-----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, BOn0b19lE6AJoubODjZ5q9mUNWdZIH9eivhe8ZJNanArAOw2FkNMNCbf7TzMkPd8 Fk6sr8U53TQ4j+vkLcjdgw== 0000892569-99-003302.txt : 19991222 0000892569-99-003302.hdr.sgml : 19991222 ACCESSION NUMBER: 0000892569-99-003302 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19991221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIDELITY NATIONAL FINANCIAL INC /DE/ CENTRAL INDEX KEY: 0000809398 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 860498599 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-09396 FILM NUMBER: 99777892 BUSINESS ADDRESS: STREET 1: 17911 VON KARMAN AVE STREET 2: STE 300 CITY: IRVINE STATE: CA ZIP: 92614 BUSINESS PHONE: 9496225000 MAIL ADDRESS: STREET 1: MLISS JONES KANE STREET 2: 17911 VON KARMAN AVE STE 300 CITY: IRVINE STATE: CA ZIP: 92614 10-K405/A 1 FORM 10-K405 AMENDMENT NO. 2 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A No. 2 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NO. 1-9396 FIDELITY NATIONAL FINANCIAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 86-0498599 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
17911 VON KARMAN AVENUE, SUITE 300 92614 (949) 622-4333 IRVINE, CALIFORNIA (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER, (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, $.0001 PAR VALUE NEW YORK STOCK EXCHANGE LIQUID YIELD OPTION NOTES, DUE 2009, NEW YORK STOCK EXCHANGE ZERO COUPON, CONVERTIBLE SUBORDINATED
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [X] As of March 25, 1999, 32,414,000 shares of Common Stock ($.0001 par value) were outstanding, and the aggregate market value of the shares of the Common Stock held by non-affiliates of the registrant was $433,580,000. The aggregate market value was computed with reference to the closing price on the New York Stock Exchange on such date. LOCATION OF EXHIBIT INDEX: The index to exhibits is contained in Part IV herein on page number 76. The information in Part III hereof is incorporated herein by reference to the Registrant's Proxy Statement on Schedule 14A for the fiscal year ended December 31, 1998, to be filed within 120 days after the close of the fiscal year that is the subject of this Report. ================================================================================ 2 INTRODUCTORY STATEMENT We are filing this Amendment No. 2 to our Annual Report on Form 10-K for the year ended December 31, 1998 to include segment disclosures in response to comments received from the Securities and Exchange Commission regarding our Registration Statement on Form S-3 (Registration No. 333-65837). Please refer to Note R of Notes to our Consolidated Financial Statements as of and for the years ended December 31, 1998, 1997 (Restated) and 1996 (Restated) filed herewith. 3 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES INDEX TO FINANCIAL INFORMATION
PAGE NO. -------- Independent Auditors' Report................................ 32 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... 33 Consolidated Statements of Earnings for the years ended December 31, 1998, 1997 and 1996.......................... 34 Consolidated Statements of Comprehensive Earnings for the years ended December 31, 1998, 1997 and 1996.............. 35 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996.............. 36 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.......................... 37 Notes to Consolidated Financial Statements.................. 38
31 4 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Fidelity National Financial, Inc.: We have audited the Consolidated Balance Sheets of Fidelity National Financial, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related Consolidated Statements of Earnings, Comprehensive Earnings, Stockholders' Equity and Cash Flows for each of the years in the three-year period ended December 31, 1998. These Consolidated Financial Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the consolidated financial position of Fidelity National Financial, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG LLP Los Angeles, California February 17, 1999, except as to Note Q to the Consolidated Financial Statements, which is as of March 25, 1999 32 5 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS
DECEMBER 31, --------------------- 1998 1997 -------- ---------- (RESTATED) Investments: Fixed maturities available for sale, at fair value........ $330,068 $239,818 Equity securities, at fair value.......................... 50,191 77,553 Other long-term investments, at cost, which approximates fair value............................................. 40,278 18,008 Short-term investments, at cost, which approximates fair value.................................................. 85,305 17,793 Investments in real estate and partnerships, net.......... 4,673 5,201 -------- -------- Total investments...................................... 510,515 358,373 Cash and cash equivalents................................... 51,309 72,887 Leases and residual interests in securitizations............ 93,507 53,782 Trade receivables (less allowance of $6,733 in 1998 and $5,153 in 1997)........................................... 75,940 53,454 Notes receivable, net (including $1,798 in 1998 and $1,421 in 1997 with affiliated parties).................................. 10,761 10,163 Prepaid expenses and other assets........................... 111,471 96,352 Title plants................................................ 58,932 57,971 Property and equipment, net................................. 46,070 44,713 Deferred tax asset.......................................... 10,965 -- -------- -------- $969,470 $747,695 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities.................. $123,357 $ 78,023 Notes payable............................................. 214,624 163,015 Reserve for claim losses.................................. 224,534 201,674 Deferred income taxes..................................... -- 16,510 Income taxes payable...................................... 8,683 10,809 -------- -------- 571,198 470,031 Minority interests........................................ 1,532 3,614 Stockholders' equity: Preferred stock, $.0001 par value; authorized, 3,000,000 shares; issued and outstanding, none........................... -- -- Common stock, $.0001 par value; authorized, 50,000,000 shares in 1998 and 1997; issued, 35,540,036 in 1998 and 33,362,204 in 1997..................................... 3 3 Additional paid-in capital................................ 173,888 137,569 Retained earnings......................................... 265,567 167,222 -------- -------- 439,458 304,794 Accumulated other comprehensive earnings.................. 11,657 23,631 Less treasury stock, 6,645,487 shares in 1998 and 1997, at cost................................................... 54,375 54,375 -------- -------- 396,740 274,050 Commitments and contingencies............................. Subsequent events......................................... -------- -------- $969,470 $747,695 ======== ========
See Notes to Consolidated Financial Statements. 33 6 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- (RESTATED) (RESTATED) REVENUE: Title insurance premiums.................................. $ 910,278 $616,074 $552,799 Escrow fees............................................... 130,299 86,033 71,122 Other fees and revenue.................................... 208,301 125,146 91,647 Interest and investment income, including realized gains (losses)............................................... 39,587 35,806 19,227 ---------- -------- -------- 1,288,465 863,059 734,795 ---------- -------- -------- EXPENSES: Personnel costs........................................... 394,284 273,221 240,232 Other operating expenses.................................. 257,080 189,226 176,524 Agent commissions......................................... 385,649 261,182 221,948 Provision for claim losses................................ 59,294 41,558 36,275 Interest expense.......................................... 17,024 12,269 11,590 ---------- -------- -------- 1,113,331 777,456 686,569 ---------- -------- -------- Earnings before income taxes and extraordinary item....... 175,134 85,603 48,226 Income tax expense........................................ 69,442 36,595 18,985 ---------- -------- -------- Earnings before extraordinary item..................... 105,692 49,008 29,241 Extraordinary item -- loss on early retirement of debt, net of applicable income tax benefit of $1,180......... -- (1,700) -- ---------- -------- -------- Net earnings........................................... $ 105,692 $ 47,308 $ 29,241 ========== ======== ======== Basic net earnings........................................ $ 105,692 $ 47,308 $ 29,241 ========== ======== ======== Basic earnings per share before extraordinary item........ $ 3.79 $ 2.10 $ 1.43 Extraordinary item -- loss on early retirement of debt, net of applicable income tax benefit, basic basis...... -- (0.07) -- ---------- -------- -------- Basic net earnings per share.............................. $ 3.79 $ 2.03 $ 1.43 ========== ======== ======== Weighted average shares outstanding, basic basis.......... 27,921 23,355 20,426 ========== ======== ======== Diluted net earnings...................................... $ 108,155 $ 50,450 $ 32,437 ========== ======== ======== Diluted net earnings per share before extraordinary item................................................... $ 3.23 $ 1.76 $ 1.23 Extraordinary item -- loss on early retirement of debt, net of applicable income tax benefit, diluted basis.... -- (0.06) -- ---------- -------- -------- Diluted net earnings per share............................ $ 3.23 $ 1.70 $ 1.23 ========== ======== ======== Weighted average shares, diluted basis.................... 33,474 29,599 26,431 ========== ======== ========
See Notes to Consolidated Financial Statements. 34 7 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 -------- ---------- ---------- Net earnings............................................... $105,692 $47,308 $29,241 -------- ------- ------- Other comprehensive earnings (loss): Unrealized gains (losses) on investments, net(1)......... (1,608) 20,333 7,798 Reclassification adjustments for gains included in net earnings(2)........................................... (10,366) (9,632) (1,501) -------- ------- ------- Other comprehensive earnings (loss)........................ (11,974) 10,701 6,297 -------- ------- ------- Comprehensive earnings..................................... $ 93,718 $58,009 $35,538 ======== ======= =======
- --------------- (1) Net of income tax expense (benefit) of ($1,059), $15,214, and $5,070 for 1998, 1997 and 1996, respectively. (2) Net of income tax expense of $6,824, $7,207, and $975 for 1998, 1997 and 1996, respectively. See Notes to Consolidated Financial Statements. 35 8 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK ADDITIONAL ACCUMULATED TREASURY STOCK --------------- PAID-IN RETAINED COMPREHENSIVE ----------------------- SHARES AMOUNT CAPITAL EARNINGS EARNINGS SHARES AMOUNT ------ ------ ---------- -------- ------------- ------ -------------- Balance, December 31, 1995 (Restated).... 25,302 $2 $ 62,413 $100,164 $ 6,633 6,880 $(56,292) Exercise of stock options.............. 118 -- 720 -- -- -- -- Common stock awards.................... 11 -- 135 -- Other comprehensive earnings -- unrealized gain on investments...... -- -- -- -- 6,297 -- -- Acquisitions........................... 210 -- 2,733 -- -- (235) 1,917 Incorporation of Granite Financial, Inc................................. 1,544 -- 2,260 -- -- -- -- Issuance of common stock pursuant to Granite Financial, Inc. initial public offering, net of offering costs............................... 1,331 1 10,734 -- -- -- -- Cash dividends......................... -- -- -- (4,313) -- -- -- Net earnings........................... -- -- -- 29,241 -- -- -- ------ -- -------- -------- -------- ----- -------- Balance, December 31, 1996 (Restated).... 28,516 3 78,995 125,092 12,930 6,645 (54,375) ------ -- -------- -------- -------- ----- -------- Exercise of stock options.............. 161 -- 1,424 -- -- -- -- Common stock awards.................... 6 -- 109 -- Other comprehensive earnings -- unrealized gain on investments...... -- -- -- -- 10,701 -- -- Acquisitions........................... 1,386 -- 12,450 -- -- -- -- Retirement and conversion of LYONs..... 1,455 -- 27,351 -- -- -- -- Nations Title Inc. purchase price adjustment.......................... (29) -- (749) -- -- -- -- Issuance of common stock pursuant to Granite Financial, Inc. secondary public offering, net of offering costs............................... 1,867 -- 17,989 -- -- -- -- Cash dividends......................... -- -- -- (5,178) -- -- -- Net earnings........................... -- -- -- 47,308 -- -- -- ------ -- -------- -------- -------- ----- -------- Balance, December 31, 1997 (Restated).... 33,362 3 137,569 167,222 23,631 6,645 (54,375) ------ -- -------- -------- -------- ----- -------- Exercise of stock options.............. 1,583 -- 22,868 -- -- -- -- Other comprehensive loss -- unrealized loss on investments................. -- -- -- -- (11,974) -- -- Acquisitions........................... 133 -- 4,250 -- -- -- -- Conversion of LYONs.................... 462 -- 9,201 -- -- -- -- Cash dividends......................... -- -- -- (7,347) -- -- -- Net earnings........................... -- -- -- 105,692 -- -- -- ------ -- -------- -------- -------- ----- -------- Balance, December 31, 1998............... 35,540 $3 $173,888 $265,567 $ 11,657 6,645 $(54,375) ====== == ======== ======== ======== ===== ========
See Notes to Consolidated Financial Statements. 36 9 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 --------- ---------- ---------- (RESTATED) (RESTATED) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings.............................................. $ 105,692 $ 47,308 $ 29,241 Adjustments to reconcile net earnings to net cash provided by operating activities: Extraordinary item: loss on early retirement of LYONs............................................... -- 2,880 -- Depreciation and amortization........................ 21,373 18,175 15,255 Net increase (decrease) in reserve for claim losses.............................................. 22,860 5,028 (1,852) Amortization of LYONs original issue discount and other debt issuance costs........................... 4,432 5,939 5,295 Provision for losses on real estate and notes receivable.......................................... 582 2,714 999 Equity in (gains) losses of unconsolidated partnerships........................................ (4,361) (488) 520 Gain on sales of investments......................... (19,679) (10,801) (3,828) (Gain) loss on sale of real estate and other assets.............................................. 2,489 (6,038) 1,352 Changes in assets and liabilities, net of effects from acquisitions: Net increase in lease and lease securitization residual interest................................... (39,725) (22,540) -- Net (increase) decrease in trade receivables......... (22,486) 2,177 (7,369) Net increase in prepaid expenses and other assets.... (17,703) (17,601) (14,400) Net increase in accounts payable and accrued liabilities......................................... 39,568 12,336 2,553 Net increase (decrease) in income taxes.............. (21,280) 19,820 2,092 --------- --------- --------- Net cash provided by operating activities......... 71,762 58,909 29,858 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from investment securities available for sale.... 179,668 263,179 188,375 Proceeds from sales of other assets....................... 6,848 17,673 3,731 Proceeds from sales of real estate........................ -- 6,407 917 Collections of notes receivable........................... 9,372 14,094 18,934 Additions to title plants................................. (1,480) (1,792) (777) Additions to property and equipment....................... (22,393) (23,174) (16,197) Additions to notes receivable............................. (11,717) (3,868) (9,403) Purchases of investment securities available for sale..... (324,540) (344,709) (194,560) Leases assigned to lender................................. -- -- (24,793) Investments in real estate and partnerships............... -- (1,048) -- Sale of subsidiary, net of cash........................... -- 5,934 -- Acquisitions of businesses, net of cash acquired.......... (1,036) (10,866) (10,138) --------- --------- --------- Net cash used in investing activities............. (165,278) (78,170) (43,911) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings................................................ 84,287 21,570 53,705 Debt service payments..................................... (28,877) (25,241) (26,793) Dividends paid............................................ (6,340) (4,703) (3,738) Stock offering proceeds, net.............................. -- 17,990 10,832 Exercise of stock options................................. 22,868 1,424 720 Issuance of treasury stock, net........................... -- -- 1,917 --------- --------- --------- Net cash provided by financing activities......... 71,938 11,040 36,643 --------- --------- --------- Net increase (decrease) in cash and cash equivalents...... (21,578) (8,221) 22,590 Cash and cash equivalents at beginning of year............ 72,887 81,108 58,518 --------- --------- --------- Cash and cash equivalents at end of year.................. $ 51,309 $ 72,887 $ 81,108 ========= ========= =========
