-----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, Mr6IOhMFYBinJui3pjN68LKlPiAr/R3wtdoxVBQIQY3oHTpvzRHaW10eOTJnNORR 7OeDSrLellGzcqiGvWDWdQ== 0000892569-99-003027.txt : 19991115 0000892569-99-003027.hdr.sgml : 19991115 ACCESSION NUMBER: 0000892569-99-003027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99751200 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 PERIOD ENDED 9-30-1999 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, 1999 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) 622-4333 (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 Stock 28,493,667 shares as of November 10, 1999 Exhibit Index appears on page 14 of 15 sequentially numbered pages. 2 FORM 10-Q QUARTERLY REPORT Quarter Ended September 30, 1999 TABLE OF CONTENTS -----------------
Part I: FINANCIAL INFORMATION Page Number ----------- Item 1. Condensed Consolidated Financial Statements A. Condensed Consolidated Balance Sheets as of September 30, 1999 3 and December 31, 1998 B. Condensed Consolidated Statements of Earnings for the three- month and nine-month periods ended September 30, 1999 and 1998 4 C. Condensed Consolidated Statements of Comprehensive Earnings for the three-month and nine-month periods ended September 30, 1999 and 1998 5 D. Condensed Consolidated Statements of Cash Flows for the nine-month 6 periods ended September 30, 1999 and 1998 E. Notes to Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk 12 Part II: OTHER INFORMATION Item 1. Legal Proceedings 14 Items 2, 3, 4 and 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 14
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, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Date: November 11, 1999 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, 1999 1998 ------------- ------------ (Unaudited) ASSETS Investments: Fixed maturities available for sale, at fair value ................ $ 339,730 $330,068 Equity securities, at fair value .................................. 33,259 50,191 Other long-term investments, at cost, which approximates fair value 42,353 40,278 Short-term investments, at cost, which approximates fair value .... 71,496 94,122 Investments in real estate and partnerships, net .................. 3,815 4,673 ----------- -------- Total investments ............................................. 490,653 519,332 Cash and cash equivalents .............................................. 46,209 42,492 Leases and residual interests in securitizations ....................... 128,394 93,507 Trade receivables, net ................................................. 69,186 75,940 Notes receivable, net .................................................. 18,060 10,761 Prepaid expenses and other assets ...................................... 112,270 111,471 Title plants ........................................................... 59,666 58,932 Property and equipment, net ............................................ 51,685 46,070 Deferred tax asset ..................................................... 23,927 10,965 ----------- -------- $ 1,000,050 $969,470 =========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities .......................... $ 121,942 $123,357 Notes payable ..................................................... 190,295 214,624 Reserve for claim losses .......................................... 239,254 224,534 Income taxes payable .............................................. 1,556 8,683 ----------- -------- 553,047 571,198 Minority interests ................................................ 803 1,532 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 1999 and 1998; issued, 39,213,197 as of September 30, 1999 and 35,540,036 as of December 31, 1998 .............................. 4 3 Additional paid-in capital ........................................ 246,945 173,888 Retained earnings ................................................. 321,759 265,567 ----------- -------- 568,708 439,458 Accumulated other comprehensive earnings (loss) ................... (5,860) 11,657 Less treasury stock, 10,676,602 shares as of September 30, 1999 and 6,645,487 shares as of December 31, 1998, at cost ............... 116,648 54,375 ----------- -------- 446,200 396,740 ----------- -------- $ 1,000,050 $969,470 =========== ========
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, ---------------------- ---------------------- 1999 1998 1999 1998 -------- ---------- ---------- -------- (Unaudited) (Unaudited) REVENUE: Title insurance premiums ................... $236,895 $ 238,207 $ 726,869 $642,726 Escrow fees ................................ 29,865 33,915 96,873 92,850 Other fees and revenue ..................... 69,116 50,866 200,441 149,089 Interest and investment income, including realized gains (losses) .................. 5,961 6,428 19,747 28,405 -------- ---------- ---------- -------- 341,837 329,416 1,043,930 913,070 -------- ---------- ---------- -------- EXPENSES: Personnel costs ............................ 96,831 102,464 311,137 284,031 Other operating expenses ................... 