-----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, GuWysdxhRmrjYk2ZQxrS9iphCSrpcZJnSG4csU4kWHf8KTdBYY7rZjA1ddfgARNW GoRMdOQkdqXa6yEidjB5+A== 0000892569-98-003049.txt : 19981116 0000892569-98-003049.hdr.sgml : 19981116 ACCESSION NUMBER: 0000892569-98-003049 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 98748020 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-Q 1 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 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, 1998 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, Suite 300, Irvine, California 92614 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (949) 622-5000 - -------------------------------------------------------------------------------- (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 Stock 26,169,060 shares as of November 12, 1998 Exhibit Index appears on page 13 of 14 sequentially numbered pages. 2 FORM 10-Q QUARTERLY REPORT Quarter Ended September 30, 1998 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, 1998 and December 31, 1997 B. Condensed Consolidated Statements of Earnings 4 for the three-month and nine-month periods ended September 30, 1998 and 1997 C. Condensed Consolidated Statements of Comprehensive 5 Income for the three-month and nine-month periods ended September 30, 1998 and 1997 D. Condensed Consolidated Statements of Cash Flows for the 6 nine-month periods ended September 30, 1998 and 1997 E. Notes to Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations Part II: THER INFORMATION Items 1.- 5. of Part II have been omitted because they are not applicable with respect to the current reporting period. Item 6. Exhibits and Reports on Form 8-K 13
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/ Alan L. Stinson ------------------------------ Alan L. Stinson Executive Vice President, Financial Operations (Chief Accounting Officer) Date: November 12, 1998 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 and per share data)
September 30, December 31, 1998 1997 ------------- ------------ (Unaudited) (Restated) ASSETS Investments: Fixed maturities available for sale, at fair value $297,889 $239,818 Equity securities, at fair value....................................... 56,626 77,553 Other long-term investments, at cost, which approximates fair value 26,376 18,008 Short-term investments, at cost, which approximates fair value 22,114 17,793 Investments in real estate and partnerships, net....................... 4,728 5,201 -------- -------- Total investments.................................................... 407,733 358,373 Cash and cash equivalents.................................................. 80,295 72,887 Leases and lease securitization residual interest.......................... 80,913 53,782 Trade receivables, net..................................................... 66,296 53,454 Notes receivable, net...................................................... 11,846 10,163 Prepaid expenses and other assets.......................................... 111,408 96,352 Title plants............................................................... 58,244 57,971 Property and equipment, net................................................ 43,282 44,713 -------- -------- $860,017 $747,695 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities............................... $101,725 $ 78,023 Notes payable.......................................................... 155,566 163,015 Reserve for claim losses............................................... 215,611 201,674 Deferred income taxes ................................................. 8,607 16,510 Income taxes payable................................................... 21,733 10,809 -------- -------- 503,242 470,031 Minority interest...................................................... 2,007 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, 31,920,681 as of September 30, 1998 and 30,329,276 as of December 31, 1997................................ 3 3 Additional paid-in capital............................................. 157,828 137,569 Retained earnings...................................................... 241,002 167,222 -------- -------- 398,833 304,794 Accumulated other comprehensive income................................. 10,310 23,631 Less treasury stock, 6,041,352 shares as of September 30, 1998 and December 31, 1997, at cost........................................ 54,375 54,375 -------- -------- 354,768 274,050 -------- -------- $860,017 $747,695 ======== ========