See Notes to Consolidated Financial Statements. 37 10 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following describes the significant accounting policies of Fidelity National Financial, Inc. ("Fidelity Financial") and its subsidiaries (collectively, the "Company") which have been followed in preparing the accompanying Consolidated Financial Statements. Description of business Fidelity National Financial, Inc., through its principal subsidiaries (collectively, the "Company"), is one of the largest national underwriters engaged in the business of issuing title insurance policies and performing other real estate related services such as escrow, collection and trust activities, real estate information and technology services, trustee sale guarantees, credit reporting, attorney services, flood certification, tax monitoring, home warranty insurance, reconveyances, recordings, foreclosure publishing and posting services and exchange intermediary services in connection with real estate transactions. Title insurance services are provided through the Company's direct operations and otherwise through independent title insurance agents who issue title policies on behalf of the underwriting subsidiaries. Title insurance is generally accepted as the most efficient means of determining title to, and the priority of interests in, real estate in nearly all parts of the United States. Today, virtually all real property mortgage lenders require their borrowers to obtain a title insurance policy at the time a mortgage loan is made or to allow the sale of loans in the secondary market. The Company's principal subsidiaries consist of Fidelity National Title Insurance Company ("Fidelity Title"), Fidelity National Title Insurance Company of New York ("Fidelity New York"), Alamo Title Insurance ("Alamo Title"); (collectively, the "Insurance Subsidiaries"); its wholly-owned underwritten title companies (collectively, the "UTCs"); and its network of wholly-owned title-related ancillary service companies known as Fidelity National Lender Express Network ("FLEXNet"). The Company also originates, funds, purchases, sells, securitizes and services equipment leases for a broad range of businesses through its wholly-owned subsidiary Granite Financial, Inc. Fidelity Title was the parent company of Fidelity National Title Insurance Company of Tennessee ("Fidelity Tennessee"), Fidelity National Title Insurance Company of California ("Fidelity California") and Nations Title Insurance Company ("Nations Title"). Fidelity Tennessee, Fidelity California and Nations Title were merged into Fidelity Title on December 31, 1998, August 7, 1997 and December 29, 1997, respectively. Fidelity New York is the parent company of Nations Title Insurance of New York Inc. ("Nations New York") and National Title Insurance of New York Inc. ("National"). Fidelity National Title Insurance Company of Pennsylvania ("Fidelity Pennsylvania") was merged into Fidelity New York as of April 11, 1997, which in turn, was the parent company of American Title Insurance Company ("ATIC"), which was merged into Fidelity Pennsylvania as of November 21, 1996. Nations Title Insurance Company, Nations Title Insurance of New York Inc. and National Title Insurance of New York Inc. were acquired, along with Nations Title Inc. ("NTI," collectively, "Nations Title Inc."), in a transaction which closed on April 1, 1996. Certain of the ancillary service companies were acquired in separate transactions during 1996 and 1997. Granite Financial, Inc. and subsidiaries ("Granite") was acquired in a transaction which closed on February 26, 1998. Alamo Title was acquired in connection with the Company's acquisition of Alamo Title Holding Company and subsidiaries ("Alamo") in a transaction which closed August 20, 1998. Principles of consolidation and basis of presentation The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All material intercompany profits, transactions and balances 38 11 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) have been eliminated. The Company's investments in non-majority-owned partnerships and subsidiaries are accounted for on the equity method. On February 26, 1998, the Company, in exchange for approximately 5.0 million shares of Company common stock plus cash in lieu of fractional shares, acquired the common stock of Granite Financial, Inc. and subsidiaries. Fidelity National Financial, Inc. common stock, as reported by the New York Stock Exchange, closed at $26.08 on February 26, 1998. The transaction has been accounted for as a pooling-of-interests. Accordingly, the Consolidated Balance Sheet as of December 31, 1997 and the related Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for each of the years in the two-year period ended December 31, 1997 and the related Notes to Consolidated Financial Statements, have been restated to reflect the inclusion of Granite. The Company acquired the common stock of Alamo Title Holding Company and subsidiaries on August 20, 1998, in exchange for approximately 2.2 million shares of Company common stock plus cash in lieu of fractional shares. Fidelity National Financial, Inc. common stock, as reported by the New York Stock Exchange, closed at $33.13 on August 20, 1998. The transaction has been accounted for as a pooling-of-interests. Accordingly, the Consolidated Balance Sheet as of December 31, 1997 and the related Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for each of the years in the two-year period ended December 31, 1997 and the related Notes to Consolidated Financial Statements, have been restated to reflect the inclusion of Alamo. The results of operations of Fidelity, Granite and Alamo separately and the combined amounts presented in the Consolidated Financial Statements for the two years prior to the consummation of the poolings-of-interests are summarized below:
YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- (DOLLARS IN THOUSANDS) Revenue: Fidelity.......................................... $746,712 $636,913 Granite........................................... 16,469 5,464 Alamo............................................. 99,878 92,418 -------- -------- Combined.......................................... $863,059 $734,795 ======== ======== Earnings: Fidelity Earnings before extraordinary item....... $ 41,471 $ 24,337 Extraordinary item.............................. (1,700) -- -------- -------- Earnings after extraordinary item............... 39,771 24,337 Granite........................................... 3,326 1,190 Alamo............................................. 4,211 3,714 -------- -------- Combined.......................................... $ 47,308 $ 29,241 ======== ========
Effective as of October 1, 1997, the Company acquired Bron Research, Inc. ("BRON"), a flood certification company headquartered in Austin, Texas. The purchase price paid by the Company for the acquisition was $9.85 million, paid in 575,599 shares of Company common stock. BRON now operates as Fidelity National Flood, Inc. This transaction has been accounted for as a pooling-of-interests. Prior to 1997, BRON's financial position and results of operations were insignificant, and as such, the 1996 Consolidated Statement of Earnings and Related Notes to Consolidated Financial Statements have not been restated to reflect the inclusion of BRON. 39 12 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) There have been no adjustments to the total net assets or stockholders' equity of the combining companies as a result of the poolings-of-interests. Certain reclassifications have been made to conform the financial statements of the combining companies to the Consolidated Financial Statements of the Company. Granite previously reported its results of operations based on a fiscal year ended June 30. Granite's fiscal year has been converted to a calendar year in order to conform to that of the Company. Cash and cash equivalents For purposes of reporting cash flows, highly liquid instruments purchased with original maturities of three months or less are considered cash equivalents. The carrying amounts reported in the Consolidated Balance Sheets for