-----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, Lr5PPc82s6JGZv3eAS3s2Vyb+bOvlBFjTdTMmkuRih5uGjEgv6uGRsXgiuoGbBTh +EWPxrcKNq/q1OHwsIDMqA== 0000892569-97-003110.txt : 19971113 0000892569-97-003110.hdr.sgml : 19971113 ACCESSION NUMBER: 0000892569-97-003110 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NYSE 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-Q SEC ACT: SEC FILE NUMBER: 001-09396 FILM NUMBER: 97715188 BUSINESS ADDRESS: STREET 1: 17911 VON KARMAN AVE STREET 2: STE 300 CITY: IRVINE STATE: CA ZIP: 92614 BUSINESS PHONE: 7148529770 MAIL ADDRESS: STREET 1: MLISS JONES KANE STREET 2: 17911 VON KARMAN AVE STE 300 CITY: IRVINE STATE: CA ZIP: 92614 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1997 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1997 Commission File Number 1-9396 FIDELITY NATIONAL FINANCIAL, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 86-0498599 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 17911 Von Karman Avenue, Irvine, California 92614 - ------------------------------------------- --------------------- (Address of principal executive offices) (Zip Code) (714) 622-4333 ---------------------------------------------------- (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. $.0001 par value common - 16,276,062 shares as of November 11, 1997 Exhibit Index appears on page 12 of 13 sequentially numbered pages. 2 FORM 10-Q QUARTERLY REPORT Quarter Ended September 30, 1997 TABLE OF CONTENTS
Page Number ----------- Part I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements A. Condensed Consolidated Balance Sheets as of 3 September 30, 1997 and December 31, 1996 B. Condensed Consolidated Statements of Earnings 4 for the three-month and nine-month periods ended September 30, 1997 and 1996 C. Condensed Consolidated Statements of Cash Flows 5 for the nine-month periods ended September 30, 1997 and 1996 D. Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations Part II: OTHER INFORMATION Items 1.- 4. of Part II have been omitted because they are not applicable with respect to the current reporting period. Item 5. Omitted because it is not applicable with respect to the current reporting period. Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIDELITY NATIONAL FINANCIAL, INC. --------------------------------- (Registrant) By: /s/ Allen D. Meadows -------------------------------- Allen D. Meadows Executive Vice President Chief Financial Officer Date: November 11, 1997 2 3 Part I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
September 30, December 31, 1997 1996 -------- -------- (Unaudited) ASSETS Investments: Fixed maturities available for sale, at fair value $174,008 $166,329 Equity securities, at fair value 84,438 43,578 Other long-term investments, at cost, which approximates fair value 8,866 5,542 Short-term investments, at cost, which approximates fair value 15,272 873 Investments in real estate and partnerships, net 7,175 11,352 -------- -------- Total investments 289,759 227,674 Cash and cash equivalents 80,329 63,971 Trade receivables, net 50,502 54,355 Notes receivable, net 8,659 11,317 Prepaid expenses and other assets 60,304 55,072 Title plants 51,661 50,701 Property and equipment, net 35,045 38,617 Income taxes receivable -- 7,589 -------- -------- $576,259 $509,296 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities $ 52,154 $ 53,987 Notes payable 150,918 148,922 Reserve for claim losses 188,333 187,245 Deferred income tax liabilities, net 15,053 7,604 Income taxes payable 12,523 -- -------- -------- 418,981 397,758 Minority interest 3,489 1,287 Stockholders' equity: Preferred stock, $.0001 par value; authorized, 3,000,000 shares; issued and outstanding, none -- -- Common stock, $.0001 par value; authorized, 50,000,000 shares in 1997 and 1996; issued, 19,855,014 as of September 30, 1997 and 19,412,694 as of December 31, 1996 2 2 Additional paid-in capital 68,376 61,271 Retained earnings 116,001 91,019 -------- -------- 184,379 152,292 Net unrealized gains on investments 23,785 12,334 Less treasury stock, 5,492,138 shares as of September 30, 1997 and December 31, 1996, at cost 54,375 54,375 -------- -------- 153,789 110,251 -------- -------- $576,259 $509,296 ======== ========
See Notes to Condensed Consolidated Financial Statements. 3 4 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data)