85,930 62,373 248,359 177,634 Agent commissions .......................... 109,638 101,003 325,235 268,148 Provision for claim losses ................. 14,864 14,626 45,194 41,383 Interest expense ........................... 4,358 2,740 10,047 9,414 -------- ---------- ---------- -------- 311,621 283,206 939,972 780,610 -------- ---------- ---------- -------- Earnings before income taxes .................. 30,216 46,210 103,958 132,460 Income tax expense ............................ 11,609 19,409 41,843 55,540 -------- ---------- ---------- -------- Net earnings ........................... $ 18,607 $ 26,801 $ 62,115 $ 76,920 ======== ========== ========== ======== Basic net earnings ......................... $ 18,607 $ 26,801 $ 62,115 $ 76,920 ======== ========== ========== ======== Basic earnings per share ................... $ .62 $ .94 $ 2.05 $ 2.78 ======== ========== ========== ======== Weighted average shares outstanding, basic basis .................................... 29,861 28,382 30,353 27,653 ======== ========== ========== ======== Diluted net earnings ....................... $ 18,607 $ 27,461 $ 62,378 $ 78,803 ======== ========== ========== ======== Diluted earnings per share ................. $ .60 $ .81 $ 1.95 $ 2.36 ======== ========== ========== ======== Weighted average shares outstanding, diluted basis .................................... 31,169 33,727 32,037 33,347 ======== ========== ========== ======== 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 EARNINGS (In thousands)
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (Unaudited) (Unaudited) Net earnings ............................. $ 18,607 $ 26,801 $ 62,115 $ 76,920 Other comprehensive earnings (loss): Unrealized losses on investments, net (1) ............................. (7,379) (11,680) (17,378) (5,391) Reclassification adjustments for (gains) losses included in net earnings (2) .. 692 (1,139) (139) (7,930) -------- -------- -------- -------- Other comprehensive loss ................. (6,687) (12,819) (17,517) (13,321) -------- -------- -------- -------- Comprehensive earnings ................... $ 11,920 $ 13,982 $ 44,598 $ 63,599 ======== ======== ======== ========
(1) Net of income tax expense (benefit) of ($4,600) and ($8,458), and ($11,682) and ($3,888) for the three-month and nine-month periods ended September 30, 1999 and 1998, respectively. (2) Net of income tax expense (benefit) of ($431) and $825, and $93 and $5,787 for the three-month and nine-month periods ended September 30, 1999 and 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, ----------------------- 1999 1998 --------- --------- (Unaudited) Cash flows from operating activities: Net earnings ............................................................... $ 62,115 $ 76,920 Reconciliation of net earnings to net cash provided by operating activities: Depreciation and amortization .......................................... 21,425 15,268 Net increase in reserve for claim losses ............................... 19,031 13,937 Net increase in provision for possible losses other than claims ........ 89 288 Gain on sales of assets ................................................ (232) (13,717) Equity in gains of unconsolidated partnerships ......................... (729) (86) Amortization of LYONs original issue discount .......................... 552 3,337 Change in assets and liabilities, net of effects from acquisition of subsidiaries: Net increase in leases and lease securitization residual interest ...... (34,887) (27,131) Net (increase) decrease in trade receivables ........................... 6,751 (12,812) Net increase in prepaid expenses and other assets ...................... (9,246) (15,518) Net increase (decrease) in accounts payable and accrued liabilities .... (1,788) 21,912 Net increase (decrease) in income taxes ................................ (9,631) 10,621 --------- --------- Net cash provided by operating activities ....................................... 53,450 73,019 --------- --------- Cash flows from investing activities: Proceeds from sales of property and equipment .............................. -- 6,968 Proceeds from sale of title plant .......................................... 1,100 405 Proceeds from sale of real estate .......................................... 946 -- Proceeds from sales and maturities of investments .......................... 339,396 162,949 Collections of notes receivable ............................................ 2,116 3,598 Additions to title plants .................................................. (1,799) (678) Additions to property and equipment ........................................ (19,233) (16,483) Additions to investments ................................................... (345,710) (223,641) Additions to notes receivable .............................................. (9,670) (6,899) Additions to real estate and joint ventures ................................ (285) -- Sale of a subsidiary, net of cash .......................................... 2,468 -- Acquisitions of businesses, net of cash acquired ........................... -- (198) --------- --------- Net cash used in investing activities ........................................... (30,671) (73,979) --------- ---------