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, ----------------------- ------------------------ 1998 1997 1998 1997 -------- --------- -------- ---------- (Unaudited) (Unaudited) (Restated) (Restated) REVENUE: Title insurance premiums...................... $238,207 $163,378 $642,726 $440,149 Escrow fees................................... 33,915 22,111 92,850 61,958 Other fees and revenue........................ 50,866 28,538 149,089 80,694 Interest and investment income, including realized gains and losses.......... 6,428 14,421 28,405 27,055 -------- -------- -------- -------- 329,416 228,448 913,070 609,856 -------- -------- -------- -------- EXPENSES: Personnel costs............................... 102,464 65,731 284,031 195,960 Other operating expenses...................... 62,373 44,267 177,634 137,732 Agent commissions............................. 101,003 73,106 268,148 184,119 Provision for claim losses.................... 14,626 10,916 41,383 28,938 Interest expense.............................. 2,740 3,006 9,414 9,190 -------- -------- -------- -------- 283,206 197,026 780,610 555,939 -------- -------- -------- -------- Earnings before income taxes.................. 46,210 31,422 132,460 53,917 Income tax expense............................ 19,409 12,927 55,540 22,047 -------- -------- -------- -------- Net earnings .............................. $ 26,801 $ 18,495 $ 76,920 $ 31,870 ======== ======== ======== ======== Basic net earnings ........................... $ 26,801 $ 18,495 $ 76,920 $ 31,870 ======== ======== ======== ======== Basic earnings per share...................... $ 1.04 $ .87 $ 3.06 $ 1.57 ======== ======== ======== ======== Weighted average shares outstanding, basic basis.................................. 25,802 21,283 25,139 20,325 ======== ======== ======== ======== Diluted net earnings.......................... $ 27,461 $ 19,313 $ 78,803 $ 34,302 ======== ======== ======== ======== Diluted earnings per share.................... $ .90 $ .70 $ 2.60 $ 1.30 ======== ======== ======== ======== Weighted average shares outstanding, diluted basis................................ 30,661 27,441 30,315 26,434 ======== ======== ======== ======== 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 COMPREHENSIVE INCOME (In thousands)
Three months ended Nine months ended September 30, September 30, --------------------- ----------------------- 1998 1997 1998 1997 ------- ------- ------- -------- (Unaudited) (Unaudited) (Restated) (Restated) Net earnings.................................... $26,801 $18,495 $76,920 $31,870 ------- ------- ------- ------- Other comprehensive income (loss): Unrealized gains (losses) on investments, net(1) (11,680) 13,935 (5,391) 20,019 Reclassification adjustments for gains included in net income (2).................. (1,139) (6,001) (7,930) (8,144) ------- ------- ------- ------- Other comprehensive income (loss)............... (12,819) 7,934 (13,321) 11,875 ------- ------- ------- ------- Comprehensive income............................ $13,982 $26,429 $63,599 $43,745 ======= ======= ======= =======
- ------------------- (1) Net of income tax expense (benefit) of $(8,458) and $9,724, and ($3,888) and $13,854 for the three-month and nine-month periods ended September 30, 1998 and 1997, respectively. (2) Net of income tax expense of $825 and $4,195 and $5,787 and $5,778 for the three-month and nine-month periods ended September 30, 1998, respectively. See Notes to Condensed Consolidated Financial Statements. 5 6 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine months ended September 30, -------------------------- 1998 1997 --------- ---------- (Unaudited) (Restated) Cash flows from operating activities: Net earnings .................................................. $ 76,920 $ 31,870 Reconciliation of net earnings to net cash provided by operating activities: Depreciation and amortization............................ 15,268 13,522 Net increase in reserve for claim losses................. 13,937 3,096 Net increase in provision for possible losses other than claims............................................ 288 1,414 Gain on sales of assets.................................. (13,717) (13,922) Equity in gains of unconsolidated partnerships........... (86) (35) Amortization of LYONs original issue discount............ 3,337 4,742 Change in assets and liabilities, net of effects from acquisition of subsidiaries................................... Net increase in leases and lease securitization residual interest............................................... (27,131) (25,572) Net (increase) decrease in trade receivables............. (12,812) 1,095 Net increase in prepaid expenses and other assets........ (15,518) (4,937) Net increase in accounts payable and accrued liabilities 21,912 1,253 Net increase in income taxes............................. 10,621 22,274 --------- --------- Net cash provided by operating activities........................ 73,019 34,800 --------- --------- Cash flows from investing activities: Proceeds from sales of property and equipment.................. 6,968 17,588 Proceeds from sale of real estate.............................. -- 4,567 Proceeds from sales and maturities of investments.............. 162,949 175,695 Collections of notes receivable................................ 3,598 11,037 Additions to title plants...................................... (273) (2,127) Additions to property and equipment............................ (16,483) (18,406) Additions to investments....................................... (214,959) (209,847) Additions to notes receivable.................................. (6,899) (2,770) Additions to real estate....................................... -- (1,048) Sale of subsidiaries, net of cash.............................. -- 3,792 Acquisitions of businesses, net of cash acquired............... (198) (4,468) --------- --------- Net cash used in investing activities............................ (65,297) (25,987) --------- ---------