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 1997 1996 1997 1996 -------- -------- -------- -------- (Unaudited) (Unaudited) REVENUE: Title insurance premiums $141,060 $126,757 $381,432 $346,543 Escrow fees 20,771 16,414 58,365 50,242 Other fees and revenue 22,148 19,824 63,995 56,009 Interest and investment income, including realized gains and losses 13,936 3,697 25,773 11,924 -------- -------- -------- -------- 197,915 166,692 529,565 464,718 -------- -------- -------- -------- EXPENSES: Personnel costs 57,036 52,851 171,854 159,735 Other operating expenses 37,953 38,184 119,115 110,574 Agent commissions 63,285 53,429 157,919 131,773 Provision for claim losses 9,981 9,273 26,041 25,048 Interest expense 2,389 2,332 7,167 6,908 -------- -------- -------- -------- 170,644 156,069 482,096 434,038 -------- -------- -------- -------- Earnings before income taxes 27,271 10,623 47,469 30,680 Income tax expense 11,414 4,306 19,484 12,272 -------- -------- -------- -------- Net earnings $ 15,857 $ 6,317 $ 27,985 $ 18,408 ======== ======== ======== ======== Primary earnings per share $ 1.06 $ .44 $ 1.90 $ 1.29 ======== ======== ======== ======== Fully diluted earnings per share $ .85 $ .38 $ 1.57 $ 1.11 ======== ======== ======== ======== Primary weighted average shares outstanding 14,999 14,321 14,692 14,249 ======== ======== ======== ======== Fully diluted weighted average shares outstanding 19,544 18,717 19,410 18,643 ======== ======== ======== ======== Cash dividends per share $ .07 $ .06 $ .21 $ .19 ======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements. 4 5 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine months ended September 30, ------------------------ 1997 1996 --------- --------- (Unaudited) Cash flows from operating activities: Net earnings $ 27,985 $ 18,408 Reconciliation of net earnings to net cash provided by operating activities: Depreciation and amortization 10,816 8,478 Net increase (decrease) in reserve for claim losses 968 (1,277) Provision for possible losses on real estate and notes receivable 819 363 Gain on sales of investments, real estate and other assets (14,342) (2,600) Amortization of LYONs original issue discount and debt issuance costs 4,742 3,899 Other (35) 127 Change in assets and liabilities, net of effects from acquisition of subsidiaries: Net (increase) decrease in trade receivables 532 (8,740) Net (increase) decrease in prepaid expenses and other assets (3,551) 2,573 Net decrease in accounts payable and accrued liabilities (231) (1,788) Net increase in income taxes 20,112 7,294 --------- --------- Net cash provided by operating activities 47,815 26,737 --------- --------- Cash flows from investing activities: Proceeds from sales of property and equipment 15,742 1,521 Proceeds from sales of real estate 4,567 -- Proceeds from sales and maturities of investments 171,932 143,627 Collections of notes receivable 3,186 9,353 Additions to title plants (735) (695) Additions to property and equipment (16,338) (8,340) Additions to investments (205,082) (148,939) Additions to notes receivable (2,324) (8,225) Investments in real estate and partnerships (1,048) (700) Acquisition of subsidiaries, net of cash acquired (1,128) (10,544) Sale of subsidiary, net of cash 3,792 -- --------- --------- Net cash used in investing activities (27,436) (22,942) --------- ---------
See Notes to Condensed Consolidated Financial Statements. (continued) 5 6 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In thousands)
Nine months ended September 30, ---------------------- 1997 1996 -------- -------- (Unaudited) Cash flows from financing activities: Borrowings $ 8,169 $ 10,897 Debt service payments (10,565) (6,030) Reissue of treasury stock -- 2,109 Dividends paid (2,934) (2,602) Stock options exercised 1,309 407 -------- -------- Net cash provided by (used in) financing activities (4,021) 4,781 -------- -------- Net increase in cash and cash equivalents 16,358 8,576 Cash and cash equivalents at beginning of period 63,971 47,431 -------- -------- Cash and cash equivalents at end of period $ 80,329 $ 56,007 ======== ======== Supplemental cash flow information: Income taxes (refunded) paid $ (642) $ 10,493 ======== ======== Interest paid $ 3,149 $ 3,355 ======== ======== Noncash investing and financing activities: Dividends declared and unpaid $ 1,044 $ 888 ======== ======== Value of stock issued in acquisition of First Title Corporation $ 3,760 $ -- Value of stock issued in acquisition of Ifland Credit Services 3,000 -- Value of stock issued in acquisition of Nations Title Inc. -- 2,130 -------- -------- $ 6,760 $ 2,130 ======== ========
See Notes to Condensed Consolidated Financial Statements. 6 7 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Note A - Basis of Financial Statements - -------------------------------------- The financial information included in this report includes the accounts of Fidelity National Financial, Inc. and its subsidiaries (collectively, the "Company") and has been prepared in accordance with generally accepted accounting principles and the instructions to Form 10-Q and Article 10 of Regulation S-X. All adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. This report should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Certain reclassifications have been made in the 1996 Condensed Consolidated Financial Statements to conform to the classifications used in 1997. Note B - Dividends - ------------------ On September 16, 1997, the Company's Board of Directors declared a cash dividend of $.07 per share, payable on October 10, 1997, to stockholders of record on September 26, 1997. Note C - Sale of American Title Company - --------------------------------------- Effective July 1, 1997, the Company sold a majority interest (60%) of its subsidiary American Title Company ("ATC"), an underwritten title company, to