See Notes to Condensed Consolidated Financial Statements. 6 7 (Continued) FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine months ended September 30, --------------------- 1999 1998 -------- -------- (Unaudited) Cash flows from financing activities: Borrowings .................................... $ 66,262 $ 17,607 Debt service payments ......................... (19,284) (20,325) Dividends paid ................................ (6,539) (4,494) Purchase of treasury stock .................... (62,273) -- Stock options exercised ....................... 2,772 6,898 -------- -------- Net cash used in financing activities .............. (19,062) (314) -------- -------- Net increase (decrease) in cash and cash equivalents 3,717 (1,274) Cash and cash equivalents at beginning of period ... 42,492 54,975 -------- -------- Cash and cash equivalents at end of period ......... $ 46,209 $ 53,701 ======== ======== Supplemental cash flow information: Income taxes paid ............................. $ 48,920 $ 43,033 ======== ======== Interest paid ................................. $ 14,606 $ 6,142 ======== ======== Noncash investing and financing activities: Dividends declared and unpaid ................. $ 1,858 $ 1,820 ======== ========
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. The Condensed Consolidated Financial Statements for both the 1999 and 1998 periods reflect the impact of the 1998 acquisitions of Granite Financial, Inc. and Alamo Title Holding Company, which have been accounted for as poolings-of-interests. 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, 1998. Certain reclassifications have been made in the 1998 Condensed Consolidated Financial Statements to conform to classifications used in 1999. Note B - Redemption of Liquid Yield Option Notes Outstanding - ------------------------------------------------------------ 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 ("LYONs") 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. Through February 15, 1999, $123,681,000 maturity value of LYONs had converted to 3,473,000 shares of common stock, resulting in an addition of approximately $70 million to stockholders' 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. Note C - Dividends - ------------------ On September 30, 1999, the Company's Board of Directors declared a cash dividend of $.07 per share, payable on October 27, 1999, to stockholders of record on October 13, 1999. Note D - Stock Purchase Plan and Employee Stock Purchase Loan Plan - ------------------------------------------------------------------ On March 17, 1999, the Company's Board of Directors approved an increase to the number of shares of outstanding Company common stock authorized for purchase under the Company's previously announced purchase program. The additional authorization permitted the Company to purchase up to 4.0 million shares. On September 13, 1999, the Company announced that its Board of Directors had approved a second increase of 2.0 million shares, bringing the total number of shares of outstanding Company common stock authorized for purchase to 6.0 million. Through November 10, 1999, the Company has purchased 4.1 million shares at an average purchase price of $15.43 per share totaling $63.0 million. Purchases may be made from time to time by the Company in the open market or in block purchases or in privately negotiated transactions depending on market conditions and other factors. 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") and the Non-Employee Director Stock Purchase Loan Program ("Loan Program"). The purpose of the Loan Plan and Loan Program is to provide key employees and directors with further incentive to maximize stockholder value. The Company offered an aggregate of $8,650,000 in loans. Loan Plan and Loan Program funds must be used to make private or open market purchases of Company common stock through a broker-dealer designated by the Company. All loans are full recourse and unsecured, and 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 any time without penalty. Through November 10, 1999, loans had been made in the amount of $7.25 million to purchase 483,825 shares of Company common stock at an average purchase price of $15.41 per share. Note E - 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, a wholly-owned subsidiary of American National Financial, Inc. ("ANFI"), for $3.25 million, subject to regulatory approval and certain other conditions. The purchase price was structured at a premium to book value. The Company currently holds a 29.4% interest in ANFI. National was acquired in April 1996, 8 9 as part of the Nations Title Inc. acquisition, and has not been actively underwriting policies since that time. This transaction received regulatory approval on May 27, 1999 and closed on June 10, 1999. The Company recognized a gain of approximately $1.2 