See Notes to Condensed Consolidated Financial Statements. (continued) 6 7 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine months ended September 30, -------------------------- 1998 1997 --------- --------- (Unaudited) (Restated) Cash flows from financing activities: Borrowings..................................................... $ 17,607 $ 12,037 Debt service payments.......................................... (20,325) (18,497) Proceeds from stock issuance................................... - 18,021 Dividends paid................................................. (4,494) (3,657) Stock options exercised........................................ 6,898 1,426 -------- -------- Net cash provided by (used in) financing activities (314) 9,330 -------- -------- Net increase in cash and cash equivalents........................ 7,408 18,143 Cash and cash equivalents at beginning of period................. 72,887 81,108 -------- -------- Cash and cash equivalents at end of period....................... $ 80,295 $ 99,251 ======== ======== Supplemental cash flow information: Income taxes paid.............................................. $ 43,033 $ (240) ======== ======== Interest paid.................................................. $ 6,142 $ 5,172 ======== ======== Noncash investing and financing activities: Dividends declared and unpaid.................................. $ 1,820 $ 1,044 ======== ========
See Notes to Condensed Consolidated Financial Statements. 7 8 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. Additionally, these financial statements include the financial position and results of operations of Granite Financial, Inc. and Alamo Title Holding Company as of and for each of the periods presented. See Note B. This report should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1997, Granite Financial, Inc.'s Annual Report on Form 10-KSB for the fiscal year ended June 30, 1997, Granite Financial, Inc.'s quarterly reports on Form 10-QSB for the quarterly periods ended September 30, 1997 and December 31, 1997, the Company's Form 8-K/A dated June 24, 1998, the Company's Form S-4 dated July 22, 1998 and the Company's Form 8-K dated August 20, 1998. Certain reclassifications have been made in the 1997 Condensed Consolidated Financial Statements to conform to the classifications used in 1998. Note B - Acquisitions The Company completed the acquisition of Granite Financial, Inc. ("Granite") on February 26, 1998. Granite is engaged in the business of originating, funding, purchasing, selling, securitizing and servicing equipment leases for a broad range of businesses located throughout the United States. The acquisition was effected by means of a merger of a wholly-owned subsidiary of the Company with and into Granite, with Granite surviving the merger as a wholly-owned subsidiary of the Company. Each of the approximately 6,417,000 shares of Granite's common stock were converted into .702 shares of the Company's common stock, approximately 4.5 million shares, plus cash in lieu of fractional shares. The closing price of the Company's common stock, as reported by the New York Stock Exchange, was $28.69 on February 26, 1998. This transaction has been accounted for as a pooling-of-interests, as such, the financial position and results of operations of Granite are included in the accompanying Condensed Consolidated Financial Statements as of and for each of the periods presented. On August 20, 1998, the Company completed the acquisition of Alamo Title Holding Company ("Alamo"). Alamo, through its subsidiaries, is a regional underwriter of title insurance policies and performs other title-related services. The acquisition was effected by means of a merger of a wholly-owned subsidiary of the Company with and into Alamo, with Alamo surviving the merger as a wholly-owned subsidiary of the Company. Each of the approximately 1,357,000 shares of Alamo's common stock were converted into 1.491 shares of the Company's common stock, approximately 2.0 million shares, plus cash in lieu of fractional shares. The closing price of the Company's common stock, as reported by the New York Stock Exchange, was $36.44 on August 20, 1998. This transaction has been accounted for as a pooling-of-interests, as such, financial position and results of operations of Alamo are included in the accompanying Condensed Consolidated Financial Statements as of and for each of the periods presented. Note C - Sale of National Title Insurance of New York Inc. On March 18, 1998, the Company announced that it had entered into an agreement to sell National Title Insurance of New York Inc. ("National") to American Title Company ("ATC"), subject to regulatory approval and certain other conditions. The purchase price is structured at a premium to book value. National was acquired in April 1996, as part of the Nations Title Inc. acquisition and has not been actively underwriting policies since the transaction closed. American Title Company is an underwritten title company which was formerly a wholly-owned subsidiary of the Company. Effective July 1, 1997, 60% of ATC was sold to certain members of ATC's management. As a result of a tax-free reorganization of American National Financial, Inc. ("ANFI"), the parent company of ATC and its subsidiaries, the Company owns approximately 40% of ANFI, and as a result, continues its proportionate ownership interest in ATC and National. 