any disclosure which is required by law, regulation or stock exchange requirements. 7.3 Due Diligence. (a) The Company shall permit Parent to conduct a due diligence investigation of the Company and its assets, liabilities, businesses, books, records and prospects. (b) Parent shall permit the Company to conduct a due diligence investigation of the Parent and its subsidiaries and their respective assets, liabilities, businesses, books, records and prospects. 7.4 Indemnification. (a) Indemnification of Parent. Subject to the limitations contained in this section, Fidelity shall, for one year following the Effective Time, defend, indemnify and hold harmless Parent, its officers, directors, stockholders, employees and agents from and against any and all losses, claims, judgments, liabilities, demands, charges, suits, penalties, costs or expenses, including court costs and attorneys' fees ("Claims and Liabilities") with respect to or arising from (i) the breach of any warranty or any inaccuracy of any representation made by the Company or Fidelity in this Agreement, or (ii) the breach of any covenant or agreement made by the Company or Fidelity in this Agreement. (b) Indemnification of Fidelity. Parent shall, for one year following the Effective Time, defend, indemnify and hold harmless Fidelity, and its officers, directors, stockholders, employees and agents against and in respect to all Claims and Liabilities with respect to or arising from (i) breach of any warranty or any inaccuracy of any representation made by Parent or Merger Subsidiary, (ii) breach of any covenant or agreement made by Parent or Merger Subsidiary in this Agreement. (c) Limitations. Anything to the contrary notwithstanding, Parent and Fidelity shall not be indemnified and held harmless in respect of any Claims and Liabilities which are covered by insurance owned by the Company to the extent that any net loss is reduced by such insurance. (d) Claims Procedure. Promptly after the receipt by any indemnified party (the "Indemnitee") of notice of the commencement of any action or proceeding against such Indemnitee, such Indemnitee shall, if a claim with respect thereto is or may be made against any indemnifying party (the "Indemnifying Party") pursuant to this Section 7.4, give such Indemnifying Party written notice of the commencement of such action or proceeding and give such Indemnifying Party a copy of such claim and/or process and all legal pleadings in connection therewith. The failure to give such notice shall not relieve any Indemnifying Party of any of his or its indemnification obligations contained in this Section 7.4, except where, and solely to the extent that, such failure actually and materially prejudices the rights of such Indemnifying Party. Such Indemnifying Party shall have, upon request within sixty (60) days after receipt of such notice, but not in any event after the settlement or compromise of such claim, the right to defend, at his or its own expense and by his or -16- 21 its own counsel, any such matter involving the asserted liability of the Indemnitee; provided, however, that if the Indemnitee determines that, as a result of an existing or prospective business relationship between Parent or any of its subsidiaries on the one hand and any other party or parties to such claim on the other hand, or as a result of other reasonable circumstances, there is a reasonable probability that a claim may materially and adversely affect him or it, other than solely as a result of money payments required to be reimbursed in full by such Indemnifying Party under this Section 7.4, the Indemnitee shall have the right to defend, compromise or settle such claim or suit; and, provided, further, that such settlement or compromise shall not, unless consented to in writing by such Indemnifying Party, be conclusive as to the liability of such Indemnifying Party to the Indemnitee. In any event, the Indemnitee, such Indemnifying Party and his or its counsel shall cooperate in the defense against, or compromise of, any such asserted liability, and in cases where the Indemnifying Party shall have assumed the defense, the Indemnitee shall have the right to participate in the defense of such asserted liability at the Indemnitee's own expense. In the event that such Indemnifying Party shall decline to participate in or assume the defense of such action, prior to paying or settling any claim against which such Indemnifying Party is, or may be, obligated under this Section 7.4 to indemnify an Indemnitee, the Indemnitee shall first supply such Indemnifying Party with a copy of a final court judgment or decree holding the Indemnitee liable on such claim or, failing such judgment or decree, the terms and conditions of the settlement or compromise of such claim. An Indemnitee's failure to supply such final court judgment or decree or the terms and conditions of a settlement or compromise to such Indemnifying Party shall not relieve such Indemnifying Party of any of his or its indemnification obligations contained in this Section 7.4, except where, and solely to the extent that, such failure actually and materially prejudices the rights of such Indemnifying Party. If the Indemnifying Party is defending the claim as set forth above, the Indemnifying Party shall have the right to settle the claim only with the consent of the Indemnitee; provided, however, that if the Indemnitee shall fail to consent to the settlement of such a claim by the Indemnifying Party, which settlement (i) the claimant has indicated it will accept, and (ii) includes an unconditional release of the Indemnitee and its affiliates by the claimant and imposes no material restrictions on the future activities of the Indemnitee and its affiliates, the Indemnifying Party shall have no liability with respect to any payment required to be made to such claimant in respect of such claim in excess of the proposed amount of settlement. If the Indemnitee is defending the claim as set forth above, the Indemnitee shall have the right to settle or compromise any claim against it after consultation with, but without the prior approval of, any Indemnifying Party; provided, however, that such settlement or compromise shall not, unless consented to in writing by such Indemnifying Party, be conclusive as to the liability of such Indemnifying Party to the Indemnitee. ARTICLE VIII CONDITIONS TO THE MERGER 8.1 Conditions to the Obligations of Each Party. The obligations of the Company, Parent and Merger Subsidiary to consummate the Merger are subject to the satisfaction of the following conditions: (a) any consents, waivers, clearances, approvals and authorizations of Regulatory Authorities or other Governmental Entities that are necessary to permit consummation of the Merger shall have been obtained and shall remain in full force and effect in each case without the -17- 22 imposition of any condition, restriction or term which could reasonably be expected to have a Material Adverse Effect; (b) no provision of any applicable law or regulation and no judgment, injunction, order, decree or other legal restraint shall prohibit or make illegal the consummation of the Merger; (c) the Board of Directors of the Company shall have duly authorized and approved the execution and delivery of this Agreement by the Company and the transactions contemplated hereby prior to the execution by the Company of this Agreement. (d) tax opinions addressed to each of Parent and the Company by KPMG Peat Marwick, independent certified public accountants for both Fidelity and Parent in form and substance mutually acceptable to Parent and the Company shall have been obtained with respect to the Merger, based on customary reliance and subject to customary qualifications, to the effect that, for federal income tax purposes, the Merger will qualify as a tax-free "reorganization" under Section 368(a) of the Code. 8.2 Conditions to the Obligations of Parent and Merger Subsidiary. The obligations of Parent and Merger Subsidiary to consummate the Merger are further subject to the satisfaction of the following conditions: (a) there shall not be effected, instituted, pending or proposed any action by any Governmental Entity (by legislation, rulemaking, change of applicable law or otherwise) (i) an effect of which is to make illegal, to delay materially or otherwise directly or indirectly to restrain or prohibit the consummation by Parent or Merger Subsidiary of the Merger, seeking to obtain material damages or imposing any material adverse conditions in connection therewith or otherwise directly or indirectly relating to the transactions contemplated by this Agreement or the Merger, (ii) an effect of which is to impose limitations on the ability of Parent or any of its subsidiaries or affiliates effectively to exercise full rights of ownership of the Shares, including, without limitation, the right to vote any Shares acquired or owned by Parent or any of its subsidiaries or affiliates on all matters properly presented to the Company's stockholders or (iii) that otherwise, in the reasonable judgment of Parent, is likely to have a Material Adverse Effect or a Parent Material Adverse Effect; (b) the Company and Fidelity shall have performed in all material respects their covenants and agreements under this Agreement, and the representations and warranties of the Company and Fidelity set forth in this Agreement shall be true in all material respects when made and at and as of the Effective Time as if made at and as of such time; and Parent and Merger Subsidiary shall have received certificates of the Chief Executive Officer or a Vice President of the Company and Fidelity to that effect; (c) no change shall have occurred or been threatened (and no development shall have occurred or been threatened involving a prospective change) that, in the reasonable judgment of Parent, has or is likely to have a Material Adverse Effect; (d) Parent shall have been furnished with copies of the text of the resolutions by which the corporate action on the part of the Company necessary to approve this Agreement and the transactions contemplated hereby were taken, together with a certificate dated as of the Effective Time executed on behalf of the Company by its corporate secretary certifying to Parent that such -18- 23 copies are true, correct and complete copies of such resolutions and that such resolutions were duly adopted and have not been amended or rescinded; (e) Parent's Board of Directors shall have received an opinion from Cruttenden Roth Incorporated, its financial advisor, in connection with the Merger that the Merger Consideration is fair to Parent from a financial point of view; (f) Parent shall have received an opinion of Stradling Yocca Carlson & Rauth, counsel to the Company, dated as of the Effective Time, as to the matters set forth on Exhibit A hereto. 8.3 Conditions to the Obligations of the Company. The obligations of the Company to consummate the Merger are subject to the further satisfaction of the following conditions: (a) there shall not be effected, instituted, pending or proposed any action by any Governmental Entity (by legislation, rulemaking, change of applicable law or otherwise) (i) an effect of which is to make illegal, to delay materially or otherwise directly or indirectly to restrain or prohibit the consummation by the Company of the Merger, seeking to obtain material damages or imposing any material adverse conditions in connection therewith or otherwise directly or indirectly relating to the transactions contemplated by this Agreement or the Merger, (ii) an effect of which is to impose limitations on the ability of Parent or any of its subsidiaries or affiliates effectively to exercise full rights of ownership of the Shares, including, without limitation, the right to vote any Shares acquired or owned by Parent or any of its subsidiaries or affiliates on all matters properly presented to the Company's stockholders or (iii) that otherwise, in the reasonable judgment of the Company, is likely to have a Material Adverse Effect or a Parent Material Adverse Effect; (b) Parent and Merger Subsidiary shall have performed in all material respects their covenants and agreements under this Agreement, and the representations and warranties of Parent and Merger Subsidiary set forth in this Agreement shall be true in all material respects when made and at and as of the Effective Time as if made at and as of such time; and the Company shall have received certificates of the Chief Executive Officer or a Vice President of Parent and Merger Subsidiary to that effect; (c) no change shall have occurred or been threatened (and no development shall have occurred or been threatened involving a prospective change), other than changes resulting from changes in interest rates, that, in the reasonable judgment of the Company, has or is likely to have a Parent Material Adverse Effect; (d) Fidelity's Board of Directors shall have received an opinion from its financial advisor Wedbush Morgan Securities that the Merger Consideration is fair to Fidelity from a financial point of view (the fairness opinion referenced in this Section 8.3(d), together with the fairness opinion referenced in Section 8.2(e), shall be known, collectively, as the "Fairness Opinions"); (e) The Company shall have received an opinion of James M. Phillips, Jr., Professional Law Corporation, counsel to Parent and Merger Subsidiary, dated as of the Effective Time, as to the matters set forth on Exhibit C hereto; -19- 24 (f) Parent shall have increased the size of the Board of Directors of Parent, effective as of the Closing, from five members to eight members, all of which members shall have been duly appointed in accordance with the Delaware General Corporation Law, and such members shall include the following individuals: William P. Foley, II, Carl A. Strunk, Richard H. Pickup, George E. Olenik, Thomas E. Pistilli and Patrick F. Stone, with two vacancies to be filled by subsequent appointment by the Corporation's Board of Directors. ARTICLE IX CONDITIONS FOLLOWING THE CLOSING 9.1 Adoption of Additional Stock Option Plan. On or before the 60th day after the Closing Date, Parent shall adopt a new stock option plan (the "Option Plan"), which Option Plan shall (i) authorize and reserve for issuance (x) 600,000 new shares of Parent's Common Stock, plus (y) the number of shares of Parent's Common Stock reserved for issuance under Parent's 1995 Incentive Stock Option Plan (the "1995 Plan") but not granted pursuant to the 1995 Plan as of the date of this Agreement, and (ii) be in form and substance as is approved by Fidelity in its discretion. In addition, on or before such 60th day after the Closing Date, Parent shall have taken all steps necessary and required to adopt the Option Plan, including, without limitation, obtaining the approval of the Option Plan by Parent's stockholders and the filing of a Registration Statement on Form S-8 pursuant to the Securities Act registering the issuance of the shares of stock under the Option Plan. 9.2 Fidelity Financing. Following the Closing, Fidelity agrees to provide Parent with up to $5 million in senior unsecured debt financing (the "Fidelity Financing") on terms and subject to conditions to be mutually agreed upon between Fidelity and Parent. The parties hereby expressly agree that the aggregate dollar amount of the Fidelity Financing shall be reduced by the dollar amount of any intercompany amounts owed by the Company to Fidelity as of the Closing Date. ARTICLE X TERMINATION 10.1 Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time : (i) by mutual written consent of the Company and Parent; (ii) by either the Company or Parent, if the Merger has not been consummated by July 30, 1998 (provided that the party seeking to terminate the Agreement shall not have breached its obligations under this Agreement in any material respect); (iii) by Parent, at any time prior to the Effective Time, by action of the Board of Directors of Parent, if there has been a breach by the Company of any of the representations, warranties, covenants or agreements contained in this Agreement, or if any representation or warranty of the Company shall have become untrue, in either case which has or -20- 25 could reasonably be expected to have a Material Adverse Effect, provided, however, that Parent shall not be permitted to terminate this Agreement pursuant to this Section 10.1(iii) with respect to any such breach or occurrence after the expiration of a ten (10) day period following Parent's receipt of notice of such breach from the Company; (iv) by the Company, at any time prior to the Effective Time, by action of the Board of Directors of the Company, if any of the representations, warranties, covenants or agreements contained in this Agreement, or if any representation or warranty of the Parent or Merger Subsidiary shall have become untrue, in either case which has or could reasonably be expected to have a Material Adverse Effect, provided, however, that the Company shall not be permitted to terminate this Agreement pursuant to this Section 10.1(v) with respect to any such breach or occurrence after the expiration of a ten (10) day period following the Company's receipt of notice such breach from the Parent or Merger Subsidiary; or 10.2 Effect of Termination. If this Agreement is terminated pursuant to Section 10.1, this Agreement shall become void and of no effect with no liability on the part of any party hereto or their respective officers and directors, except that the agreements contained in Sections 5.4, 6.1 and 11.4 shall survive the termination hereof. Specifically, and without limiting the generality of the foregoing, Parent and Merger Subsidiary agree that, except as expressly provided in this Section 10.2, termination of this Agreement shall be their sole and exclusive remedy for any nonwillful breach by the Company of its representations, warranties and covenants under this Agreement and the Company agrees that termination of this Agreement shall be its sole and exclusive remedy for any nonwillful breach by Parent or Merger Subsidiary of their representations, warranties and covenants under this Agreement. If this Agreement is terminated by reason of a willful breach by a party, then the breaching party shall be liable to the non-breaching party for all actual, consequential and incidental damages suffered by the non-breaching party arising from such willful breach. ARTICLE XI MISCELLANEOUS 11.1 Notices. All notices, requests and other communications to any party hereunder shall be in writing (including telecopy or similar writing) and shall be given, if to the Company or Fidelity, to: Fidelity National Financial, Inc. 3916 State Street, Suite 300 Santa Barbara, California 93105 Telecopy: (805) 898-7191 Attn: Carl A. Strunk, Executive Vice President -21- 26 with a copy to: Stradling Yocca Carlson & Rauth 660 Newport Center Drive, Suite 1600 Newport Beach, CA 92660-6441 Telecopy: (714) 725-4100 Attn: C. Craig Carlson, Esq. if to the Parent or Merger Subsidiary, to: Micro General Corporation 14711 Bentley Circle Tustin, CA 92780 Telecopy: (714) 731-0557 Attn: Thomas E. Pistilli, President with a copy to: Palmieri, Tyler, Wiener, Wilhelm & Waldron, LLP East Tower - Suite 1300 2063 Main Street Irvine, CA 92614-6228 Telecopy: (714) 851-1554 Attn: James M. Phillips, Jr., Esq. or such other address or telecopy number as such party may hereafter specify for the purpose by notice to the other parties hereto. Each such notice, request or other communication shall be effective when delivered at the address specified in this Section. 11.2 Survival of Representations and Warranties. The representations and warranties and agreements contained herein and in any certificate or other writing delivered pursuant hereto shall survive the Effective Time or the termination of this Agreement for a period of one year from the date thereof, except for the representations, warranties and agreements set forth in Sections 5.4, 6.1, 7.4 and 11.4 which shall have no expiration date. 11.3 Amendments; No Waivers. (a) Any provision of this Agreement may be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Company, Fidelity, Parent and Merger Subsidiary or in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. -22- 27 11.4 Fees and Expenses. Except as otherwise provided in this Agreement, all costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such cost or expense; provided, however, with respect to legal fees only, the parties hereby expressly agree that all legal fees incurred by the Company, Fidelity, Parent and Merger Subsidiary in connection with the transactions contemplated by this Agreement shall be aggregated and apportioned equally between Fidelity, on the one hand, and Parent, on the other hand. 11.5 Successors and Assigns; Parties in Interest. The provisions of this Agreement shall be binding, upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other parties hereto except that, with the consent of the Company, Merger Subsidiary may transfer or assign, in whole or from time to time in part, to one or more of Parent or any of its wholly-owned subsidiaries, any or all of its rights or obligations, but any such transfer or assignment will not relieve Merger Subsidiary of its obligations under this Agreement. Except as expressly set forth herein nothing in this Agreement, express or implied, is intended to or shall confer upon any person not a party hereto any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement, including to confer third party beneficiary rights. 11.6 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties shall negotiate in good faith to modify this Agreement and to preserve each party's anticipated benefits under this Agreement. 11.7 Governing Law. This Agreement shall be construed in accordance with and governed by the internal laws of the State of California, without giving effect to the principles of conflicts of laws thereof. 11.8 Entire Agreement. This Agreement, including Exhibits and Disclosure Schedules to this Agreement, constitutes the entire agreement, and supersedes all other prior agreements, written and oral, among the parties, with respect to the subject matter hereof. 11.9 Counterparts; Effectiveness; Interpretation. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by all of the other parties hereto. When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". 11.10 Effect of Disclosure Schedule. Notwithstanding anything to the contrary contained in this Agreement or in any Section of the Disclosure Schedule, any information disclosed in one Section of the Disclosure Schedule shall be deemed to be disclosed in all Sections of the Disclosure Schedule, to the extent that such deemed disclosure is apparent from the information actually disclosed. -23- 28 The parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. MICRO GENERAL CORPORATION By: ------------------------------------ Thomas E. Pistilli, President ACS MERGER, INC. By: ------------------------------------ Carl A. Strunk, President, Treasurer and Secretary ACS SYSTEMS, INC. By: ------------------------------------ Carl A. Strunk, Executive Vice President FIDELITY NATIONAL FINANCIAL, INC. By: ------------------------------------ Carl A. Strunk, Executive Vice President and Chief Financial Officer -24- EX-10.57.1 5 AGREEMENT OF MERGER MAY 14,98 ACS SYSTEMS 1 EXHIBIT 10.57.1 AGREEMENT OF MERGER THIS AGREEMENT OF MERGER (the "Agreement") is entered into as of this 14th day of May, 1998 by and among ACS SYSTEMS, INC., a California corporation (the "Company"), ACS MERGER, INC., a Delaware corporation ("Merger Subsidiary") and MICRO GENERAL CORPORATION, a Delaware Corporation and the Parent of Merger Subsidiary ("Parent") (the Company and Merger Subsidiary are sometimes collectively referred to herein as the "Constituent Corporations"). RECITALS: A. The Company is a corporation duly organized and existing under the laws of the State of California and has an authorized capital of 300,000 shares, all of which are designated common stock (the "ACS Common Stock"). As of May 14, 1998, there were 3,000 shares of ACS Common Stock issued and outstanding. B. Merger Subsidiary is a corporation duly organized and existing under the laws of the State of Delaware and has an authorized capital of 1,000 shares, all of which are designated common stock (the "Merger Subsidiary Common Stock"). As of May 14, 1998, there were 100 shares of Merger Subsidiary Common Stock issued and outstanding. C. The respective Boards of Directors of the Company and Merger Subsidiary have approved this Agreement and the respective sole shareholder and sole stockholder of the Company and Merger Subsidiary have duly approved, in accordance with the applicable laws of the State of California, the principal terms of this Agreement. NOW, THEREFORE, the parties hereby agree as follows: 1. THE MERGER. 1.1 MERGER AND EFFECTIVENESS. In accordance with the provisions of this Agreement and the California General Corporation Law ("CGCL"), Merger Subsidiary shall be merged with and into the Company (the "Merger"), with the Company as the surviving corporation (the "Surviving Corporation"). The Merger shall become effective in accordance with the CGCL upon the filing of this Agreement, together with a Certificate of Approval of each Constituent Corporation, with the Secretary of State of the State of California (the "Effective Time"). 1.2 EFFECT OF THE MERGER. Upon the Effective Time of the Merger, the separate existence of Merger Subsidiary shall cease and the Company, as the Surviving Corporation, shall succeed, without other transfer, to all the rights and property of Merger Subsidiary and shall be subject to all the debts and liabilities of Merger Subsidiary in the same manner as if the Company itself incurred them. The Merger shall otherwise have the effects set forth in Section 1107 of the CGCL. 2 2. CHARTER DOCUMENTS. 2.1 ARTICLES OF INCORPORATION. The Articles of Incorporation of the Company as in effect immediately before the Effective Time of the Merger shall continue in full force and effect as the Articles of Incorporation of the Surviving Corporation until duly amended in accordance with the provisions thereof and applicable law. 2.2 BYLAWS. The Bylaws of the Company as in effect immediately before the Effective Time of the Merger shall continue in full force and effect as the Bylaws of the Surviving Corporation until duly amended in accordance with the provisions thereof, the Articles of Incorporation and applicable law. 3. MANNER OF CONVERSION OF STOCK. 3.1 CONVERSION OF ACS COMMON STOCK. At the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the holder thereof, all shares of ACS Common Stock which were issued and outstanding immediately prior to the Effective Time of the Merger shall be converted into the right to receive an aggregate of 4,600,000 shares of common stock, par value $.05 per share, of Parent ("Parent Common Stock") on a pro rata basis without interest (the "Merger Consideration"). 3.2 MERGER SUBSIDIARY COMMON STOCK. At the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the holder thereof, each share of common stock of Merger Subsidiary which was issued and outstanding immediately prior to the Effective Time of the Merger shall be converted into the right to receive one (1) share of ACS Common Stock. 4. GENERAL. 4.1 FURTHER ASSURANCES. From time to time, as and when required by the Company, its successors or assigns, there shall be executed and delivered on behalf of Merger Subsidiary such deeds and other instruments, and there shall be taken or caused to be taken by it such further and other actions as shall be appropriate or necessary in order to vest or perfect in or conform of record or otherwise by the Company the title to and possession of all the property, interests, assets, rights, privileges, immunities, powers, franchises and authority of Merger Subsidiary and otherwise to carry out the purposes of this Agreement, and the officers and directors of the Company are fully authorized in the name and on behalf of Merger Subsidiary or otherwise to take all such actions and to execute and deliver all such deeds and other instruments. 4.2 AMENDMENTS; WAIVERS. Any provision of this Agreement may be amended or waived prior to the Effective Time of the Merger if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Company, Merger Subsidiary and Parent or in the case of a waiver, by the party against whom the waiver is to be effective and, in either case approved by the shareholders of the Company, Merger Subsidiary and/or Parent, as applicable and as required by law. 4.3 INTEGRATION. This Agreement is being entered into pursuant to, and in order to implement the terms of, the Plan. 4.4 GOVERNING LAW. This Agreement shall be construed, interpreted and 3 enforced in accordance with and governed by the laws of the State of California. 4.5 COUNTERPARTS. In order to facilitate the filing of this Agreement, the same may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company, Merger Subsidiary and Parent have each caused this Agreement of Merger to be executed by their respective authorized officers as of the date first above written. MICRO GENERAL CORPORATION By: ---------------------------------------- Thomas E. Pistilli, President By: ---------------------------------------- Linda I. Morton, Secretary ACS MERGER, INC. By: ---------------------------------------- Carl A. Strunk, President and Secretary ACS SYSTEMS, INC. By: ---------------------------------------- Mark J. Attaway, President By: ---------------------------------------- M'Liss Jones Kane, Secretary 4 CERTIFICATE OF APPROVAL OF AGREEMENT OF MERGER Mark J. Attaway and M'Liss Jones Kane hereby certify that: 1. They are the President and the Secretary, respectively, of ACS SYSTEMS, INC., a California corporation (the "Corporation"). 2. The Agreement of Merger, in the form attached hereto (the "Agreement of Merger"), was duly approved by the Board of Directors of the Corporation. 3. There is one class of shares of the Corporation, consisting of Common Stock, and the number of shares outstanding and entitled to vote on the merger is 3,000 shares of Common Stock. 4. The principal terms of the Agreement of Merger were approved by a vote of a number of shares of Common Stock of the Corporation which equaled or exceeded the vote required. The percentage vote required was more than fifty percent (50%) of the outstanding shares of Common Stock We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of our own knowledge. Date: May 14, 1998 ------------------------------------ Mark J. Attaway, President ------------------------------------ M'Liss Jones Kane, Secretary 5 CERTIFICATE OF APPROVAL OF AGREEMENT OF MERGER Carl A. Strunk hereby certifies that: 1. He is the President, Treasurer and Secretary of ACS MERGER, INC., a Delaware corporation (the "Corporation"). 2. The Agreement of Merger, in the form attached hereto (the "Agreement of Merger"), was duly approved by the Board of Directors of the Corporation. 3. There is one class of shares of the Corporation, consisting of Common Stock, and the number of shares outstanding and entitled to vote on the merger is 100 shares of Common Stock. 4. The principal terms of the Agreement of Merger were approved by a vote of a number of shares of Common Stock of the Corporation which equaled or exceeded the vote required. The percentage vote required was more than fifty percent (50%) of the outstanding shares of Common Stock. 5. Equity securities of Micro General Corporation, a Delaware corporation and the parent of the Corporation (the "Parent"), are to be issued in the merger. No vote of shareholders of the Parent was required. I further declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of my own knowledge. Date: May 14, 1998 ---------------------------------------- Carl A. Strunk, President, Treasurer and Secretary EX-10.58 6 CREDIT AGREEMENT 1 Exhibit 10.58 CREDIT AGREEMENT THIS CREDIT AGREEMENT (the "Agreement") is made and dated as of the 1st day of August, 1998, by and among FIDELITY NATIONAL FINANCIAL, INC., a Delaware corporation (the "Company"); the lenders from time to time party hereto (each a "Lender," and, collectively, the "Lenders"); and SANWA BANK CALIFORNIA ("Sanwa"), as agent for the Lenders (in such capacity, the "Agent"). RECITALS A. The Company has requested that the Lenders extend credit to the Company in the form of a secured revolving credit facility and a secured term loan facility, and that the Agent agree to act as credit agent and collateral agent for the benefit of the Lenders with respect thereto. B. The Company, the Agent and the Lenders desire to enter into this Agreement to evidence the willingness of the Lenders to provide such credit facilities and of the Agent to act on their behalf, and to set forth the rights and obligations of the parties with respect to such credit extensions. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. Revolving Credit Facility. 1(a) Revolving Credit Limit. On the terms and subject to the conditions set forth herein, the Lenders severally agree that they shall from time to time to but not including the Maturity Date (as that term and capitalized terms not otherwise defined herein are defined in the Glossary attached hereto as Annex 1), make revolving loans (the "Revolving Loans" or a "Revolving Loan"), pro rata in accordance with their respective Percentage Shares, in an aggregate outstanding amount not to exceed at any date: (1) the Aggregate Credit Limit, less (2) the aggregate outstanding principal amount of the Term Loan on such date. 1(b) Calculation and Payment of Interest. The Company shall pay interest on Revolving Loans outstanding hereunder from the date disbursed to but not including the date of payment, at a rate per annum equal to, at the option of and as selected by the Company from time to time (subject to the provisions of Paragraphs 3(b), 3(c) and 3(d) below): (1) the Floating Rate during the applicable computation period, or (2) the Applicable Eurodollar Rate for the selected Interest Period. Interest on Revolving Loans shall be payable as provided in Paragraph 3(a) below. 1 2 1(c) Principal Repayment. Subject to the provisions of Paragraph 3(b) below, including, without limitation, the right of the Company to continue Eurodollar Loans following the end of their respective Interest Periods on the terms and subject to the conditions set forth therein, the Company shall pay the principal amount of each Revolving Loan outstanding as a Eurodollar Rate Loan on the last day of the Interest Period therefor and shall pay the principal amount of each Revolving Loan outstanding as a Floating Rate Loan on the Maturity Date. Principal amounts prepaid hereunder may be reborrowed on the terms and subject to the conditions set forth in Paragraph 6(b) below, it being expressly acknowledged and agreed that the credit facility provided under this Paragraph 1 is a revolving facility. 2. Term Loan. 2(a) Credit Amount. On the terms and subject to the conditions set forth herein, the Lenders severally agree that on the Effective Date they shall advance, in a single disbursement, their respective Percentage Shares of a term loan (the "Term Loan") in such amount as the Company may request pursuant to a duly executed Loan Request, but not to exceed in any event the lesser of: (1) $20,000,000.00, and (2) the Aggregate Credit Limit minus the dollar amount of Revolving Loans requested to be funded on the Effective Date. 2(b) Calculation and Payment of Interest. The Company shall pay interest on the Term Loan (including portions thereof as selected by the Company subject to the provisions of Paragraph 3(b) below) from the date disbursed to but not including the date of payment, at a rate per annum equal to, at the option of and as selected by the Company from time to time (subject to the provisions of Paragraphs 3(b), 3(c) and 3(d) below): (1) the Floating Rate during the applicable computation period, or (2) the Applicable Eurodollar Rate for the selected Interest Period. Interest on the Term Loan shall be payable as provided in Paragraph 3(a) below. 2(c) Payment of Principal. The principal amount of the Term Loan shall be payable in: (1) ten consecutive equal quarterly installments of $1,000,000.00 each, said installments to be payable on the last Business Day of each calendar quarter, commencing September 30, 1998, and (2) one final installment in the amount necessary to repay the remaining outstanding principal balance of the Term Loan in full on the Maturity Date. 3. Pricing Provisions. 3(a) Interest Billing and Payment Requirements. Interest accruing on Floating Rate Loans shall be payable monthly, in arrears, for each month on the last Business Day of such month in the amount set forth in an interest billing for such Floating Rate Loans delivered by the Agent to the Company (which delivery may be telephonic or by facsimile transmission and, if by telephone, shall be confirmed on the same Business Day by facsimile transmission or other writing), with the balance of accrued and unpaid interest payable in full on the Maturity Date. Interest accruing on Eurodollar Rate Loans shall be payable, in arrears, on the last day of the applicable Interest Period therefor, or in the case of Eurodollar Rate Loans with Interest Periods ending later than three months from the date funded, at the end of each three month period from the date funded and at the end of the applicable Interest Period therefor. 