million prior to applicable income taxes, in connection with the sale of National. This gain has been reflected in the Condensed Consolidated Statements of Earnings for the nine-month period ended September 30, 1999. Note F - Acquisition of Chicago Title Corporation - ------------------------------------------------- On August 1, 1999, the Company announced that it had signed an Agreement and Plan of Merger ("Agreement") to purchase Chicago Title Corporation ("Chicago Title", NYSE: CTZ), headquartered in Chicago, Illinois, for approximately $1.13 billion, or $52.00 per share of Chicago Title common stock, using approximately equal amounts of cash and Company common stock, subject to certain adjustments based on the average price of Company common stock, as defined in the Agreement. The allocation between cash and stock will be adjusted so Chicago Title stockholders will receive more than 50% of the outstanding stock of the new company. The price is payable in shares of Company common stock or, upon election by Chicago Title stockholders, in cash, subject to proration as may be necessary to achieve the allocation between cash and stock described above. The Agreement has been approved by the boards of both companies, and was amended on October 13, 1999. The transaction is subject to approval by the stockholders of Chicago Title and the Company, requisite regulatory authorities and other customary conditions and is expected to be completed in the first quarter of 2000. 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 in the Company's reports on Forms 10-Q, 10-K and filings under the Securities Act of 1933, as amended. Results of Operations - --------------------- Fluctuations in interest rates, offset by high consumer confidence and strength in the overall economy resulted in an increase in total third quarter 1999 revenue of $12.4 million, or 3.8%, to $341.8 million compared to $329.4 million of total revenue for the third quarter of 1998. Similarly, total revenue for the nine-month period ended September 30, 1999 increased $130.9 million, or 14.3%, to $1.04 billion from $913.1 million for the comparable 1998 period. The following table presents information regarding the components of title premiums (dollars in thousands):
Three months ended Nine months ended September 30, September 30, ------------------------------------- ------------------------------------- % of % of % of % of 1999 Total 1998 Total 1999 Total 1998 Total -------- ----- -------- ----- -------- ----- -------- ----- Title premiums from direct operations ............. $ 99,524 42.0% $111,249 46.7% $319,166 43.9% $306,248 47.6% Title premiums from agency operations ............. 137,371 58.0 126,958 53.3 407,703 56.1 336,478 52.4 -------- ----- -------- ----- -------- ----- -------- ----- Total ........... $236,895 100.0% $238,207 100.0% $726,869 100.0% $642,726 100.0% ======== ===== ======== ===== ======== ===== ======== =====
Economic conditions have shifted the mix of the Company's core title and escrow businesses from a refinance driven market to a more traditional resale and new home sale market. The continuing increase in fee per file that has occurred as a result of this transition has enabled the Company to maintain its premium volume quarter over quarter, while reporting an increase in the nine months ended September 30, 1999 compared to the comparable 1998 period, even though order counts have declined. Title premiums were essentially flat quarter over quarter, at $236.9 million and $238.2 million for the three-month periods ended September 30, 1999 and 1998, respectively. Title premiums for the first nine months of 1999 increased $84.1 million, or 13.1%, compared to the 1998 period. The trend in the mix of business between direct and agency operations reflects the impact of the lag of approximately three to six months in agent remittances compared to the immediate recognition of title insurance premiums generated by direct operations and fluctuations in title premiums by region. 9 10 Escrow fees for the third quarter of 1999 decreased $4.0 million, or 11.9%, to $29.9 million from $33.9 million in the third quarter of 1998. For the nine months ended September 30, 1999, escrow fees were $96.9 million, an increase of $4.0 million, or 4.3%, from escrow fees of $92.9 million in the first nine months of 1998. This growth in escrow fees is generally consistent with the trends in the Company's direct operations and has been further impacted by the Company's continuing efforts to expand its escrow presence in Southern California. The increase in other fees and revenue reflects the continuing increase in the contribution made by the Company's real estate related ancillary service businesses, the revenue generated by FNF Capital, Inc., formerly known as Granite Financial, Inc., our equipment leasing subsidiary, and the increased revenue of Micro General Corporation, a majority-owned information technology and telecommunication services subsidiary. The majority of the increase in other fees and revenue can be attributed