certain members of ATC's management. ATC will function as an exclusive agent of the Company. The sale price of the 60% interest was $6.0 million resulting in a realized gain of approximately $1.3 million before applicable income taxes. Note D - Acquisitions - --------------------- On April 4, 1996, the Company purchased 17% of the outstanding common stock of National Alliance Marketing Group, Inc. ("National"), a California corporation, for $566,667; together with a warrant to acquire an additional 14% of National common stock. In addition, the company loaned $1,200,000 to National 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 agreed to increase the warrant shares which the Company can purchase. If the entire $1,700,000 was borrowed the Company could purchase an additional 34% of the outstanding shares of National. After receiving approval of the transaction from the California Department of Insurance, the transaction closed on July 12, 1996. National is the parent company of Alliance Home Warranty Company, 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 system and built-in appliances inside a home for a period of one year. On July 3, 1997, the Company converted the outstanding note balance in conjunction with the exercise of the warrants and now owns 51% of the outstanding common stock of National. The outstanding balance of the notes receivable due from National at conversion was approximately $1.6 million. On July 22, 1997, the Company purchased 1,000,000 shares of common stock of GB Foods Corporation, which represents approximately 15.5% of the outstanding common stock of GB Foods Corporation, for a purchase price of $5.0 million. Additionally, the Company purchased warrants to acquire an additional 3,500,000 shares of GB Foods Corporation at various prices ranging from $5.00 - $7.50 for a purchase price of $800,000, 1,500,000 million warrants are exercisable at $5.00 per share, 1,000,000 million warrants are exercisable at $7.00 per share and 1,000,000 million warrants are exercisable at $7.50 per share. In conjunction with the common stock purchase, the Company gained control of three seats on the GB Foods Corporation Board of Directors. The purpose of the investment is consistent with the Company's strategic goal to diversify into non-interest rate sensitive businesses. The Company's investment in GB Foods Corporation will be accounted for under the equity method. On August 22, 1997, the Company acquired the common stock of First Title Corporation, 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 (230,362 shares or $3.8 million) and 20% cash (approximately $900,000). This transaction has been accounted for as a purchase. 7 8 On September 18, 1997, the Company acquired the common stock of Ifland Credit Services ("ICS"), a credit reporting company headquartered in Lexington, Kentucky, for a purchase price of $3.75 million. ICS has been merged with Credit Reports, Inc. The purchase price was payable 80% in common stock of the Company (154,686 shares or $3.0 million) and 20% cash ($750,000). This transaction has been accounted for as a purchase. 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 475,702 shares of Company common stock. Bron now operates as Fidelity National Flood, Inc. This transaction has been accounted for as a pooling-of-interests. On October 9, 1997, the Company acquired the common stock of Credit Reports, Inc. ("CRI"), a credit reporting company headquartered in Scottsdale, Arizona, with operations in California, Colorado, Nevada and Oregon. CRI has been merged with ICS. The purchase price for CRI was $200,000, payable in 10,414 shares of Company common stock. This transaction has been accounted for as a purchase. 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; payable in 50% common stock of the Company (274,689 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. Note E - Subsequent Events - -------------------------- On October 17, 1997, Fidelity National Financial, Inc., in a private transaction, purchased $45 million aggregate principal amount at maturity of its outstanding Liquid Yield Option Notes due 2009 (the "LYONs") 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 1,152,381 shares of the Company's common stock (the "Exchange Shares"). The Company also paid Merrill Lynch, the excess of a base price of $23.625 per Exchange Share over the actual sales price (less $0.05 per share in commissions) realized by Merrill Lynch for sales of up to 502,381 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 $23.625) 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, will be recorded in the fourth quarter of 1997. Effective October 23, 1997, the Company sold its small business investment company subsidiary FNF Ventures, Inc., to certain members of FNF Ventures, Inc.'s management. The sale price was $2.8 million, resulting in a realized gain of approximately $800,000 before applicable income taxes. Note F - Recent Accounting Pronouncements - ----------------------------------------- In March 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), effective for fiscal years