2 3 3(b) Election of Type of Loan; Conversion Options; Funding of Loans. (1) The Term Loan shall initially be funded as a Floating Rate Loan and, thereafter, subject to the provisions of this Paragraph 3(b), the outstanding principal amount thereof or portions of such amount may be converted into Eurodollar Rate Loans as provided hereunder. (2) The Company may elect from time to time to have Revolving Loans funded by giving the Agent irrevocable notice of such election no later than: (i) in the case of a Revolving Loan to be funded as a Floating Rate Loan, 12:00 noon (Los Angeles time) on the Business Day immediately preceding the requested funding date, and (ii) in the case of a Revolving Loan to be funded as a Eurodollar Rate Loan, 9:00 a.m. (Los Angeles time) on the third Eurodollar Business Day preceding the proposed funding date. (3) The principal amount of each Eurodollar Rate Loan shall be in the minimum amount of $5,000,000.00 and multiples of $1,000,000.00 in excess thereof, and the principal amount of each Floating Rate Loan shall be in the minimum amount of $1,000,000.00 and multiples of $1,000,000.00 in excess thereof, and the aggregate number of Eurodollar Rate Loans outstanding on any date with a different Interest Period may not exceed five. (4) The Company may elect from time to time to convert Loans outstanding: (i) as Eurodollar Rate Loans to Floating Rate Loans by giving the Agent irrevocable notice of such election no later than 12:00 noon (Los Angeles time) on the Business Day immediately preceding the last day of the Interest Period for such Eurodollar Rate Loan, and (ii) as Floating Rate Loans to Eurodollar Rate Loans by giving the Agent irrevocable notice of such election no later than 9:00 a.m. (Los Angeles time) on the third Eurodollar Business Day preceding the proposed conversion date. Any conversion of Eurodollar Rate Loans may only be made on the last day of the applicable Interest Period. No Floating Rate Loan may be converted into a Eurodollar Rate Loan if an Event of Default or Potential Default has occurred and is continuing at the requested conversion date. (5) The Company may elect from time to time to have any Eurodollar Rate Loan continued as such upon the expiration of the Interest Period applicable thereto by giving the Agent irrevocable notice of such election no later than 9:00 a.m. (Los Angeles time) on the third Eurodollar Business Day preceding the last day of such Interest Period; provided, however, that no Eurodollar Rate Loan may be continued when any Event of Default or Potential Default has occurred and is continuing, but shall be automatically converted to a Floating Rate Loan on the last day of the Interest Period applicable thereto. The Agent shall notify the Company promptly that such automatic conversion will occur. If the Company shall fail to give notice of its election to continue a Eurodollar Rate Loan as provided above, the Company shall be 3 4 deemed to have elected to convert the affected Eurodollar Rate Loan to a Floating Rate Loan on the last day of the applicable Interest Period. (6) Each request for the funding, continuation or conversion of a Loan shall be evidenced by the timely delivery by the Company to the Agent of a duly executed Loan Request (which delivery may be by facsimile transmission). (7) Upon receipt of a Loan Request for the funding of a new Loan, including, without limitation, the Term Loan, the Agent shall notify each Lender of such Lender's Percentage Share thereof no later than 9:30 a.m. (Los Angeles time) on the date such Loan Request is received by the Agent (said notice by the Agent to the Lenders to be given telephonically and confirmed by facsimile transmission). Each Lender shall make its Percentage Share of the proposed Loan available to the Agent, in same-day funds, on the funding date at the Contact Office of the Agent, ABA 122003516, for the Agent's Account #2302-25217, or such other account as the Agent shall designate no later than 12:00 noon (Los Angeles time). The failure of any Lender to advance its Percentage Share of a proposed Loan shall not relieve any other Lender of its obligation hereunder to advance its Percentage Share thereof, but no Lender shall be responsible for the failure of any other Lender to make any such advance. 3(c) Inability to Determine Rate. In the event that the Agent shall have reasonably determined (which determination shall be conclusive and binding upon the Company) that by reason of circumstances affecting the interbank market adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for any Interest Period, the Agent shall forthwith give facsimile notice of such determination, confirmed in writing, to each Lender and to the Company. If such notice is given: (1) no Revolving Loan may be funded as a Eurodollar Rate Loan, (2) any Floating Rate Loan that was to have been converted to a Eurodollar Rate Loan shall, subject to the provisions hereof, be continued as a Floating Rate Loan, and (3) any outstanding Eurodollar Rate Loan shall be converted, on the last day of the then current Eurodollar Interest Period applicable thereto, to a Floating Rate Loan. Until such notice has been withdrawn by the Agent, the Company shall not have the right to convert a Floating Rate Loan to a Eurodollar Rate Loan or to fund any Revolving Loan as a Eurodollar Rate Loan or to continue a Eurodollar Rate Loan as such. The Agent shall withdraw such notice in the event that the circumstances giving rise thereto no longer pertain and that adequate and reasonable means exist for ascertaining the Eurodollar Rate for the Interest Period requested by the Company, and following withdrawal of such notice by the Agent, the Company shall have the right to have Revolving Loans funded as Eurodollar Rate Loans, to convert Floating Rate Loans to a Eurodollar Rate Loans and to continue Eurodollar Rate Loans as such in accordance with the terms and conditions of this Agreement. 3(d) Illegality. Notwithstanding any other provisions herein, if any law, regulation, treaty or directive or any change therein or in the interpretation or application thereof, shall make it unlawful for any Lender to make or maintain Eurodollar Rate Loans as contemplated by this Agreement: (1) the commitment of such Lender to make or to continue Eurodollar Rate Loans or to convert Floating Rate Loans to Eurodollar Rate Loans shall 4 5 forthwith be canceled and (2) such Lender's Percentage Share of Loans then outstanding as Eurodollar Rate Loans, if any, shall be converted automatically to Floating Rate Loans at the end of their respective Interest Periods or within such earlier period as may be required by law. In the event of a conversion of any such Loan prior to the end of its applicable Interest Period the Company hereby agrees promptly to pay any Lender affected thereby, upon demand, the amounts required pursuant to Paragraph 3(g) below, it being agreed and understood that such conversion shall constitute a prepayment for all purposes hereof. The provisions hereof shall survive the termination of this Agreement and payment of the outstanding Loans and all other amounts payable hereunder. 3(e) Requirements of Law; Increased Costs. In the event that any applicable law, order, regulation, treaty or directive issued by any central bank or other governmental authority, agency or instrumentality or in the governmental or judicial interpretation or application thereof, or compliance by any Lender with any request or directive (whether or not having the force of law) issued by any central bank or other governmental authority, agency or instrumentality: (1) Does or shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement or any Loans made hereunder, or change the basis of taxation of payments to such Lender of principal, fee, interest or any other amount payable hereunder (except for change in the rate of tax on the overall net income of such Lender); (2) Does or shall impose, modify or hold applicable any reserve, capital requirement, special deposit, compulsory loan or similar requirements against assets held by, or deposits or other liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender which are not otherwise included in the determination of interest payable on the Obligations; or (3) Does or shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender of making, renewing or maintaining any Loan or to reduce any amount receivable in respect thereof or the rate of return on the capital of such Lender or any corporation controlling such Lender, then, in any such case, the Company shall promptly pay to such Lender, upon its written demand made through the Agent, any additional amounts necessary to compensate such Lender for such additional cost or reduced amounts receivable or rate of return as determined by such Lender with respect to this Agreement or Loans made or Letters of Credit issued hereunder. If a Lender becomes entitled to claim any additional amounts pursuant to this Paragraph 3(e), it shall promptly notify the Company of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to the foregoing sentence containing the calculation thereof in reasonable detail submitted by a Lender to the Company shall be conclusive in the absence of manifest error. The provisions hereof shall survive the termination of this Agreement and payment of the outstanding Loans and other Obligations. 5 6 3(f) Funding. Each Lender shall be entitled to fund all or any portion of its Loans in any manner it may determine in its sole discretion, including, without limitation, in the Grand Cayman inter-bank market, the London inter-bank market and within the United States, but all calculations and transactions hereunder shall be conduced as though all Lenders actually fund all Eurodollar Rate Loans through the purchase of offshore dollar deposits in the amount of the relevant Eurodollar Rate Loan in maturities corresponding to the applicable Interest Periods. 3(g) Prepayment Premium. In addition to all other payment obligations hereunder, in the event: (1) any Loan which is outstanding as a Eurodollar Rate Loan is prepaid prior to the last day of the applicable Interest Period, whether following the occurrence of an Event of Default or otherwise, or (2) the Company shall fail to continue or to make a conversion to a Eurodollar Rate Loan after the Company has given notice thereof as provided in Paragraph 3(b) above, then the Company shall immediately pay to the Lenders holding the Loans prepaid or not made, continued or converted, through the Agent, an additional premium sum compensating each Lender for losses, costs and expenses incurred by such Lender in connection with such prepayment or such failure to borrow, continue or convert. The Company acknowledges that such losses, costs and expenses are difficult to quantify and that, in the case of the prepayment of or failure to continue or convert to a Eurodollar Loan, the following formula represents a fair and reasonable estimate of such losses, costs and expenses: Amount [Applicable Eurodollar Rate ] Days Remaining Being [Eurodollar Rate for such Incre- ] in Interest Prepaid or [for Increment ment for Days ] x Period Being x [Being Prepaid - Remaining in ] ------------- Not Borrowed, [or Not Borrowed, Interest ] 360 Converted or [Converted or Period ] or Continued [Continued (as quoted on the first Eurodollar Business Day Following Lenders' receipt of notice thereof)
For purposes of calculating the current Eurodollar Rate for the days remaining in the Interest Period for both the increment being prepaid or not converted or continued, said current Eurodollar Rate shall be an interest rate interpolated between Eurodollar Rates quoted for standard calendar periods for subsequent months' maturities in accordance with normal conventions. A certificate as to any additional amounts payable pursuant to the foregoing sentence containing the calculation thereof in reasonable detail submitted by a Lender to the Company shall be conclusive in the absence of manifest error. The provisions hereof shall survive the termination of this Agreement and the payment of all other Obligations. 3(h) Fees. The Company shall pay the following fees: (1) To the Agent for the pro rata benefit of the Lenders in accordance with their respective Percentage Shares, on the last Business Day of each 6 7 calendar quarter (and on the Maturity Date) for such calendar quarter (or portion thereof), a non-usage fee in the amount set forth in a fee billing delivered by the Agent to the Company, which non-usage fee shall equal: (1) the average daily Aggregate Credit Limit in effect during such calendar quarter (or portion thereof), minus the sum of the daily average outstanding principal balance of the Term Loan and the daily average outstanding amount of Revolving Loans during such calendar quarter (or portion thereof), multiplied by (2) the product of: (i) one quarter of one percent (0.25%), and (ii) a fraction, the numerator of which is the number of days in the applicable calculation period and the denominator of which is 360. (2) To the Agent for its own account, such fees in such amounts and payable at such times as the Company and the Agent may from time to time agree in writing. 3(i) Default Interest. Notwithstanding anything to the contrary contained herein, on any date that there shall have occurred and be continuing an Event of Default, any and all Obligations outstanding shall bear interest at a per annum rate equal to two percent (2%) in excess of the rate applicable to each respective Loan then outstanding under this Agreement or, in the case of Obligations other than Loans, two percent (2%) in excess of the highest rate applicable to Loans then outstanding. 3(j) Computations. All computations of interest and fees payable hereunder shall be based upon a year of three hundred and sixty (360) days for the actual number of days elapsed. 3(k) Obligation of Lenders to Mitigate; Replacement of Lenders. Each Lender agrees that: (1) As promptly as practicable after the officer of such Lender responsible for administering the Loans of such Lender becomes aware of any event or condition that would entitle such Lender to receive payments under Paragraphs 3(e) above, such Lender will use reasonable efforts (i) to make, issue, fund or maintain the affected Loans of such Lender through another lending office of such Lender or (ii) take such other measures as such Lender may deem reasonable, if as a result thereof the additional amounts which would otherwise be required to be paid to such Lender pursuant to Paragraph 3(e) above would be materially reduced or eliminated and if, as determined by such Lender in its sole discretion, the making, issuing, funding or maintaining or purchasing of such Loans through such other lending office or in accordance with such other measures, as the case may be, would not otherwise materially adversely affect such Loans or the interests of such Lender. (2) If the Company receives a notice pursuant to Paragraph 3(e) above stating that a Lender is unable to take such steps as are set forth in subparagraph (1) above, so long as (i) no Potential Default or Event of Default shall have occurred and be continuing, (ii) the Company has obtained a commitment from another Lender or another financial institution reasonably acceptable to the Agent to purchase at par such 7 8 Lender's Loans and Maximum Commitment, together with accrued interest and fees and to assume all obligations of the Lender to be replaced under the Loan Documents, and (iii) such Lender to be replaced is unwilling to withdraw the applicable notices delivered to the Company, upon thirty (30) days' prior written notice to such Lender and the Agent and payment of any amounts then due to such Lender under Paragraph 3(e) above, the Company may require, at the Company's expense and subject to payment of such additional amounts as may become due under Paragraph 3(g) above as a result of such action, the Lender giving such notice to assign, without recourse, all of its Loans and Maximum Commitment, accrued interest and fees to such other Lender or financial institution pursuant to the provisions of Paragraph 12 below. 4. Miscellaneous Provisions. 4(a) Open Book Account. The obligation of the Company to repay the Loans shall be evidenced by a notation on the books and records of the Agent and each Lender. The Agent shall deliver a statement of account to the Company and each Lender monthly setting forth the unpaid balance of Loans outstanding hereunder. Such statement shall (absent clerical error) be deemed conclusively correct and accepted by the Company and the Lenders unless any of such Persons notifies the Agent to the contrary within ten (10) Business Days following delivery of such statement. Upon any advance, conversion or prepayment with respect to any Loan, each Lender is hereby authorized to record the date and amount of each such advance and conversion made by such Lender, or the date and amount of each such payment or prepayment of principal of the Loan made by such Lender, the applicable Interest Period and interest rate with respect thereto, on its books (or by any analogous method any Lender may elect consistent with its customary practices) and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded absent manifest error. The failure of the Agent or any Lender to make any such notation shall not affect in any manner or to any extent the Company's Obligations hereunder. 4(b) Nature and Place of Payments. All payments made on account of the Obligations shall be made by the Company to the Agent for the account of the Lenders or the Agent, as applicable, without setoff or counterclaim, in lawful money of the United States of America in immediately available same day funds, free and clear of and without deduction for any taxes, fees or other charges of any nature whatsoever imposed by any taxing authority and must be received by the Agent by 10:00 a.m. (Los Angeles time) on the day of payment, it being expressly agreed and understood that if a payment is received after 10:00 a.m. (Los Angeles time) by the Agent, such payment will be considered to have been made by the Company on the next succeeding Business Day and interest thereon shall be payable by the Company at the then applicable rate during such extension. All payments on account of the Obligations shall be made to the Agent through its Contact Office . If any payment required to be made by the Company hereunder becomes due and payable on a day other than a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest thereon shall be payable at the then applicable rate during such extension. 4(c) Prepayments. 8 9 (1) The Company may prepay Loans hereunder in whole or in part at any time. (2) The Company shall pay in connection with any prepayment hereunder all interest accrued but unpaid on Loans to which such prepayment is applied, and all prepayment premiums, if any, on Eurodollar Rate Loans to which such prepayment is applied, concurrently with payment to the Agent of any principal amounts. (3) Principal prepayments on the Term Loan shall be applied against principal installments on the Term Loan in inverse order of maturity. 4(d) Allocation of Payments Received. Prior to the occurrence of an Event of Default and acceleration of the Obligations, all amounts received by the Agent on account of the Loans shall be applied against Loans in such order as the Company may direct in writing, subject to the requirement that disbursements to the Lenders shall be in accordance with their respective Percentage Shares. Such amounts shall be disbursed by the Agent to the Lenders pro rata in accordance with their respective Percentage Shares by wire transfer on the date of receipt if received by the Agent before 10:00 a.m. (Los Angeles time) or if received later, by 12:00 noon (Los Angeles time) on the next succeeding Business Day, without further interest payable by the Agent. Following the occurrence of an Event of Default and acceleration of the Obligations, all amounts received by the Agent on account of the Obligations shall be disbursed by the Agent as follows: (1) First, to the payment of reasonable expenses incurred by the Agent in the performance of its duties and enforcement of its rights and the rights of the Lenders under the Loan Documents, including, without limitation, all costs and expenses of collection, attorneys' fees, court costs and foreclosure expenses; (2) Then, to the Lenders, pro rata in accordance with their respective Percentage Shares, until all outstanding Loans and interest accrued thereon and all other Obligations have been paid in full, said amounts to be allocated first to interest and then, but only after all accrued interest has been paid in full, to principal of Loans and, finally, to all other Obligations; and (3) Then, to such Persons as may be legally entitled thereto. 4(e) Telephonic/Facsimile Communications. Any agreement of the Agent and the Lenders herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company. The Agent and the Lenders shall be entitled to rely on the authority of any Person purporting to be an authorized Person and the Agent and the Lenders shall not have any liability to the Company or other Person on account of any action taken or not taken by the Agent or the Lenders in reliance upon such telephonic or facsimile notice other than actions or inactions constituting gross negligence or willful misconduct on the part of the Agent and the Lenders. The obligation of the Company to repay the Loans shall not be affected in any way or to any extent by any failure by the Agent and the Lenders to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the 9 10 Lenders of a confirmation which is at variance with the terms understood by the Agent and the Lenders to be contained in the telephonic or facsimile notice. 4(f) Use of Proceeds. The proceeds of the Loans shall be used for general corporate purposes consistent with the terms and provisions of this Agreement. 5. Collateral Security; Negative Pledge Agreement; Additional Documents. 5(a) Collateral Security. As collateral security for the Obligations, on or before the Effective Date the Company shall deliver to the Agent each of the following (collectively, the "Initial Collateral Documents"): (1) the Stock Pledge Agreement, pursuant to which the Company shall pledge and grant to the Agent for the benefit of the Lenders and the Lenders from time to time party hereto, a first priority perfected security interest in and lien upon all existing and hereafter outstanding capital stock of the Pledged Subsidiaries (collectively, the "Pledged Stock"); (2) all stock certificates evidencing the Pledged Stock outstanding on the Effective Date accompanied by blank stock powers covering such Pledged Stock, and (3) such UCC-1 financing statements as the Agent shall request. 5(b) Negative Pledge Agreements. On or before the Effective Date the Company shall cause each of the Pledged Subsidiaries to execute and deliver to the Agent the Negative Pledge Agreement, pursuant to which such Pledged Subsidiary shall covenant and agree that until the Obligations have been paid in full and the credit facility evidenced hereby terminated, such Pledged Subsidiary will not grant or permit to exist any Lien upon any of its property or assets, including, without limitation, any capital stock of Subsidiaries owned by it, other than Liens expressly created or permitted under the Loan Documents. 5(c) Additional Documents. The Company agrees to execute and deliver and to cause to be executed and delivered to the Agent from time to time such documents, instruments and agreements as are in the Agent's judgment reasonably necessary to obtain for the Agent on behalf of the Lenders the benefit of the Pledged Stock, the Negative Pledge Agreements and the other Loan Documents. 6. Conditions Precedent. 6(a) First Loan. As conditions precedent to the funding of the first Loan hereunder: (1) The Company shall have delivered or shall have had delivered to the Agent, in form and substance reasonably satisfactory to the Agent and its counsel, each of the following (with sufficient copies for each of the Lenders): (i) A duly executed copy of this Agreement; (ii) A duly executed copy of the Stock Pledge Agreement and the other Initial Collateral Documents; 10 11 (iii) The Negative Pledge Agreement, duly executed by each of the Pledged Subsidiaries; (iv) Certified copies of resolutions of the Board of Directors of the Company approving the execution and delivery of the Loan Documents to which the Company is party; (v) A certificate of the Secretary or an Assistant Secretary of the Company certifying the names and true signatures of the officers of the Company authorized to sign the Loan Documents to which the Company is party; (vi) Certified copies of resolutions of the Boards of Directors of each of the Pledged Subsidiaries approving the execution and delivery of the Negative Pledge Agreement to be executed by such Pledged Subsidiary; (vii) A certificate of the Secretary or an Assistant Secretary of each of the Pledged Subsidiaries certifying the names and true signatures of the officer(s) of the Pledged Subsidiary authorized to sign the Negative Pledge Agreement to be executed by such Pledged Subsidiary; (viii) A copy of the Certificate of Incorporation of the Company, certified by the Secretary of State of the State of Delaware as of a recent date; (ix) A copy of each of the Certificate of Incorporation and Bylaws of the Company, certified by the Secretary or an Assistant Secretary of the Company as of the date of this Agreement as being accurate and complete; (x) A certificate of good standing or status of the Company from the Secretary of State of the States of Delaware and California as of a recent date; (xi) A Closing Certificate, duly executed by an Authorized Officer, dated as of the date of the first Loan hereunder, confirming the accuracy and completeness of the representations and warranties of the Company set forth in the Loan Documents and the fact that there does not exist a Potential Default or an Event of Default; (xii) A Financial Covenant Compliance Certificate, duly executed by an Authorized Officer, dated at and as of June 30, 1998 and evidencing compliance by the appropriate Persons with the requirements of Paragraphs 9(g)(3), 9(g)(4), 9(g)(5), 9(g)(7), 9(g)(8), 9(j), 9(k), 9(l), 9(m), 9(n), 9(o) and 9(p) below; (xiii) An opinion of Stradling Yocca Carlson & Rauth, counsel to the Company and the Pledged Subsidiaries; 11 12 (xiv) For each of the Pledged Subsidiaries, consents to the pledge of the Pledged Shares thereof (or written waiver of the requirement for any such consent) from the Applicable Insurance Regulatory Authority, in form and substance to the Agent and the Lenders, or other evidence, including without limitation, an opinion of counsel to the Company and the Pledged Subsidiaries satisfactory to the Agent and the Lenders, that such filing or waiver is not required; (xv) Evidence satisfactory to the Agent and the Lenders that upon the funding of the first Loan, all Indebtedness of the Company to Sanwa with respect to the Existing Bridge Facility shall have been paid in full, the credit facility evidenced thereby terminated and any and all Liens in favor of Sanwa securing the Existing Bridge Facility released; and (xvi) The Agent's Fee Letter, duly executed by the Company. (2) The Agent shall have delivered to the Company and each of the Lenders the initial Commitment Schedule, which shall be acceptable to the Company and each of the Lenders. (3) All acts and conditions (including, without limitation, the obtaining of any necessary regulatory approvals and the making of any required filings, recordings or registrations) required to be done and performed and to have happened precedent to the execution, delivery and performance of the Loan Documents and to constitute the same legal, valid and binding obligations, enforceable in accordance with their respective terms, shall have been done and performed and shall have happened in due and strict compliance with all applicable laws. (4) All documentation, including, without limitation, documentation for corporate and legal proceedings in connection with the transactions contemplated by the Loan Documents, shall be reasonably satisfactory in form and substance to the Agent and its counsel. 6(b) All Loans. As conditions precedent to each Lender's obligation to advance its Percentage Share of any Loan, including the first Loan and including the conversion of any Loan to another type of Loan or the continuation of any Eurodollar Rate Loan after the end of its applicable Interest Period, at and as of the date of such advance, conversion or continuation: (1) There shall have been delivered to the Agent a Loan Request therefor; (2) The representations and warranties of the Company contained in the Loan Documents shall be accurate and complete in all material respects as if made on and as of the date of such advance, conversion or continuance; 12 13 (3) There shall not have occurred an Event of Default or Potential Default; and (4) If the Loan is a Revolving Loan, following the funding thereof the aggregate principal amount of Revolving Loans outstanding shall not exceed the limitations of Paragraph 1(a) above. By delivering a Loan Request to the Agent hereunder, the Company shall be deemed to have represented and warranted the accuracy and completeness of the statements set forth in subparagraphs (b)(2) through (b)(4) above. 7. Representations and Warranties of the Company. As an inducement to the Agent and each Lender to enter into this Agreement and to make Loans as provided herein, the Company represents and warrants to the Agent and each Lender that: 7(a) Financial Condition. The financial statements, dated the Statement Date and the Interim Date, copies of which have heretofore been furnished to each Lender, are complete and correct (subject, in the case of the statements dated the Interim Date, to year-end audit adjustments) and present fairly in accordance with GAAP the financial condition of the Company and its consolidated Subsidiaries at such dates and the consolidated and consolidating results of their operations and cash flows for the fiscal periods then ended. In addition, the Company has furnished to each Lender for each of the Significant Insurance Subsidiaries: (1) the annual Statutory Statement or any other financial statement required to be filed by or on behalf of such Significant Insurance Subsidiary with any Applicable Insurance Regulatory Authority for the fiscal year ended December 31, 1997 and (2) the quarterly Statutory Statement or any other financial statement required to be filed by or on behalf of such Significant Insurance Subsidiary with any Applicable Insurance Regulatory Authority for the fiscal quarter ended March 31, 1998. Such Statutory Statements and other financial statements present fairly in accordance with SAP the financial condition of the Significant Insurance Subsidiaries and the results of operations for the fiscal periods then ended. 7(b) No Change. Since the Statement Date there has been no material adverse change in the business, operations, assets or financial or other condition of the Company, any Pledged Subsidiary or the Company and its Subsidiaries taken as a whole. Except as expressly disclosed in writing to the Agent and the Lenders prior to the Effective Date (including disclosures in filings with the Securities and Exchange Commission), from the Statement Date through the Effective Date neither the Company nor any of its Subsidiaries has entered into, incurred or assumed any material long-term debt, mortgages, leases or oral or written commitments, nor commenced any significant project, nor made any purchase or acquisition of any significant property. 7(c) Corporate Existence; Compliance with Law. The Company and each of its Subsidiaries: (1) is duly organized, validly existing and in good standing as a corporation under the laws of the jurisdiction of its organization and is qualified to do business in 13 14 each jurisdiction where its ownership of property or conduct of business requires such qualification and where failure to qualify would have a material adverse effect on the Company or such Subsidiary or its property and/or business or on the ability of the Company or such Subsidiary to pay or perform the Obligations, (2) has the corporate power and authority and the legal right to own and operate its property and to conduct business in the manner in which it does and proposes so to do, (3) has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as not being or proposed to be conducted, and (4) is in compliance with all Requirements of Law and Contractual Obligations, the failure to comply with which could have a material adverse effect on the business, operations, assets or financial or other condition of the Company, any Pledged Subsidiary or the Company and its Subsidiaries taken as a whole. 7(d) Corporate Power; Authorization; Enforceable Obligations. The Company and each of the Pledged Subsidiaries has the corporate power and authority and the legal right to execute, deliver and perform the Loan Documents to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance of such Loan Documents. The Loan Documents to which the Company and the Pledged Subsidiaries are party have been duly executed and delivered on behalf of such Person and, assuming that the Loan Documents are duly executed by the Agent and the Lenders, as applicable, constitute legal, valid and binding obligations of such Person enforceable against such Person in accordance with their respective terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally and the effect of equitable principles whether applied in an action at law or a suit in equity. 7(e) No Legal Bar. The execution, delivery and performance of the Loan Documents to which the Company and the Pledged Subsidiaries are party, the borrowing hereunder and the use of the proceeds thereof, will not violate any Requirement of Law or any Contractual Obligation of the Company or any of its Subsidiaries the violation of which could have a material adverse effect on the business, operations, assets or financial or other condition of the Company, any Pledged Subsidiary or the Company and its Subsidiaries taken as a whole or create or result in the creation of any Lien on any assets of the Company or any of its Subsidiaries, except Liens created pursuant to or permitted under the Loan Documents. 7(f) No Material Litigation. Except as disclosed on Exhibit A hereto, no litigation, investigation or proceeding of or before any arbitrator, court or Governmental Authority is pending or, to the knowledge of the Company, threatened by or against the Company or any of its Subsidiaries or against any of such parties' properties or revenues which is likely to be adversely determined and which, if adversely determined, is likely to have a material adverse effect on the business, operations, property or financial or other condition of the Company, any Pledged Subsidiary or the Company and its Subsidiaries taken as a whole. 7(g) Taxes. The Company and each of its Subsidiaries have filed or caused to be filed all material tax returns that are required to be filed and have paid all taxes shown to be due and payable on said returns or on any assessments made against them or any of their property other than taxes which are being contested in good faith by appropriate 14 15 proceedings and as to which the Company or applicable Subsidiary has established adequate reserves in conformity with GAAP. 7(h) Investment Company Act. The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 7(i) Subsidiaries. Attached hereto as Exhibit B is an accurate and complete list of all direct and indirect Subsidiaries of the Company and of Subsidiaries of the Company, their respective jurisdictions of incorporation and the percentage of their capital stock owned by the Company or other Subsidiaries. All of the issued and outstanding shares of capital stock of such Subsidiaries have been duly authorized and issued and are fully paid and non-assessable. 7(j) Federal Reserve Board Regulations. Neither the Company nor any of its Subsidiaries is engaged or will engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of such terms under Regulation U. No part of the proceeds of any Loan issued hereunder will be used for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent with, the provisions of the Regulations of the Board of Governors of the Federal Reserve System. 7(k) ERISA. The Company and each of its Subsidiaries are in compliance in all respects with the requirements of ERISA and no Reportable Event has occurred under any Plan maintained by the Company or any of its Subsidiaries which is likely to result in the termination of such Plan for purposes of Title IV of ERISA. 7(l) Assets. The Company and each of its Subsidiaries has good and marketable title to all property and assets reflected in the financial statements dated the Interim Date referred to in Paragraph 7(a) above, except property and assets sold or otherwise disposed of in compliance with Paragraph 9(h) below. Neither the Company nor any of its Subsidiaries has outstanding Liens on any of its properties or assets nor are there any security agreements to which the Company or any of its Subsidiaries is a party, or title retention agreements, whether in the form of leases or otherwise, of any personal property except as reflected in the financial statements referred to in Paragraph 7(a) above or as permitted under Paragraph 9(a) below. 7(m) Securities Acts. The Company has not issued any unregistered securities in violation of the registration requirements of Section 5 of the Securities Act of 1933, as amended, or any other law, and is not violating any rule, regulation or requirement under the Securities Act of 1933, as amended, or the Securities and Exchange Act of 1934, as amended. The Company is not required to qualify an indenture under the Trust Indenture Act of 1939, as amended, in connection with its execution and delivery of the Loan Documents. 