to the growth of Micro General Corporation. Micro General Corporation's gross margins are not as great as those of the Company's core title and real estate businesses. Other fees and revenue during the third quarter of 1999 totaled $69.1 million compared to $50.9 million in the third quarter of 1998, representing an increase of $18.2 million, or 35.9%. Other fees and revenue totaled $200.4 million for the nine-month period ended September 30, 1999, an increase of $51.4 million, or 34.4%, from other fees and revenue of $149.1 million for the 1998 period. Interest and investment income decreased 7.3% to $6.0 million in the third quarter of 1999 from $6.4 million in the third quarter of 1998. The decrease in interest and investment income earned during the 1999 quarter is primarily due to an increase in invested assets and related interest and dividend income, offset by net realized losses in 1999 compared to net realized gains for the same period in 1998. Net realized losses totaled $1.1 million in the third quarter of 1999 compared to net realized gains of $1.5 million in the third quarter of 1998. Net investment income for the nine-month period ended September 30, 1999 totaled $19.7 million compared to $18.7 million in the comparable 1998 period, after excluding the non-recurring gain described below, a decrease of 5.6%. The increase in the nine months ended September 30, 1999 over the same period in 1998 is primarily the result of an increase in invested assets and related income offset by a decrease in net realized gains. Total net realized gains for the nine-month periods ended September 30, 1999 and 1998 were $232,000 and $13.7 million, respectively. Included in net realized gains for 1998 is a non-recurring gain resulting from the sale of the Company's investment in Data Tree Corporation in the amount of $9.7 million, before applicable income taxes. The Company's operating expenses consist primarily of personnel costs, other operating expenses and agent commissions which are incurred as orders are received and processed. Title insurance premiums, escrow 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. The changes in the market environment, mix of business between direct and agency operations and the contributions from our various business units have impacted margins and net earnings. The Company has taken steps to maintain expense levels consistent with revenues; however, a short time lag does exist in reducing variable costs and certain fixed costs are incurred regardless of revenue levels. Personnel costs include both base salaries and commissions paid to employees and are one of the most significant operating expenses incurred by the Company. 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, decreased to 28.3% for the three-month period ended September 30, 1999 compared to 31.1% for the corresponding period in 1998. For the nine-month periods ended September 30, 1999 and 1998, personnel expenses as a percentage of total revenue were 29.8% and 31.1%, respectively. 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 attempt to adjust personnel costs in accordance with activity. Personnel costs totaled $96.8 million and $102.5 million for the quarters ended September 30, 1999 and 1998, respectively, and $311.1 million and $284.0 million for the nine-month periods ended September 30, 1999 and 1998, respectively. 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 increased as a percentage of total revenue to 25.1% in the third quarter of 1999 from 18.9% in the third quarter of 1998. Other operating expenses as a percentage of total revenue increased to 23.8% for the nine-month period 10 11 ended September 30, 1999 compared to 19.5% for the 1998 period. The fluctuations in the three-month and nine-month periods can be attributed to expenses related to the Company's non-title operations, primarily Micro General Corporation, and approximately $4.7 million of non-recurring expenses. The Company previously implemented and remains committed to aggressive cost control programs which will help maintain operating expense levels consistent with the levels of revenue production; however, certain fixed costs are incurred regardless of revenue levels, resulting in period over period fluctuations. Other operating expenses totaled $85.9 million in the third quarter of 1999 compared to $62.4 million in the third quarter of 1998. For the nine-month periods ended September 30, 1999 and 1998, other operating expenses totaled $248.4 million and $177.6 million, respectively. Agent commissions represent the portion of policy premiums retained by agents pursuant to the terms of their respective agency contracts. Agent commissions were 79.8% of agent policy premiums in the third quarter of 1999 compared to 79.6% of agent policy premiums in the third quarter of 1998. Agent commissions for the nine-month periods ended September 30, 1999 and 1998 were 79.8% and 79.7%, 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 provision for claim losses includes known claims and an estimate of