ending after December 15, 1997. SFAS 128 introduces and requires the presentation of "basic" earnings per share which represents net earnings divided by the weighted average shares outstanding excluding all common stock equivalents. Dual presentation of "diluted" earnings per share, reflecting the dilutive effects of all common stock equivalents, will also be required. The diluted presentation is similar to the current presentation of fully diluted earnings per share. Management has not determined whether the adoption of SFAS 128 will have a material impact on the Company's financial position or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 requires all items that are necessary to be recognized under accounting standards as components of comprehensive income to be reported in a 8 9 financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial statement, but requires that an enterprise display an amount representing total comprehensive income for the period covered by that financial statement. SFAS 130 requires an enterprise to (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Management has not determined whether the adoption of SFAS 131 will have a material impact on the Company's financial reporting. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the revenues derived from the enterprise's products or services and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. Management has not determined whether the adoption of SFAS 131 will have a material impact on the Company's financial reporting. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Total revenue for the third quarter of 1997 increased 19.0% to $197.9 million from $166.7 million for the third quarter of 1996. Total revenue for the nine-month period ended September 30, 1997 increased 14.0% to $529.6 million from $464.7 million for the comparable 1996 period. The quarter over quarter increase can be attributed to increased title premiums, escrow fees, other fees and revenue and investment income. The increase in title premiums for the quarter and nine-month period ended September 30, 1997 compared to the 1996 period is primarily the result of the Company's expanded presence in agency operations resulting from the Company's acquisition of Nations Title Inc., which closed on April 1, 1996, and favorable market conditions. Additionally, agency premiums were positively impacted by the sale of a majority interest of American Title Company (formerly an underwritten title company subsidiary of the company, to American Title Company Management). The sale of ATC, which was effective July 1, 1997, results in a shift of approximately $9.6 million of premiums from direct operations to agency operations as ATC is now one of the Company's largest agents. The following table presents information regarding the components of title premiums (dollars in thousands):
Three months ended September 30, Nine months ended September 30, ----------------------------------------- --------------------------------------- 1997 % of Total 1996 % of Total 1997 % of Total 1996 % of Total ------ ---------- ------ ---------- ------ ---------- ------ ---------- Title premiums from direct operations $ 61,607 43.7% $ 58,919 46.5% $181,094 47.5% $178,982 51.6% Title premiums from agency operations 79,453 56.3% 67,838 53.5% 200,338 52.5% 167,561 48.4% -------- ----- -------- ----- -------- ----- -------- ----- Total title premiums $141,060 100.0% $126,757 100.0% $381,432 100.0% $346,543 100.0% ======== ===== ======== ===== ======== ===== ======== =====
The increase in escrow fees and other fees and revenue can be attributed to favorable title order openings and closings in our direct operations which began to trend upward at the end of the first quarter and have remained strong, as well as positive price and transaction trends in the real estate resale market, particularly in California, the nation's largest title insurance market and an area in which the Company has a strong presence. Additionally, the increase in other fees and revenue has been favorably affected by increased contributions made by the Company's title-related services subsidiaries, such as real estate information and technology services, foreclosure publishing and posting, recording services home-warranty and exchange intermediary services. 9 10 Interest and investment income increased 275.7% to $13.9 million in the third quarter of 1997 from $3.7 million in the third quarter of 1996. For the nine-month period ended September 30, 1997, interest and investment income was $25.8 million, a 116.8% increase over the $11.9 million of interest and investment income earned in the comparable 1996 period. The increase in interest and investment income earned during the 1997 periods is due to an increase in net realized gains with a slight impact from an increase in the invested asset base compared to the same periods in 1996. Net realized gains from the sale of investments were $10.4 million in the third quarter of 1997 as compared to net realized gains of $601,000 in the corresponding 1996 period. Included in the quarter and nine-month