8 9 Note D - Sale of ACS Systems, Inc. The Company completed the sale of its wholly-owned subsidiary ACS Systems, Inc. ("ACS") to Micro General Corporation (OTCBB:MGEN) for 4.6 million shares of Micro General common stock 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. The sales price was valued at $6,900,000 resulting in a deferred gain to the Company of approximately $5,300,000. ACS will continue to provide the above listed services to the Company at preferred customer rates. The Company currently owns 81.4% of Micro General Corporation. Note E - Conversion of Interest in Data Tree Corporation 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 approximately $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 Condensed Consolidated Statements of Earnings for the nine-month period ended September 30, 1998. Note F - Dividends On September 23, 1998, the Company's Board of Directors declared a cash dividend of $.07 per share, payable on October 19, 1998, to stockholders of record on October 5, 1998. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Factors That May Affect Operating Results The statements contained in this report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those in such forward-looking statements. The reader should consult the risk factors listed from time to time and other information disclosed in the Company's reports on Forms 10-Q, 10-K and filings under the Securities Act of 1933, as amended. Results of Operations Total revenue for the third quarter of 1998 increased 44.2% to $329.4 million from $228.4 million for the third quarter of 1997. Total revenue for the nine-month period ended September 30, 1998 increased 49.7% to $913.1 million from $609.9 million for the comparable 1997 period. The increases in total revenue for both the three-month and nine-month periods ended September 30, 1998 are primarily the result of continuing strength in the Company's core title operations, which have been positively impacted by favorable market conditions leading to an increase in real estate activity and, in turn, increased order inventory levels and closings. The current economic environment has led to one of the strongest real estate markets in history with mortgage interest rates approaching historical lows. Additionally, the contribution of the Company's ancillary service subsidiaries has increased significantly as the demand for services has increased consistent with the trend in real estate activity and the Company continues the successful integration of businesses acquired in the second half of 1997. 9 10 The following table presents information regarding the components of title premiums (dollars in thousands):
Three months ended Nine months ended September 30, September 30, ----------------------------------------- ----------------------------------------- 1998 % of Total 1997 % of Total 1998 % of Total 1997 % of Total -------- ---------- -------- ---------- -------- ---------- -------- ---------- Title premiums from direct operations $111,249 46.7% $ 72,710 44.5% $306,248 47.6% $209,959 47.7% Title premiums from agency operations 126,958 53.3% 90,668 55.5% 336,478 52.4% 230,190 52.3% -------- ----- -------- ----- -------- ----- -------- ----- Total title premiums $238,207 100.0% $163,378 100.0% $642,726 100.0% $440,149 100.0% ======== ===== ======== ===== ======== ===== ======== =====
The increases in title premiums of $74.8 million, or 45.8%, and $202.6 million, or 46.0%, for the three-month and nine-month periods ended September 30, 1998, respectively, are consistent with the current real estate market environment. Title orders and requests for real estate related services have continued to react favorably to existing conditions. Escrow fees have followed the same trend as title premiums, as would be expected. Escrow fees have increased 53.4% and 49.9% for the three-month and nine-month periods ended September 30, 1998, respectively. The increase in escrow fees can also be attributed to current market conditions, the continuing West Coast real estate recovery and the Company's efforts to expand its presence in the southern California escrow market. The Company has made a concerted effort to develop its ancillary service segments with the acquisitions of ancillary service companies in the second half of 1997. Ancillary services include real estate information, credit reporting, flood certification, real estate tax services, home warranty protection, default management services, exchange intermediary services and attorney services. The growth of these subsidiaries has been significant. Third quarter 1998 revenue increased 157.6% to $21.9 million compared to $8.5 million in the third quarter of 1997, while pretax earnings increased 136.4% to $2.6 million in 1998 from $1.1 million in 1997. The increases in the nine-month results were similarly dramatic. Revenue increased 173.5% to $62.9 million for the nine-month period ended September 30, 1998 compared to $23.0 million for the 1997 period while 1998 pretax earnings increased 204.2% to $7.3 million from $2.4 million in 1997. Interest and investment income decreased to $6.4 million in the third quarter of 1998 from $14.4 million in the third quarter of 