anticipated title 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 prevailing market conditions of prior years, the Company will maintain the trend of favorable claim loss experience. Based on this information, in the quarters and nine-month periods ended September 30, 1999 and 1998, the Company recorded a provision for claim losses of 6.5% and 7.0% of title insurance premiums, respectively, 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 6.3% and 6.1% in the third quarter of 1999 and 1998, respectively, and 6.2% and 6.4%, for the nine months ended September 30, 1999 and 1998, respectively. Interest expense is incurred by the Company primarily in financing its capital asset purchases, lease originations and certain other 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 Company's Liquid Yield Option Notes. Interest expense of "non-LYONs" debt totaled $4.4 million and $1.6 million for the three-month periods ended September 30, 1999 and 1998, respectively. The LYONs related component of interest expense was zero for the third quarter of 1999 and $1.1 million for the third quarter of 1998. Interest expense of "non-LYONs" debt totaled $9.6 million and $6.2 million for the nine-month periods ended September 30, 1999 and 1998, respectively. The LYONs related component of interest expense amounted to $445,000 for the first nine-months of 1999 and $3.2 million for the first nine months of 1998. The decrease in LYONs related interest is attributable to the redemption of the LYONs in February 1999. The period over period fluctuations in interest related to "non-LYONs" debt can be attributed to an increase in outstanding notes payable and rising interest rates. Income tax expense for the three-month and nine-month periods ended September 30, 1999 and 1998, as a percentage of earnings before income taxes was 38.4% and 42.0%; and 40.2% and 41.9%, respectively. The fluctuation in income tax expense as a percentage of earnings before income taxes is attributable to the Company's estimate of ultimate income tax liability and the characteristics of net income, i.e., operating income versus investment income. Liquidity and Capital Resources - ------------------------------- The Company's cash requirements include debt service, operating expenses, lease fundings and 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, cash received from subsidiaries, cash generated by investment securities and bank borrowings through existing credit facilities. Two 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 11 12 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 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 and/or banking authorities. The Company's ancillary service and leasing subsidiaries collect revenue and pay operating expenses; however, they are not generally regulated by insurance or banking regulatory authorities. Positive cash flow from the UTCs, ancillary services and leasing subsidiaries is invested primarily in cash and cash equivalents. The short-term and long-term liquidity requirements of the Company, insurance subsidiaries, UTCs, ancillary services and leasing subsidiaries are monitored regularly to match cash inflows with cash requirements. The Company and its subsidiaries forecast their daily cash needs and periodically review their short-term and long-term projected sources and uses of funds, as well as the asset, liability, investment and cash flow assumptions underlying these projections. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company does not believe there have been any material changes in the market risks since December 31, 1998, which would impact the fair value of certain assets and liabilities included in the Condensed Consolidated Balance Sheets. 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. The scope of the Y2K program includes a review of the systems used in our 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 continues 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 a continuing phase. Phase II is "Plan Execution and Remediation." Phase III is "Testing." Phase IV is "Maintaining Y2K Compliance." The Company was substantially Y2K compliant as of November 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. These estimates may be subject to change 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. Management of the Company believes that its electronic data processing and information systems will be Y2K compliant; however, there can be no assurance all of the Company's systems will be Y2K compliant, or 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 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 substantially completed a contingency plan in the event that any systems are not Y2K compliant. 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. 