periods net realized gains are a gain from the sale of the Company's former home office building of $4.3 million, a gain from the sale of ATC of $1.3 million and net gains from the sale of investment securities of $5.0 million. These amounts are prior to applicable income taxes. Net realized gains for the nine-month periods ended September 30, 1997 and 1996 were $14.3 million and $2.6 million, respectively. The Company has shifted the emphasis in its fixed income portfolio from taxable to non-taxable securities during 1997. The Company's operating expenses consist primarily of personnel costs and other operating expenses which are incurred as title insurance orders are received and processed by the Company's direct operations. Title insurance premiums and escrow fees are recognized as income at the time the underlying real estate transaction closes. As a result, revenue lags approximately 60-90 days behind expenses and therefore gross margins may fluctuate. Personnel costs include both base salaries and sales commissions (direct operations) paid to employees and are the most significant operating expense incurred by the Company. These costs generally fluctuate with the level of direct orders opened and closed and with the mix of revenue between direct and agency operations. Personnel costs, as a percentage of total revenue, have decreased to 28.8% for the three-month period ended September 30, 1997 compared to 31.7% for the corresponding period in 1996. Personnel costs as a percentage of total revenue for the nine-month period ended September 30, 1997 have decreased to 32.5% from 34.4% for the corresponding 1996 period. Other operating expenses consist primarily of facilities expenses, title plant maintenance, premium taxes (which insurance underwriters are required to pay on title premiums in lieu of franchise and other state taxes), escrow losses, courier services, computer services, professional services, general insurance, trade and notes receivable allowances and depreciation. Other operating expenses decreased as a percentage of total revenue to 19.2% in the third quarter of 1997 from 22.9% in the third quarter of 1996. As a percentage of total revenue, other operating expenses for the nine-month period ended September 30, 1997 decreased to 22.5% from 23.8% for the same period in 1996. The Company previously implemented and remains committed to aggressive cost control programs which will help maintain operating expense levels consistent with the levels of title-related revenue production; however, certain fixed costs are incurred regardless of revenue levels, resulting in period over period fluctuations. The period over period fluctuations in personnel costs and other operating expenses are primarily the result of the fluctuations in total revenue, as well as the changes in the direct operation and agency operation title premium mix. The addition of Nations Title Inc. title premiums, which are primarily agency-related, has provided a balance between direct operations and agency operations revenue. Additionally, the sale of ATC has shifted costs from personnel costs and other operating expenses to agent commissions. Agent commissions represent the portion of policy premiums retained by agents pursuant to the terms of their respective agency contracts. Agent commissions were 79.7% of agent policy premiums in the third quarter of 1997 compared to 78.8% of agency policy premiums in the third quarter of 1996. The fluctuation in the third quarter of 1997 compared to the third quarter of 1996 is due to the conversion of ATC to an agency operation and the related increase in commission expense. Agent commissions were 78.8% of agency policy premiums in the first nine months of 1997 compared to 78.6% in the first nine months of 1996. Agent commissions and the resulting percentage of agency premiums retained by the Company varies according to regional differences in real estate closing practices and state regulations. 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. 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 a trend of favorable claim loss experience. The Company has provided for claim losses at 7.0% of title insurance premiums prior to the impact of major claims expense, recoupments 10 11 and the impact of certain state promulgated title premium rates. Application of these factors resulted in a net provision for claim losses as a percentage of premiums of 7.1% and 7.3% for the three-month periods ended September 30, 1997 and 1996, respectively, and 6.8% and 7.2% for the nine-month periods ended September 30, 1997 and 1996, respectively. Interest expense is incurred by the Company in financing its capital asset purchases and certain acquisitions. Interest expense consists of interest related to the Company's outstanding debt and the amortization of original issue discount and debt issuance costs related to the Liquid Yield Option Notes ("LYONs"). Interest expense of "non-LYONs" debt totaled $1.0 million and $1.0 million for the three-month periods ended September 30, 1997 and 1996, respectively; and $3.1 million and $3.0 