these instruments approximate their fair value. Investments Fixed maturity securities are purchased to support the investment strategies of the Company, which are developed based on many factors including rate of return, maturity, credit risk, tax considerations and regulatory requirements. Fixed maturity securities which may be sold prior to maturity to support the Company's investment strategies are carried at fair value and are classified as available for sale as of the balance sheet dates. Fair values for fixed maturity securities are principally a function of current interest rates and are based on quoted market prices. Equity securities are considered to be available for sale and carried at fair value as of the balance sheet dates. Fair values are based on quoted market prices. Other long-term investments, which consist of a limited partnership investment in an investment fund, as well as certain other debt instruments and equity investments, are carried at cost or on the equity method, as appropriate, which approximates fair value. Short-term investments, which consist primarily of securities purchased under agreements to resell, commercial paper and money market instruments, which have an original maturity of one year or less, are carried at amortized cost, which approximates fair value. Investments in real estate and partnerships are generally held for investment purposes and are carried at cost in the absence of any other than temporary impairment in value. Investments in real estate which are held for sale, including real estate acquired through foreclosure of properties in satisfaction of commercial and real estate loans, are carried at the lower of cost or fair value less estimated costs to sell. Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income on a trade date basis. Unrealized gains or losses on bonds and common stocks which are classified as available for sale, net of applicable deferred income taxes (benefits), are excluded from income and credited or charged directly to a separate component of stockholders' equity. If any unrealized losses on bond or common stocks are deemed other than temporary, such unrealized losses are recognized as realized losses. Leases and Residual Interests in Securitizations Leases and residual interests in securitizations includes direct financing leases, direct financing leases assigned to lender and residual interests in securitizations. See Note D. 40 13 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Direct Financing Leases Granite has entered into various lease agreements which, in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 13, "Accounting for Leases," meet the criteria of capitalization and are accounted for as direct financing leases. Under this method, the amount by which gross lease rentals exceed the cost of the related assets, less the estimated recoverable residual value at the expiration of the lease, is recognized as income from direct financing leases over the life of the lease using the interest method. Any permanent reduction in the estimated residual equipment value of leased property is charged to operations in the period it occurs. See Note D. Sales of Leases Gains or losses resulting from sales of leases are recognized in the accompanying Consolidated Statements of Earnings at the date of sale and are based on the difference between the selling price of the sales and the carrying value of the related leases sold. Nonrefundable fees and direct costs associated with the origination of leases are deferred and recognized when the leases are sold. On January 1, 1997, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). Under SFAS 125, a transfer of financial assets in which control is surrendered is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in the exchange. Liabilities and derivatives incurred or obtained by the transfer of financial assets are required to be measured at fair value, if practicable. Also, servicing assets and other retained interests in the transferred assets must be measured by allocating the previous carrying value between the asset sold and the interest retained, if any, based on their relative fair values at the date of transfer. Direct Financing Leases Assigned to Lender SFAS 125 prohibits early application. Prior to January 1, 1997, direct financing leases sold prior to that date as part of a securitization to a special-purpose entity that issued debt securities were accounted for as collateralized borrowings. The leases collateralizing the debt are recorded as direct financing leases assigned to lender. The leases and related debt are reflected in the Consolidated Balance Sheets. See Notes D and H. Residual Interests in Securitizations Residual interests in securitizations ("Residuals") of lease receivables in trust are recorded as a result of the sale of lease receivables through securitization. The securitizations are generally structured as follows: First, the Company sells a portfolio of lease receivables to a special purpose entity ("SPE") which has been established for the limited purpose of buying and reselling the Company's lease receivables. Next, the SPE transfers the same lease receivables to a Trust (the "Trust"), and the Trust in turn issues interest-bearing asset-backed securities (the "Bonds and Certificates") generally in an amount equal to the aggregate initial principal balance of the lease receivables, multiplied by an advance rate. The Company typically sells these lease receivables at face value and with limited recourse relating to defaulted loans, prepayments and certain representations and warranties provided by the Company to the Trust. One or more investors purchase these Bonds and Certificates and the proceeds from the sale of the Bonds and Certificates are used as consideration to purchase the lease receivables from the Company. At the closing of each securitization which is accounted for as a sale the Company removes from its balance sheet the lease receivables held for sale and adds to its balance sheet (i) the cash received and (ii) the allocated cost of the Residuals which consists of (a) cash collateral account and (b) net excess cash flows. 41 14 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) The excess of the cash received by the Company over the allocated cost of the lease receivables sold less transaction costs, equals the net gain on sale recorded by the Company. The Company allocates its basis in the lease receivables between the portion of the lease receivables sold (the Bonds and Certificates) and the portion retained (the Residuals) based on the relative fair values of those portions on the date of the sale. The Company may recognize unrealized gains or losses through stockholders' equity attributable to the change in the fair value of the Residuals, which are recorded at estimated fair value and accounted for as available for sale securities. The Company is not aware of an active market for the purchase or sale of Residuals at this time. Accordingly, the Company estimates the fair value of the Residuals by calculating the present value of the estimated expected future excess cash flows received by the Company after being released by the Trust (cash out method) using a discount rate of 12%, which management believes is commensurate with the risks involved. The Company is entitled to the cash flows from the Residuals that represent collections on the lease receivables in excess of the amounts required to pay the Bonds and Certificate principal and interest, the base servicing fees and certain other fees such as trustee and custodial fees. At the end of each collection period, the aggregate cash collections from the lease receivables are allocated first to the servicing fees and certain other fees such as trustee and custodial fees for the period, then to the Bond and Certificate holders for interest at the pass-through rate on the Bonds and Certificates plus principal as defined in the Trust and Security Agreements. If the amount of cash required for the above allocations exceeds the amount collected during the collection period, the shortfall is drawn from the Cash Collateral Account. If the cash collected during the period exceeds the amount necessary for the above allocations, and there is no shortfall in the related Cash Collateral Account, the excess is released to the Company. If the Cash Collateral Account balance is not at the required credit enhancement level, the excess cash collected is used to build the cash collateral account until the credit enhancement level is achieved. The specified credit