7(n) Consents, Etc. No consent, approval, authorization of, or registration, declaration or filing with any Governmental Authority or any other Person is required on the part of the Company or any of its Subsidiaries in connection with the execution and delivery of the Loan Documents or the performance of or compliance with the terms, 15 16 provisions and conditions hereof or thereof, including, without limitation, with respect to the pledge of the Pledged Shares and in connection with a foreclosure or other exercise of remedies with respect to the Pledged Shares, other than such as have been obtained prior to or concurrently with the occurrence of the Effective Date. 7(o) Copyrights, Patents, Trademarks and Licenses, etc. The Company and each of its Subsidiaries owns or is licensed or otherwise has the right to use all of the patents, trademarks, service marks, trade names, copyrights, contractual franchises, authorizations and other rights that are reasonably necessary for the operation of its business, without conflict with the rights of any other Person. To the best knowledge of the Company, no slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed, by the Company or any of its Subsidiaries infringes upon any rights held by any other Person. Except as specifically disclosed on Exhibit A hereto, no claim or litigation regarding any of the foregoing is pending or, to the knowledge of the Company, threatened, and, to the knowledge of the Company, no patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code is pending or proposed, which, in either case, could, reasonably be expected to have a material adverse effect on the Company or any of its Subsidiaries. 7(p) Hazardous Materials. To the best knowledge of the Company, neither the Company, any of its Subsidiaries nor any other Person has: (1) caused or permitted any Hazardous Materials to be disposed of in, on, under or about any Property or any part thereof, and no Property, nor any part thereof, has ever been used (whether by the Company, any of its Subsidiaries or, to the best knowledge of the Company, by any other Person) for activities involving, directly or indirectly, the disposal of any Hazardous Materials; (2) caused or permitted to be incorporated into or utilized in the construction of any improvements located on any Property any chemical, material, or substance to which exposure is prohibited, limited or regulated by any Hazardous Materials Laws or which, even if not so regulated, is known to pose a hazard (either in its present form or if disturbed or removed) to the health and safety of the occupants of such Property or of property adjacent to the Property; or (3) discovered any occurrence or condition on any Property that could cause such Property or any part thereof to be in violation of any Hazardous Materials Laws. 7(q) Regulated Entities. The Company is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness. 7(r) Insurance Licenses. Each of the Insurance Subsidiaries holds active Licenses for the transaction of the line or lines of insurance in which it is engaged in all jurisdictions in which it conducts, directly or indirectly, any material insurance business. No such License is the subject of a proceeding for suspension or revocation or any similar proceedings, there is no sustainable basis for such a suspension or revocation, and to the Company's knowledge no such suspension or revocation has been threatened, in any case in which such suspension or revocation is likely to have a material adverse effect on the business, 16 17 operations, property or financial or other condition of the Company, any Pledged Subsidiary or the Company and its Subsidiaries taken as a whole. 8. Affirmative Covenants. The Company hereby covenants and agrees with the Agent and each Lender that, as long as any Obligations remain unpaid or any Lender has any obligation to advance its Percentage Share of Loans hereunder, the Company shall: 8(a) Financial Statements. Furnish or cause to be furnished to the Agent and to each of the Lenders directly (without the need for duplication of any of the required items is the same are included in other materials being delivered concurrently): (1) Within one hundred five (105) days after the last day of each fiscal year of the Company: (i) consolidated statements of income and cash flows of the Company and its consolidated Subsidiaries for such year and balance sheets as of the end of such year presented fairly in accordance with GAAP and accompanied by an unqualified report of a firm of independent certified public accountants reasonably acceptable to the Agent, (ii) internally prepared consolidating statements of income and balance sheets as of the end of such year presented fairly in accordance with GAAP, and (iii) a copy of the Company's 10K filed with the Securities and Exchange Commission for such fiscal year; (2) Within sixty (60) days after the last day of each of the first three fiscal quarters of the Company: (i) consolidated statements of income and cash flows for the Company and its consolidated Subsidiaries for such calendar quarter and balance sheets as of the end of such calendar quarter, (ii) internally prepared consolidating statements of income and balance sheets as of the end of such year presented fairly in accordance with GAAP, and (iii) a copy of the Company's 10Q filed with the Securities and Exchange Commission for such fiscal quarter; (3) Concurrently with the delivery of each of the financial statements delivered pursuant to subparagraph (1) and (2) above: (i) a certificate of an Authorized Officer stating that such financial statements are presented fairly in accordance with GAAP (subject, with respect to interim periods, to ordinary year-end audit adjustments), confirming as of the last day of such fiscal period the continuing accuracy and completeness of all representations and warranties of the Company set forth in the Loan Documents or, with respect to any representation and warranty made as of a specific date, the accuracy and completeness as of such date, and that there does not exist a Potential Default or an Event of Default hereunder, and (ii) a Financial Covenant Compliance Certificate; (4) Within one hundred five (105) days after the last day of each fiscal year of each Significant Insurance Subsidiary: (i) a copy of the annual Statutory Statement or any other financial statement required to be filed by or on behalf of such Significant Insurance Subsidiary with any Applicable Insurance Regulatory Authority for such fiscal year, and (ii) a certificate of an Authorized Officer of the Company stating 17 18 that such Statutory Statement and/or other financial statements are presented fairly as required by the Applicable Insurance Regulatory Authority and fairly represent the financial condition of such Significant Insurance Subsidiary and that such Significant Insurance Subsidiary is in compliance with all regulatory and/or statutory reserve requirements applicable to it; (5) Within sixty (60) days after the last day of each of the first three fiscal quarters of each Significant Insurance Subsidiary: (i) a copy of the quarterly Statutory Statement or any other financial statement required to be filed by or on behalf of such Significant Insurance Subsidiary with any Applicable Insurance Regulatory Authority for such fiscal period, and (ii) a certificate of an Authorized Officer stating that such financial statements are presented fairly as required by the Applicable Insurance Regulatory Authority and fairly represent the financial condition of such Significant Insurance Subsidiary and that such Significant Insurance Subsidiary is in compliance with all regulatory and/or statutory reserve requirements applicable to it; (6) Within fifteen (15) days following the filing thereof, copies of all financial statements, reports and proxy statements and all regular and periodic reports and all registration statements which the Company files with the Securities and Exchange Commission (or any successor agency); (7) As soon as received by the Company, a copy of any final financial examination report (including, without limitation, any report in respect of any tri-annual examination conducted by any Applicable Insurance Regulatory Authority) or market conduct examination report issued by or prepared for any governmental authority (including any Applicable Insurance Regulatory Authority and NAIC) with respect to any Significant Insurance Subsidiary; (8) Immediately, notice of any actual (or threatened action that could lead to the) suspension, termination or revocation of any License of any Significant Insurance Subsidiary by any Governmental Authority (including any Applicable Insurance Regulatory Authority), including any notice by any Governmental Authority of the commencement of any proceeding, hearing or administrative action to suspend, terminate or revoke any such License; (9) Promptly after the Company knows or has reason to believe that any Applicable Insurance Regulatory Authority or other regulator having jurisdiction over the Company or any of its Significant Insurance Subsidiaries has commenced any proceeding, issued any order, given notice of a formal hearing, sought relief from any court or taken any similar action with respect to the Company or any of its Significant Insurance Subsidiaries that seeks to, or would, result in the revocation of any License or other authorization of the Company or any of its Significant Insurance Subsidiaries or materially restrict the ability of the Company or any of its Significant Insurance Subsidiaries to do business in any jurisdiction, a notice describing in reasonable detail such proceeding, order, hearing or similar action; and 18 19 (10) Promptly following the delivery or receipt by the Company or any of its Subsidiaries of any other material correspondence, notice or report to or from any Applicable Insurance Regulatory Authority (including, without limitation, any NAIC specified real estate and mortgage survey, or any successor report or survey, filed with the NAIC), a copy thereof. 8(b) Other Information. Promptly furnish or cause to be furnished to the Agent (with the Agent providing the same to each of the Lenders) such additional financial and other information, including, without limitation, financial statements of the Company and the Pledged Subsidiaries, as the Agent or any Lender (through the Agent) may from time to time reasonably request, including, without limitation, such information as is necessary to enable any Lender to participate out or assign any of its interests in the Loans and other Obligations hereunder or to enable other financial institutions to become signatories hereto. 8(c) Payment of Indebtedness. And shall cause each of its Subsidiaries to, pay, discharge or otherwise satisfy at or before maturity or before it becomes delinquent, defaulted or accelerated, as the case may be, all its Indebtedness (including taxes), except: (1) Indebtedness being contested in good faith and for which provision is made to the satisfaction of the Agent for the payment thereof in the event the Company or such Subsidiary is found to be obligated to pay such Indebtedness and which Indebtedness is thereupon promptly paid by the Company or such Subsidiary, and (2) additional Indebtedness in an amount not to exceed $1,000,000.00 in the aggregate at any date outstanding. 8(d) Maintenance of Existence and Properties. And shall cause each of its Subsidiaries to: (1) maintain its corporate existence and maintain all rights, privileges, licenses, approvals, franchises, properties and assets necessary or desirable in the normal conduct of its business (except to the extent expressly permitted under the Loan Documents), and (2) comply with all Contractual Obligations and Requirements of Law the failure to comply with which could have a material adverse effect on the business, operations, assets or financial or other condition of the Company, any Pledged Subsidiary or the Company and its Subsidiaries taken as a whole. 8(e) Inspection of Property; Books and Records; Discussions. And shall cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law the failure to comply with which could have a material adverse effect on the business, operations, assets or financial or other condition of the Company, any Pledged Subsidiary or the Company and its Subsidiaries taken as a whole shall be made of all dealings and transactions in relation to its business and activities, and permit representatives of the Agent or any Lender (at no cost or expense to the Company or any Subsidiary and during normal business hours unless there shall have occurred and be continuing an Event of Default) to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired by the Agent or any Lender and to discuss the business, operations, properties and financial and other condition of the Company and any of its 19 20 Subsidiaries with officers and employees of such parties, and with their independent certified public accountants. 8(f) Notices. Promptly give written notice to the Agent (with the Agent providing the same to each of the Lenders) of: (1) The occurrence of any Potential Default or Event of Default; (2) Any litigation or proceeding affecting the Company or any of its Subsidiaries which is likely to be resolved adversely and which if resolved adversely could have a material adverse effect on the business, operations, property, or financial or other condition of the Company, any Pledged Subsidiary or the Company and its Subsidiaries taken as a whole; (3) Any material adverse change in the business, operations, property or financial or other condition of the Company, any Pledged Subsidiary or the Company and its Subsidiaries taken as a whole; and (4) Prior to the occurrence thereof, the formation or acquisition of any Subsidiary following the Effective Date as to which the Company or such Subsidiary will make investments or contributions in an aggregate amount in excess of $5,000,000.00. 8(g) Expenses. Pay all reasonable out-of-pocket expenses (including fees and disbursements of counsel): (1) of the Agent incident to the preparation, negotiation and administration of the Loan Documents and the protection of the rights of the Lenders and the Agent under the Loan Documents, and (2) of the Agent and, following the occurrence of an Event of Default, each of the Lenders incident to the enforcement of payment of the Obligations, whether by judicial proceedings or otherwise, including, without limitation, in connection with bankruptcy, insolvency, liquidation, reorganization, moratorium or other similar proceedings involving the Company or a "workout" of the Obligations. The obligations of the Company under this Paragraph 8(g) shall be effective and enforceable whether or not any Loan is funded hereunder and shall survive payment of all other Obligations. 8(h) Loan Documents. And shall cause each of the Pledged Subsidiaries to, comply with and observe all terms and conditions of the Loan Documents to which the Company or any Pledged Subsidiary is party. 8(i) Insurance. And shall cause each of its Subsidiaries to, obtain and maintain insurance with responsible companies in such amounts and against such risks as are usually carried by corporations engaged in similar businesses similarly situated, and furnish any of the Lenders on request (made through the Agent) full information as to all such insurance. 8(j) Hazardous Materials. And shall cause each of its Subsidiaries to: 20 21 (1) Keep and maintain all Property in compliance with, and shall not cause or permit any Property to be in violation of, any federal, state or local laws, ordinances or regulations relating to industrial hygiene or to the environmental conditions on, under or about any Property, including, but not limited to, soil and ground water conditions. (2) Immediately advise the Agent in writing if any Hazardous Materials Claims are hereafter asserted, and of any discharge, release or disposal of any Hazardous Materials in, on, under or about any Property. The Agent and the Lenders shall have the right to join and participate in, as parties if they so elect, any legal proceedings or actions initiated in connection with any Hazardous Materials Claims and to have their reasonable attorneys' fees in connection therewith paid by the Company. (3) Without the prior written consent of the Agent and the Lenders, take any remedial action in response to the presence of any Hazardous Materials in, on, under or about any Property, nor enter into any settlement agreement, consent decree or other compromise in respect to any Hazardous Material Claims, which remedial action, settlement, consent or compromise might, in the reasonable judgment of the Agent and the Lenders impair the value of such Property; provided, however, that the prior consent of the Agent and the Lenders shall not be necessary in the event that the presence of Hazardous Materials in, on, under or about a Property either poses an immediate threat to the health, safety or welfare of any individual or is of such a nature that an immediate remedial response is necessary and it is not possible to obtain the consent of the Agent and the Lenders before taking such action, provided that in such event the Company shall notify the Agent as soon as practicable of any action so taken. The Agent and the Lenders agree not to withhold their consent, where such consent is required hereunder, if either (i) a particular remedial action is ordered by a court of competent jurisdiction, or (ii) the Company establishes to the reasonable satisfaction of the Agent and the Lenders that there is no reasonable alternative to such remedial action which would result in less impairment of the value of any Property. 8(k) Compliance with Laws. And shall cause each of its Subsidiaries to, comply, with all Requirements of Law and Contractual Obligations the failure to comply with which could have a material adverse effect on the business, operations, assets or financial or other condition of the Company, any Pledged Subsidiary or the Company and its consolidated Subsidiaries taken as a whole. 8(l) Year 2000 Compliance. And shall cause each of its Subsidiaries to, perform all acts reasonably necessary to ensure that the Company and such Subsidiaries (and any business in which the Company or any of its Subsidiaries holds a substantial interest) and all customers, suppliers and vendors that are material to the Company's or any of its Subsidiaries' businesses become Year 2000 Compliant in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all of the systems of the Company and its Subsidiaries and adopting a detailed plan, with itemized budget, for the remediation and testing of such systems, as well as ascertaining that the material customers, 21 22 suppliers and vendors of the Company and its Subsidiaries are taking all appropriate steps to become Year 2000 Compliant on a timely basis. For purposes hereof, the phrase "Year 2000 Compliant" shall mean, in regard to any entity, that the software, hardware, firmware, equipment, goods and systems utilized by and material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. The Company shall immediately upon request provide the Agent with such certifications or other evidence of the compliance of the Company and its Subsidiaries with the terms hereof as the Agent may from time to time require. 9. Negative Covenants. The Company hereby agrees that, as long as any Obligations remain unpaid or any Lender has any obligation to advance its Percentage Share of Loans hereunder, the Company shall not, directly or indirectly: 9(a) Liens. Create, incur, assume or suffer to exist any Lien upon the Pledged Stock, and the Company shall not and not permit any Subsidiary to, create, incur, assume or suffer to exist any Lien upon any of its or their other property and assets except: (1) Liens existing on the Effective Date and reflected in the financial statements referred to in Paragraph 7(a) above (other than Liens securing the Existing Bridge Facility, which Liens will be released on the Effective Date); (2) Liens or charges for current taxes, assessments or other governmental charges which are not delinquent or which remain payable without penalty, or the validity of which are contested in good faith by appropriate proceedings upon stay of execution of the enforcement thereof, provided that the Company or such Subsidiary, as applicable, shall have set aside on its books and shall maintain adequate reserves for the payment of same in conformity with GAAP; (3) Liens, deposits or pledges made to secure statutory obligations, surety or appeal bonds, or bonds to obtain, or to obtain the release of, attachments, writs of garnishment or for stay of execution, or to secure the performance of bids, tenders, contracts (other than for the payment of borrowed money), leases or for purposes of like general nature in the ordinary course of the business of the Company or such Subsidiary; (4) Purchase money security interests for property hereafter acquired, conditional sale agreements, or other title retention agreements, with respect to property hereafter acquired; provided, however, that no such security interest or agreement shall extend to any property other than the property acquired; (5) Statutory Liens of landlord's, carriers, warehousemen, mechanics, materialmen and other similar Liens imposed by law and created in the ordinary course of business for amounts not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves are being maintained in conformity with GAAP; 22 23 (6) Attachment and judgment Liens not otherwise constituting an Event of Default any of which Liens are in existence less than thirty (30) days after the entry thereof or with respect to which execution has been stayed, payment is covered in full by insurance, or the Company or such Subsidiary shall in good faith be prosecuting an appeal or proceedings for review and shall have set aside on its books such reserves as may be required by GAAP with respect to such judgment or award; (7) Liens incidental to the conduct of the business or the ownership of the property of the Company or such Subsidiary which were not incurred in connection with borrowed money and which do not in the aggregate materially detract from the value of the property or materially impair the use thereof in the operation of the business and which, in any event, do not secure obligations aggregating in excess for the Company and all Subsidiaries of $1,000,000.00; (8) Liens securing Indebtedness of Insurance Subsidiaries incurred or assumed in connection with the settlement of claim losses in the ordinary course of business of such Insurance Subsidiaries; (9) Easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of Property or minor imperfections in title thereto that, in the aggregate, are not material in amount, and that do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (10) Liens on assets of a Person which becomes a Subsidiary after the date of this Agreement pursuant to a Permitted Acquisition, which Liens are in existence at such time; (11) Liens on assets of GFI securing the GFI Warehouse Debt; and (12) Liens securing Other Permitted Secured Debt. 9(b) Indebtedness. And shall not permit any Subsidiary to, create, incur, assume or suffer to exist, or otherwise become or be liable in respect of any Indebtedness except: (1) The Obligations; (2) Indebtedness reflected in the financial statements referred to in Paragraph 7(a) above (other than Indebtedness of the Company to Sanwa under the Existing Bridge Facility, which Indebtedness will be paid in full on the Effective Date); (3) Trade debt incurred in the ordinary course of business; 23 24 (4) Indebtedness secured by Liens permitted under Paragraph 9(a) above; (5) Subordinated Debt; (6) Guaranties issued by the Company and other contingent obligations of the Company covering Indebtedness of Subsidiaries to non-Affiliates in an aggregate amount not to exceed: (i) in the case of all Subsidiaries other than GFI, $10,000,000.00, and (ii) in the case of GFI, that dollar amount which when added to the aggregate dollar amount of all outstanding advances and loans to, and contributions by the Company to, and investments by the Company in, GFI from and after December 31, 1997, do not exceed $35,000,000.00; (7) Capital leases existing on the date hereof or otherwise incurred in the ordinary course of business; (8) Indebtedness of a Person which becomes a Subsidiary after the date of this Agreement pursuant to a Permitted Acquisition, which Indebtedness is in existence at such time; and (9) Other Permitted Secured and Unsecured Debt. 9(c) Consolidation and Merger. And shall not permit any Subsidiary to, liquidate or dissolve or enter into any consolidation or merger, partnership, joint venture, syndicate or other combination except: (1) A consolidation or merger consummated in connection with a Permitted Acquisition and subject to the Company (if the Company is involved) being the surviving corporation, or if the Permitted Acquisition involves a Pledged Subsidiary, such Pledged Subsidiary being the surviving corporation; (2) The consolidation or merger of a Pledged Subsidiary into the Company with the Company being the surviving corporation; (3) The consolidation or merger of a Pledged Subsidiary into another Pledged Subsidiary; (4) The consolidation or merger of a Subsidiary other than a Pledged Subsidiary into another Subsidiary which is not a Pledged Subsidiary; and (5) A partnership or joint venture in which the investment of the Company or such Subsidiary will not violate Paragraph 9(g) below; provided, however, that as a condition precedent to any consolidation or merger otherwise permitted hereunder, there shall have been delivered to the Agent and the Lenders, prior to the consummation thereof or to the entering into of any binding agreement to consummate the same, 24 25 evidence satisfactory to the Agent and the Lenders that neither prior to or after giving effect to such consolidation or merger will there exist an Event of Default or Potential Default. 9(d) Acquisitions. And shall not permit any Subsidiary to, purchase or acquire or incur liability for the purchase or acquisition of all or any substantial portion of the assets or business of any Person, whether in a single transaction or a series of transactions, other than Permitted Acquisitions; provided, however, that as a condition precedent to the right of the Company or any Subsidiary to consummate a Permitted Acquisition hereunder, there shall have been delivered to the Agent and the Lenders no later than thirty (30) days prior thereto evidence satisfactory to the Agent and the Lenders, including, without limitation, pro forma financial statements in form and detail satisfactory to the Agent and the Lenders, demonstrating that: (1) such acquisition meets all requirements set forth in the definition of "Permitted Acquisition" and (2) both before and after giving effect thereto there shall not exist an Event of Default or Potential Default. 9(e) Payment of Dividends. Declare or pay any dividends upon its shares of stock now or hereafter outstanding or make any distribution of assets to its stockholders as such, whether in cash, property or securities, except: (1) dividends payable in shares of capital stock and cash in lieu of fractional shares or in options, warrants or other rights to purchase shares of capital stock and dividends, (2) dividends payable by the Subsidiaries of the Company to the Company or to other Subsidiaries of the Company (it being agreed and understood that the Company shall not permit to exist any Contractual Obligations restricting the payment of dividends by any Subsidiary to the Company except those imposed by Applicable Insurance Regulatory Authorities), and (3) if, but only if, at the date of payment thereof and both before and after giving effect to the payment thereof there does not exist an Event of Default or Potential Default, dividends payable by the Company to its shareholders. 9(f) Purchase or Retirement of Stock. Acquire, purchase, redeem or retire any shares of its capital stock now or hereafter outstanding at any time at which there shall exist an Event of Default or Potential Default. 9(g) Investments; Advances. And shall not permit any Subsidiary to, make or commit to make any advance, loan or extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of, or make any other investment in, any Person other than: (1) Extensions of credit to customers in the ordinary course of the title insurance business and ancillary or related lines of business; (2) Extensions of credit and capital contributions to and investments in Subsidiaries; (3) Advances to and investments by the Company in GFI from and after December 31, 1997 in an outstanding aggregate dollar amount which when taken with the aggregate dollar amount of outstanding guaranties and other contingent liabilities 25 26 of the Company for Indebtedness of GFI to non-Affiliates incurred or assumed from and after December 31, 1997 does not exceed $35,000,000.00; (4) Note and loan receivables held by the Company and Subsidiaries (other than GFI) with an aggregate book value, determined in accordance with GAAP, for the Company and all such Subsidiaries not to exceed $20,000,000.00; (5) Direct and indirect investments in real estate in an aggregate amount not to exceed $10,000,000.00; (6) Primary Quality Investments; (7) Secondary Quality Investments with an aggregate cost not to exceed sixty six percent (66%) of the Company's Effective Tangible Net Worth; provided, however, that such Secondary Quality Investments shall be diversified such that no single such Secondary Quality Investment with a cost in excess of five percent (5%) of the Company's Effective Tangible Net Worth shall be in any single Person, except that the Company may make investments in Secondary Quality Investments which do not meet such diversification requirement so long as the aggregate cost of such Secondary Quality Investments does not exceed twenty five percent (25%) of the Company's Effective Tangible Net Worth; (8) Other debt and equity investments which are not traded in recognized public markets in an aggregate cost not to exceed that amount which when added to the aggregate cost of Secondary Quality Investments which do not meet the diversification requirements of the proviso of subparagraph (7) above would exceed twenty five percent (25%) of the Company's Effective Tangible Net Worth; (9) Investments in American Title Company in existence on the Effective Date, as such investments may be increased in the event of the sale of National Title Company of New York; and (10) Investments consisting of Permitted Acquisitions. 9(h) Sale of Assets. And shall not permit any Subsidiary to, sell, lease, assign, transfer or otherwise dispose of any of its assets (other than obsolete or worn out property), whether now owned or hereafter acquired, other than in the ordinary course of business as presently conducted and at fair market value; provided, however, that the Company and its Subsidiaries may sell the stock of Subsidiaries (other than the Pledged Subsidiaries) at fair market value and provided that prior to and after giving effect to such sale there does not exist an Event of Default or Potential Default. 9(i) Restriction on Acquisitions. And shall not permit any Subsidiary to, acquire more than fifty percent (50%) in fair market value of equity interests in or assets of any Person, whether in a single transaction or a series of transactions, unless such acquisition shall constitute a Permitted Acquisition. 26 27 9(j) Capital Expenditures. And shall not permit any Subsidiary to, make Capital Expenditures in excess of $20,000,000.00 in the aggregate for the Company and all Subsidiaries during any fiscal year; provided, however, that the limitations contained in this Paragraph 9(j) shall not apply to Capital Expenditures associated with Permitted Acquisitions. 9(k) Minimum Effective Tangible Net Worth. Permit at any date the Company's Effective Tangible Net Worth to be less than: (1) $206,000,000.00, plus (2) fifty percent (50%) of consolidated Net Profit After Taxes of the Company for each fiscal quarter, determined at the end of each fiscal quarter beginning with the fiscal quarter ending March 31, 1998, plus (3) one hundred percent (100%) of the net proceeds of any equity offering of the Company or the conversion of debt into equity, consummated following the Effective Date, plus (4) one hundred percent (100%) of any increase in the equity of the Company related to the valuation of stock issued for the purposes of consummating any Permitted Acquisition following the Effective Date. 9(l) Minimum Net Worth of FNTC. Permit at any date FNTC's net worth, determined in accordance with GAAP, to be less than: (1) $26,000,000.00, plus (2) fifty percent (50%) of Net Profits After Taxes of FNTC for each fiscal quarter, determined at the end of each fiscal quarter beginning with the fiscal quarter ending March 31, 1998. 9(m) Leverage Ratio. Permit at any date the Company's ratio of Debt to Effective Tangible Net Worth to be greater than 1.15:1.00. 9(n) Minimum Cash Flow Coverage Ratio. Permit as of the last day of any fiscal quarter, the ratio of: (1) Adjusted Cash Flow of the Company during such fiscal quarter and the immediately preceding three fiscal quarters, to (2) The sum of, during such fiscal quarter and the immediately preceding three fiscal quarters: (i) Adjusted Scheduled Principal Payments, plus (ii) interest expense (excluding amortization of the original issue discount on the LYONs during such period), plus (iii) net claims paid and net credit write-offs, plus (iv) dividends paid by the Company, to be less than 1.20:1.00. 9(o) Minimum Statutory Surplus. Permit any date the aggregate Statutory Surplus of FNNEW and FNTIC to be less than $75,000,000.00. 9(p) Minimum Primary Investment Portfolio. Permit at any date the fair market value of Primary Quality Investments held by the Company to be less than reserves for claim losses, determined in accordance with GAAP. 9(q) Subordinated Debt. Make or permit to be made any prepayment on or repurchase any of the LYONs or make any prepayment on or repurchase any other 27 28 Subordinated Debt or amend or consent to the amendment or waiver of any term or provision of the Subordinated LYONs Debt Indenture if prior to or after giving effect to such action there exists an Event of Default or Potential Default. 9(r) Restriction on Negative Pledges. And will not permit any Subsidiary to, grant, enter into or permit to remain in effect any agreement with any Person (other than the Agent and the Lenders pursuant to the Negative Pledge Agreements and Paragraph 9(a) above) which would have the effect of prohibiting or restricting in any manner the Company or any of the Pledged Subsidiaries from granting to the Agent for the benefit of the Lenders such Liens upon assets and properties of the Company and the Pledged Subsidiaries as the Company, such Pledged Subsidiaries and the Lenders might otherwise agree. 9(s) Formation of Additional Subsidiaries. Following the Effective Date form, or permit any Subsidiary to form, any additional Subsidiary other than in connection with Permitted Acquisitions. 10. Events of Default. Upon the occurrence of any of the following events (an "Event of Default"): 10(a) The Company shall fail to pay any principal on the Loans on the date when due or fail to pay within five days of the date when due any other Obligation; or 10(b) Any representation or warranty made by the Company in any Loan Document shall be inaccurate or incomplete in any material respect on or as of the date made or deemed made; or 10(c) The Company shall fail to maintain its corporate existence or the corporate existence of any Pledged Subsidiary or shall default in the observance or performance of, or there shall otherwise occur a breach of, any covenant or agreement contained in Paragraph 9 above; or 10(d) The Company shall fail to observe or perform any other term or provision contained in the Loan Documents and such failure shall continue for fifteen (15) days after the Company became aware of such failure; or 10(e) The Company or any Subsidiary shall default in any payment of principal of or interest on any Indebtedness (other than the Obligations) in an aggregate amount for the Company and all of its Subsidiaries in excess of $1,000,000.00 (and any grace period applicable thereto shall have expired) or any other event shall occur, the effect of which is to permit such Indebtedness to be declared or otherwise to become due prior to its stated maturity; or 10(f) (1) The Company or any of its Subsidiaries, shall commence any case, proceeding or other action (i) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or 28 29 seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Company or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (2) there shall be commenced against the Company or any of its Subsidiaries, any case, proceeding or other action of a nature referred to in clause (1) above which (i) results in the entry of an order for relief or any such adjudication or appointment, or (ii) remains undismissed, undischarged or unbonded for a period of thirty (30) days; or (3) there shall be commenced against the Company or any of its Subsidiaries, any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or substantially all of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, stayed, satisfied or bonded pending appeal within sixty (60) days from the entry thereof; or (4) the Company or any of its Subsidiaries, shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in (other than in connection with a final settlement), any of the acts set forth in clause (1), (2) or (3) above; or (5) the Company or any of its Subsidiaries, shall generally not, or shall be unable to, or shall admit in writing its inability to pay its debts as they become due; or 10(g) (1) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (2) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or nor waived, shall exist with respect to any Plan, (3) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or institution of proceedings is, in the reasonable opinion of the Agent, likely to result in the termination of such Plan for purposes of Title IV of ERISA, and, in the case of a Reportable Event, the continuance of such Reportable Event unremedied for ten days after notice of such Reportable Event pursuant to Section 4043(a), (c) or (d) of ERISA is given or the continuance of such proceedings for ten days after commencement thereof, as the case may be, (4) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (5) any withdrawal liability to a Multiemployer Plan shall be incurred by the Company or (6) any other event or condition shall occur or exist; and in each case in clauses (1) through (6) above, such event or condition, together with all other such events or conditions, if any, is likely to subject the Company or any of its Subsidiaries to any tax, penalty or other liabilities in the aggregate material in relation to the business, operations, property or financial or other condition of the Company, any Pledged Subsidiary or the Company and its Subsidiaries taken as a whole; or 10(h) One or more judgments or decrees shall be entered against the Company or any of its Subsidiaries and such judgments or decrees (other than decrees involving amounts in the aggregate of less than $5,000,000.00) shall not have been vacated, discharged, stayed, satisfied or bonded pending appeal within thirty (30) days from the entry thereof or in any event later than five days prior to the date of any proposed sale thereunder; or 29 30 10(i) Any Pledged Subsidiary shall fail to observe or perform any provision of its Negative Pledge Agreement or shall attempt to rescind or revoke such Negative Pledge Agreement; or 10(k) There shall occur a Change of Control; THEN, automatically upon the occurrence of an Event of Default under Paragraph 10(f) above, at the option of any Lender upon the occurrence of an Event of Default under Paragraph 10(a) above and, in all other cases, at the option of the Majority Lenders, each Lender's obligation to make Loans shall terminate and the principal balance of outstanding Loans and interest accrued but unpaid thereon and all other Obligations shall become immediately due and payable, without demand upon or presentment to the Company, which are expressly waived by the Company and the Agent and the Lenders may immediately exercise all rights, powers and remedies available to them at law, in equity or otherwise, including, without limitation, pursuant to the Stock Pledge Agreement. 