million for the nine-month periods ended September 30, 1997 and 1996, respectively. The LYONs related component of interest expense amounted to $1.4 million for the third quarter of 1997 and $1.3 million for the third quarter of 1996; and $4.1 million and $3.9 million for the nine-month periods ended September 30, 1997 and 1996, respectively. Interest rates being paid by the Company on certain "non-LYONs" debt in 1997 are lower than those paid in 1996 as a result of decreases in certain rates (e.g., LIBOR) to which certain of the interest rates being paid by the Company are indexed. Income tax expense for the three-month periods ended September 30, 1997 and 1996, as a percentage of earnings before income taxes was 41.9% and 40.5%, respectively. Income tax expense for the nine-month periods ended September 30, 1997 and 1996 was 41.0% and 40.0%, respectively. The fluctuations in income tax expense as a percentage of earnings before income taxes are attributable to the characteristics of net income, i.e., operating income versus investment income; and the components of investment income, taxable versus non-taxable. Liquidity and Capital Resources The Company's insurance subsidiaries and wholly-owned underwritten title companies collect premiums and pay claims and operating expenses. Fluctuations in operating cash flows are primarily the result of increases or decreases in revenue. 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 and distributions from subsidiaries. Positive cash flow from the insurance subsidiaries is invested primarily in short-term investments, medium-term bonds and certain equity securities. Cash, cash equivalents and short-term investments held by the Company's insurance subsidiaries and underwritten title companies ("UTCs") provide liquidity for projected claims and operating expenses. The Company's cash requirements include debt service, operating expenses, taxes and dividends on its common stock. As a holding company, the Company receives cash from its subsidiaries as reimbursement for operating and other administrative expenses it incurs. The reimbursements are executed within the guidelines of various management agreements between the holding company and its subsidiaries. The Company also receives funds from dividend distributions from its insurance subsidiaries and UTCs. The insurance subsidiaries and UTCs 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 and UTCs can pay dividends or make other distributions to the Company. The Company believes that all anticipated cash requirements for current operations will be met from internally generated funds and short-term bank borrowings through existing credit facilities. The short- and long-term liquidity requirements of the Company and its subsidiaries are monitored regularly to match cash inflows with cash requirements. The Company and 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. 11 12 Part II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 11 -- Computation of Primary and Fully Diluted Earnings Per Share Exhibit 27 -- Financial Data Schedule (b) Reports on Form 8-K: Form 8-K dated September 23, 1997 - Fidelity National Financial, Inc. Announces Management Changes Form 8-K dated November 3, 1997 - Fidelity National Financial, Inc. Announces Purchase of its Liquid Yield Option Notes due 2009 for $27.2 Million Form 8-K dated November 5, 1997 - Combined Revenue and Net Earnings for Fidelity National Financial, Inc. and Bron Research, Inc. 12 EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE (In thousands, except per share amounts)
Three months ended Nine months ended September 30, September 30, ------------------- ------------------- 1997 1996 1997 1996 ------- ------- ------- ------- (Unaudited) (Unaudited) Primary net earnings $15,857 $ 6,317 $27,985 $18,408 Add: Amortization of original issue discount and debt issuance costs, net of income tax effect, applicable to LYONs 818 785 2,432 2,322 ------- ------- ------- ------- Fully diluted earnings $16,675 $ 7,102 $30,417 $20,730 ======= ======= ======= ======= Weighted average shares outstanding during the period 14,019 13,724 13,928 13,644 Common stock equivalent shares - primary 980 597 764 605 ------- ------- ------- ------- Common and common stock equivalent shares for purpose of calculating primary earnings per share 14,999 14,321 14,692 14,249 Incremental shares to reflect full dilution 4,545 4,396 4,718 4,394 ------- ------- ------- ------- Total shares for purpose of calculating fully diluted earnings per share 19,544 18,717 19,410 18,643 ======= ======= ======= ======= Primary earnings per share $ 1.06 $ .44 $ 1.90 $ 1.29 ======= ======= ======= ======= Fully diluted earnings per share $ .85 $ .38 $ 1.57 $ 1.11 ======= ======= ======= =======
EX-27 3 FINANCIAL DATA SCHEDULE
7 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 174,008 0 0 84,438 0 7,175 289,759 80,329 0 0 576,259 188,333 0 0 0 150,918 0 0 2 153,787 576,259 381,432 11,431 14,342 122,360 26,041 0 456,055 47,469 19,484 27,985 0 0 0 27,985 1.90 1.57 0 0 0 0 0 0 0
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