enhancement levels are defined in the applicable Trust and Security Agreement which are expressed generally as a percentage of either the original or current collateral principal balance. The implicit interest rate on the lease receivables is relatively high in comparison to the pass through rate on the Bonds and Certificates. In determining the value of the Residuals described above, the Company estimates the future rates of prepayments, delinquencies, defaults and default loss severity as they impact the amount and timing of the estimated cash flows. The Company has used a zero prepayment estimate because the lease contracts generally require the lessee to pay all or a majority of the lease payments due under the remaining lease term. The Company estimates the timing of the receipt of such prepayments in its estimate of cash flows. The Company's loss estimate is 1.5% to 2.0% of the gross lease payment, which is based on historical loss data for comparable leases and the specific characteristics of the leases originated by the Company. The Company's prepayment and default estimates resulted in a weighted average life of the pool of leases of between approximately 1.5 and 2.0 years. In future periods, the Company may increase the estimated fair value of the Residuals if the actual performance of the lease receivables is higher than the original estimate. If the actual performance of the lease receivables is lower than the original estimate, then an adjustment to the carrying value of the Residuals may be required if the estimated fair value of the Residuals is less than its carrying value. The Bond and Certificate holders and their securitization trusts have no recourse to the Company's other assets for failure of lessees to pay when due. The Company's Residuals are subordinate to the Bonds and Certificates until the Bond and Certificate holders are fully paid. 42 15 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Allowance for Losses on Leases The Company establishes an allowance for losses to provide for expected losses in the Company's existing portfolio of leases and leases transferred on a recourse basis. The allowance for losses is based on the Company's historical and expected loss experience, industry knowledge and other economic factors. The ultimate obligation for defaults and delinquencies related to leases transferred on a recourse basis is measured and recorded at the time of transfer. Leases are collateralized by the equipment under lease, and lessees generally are required to personally guarantee lease payments. The Company's risk of loss is partially mitigated by recovering collateral and enforcing guarantees. However, the resale value of leased equipment generally declines at a rate greater than the principal of the lease. As a result, full recovery on defaulted leases is not usually possible. Lease Acquisition Costs and Broker Commissions Lease acquisition costs consist of broker bonuses and commissions paid upon the origination of the lease contracts. The costs are included in direct financing leases and are amortized to expense over the life of the related lease contracts on the interest method. Trade receivables The carrying values reported in the Consolidated Balance Sheets for trade receivables approximate their fair value. Fair value of financial instruments The fair values of financial instruments presented in the applicable notes to the Company's Consolidated Financial Statements are estimates of the fair values at a specific point in time using available market information and appropriate valuation methodologies. These estimates are subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. Therefore, the fair values presented are not necessarily indicative of amounts the Company could realize or settle currently. The Company does not necessarily intend to dispose of or liquidate such instruments prior to maturity. See Notes C, D, E and H. Title plants Title plants are recorded at the cost incurred to construct or obtain and organize historical title information to the point it can be used to perform title searches. Costs incurred to maintain, update and operate title plants are expensed as incurred. Title plants are not amortized as they are considered to have an indefinite life if maintained. Sales of title plants are reported at the amount received net of the adjusted costs of the title plant sold. Sales of title plant copies are reported at the amount received. No cost is allocated to the sale of copies of title plants unless the carrying value of the title plant is diminished or impaired. Property and equipment Property and equipment are recorded at cost, less depreciation. Depreciation is computed primarily using the straight-line method based on the estimated useful lives of the related assets which range from three to thirty years. Leasehold improvements are amortized on a straight-line basis over the lesser of the term of the applicable lease or the estimated useful lives of such assets. 43 16 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Cost in excess of net assets acquired and other intangible assets Intangible assets include cost in excess of net assets acquired, capitalized software costs, capitalized licensing costs and capitalized debt offering costs and are amortized on a straight line basis over three to forty years. Intangible assets at December 31, 1998 consist of cost in excess of net assets acquired of $60,830,000 less accumulated amortization of $6,916,000, capitalized licensing costs of $2,500,000 less accumulated amortization of $221,000, capitalized software of $13,515,000 less accumulated amortization of $7,085,000 and capitalized debt offering costs of $4,536,000 less accumulated amortization of $2,500,000. At December 31, 1997, intangible assets consist of cost in excess of net assets acquired of $48,026,000 less accumulated amortization of $4,608,000, capitalized licensing costs of $2,500,000 less accumulated amortization of $159,000, capitalized software of $12,326,000 less accumulated amortization of $4,636,000 and capitalized debt offering costs of $6,883,000 less accumulated amortization of $3,625,000. Impairment of intangible assets is monitored on a continual basis, and is assessed based on an analysis of the cash flows generated by the underlying assets. No impairment of intangible assets has been noted. Income taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 provides that deferred tax assets and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and expected benefits of utilizing net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period enacted. Reserve for claim losses The Company's reserve for claim losses includes known claims as well as losses the Company expects to incur, net of recoupments. Each known claim is reserved for on the basis of a review by the Company as to the estimated amount of the claim and the costs required to settle the claim. Reserves for claims which are incurred but not reported are provided for at the time premium revenue is recognized based on historical loss experience and other factors, including industry averages, claim loss history, current legal environment, geographic considerations and type of policy written. The occurrence of a significant major claim (those greater than $500,000) in any given period could have a material adverse effect on the Company's financial condition and results of operations for such period. See Note J. If a loss is related to a policy issued by an independent agent, the Company may proceed against the independent agent pursuant to the terms of the agency agreement. In any event, the Company may proceed against third parties who are responsible for any loss under the title insurance policy under rights of subrogation. The Company also accrues reserves for losses arising from the escrow, closing and disbursement functions due to fraud or operational error based on historical experience. Reinsurance In the ordinary course of business, the Company reinsures certain risks with other insurers for the purpose of limiting its maximum loss exposure and also assumes reinsurance for certain risks of other insurers for the purpose of earning additional revenue. The Company cedes or assumes a portion of certain policy liabilities 44 17 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) under agent fidelity, excess of loss and case-by-case reinsurance agreements. Reinsurance agreements provide that in the event of a loss (including costs, attorneys' fees and expenses) exceeding the retained amounts, the reinsurer is liable for the excess