12 13 Part II: OTHER INFORMATION Item 1. Legal Proceedings The Company has been named as a defendant in four class action lawsuits alleging irregularities and violations of title and escrow practices. One of these suits was filed by the Attorney General of the State of California on behalf of the California Controller and the California Department of Insurance against the entire title and escrow industry in California. The other three were filed by private law firms in Federal Court in San Francisco and the State Court in Los Angeles. As a result of extensive meetings and discussions between the Company and the Attorney General of the State of California, the Attorney General has issued a letter stating that it does not expect to serve Fidelity National Financial, Inc. with a formal complaint. The Attorney General and the Company have expressed with confidence that the issues regarding the Company are likely to be resolved without litigation. The Company also anticipates that a resolution of the action filed by the California Attorney General will serve as a basis for the resolution of the other lawsuits filed. The Company does not believe that any resolution will have a material impact on its financial position or on its results of operations. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.58.2 Second amendment, dated as of September 30, 1999, 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. 10.60 Agreement and Plan of Merger, dated as of August 1, 1999, by and between Fidelity National Financial, Inc. and Chicago Title Corporation and amended as of October 13, 1999, incorporated by reference from Form S-4, Registration No. 333-89163. 11 Computation of Basic and Diluted Earnings Per Share 27 Financial Data Schedule (b) Reports on Form 8-K: Report on Form 8-K, dated August 1, 1999, related to the execution of an Agreement and Plan of Merger to acquire Chicago Title Corporation. 13 EX-10.58.2 2 SECOND AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.58.2 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is made and dated as of the 29th day of October, 1999, by and among SANWA BANK CALIFORNIA, ("Sanwa"), in its capacity as agent for the Lenders party to the Credit Agreement referred to below (the "Agent"), the Lenders from time to time party thereto, and FIDELITY NATIONAL FINANCIAL, INC., a Delaware corporation (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. Capitalized terms used but not otherwise defined herein are used with the meanings given such terms in the Credit Agreement. 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 Aggregate Credit Limit. To reflect the agreement of the parties hereto to increase the Aggregate Credit Limit, effective as of the date of this Amendment, the definition of the term "Aggregate Credit Limit" set forth in the Glossary is hereby amended to read in its entirety as follows: "'Aggregate Credit Limit' shall mean $150,000,000.00, as such amount may be increased or decreased by written agreement of the Agent, the Company and one hundred percent (100%) of the Lenders." 2. Addition of New Lender; Increase in Maximum Commitment. The parties hereto hereby acknowledge and agree that from and after the date of this Amendment: (a) Bank of America, N.A. ("BofA") will be a Lender under the Credit Agreement with all the rights and benefits and with all the obligations of the existing Lenders thereunder, and (b) Sanwa's Maximum Commitment shall be increased to $30,000,000. Each of BofA and Sanwa hereby agrees to purchase on the date of this Amendment and to accept the assignment and transfer of a portion of the Obligations held by the Existing Lenders consistent with the Commitment Schedule attached hereto as Exhibit A. 3. Increase in Permitted Advances and Investments. To reflect the agreement of the parties hereto to permit the Company to make more advances and investments to FNF 2 Capital, Inc. (formerly Fidelity National Leasing, Inc. and Granite Financial, Inc.), effective as of the Second Amendment Effective Date (as defined in Paragraph 8 below), subparagraph 9(g)(3) of the Credit Agreement is hereby amended to read in its entirety as follows: "(3) Advances to and investments by the Company in FNF Capital, Inc. (formerly Fidelity National Leasing, Inc. and Granite Financial, Inc.) 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 of the Company for Indebtedness of FNF Capital, Inc. to non-Affiliates incurred or assumed from and after December 31, 1997 does not exceed $75,000,000.00;" 4. Increase in Minimum Statutory Surplus. To reflect the agreement of the parties hereto to increase the minimum aggregate Statutory Surplus that the Company has to maintain on any date, effective as of the Second Amendment Effective Date, Paragraph 9(o) of the Credit Agreement is hereby amended to read in its entirety as follows: "9(o) Minimum Statutory Surplus. Permit any date the aggregate Statutory Surplus of FNNEW and FNTIC to be less than $95,000,000.00." 5. Commercial Paper Issuer Concentration. To reflect the agreement of the parties hereto to increase the commercial paper issuer concentration for the Company's investments, effective as of the Second Amendment Effective Date, subparagraph (d) of the definition of the term "Primary Quality Investments" set forth in the Glossary is hereby amended to read in its entirety as follows: "(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 $10,000,000.00 per issuing institution." 