11. The Agent. 11(a) Appointment. Each Lender hereby irrevocably designates and appoints the Agent as the agent of such Lender under the Loan Documents and each such Lender hereby irrevocably authorizes the Agent, as the agent for such Lender, to take such action on its behalf under the provisions of the Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of the Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in the Loan Documents, the Agent shall not have any duties or responsibilities, except those expressly set forth herein or therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into the Loan Documents or otherwise exist against the Agent. The Company shall pay to the Agent an agency fee in such amount and at such times as the Agent and the Company may from time to time agree in writing. 11(b) Delegation of Duties. The Agent may execute any of its duties under the Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 11(c) Exculpatory Provisions. Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (1) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with the Loan Documents (except for its or such Person's own gross negligence or willful misconduct), or (2) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Company or any officer thereof contained in the Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with the Loan Documents or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of the Loan Documents or for any 30 31 failure of the Company to perform its obligations hereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, the Loan Documents or to inspect the properties, books or records of the Company. 11(d) Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certification, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation reasonably believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Company), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any note as the owner thereof for all purposes. As to the Lenders: (1) the Agent shall be fully justified in failing or refusing to take any action under the Loan Documents unless it shall first receive such advice or concurrence of the Majority Lenders or all of the Lenders, as appropriate, or it shall first be indemnified to its satisfaction by the Lenders ratably in accordance with their respective Percentage Shares against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any action (except for liabilities and expenses resulting from the Agent's gross negligence or willful misconduct), and (2) the Agent shall in all cases be fully protected in acting, or in refraining from acting, under the Loan Documents in accordance with a request of the Majority Lenders or all of the Lenders, as appropriate, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders. 11(e) Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Potential Default or Event of Default hereunder unless the Agent has received notice from a Lender or the Company referring to the Loan Documents, describing such Potential Default or Event of Default and stating that such notice is a "notice of default." In the event that the Agent receives such a notice, the Agent shall give notice thereof to the Lenders. The Agent shall take such action with respect to such Potential Default or Event of Default as shall be reasonably directed by the Majority Lenders provided that such action is consistent with the provisions of this Agreement; provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Potential Default or Event of Default as it shall deem advisable in the best interest of the Lenders. 11(f) Non-Reliance on Agent and Other Lenders. Each Lender expressly acknowledges that neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Company, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Company and made its own decision to make its loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently 31 32 and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of the Company which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 11(g) Indemnification. The Lenders agree to indemnify the Agent in its capacity as such (to the extent not reimbursed by the Company and without limiting the obligation of the Company to do so), ratably according to the respective amounts of their Percentage Shares, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including without limitation at any time following the payment of the Obligations) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. The agreements in this subsection shall survive the payment of the Obligations. 11(h) Agent in Its Individual Capacity. The Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Company as though the Agent were not the Agent hereunder. With respect to such loans made or renewed by them, the Agent shall have the same rights and powers under the Loan Documents as any Lender and may exercise the same as though it were not the Agent, and the terms "Lender" and "Lenders" shall include the Agent in its individual capacity. 11(i) Successor Agent. The Agent may resign as Agent under the Loan Documents upon sixty (60) days' notice to the Lenders and agrees that it will so resign in the event it ceases to hold any Percentage Share of the Obligations. The Agent may be removed from such capacity in the event the Lenders (other than the Agent) shall determine in their reasonable business judgment that the Agent has consistently failed to perform the obligations of the Agent hereunder. If the Agent shall resign or be removed as provided herein, then the Lenders (other than the Agent) shall appoint from among the Lenders a successor agent or, if such Lenders are unable to agree on the appointment of a successor agent, the Agent shall appoint a successor agent for the Lenders (which successor agent shall, in either case and assuming that there does not exist a Potential Default or Event of Default, be reasonably acceptable to the Company), whereupon such successor agent shall succeed to the rights, powers and duties of the Agent, and the term "Agent" shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, 32 33 without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any of the Loan Documents or successors thereto. After any retiring Agent's resignation hereunder as Agent, the provisions of this Paragraph 11 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Loan Documents. 12. Additional Lenders; Assignments and Participations. 12(a) Addition of New Lender. (1) Any Lender (an "Assigning Lender") may at any time propose that one or more financial institutions (each, an "Applicant Financial Institution") become an additional Lender hereunder by way of assignment by such Assigning Lender of all or a portion of such Assigning Lender's Maximum Commitment by notifying the Agent of the identity of such Applicant Financial Institution and such Applicant Financial Institution's proposed Maximum Commitment. The addition of any Applicant Financial Institution shall be subject to: (i) The prior written consent of the Agent and, but only if there shall not exist an Event of Default or Potential Default, the Company, no such consent to be unreasonably withheld; and (ii) Delivery of each of the items and the occurrence of each of the events described in subparagraph (2) below. (2) Assuming delivery of the consent of the Agent as required pursuant to subparagraph (1)(i) above, the Agent and the Assigning Lender shall mutually agree on the Adjustment Date on which such Applicant Financial Institution shall become a party hereto and a Lender hereunder. On such Adjustment Date: (i) The Agent shall deliver to the Company and each of the Lenders a replacement Commitment Schedule to be effective as of such Adjustment Date, reflecting the Lenders' respective Maximum Commitments and Percentage Shares after giving effect to the assignment. (ii) No later than 11:30 a.m. (Los Angeles time) on such Adjustment Date, such Applicant Financial Institution shall pay to the Agent for delivery to the Assigning Lender an amount equal to such Applicant Financial Institution's Percentage Share of Loans outstanding held by the Assigning Lender. The Agent shall thereupon remit such amount to the Assigning Lender. Following such Adjustment Date, fees and interest accrued on the Obligations to but not including such Adjustment Date shall be payable to the Lenders in accordance with their respective Percentage Shares prior to such Adjustment Date before giving effect to the readjustment thereof pursuant to the Commitment Schedule provided by the Agent on such Adjustment Date. 33 34 (iii) The Agent, the Company, the Assigning Lender and the Applicant Financial Institution shall execute and deliver an Assignment and Acceptance Agreement, which Assignment and Acceptance Agreement shall constitute an amendment to this Agreement and the other Loan Documents to the extent necessary to reflect the inclusion of the Applicant Financial Institution as a Lender hereunder. (iv) The Applicant Financial Institution shall pay to the Agent a registration fee of $3,500.00. Subject to the requirements described above, on the Adjustment Date the Applicant Financial Institution shall become a party hereto and a Lender hereunder and shall be entitled to all rights, benefits and privileges accorded a Lender under the Loan Documents and shall be subject to all obligations of a Lender under the Loan Documents. 12(b) Assignments Among Existing Lenders. Any Lender may at any time agree to assign a portion of such Lender's Maximum Commitment and Percentage Share to one or more of its Affiliates or to another existing Lender (a "Transferee Lender"). In such event, such Lender and the Transferee Lender shall so notify the Agent and the Company of the Adjustment Date on which such assignment is to be effective. On such Adjustment Date: (1) The Company shall deliver to the Agent, and each of the Lenders a Commitment Schedule to be effective as of such Adjustment Date, reflecting the Aggregate Credit Limit and the Lenders' respective Maximum Commitments and Percentage Shares. (2) The Agent, the Company, the assigning Lender and the Transferee Lender shall execute and deliver an Assignment and Acceptance Agreement, which shall constitute an amendment to this Agreement and the other Loan Documents to the extent necessary to reflect such transfer. (3) No later than 12:30 p.m. (Los Angeles time) on such Adjustment Date, the Transferee Lender shall pay to the Agent an amount equal to such Transferee Lender's Percentage Share of Loans outstanding in excess of such Transferee Lender's previous Percentage Share thereof. The Agent shall thereupon remit to the transferring Lender the amount thereof. 12(c) Minimum Loan Commitment. Notwithstanding anything to the contrary contained herein, the inclusion of any Applicant Financial Institution as a Lender hereunder pursuant to Paragraph 12(a) above and the assignment by an existing Lender of a portion of such Lender's Maximum Commitment to a Transferee Lender pursuant to Paragraph 12(b) above shall be subject to the following restrictions: (1) If an Applicant Financial Institution is acquiring a portion of an existing Lender's Maximum Commitment by way of an assignment from such existing Lender, then such assignment of Maximum Commitment must be in the minimum 34 35 amount of $5,000,000.00 (or if in a higher amount, in integral multiples of $1,000,000.00 in excess thereof) and such existing Lender must continue to hold a Maximum Commitment of not less than $5,000,000.00 following the consummation of the contemplated assignment; (2) If an existing Lender is assigning a portion of its Maximum Commitment to a Transferee Lender, such assignment of Maximum Commitment is in the minimum amount of $5,000,000.00 (or if in a higher amount, in integral multiples of $1,000,000.00 in excess thereof) and such existing Lender shall continue to hold a Maximum Commitment of not less than $5,000,000.00 following the consummation of the contemplated assignment. 12(d) Sub-Participations by Lenders. Any Lender may at any time sell participating interests in any of the Obligations held by such Lender and its Maximum Commitment hereunder; provided, however, that: (1) No participation contemplated by this Paragraph 12(d) shall relieve such Lender from its obligations hereunder or under any other Loan Document; (2) Such Lender shall remain solely responsible for the performance of such obligations; (3) The Company, the Agent, and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents; and (4) The participation agreement or other document evidencing the sale of such participating interest shall not require the Lender to obtain the consent of the purchaser thereof to any amendment or waiver with respect to the Loan Documents other than as to amendments and waivers requiring the consent of one hundred percent (100%) of the Lenders pursuant to Paragraph 13(b) below. 12(e) Federal Reserve Bank. Notwithstanding the provisions of Paragraphs 12(a) and 12(b) above, any Lender may at any time pledge or assign all or any portion of such Lender's rights under this Agreement and the other Loan Documents to a Federal Reserve Bank. 13. Miscellaneous Provisions. 13(a) No Assignment. The Company may not assign its rights or obligations under this Agreement or the other Loan Documents without the prior written consent of one hundred percent (100%) of the Agent and the Lenders. Any attempted assignment in violation of this Paragraph 13(a) shall be automatically deemed null and void. Subject to the foregoing, all provisions contained in this Agreement or any document or agreement referred to herein or relating hereto shall inure to the benefit of each Lender, its successors and assigns, and shall be binding upon the Company, its successors and assigns. 35 36 13(b) Amendment. Neither this Agreement nor any other Loan Document may be amended or terms or provisions hereof waived unless such amendment or waiver is in writing and signed by the Majority Lenders, the Agent and the Company; provided, however, that without the prior written consent of one hundred percent (100%) of the Agent and the Lenders and (other than with respect to subparagraph (3) below) the Company, no amendment or waiver shall: (1) reduce the principal of, or rate of interest or fees on, the Loans or extend or otherwise modify the required amount or due date for any Loan, (2) modify any Lender's Maximum Commitment or Percentage Share (except as the result of an assignment permitted under Paragraph 12 above), (3) modify any provision of the Loan Documents requiring one hundred percent (100%) of the Lenders to act, (4) modify the definition of "Majority Lenders," (5) release any Pledged Subsidiary from its obligations under its Negative Pledge Agreement or release any collateral at any time held for the Obligations, or (6) amend this Paragraph 13(b). It is expressly agreed and understood that the failure by the required Lenders to elect to accelerate amounts outstanding hereunder and/or to terminate the obligation of the Lenders to make Loans hereunder shall not constitute an amendment or waiver of any term or provision of this Agreement. 13(c) Cumulative Rights; No Waiver. The rights, powers and remedies of the Lenders hereunder and under the other Loan Documents are cumulative and in addition to all rights, power and remedies provided under any and all agreements between the Company and the Lenders relating hereto, at law, in equity or otherwise. Any delay or failure by the Lenders to exercise any right, power or remedy shall not constitute a waiver thereof by the Lenders, and no single or partial exercise by the Lenders of any right, power or remedy shall preclude other or further exercise thereof or any exercise of any other rights, powers or remedies. 13(d) Entire Agreement. This Agreement and the other Loan Documents embody the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof and thereof. 13(e) Survival. All representations, warranties, covenants and agreements contained herein and in the other Loan Documents on the part of the Company and the Pledged Subsidiaries shall survive the termination of this Agreement and shall be effective until the Obligations are paid and performed in full or longer as expressly provided herein. 13(f) Notices. All notices given by any party to the others under any of the Loan Documents shall be in writing unless otherwise provided for herein, delivered by facsimile transmission, by personal delivery or by overnight courier, addressed to the party as set forth on Schedule I attached hereto, as such Schedule I may be amended from time to time. Any party may change the address to which notices are to be sent by notice of such change to each other party given as provided herein. 13(g) Governing Law. This Agreement and the other Loan Documents shall be governed by and construed in accordance with the laws of the State of California without giving effect to its choice of law rules. 36 37 13(h) Counterparts. This Agreement and the other Loan Documents may be executed in any number of counterparts, all of which together shall constitute one agreement. 13(i) Sharing of Payments. If any Lender shall receive and retain any payment, whether by setoff, application of deposit balance or security, or otherwise, in respect of the Obligations in excess of such Lender's Percentage Share thereof, then such Lender shall purchase from the other Lenders for cash and at face value and without recourse, such participation in the Obligations held by them as shall be necessary to cause such excess payment to be shared ratably as aforesaid with each of them; provided, that if such excess payment or part thereof is thereafter recovered from such purchasing Lender, the related purchases from the other Lenders shall be rescinded ratably and the purchase price restored as to the portion of such excess payment so recovered, but without interest. Each Lender is hereby authorized by the Company to exercise any and all rights of setoff, counterclaim or bankers' lien against the full amount of the Obligations, whether or not held by such Lender. Each Lender hereby agrees to exercise any such rights first against the Obligations and only then to any other Indebtedness of the Company to such Lender. 13(j) Consent to Jurisdiction. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE CENTRAL DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE LENDERS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND THE LENDERS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE LENDERS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW. 13(k) Waiver of Jury Trial. THE COMPANY, THE LENDERS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE LENDERS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY 37 38 IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 13(l) Indemnity. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify and hold the Agent and each Lender and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including reasonable attorney's fees and expenses, including the documented cost of internal counsel) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Lender) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any insolvency proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, however, that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Paragraph 13(l) shall survive payment of all other Obligations. 13(m) Marshalling; Payments Set Aside. Neither the Agent nor the Lenders shall be under any obligation to marshall any assets in favor of the Company or any other Person or against or in payment of any or all of the Obligations. To the extent that the Company makes a payment or payments to the Agent or the Lenders (through the Agent), or the Agent on behalf of the Lenders enforces their Liens or exercises their rights of set-off, and such payment or payments or the proceeds of such enforcement or set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent in its discretion) to be repaid to a trustee, receiver or any other party in connection with any insolvency proceeding, or otherwise, then (1) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or set-off had not occurred, and (2) each Lender severally agrees to pay to the Agent upon demand its ratable share of the total amount so recovered from or repaid by the Agent. 13(n) Set-off. In addition to any rights and remedies of the Lenders provided by law, if an Event of Default exists, each Lender is authorized at any time and from 38 39 time to time, without prior notice to the Company, any such notice being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing to, such Lender to or for the credit or the account of the Company against any and all Obligations owing to such Lender, now or hereafter existing, irrespective of whether or not the Agent or such Lender shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Lender agrees promptly to notify the Company and the Agent after any such set-off and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 13(o) Severability. The illegality or unenforceability of any provision of this Agreement or any other Loan Document or any instrument or agreement required hereunder or thereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions hereof or thereof. 13(p) No Third Parties Benefited. This Agreement and the other Loan Documents are made and entered into for the sole protection and legal benefit of the Company, the Lenders and the Agent, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. Neither the Agent nor any Lender shall have any obligation to any Person not a party to this Agreement or other Loan Documents. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. FIDELITY NATIONAL FINANCIAL, INC. a Delaware corporation By: /s/ A. D. Meadows Name: Allen d. Meadows Title: EVP & CFO SANWA BANK CALIFORNIA, as Agent and as a Lender By: /s/ Craig Ciebiera Craig Ciebiera, Vice President 39 40 COMERICA BANK - CALIFORNIA, as a Lender By: /s/ Mario DePasquale Name: Mario DePasquale Title: Assistant Vice President By: _________________________________ Name: _________________________________ Title: _________________________________ FIRST BANK & TRUST, as a Lender By: /s/ K. P. Balkrishna Name: K.P. Balkrishna Title: Senior Vice President SUN TRUST BANK, CENTRAL FLORIDA, N.A., as a Lender By: /s/ Janet P. Sammons Name: Janet P. Sammons Title: Vice President THE SUMITOMO BANK, LIMITED, LOS ANGELES BRANCH, as a Lender By: /s/ Kuzo Masaki Name: Kuzo Masaki 40 41 Title: General Manager WELLS FARGO BANK, N.A., as a Lender By: /s/ Timothy A. McDevitt Name: Timothy A. McDevitt Title: Vice President By: /s/ Donald A. Hartmann Name: Donald A. Hartmann Title: Senior Vice President 41 42 TABLE OF EXHIBITS AND SCHEDULES Exhibit A Schedule of Litigation Exhibit B Schedule of Subsidiaries Schedule I Schedule of Addresses for Notice Purposes Annex 1 Glossary, with Exhibits 42 43 ANNEX 1: GLOSSARY THIS GLOSSARY is attached to and incorporated by reference in that certain Credit Agreement dated as of August 1, 1998 by and among FIDELITY NATIONAL FINANCIAL, INC. (the "Company"), the Lenders from time to time party thereto (the "Lenders") and SANWA BANK CALIFORNIA, as Agent for the Lenders. For purposes of the Credit Agreement and the other Loan Documents, the following capitalized terms shall have the following meanings: "Adjusted Cash Flow" shall mean for any fiscal period: (a) consolidated Cash Flow of the Company for such fiscal period, less (b) amortization of the original issue discount on the LYONs during such fiscal period, and plus (c) provision for claim losses and provision for credit losses, determined in accordance with GAAP for such period. "Adjusted Scheduled Principal Payments" shall mean for any fiscal period: (a) all regularly scheduled payments of principal required to be made on account of Indebtedness of the Company and its Subsidiaries during such fiscal period, less (b) principal payments required to be made on GFI Warehouse Debt (whether as a result of the maturity thereof or otherwise), and less (c) principal payments on the GFI Class A Notes. "Adjustment Date" shall mean the date as of which the addition of a new Lender or assignment among existing Lenders is to be effective as provided more particularly in Paragraph 12 of the Agreement. "Affiliate" shall mean, as to any Person, any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with, such Person. "Control" as used herein means with respect to any business entity the power to direct the management and policies of such business entity. "Agent" shall have the meaning given such term in the introductory paragraph of the Agreement and shall include any successor to Sanwa as the initial "Agent" under the Agreement. "Agent's Fee Letter" shall mean a fee letter in form and substance satisfactory to the Agent setting forth the fees to be paid to the Agent with respect to the credit facility evidenced by the Agreement. "Aggregate Credit Limit" shall mean $100,000,000.00, as such amount may be increased or decreased by written agreement of the Agent, the Company and one hundred percent (100%) of the Lenders. "Applicable Eurodollar Rate" shall mean, with respect to any Eurodollar Loan for the Interest Period applicable to such Eurodollar Loan, the rate per annum A-1 44 (rounded upward, if necessary, to the next higher 1/16 of one percent) calculated as of the first day of such Interest Period in accordance with the following formula: Applicable Eurodollar Rate = ER + 1.15 ---- 1-ERP where ER = Eurodollar Rate ERP = Eurodollar Reserve Percentage "Applicable Insurance Regulatory Authority" shall mean, when used with respect to any Significant Insurance Subsidiary, the insurance department or similar administrative agency or authority located in the jurisdiction in which such Significant Insurance Subsidiary is domiciled. "Applicant Financial Institution" shall have the meaning given such term in Paragraph 12(a) of the Agreement. "Assigning Lender" shall have the meaning given such term in Paragraph 12(a) of the Agreement. "Assignment and Acceptance Agreement" shall mean an agreement in the form of that attached hereto as Exhibit A. "Authorized Officer" shall mean any of the chief financial officer, executive vice president - finance, president, chief executive officer or chief operating officer of the Company. "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banks in Los Angeles, California are authorized or obligated to close their regular banking business. "Capital Expenditures" shall mean, for any period, the aggregate of all expenditures by the Company and its Subsidiaries for the acquisition or leasing of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) which should be capitalized under GAAP on a consolidated balance sheet of the Company and its Subsidiaries. For the purpose of this definition, the purchase price of equipment which is purchased simultaneously with the trade-in of existing equipment owned by the Company or any of its Subsidiaries or with insurance proceeds shall be included in Capital Expenditures only to the extent of the gross amount of such purchase price less the credit granted by the seller of such equipment for such equipment being traded in at such time, or the amount of such proceeds, as the case may be. "Cash Flow" shall mean for any period the sum of (a) net income (or net loss) plus (b) all amounts treated as expenses for interest, amortization and depreciation. A-2 45 "Change of Control" shall mean any of the following: (a) The acquisition by any other entity, individual or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") of beneficial ownership (as defined in Rule 13d-3 promulgated under the Exchange Act) of more than twenty percent (20%) of the common stock of the Company and/or other securities which have more than twenty percent (20%) of the combined voting power of the securities of the Company entitled to vote in the election of directors; or (b) The sale of all or substantially all of the assets of the Company to any other entity, individual or group except in a transaction whereby the holders of the common stock and/or other securities entitled to vote in the election of directors immediately prior to such transaction own, directly or indirectly, at least eight percent (80%) of all such securities immediately after giving effect to such transaction; or (c) If the Company shall cease to own directly one hundred percent (100%) of the outstanding capital stock of each of the Pledged Subsidiaries. "Closing Certificate" shall mean a certificate in the form of that attached hereto as Exhibit B. "Commitment Schedule" shall mean a schedule setting forth the current Aggregate Credit Limit and, for each Lender, such Lender's Maximum Commitment and Percentage Share, as such schedule may be modified from time to time consistent with the Loan Documents. "Commonly Controlled Entity" of a Person shall mean a Person, whether or not incorporated, which is under common control with such Person within the meaning of Section 414(c) of the Internal Revenue Code. "Contact Office" shall mean the office of the Agent located at 601 South Figueroa Street, W8-12, Los Angeles, California 90017 or such other office as the Agent may notify the Company and the Lenders from time to time in writing. "Contractual Obligation" as to any Person shall mean any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound. "Debt" shall mean at any date: (a) consolidated Total Liabilities of the Company, less (b) Total Liabilities of GFI, less (c) reserves for claim losses established in conformity with GAAP, and less (d) Subordinated Debt of the Company and its Subsidiaries. "Effective Fed Funds Rate" shall mean for any day, the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve A-3 46 System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York or, if such rate is not so published for any day that is a Business Day, the average of quotations for such day on such transactions received by the Agent from three Federal Funds brokers of recognized standing selected by the Agent. "Effective Date" shall mean the date on which all conditions precedent to the funding of the first Loan set forth in Paragraph 6(a) of the Agreement have been met to the satisfaction of the Agent and the Lenders. "Effective Tangible Net Worth" shall mean on any date: (a) the consolidated Tangible Net Worth of the Company, plus (b) Subordinated Debt of the Company and its consolidated Subsidiaries, less (c) the Tangible Net Worth of GFI, determined in accordance with GAAP. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may from time to time be supplemented or amended. "Eurodollar Business Day" shall mean a Business Day upon which commercial banks in London, England are open for domestic and international business. "Eurodollar Rate" shall mean, with respect to any Eurodollar Loan for the Interest Period applicable to such Eurodollar Loan, the rate for the applicable Interest Period shown on Page 1701 of the Knight-Ridder screen for the corresponding deposits of U.S. dollars three Business Days prior to the first day of such Interest Period or such rate as is otherwise determined by the Agent with reference to the British Banker's Association, or, if such rates are not available, the arithmetic average as determined by the Agent of the rates at which deposits in immediately available U.S. dollars in an amount equal to the amount of such Eurodollar Loan having a maturity approximately equal to such Interest Period are offered to three reference banks to be selected by the Bank in the London interbank market, at approximately 11:00 a.m. (London time) three Eurodollar Business Days prior to the first day of such Interest Period. "Eurodollar Rate Loans" shall mean Loans outstanding under the Agreement at such time as they are made and/or being maintained at a rate of interest based upon the Eurodollar Rate. "Eurodollar Reserve Percentage" shall mean with respect to an Interest Period for a Eurodollar Loan, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves and taking into account any transitional adjustments) which is imposed under Regulation D on eurocurrency liabilities. "Event of Default" shall have the meaning given such term in Paragraph 10 of the Agreement. A-4 47 "Existing Bridge Facility" shall mean the credit facility extended by Sanwa to the Company and evidenced by that certain Bridge Loan Note dated as of March 24, 1998 executed by the Company in favor of Sanwa. "Financial Covenant Compliance Certificate" shall mean a certificate in the form of that attached hereto as Exhibit C, demonstrating compliance by the appropriate Persons with the requirements of Paragraphs 9(g)(3), 9(g)(4), 9(g)(5), 9(g)(7), 9(g)(8), 9(j), 9(k), 9(l), 9(m), 9(n), 9(o) and 9(p) of the Agreement. "Floating Rate" shall mean on any day the higher of: (a) the rate of interest publicly announced by Sanwa from time to time as its "reference rate" as in effect at Sanwa's principal office in Los Angeles, California on such day, and (b) the Effective Fed Funds Rate on such day plus one half of one percent (0.50%). "Floating Rate Loans" shall mean Loans outstanding under the Agreement during such time as they are made and/or being maintained at a rate of interest based upon the Floating Rate. "FNNEW" shall mean Fidelity National Title Insurance Company of New York, a New York corporation. "FNTIC" shall mean Fidelity National Title Insurance Company, a California corporation. "FNTC" shall mean Fidelity National Title Company, a California corporation. "GAAP" shall mean generally accepted accounting principles in the United States of America in effect from time to time consistently applied. "GFI" shall mean Granite Financial, Inc., a Delaware corporation. "GFI Class A Notes" shall mean 6.33% Class A Lease-Backed Term Notes, Series 1996-1 Due November 20, 2001 issued pursuant to an Indenture dated as of april 1, 1996 among GF Funding Corp. I, Norwest Bank Minnesota, National Association, and Granite Financial, LLC. "GFI Warehouse Debt' shall mean Indebtedness of GFI consisting of short term working capital lines of credit. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, or any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Hazardous Materials" shall mean any flammable materials (excluding wood products normally used in construction), explosives, radioactive materials, hazardous wastes, toxic substances or related materials, including, without limitation, any A-5 48 substances defined as or included in the definitions of "hazardous substances," "Hazardous wastes," "hazardous materials," or toxic substances" under any applicable federal, state, or local laws or regulations. "Hazardous Materials Claims" shall mean any enforcement, cleanup, removal or other governmental or regulatory action or order with respect to the Property, pursuant to any Hazardous Materials Laws, and/or any claim asserted in writing by any third party relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Materials. "Hazardous Materials Laws" shall mean any applicable federal, state or local laws, ordinances or regulations relating to Hazardous Materials. "Indebtedness" of any Person shall mean all items of indebtedness which, in accordance with GAAP and practices, would be included in determining liabilities as shown on the liability side of a statement of condition of such Person as of the date as of which indebtedness is to be determined, including, without limitation, all obligations for money borrowed and capitalized lease obligations, and shall also include all indebtedness and liabilities of others assumed or guaranteed by such Person or in respect of which such Person is secondarily or contingently liable (other than by endorsement of instruments in the course of collection) whether by reason of any agreement to acquire such indebtedness or to supply or advance sums or otherwise. "Initial Collateral Documents" shall have the meaning given such term in Paragraph 5(a) of the Agreement. "Insurance Subsidiary" shall mean any Subsidiary of the Company which is a licensed insurance company or a licensed underwritten title company. "Interest Period" shall mean with respect to any Loan which is being maintained as a Eurodollar Rate Loan, the period commencing on the date such Loan is advanced and ending one, two, three, four or six months thereafter, as designated in the related Loan Request; provided, however, that: (a) any Interest Period which would otherwise end on a day which is not a Eurodollar Business Day shall be extended to the next succeeding Eurodollar Business Day unless by such extension it would fall in another calendar month, in which case such Interest Period shall end on the immediately preceding Eurodollar Business Day, (b) any Interest Period which begins on a day for which there is no numerically corresponding day in the calendar month in which such Interest Period is to end shall, subject to the provisions of clause (a) of the Agreement, end on the last day of such calendar month, and (c) no Interest Period shall end after the Maturity Date or. "Interim Date" shall mean June 30, 1998. A-6 49 "Licenses" shall mean any licenses or certificates of authority from any Applicable Insurance Regulatory Authority or permits or authorizations to transact title insurance business or to act as an insurance agent or broker. "Lien" shall mean any security interest, mortgage, pledge, lien, claim on property, charge or encumbrance (including any conditional sale or other title retention agreement), any lease in the nature thereof, and the filing of or agreement to give any financial statement under the Uniform Commercial Code of any jurisdiction. "Loan Documents" shall mean the Agreement, the Stock Pledge Agreement, the Negative Pledge Agreements and each other document, instrument or agreement executed by the Company in connection herewith or therewith, as any of the same may be amended, extended or replaced from time to time. "Loan Request" shall mean a request for a Loan in substantially the form of Exhibit D attached hereto. "Loans" shall mean, collectively and severally, the Revolving Loans and the Term Loan. "LYONs" shall mean those certain Liquid Yield Option Notes issued by the Company pursuant to the Subordinated LYONs Debt Indenture. "Majority Lenders" shall mean the Lenders holding not less than sixty-six and two thirds percent (66.667%) of the Percentage Shares. "Maturity Date" shall mean the earlier of: (a) July 31, 2001, as such date may be extended from time to time in writing by one hundred percent (100%) of the Lenders, in their sole discretion, and (b) the date the Lenders terminate their obligation to make further Loans under the Agreement pursuant to Paragraph 10 of the Agreement. "Maximum Commitment" shall mean , with respect to any Lender on any date, the dollar amount specified as such Lender's "Maximum Commitment" on the current Commitment Schedule, as such amount may be increased pursuant to an assignment of additional Maximum Commitment to such Lender pursuant to Paragraph 13(b) of the Agreement or otherwise increased or decreased by written agreement of the Company, the Agent and one hundred percent (100%) of the Lenders. "Multiemployer Plan" as to any Person shall mean a Plan of such Person which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NAIC" shall mean the National Association of Insurance Commissioners and any successor thereto. "Negative Pledge Agreement" shall mean an agreement in the form of that attached hereto as Exhibit E. A-7 50 "Net Profit After Taxes" shall mean for any Person for any fiscal period, the pre-tax net income (or net loss) of such Person for such period, determined in accordance with GAAP, less all accrued taxes on or measured by income to the extent included in the determination of such net income (or loss); provided, however, that net income (or loss) shall be computed without giving effect to extraordinary losses or extraordinary gains, as determined under GAAP. "Obligations" shall mean any and all debts, obligations and liabilities of the Company to the Lenders (whether now existing or hereafter arising, voluntary or involuntary, whether or not jointly owed with others, direct or indirect, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished and later increased, created or incurred), arising out of or related to the Loan Documents. "Other Permitted Secured and Unsecured Debt" shall mean Indebtedness described on Exhibit F attached hereto. "Other Permitted Secured Debt" shall mean Indebtedness described as such on Exhibit F attached hereto. "PBGC" shall mean the Pension Benefit Negative Pledge Agreement Corporation established pursuant to Subtitle A of Title IV of ERISA and any successor thereto. "Percentage Share" shall mean, for any Lender at any date that percentage which the Maximum Commitment of such Lender at such date bears to the Aggregate Credit Limit on such date, as set forth in the most recent Commitment Schedule delivered by the Agent to the Company and the Lenders. "Permitted Acquisition" shall mean an acquisition by the Company or one of its Subsidiaries as to which each of the following statements is accurate and complete (and the Company by consummating such acquisition being automatically deemed to so represent and warrant to the Agent and the Lenders): (a) The acquisition is of an equity interest in or assets of a company which meets each of the following criteria: (1) The company's principal line of business is providing financial services to the public or, if the company's principal line of business is not providing financial services to the public, the total consideration to be paid by the Company or such Subsidiary for the subject equity interests or assets did not exceed the following limitations: (i) If the consideration is to be paid through the issuance of stock or warrants or other securities convertible into stock, the book value of such stock (or the stock into which such warrants or A-8 51 other securities are convertible), when taken together with the aggregate book value of all stock (or the stock into which such warrants or other securities are convertible) issued by the Company and its Subsidiaries in connection with the acquisition of equity interests in or assets of other non-financial services companies from and after December 31, 1997, will not exceed $25,000,000.00, or (ii) If the consideration is to be paid in cash, the dollar amount thereof when taken together with the aggregate dollar amount of cash consideration paid by the Company and its Subsidiaries in connection with the acquisition of equity interests in or assets of other non-financial services companies from and after December 31, 1997, will not exceed $10,000,000.00; (2) The company's ratio of Cash Flow to scheduled principal and interest payments required to be made on account of Indebtedness of such company as of the end of the most recent fiscal quarter of the company for such quarter and the immediately preceding three fiscal quarters was not less than 1.20:1.00; and (3) The company's ratio of Total Liabilities to Tangible Net Worth as of the end of the most recent fiscal quarter of the company was not more than 3.00:1.00. (b) If the consideration paid by the Company included the issuance of stock of the Company (or warrants or other securities convertible into stock of the Company), the book value of such stock (or the stock into which such warrants or other securities are convertible), when taken in the aggregate with the book value of all stock (and warrants or other convertible securities) issued by the Company in connection with acquisitions of all or substantially all of the stock or assets of companies after December 31, 1997 (other than GFI) did not exceed fifty percent (50%) of the Company's Effective Tangible Net Worth at the date of consummation of the subject acquisition. (c) The cash consideration paid by the Company in connection with such acquisition, when taken in the aggregate with the cash consideration paid by the Company in connection with acquisitions of all or substantially all of the stock or assets of companies after December 31, 1997 (other than GFI) did not exceed twenty five percent (25%) of the Company's Effective Tangible Net Worth at the date of consummation of the subject acquisition. (d) The book value of stock (or warrants or other convertible securities) to be issued or cash to be paid in connection with the subject acquisition, when taken in the aggregate book value of all stock (or warrants or other convertible securities) issued by the Company and its Subsidiaries and cash consideration paid by the Company and its Subsidiaries in consideration of acquisitions of all or substantially all of the stock or assets of companies after December 31, 1997 (other than GFI) did not exceed fifty A-9 52 percent (50%) of the Company's Effective Tangible Net Worth at the date of consummation of the subject acquisition. (e) Following the consummation of such acquisition and after giving effect thereto there does not exist an Event of Default or Potential Default. "Person" shall mean any corporation, natural person, firm, joint venture, partnership, limited liability company, trust, unincorporated organization, government or any department or agency of any government. "Plan" shall mean as to any Person, any pension plan that is covered by Title IV of ERISA and in respect of which such Person or a Commonly Controlled Entity of such Person is an "employer" as defined in Section 3(5) of ERISA. "Pledged Stock" shall have the meaning given such term in Paragraph 5(a) of the Agreement. "Pledged Subsidiaries" shall mean each of FNNEW, FNTIC and FNTC. "Potential Default" shall mean an event which but for the lapse of time or the giving of notice, or both, would constitute an Event of Default. "Primary Quality Investments" shall mean any of the following: (a) Operating deposit accounts maintained in the Company's name alone with FDIC member institutions; (b) Direct obligations of the United States of America or any agency thereof; (c) Certificates of deposit issued by FDIC member institutions rated at least A- by Standard and Poor's Corporation (or bearing an equivalent rating of another nationally recognized rating agency) with a maturity not to exceed ninety (90) days and in an aggregate dollar amount not to exceed $5,000,000.00 per issuing institution; (d) Commercial paper issued by obligors rated at least A- by Standard and Poor's Corporation (or bearing an equivalent rating of another nationally recognized rating agency) with a maturity not to exceed ninety (90) days and in an aggregate dollar amount not to exceed $5,000,000.00 per issuer/obligor; (e) Shares of money market funds in which the underlying investments are rated at investment grade by Standard and Poor's Corporation (or bearing an equivalent rating of another nationally recognized rating agency); and (f) Bonds and preferred stock rated at investment grade by Standard and Poor's Corporation (or bearing an equivalent rating of another nationally recognized A-10 53 rating agency) in an aggregate dollar amount not to exceed in any single issuer/obligor ten percent (10%) of the Company's Effective Tangible Net Worth. "Property" shall mean, collectively and severally, any and all real property, including all improvements and fixtures thereon, owned or occupied by the Company or any of its Subsidiaries. "Reference Rate" shall mean the fluctuating per annum rate announced from time to time by the Agent in Los Angeles, California, as its "Reference Rate". The Reference Rate is a rate set by the Agent based upon various factors including the Agent's costs and desired return, general economic conditions, and other factors, and is used as a reference point for pricing some loans, which may be priced at, of the Agreement or below the Reference Rate. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System (12 C.F.R. Section 221), as the same may from time to time be amended, supplemented or superseded. "Reportable Event" shall mean a reportable event as defined in Title IV of ERISA, except actions of general applicability by the Secretary of Labor under Section 110 of ERISA. "Requirements of Law" shall mean as to any Person the Certificate of Incorporation and ByLaws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation, or a final and binding determination of an arbitrator or a determination of a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Revolving Loan" shall have the meaning given such term in Paragraph 1(a) of the Agreement. "SAP" shall mean with respect to any Significant Insurance Subsidiary, the accounting procedures and practices prescribed or permitted by the Applicable Insurance Regulatory Authority for such Significant Insurance Subsidiary, applied on a consistent basis. "Secondary Quality Investments" shall mean debt and equity investments which are traded in recognized public markets but which do not qualify as Primary Quality Investments. "Significant Insurance Subsidiary" shall mean any of those Subsidiaries of the Company listed on Exhibit G attached hereto and any Subsidiary formed or acquired following the Effective Date which the Agent has designated as such. A-11 54 "Single Employer Plan" shall mean as to any Person any Plan of such Person which is not a Multiemployer Plan. "Statement Date" shall mean December 31, 1997. "Statutory Statement" shall mean with respect to any Significant Insurance Subsidiary, a statement of the condition and affairs of such Significant Insurance Subsidiary, prepared in accordance with SAP and filed with the Applicable Insurance Regulatory Authority for such Significant Insurance Subsidiary. "Statutory Surplus" shall mean with respect to any Significant Insurance Subsidiary at any date, the amount, determined in accordance with SAP, of such Significant Insurance Subsidiary's surplus as regards policy holders as of the last day of the fiscal quarter of such Significant Insurance Subsidiary ending on or most recently ended prior to such date. "Stock Pledge Agreement" shall mean an agreement in the form of that attached hereto as Exhibit H. "Subordinated Debt" shall mean Indebtedness of the Company subordinated to the Obligations pursuant to written subordination agreements in form and substance satisfactory to the Agent and the Majority Lenders, it being agreed and understood that Indebtedness of the Company evidenced by the LYONs shall constitute "Subordinated Debt" for all purposes of the Loan Documents. "Subordinated LYONs Debt Indenture" shall mean that certain Indenture dated as of February 1, 1995 by and between the Company and Chemical Bank, as Trustee, as the same may be amended from time to time. "Subsidiary" shall mean with respect to any Person: (a) any corporation more than fifty percent (50%) of the stock of which having by the terms thereof ordinary voting power to elect the board of directors, managers or trustees of such corporation shall, at the time as of which any determination is being made, be owned by such Person, either directly or through Subsidiaries of such Person (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency), and (b) any Person other than a corporation, including, without limitation, any partnership, joint venture or other business combination, whose management and policies are controlled by or under common control with such Person or any of the Subsidiaries of such Person. "Tangible Net Worth" shall mean for any Person at any time of determination, total assets (exclusive of equity investments in Subsidiaries and other Persons, notes receivable from Affiliates, goodwill, patents, trademarks, trade names, organization expense, treasury stock, unamortized debt discount and premium, deferred charges and other like intangibles) less Total Liabilities (including accrued and deferred income taxes but excluding Subordinated Debt), at such time. A-12 55 "Total Liabilities" shall mean for any Person at any time of determination, all liabilities of such Person which in accordance with GAAP would be shown on the liability side of a balance sheet of such Person but excluding Subordinated Debt, as determined in accordance with GAAP. "Transferee Lender" shall have the meaning given such term in Paragraph 12(b) of the Agreement. A-13 56 TABLE OF EXHIBITS TO GLOSSARY Exhibit A Form of Assignment and Acceptance Agreement Exhibit B Form of Closing Certificate Exhibit C Form of Financial Covenant Compliance Certificate Exhibit D Form of Loan Request Exhibit E Form of Negative Pledge Agreement Exhibit F Schedule of Permitted Other Secured and Unsecured Debt Exhibit G Schedule of Significant Insurance Subsidiaries Exhibit H Form of Stock Pledge Agreement
A-14 57 STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (the "Stock Pledge Agreement") is made and dated as of the 1st day of August, 1998 by and between FIDELITY NATIONAL FINANCIAL, INC. a Delaware corporation (the "Company"), and SANWA BANK CALIFORNIA, acting in its capacity as agent for the Lenders from time to time party to (and as the term "Lenders" and capitalized terms not otherwise defined herein are defined in) that certain Credit Agreement dated as of August 1, 1998 (as the same may be amended, extended and replaced from time to time, the "Credit Agreement") (Sanwa acting in such capacity being referred to herein as the "Agent"). RECITALS A. Pursuant to the Credit Agreement, the Lenders have agreed to extend credit to the Company and the Agent has agreed to act as agent for the Lenders in connection with such credit extension. B. As a condition precedent to the agreement of the Lenders to enter into the Credit Agreement, the Company is required, among other things, to execute and deliver to the Agent for the benefit of the Lenders this Stock Pledge Agreement. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. Appointment. By executing the Credit Agreement or otherwise becoming a Lender thereunder, each Lender shall automatically be deemed to have appointed the Agent to act as secured party, agent, custodian and bailee for the exclusive benefit of Lenders with respect to the Collateral (as defined in Paragraph 3 below). The Agent hereby accepts such appointment and agrees to maintain and hold all Collateral as secured party, agent, custodian and bailee for the exclusive benefit of the Lenders. The Agent agrees to act in accordance with this Stock Pledge Agreement and acknowledges and agrees that the Agent is not, and shall not at any time in the future be, subject with respect to the Collateral, in any manner or to any extent, to the direction or control of the Company except as expressly permitted hereunder and under the other Loan Documents. 2. Grant of Security Interest. The Company hereby pledges, mortgages, assigns and grants to the Agent for the equal, ratable benefit of the Lenders and to each of the Lenders in 58 accordance with their respective Percentage Shares, a first priority perfected security interest in the property described in Paragraph 3 below (collectively and severally, the "Collateral") to secure payment and performance of the Obligations. 3. Collateral. The Collateral shall consist of all now existing and hereafter arising right, title and interest of the Company in each of the following: (a) All now existing and hereafter outstanding capital stock of the Pledged Subsidiaries, and all new substituted and additional documents, instruments, and general intangibles issued with respect thereto (collectively and severally, the "Pledged Shares") and all now existing and hereafter arising rights of the holder of the Pledged Shares, including, without limitation, all voting and rights to and interest in all cash and noncash dividends and all other property now or hereafter distributable on account of or receivable with respect to any of the foregoing; and (b) All proceeds of the foregoing Collateral. For purposes of this Stock Pledge Agreement, the term "proceeds" shall mean whatever is receivable or received when Collateral or proceeds are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including return premiums, with respect to any insurance relating thereto. 4. Representations and Warranties. In addition to all representations and warranties of the Company set forth in the Loan Documents, which are incorporated herein by this reference, the Company hereby represents and warrants that: (a) The Company is the sole owner of and has good and marketable title to the Collateral (or, in the case of after-acquired Collateral, at the time the Company acquires rights in the Collateral, will be the sole owner thereof) and is the record and beneficial owner of the Pledged Shares; (b) Except for the security interest in favor of the Agent for the benefit of the Lenders granted pursuant hereto, no person has (or, in the case of after-acquired Collateral, at the time the Company acquires rights therein, will have) any right, title, claim or interest (by way of security interest or other lien or charge) in, against or to the Collateral; (c) All information heretofore, herein or hereafter supplied to the Agent or any Lender by or on behalf of the Company with respect to the Collateral is accurate and complete; (d) The Company has delivered to the Agent all instruments, chattel paper and other items of Collateral in which a security interest is or may be perfected by possession, and any certificate Pledged Shares together with such additional writings, including, without limitation, assignments and stock powers, with respect thereto as the Agent shall request; and (e) The Pledged Shares in the aggregate constitute all of the issued and outstanding shares of the Subsidiaries, have been validly issued and are fully paid and 2 59 nonassessable, and there are no outstanding options, warrants or other agreements with respect thereto. 5. Covenants and Agreements of the Company. In addition to all covenants and agreements of the Company set forth in the Loan Documents, which are incorporated herein by this reference, the Company hereby agrees: (a) To do all acts that may be necessary to maintain, preserve and protect the Collateral; (b) Not to use or permit any Collateral to be used unlawfully or in violation of any provision of this Stock Pledge Agreement, any other agreement with the Agent and/or the Lenders related hereto, or any Requirement of Law or Contractual Obligation affecting the Collateral; (c) To pay promptly when due all taxes, assessments, charges, encumbrances and Liens now or hereafter imposed upon or affecting any Collateral; (d) To appear in and defend any action or proceeding which may affect its title to or the Agent's interest on behalf of the Lenders in the Collateral; (e) Not to surrender or lose possession of (other than to the Agent), sell, encumber, lease, rent, or otherwise dispose of or transfer any Collateral or right or interest therein and to keep the Collateral free of all levies and security interests or other Liens or charges except the security interest in favor of the Agent for the benefit of the Lenders granted hereunder; (f) To account fully for and promptly deliver to the Agent, in the form received, all documents, chattel paper, instruments and agreements constituting Collateral hereunder and all proceeds of the Collateral received, all endorsed to the Agent or in blank, as requested by the Agent, and accompanied by such stock powers as appropriate and until so delivered all such documents, instruments, agreements and proceeds shall be held by the Company in trust for the Lenders, separate from all other property of the Company; (g) To keep separate, accurate and complete records of the Collateral and to provide the Agent and each of the Lenders with such records and such other reports and information relating to the Collateral as the Agent or any Lender may request from time to time; (h) To keep the records concerning the Collateral at the location referred to in Paragraph 8 below and not to remove such records from such location without the prior written consent of the Agent; and (i) To account fully for and promptly deliver to the Agent, in the form received, any dividend or any other distribution on account of the Pledged Shares whether in securities or property by way of stock-split, spin-off, split-up or reclassification, combination of shares or the like, or in case of any reorganization, consolidation or merger; provided, however, 3 60 that until there shall have occurred an Event of Default, the Company shall be entitled to retain any cash dividends paid on account of the Pledged Shares. 6. Authorized Action by Secured Party. The Company hereby agrees that from time to time, without presentment, notice or demand, and without affecting or impairing in any way the rights of the Agent with respect to the Collateral, the obligations of the Company hereunder or the Obligations, the Agent may, but shall not be obligated to and shall incur no liability to the Company, any Lender or any third party for failure to, take any action which the Company is obligated by this Stock Pledge Agreement to do and to exercise such rights and powers as the Company might exercise with respect to the Collateral, and the Company hereby irrevocably appoints the Agent as its attorney-in-fact to exercise such rights and powers, including without limitation, to: (a) collect by legal proceedings or otherwise and endorse, receive and receipt for all dividends, interest, payments, proceeds and other sums and property now or hereafter payable on or on account of the Collateral; (b) enter into any extension, reorganization, deposit, merger, consolidation or other agreement pertaining to, or deposit, surrender, accept, hold or apply other property in exchange for the Collateral; (c) insure, process and preserve the Collateral; (d) transfer the Collateral to its own or its nominee's name; (e) make any compromise or settlement, and take any action it deems advisable, with respect to the Collateral; and (f) notify any obligor on any Collateral to make payment directly to the Agent. The Company hereby grants to the Agent for the benefit of the Lenders an exclusive, irrevocable power of attorney, with full power and authority in the place and stead of the Company to take all such action permitted under this Paragraph 6. 7. Remedies. Upon the occurrence of an Event of Default the Agent may, without notice to or demand on the Company and in addition to all rights and remedies available to the Agent and the Lenders under the Loan Documents, at law, in equity or otherwise, do any one or more of the following: (a) Foreclose or otherwise enforce the Agent's security interest in any manner permitted by law, or provided for in this Stock Pledge Agreement; (b) Sell, lease or otherwise dispose of any Collateral at one or more public or private sales at the Agent's place of business or any other place or places, including, without limitation, any broker's board or securities exchange, whether or not such Collateral is present at the place of sale, for cash or credit or future delivery, on such terms and in such manner as the Agent may determine; (c) Recover from the Company all costs and expenses, including, without limitation, reasonable attorneys' fees (including the allocated cost of internal counsel), incurred or paid by the Agent or any Lender in exercising any right, power or remedy provided by this Stock Pledge Agreement; (d) Vote or consent, and in connection therewith the Company hereby grants to the Agent a proxy to vote or to consent, with respect to Pledged Shares; and 4 61 (e) Restrict the prospective bidders or purchasers of Pledged Shares to persons or entities who (1) will represent and agree that they are purchasing for their own account, for investment, and not with a view to the distribution or sale of any of the Pledged Shares; and (2) satisfy the offeree and purchaser requirements for a valid private placement transaction under Section 4(2) of the Securities Act of 1933, as amended (the "Act"), and under Securities and Exchange Commission Release Nos. 33-6383; 34-18524; 35-22407; 39-700; IC-12264; AS-306, or under any similar statute, rule or regulation. The Company agrees that disposition of the Pledged Shares pursuant to any private sale made as provided above may be at prices and on other terms less favorable than if the Pledged Shares were sold at public sale, and that the Agent has no obligation to delay the sale of any Pledged Shares for public sale under the Act. The Company agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. In the event that the Agent elects to sell the Pledged Shares, or part of them, and there is a public market for the Pledged Shares, in a public sale, the Company shall use its best efforts to register and qualify the Pledged Shares, or applicable part thereof, under the Act and all state Blue Sky or securities laws required by the proposed terms of sale, and all expenses thereof shall be payable by the Company, including, but not limited to, all costs of (i) registration or qualification of, under the Act or any state Blue Sky or securities laws or pursuant to any applicable rule or regulation issued pursuant thereto, any Pledged Shares, and (ii) sale of such Pledged Shares, including, but not limited to, brokers' or underwriters' commissions, fees or discounts, accounting and legal fees (including the allocated cost of internal counsel) and disbursements, costs of printing and other expenses of transfer and sale. If any consent, approval or authorization of any state, municipal or other governmental department, agency or authority shall be necessary to effectuate any sale or other disposition of Pledged Shares, or any part thereof, the Company will execute such applications and other instruments as may be required in connection with securing any such consent, approval or authorization, and will otherwise use its best efforts to secure the same. The Company shall be given five (5) business days' prior notice of the time and place of any public sale or of the time after which any private sale or other intended disposition of Collateral other than Pledged Shares is to be made, which notice the Company hereby agrees shall be deemed reasonable notice thereof. Upon any sale or other disposition pursuant to this Stock Pledge Agreement, the Agent shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral or portion thereof so sold or disposed of. Each purchaser at any such sale or other disposition (including the Agent) shall hold the Collateral free from any claim or right of whatever kind, including any equity or right of redemption of the Company and the Company specifically waives (to the extent permitted by law) all rights of redemption, stay or appraisal which it has or may have under any rule of law or statute now existing or hereafter adopted. Notwithstanding the foregoing, none of the above remedies can be exercised either directly as to FNTIC or indirectly as to FNTIC, by way of actions as to direct or indirect holding companies of FINTIC, without first filing for and obtaining written prior approval from the California Insurance Department pursuant to California Insurance Code Section 1215.2. 5 62 8. Residence; Collateral Location; Records Location. The Company represents that its chief place of business is located at 3916 State Street, Santa Barbara, California 93105 and that the Company's records concerning the Collateral are located at its chief place of business. EXECUTED as of the day and year first above written. FIDELITY NATIONAL FINANCIAL, INC., a Delaware corporation By: /s/ A. D. Meadows Name: Allen D. Meadows Title: EVP & CFO SANWA BANK CALIFORNIA, a California banking corporation, as Agent By: /s/ C. M. Ciebiera Name: C.M. Ciebiera Title: Vice President/Manager 6 EX-10.58.1 7 FIRST AMENDMENT TO THE CREDIT AGREEMENT 1 EXHIBIT 10.58.1 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is made and dated as of the 31st day of December, 1998, by and among SANWA BANK CALIFORNIA, ("Sanwa"), SANWA, in its capacity as agent for the Lenders party to the Credit Agreement referred to below (the "Agent") (and as the long term "Lenders" and capitalized terms not otherwise defined herein are used in the Credit Agreement), the Lenders from time to time party to the Credit Agreement referred to below and FIDELITY NATIONAL FINANCIAL, INC. (the "Company"). RECITALS A. Pursuant to that certain Credit Agreement dated as of August 1, 1998, by and among the Agent, the Lenders and the Company (as amended from time to time, the "Credit Agreement"), the Lenders agreed to extend credit to the Company on the terms and subject to the conditions set forth therein. B. The Company, the Agent and the Lenders desire to modify the Credit Agreement in certain respects as set forth more particularly below. NOW, THEREFORE, in consideration of the foregoing Recitals and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. Increase in Capital Expenditures. To reflect the agreement of the parties to increase the aggregate amount of Capital Expenditures that the Company may make in any fiscal year, effective as of the Effective Date (as such term is defined in Paragraph 4 below) Paragraph 9(j) of the Credit Agreement is hereby amended to read in its entirety as follows: "9(j) Capital Expenditures. And shall not permit any Subsidiary to, make Capital Expenditures in excess of $25,000,000.00 in the aggregate for the Company and all Subsidiaries during any fiscal year; provided, however, that the limitations contained in this Paragraph 9(j) shall not apply to Capital Expenditures associated with Permitted Acquisitions." 2. Amendment of Definition. To reflect the agreement of the parties to amend the definition of the term "Primary Quality Investments" set forth in Annex I to the Credit Agreement, effective as of the Effective Date subparagraph (d) of such term is hereby amended to read in its entirety as follows: 2 "(d) Commercial paper issued by obligors rated at least investment grade by Standard and Poor's Corporation (or bearing an equivalent rating of another nationally recognized rating agency) with a maturity not to exceed ninety (90) days and in an aggregate amount not to exceed $5,000,000.00 per issuing institution." 3. Reaffirmation of Loan Documents. The Company hereby affirms and agrees that (a) the execution and delivery by the Company of and the performance of its obligations under this Amendment shall not in any way amend, impair, invalidate or otherwise affect any of the obligations of the Company or the rights of the Lenders under the Loan Documents or any other document or instrument made or given by the Company in connection therewith, (b) the term "Obligations" as used in the Loan Documents includes, without limitation, the Obligations of the Company under the Credit Agreement as amended hereby and (c) the Loan Documents remain in full force and effect. 4. Effective Date. This Amendment shall be effective retroactive to December 31, 1998 on the date (the "Effective Date") that there has been delivered to the Agent: (a) A copy of this Amendment, duly executed by each party hereto; (b) Such corporate resolutions, incumbency certificates and other authorizing documentation as the Agent may reasonably request. 5. Representations and Warranties. The Company hereby represents and warrants to the Agent and the Lenders as follows: (a) The Company has the corporate power and authority and the legal right to execute, deliver and perform this Amendment and has taken all necessary corporate action to authorize the execution, delivery and performance of this Amendment. This Amendment has been duly executed and delivered on behalf of the Company and constitutes the legal, valid and binding obligations of the Company enforceable against the Company in accordance with its terms. (b) At and as of the date of execution hereof and at and as of the effective date of this Amendment and both prior to and after giving effect hereto: (i) the representations and warranties of the Company contained in the Credit Agreement and the other Loan Documents are accurate and complete in all respects, and (ii) there has not occurred an Event of Default or Potential Default. 6. No Other Amendment. Except as expressly amended hereby, the Loan Documents shall remain in full force and effect as written and amended to date. 2 3 7. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. FIDELITY NATIONAL FINANCIAL, INC., a Delaware corporation By: /s/ Allen D. Meadows ---------------------------- Name: Allen D. Meadows ---------------------------- Title: EVP & CFO ---------------------------- SANWA BANK CALIFORNIA, as Agent and as a Lender By: /s/ S. L. Skelton ---------------------------- Name: S. L. Skelton ---------------------------- Title: VP ---------------------------- COMERICA BANK - CALIFORNIA, as a Lender By: /s/ Mario DePasquale ---------------------------- Name: Mario DePasquale ---------------------------- Title: AVP ---------------------------- FIRST BANK & TRUST, as a Lender By: /s/ Alison A. Davis ---------------------------- Name: Alison A. Davis ---------------------------- Title: VP ---------------------------- 3 4 SUN TRUST BANK, CENTRAL FLORIDA, N.A., as a Lender By: ---------------------------- Name: ---------------------------- Title: ---------------------------- THE SUMITOMO BANK, LIMITED, LOS ANGELES BRACH, as a Lender By: /s/ Al Galluzzo ---------------------------- Name: Al Galluzzo ---------------------------- Title: SVP ---------------------------- WELLS FARGO BANK, N.A., as a Lender By: /s/ Timothy A. McDevitt ---------------------------- Name: Timothy A. McDevitt ---------------------------- Title: VP ---------------------------- 4 EX-10.59 8 STOCK PURCHASE AGREEMENT 1 Exhibit 10.59 STOCK PURCHASE AGREEMENT BY AND AMONG GRANITE FINANCIAL, INC, FIDELITY NATIONAL FINANCIAL, INC., LEXINGTON CAPITAL CORPORATION, AND THE SHAREHOLDERS OF LEXINGTON CAPITAL CORPORATION DATED AS OF AUGUST 31, 1998 2