amount assumed. However, the ceding company remains primarily liable in the event the reinsurer does not meet its contractual obligations. Reinsurance activity is not considered significant. Title premiums, escrow fees, other fees and revenue and agent commissions Title insurance premiums, escrow fees and certain other fees and revenue are recognized as revenue at the time of closing of the related transaction as the earnings process is considered complete. Certain other fees and revenue are recognized over the period the related services are provided. Title insurance commissions earned by the Company's agents are recognized as an expense concurrently with premium recognition. Other fees and revenue includes revenue derived from Granite's operations, as well as non-title related revenue from other subsidiaries and other title-related revenue not included in title insurance premiums or escrow fees. Share and per share restatement On December 11, 1996, the Company declared a 10% stock dividend to shareholders of record on December 23, 1996, distributed January 7, 1997. The Company declared a 10% stock dividend on December 17, 1997 to shareholders of record on December 29, 1997, distributed January 14, 1998. On December 13, 1998, the Company declared a 10% stock dividend to shareholders of record on December 28, 1998, distributed January 12, 1999. The par value of the additional shares of common stock issued in connection with the stock dividends was credited to common stock and a like amount charged to retained earnings as of December 31, 1998, 1997 and 1996, respectively. Fractional shares were paid in cash. All data with respect to earnings per share, dividends per share and share information, including price per share where applicable, in the Consolidated Financial Statements and Notes thereto have been retroactively adjusted to reflect all stock dividends and splits. Additionally, all data impacted has been restated to reflect the acquisitions of Granite, Alamo and BRON. Earnings per share In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), effective for fiscal years ending after December 15, 1997. The Company retroactively adopted SFAS 128 in 1997. Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the period. Dilutive earnings per share is calculated by dividing net earnings available to common shareholders plus the impact of assumed conversions of dilutive potential securities. The Company has granted certain options and warrants which have been treated as common share equivalents for purposes of calculating diluted earnings per share. The Liquid Yield Option Notes ("LYONs") are considered other dilutive securities for purposes of calculating diluted earnings per share to the extent that they are not antidilutive. 45 18 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) The following table sets forth the calculation of basic and diluted earnings per share for each of the years in the three-year period ended December 31, 1998:
YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1997 1996 ----------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Basic earnings per share calculation: Earnings before extraordinary loss................. $105,692 $49,008 $29,241 Extraordinary loss, net of applicable income tax benefit of $1,180............................... -- (1,700) -- -------- ------- ------- Net earnings....................................... $105,692 $47,308 $29,241 ======== ======= ======= Weighted average shares.................... 27,921 23,355 20,426 ======== ======= ======= Basic earnings per share Earnings before extraordinary loss................. $ 3.79 $ 2.10 $ 1.43 Extraordinary loss................................. -- (.07) -- -------- ------- ------- Net earnings....................................... $ 3.79 $ 2.03 $ 1.43 ======== ======= ======= Diluted earnings per share calculation: Earnings before extraordinary loss................. $105,692 $49,008 $29,241 Plus: Impact of assumed conversion of LYONs........ 2,463 3,142 3,196 -------- ------- ------- Earnings before extraordinary loss plus assumed conversion...................................... 108,155 52,150 32,437 Extraordinary loss, net of applicable income tax benefit of $1,180............................... -- (1,700) -- -------- ------- ------- Net earnings plus assumed conversions.............. $108,155 $50,450 $32,437 ======== ======= ======= Weighted average shares............................ 27,921 23,355 20,426 Plus: Incremental shares from assumed conversions LYONs...................................... 3,694 5,008 5,272 Options.................................... 1,859 1,236 733 -------- ------- ------- Dilutive potential shares.......................... 33,474 29,599 26,431 ======== ======= ======= Diluted earnings per share Earnings before extraordinary loss plus assumed conversions..................................... $ 3.23 $ 1.76 $ 1.23 Extraordinary loss................................. -- (0.06) -- -------- ------- ------- Net earnings....................................... $ 3.23 $ 1.70 $ 1.23 ======== ======= =======
Management estimates The preparation of these Consolidated Financial Statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 46 19 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Certain reclassifications Certain reclassifications have been made in the 1997 and 1996 Consolidated Financial Statements to conform to the classifications used in 1998. B. ACQUISITIONS On April 4, 1996, the Company purchased 17% of the outstanding common stock of National Alliance Marketing Group, Inc. ("National Alliance"), a California corporation, for $567,000; together with a warrant to acquire an additional 14% of National Alliance common stock. In addition, the Company loaned $1,200,000 to National Alliance at closing at a rate of Prime plus one percent. Subsequently, the Company agreed to increase the credit facility from $1,200,000 to $1,700,000. In consideration for the increase in the credit facility National Alliance agreed to increase the warrant shares which the Company could purchase. If the entire $1,700,000 was borrowed the Company could purchase an additional 34% of the outstanding shares of National Alliance. After receiving approval of the transaction from the California Department of Insurance, the transaction closed on July 12, 1996. National Alliance is the parent company of Alliance Home Warranty Company ("Alliance"), a California insurance company. Alliance sells home warranty plans to buyers of resale homes, primarily in the Central and Southern California markets. A home warranty contract generally promises the repair or replacement of major operating systems and built-in appliances inside a home for a period of one year. On July 3, 1997, the Company converted the outstanding note balance in conjunction with the exercise of the warrants and then owned 51% of the outstanding common stock of National Alliance. The outstanding balance of the note receivable due from National Alliance at conversion was approximately $1.6 million. On August 14, 1998, the Company acquired the outstanding minority interest in National Alliance, 49%, for a purchase price of $3,320,000. The Company now owns 100% of National Alliance, which is now known as Fidelity National Home Warranty. Prior to the conversion of the convertible note in July 1997, the Company accounted for its investment in National Alliance on the equity method. Since that time the Company has accounted for National Alliance as a purchase and has consolidated its interest in National Alliance's financial position and results of operations with those of the Company. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the National Alliance acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value..................... $ 4,467 Cost in excess of net assets acquired...................... 4,553 Liabilities assumed at fair value.......................... (3,383) ------- Total purchase price............................. $ 5,637 =======
Alamo acquired substantially all of the assets of Southwest Land Title Company of Angleton effective January 31, 1997 for $1.1 million cash, and created a new corporation, Alamo Title Company of Brazoria, Inc. ("Brazoria") into which the acquired assets were placed. This transaction has been accounted for as a purchase. The assets acquired, including cost in excess of assets acquired, in the Brazoria acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value...................... $ 850 Cost in excess of net assets acquired....................... 250 ------ Total purchase price.............................. $1,100 ======