1997. For the nine-month period ended September 30, 1998, interest and investment income was $28.4 million compared to $27.1 million of interest and investment income earned in the comparable 1997 period. The decrease in interest and investment income in the third quarter of 1998 compared to the third quarter of 1997 is primarily related to the timing of realized gains. Realized gains in the third quarter of 1998 were $2.0 million compared to $10.2 million in the third quarter of 1997. Included in the third quarter of 1997 are realized gains of approximately $5.6 million related to the sale of the Company's former home office building ($4.3 million) and a gain on the sale of 60% of ATC ($1.3 million). The slight increase in interest and investment income for the nine-month period ended September 30, 1998 compared to the 1997 period is an increase in interest and dividend income resulting from an increased invested asset base offset by lower interest rates. Realized gains in 1998 were $13.7 million compared to $13.9 million in 1997. Included in 1998 realized gains is a gain from the conversion of the Company's investment in Data Tree Corporation of approximately $9.7 million. See Note C. The Company's operating expenses consist primarily of personnel cost, other operating expenses and commissions paid to agents which are incurred as orders are received and processed. Title insurance premiums, escrow fees and other fees and revenue are recognized as income at the time the underlying transaction closes. As a result, revenue lags approximately 60-90 days behind expenses and therefore gross margins may fluctuate. Personnel costs include base salaries, bonuses and sales commissions paid to employees. These costs generally fluctuate with the level of orders opened and closed and with the mix of revenue. Personnel costs, as a percentage of total revenue, have increased to 31.1% for the three-month period ended September 30, 1998 compared to 28.8% for the corresponding period in 1997. Personnel costs as a percentage of total revenue for the nine-month period ended September 30, 1998 have decreased to 31.1% from 32.1% for the corresponding 1997 period. Adjusting for the increase in personnel costs of $6.3 million related to the acquisitions made in 1997, personnel costs as a percentage of total revenue were 29.2% and 30.4% for the three-month and nine-month periods ended September 30, 1998, respectively. These fluctuations reflect a continued emphasis on expense control and an increase in productivity from our automation and electronic commerce. 10 11 The Company has taken significant measures to maintain personnel costs at levels consistent with revenues. The Company continues to monitor the prevailing market conditions and will adjust personnel costs in accordance with activity. Other operating expenses consist primarily of facilities expenses, title plant maintenance, premium taxes (which insurance underwriters are required to pay on title premiums in lieu of franchise and other state taxes), escrow losses, courier services, computer services, professional services, general insurance, trade and notes receivable allowances and depreciation. Certain of these fixed costs are incurred regardless of revenue levels, resulting in period over period fluctuations. Other operating expenses decreased as a percentage of total revenue to 18.9% in the third quarter of 1998 from 19.4% in the third quarter of 1997. As a percentage of total revenue, other operating expenses for the nine-month period ended September 30, 1998 decreased to 19.5% from 22.6% for the same period in 1997. Adjusting for the increase in other operating expenses related to the acquisitions made in 1997, other operating expenses as a percentage of total revenue were 17.7% and 18.2% for the three-month and nine-month periods ended September 30, 1998, respectively. The Company previously implemented and remains committed to aggressive cost control programs which will help maintain operating expense levels consistent with revenue levels. Agent commissions represent the portion of policy premiums retained by agents pursuant to the terms of their respective agency contracts. Agent commissions were 79.6% of agent policy premiums in the third quarter of 1998 compared to 80.6% of agent policy premiums in the third quarter of 1997; for the nine-month periods ended September 30, 1998 and 1997 agent commissions as a percentage of agent policy premiums were 79.7% and 80.0%, respectively. Agent commissions and the resulting percentage of agency premiums retained by the Company vary according to regional differences in real estate closing practices and state regulations. The 1998 decrease in agent commissions as a percentage of agency premiums from 1997 resulted in an increase in the percentage of agency premiums retained by the Company. 