TABLE OF CONTENTS PAGE RECITALS........................................................................ 1 INDEX OF EXHIBITS................................................................iv INDEX OF SCHEDULES...............................................................iv ARTICLE I Certain Definitions............................... 1 ARTICLE 2 Stock Purchase................................. 6 2.1 Sale and Transfer of Stock............................................. 6 2.2 Consideration.......................................................... 6 ARTICLE 3 Closing..................................... 7 3.1. Closing................................................................. 7 3.2 Mutual Deliveries at Closing............................................ 7 3.3 Shareholders' Deliveries at Closing..................................... 7 3.4 Company's Deliveries at Closing......................................... 7 3.5 GFI's and FNFI's Deliveries at Closing...................................8 3.6 Conditions of GFI and FNFI.............................................. 9 3.7 Conditions of Company and Shareholders................................. 10 ARTICLE 4 Representations and Warranties of Company and Shareholders.. 11 4.1 Organization and Standing; Articles and Bylaws......................... 12 4.2 Authorization.......................................................... 12 4.3 Subsidiaries........................................................... 12 4.4 Capitalization......................................................... 12 4.5 Financial Statements................................................... 13 4.6 Material Contracts..................................................... 13 4.7 Assets Other Than Real Property........................................ 14 4.8 Real Property.......................................................... 14 4.9 No Conflicts........................................................... 14 4.10 Litigation............................................................. 15 4.11 Taxes.................................................................. 15 4.12 Employees.............................................................. 15 4.13 Consents............................................................... 16
i 3 4.14 Operating Rights....................................................... 16 4.15 Compliance with Applicable Laws........................................ 16 4.16 Insurance.............................................................. 16 4.17 Absence of Changes..................................................... 17 4.18 Employee Plans......................................................... 17 4.19 Intellectual Property Rights........................................... 18 4.20 Environment, Health and Safety......................................... 18 4.21 Certain Transactions................................................... 19 4.22 Bank Accounts; Powers of Attorney.......................................19 4.23 Investment Representation...............................................19 4.24 Absence of Claims Against Company.......................................20 4.25 Employee Loans......................................................... 20 4.26 Brokers' Fees.......................................................... 20 4.27 Full Disclosure........................................................ 20 ARTICLE 5 Representations and Warranties of GFI and FNFI.............. 20 5.1 Organization and Standing; Articles and Bylaws......................... 20 5.2 Authorization.......................................................... 20 5.3 No Conflicts........................................................... 21 5.4 Fidelity SEC Documents................................................. 21 5.5 Fidelity Common Stock.................................................. 21 5.6 Consents............................................................... 22 5.7 Brokers' Fees.......................................................... 22 5.8 Full Disclosure........................................................ 22 ARTICLE 6 Conduct of Business Pending Closing................... 22 6.1 Qualification.......................................................... 22 6.2 Ordinary Course........................................................ 22 6.3 Corporate Changes...................................................... 23 6.4 Indebtedness........................................................... 23 6.5 Accounting..............................................................23 6.6 Compliance with Legal Requirements..................................... 23 6.7 Disposition of Assets.................................................. 23 6.8 Compensation........................................................... 23 6.9 Modification or Breach of Agreements; New Agreements................... 24 6.10 Capital Expenditures................................................... 24 6.11 Consents............................................................... 24 6.12 Maintenance of Insurance............................................... 24
ii 4 6.13 Discharge.............................................................. 24 6.14 Claims................................................................. 24 6.15 Taxes and Tax Assessments.............................................. 24 ARTICLE 7 Additional Covenants............................ 24 7.1 Covenants of Company and Shareholders.................................. 25 7.2 Covenants of GFI and FNFI.............................................. 25 7.3 Tax Advice..............................................................26 7.4 Access and Information................................................. 26 7.5 Expenses............................................................... 27 7.6 Certain Notifications.................................................. 27 7.7 Publicity.............................................................. 27 7.8 Further Assurances..................................................... 27 7.9 Competing Offers....................................................... 27 7.10 NYSE Listing........................................................... 28 7.11 Distribution of Retained Earnings.......................................28 7.12 Board of Directors......................................................28 ARTICLE 8 Termination, Amendment and Waiver..................... 28 8.1 Termination............................................................ 28 8.2 Effect of Termination.................................................. 29 8.3 Amendment.............................................................. 29 8.4 Waiver................................................................. 29 ARTICLE 9 Indemnification............................... 29 9.1 Survival of Representations and Warranties............................. 29 9.2 Indemnification by Company and Shareholders............................ 30 9.3 Indemnification by FNFI................................................ 30 9.4 Third-Party Claims..................................................... 30 9.5 Access and Information................................................. 31 9.6 Mitigation............................................................. 31 9.7 Right of Set-Off....................................................... 31 9.8 Limitations............................................................ 31 9.8 Indemnification Exclusive.............................................. 31
iii 5 ARTICLE 10 General Provisions.............................. 32 10.1 Governing Law.......................................................... 32 10.2 Successors and Assigns................................................. 32 10.3 Entire Agreement....................................................... 32 10.4 Severability........................................................... 32 10.5 Notice................................................................. 33 10.6 Construction........................................................... 33 10.7 Headings............................................................... 34 10.8 Counterparts........................................................... 34 10.9 Recitals, Schedules, and Exhibits...................................... 34
INDEX OF EXHIBITS EXHIBIT A - Employment Agreements for Shareholders EXHIBIT B - Registration Rights Agreement EXHIBIT C - Officer's Certificate of the Company EXHIBIT D - Secretary's Certificate of the Company EXHIBIT E - Opinion of Counsel to the Company EXHIBIT F - Officer's Certificate of GFI and FNFI EXHIBIT G - Secretary's Certificate of GFI and FNFI EXHIBIT H - Opinion of Counsel to GFI and FNFI INDEX OF SCHEDULES Company Disclosure Schedule iv 6 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into as of this 31st day of August, 1998, by and among GRANITE FINANCIAL, INC., a Delaware corporation ("GFI"), FIDELITY NATIONAL FINANCIAL, INC., a Delaware corporation ("FNFI"), LEXINGTON CAPITAL CORPORATION, an Illinois corporation ("Company"), LAWRENCE B. MOLLER and EDWARD C. LITKE (collectively, the "Shareholders). GFI, FNFI, Company, and Shareholders are sometimes referred to collectively herein as the "Parties" or singularly as a "Party." RECITALS A. Shareholders are the record and beneficial owners of all the issued and outstanding shares of capital stock of Company (the "Company Shares"). B. GFI is a wholly owned subsidiary of FNFI. B. The respective Boards of Directors of GFI, FNFI, and Company deem it advisable and in the best interests of their respective shareholders that GFI purchase all of the Company Shares pursuant to this Agreement. C. The Shareholders desire to sell all of the Company Shares to GFI pursuant to this Agreement. NOW, THEREFORE, in consideration of the premises and the respective representations, warranties, covenants, agreements and conditions hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows: ARTICLE I CERTAIN DEFINITIONS Unless the context otherwise requires, the terms defined in this Article 1 shall have the meanings herein specified for all purposes of this Agreement, applicable to both the singular and the plural forms of such terms. Any capitalized term used in this Agreement and not ascribed a meaning in this Article 1 shall have the meaning ascribed to such term elsewhere in this Agreement. "Affiliate" means, with respect to a Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person. 1 7 "Basis" means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction that forms or would reasonably form the basis for any specified consequence. "Benefit Arrangement" means any form of current or deferred compensation, bonus, stock option, stock appreciation right, severance pay, salary continuation, pension, profit-sharing, retirement or incentive plan, practice or arrangement, any group or individual disability, medical, dental, health, hospitalization, life insurance or other insurance plans or related benefits, or any other welfare or similar plan or arrangement for the benefit of any director, officer or employee of Company, whether active or retired, or for any class or classes of such directors, officers or employees. "Claim" means any actual or threatened claim, action, suit, arbitration, hearing, inquiry, proceeding (including administrative and informal proceedings), complaint, charge, investigation or audit by or before any Governmental Entity or arbitrator and any appeal from any of the foregoing. "Closing" has the meaning set forth in Section 3.1, below. "Closing Date" has the meaning set forth in Section 3.1, below. "Closing Fidelity Price" means the average of the per share closing sales price of FNFI's Common Stock publicly traded on the New York Stock Exchange for the ten (10) consecutive trading days ending two (2) business days prior to the Closing Date. "Code" means the Internal Revenue Code of 1986, as amended. "Company Shares" has the meaning set forth in Recital A. "Company Stock" means shares of Common Stock, $1.00 par value, of Company. "Confidential Information" means any information concerning the businesses and affairs of any of the Parties that is not already generally available to the public. "Disclosure Schedule" means the Schedules to this Agreement required to be prepared by Company and Shareholders and delivered to GFI. "Employee Plan" means any "employee benefit plan," as defined in Section 3(3) of ERISA, which is subject to any provisions of ERISA and covers any employee, whether active or retired, of the Company. 2 8 "Environmental, Health, and Safety Laws" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, and the Occupational Safety and Health Act of 1970, each as amended, together with all Legal Requirements concerning pollution or protection of the environment, public health and safety, or employee health and safety, including Legal Requirements relating to emissions, discharges, releases, or threatened releases of pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials or wastes into ambient air, surface water, ground water, or lands or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, or chemical, industrial, toxic materials or other Hazardous Materials. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Fidelity Common Stock" means the shares of restricted Common Stock, par value of $0.0001 per share, of FNFI. "GAAP" means United States generally accepted accounting principles, as amended from time to time. "Governmental Entity" means any court, federal, state, local or foreign government or any administrative agency or commission or any other governmental authority or instrumentality whatsoever. "Hazardous Substances" means any hazardous, toxic or infectious substance, material, gas or waste which is regulated by any Governmental Entity. "Indebtedness" means, when used with reference to any Person, without duplication, (i) any Liability of such Person created or assumed by such Person, or any Subsidiary thereof, (A) for borrowed money, (B) evidenced by a bond, note, debenture, or similar instrument (including a purchase money obligation, deed of trust or mortgage) given in connection with the acquisition of, or exchange for, any property or assets (other than inventory or similar property acquired and consumed in the Ordinary Course of Business), including securities and other indebtedness, (C) in respect of letters of credit issued for such Person's account and "swaps" of interest and currency exchange rates (and other interest and currency exchange rate hedging agreements) to which such Person is a party or (D) for the payment of money as lessee under leases that should be, in accordance with GAAP, recorded as capital leases for financial reporting purposes; (ii) any Liability of others described in the preceding clause (i) guaranteed as to payment of principal or interest by such Person or in effect guaranteed by such Person through an agreement, contingent or otherwise, to purchase, repurchase, or pay the related Indebtedness or to acquire the security therefor; (iii) all Liabilities or obligations secured by a Lien upon property owned by such Person and upon which Liabilities or obligations such Person customarily pays interest or principal, whether or not such Person has assumed or become liable for the payment of such liabilities or 3 9 obligations; and (iv) any amendment, renewal, extension, revision or refunding of any such Liability or obligation. "Intellectual Property" means (i) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof; (ii) all trademarks, service marks, trade dress, logos, trade names, and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith; (iii) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith; (iv) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals); (v) all computer software (including data and related documentation); (vi) all other proprietary rights; and (vii) all copies and tangible embodiments thereof (in whatever form or medium). "Knowledge" or "Known" means that Company and the Shareholders are actually aware of the fact or matter in question or reasonably should be aware of the fact or matter in question after a reasonable investigation in the Ordinary Course of Business concerning such fact or matter. "Legal Requirement" means any statute, law, ordinance, rule, regulation, permit, order, writ, judgment, injunction, decree or award issued, enacted or promulgated by any Governmental Entity or any arbitrator with binding authority on a Party or Parties, as the case may be. "Liability" means any liability (whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), including, but not limited to, any liability for Taxes. "Licenses" has the meaning set forth in Section 4.14, below. "Lien" means all liens (including judgment and mechanics' liens, regardless of whether liquidated), mortgages, assessments, security interests, easements, pledges, trusts (constructive or otherwise), deeds of trust, options or other charges, encumbrances or restrictions. "Losses" means any and all losses, damages, demands, assessments, adjustments, judgments, settlement payments, deficiencies, penalties, fines, interest (including interests from the date of such damages), and costs and expenses (including without limitation reasonable attorneys' fees and disbursements of every kind, nature and description), less any recoveries thereon. 4 10 "Material Adverse Effect" means any event, effect, development, occurrence or circumstance, individually or when taken together with all other such events, effects, developments, occurrences or circumstances, causing, resulting in or having a material adverse effect on (i) the business, assets, results of operations, properties or condition (financial or otherwise) of Company, GFI or FNFI, as applicable; or (ii) the legal right or authorization of Company, GFI or FNFI, as applicable, to continue to operate its business as a going concern. "Material Contracts" means with respect to Company (i) any union contract or any employment or consulting contract or arrangement providing for future compensation, written or oral, with any officer, director or employee which is not terminable on thirty (30) days notice or less without penalty or obligation to make payments related to such termination; (ii) any plan contract or arrangement, whether written or oral, providing for bonuses, pensions, deferred compensation, severance pay or benefits, retirement payments, profit sharing or the like; (iii) any existing broker agreement, lease sale or purchase agreement, distribution agreement, volume purchase agreement, or similar agreement in which the annual amount involved in fiscal 1997 and fiscal year 1998 exceeded or is expected to exceed $10,000 in aggregate amount; (iv) except for trade indebtedness incurred in the Ordinary Course of Business, any Indebtedness incurred in the acquisition of companies or other entities or Indebtedness for borrowed money by way of direct loan, sale of debt securities, recourse obligations on lease sales, purchase money obligation, conditional sale, guarantee, leasehold obligations or otherwise; (v) any contract containing covenants purporting to limit in any way the freedom of Company to compete in any line of business or in any geographic area; (vi) any agreement of indemnification; (vii) any agreement, contract or commitment relating to capital expenditures and which involve future payments in excess of $25,000 in the aggregate by Company; (viii) any agreements, contracts or commitments relating to the disposition of assets, including any intangible assets or intellectual property rights (other than inventory), which involve payments in excess of $25,000 in the aggregate by Company; (ix) any contracts with a Governmental Entity subject to price redetermination or renegotiation; or (x) all insurance policies of Company; (xi) all equipment leases of Company in which the Company is lessee and which involve payments in excess of $20,000 in the aggregate; or (xii) any other agreement, contract or commitment which is material to Company. "Material Contracts" with respect to GFI or FNFI means any agreement, contract or commitment which FNFI files or is requested to file with its SEC reports. "Ordinary Course of Business" means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency and, where appropriate, in accordance with formula). "Party" has the meaning set forth in the preamble to this Agreement. "Permitted Liens" means (i) liens for Taxes not yet due and payable or for Taxes that the taxpayer is contesting in good faith through appropriate proceedings; (ii) purchase money liens and liens securing rental payments under capital lease arrangements and (iii) liens, if any, that are not substantial in character, amount or extent and do not detract materially from the value, or interfere 5 11 with present use or the sale or other disposition, of the property subject thereto or affected thereby. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof), or any other legal entity. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended. "Subsidiary" means any corporation with respect to which a specified Person (or a Subsidiary thereof) owns a majority of the common stock or has the power to vote or direct the voting of sufficient securities to elect a majority of the directors. "Tax" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs, duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax or contribution of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. ARTICLE 2 STOCK PURCHASE 2.1 Sale and Transfer of Stock. On the basis of the representations, warranties, covenants and agreements and subject to the satisfaction (or waiver by the Party whose obligations hereunder are subject to such satisfaction) of the conditions set forth in this Agreement, on the Closing Date, Shareholders shall sell, convey, assign, transfer and deliver to GFI, and GFI shall purchase and acquire from Shareholders, all of the Company Shares owned by Shareholders, which constitutes 100% of the issued and outstanding capital stock of the Company. Shareholders shall transfer to GFI good and marketable title to such Company Shares, free and clear of all Liens. 6 12 2.2 Consideration. In consideration for the sale of all of the Company Shares to GFI, GFI and FNFI shall provide Shareholders with the following consideration at the Closing: (a) Cash in the amount of $3,000,000; and (b) A number of shares of Fidelity Common Stock equal to $500,000 divided by the Closing Fidelity Price. The cash and Fidelity Common Stock due the Shareholders under this Section 2.2 shall be allocated among the Shareholders in proportion to the number of Company Shares owned by each Shareholder. ARTICLE 3 CLOSING 3.1. Closing. The consummation of the purchase of the Company Shares by GFI and the other transactions contemplated by this Agreement (the "Closing") shall occur at such place and on such date (the "Closing Date") and at such time as may be mutually designated by the Parties within five (5) business days following the satisfaction or waiver of the conditions set forth in Sections 3.6 and 3.7, below, or such other date, time, place and manner as the Parties may mutually agree. 3.2 Mutual Deliveries at Closing. Provided that all of the conditions to the Closing set forth in Sections 3.6 and 3.7, below, have been satisfied or waived by the Party benefitting therefrom, the appropriate Parties or Persons shall execute and deliver or cause to be delivered to the appropriate Parties at Closing the following: (a) The Employment Agreements between Company and each of the Shareholders in substantially the form of Exhibit "A" hereto; and (b) The Registration Rights Agreement substantially in the form of Exhibit "B" hereto. 3.3 Shareholders' Deliveries at Closing. Provided that all of the conditions to the Closing set forth in Sections 3.6 and 3.7, below, have been satisfied or waived by the Party benefiting therefrom, Shareholders shall execute and deliver or cause to be delivered to GFI at the Closing the following documents: (a) The original stock certificates for all of the Company Shares along with duly executed stock powers in favor of GFI for each certificate; 7 13 (b) Such other documents and instruments as may be specified in this Agreement or otherwise reasonably requested by GFI in order to consummate the transactions contemplated hereby. 3.4 Company's Deliveries at Closing. Provided that all of the conditions to the closing set forth in Sections 3.6 and 3.7, below, have been satisfied or waived from the Party benefitting therefrom, Company shall execute and deliver or cause to be delivered to GFI at the Closing the following: (a) An Officer's Certificate of the Company dated the Closing Date substantially in the form of Exhibit "C" hereto; (b) A Secretary's Certificate of the Company dated the Closing Date substantially in the form of Exhibit "D" hereto; (c) An opinion of counsel to the Company substantially in the form of Exhibit "E" hereto; (d) Company's original minute book, such minute book to contain (i) original Articles of Incorporation and all amendments thereto, or copies thereof if the originals are unavailable; (ii) Company's Bylaws presently in effect; (iii) Company's stock transfer records together with all available canceled stock certificates; and (iv) all minutes of meetings or consents in lieu of such meetings of Company's Board of Directors and shareholders; (e) A good standing certificate of Company, dated within thirty (30) business days of the Closing Date, for each jurisdiction in which Company is required to be qualified and authorized to do business; (f) Minutes of the Board of Directors and shareholders of Company authorizing and approving this Agreement and the transactions contemplated herein; (g) The resignations of all of the officers and directors of Company effective as of the Closing Date; and (h) Such other documents and instruments as may be specified in this Agreement or otherwise reasonably requested in writing by GFI at least five (5) days prior to the Closing Date in order to consummate the transactions contemplated hereby. 3.5 GFI and FNFI's Deliveries at Closing. Provided that all of the conditions to the Closing set forth in Sections 3.6 and 3.7, below, have been satisfied or waived by the Party benefiting therefrom, GFI or FNFI shall execute and deliver or cause to be delivered to Shareholders at the Closing (or such later time as may be indicated below) the following: 8 14 (a) An Officer's Certificate of each of GFI and FNFI dated the Closing Date substantially in the form of Exhibit "F" hereto (provided, however, that such Officer's certificate may be delivered within 30 days following the Closing); (b) A Secretary's Certificate of each of GFI and FNFI dated the Closing Date substantially in the form of Exhibit "G" hereto (provided, however, that such Secretary's certificate may be delivered within 30 days following the Closing); (c) An opinion of counsel to GFI and FNFI substantially in the form of Exhibit "H" hereto; (d) The cash and Fidelity Common Stock in accordance with Section 2.2, above; (e) Such other documents and instruments as may be specified in this Agreement or otherwise reasonably requested in writing by Shareholders at least (5) days prior to the Closing Date in order to consummate the transactions contemplated hereby. 3.6 Conditions of GFI and FNFI. GFI's and FNFI's obligations hereunder to consummate the transactions hereunder are subject to the satisfaction, at or prior to the Closing, of all of the following conditions: (a) Representations and Warranties True; Performance of Obligations. The representations and warranties made by Company and Shareholders in this Agreement shall be true, correct and complete in all material respects on and as of the Closing Date with the same force and effect as if they had been made on and as of said date; and Company and Shareholders shall have in all material respects performed all of the obligations and complied with each and all of the covenants required to be performed or complied with by them on or prior to the Closing Date. (b) Material Adverse Effect. No act, event or condition shall have occurred after the date hereof which has had or could have a Material Adverse Effect on Company. (c) Authorizations and Approvals. All authorizations, approvals or consents from third parties, including from any Governmental Entity, shareholders, landlord or other Person, necessary for the consummation of the transactions contemplated hereby shall have been obtained. (d) Deliveries. GFI and FNFI shall have received from the appropriate Party or Person, the delivery obligations set forth in Sections 3.2 through 3.4, above. (e) No Claims. There shall not be instituted and pending or threatened any Claims before any Governmental Entity (i) challenging or otherwise seeking to restrain or prohibit the consummation of the transactions contemplated hereby, or (ii) seeking to prohibit the direct 9 15 or indirect ownership or operation by GFI or FNFI of all or a material portion of the business or assets of Company, or to compel GFI, FNFI or Company to dispose of or hold separate all or a material portion of the business or assets of Company, GFI or FNFI. (f) Corporate Action. All corporate and other proceedings and actions taken in connection with the transactions contemplated hereby and all certificates, opinions, agreements, instruments, releases and documents referenced herein or incident to the transactions contemplated hereby shall be in form and substance satisfactory to GFI, FNFI and their counsel. (g) Requisite Regulatory Approvals. All notices or filings required to be made, all authorizations, permits, certificates, registrations, consents, approvals or orders required to be obtained, and all waiting periods required to expire, prior to the consummation of the transactions contemplated by this Agreement under applicable federal law of the United States or applicable laws of any state having jurisdiction over the transactions contemplated by this Agreement or the businesses conducted by the Parties or any Affiliate or Subsidiary of any Party (collectively, the "Requisite Regulatory Approvals") shall have been obtained or expired, as the case may be, without the imposition of any condition which is materially burdensome upon GFI, FNFI or any Party or Person to be affected by such condition. (h) Employment Agreements. Each Shareholder shall have entered into the Employment Agreement with the Company substantially in the form attached hereto as Exhibit "A." (i) Registration Rights Agreement. Shareholders shall have entered into the Registration Rights Agreement substantially in the form of Exhibit "B" hereto. (j) Residual Interests in Leases and Equipment. Prior to the Closing, the Shareholders shall fully assign and transfer to the Company all right, title and interest of the Shareholders in and to any "Residuals," as hereafter defined, on equipment lease transactions originated by the Company at any time prior to Closing. Residuals mean all rights of the Shareholders or the Company to the lease agreement and equipment subject to the lease agreement after the lessee has performed all obligations during the scheduled lease term, including any release, sale or other re-marketing of the equipment, payments made by lessee during any renewal or extension of the lease term or holding over past the expiration of the lease agreement. Such Residuals shall be recorded as an asset on the balance sheet of the Company. (l) Shareholder Indebtedness. Prior to the Closing, Shareholders shall fully repay all loans, indebtedness and other advances made by the Company to Shareholders. 3.7 Conditions of Company and Shareholders. Company's and Shareholders' obligations hereunder to consummate the transactions hereunder are subject to the satisfaction, at or prior to the Closing, of the following conditions: 10 16 (a) Representations and Warranties True; Performance of Obligations. The representations and warranties made by GFI and FNFI in this Agreement shall be true, correct and complete in all material respects on and as of the Closing Date with the same force and effect as if they had been made on and as of said date; and GFI and FNFI shall have in all material respects performed all of the obligations and complied with each and all of the covenants required to be performed or complied with by them on or prior to the Closing. (b) Material Adverse Effect. No act, event or condition shall have occurred after the date hereof has had or could have a Material Adverse Effect on GFI or FNFI. (c) Authorizations and Approvals. All authorizations, approvals or consents from third parties, including from any Governmental Entity, shareholders, landlord or other Person, necessary for the consummation of the transactions contemplated hereby shall have been obtained. (d) NYSE Listing. FNFI shall have made such filings as are necessary with the New York Stock Exchange regarding the transactions contemplated hereby and the shares of Fidelity Common Stock to be issued under this Agreement shall have been filed for listing on the NYSE, subject only to official notice of issuance. (e) Deliveries. Company or Shareholders, as appropriate, shall have received from GFI or FNFI the delivery obligations set forth in Sections 3.2 and 3.5, above. (f) Corporate Action. All corporate and other proceedings and actions taken in connection with the transactions contemplated hereby and all certificates, opinions, agreements, instruments, releases and documents referenced herein or incident to the transactions contemplated hereby shall be in form and substance satisfactory to Company, Shareholders and their counsel. (g) No Claims. There shall not be instituted and pending or threatened any Claims before any Governmental Entity (i) challenging or otherwise seeking to restrain or prohibit the consummation of the transactions contemplated hereby, or (ii) seeking to prohibit the direct or indirect ownership or operation by GFI or FNFI of all or a material portion of the business or assets of Company, or to compel GFI or FNFI or Company to dispose of or hold separate all or a material portion of the business or assets of Company, GFI or FNFI. (h) Requisite Regulatory Approvals. The Requisite Regulatory Approvals shall have been obtained or expired, as the case may be, without the imposition of any condition which is materially burdensome upon Company or any Party or Person to be affected by such condition. (i) Employment Agreements. The Company shall have entered into the Employment Agreements with each of the Shareholders substantially in the forms attached hereto as Exhibit "A" hereto. 11 17 (j) Registration Rights Agreement. FNFI shall have afforded Shareholders an opportunity to enter into the Registration Rights Agreement substantially in the form of Exhibit "B" hereto. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF COMPANY AND SHAREHOLDERS The Company and Shareholders each represents and warrants to GFI and FNFI that (except for changes contemplated by this Agreement and except as set forth in the Disclosure Schedule attached hereto), each of the following statements is true, correct and complete in all material respects as of the date of this Agreement and will be true, correct and complete in all material respects as of the Closing Date (each such statement to be made again by Company and Shareholders on that date with the Closing Date being substituted for the date of this Agreement throughout this Article 4): 4.1 Organization and Standing; Articles and Bylaws. Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois, has full power and authority to own its assets and properties and to carry on its business as presently conducted. Company is duly qualified and authorized to do business, and is in good standing as a foreign corporation, in each jurisdiction where the nature of its activities and of its properties (both owned and leased) make such qualification necessary, except where the failure to so qualify would not have a Material Adverse Effect. Company has furnished GFI with copies of its Articles of Incorporation and Bylaws, as amended to the date hereof. Said copies are true, correct and complete and contain all amendments through the Closing Date. 4.2 Authorization. All actions on the part of the Shareholders and all corporate action on the part of Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement and the documents contemplated hereby, the performance of all of Company's and Shareholders obligations hereunder and thereunder have been taken or will be taken prior to the Closing. This Agreement and the documents contemplated hereby, when executed and delivered, shall constitute valid and legally binding obligations of Company and Shareholders enforceable in accordance with their respective terms, except as the enforceability thereof may be affected by the laws of bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally or any equitable remedy a court may impose. 4.3 Subsidiaries. Except as disclosed in Schedule 4.3, the Company has no Subsidiaries and does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity, nor is the Company, directly or indirectly, a participant in any joint venture, partnership or other entity. 