On March 31, 1997, Granite acquired the assets and liabilities of Global Finance & Leasing, Inc. ("Global"), a micro-ticket leasing company, for a purchase price of $2.3 million in cash. The acquisition 47 20 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) agreement provides for additional contingent consideration of $916,000 based on the collection of certain receivables. Granite believes the collection of these receivables is remote. Therefore, no liability has been recorded in the Company's Consolidated Financial Statements. This transaction has been accounted for as a purchase. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Global acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value..................... $ 3,545 Cost in excess of net assets acquired...................... 3,297 Liabilities assumed at fair value.......................... (4,508) ------- Total purchase price............................. $ 2,334 =======
On June 20, 1997, Granite acquired certain assets and liabilities of SFR Funding, Inc. ("SFR"), a small ticket equipment leasing company, for cash of $300,000, a note payable of $250,000 and the assumption of certain liabilities. The SFR transaction resulted in cost in excess of net assets acquired of $681,000. Neither the financial position nor the results of operations of SFR have been significant to the Company or Granite since acquisition. This transaction has been accounted for as a purchase. On August 22, 1997, the Company acquired the common stock of First Title Corporation ("First Title"), a title company with fourteen offices throughout the southeastern United States. First Title has been merged into a subsidiary of the Company. First Title was acquired for $4.7 million; payable in 80% common stock of the Company (278,738 shares or $3.8 million) and 20% cash (approximately $900,000). This transaction has been accounted for as a purchase. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the First Title Corporation acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value...................... $1,294 Cost in excess of net assets acquired....................... 4,033 Liabilities assumed at fair value........................... (627) ------ Total purchase price.............................. $4,700 ======
On September 18, 1997, the Company acquired the common stock of Ifland Credit Services ("ICS"), a credit reporting company headquartered in Lexington, Kentucky, for a purchase price of $3.75 million. ICS has been merged with Credit Reports, Inc. ("CRI") and Classified Credit Data, Inc. ("CCD") in order to form Fidelity National Credit Services. The purchase price was payable 80% in common stock of the Company (187,170 shares or $3.0 million) and 20% cash ($750,000). This transaction has been accounted for as a purchase. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Ifland Credit Services acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value...................... $ 618 Cost in excess of net assets acquired....................... 3,517 Liabilities assumed at fair value........................... (385) ------ Total purchase price.............................. $3,750 ======
On October 9, 1997, the Company acquired the common stock of Credit Reports, Inc., a credit reporting company headquartered in Scottsdale, Arizona, with operations in California, Colorado, Nevada and Oregon. 48 21 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) CRI has been merged with ICS and CCD in order to form Fidelity National Credit Services. The purchase price for CRI was $200,000, subject to certain purchase price adjustments based on the combined equity of CRI and Express Network, Inc., its affiliate, payable in 12,601 shares of Company common stock. This transaction has been accounted for as a purchase. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Credit Reports, Inc. acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value..................... $ 2,559 Cost in excess of net assets acquired...................... 139 Liabilities assumed at fair value.......................... (2,498) ------- Total purchase price............................. $ 200 =======
Also on October 9, 1997, the Company acquired the common stock of Express Network, Inc. ("ENI"), a provider of attorney services such as courier, messenger, courthouse filing, process serving, investigation and reprographics. ENI provides services to legal firms in Los Angeles, Orange County, San Diego, Riverside and San Francisco, California. The purchase price for ENI was $10.55 million; subject to certain purchase price adjustments based on the combined equity of ENI and CRI, its affiliate, payable in 50% common stock of the Company (332,374 shares or $5.275 million) and 50% cash (approximately $5.275 million). Approximately $2.8 million of the cash portion of the purchase price will be paid in equal installments over a four-year period. This transaction has been accounted for as a purchase. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Express Network, Inc. acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value..................... $ 3,018 Cost in excess of net assets acquired...................... 9,640 Liabilities assumed at fair value.......................... (2,108) ------- Total purchase price............................. $10,550 =======
On October 21, 1997, the Company acquired 100% of the common stock of Classified Credit Data, Inc., a credit reporting company headquartered in Orange County, California, for a purchase price of $300,000, which was paid in cash. CCD was merged with ICS and CRI in order to form Fidelity National Credit Services. This transaction has been accounted for as a purchase. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Classified Credit Data acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value...................... $ 385 Cost in excess of net assets acquired....................... 386 Liabilities assumed at fair value........................... (471) ----- Total purchase price.............................. $ 300 =====
On December 30, 1997, Granite completed the acquisition of 84% of the common stock of North Pacific Funding, Inc. dba C&W Leasing and its wholly-owned subsidiary CKC Corporation dba US Funding (collectively, "C&W Leasing"). The purchase price for this transaction was $5.1 million, in the form of notes payable to the former stockholders. This transaction has been accounted for as a purchase. The remaining 16% of the common stock of C&W Leasing was purchased on January 5, 1998 for additional consideration of $900,000 in promissory notes payable. 49 22 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the C&W Leasing acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value..................... $ 1,003 Cost in excess of net assets acquired...................... 5,821 Liabilities assumed at fair value.......................... (1,724) ------- Total purchase price............................. $ 5,100 =======
The Company completed the sale of its wholly-owned subsidiary ACS Systems, Inc. ("ACS") to Micro General Corporation (OTCBB:MGEN) ("Micro General") for 4.6 million shares of Micro General common stock, valued at $1,297,000, on May 14, 1998. ACS provides small to medium size businesses within the real estate industry with software, systems integration and communication services including telecommunications hardware, long distance reselling, computer hardware and system software reselling, consulting services, technical services, internet services, electronic commerce and title and escrow software applications. ACS will continue to provide the above listed services to the Company at preferred customer rates. The Company currently owns 70.6% of Micro General Corporation. This transaction has been accounted for as a reverse merger of Micro General into the Company. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Micro General acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value..................... $ 1,484 Cost in excess of net assets acquired...................... 5,161 Liabilities assumed at fair value.......................... (4,812) Minority interest.......................................... (536) ------- Total purchase price............................. $ 1,297 =======