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 has provided for claim losses at 7.0% of title insurance premiums prior to the impact of major claims expense, recoupments and premium rates and loss experience in the state of Texas. Premiums are generally higher in Texas for similar coverage than in other states, while loss experience is comparable. As a result, losses as a percentage of premiums are lower. Application of these factors resulted in a net provision for claim losses as a percentage of premiums of 6.1% and 6.7% for the three-month periods ended September 30, 1998 and 1997, respectively, and 6.4% and 6.6% for the nine-month periods ended September 30, 1998 and 1997, respectively. Interest expense is incurred by the Company in financing its capital asset purchases, lease originations 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 $1.6 million for the three-month periods ended September 30, 1998 and 1997; and $6.3 million and $5.0 million for the nine-month periods ended September 30, 1998 and 1997, respectively. The LYONs related component of interest expense amounted to $1.1 million for the third quarter of 1998 and $1.4 million for the third quarter of 1997; and $3.2 million and $4.1 million for the nine-month periods ended September 30, 1998 and 1997, respectively. The decrease in LYONs related interest is attributable to the retirement of $45.0 million maturity value of LYONs in October, 1997 and conversions. The fluctuation in interest expense is primarily due to the increase in outstanding notes payable at September 30, 1998 compared to September 30, 1997 offset by the decrease in LYONs related interest and overall lower interest rates in 1998 compared to 1997. Income tax expense for the three-month periods ended September 30, 1998 and 1997, as a percentage of earnings before income taxes was 42.0% and 41.1%, respectively. Income tax expense for the nine-month periods ended September 30, 1998 and 1997 was 41.9% and 40.9%, respectively. The fluctuations in income tax expense as a percentage of earnings before income taxes are attributable to the Company's estimate of ultimate income tax liability and the characteristics of net income, i.e., operating income versus investment income, taxable versus non-taxable. 11 12 Liquidity and Capital Resources The Company's cash requirements include debt service, operating expenses, lease fundings, lease securitizations, certain acquisitions, 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. The Company's insurance subsidiaries and underwritten title companies ("UTCs") collect premiums and pay claims and operating expenses. The insurance subsidiaries and UTCs 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. The short- and long-term liquidity requirements of the Company, insurance subsidiaries, UTCs, ancillary service and finance subsidiaries are monitored regularly to match cash inflows with cash requirements. The Company, insurance subsidiaries, UTCs, ancillary service and leasing 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. Year 2000 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, 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 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. 12 13 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. Part II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 11 -- Computation of Basic and Diluted Earnings Per Share Exhibit 27 -- Financial Data Schedule (b) Reports on Form 8-K: Current Report on Form 8-K, dated August 20, 1998 relating to the: a) Termination of the Agreement and Plan of Merger by and among Fidelity National Financial, Inc. and subsidiaries, and Matrix Capital Corporation and the agreement between Fidelity National Financial, Inc. and Matrix Capital corporation to enter into a depository and warrant purchase agreement and; b) completion of the merger of Alamo Title Holding Company and a wholly-owned subsidiary of Fidelity National Financial, Inc., with and into Alamo Title Holding Company. 13 EX-11 2 COMPUTATION OF BASIC & DILUTED EARNING PER SHARE 1 EXHIBIT 11 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE (In thousands, except per share data)
Three months ended Nine months ended September 30, September 30, ------------------- ------------------ 1998(1) 1997(1) 1998(1) 1997(1) ------- ------- ------- ------- Net earnings, basic basis.................. $26,801 $18,495 $76,920 $31,870 Plus: Impact of assumed conversion of the LYONs, net of applicable income taxes......................... 660 818 1,883 2,432 ------- ------- ------- ------- Diluted earnings........................... $27,461 $19,313 $78,803 $34,302 ======= ======= ======= ======= Weighted average shares outstanding during the period, basic basis 25,802 21,283 25,139 20,325 Plus: Common stock equivalent shares assumed from conversion of options... 1,654 1,366 1,753 1,317 Common stock equivalent shares assumed from conversion of LYONs... 3,205 4,792 3,423 4,792 ------- ------- ------- ------- Weighted average shares outstanding during the period, diluted basis......... 30,661 27,441 30,315 26,434 ======= ======= ======= ======= Basic earnings per share................... $ 1.04 $ .87 $ 3.06 $ 1.57 ======= ======= ======= ======= Diluted earnings per share................. $ .90 $ .70 $ 2.60 $ 1.30 ======= ======= ======= =======
- ------------ (1) Earnings and weighted average shares outstanding for both 1998 and 1997 include the full period results and impact of Fidelity, Alamo and Granite combined, as the mergers have been accounted for as poolings-of-interests. 14 EX-27 3 FINANCIAL DATA SCHEDULE
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 3.06 2.60 0 0 0 0 0 0 0
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