12 18 4.4 Capitalization. The authorized capital stock of Company consists of 100,000 shares of Common Stock, $1.00 par value, of which 6,000 shares are issued and outstanding as of the date of this Agreement. All of the Company Shares have been duly authorized and validly issued and are fully paid and non-assessable. All of the Company Shares were offered, issued, sold and delivered by Company in compliance with all applicable state and federal laws concerning the issuance of securities. None of the Company Shares were issued in violation of any preemptive rights created by statue, or by Company's charter documents, or by any agreement to which Company may be bound. Schedule 4.4 to the Disclosure Schedule hereto contains a complete list of, and the number of shares owned of record by, the holders of the issued and outstanding Company Stock. There are no outstanding shares of Company Stock, preferred stock or any other equity securities of Company, and there are no options, warrants, calls, conversion rights, commitments or agreements of any character to which Company or Shareholders may be bound that do or may obligate Company or Shareholders to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of Company Stock, preferred stock or other equity securities or that do or may obligate Company or Shareholders to grant, extend or enter into any such option, warrant, call, conversion right, commitment or agreement. There are no outstanding arrangements, agreements, commitments or understandings of any kind affecting or relating to the voting, issuance, purchase, redemption, repurchase or transfer of any capital stock of Company or any other securities of Company. Company and Shareholders have not, or prior to the Closing will have not, become a party to or subject to any contract or obligation wherein any Person has a right or option to purchase or acquire any rights in any additional capital stock or securities of Company. Shareholders own of record and beneficially, and have good and marketable title to all of the Company Shares, free and clear of all Claims and Liens. As a result of the completion of the transactions set forth herein, GFI will be the record and beneficial owner of all outstanding capital stock of Company and rights to acquire capital stock of Company. 4.5 Financial Statements. Schedule 4.5 to the Disclosure Schedule hereto includes (i) true, complete and correct copies of Company's balance sheet as of December 31, 1997 (the end of its most recently completed fiscal year) and statements of income and retained earnings for the year ended December 31, 1997; and (ii) true, complete and correct copies of Company's balance sheet as of July 3,1998 and statement of income for the period then ended (collectively, the "Financial Statements"). The Financial Statements have been prepared as a compilation and fairly present the financial position of Company as of the dates thereof and the results of its operations for the periods then ended, subject, in the case of the June 30, 1998 Financial Statements, to the omission of complete footnote information and normal year-end adjustments. There are no material Company Liabilities, direct or indirect, fixed or contingent, which are not reflected in the balance sheet as of July 3, 1998, except for Liabilities incurred in the Ordinary Course of Business subsequent to July 3, 1998, which, either individually or in the aggregate, would not be material. To the Company and Shareholders' Knowledge, there is no Basis for any assertion against Company of any Liability or obligation of any nature whatsoever that is not fully reflected in the 13 19 Financial Statements which, either individually or in the aggregate, would be material. Since the date of the December 31, 1997 Financial Statements, there have been no material changes in Company's accounting policies. 4.6 Material Contracts. Schedule 4.6 to the Disclosure Schedule hereto contains a complete and accurate list of all Material Contracts to which Company is a party or bound. True, correct and complete copies of all Material Contracts listed on Schedule 4.6 to the Disclosure Schedule have been furnished or made available by Company to GFI. Each Material Contract so listed is a valid and binding obligation of Company and is enforceable against Company and the other Person or Persons thereto, in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and subject to the availability of equitable remedies. Company has performed all obligations required to be performed by it to date and is not in default under or in breach of any term or provision of any Material Contract to which Company is a party, is subject or is otherwise bound, and, to the Knowledge of Company and the Shareholders, no event has occurred that, with the giving of notice or the passage of time or both, would constitute such a default or breach under any Material Contract. To the Knowledge of Company and the Shareholders, no party with whom Company has a Material Contract is in default of its obligations thereunder, except as disclosed on Schedule 4.6. No consent or approval of any party to any of the Material Contracts is necessary in order to permit Company to consummate the transactions contemplated hereby. 4.7 Assets Other Than Real Property. Company has good and marketable title to all properties and assets (other than real property which is subject to Section 4.8, below) owned or leased by Company, free and clear of all Liens except for Permitted Liens and those Liens set forth on Schedule 4.7. The assets and properties of Company constitute all the assets, properties, rights, privileges and interests necessary for the operation of Company's business. All of the vehicles, machinery and equipment of Company are in good working order and condition, ordinary wear and tear excepted. 4.8 Real Property. Company does not own any real property. Schedule 4.8 to the Disclosure Schedule hereto contains an accurate list and general description of all real property leases, subleases, licenses or similar agreements ("Leases") to which Company is a party (copies of which have been previously furnished to GFI), in each case setting forth (i) the landlord and tenant or sublessor and sublessee, as applicable, thereof and the date and term of each of the Leases; (ii) the legal description or street address of each property covered thereby; and (iii) a brief description (including size and function) of the principal improvements and buildings thereon (the "Leased Premises"). Company has valid leasehold interests in the Leased Premises, free and clear of all Liens and Claims, except for (i) Claims of lessors, co-lessees or sublessees in such matters as are reflected in the Leases; (ii) title exceptions affecting the fee estate of the lessor under such Leases; and (iii) other matters as described in the Disclosure Schedule. Company is not in default, and no facts or circumstances have occurred which, through the passage of time or both, or the giving of notice would constitute a default, under any Lease. To the Company's and Shareholders' Knowledge, the activities of Company, with respect to the Leased Premises, are in 14 20 all material respects permitted and authorized by applicable zoning laws, ordinances and regulations and all laws and regulations of any Governmental Entity. To the Knowledge of Company and Shareholders, the portions of the buildings on the Leased Premises that are used in the business of Company are each in good repair and condition (including without limitation, the electrical, mechanical, HVAC, plumbing, elevator, other building systems and structural components serving such premises, and the roofs are water-tight), and are in the aggregate sufficient to satisfy Company's current business activities as conducted thereat. 4.9 No Conflicts. The execution and delivery nor the performance of this Agreement by Company will result in any of the following: (i) a default or an event that, with notice or lapse of time or both, could be a default, breach or violation of (A) the Articles of Incorporation or Bylaws of Company, (B) any Material Contract; (ii) the termination of any Material Contract or the acceleration of the maturity of any Indebtedness or other material obligation of Company; (iii) to the Knowledge of Company and the Shareholders, the creation or imposition of any Lien (except for Permitted Liens) on any of the assets or properties of Company; (iv) to the Knowledge of Company and the Shareholders, the creation or imposition of any Lien on any shares of the Company Stock; or (v) to the Knowledge of Company and the Shareholders, a violation or breach of any writ, injunction or decree of any Governmental Entity or arbitrator to which Company is a party or by which any of its properties are bound. 4.10 Litigation. There are no Claims before any court or administrative agency pending or, to the Company's and Shareholders' Knowledge, currently threatened against or with respect to Company (or to the Knowledge of Company or Shareholders any Basis therefor), which question the validity of this Agreement or any action taken or to be taken in connection herewith, or which, individually or in the aggregate, might result in a Material Adverse Effect, or in any material impairment of the right or ability to carry on its business as now conducted or as proposed to be conducted, or in any material Liability or Loss on the part of Company. Except as provided in Schedule 4.10 to the Disclosure Schedule, Company and Shareholders are not a party or subject to, and none of their assets are bound by, the provisions of any order, writ, injunction, judgment, or decree of any Governmental Entity or arbitrator. 4.11 Taxes. Company has no Liability for any federal, state or local Taxes, except for Taxes which have accrued and are not yet payable. Company has filed or caused to be filed all Tax Returns required under applicable law to be filed on or before the Closing Date, Company has paid or made provision for all Taxes and other charges which have or may become due for the periods covered by such Tax Returns, and all such Tax Returns are true, correct and complete in all respects. None of the Tax Returns of Company are currently under investigation or audit, nor is an investigation or audit pending, and there has not been an investigation or audit of the Tax Returns of Company in the past seven (7) years. There are no outstanding agreements or waivers extending the statutory period of limitations applicable to any Tax Return for any period. The accounting treatment of all items of income, gain, loss, deduction and credit as reported on all Tax Returns and estimates filed by or on behalf of Company are true, correct and complete, and all deferred Taxes and all Taxes due for the period ending on the Closing Date have been accrued on 15 21 the Balance Sheet of the June 30, 1998 Financial Statements. No Claim has ever been made by any Governmental Entity in a jurisdiction where Company does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. All Taxes owed by Company or which Company is obligated to withhold from amounts owed or owing to any employee, independent contractor, stockholder, creditor or third party have been paid. There are no unresolved Claims concerning Company's Tax Liability, and to the Knowledge of Company and Shareholders no Basis for any such Claims exist. 4.12 Employees. Schedule 4.12(a) to the Disclosure Schedule hereto sets forth a complete list of all current employees of Company, together with each employee's tenure with Company, title or job classification, and the current annual rate of compensation payable to each such employee. There are no unfair labor practice complaints, strikes, slowdowns, stoppages or other controversies pending or, to the Company's and Shareholders' Knowledge, threatened, attempts to unionize or controversies threatened between Company and, or relating to, any of its employees, nor to the Knowledge of Company or Shareholders any Basis therefore. Company is not a party to any collective bargaining agreement with respect to any of its employees or, except as set forth on Schedule 4.12(b) of the Disclosure Schedule, to a written employment contract with any of its employees, and there are no understandings with respect to the employment of any officer or employee of Company which are not terminable by Company without Liability on not more than thirty (30) days' notice. Except as set forth in the Company's profit sharing plan and retirement plan attached hereto as Schedule 4.18, no officer, director, or employee is entitled to receive any payment of any amount under any existing agreement, Benefit Arrangement, Employment Plan or other benefit, or to the accrual or vesting of any other benefit or payment as a result of the consummation of any transactions contemplated by this Agreement. Company has complied with all applicable Legal Requirements which govern workers' compensation, equal employment opportunity and equal pay. Company's employment of each of its employees is in compliance with all immigration and naturalization laws of the United States. 4.13 Consents. All consents, approvals, orders, or authorizations of, or registrations, qualifications, designations, declarations or filings with, any Governmental Entity or under any Material Contract, required on the part of Company in connection with the valid execution and delivery of this Agreement and the sale of the Company Shares, or the consummation of any other transaction contemplated hereby have been obtained, or will be effective at the Closing, except for those consents where the failure to obtain such consents does not result in a Material Adverse Effect on the Company, GFI, FNFI or the Company Shares. 4.14 Operating Rights. To the Company's and Shareholders' Knowledge, Company has all operating authority, licenses, franchises, permits, certificates, consents, rights and privileges (collectively, "Licenses") as are necessary or appropriate to the operation of its business as now conducted, except for those Licenses where the failure to hold such Licenses would not result in a Material Adverse Effect on the Company, GFI, FNFI or the Company Shares. Such Licenses are in full force and effect, no violations have been or are expected to have been recorded in respect of any such Licenses, and no proceeding is pending or, to the Company's and 16 22 Shareholders' Knowledge, threatened or any Basis therefore, that could result in the revocation or limitation of any such Licenses. Company has conducted its business so as to comply in all material respects with all such Licenses. 4.15 Compliance with Applicable Laws. To the Company's and Shareholders' Knowledge, the properties, assets, business and operations of Company have been and are being maintained and conducted in compliance with all Legal Requirements to which Company is subject. No investigation or review by any Governmental Entity with respect to Company is pending or, to the Company's and Shareholders' Knowledge, threatened, or to the Knowledge of Company or Shareholders is there any Basis therefore, nor has any Governmental Entity indicated to Company an intention to conduct the same. 4.16 Insurance. Schedule 4.16 to the Disclosure Schedule hereto sets forth an accurate list, as of the date of this Agreement first set forth above, of all insurance policies carried by Company and all insurance loss runs or workmen's compensation claims received for the past two (2) policy years. Attached to Schedule 4.16 to the Disclosure Schedule are true, complete and correct copies of the policies from the insurance company of all current insurance policies, all of which are in full force and effect. All premiums payable under all such policies have been paid and Company is otherwise in full compliance with the terms of such policies (or other policies providing substantially similar insurance coverage). To the Knowledge of Company or Shareholders, such policies of insurance are of the type and in amounts carried by Persons conducting businesses similar to that of Company. To the Company's and Shareholders' Knowledge, there is no pending termination of or material premium increase with respect to, any of such policies. All claims previously made under such policies have been timely filed. 4.17 Absence of Changes. Except as set forth on Schedule 4.17 to the Disclosure Schedule, since January 1, 1998, there has not been (i) any change or amendment in the Articles of Incorporation, Bylaws or other governing instruments of Company; (ii) any sale or issuance of, or grant of options or rights to acquire, any shares of the Company Stock or other securities of Company or any declaration, setting aside, or payment of dividends or redemptions in respect of any shares of capital stock of Company, or any direct or indirect redemption, purchase, or other acquisition of such stock, or any agreement, understandings or commitments to do the same; (iii) any transfer or other disposition or pledge of, or the grant of options or rights to acquire, any of the outstanding shares of the Company Stock; (iv) any amendment, termination or revocation, or any threat of any amendment, termination, or revocation of any Material Contract; (v) any sale, transfer, mortgage, pledge, or subjection to Lien (other than Permitted Liens) of, on or affecting any of the assets of Company valued at or above $10,000 individually or in the aggregate; (vi) any increase in the compensation paid or payable or in the fringe benefits provided to any employee of Company, or the adoption of any Benefit Arrangements or Employee Plans not in existence in the fiscal year ended December 31, 1997; (vii) any damage, destruction or loss, whether or not covered by insurance, of any of the assets of Company; (viii) any purchase or lease, or commitment for the purchase or lease, of equipment or other capital items not disclosed in Company's Financial Statements which is in excess of the normal, ordinary and usual requirements 17 23 of the business of Company; (ix) any change that by itself or together with other changes, has had a Material Adverse Effect; (x) any agreement or arrangement made by Company or any Shareholder to take any action which, if taken prior to the date hereof, would have made any representation or warranty set forth in this Agreement untrue or incorrect as of the date when made; or (xi) the commencement or notice or threat of commencement of any Claim against Company or any of its affairs. 4.18 Employee Plans. Schedule 4.18 to the Disclosure Schedule hereto sets forth a complete list of all Employee Plans and Benefit Arrangements maintained, administered or contributed to, or otherwise participated in, by Company. True and complete copies of each such Employee Plan or Benefit Arrangement, including amendments thereto, have been provided to GFI, together with true and complete copies of (i) annual reports for the most recent three (3) years (Form 5500 Series including, if applicable, Schedules A and B thereto); (ii) all plan documents and the most recent summary plan description of each such Employee Plan, together with any modifications thereto; and (iii) the most recent favorable determination letter (if applicable) from the Internal Revenue Service for each such Employee Plan. None of the Employee Plans is a "multiemployer plan" as defined in Section 3(37) of ERISA or a "multiple employer plan" as covered in Section 412(c) of the Code, and the Company has not been obligated to make a contribution to any such multiemployer or multiple employer plan. All contributions under the terms of the Plan or Arrangement or applicable law (including all employer contributions and employee salary reduction contributions) which are due have been paid to each such Employee Plan or Benefit Arrangement and all contributions for any period ending on or before the Closing Date which are not yet due have been paid to each such Employee Plan or Benefit Arrangement or accrued in accordance with past custom and practice of Company. Each Employee Plan which is intended to be qualified under Section 401(a) of the Code is, to the Company's and Shareholders' Knowledge, so qualified and each trust maintained pursuant thereto is exempt from income tax under Section 501(a) of the Code. Neither Company nor any Employee Plan, nor any trusts created thereunder, has engaged in a non-exempted "prohibited transaction," as defined in Section 406 of ERISA and Section 4975 of the Code, or any breach of fiduciary duty as defined in Part 4 of Subtitle B of Title I of ERISA in connection with any Employee Plan. 4.19 Intellectual Property Rights. (a) To the Company's and Shareholders' Knowledge, Company owns, or has the right to use, sell or license all Intellectual Property necessary or required for the conduct of its business as presently conducted and such rights to use, sell or license are reasonably sufficient for such conduct of Company's business. Company has taken all reasonable and practicable action designed to safeguard and maintain the secrecy and confidentiality of, and its proprietary right in, all of its Intellectual Property. (b) Neither the manufacture, marketing, license, sale or intended use of any Intellectual Property licensed or sold by Company or currently under development by Company violates any license or agreement between Company and any third party or, to the Company's and 18 24 Shareholders' Knowledge infringes any Intellectual Property of any other party; and there is not pending or threatened, nor to the Knowledge of Company or Shareholders any Basis therefor, any Claim contesting the validity, ownership or right to use, sell, license or dispose of any Intellectual Property or that the proposed use, sale, license or disposition thereof conflicts or will conflict with the rights of any other party, nor to the Knowledge of Company or Shareholders, is there any Basis for any such assertion. 4.20 Environment, Health and Safety. (a) Company has complied with all Environmental, Health and Safety Laws, except where failure to comply would not have a Material Adverse Effect, and Company has received no written notice that a Claim or notice has been filed or commenced against it alleging any failure to so comply. Without limiting the generality of the preceding sentence, Company has, to the Company's and Shareholders' Knowledge, obtained and been in compliance with all of the terms and conditions of all Licenses and other authorizations which are required under, and has complied with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables which are contained in, all Environmental, Health, and Safety Laws, except where failure to comply would not have a Material Adverse Effect. (b) Company has not, in violation of any Environmental, Health and Safety Laws, handled or disposed of any substance, arranged for the disposal of any substance, exposed any employee or other individual to any substance or condition, or owned or operated any property or facility in any manner that could form a Basis for any present or future Claim against Company giving rise to any Liability, except where having done so would not have a Material Adverse Effect. To the Company's and Shareholders' Knowledge, Company has no Liability for damage to any site, location, or body of water (surface or subsurface), for any illness of or personal injury to any employee or other individual, or for any reason under any Environmental, Health, and Safety Law which could have a Material Adverse Effect. (c) All properties used in the Company's business are, to the Company's and Shareholders' Knowledge, free of Hazardous Substances, except where the existence thereof would not have a Material Adverse Effect. 4.21 Certain Transactions. There are no existing or pending transactions, nor are there any agreements or understandings, between Company, on the one hand, and any Shareholder, officer or director of Company, or any person or entity affiliated with any of them, on the other hand, including, without limitation, any transactions, arrangements or understandings relating to the purchase or sale of goods or services or the sale, lease or use of any of the assets of or by Company, with or without adequate compensation, or to any indebtedness owed to or by Company, in any amount whatsoever. 4.22 Bank Accounts; Powers of Attorney. Schedule 4.22 of the Disclosure Schedule sets forth an accurate list, as of the date of this Agreement, of the following: (i) the name of each 19 25 financial institution in which Company has any account or safe deposit box; (ii) the names in which the accounts or boxes are held; (iii) the type of account; and (iv) the name of each person authorized to draw thereon or have access thereto. The Disclosure Schedule hereto also sets forth the name of each Person holding a general or special power of attorney from Company and a description of the terms of such power. 4.23 Investment Representations. Each Shareholder is an "accredited investor," as such term is defined under the Securities Act. Each Shareholder is receiving the Fidelity Common Stock for his own account for investment purposes only, and not as a nominee or agent for any other Person, and not with a view to or for resale in connection with any distribution thereof. Each Shareholder acknowledges that the Fidelity Common Stock to be issued hereunder will not be registered under the Securities Act, nor qualified under any state securities laws on the ground, among others, that no distribution or public offering is to be effected. 4.24 Absence of Claims Against Company. No Shareholder has any Claims against the Company. 4.25 Employee Loans. Except as set forth on the Schedule 4.25, there are no outstanding loans and/or other advances made by Company to any of its officers, directors, shareholders, employees, agents or consultants. 4.26 Brokers' Fees. Company and Shareholders have no Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement. 4.27 Full Disclosure. Neither this Agreement, the representations and warranties by Company and Shareholders contained herein, the Exhibits or Schedules hereto, nor any other written statement or certificate delivered or to be furnished to GFI or FNFI in connection herewith, when read together, contain any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. To the Knowledge of Company and Shareholders, there is no fact which has not been disclosed to GFI and FNFI that would have a Material Adverse Effect or would affect the ability of Company and Shareholders to perform their obligations under this Agreement. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF GFI AND FNFI GFI and FNFI represent and warrant to Company and Shareholders that (except for changes contemplated by this Agreement) each of the following statements is true, correct and complete in all material respects as of the date of this Agreement and will be true, correct and complete in all material respects as of the Closing Date (each such statement to be made again by 20 26 GFI and FNFI on that date with the Closing Date being substituted for the date of this Agreement throughout this Article 5): 5.1 Organization and Standing; Articles and Bylaws. GFI and FNFI are corporations duly organized, validly existing and in good standing under the laws of the State of Delaware, have full power and authority to own their respective assets and properties and to carry on their respective businesses as presently conducted. GFI and FNFI are duly qualified and authorized to do business, and are in good standing as foreign corporations, in each jurisdiction where the nature of their respective activities and of their respective properties (both owned and leased) make such qualification necessary, except where the failure to so qualify would not have a Material Adverse Effect. 5.2 Authorization. All corporate action on the part of GFI and FNFI, and their respective officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement and the documents contemplated hereby, the performance of all of GFI's and FNFI's obligations hereunder and thereunder, and for the purchase of the Company Shares and the issuance of the Fidelity Stock have been taken or will be taken prior to the Closing. This Agreement and the documents contemplated hereby, when executed and delivered by GFI and FNFI, shall constitute valid and legally binding obligations of GFI and FNFI enforceable in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and subject to the availability of equitable remedies. 5.3 No Conflicts. Neither the execution and delivery nor the performance of this Agreement by GFI and FNFI will result in any of the following: (i) a default or an event that, with notice or lapse of time or both, could be a default, breach or violation of (A) the Articles of Incorporation or Bylaws of GFI or FNFI, (B) any Material Contract of GFI or FNFI; (ii) the termination of any Material Contract of GFI or FNFI or the acceleration of the maturity of any Indebtedness or other material obligation of GFI or FNFI; (iii) the creation or imposition of any Lien (except for Permitted Liens) on any of the respective assets or properties of GFI or FNFI; (iv) the creation or imposition of any Lien on any shares of the Fidelity Common Stock; or (v) a violation or breach of any writ, injunction or decree of any Governmental Entity to which GFI or FNFI is a party or by which any of their respective properties are bound. 5.4 Fidelity SEC Documents. FNFI has filed all forms, reports and documents required to be filed with the SEC (the "Fidelity SEC Documents"), all of which have been made available to Company. As of their respective dates, the Fidelity SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such Fidelity SEC Documents, and none of the Fidelity SEC Documents contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of FNFI included in the Fidelity SEC Documents comply in all material 21 27 respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except in the case of the unaudited interim financial statements, as permitted by Form 10-Q promulgated by the SEC) and fairly present (subject, in the case of the unaudited interim financial statements, to recurring audit adjustments normal in nature and amount) the consolidated financial position of FNFI as at the dates thereof and the consolidated results of its operations and cash flows or changes in financial position for the periods then ended. There has been no Material Adverse Effect on FNFI since the filing of FNFI's most recent Form 10-Q. 5.5 Fidelity Common Stock. All of the shares of Fidelity Common Stock to be issued to Shareholders pursuant to Section 2.2 above, will be duly authorized, validly issued, fully paid and non-assessable. Such shares, when issued in accordance with the terms hereof, will have been offered, issued, sold and delivered by FNFI in compliance with all applicable state and federal laws, free and clear of all Liens and Claims and none of such shares shall be issued in violation of the preemptive rights, rights of first offer, or other rights of any shareholder of FNFI. 5.6 Consents. All consents, approvals, orders, or authorizations of, or registrations, qualifications, designations, declarations or filings with, any Governmental Entity, required on the part of GFI and/or FNFI in connection with the valid execution and delivery of this Agreement and the issuance of Fidelity Common Stock, or the consummation of any other transaction contemplated hereby have been obtained, or will be effective at the Closing. 5.7 Brokers' Fees. Neither GFI nor FNFI is a party to or obligated under any agreement with any broker, agent, or finder relating to the transactions contemplated hereby, and neither the execution of this Agreement nor the consummation of the transactions provided for herein will result in any liability to any broker, agent, or finder. 5.8 Full Disclosure. Neither this Agreement, the representations and warranties by GFI and/or FNFI contained herein, the Exhibits or Schedules hereto, nor any other written statement or certificate delivered or to be furnished to Company in connection herewith, when read together, contain any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. To the Knowledge of GFI and FNFI, there is no fact which has not been disclosed to Company and Shareholders that would have a Material Adverse Effect or would affect the ability of GFI and FNFI to perform their obligations under this Agreement. ARTICLE 6 CONDUCT OF BUSINESS PENDING CLOSING During the period commencing on the date hereof and continuing through the Closing Date, Company and Shareholders, jointly and severally, covenant and agree that: 22 28 6.1 Qualification. Company shall maintain all qualifications to transact business and remain in good standing in its jurisdiction of incorporation and in the foreign jurisdictions in which Company owns or leases any property or conducts any business. 6.2 Ordinary Course. Company shall conduct its business in, and only in, the Ordinary Course of Business and, to the extent consistent with such business, shall not make or institute any unusual or novel methods of management, accounting, or operation that vary materially from those methods used by the Company as of December 31, 1997. Company will use commercially reasonable efforts to preserve its business organization intact, to keep available to Company its present officers and employees, and to preserve its present relationships with suppliers, customers, and others having business relationships with the Company. Company shall maintain its properties and assets in good condition and repair. 6.3 Corporate Changes. Company shall not (i) amend its Articles of Incorporation or Bylaws (or equivalent documents); (ii) acquire by merging or consolidating with, or agreeing to merge or consolidate with, or purchase substantially all of the stock or assets of, or otherwise acquire, any business or any corporation, partnership, association or other business organization or division thereof; (iii) enter into any partnership or joint venture; (iv) except as provided in Section 7.11, declare, set aside, make or pay any dividend or other distribution in respect of its capital stock or purchase or redeem, directly or indirectly, any shares of its capital stock; (v) issue or sell any shares of its capital stock of any class or any options, warrants, conversion or other rights to purchase any such shares or any securities convertible into or exchangeable for such shares; or (vi) liquidate or dissolve or obligate itself to do so. 6.4 Indebtedness. Except in the Ordinary Course of Business and as disclosed on Schedule 6.4, Company shall not incur any Indebtedness, sell any debt securities or lend money to or guarantee the Indebtedness of any Person. Company shall not restructure or refinance its existing Indebtedness. 6.5 Accounting. Company shall not make any change in the accounting principles, methods or practices followed by it or depreciation or amortization policies or rates heretofore adopted by it. Company shall maintain its books, records, and accounts in accordance with GAAP applied on a basis consistent with that of prior periods. 6.6 Compliance with Legal Requirements. Company shall comply promptly and in all material respects with all Legal Requirements imposed upon it, its operations and with respect to the transactions contemplated by this Agreement, and shall cooperate promptly with, and furnish information to, GFI and FNFI in connection with any such requirements imposed upon GFI or FNFI, or upon any of its Affiliates, in connection therewith or herewith. 6.7 Disposition of Assets. Except in the Ordinary Course of Business, Company shall not sell, transfer, license, lease or otherwise dispose of, or suffer or cause the encumbrance by any 23 29 Lien other than Permitted Liens upon any of its properties or assets, tangible or intangible, or upon any interest therein. 6.8 Compensation. Except in the Ordinary Course of Business, Company shall not (i) adopt or amend in any material respect any collective bargaining, bonus, profit-sharing, compensation, stock option, pension, retirement, deferred compensation, Employee Plan, Benefit Arrangement, or any other agreement, trust, fund or arrangement for the benefit of employees other than to comply with any Legal Requirement; or (ii) pay, or make any accrual or arrangement for payment of, any increase in compensation, bonuses or special compensation of any kind, or any severance or termination pay to, or enter into any employment or loan or loan guarantee agreement with, any Shareholder or any current or former officer, director, employee or consultant of Company. 6.9 Modification or Breach of Agreements; New Agreements. Except in the Ordinary Course of Business, Company shall not terminate or modify, or commit or cause or suffer to be committed any act that will result in breach or violation of any term of or (with or without notice or passage of time, or both) constitute a default under or otherwise give any Person a basis for nonperformance under, any Material Contract, written or oral. Company shall refrain from becoming a party to any contract or commitment other than in the Ordinary Course of Business. Company shall meet all of its contractual obligations in accordance with their respective terms. 6.10 Capital Expenditures. Except in the Ordinary Course of Business, except for capital expenditures or commitments necessary to maintain its properties and assets in good condition and repair (the amount of which shall not exceed $15,000 individually or in the aggregate), Company shall not purchase or enter into any contract to purchase any capital assets. 6.11 Consents. Company shall use commercially reasonable efforts to obtain any consent, authorization or approval of, or exemption by, any Governmental Entity or Person required to be obtained or made by any Party hereto in connection with the transactions contemplated hereby or the taking of any action in connection with the consummation thereof. 6.12 Maintenance of Insurance. Company shall maintain its policies of insurance in full force and effect on substantially the same terms and conditions as in effect on the date of this Agreement first set forth above, and shall not do, permit or willingly allow to be done any act by which any of said policies of insurance may be suspended, materially impaired or canceled. 6.13 Discharge. Company shall not cancel, compromise, release or discharge any Claim of Company upon or against any Person or waive any right of Company of material value, and not discharge any Lien upon any asset of Company or compromise any debt or other obligation of Company to any Person other than Liens, debts or obligations with respect to current Liabilities of Company. 24 30 6.14 Claims. Company shall not institute, settle or agree to settle any Claim before any Governmental Entity. 