6. Waiver. The Company has recently entered into an agreement to acquire Chicago Title Company (the "Proposed Acquisition"). As a result of the Proposed Acquisition, the Company has been out of compliance with the negative covenant regarding acquisitions set forth in Paragraph 9(d) of the Credit Agreement, resulting in an Event of Default under Paragraph 10(c) of the Credit Agreement (the "Existing Default"). The Lenders signatory below hereby waive the Existing Default on a one-time basis as of the Second Amendment Effective Date. The Company hereby acknowledges and agrees that nothing contained herein shall constitute any agreement by the Lenders to waive any Event of Default under the Credit Agreement other than that waived pursuant to this Paragraph 6. 2 3 7. 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. 8. Second Amendment Effective Date. This Amendment shall be effective as of September 30, 1999 (the "Second Amendment Effective Date") on the earliest 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; and (c) An amendment fee for the account of each Lender (other than BofA) equal to 0.075% multiplied by such Lender's Maximum Commitment as of the date immediately prior to the date of this Amendment. 9. 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 (other than the Existing Default) or Potential Default. 10. No Other Amendment. Except as expressly amended hereby, the Loan Documents shall remain in full force and effect as written and amended to date. 11. 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. 3 4 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/ Alan L. Stinson Name: Alan L. Stinson Title: Executive Vice President and Chief Financial Officer SANWA BANK CALIFORNIA, as Agent and as a Lender By: /s/ Steven L. Skelton Name: Steven L. Skelton Title: Vice President & Manager COMERICA BANK - CALIFORNIA, as a Lender By: /s/ Mario DePascuale Name: Mario DePasquale Title: Assistant Vice President FIRST BANK & TRUST, as a Lender By: K. P. Balkrishna Name: K.P. (Bala) Balkrishna Title: Executive Vice President Commercial Banking SUN TRUST BANK, CENTRAL FLORIDA, N.A., as a Lender By: /s/ W. David Wisdom Name: W. David Wisdom Title: Vice President 4 5 THE SUMITOMO BANK, LIMITED, LOS ANGELES BRACH, as a Lender By: /s/ Al Galluzzo Name: Al Galluzzo Title: Senior Vice President WELLS FARGO BANK, N.A., as a Lender By: /s/ David B. Hollingsworth Name: David B. Hollingsworth Title: Vice President By: /s/ Mark Haberecht Name: Mark Haberecht Title: Assistant Vice President BANK OF AMERICA, N.A., as a Lender By: /s/ Elizabeth W. F. Bishop Name: Elizabeth W. F. Bishop Title: Vice President 5 6 EXHIBIT A COMMITMENT SCHEDULE (AS OF OCTOBER 29, 1999)
LENDER MAXIMUM COMMITMENT PERCENTAGE SHARE - ------ ------------------ ---------------- Sanwa Bank California $ 30,000,000 20.000000000% First Bank & Trust 20,000,000 13.333333333% Comerica Bank-California 20,000,000 13.333333333% The Sumitomo Bank, Limited 15,000,000 10.000000000% Wells Fargo Bank, N.A. 11,000,000 7.333333334% Sun Trust Bank, Central Florida, N.A. 11,000,000 7.333333334% Bank of America, N.A. 43,000,000 28.666666666% ------------ ------------- Aggregate Credit Limit $150,000,000 100.000000000%
6 EX-11 3 COMPUTATION OF BASIC AND DILUTED EARNINGS /SHARE 1 EXHIBIT 11 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE (In thousands, except per share amounts)
Three months ended Nine months ended September 30, September 30, ------------------ ------------------ 1999 1998 1999 1998 ------- ------- ------- ------- Net earnings, basic basis ................... $18,607 $26,801 $62,115 $76,920 Plus: Impact of assumed conversion of the LYONs, net of applicable incomes taxes ................................ -- 660 263 1,883 ------- ------- ------- ------- Diluted earnings ............................ $18,607 $27,461 $62,378 $78,803 ======= ======= ======= ======= Weighted average shares outstanding during the period, basic basis ................... 29,861 28,382 30,353 27,653 Plus: Common stock equivalent shares assumed from conversion of options ........... 1,308 1,819 1,212 1,928 Common stock equivalent shares assumed from conversion of LYONs ............. -- 3,526 472 3,766 ------- ------- ------- ------- Weighted average shares outstanding during the period, diluted basis ................. 31,169 33,727 32,037 33,347 ======= ======= ======= ======= Basic earnings per share .................... $ .62 $ .94 $ 2.05 $ 2.78 ======= ======= ======= ======= Diluted earnings per share .................. $ .60 $ .81 $ 1.95 $ 2.36 ======= ======= ======= =======
EX-27 4 FINACIAL DATA SCHEDULE
7 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 339,730 0 0 33,259 0 3,815 490,653 46,209 0 0 1,000,050 239,254 0 0 0 190,295 0 0 4 446,196 0 726,869 19,515 232 297,314 45,194 0 894,778 103,958 41,843 62,115 0 0 0 62,115 2.05 1.95 0 0 0 0 0 0 0
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