6.15 Taxes and Tax Assessments. Company shall pay, when due, and prior to the imposition or assessment of any interest, penalties or Liens by reason of the nonpayment of, all Taxes assessed against Company, its assets, properties or operations. Company shall furnish promptly to GFI a copy of all notices of proposed assessment or similar notices or reports that are received from any taxing authority and which relate to Company's operations for periods ending on or prior to the Closing Date. ARTICLE 7 ADDITIONAL COVENANTS 7.1 Covenants of Company and Shareholders. During the period from the date hereof through the Closing Date, Company and Shareholders agree to: (a) Comply promptly with all applicable Legal Requirements imposed upon them with respect to the transactions contemplated by this Agreement, and shall cooperate promptly with, and furnish information to, GFI or FNFI in connection with any such requirements imposed upon GFI or FNFI or upon any of its Affiliates in connection therewith or herewith; (b) Use their reasonable best efforts to obtain (and to cooperate with GFI and FNFI in obtaining) any consent, authorization or approval of, or exemption by, any Person required to be obtained or made by Company and/or Shareholders in connection with the transactions contemplated by this Agreement; (c) Use their reasonable best efforts to bring about the satisfaction of the conditions precedent to Closing set forth in Section 3.6, above; (d) Promptly advise GFI and FNFI orally and, within three (3) business days thereafter, in writing of any change in Company's business or condition that has had or would reasonably be expected to have a Material Adverse Effect on Company; (e) Deliver to GFI and FNFI prior to the Closing a written statement disclosing any untrue statement in this Agreement or any Exhibit or Schedule hereto (or supplement thereto) or document furnished pursuant hereto, or any omission to state any material fact required to make the statements herein or therein contained complete and not misleading, immediately upon the discovery of such untrue statement or omission, accompanied by a written supplement to any Exhibit or Schedule to this Agreement that may be affected thereby; provided, however, that the disclosure of such untrue statement or omission shall not prevent GFI or FNFI from terminating this Agreement pursuant to Section 8.1(b), below, at any time at or prior to the Closing in respect of any original untrue or misleading statement; and 25 31 (f) Within five business (5) days prior to the Closing, deliver to GFI and FNFI the Disclosure Schedule. 7.2 Covenants of GFI and FNFI. During the period from the date hereof to the Closing Date, GFI and FNFI shall: (a) Comply promptly with all applicable Legal Requirements imposed upon it with respect to the transactions contemplated by this Agreement, and shall cooperate promptly with, and furnish information to, Shareholders in connection with any such requirements imposed upon the Shareholders or Company or upon any of Company's Affiliates in connection therewith or herewith; (b) Use its reasonable best efforts to obtain any consent, authorization or approval of, or exemption by, any Person required to be obtained or made by GFI and FNFI in connection with the transactions contemplated by this Agreement; (c) Use its reasonable best efforts to bring about the satisfaction of the conditions precedent to Closing set forth in Section 3.7 of this Agreement; and (d) Promptly advise Company orally and, within three (3) business days thereafter, in writing of any change in GFI's or FNFI's business or condition that has had or would reasonably be expected to have a Material Adverse Effect on GFI or FNFI; 7.3 Tax Advice. Each Shareholder shall assume and be fully responsible for any and all Liability, including without limitation any and all Tax Liability, incurred by such Shareholder, which is caused by, arises from, or relates to the sale of the Company Shares to GFI and the other transactions set forth herein. Company and Shareholders acknowledge that they have received their own independent tax advice with respect to this Agreement and the transactions contemplated thereby, and are not in any way relying on any statements or advice of GFI, FNFI or any of their officers, directors, employees, agents or representatives with respect to such matters. 7.4 Access and Information. (a) During the period commencing on the date hereof and continuing through the Closing Date, Shareholders shall cause Company to afford to GFI and FNFI and to their accountants, counsel, and other representatives, reasonable access during regular business hours and without undue interruption to its business to all of its properties, books, contracts, commitments, records and personnel and, during such period, to cause Company to furnish promptly to GFI and FNFI all information concerning its business, properties and personnel as GFI or FNFI may reasonably request. (b) Except to the extent permitted by the provisions of Section 7.7, below, GFI and FNFI shall hold in confidence, and shall use reasonable efforts to ensure that their respective 26 32 employees and representatives hold in confidence, all such information supplied to it by Shareholder or Company concerning Company and shall not disclose such information to any third party except as may be required by any Legal Requirement and except for information that (i) is or becomes generally available to the public other than as result of disclosure by GFI or FNFI or its representatives; (ii) becomes available to GFI or FNFI or their representatives from a third party other than Shareholders or Company, and GFI or FNFI or their representatives have no reason to believe that such third party is not entitled to disclose such information; (iii) is known to GFI or FNFI or their representatives on a non-confidential basis prior to its disclosure by Shareholders or Company; or (iv) is made available by Shareholders or Company to any other Person on a non-restricted basis. GFI and FNFI's obligations under the foregoing sentence shall expire on the Closing Date or, if the closing does not occur, one (1) year after the date hereof. 7.5 Expenses. All costs and expenses (including, without limitation, all legal fees and expenses and costs) incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring the same. The legal expenses of the Company shall either (i) be paid by the Shareholders or (ii) be paid by the by the Company and deducted from the amount of retained earnings to be distributed to the Shareholders under Section 7.11. 7.6 Certain Notifications. At all times from the date hereof to the Closing Date, each Party shall promptly notify the others in writing of the occurrence of any event that will or reasonably would be expected to result in the failure to satisfy any of the conditions specified in Sections 3.6 and 3.7, above. 7.7 Publicity. At all times prior to the Closing Date, each Party shall obtain the consent of all other Parties hereto prior to issuing, or permitting any of its directors, officers, employees or agents to issue, any press release or other information to the press, employees of Company or any third party with respect to this Agreement or the transactions contemplated hereby; provided, however, that no party shall be prohibited from supplying any information to any of its representatives, agents, attorneys, advisors, and others to the extent necessary to complete the transactions contemplated hereby so long as such representatives, agents, attorneys, advisors, and others are made aware of the terms of this Section 7.7. Nothing contained in this Agreement shall prevent any party to this Agreement at any time from furnishing any required information to any Governmental Entity or authority pursuant to a Legal Requirement or from complying with its legal or contractual obligations; provided that the Party furnishing such information shall have used its reasonable best efforts to comply with this provision first, and in any event does so only with the advice of counsel. 7.8 Further Assurances. (a) Subject to the terms and conditions of this Agreement, each of the Parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable Legal Requirements, to consummate and make effective the transactions contemplated by this Agreement. 27 33 (b) If at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, Shareholders and the proper officers or directors of GFI, FNFI and Company, as the case may be, shall take or cause to be taken all such necessary or convenient action and execute, and deliver and file, or cause to be executed, delivered and filed, all necessary or appropriate documentation. 7.9 Competing Offers. Shareholders agree that they will not, and will cause Company not to, directly or indirectly, through an officer, director, agent, or otherwise, solicit, initiate or encourage the submissions of bids, offers or proposals by, any Person with respect to an acquisition of Company or its assets or capital stock or a merger or similar transaction, and Shareholders will not, and will not permit Company to, engage any broker, financial adviser or consultant to initiate or encourage proposals or offers from other Persons. Furthermore, Shareholders shall not, and shall not permit Company to, directly or indirectly, through any officer, director, agent or otherwise, engage in negotiations concerning any such transaction with, or provide information to, any Person other than GFI and FNFI and their representatives with a view to engaging, or preparing to engage, that Person with respect to any matters in this Section 7.9. Shareholders shall ensure that Company shall not commence any proceeding to merge, consolidate or liquidate or dissolve or obligate itself to do so. 7.10 NYSE Listing. FNFI will make such filings as are necessary with the New York Stock Exchange regarding the transactions contemplated hereby and will cause the shares of Fidelity Common Stock to be issued under this Agreement to be approved for listing on the NYSE, subject only to official notice of issuance, prior to the Closing. 7.11 Distribution of Retained Earnings. Notwithstanding anything to the contrary contained herein, Shareholders may, immediately prior to the Closing, take a distribution from the Company equal to the retained earnings of the Company as of Closing (but excluding from such retained earnings the Residuals assigned to the Company under Section 3.6(l)), computed in accordance with the Code and regulations issued thereunder. The purpose of such distribution is to allow Shareholders to receive the net profits of the Company earned through the Closing which have not previously been distributed to the Shareholders. 7.12 Board of Directors. Following the Closing, the Shareholders shall be appointed to and shall serve on the Board of Directors of the Company along with such other persons as designated from time to time by GFI. Shareholders acknowledge that GFI will appoint at least 3 other persons to the Board and that GFI shall at all times have control over the Board of Directors. ARTICLE 8 TERMINATION, AMENDMENT AND WAIVER 8.1 Termination. This Agreement may be terminated at any time prior to the Closing: 28 34 (a) By written consent of GFI, FNFI, Company and Shareholders; (b) By Shareholders and Company as a group, on the one hand, or by GFI and FNFI as a group, on the other hand, if there has been a breach, failure to fulfill or default (collectively, a "Breach") on the part of the other Party (the "Breaching Party") of any of the representations and warranties contained herein or in the due and timely performance and satisfaction of any of the covenants, agreements or conditions contained herein; or (c) By Shareholders and Company as a group, on the one hand, or by GFI and FNFI as a group, on the other hand, if there shall be a final non-appealable order of a Governmental Entity or arbitrator in effect preventing consummation of the transactions hereunder; or there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the transactions hereunder by any Governmental Entity or arbitrator which would make the consummation of the transactions illegal. (d) By Shareholders and Company as a group, on the one hand, or by GFI and FNFI as a group, on the other hand, if the Closing has not occurred on or prior to August 14, 1998. 8.2 Effect of Termination. In the case of any termination of this Agreement pursuant to Section 8.1, above, this Agreement shall forthwith become void, and there shall be no Liability or obligation on the part of any Party or its officers, directors or shareholders. Notwithstanding the foregoing sentence, (i) the provisions of Section 7.4(b) and 7.5 shall remain in full force and effect and survive any termination of this Agreement; (ii) each Party shall remain liable for any breach of this Agreement prior to its termination; and (iii) in the event of termination pursuant to Section 8.1(b), above, then notwithstanding the provisions of Section 7.5, above, the Breaching Party shall be liable to the non-breaching Party to the extent of the expenses incurred by such other party in connection with this Agreement and the transactions contemplated thereby. 8.3 Amendment. This Agreement may be amended at any time by a written instrument executed by the Parties. Any amendment effected pursuant to this Section 8.3 shall be binding upon all Parties. 8.4 Waiver. Any term or provision of this Agreement may be waived in writing at any time by the Party or Parties entitled to the benefits thereof. Any waiver effected pursuant to this Section 8.4 shall be binding upon all Parties hereto. No failure to exercise and no delay in exercising any right, power or privilege shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude the exercise of any other right, power or privilege. No waiver of any breach of any covenant or agreement hereunder shall be deemed a waiver of a preceding or subsequent breach of the same or any other covenant or agreement. The rights and remedies of each Party under this Agreement are in addition to all other rights and remedies, whether at law, in equity or otherwise, that such Party may have against the other Parties. 29 35 ARTICLE 9 INDEMNIFICATION 9.1 Survival of Representations and Warranties. The representations and warranties of Company, Shareholders, GFI and FNFI contained in this Agreement or in any writing delivered pursuant hereto or at the Closing shall survive the Closing and the consummation of the transactions contemplated hereby until 18 months after the Closing Date; provided that the representations and warranties contained in Sections 4.2, 4.4, 4.11, and 4.20 shall continue until the expiration of the applicable statutes of limitations. 9.2 Indemnification by Company and Shareholders. Effective as of the Closing and subject to the limitations set forth in Section 9.9, Shareholders, in consideration for the purchase of the Company Shares by GFI, covenant and agree with GFI, FNFI and their respective officers, directors, employees, shareholders, assigns, successors and Affiliates (a "FNFI Indemnified Party") to indemnify and hold harmless a FNFI Indemnified Party from, against and in respect of any and all Losses suffered, sustained, incurred or paid by any FNFI Indemnified Party in connection with resulting from or arising out of, directly or indirectly: (a) any breach of any representation or warranty of any Shareholder or Company set forth in this Agreement or any certificate, document or instrument delivered by or on behalf of any Shareholder or Company in connection herewith; (b) any non-fulfillment of any covenant or agreement on the part of any Shareholder or Company in this Agreement; or (c) the business, operations or assets of Company prior to the Effective Time, except to the extent disclosed in the Financial Statements or the Disclosure Schedule. Payment shall not be a condition precedent to recovery under the above indemnities. 9.3 Indemnification by GFI and FNFI. Effective as of the Closing and subject to the limitations set forth in Section 9.9, GFI and FNFI covenant and agree with Shareholders and their respective heirs, successors and assigns (a "Shareholder Indemnified Party") to indemnify and hold harmless a Shareholder Indemnified Party from, against and in respect of any and all Losses suffered, sustained, incurred or paid by any Shareholder Indemnified Party in connection with resulting from or arising out of, directly or indirectly: (a) any breach of any representation or warranty of GFI or FNFI set forth in this Agreement or any certificate, document or instrument delivered by or on behalf of GFI or FNFI in connection herewith; or (b) any non-fulfillment of any covenant or agreement on the part of GFI or FNFI in this Agreement which is required to be performed after the Closing. 30 36 Payment shall not be a condition precedent to recovery under the above indemnities. 9.4 Third-Party Claims. In the event any third party asserts any Claim with respect to any matter as to which the indemnities in this Agreement relate, the Party or Person against whom the Claim is asserted (the "Indemnified Party") shall give prompt notice to the other Party or Person (the "Indemnifying Party"), and the Indemnifying Party shall have the right at its election to take over the defense or settlement of the third-party Claim at its own expense by giving prompt notice to the Indemnified Party. If the Indemnifying Party does not give such notice and does not proceed diligently so to defend the third-party Claim within thirty (30) days after receipt of the notice of the third-party Claim, the Indemnifying Party shall be bound by any defense or settlement that the Indemnified Party may make as to those claims and shall reimburse the Indemnified Party for its Losses related to the defense or settlement of the third-party Claim. The Parties shall cooperate in defending against any asserted third-party Claims. For purposes of this Article 9, the reference to this Agreement includes any certificate, Disclosure Schedule, Exhibit, list, summary or other information provided or delivered to a party by the Indemnifying Party or its agents and affiliates in connection with this Agreement. 9.5 Access and Information. With respect to any Claim for indemnification hereunder, the Indemnified Party will give to the Indemnifying Party and its counsel, accountants and other representatives full and free access during normal business hours and upon the giving of reasonable prior notice to their books and records relating to such Claims, and to their employees, accountants, counsel and other representatives, all without charge to the Indemnifying Party, except for reimbursement of reasonable out-of-pocket expenses. The Indemnified Party agrees to maintain any of its books and records which may relate to a Claim for indemnification hereunder for such period of time as may be necessary to enable the Indemnifying Party to resolve such Claim; provided that the failure to do so shall not relieve the Indemnifying Party of any obligation hereunder unless the Indemnifying Party demonstrates that the failure to do so substantially prejudiced the Indemnifying Party in the defense of any third-party proceeding, and then only to the extent so prejudiced. 9.6 Mitigation. The Indemnified Parties agree to mitigate their Losses and use their reasonable efforts to collect any indemnifiable damages from any available insurer or third-party indemnitors before collecting from the Indemnifying Party; provided, however, nothing in the foregoing sentence shall preclude any Indemnified Party from filing a Claim against the Indemnifying Party from the outset. If any amounts are recovered from an insurer or third party after payment to an Indemnified Party, the recovering party (or parties) shall promptly pay over to such Indemnifying Party (or Parties) any such recovered amounts, but only to the extent of any Losses with respect to such matter. 9.7 Right of Set-Off. Any Party to this Agreement shall be entitled to set-off against any amounts due to another Party under the terms of this Agreement or under any additional agreement (except for the Employment Agreements) executed in connection herewith, any amounts due from such other Party under the terms of this Agreement. 31 37 9.8 Limitations. The obligations of the parties to indemnify the other parties under this Article 9 are subject to the following limitations: (a) Each of the Shareholder's obligations shall be limited to an aggregate amount equal to the total consideration received by such Shareholder under Section 2.2. (b) Any indemnification claim under this Article 9 asserted by GFI or FNFI against the Company or the Shareholders shall be asserted on a 50/50 basis against each of the Shareholders (i.e., each Shareholder shall not be liable for more than 50% of any such claim). (c) GFI or FNFI shall not assert a claim for indemnification until the total of all claims exceed an aggregate amount of $20,000 (the "Threshold Amount"). Once the claims exceed the Threshold Amount, GFI and FNFI can assert and recover all amounts owed hereunder, including the initial $20,000 representing the Threshold Amount. (d) FNFI's obligations to indemnify the Shareholders under this Article 9 shall only apply to those breaches by FNFI of its representations, warranties, covenants and obligations under this Agreement and not the representations, warranties, covenants and obligations of GFI. 9.9 Indemnification Exclusive. The indemnification provisions of this Article 9 are the sole and exclusive remedy any Party has against another Party for any breach of representation, warranty, covenant or agreement. ARTICLE 10 GENERAL PROVISIONS 10.1 Governing Law. This Agreement shall be governed by and construed under the laws of the State of Illinois as applied to agreements among Illinois residents, made and to be performed entirely within the State of Illinois. 10.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the Parties hereto. 10.3 Entire Agreement. This Agreement, the Exhibits and Schedules hereto, and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the Parties with regard to the subject matter hereof and no Party shall be liable or bound to any other Party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any Person, other than the Parties hereto and their respective successors and assigns, any rights, remedies, obligations, or Liabilities under or by reason of this Agreement, except as expressly provided herein. 32 38 10.4 Severability. In the event any provision of this Agreement shall be invalid, illegal, or unenforceable, it shall, to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the Parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 10.5 Notice. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given (i) if delivered personally (including by overnight express or messenger), upon delivery; (ii) if delivered by registered or certified mail, return receipt requested, upon the earlier of actual delivery or three (3) days after being mailed; or (iii) if given by facsimile, upon confirmation of transmission by facsimile, in each case to the Parties at the following addresses: (a) If to GFI or FNFI, addressed to: Fidelity National Financial, Inc. 3916 State Street, Suite 300 Santa Barbara, California 93105 Attn: Andrew F. Puzder Facsimile: (805) 898-7149 With a copy to: Greg Lane, Esq. Fidelity National Financial, Inc. 3916 State Street, Suite 300 Santa Barbara, California 93105 Facsimile: 805-898-7149 (b) If to Shareholders or Company, addressed to: Lexington Capital Corporation 106 Wilmot Road, Suite 250 Deerfield, Illinois 60015 Facsimile: 847-374-1044 With a copy to: Allan J Reich, Esq. D'Ancona & Pflaum 30 N. LaSalle Street Suite 2900 Chicago, Illinois 60602 33 39 Facsimile: 312-580-0923 10.6 Construction. Parties to this Agreement have participated jointly in the negotiation and drafting of this Agreement and have had competent counsel of their own choosing. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 10.7 Headings. The headings of the Articles and Sections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 10.8 Counterparts. This Agreement may be executed by facsimile and in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 10.9 Recitals, Schedules, and Exhibits. The Recitals, Schedules and Exhibits to this Agreement are incorporated herein and, by this reference, made a part hereof as if fully set forth at length herein. [SIGNATURE PAGES FOLLOW.] 34 40 IN WITNESS WHEREOF, the foregoing Stock Purchase Agreement is hereby executed as of the date first above written. FNFI: FIDELITY NATIONAL FINANCIAL, INC., a Delaware Corporation By: /s/ William W. Wehner --------------------------------- Its: Executive Vice President --------------------------------- GFI: GRANITE FINANCIAL, INC., a Delaware Corporation By: /s/ William W. Wehner --------------------------------- Its: Chief Executive Officer --------------------------------- COMPANY: LEXINGTON CAPITAL CORPORATION, an Illinois Corporation By: /s/ Lawrence B. Moller --------------------------------- Its: President --------------------------------- SHAREHOLDERS: /s/ Edward C. Litke ------------------------------------ Edward C. Litke, shareholder /s/ Lawrence B. Moller ------------------------------------ Lawrence B. Moller, shareholder 35 EX-11 9 COMPUTATION OF BASIC AND DILUTED EPS 1 EXHIBIT 11 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 -------- --------- --------- (RESTATED) (RESTATED) Basic earnings per share calculation: Earnings before extraordinary loss $105,692 $ 49,008 $ 29,241 Extraordinary loss, net of applicable income tax benefit of $1,180 -- (1,700) -- -------- -------- -------- Net earnings $105,692 $ 47,308 $ 29,241 ======== ======== ======== Weighted average shares 27,921 23,355 20,426 ======== ======== ======== Basic earnings per share Earnings before extraordinary loss $ 3.79 $ 2.10 $ 1.43 Extraordinary loss -- (.07) -- -------- -------- -------- Net earnings $ 3.79 $ 2.03 $ 1.43 ======== ======== ======== Diluted earnings per share calculation: Earnings before extraordinary loss $105,692 $ 49,008 $ 29,241 Plus: Impact of assumed conversion of LYONs 2,463 3,142 3,196 -------- -------- -------- Earnings before extraordinary loss plus assumed conversion 108,155 52,150 32,437 Extraordinary loss, net of applicable income tax benefit of $1,180 -- (1,700) -- -------- -------- -------- Net earnings plus assumed conversions $108,155 $ 50,450 $ 32,437 ======== ======== ======== Weighted average shares 27,921 23,355 20,426 Plus: Incremental shares from assumed conversions LYONs 3,694 5,008 5,272 Options 1,859 1,236 733 -------- -------- -------- Dilutive potential shares 33,474 29,599 26,431 ======== ======== ======== Diluted earnings per share Earnings before extraordinary loss plus assumed conversions $ 3.23 $ 1.76 $ 1.23 Extraordinary loss -- (0.06) -- -------- -------- -------- Net earnings $ 3.23 $ 1.70 $ 1.23 ======== ======== ========
EX-21 10 LIST OF SUBSIDIARIES 1 EXHIBIT 21 LIST OF SUBSIDIARIES OF FIDELITY NATIONAL FINANCIAL, INC. 1. Fidelity National Title Insurance Company, a California corporation ("FNTIC"), 99.9% owned by FNFI; Subsidiaries: (a) Fidelity National Company of California, a California corporation; (b) Fidelity National Company of Northern California, a California corporation; (c) Fidelity National Title & Escrow of Hawaii, Inc., a Hawaii corporation; (d) Fidelity National Title Insurance Agency of Coconino, Inc., an Arizona corporation, FNTIC owns 21%; (e) BHC&M, Ltd., a Virginia corporation; (f) Title Services, Inc., a Tennessee corporation; (g) Fidelity Tax Service, Inc., a California corporation; (h) Kensington Development Corporation, a California corporation, 10% is owned by FNTIC; 90% by Manchester Development Corporation, a California corporation (see 34(a) below); (i) Pacific American Property Exchange Corporation, a California corporation; (j) Republic Title Insurance Agency, Inc., a California corporation (inactive); (k) Title Insurance Policy Co. of Pinal County, an Arizona corporation (inactive); (l) UTC Capital Group, Inc., a Texas corporation; Subsidiaries: 1. Dallas-Fidelity National Title Agency, Inc. dba Fidelity National Title Agency, Inc., a Texas corporation (inactive); 2. LRT Record Services, Inc. dba Land Records of Texas, a Texas corporation (inactive); (m) Western Financial Trust Company, a California corporation; 2. Fidelity National Title Insurance Company of New York, a New York corporation; Subsidiaries: (a) Amtitle Company, a California corporation (inactive); (b) Gulf Stream Title Company of Miami, a Florida corporation (inactive); (c) Miami Title and Abstract Company, a Florida corporation (inactive); 2 (d) National Title Insurance of New York, Inc., a New York corporation; (e) National Title Insurance Services, Inc., a North Carolina corporation; (f) Nations Title Insurance of New York, Inc., a New York corporation; Subsidiaries: 1. Fidelity National Title and Abstract, Inc., a Maryland corporation; 2. Nations Title of Arizona, Inc., an Arizona corporation; (g) Network Title Insurance Agencies of Florida, Inc., a Florida corporation (inactive); (h) Settlement Network of Pennsylvania, Inc., a Pennsylvania corporation (inactive); (i) Statewide Research, Inc., a Florida corporation; 3. Agency Sales and Posting, Inc., a California corporation; 4. Alamo Title Holding Company, a Texas corporation ("ATHC"); Subsidiaries: (a) Alamo Title Company of Tarrant County, Inc. dba Alamo Title Company, a Texas corporation; (b) Alamo Title Insurance, a Texas corporation ("ATI"); Subsidiaries: 1. Alamo Title Company, a Texas corporation; 2. Rio Grande Title Company, Inc., a Texas corporation, ATI owns 20%; (c) Alamo Title of Guadalupe County, Inc. dba Alamo Title County, a Texas corporation; (d) Alamo Title of Travis County, Inc. dba Alamo Title Company, a Texas corporation; (e) Hexter-Fair Title Company, a Texas corporation, ATHC owns 50%; (f) SWT Holding, Inc., a Texas corporation; Subsidiary: 1. Alamo Title Company of Harris County, Inc. dba Alamo Title Company, a Texas corporation; Subsidiary: (a) Alamo Title Company of Brazoria County, Inc. dba Alamo Title Company, a Texas corporation; 3 5. American National Financial, Inc., a California corporation, FNFI owns 42.7%; Subsidiaries: (a) American Document Services, Inc., a California corporation; (b) American Title Company, a California corporation; Subsidiaries: 1. Landmark REO Management Services, Inc., a Kansas corporation; 2. Nations Title Insurance of Arizona, Inc., an Arizona corporation; 3. Santa Barbara Title Company, a California corporation; (c) West Point Appraisal Services, Inc.; a California corporation; (d) West Point Properties, Inc., a California corporation; (e) West Point Support Services, Inc., a California corporation; 6. Arizona Sales and Posting, Inc., an Arizona corporation; 7. A.S.A.P. Legal Publication Services, Inc., a California corporation; 8. Builders Title of Nevada, Inc., a Nevada corporation; 9. CalWest Service Corporation, a California corporation; 10. Classified Credit Data, Inc. a California corporation; 11. Credit Reports, Inc., a California corporation; 12. El Paso-Fidelity Title Company dba Fidelity National Title Company of El Paso, a Texas corporation (inactive); 13. Fidelity Asset Management, Inc., an Arizona corporation; 14. Fidelity Asset Management, Inc., a California corporation; 15. Fidelity Express Network, Inc., a California corporation; 16. Fidelity National 1031 Exchange Services, Inc., a California corporation; 17. Fidelity National Flood, Inc., a Texas corporation; 18. Fidelity National Information Services, Inc., a California corporation; 19. Fidelity National Tax Service, Inc., a California corporation, 100% of the Preferred stock is owned by FNFI; 20. Fidelity National Title Agency, Inc., an Arizona corporation; 4 21. Fidelity National Title Agency of Nevada, Inc., a Nevada corporation; 22. Fidelity National Title Agency of Pinal County, Inc., an Arizona corporation; 23. Fidelity National Title Company, a California corporation; 24. Fidelity National Title Company of California, a California corporation; 25. Fidelity National Title Company of Oregon, an Oregon corporation; Subsidiary: (a) Professional Escrow, Inc., an Oregon corporation; 26. Fidelity National Title Company of Washington, a Washington corporation; 27. Fidelity National Title of Nevada, Inc., a Nevada corporation; 28. Fidelity Participations, Inc., a California corporation; 29. First Title Corporation, a Tennessee corporation; 30. FNTIC Properties, a California corporation; 31. Granite Financial, Inc., a Delaware corporation; Subsidiaries: (a) GF Funding Corp. I, a Delaware corporation; (b) GF Funding Corp. II, a Delaware corporation; (c) GF Funding Corp. III, a Delaware corporation; (d) GF Funding Corp. IV, a Delaware corporation; (e) GF Funding Corp. V, a Delaware corporation; (f) GF Funding Corp. VI, a Delaware corporation; (g) GF Funding Corp. VII, a Delaware corporation; (h) Granite Financial Acquisition Corp. I, a Delaware corporation; (i) North Pacific Funding, Inc., a Washington corporation; Subsidiary: 1. CKC Corporation, a Washington corporation; 32. ICS Ifland Credit Services, Inc., a Kentucky corporation; 5 33. Lexington Capital Corporation, a Illinois corporation; 34. Manchester Development Corporation, dba Orion Realty Group, a California corporation; Subsidiary: (a) Kensington Development Corporation, a California corporation, Manchester Development Corporation, a California corporation, owns 90%, Fidelity National Title Insurance Company ("FNTIC"), a California corporation, owns 10% (see 1(h) above); 35. Micro General Corporation, a Delaware corporation, FNFI owns 81%; 36. National Alliance Marketing Group, Inc., a California corporation; Subsidiary: (a) Fidelity National Home Warranty Company, a California corporation; 37. Nations Title, Inc., a Kansas corporation; Subsidiaries: (a) Fidelity National Appraisal Services, Inc., a Kansas corporation; (b) Nations Post and Pub Services, Inc., a Kansas corporation; 38. Nationwide Recording Service, a California corporation; 39. Rocky Mountain Aviation, Inc., an Arizona corporation; 40. Rocky Mountain Printing Services, Inc., a California corporation; 41. Rocky Mountain Support Services, Inc., an Arizona corporation; 42. San Joaquin Title Company, a California corporation; 43. Title Insurance and Escrow Services, Inc., an Oregon corporation; 44. WAEC Apartments, Inc., a California corporation; 45. WAEC, Inc., a California corporation; 46. Western Pacific Property and Casualty Agency, Inc., an Arizona corporation. EX-23 11 INDEPENDENT AUDITORS' CONSENT 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Fidelity National Financial, Inc.: We consent to incorporation by reference in the Registration Statements (No. 33-32853, 33-15027, 33-34300, 33-45709, 33-45272, 33-15008, 33-56514, 33-64834, 33-64836, 33-83026, 33-61983, 333-48411, 333-61111, 333-64229) on Form S-8 of Fidelity National Financial, Inc. of our reports dated February 17, 1999, except as to Note Q to the Consolidated Financial Statements, which is as of March 25, 1999 relating to the Consolidated Balance Sheets of Fidelity National Financial, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related Consolidated Statements of Earnings, Comprehensive Earnings, Stockholders' Equity and Cash Flows and related schedules for each of the years in the three-year period ended December 31, 1998 which reports appear in the December 31, 1998 Annual Report on Form 10-K of Fidelity National Financial, Inc. KPMG LLP Los Angeles, California March 26, 1999 EX-27 12 FDS 12-31-98
7 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 330,068 0 0 50,191 0 4,673 510,515 51,309 0 0 969,470 224,534 0 0 0 214,624 0 0 3 396,737 969,470 910,278 22,397 17,190 338,600 59,294 0 1,054,037 175,134 69,442 0 0 0 0 105,692 3.79 3.23 0 0 0 0 0 0 0
EX-27.1 13 FDS 9-30-98 (RESTATED)
7 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 297,889 0 0 56,626 0 4,728 407,733 80,295 0 0 860,017 215,611 0 0 0 155,566 0 0 3 354,765 860,017 642,726 14,688 13,717 241,939 41,383 0 739,227 132,460 55,540 76,920 0 0 0 76,920 2.78 2.36 0 0 0 0 0 0 0
EX-27.2 14 FDS 6-30-98 (RESTATED)
7 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 256,315 0 0 91,395 0 0 387,792 90,185 0 0 836,251 206,919 0 0 0 156,295 0 0 3 334,038 836,251 404,517 10,025 11,954 157,158 26,757 0 470,647 86,250 36,131 50,119 0 0 0 50,119 1.84 1.56 0 0 0 0 0 0 0
EX-27.3 15 FDS 3-31-98 (RESTATED)
7 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 239,663 0 0 81,155 0 5,172 366,537 55,072 0 0 771,024 201,853 0 0 0 165,751 0 0 3 292,896 771,024 182,296 4,994 1,997 72,926 13,339 0 220,075 28,799 12,119 16,680 0 0 0 16,680 .62 .53 0 0 0 0 0 0 0
EX-27.4 16 FDS 12-31-97 (RESTATED)
7 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 239,818 0 0 77,553 0 5,201 358,373 72,887 0 0 747,695 201,674 0 0 0 163,015 0 0 3 274,047 747,695 616,074 18,967 16,839 211,179 41,558 0 735,898 85,603 36,595 49,008 0 (1,700) 0 47,308 2.03 1.70 0 0 0 0 0 0 0
EX-27.5 17 FDS 9-30-97 (RESTATED)
7 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 197,666 0 0 87,696 0 7,175 317,417 101,068 0 0 705,845 199,742 0 0 0 182,325 0 0 3 228,429 705,845 440,149 13,098 13,957 142,652 28,938 0 527,001 53,917 22,047 31,870 0 0 0 31,870 1.43 1.18 0 0 0 0 0 0 0
EX-27.6 18 FDS 6-30-97 (RESTATED)
7 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 191,309 0 0 62,022 0 7,767 272,288 75,825 0 0 630,300 199,257 0 0 0 184,194 0 0 3 178,163 630,300 278,598 8,730 3,990 90,090 18,022 0 340,891 22,495 9,120 13,375 0 0 0 13,375 .61 .53 0 0 0 0 0 0 0
EX-27.7 19 FDS 3-31-97 (RESTATED)
7 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 181,474 0 0 51,952 0 7,081 250,604 61,636 0 0 601,759 198,141 0 0 0 183,788 0 0 3 161,441 601,759 127,453 4,927 1,545 41,387 7,795 0 162,416 5,101 2,104 2,997 0 0 0 2,997 .14 .14 0 0 0 0 0 0 0
EX-27.8 20 FDS 12-31-96 (RESTATED)
7 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 188,350 0 0 45,822 0 11,352 254,577 81,108 0 0 609,658 196,527 0 0 0 179,508 0 0 3 162,642 609,658 552,799 16,751 2,476 162,769 36,275 0 650,294 48,226 18,985 29,241 0 0 0 29,241 1.43 1.23 0 0 0 0 0 0 0
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