Additionally, on November 17, 1998, Micro General acquired LDExchange.com, Inc. ("LDX"), for a purchase price of $3.1 million, payable $1.1 million in cash and $2.0 million in Micro General common stock (1,000,000 shares). LDX is a facilities based, wholesale carrier providing international telecommunication services. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the LDX acquisition were as follows (dollars in thousands): Tangible assets acquired at fair value..................... $ 2,325 Cost in excess of net assets acquired...................... 2,739 Liabilities assumed at fair value.......................... (1,964) ------- Total purchase price............................. $ 3,100 =======
Effective September 1, 1998, the Company acquired 100% of Lexington Capital Corporation ("Lexington"), a financial services company specializing in financing national and regional franchisee accounts, for a purchase price of $3.5 million, payable in $3.0 million in cash and $500,000 in restricted common stock of the Company (15,129 shares). The acquisition of Lexington resulted in $3,500,000 of cost in excess of net assets acquired. Neither the financial position or the results of operations of Lexington have been material to the Company since acquisition. This transaction has been accounted for as a purchase. Selected unaudited pro forma combined results of operations for the years ended December 31, 1998, 1997 and 1996, assuming the National Alliance (51%), Brazoria, Global, SFR, First Title, ICS, CRI, ENI, CCD and C&W Leasing acquisitions occurred on January 1, 1997 and 1996, and assuming the Micro General, 50 23 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) LDX, National Alliance (49%) and Lexington acquisitions occurred January 1, 1998 and 1997, are presented as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenue..................................... $1,315,624 $908,244 $826,060 Basic earnings before extraordinary item.......... 106,055 49,558 27,699 Basic net earnings................................ 106,055 47,858 27,699 Basic earnings per share.......................... 3.80 2.00 1.30 Diluted earnings before extraordinary item........ 108,518 52,700 30,895 Diluted net earnings.............................. 108,518 51,000 30,895 Diluted earnings per share........................ 3.24 1.69 1.13
C. INVESTMENTS The carrying amounts and fair values of the Company's fixed maturity securities at December 31, 1998 and 1997 are as follows:
DECEMBER 31, 1998 --------------------------------------------------------- GROSS GROSS CARRYING AMORTIZED UNREALIZED UNREALIZED FAIR VALUE COST GAINS LOSSES VALUE -------- --------- ---------- ---------- -------- (DOLLARS IN THOUSANDS) Fixed maturity investments (available for sale): U.S. government and agencies.............. $ 50,699 $ 49,949 $ 932 $(182) $ 50,699 States and political subdivisions......... 188,703 183,299 5,405 (1) 188,703 Corporate securities...................... 86,027 85,179 1,491 (643) 86,027 Foreign government bonds.................. 75 75 -- -- 75 Mortgage-backed securities................ 4,564 4,449 115 -- 4,564 -------- -------- ------ ----- -------- $330,068 $322,951 $7,943 $(826) $330,068 ======== ======== ====== ===== ========
DECEMBER 31, 1997 --------------------------------------------------------- GROSS GROSS CARRYING AMORTIZED UNREALIZED UNREALIZED FAIR VALUE COST GAINS LOSSES VALUE -------- --------- ---------- ---------- -------- (DOLLARS IN THOUSANDS) Fixed maturity investments (available for sale): U.S. government and agencies.............. $ 39,106 $ 38,720 $ 429 $ (43) $ 39,106 States and political subdivisions......... 142,655 139,635 3,028 (8) 142,655 Corporate securities...................... 52,810 52,308 532 (30) 52,810 Foreign government bonds.................. 89 90 -- (1) 89 Mortgage-backed securities................ 5,158 5,118 60 (20) 5,158 -------- -------- ------ ----- -------- $239,818 $235,871 $4,049 $(102) $239,818 ======== ======== ====== ===== ========
The change in unrealized gains (losses) on fixed maturities for the years ended December 31, 1998, 1997, and 1996 was $3,170,000, $5,263,000 and ($3,482,000), respectively. The amortized cost and estimated fair value of fixed maturity securities, which are classified as available for sale at December 31, 1998, by contractual maturity, are shown as follows. Expected maturities may differ 51 24 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties:
DECEMBER 31, 1998 --------------------------------------------- AMORTIZED % FAIR % COST OF TOTAL VALUE OF TOTAL --------- -------- -------- -------- (DOLLARS IN THOUSANDS) Maturity One year or less......................... $ 5,836 1.8% $ 5,696 1.7% After one year through five years........ 132,377 41.0 134,866 40.9 After five years through ten years....... 158,156 49.0 162,528 49.2 After ten years.......................... 26,582 8.2 26,978 8.2 -------- ----- -------- ----- $322,951 100.0% $330,068 100.0% ======== ===== ======== ===== Subject to call............................ $ 47,491 14.7% $ 48,600 14.7%
Fixed maturity securities valued at approximately $18,041,000 and $19,125,000 were on deposit with various governmental authorities at December 31, 1998 and 1997, respectively, as required by law. Equity securities at December 31, 1998 and 1997 consist of investments in various industry groups as follows:
DECEMBER 31, ---------------------------------------- 1998 1997 ------------------ ------------------ FAIR FAIR COST VALUE COST VALUE ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Banks, trust and insurance companies........ $ 1,874 $ 1,949 $ 517 $ 950 Industrial, miscellaneous and all other..... 35,878 48,242 41,154 76,603 ------- ------- ------- ------- $37,752 $50,191 $41,671 $77,553 ======= ======= ======= =======
The carrying value of the Company's investment in equity securities is fair value. As of December 31, 1998, gross unrealized gains and gross unrealized losses on equity securities were $22,464,000 and $10,025,000, respectively. Gross unrealized gains and gross unrealized losses on equity securities were $38,464,000 and $2,582,000, respectively, as of December 31, 1997. The change in unrealized gains and losses on equity securities for the years ended December 31, 1998, 1997 and 1996 was ($23,443,000), $12,756,000 and $15,214,000, respectively. Included in equity securities is an investment in a certain equity security, CKE Restaurants, Inc., with a cost basis of $2,341,000 and a fair value of $18,462,000 at December 31, 1998 and a cost basis of $3,366,000 and a fair value of $31,404,000 at December 31, 1997. On July 22, 1997, the Company purchased 1,000,000 shares of common stock of GB Foods Corporation, now known as Santa Barbara Restaurant Group ("SBRG"), which represented approximately 15.5% of the outstanding common stock of SBRG for a purchase price of $5.0 million. Additionally, the Company purchased warrants to acquire an additional 3,500,000 shares of SBRG at various prices ranging from $5.00 -- $7.50 for a purchase price of $800,000; 1,500,000 warrants exercisable at $5.00 per share, 1,000,000 warrants exercisable at $7.00 per share and 1,000,000 warrants exercisable at $7.50 per share. In conjunction with the common stock purchase, the Company gained control of three seats on the SBRG Board of Directors. During 1998, the Company exercised 1,000,000 of the $5.00 warrants in conjunction with an acquisition by SBRG in order to provide SBRG additional capital. In addition, on December 31, 1998, the Company exchanged certain investments in restaurant common stocks with a combined value of $9.45 million for an additional 52 25 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) 2,478,000 shares of SBRG. The Company now owns approximately 31.1% of SBRG. The Company's investment in SBRG is accounted for under the equity method. Effective July 1, 1997, the Company sold a majority interest (60%) of its subsidiary American Title Company ("ATC"), an underwritten title company, to certain members of ATC's management. ATC functions as an exclusive agent of the Company. The sale price of the 60% interest was $6.0 million resulting in a realized gain of approximately $1.3 million before applicable income taxes. As a result of a tax free reorganization of American National Financial, Inc. ("ANFI"), the parent company of ATC and its subsidiaries, in November 1998, the Company's interest in ATC was converted to an ownership interest of approximately 43% of ANFI. Subsequent to ANFI's initial public offering in February 1999, the Company's ownership interest in ANFI became approximately 31.5%. The Company's investment in ANFI is accounted for under the equity method. Interest and investment income, including realized gains (losses), consists of the following:
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (DOLLARS IN THOUSANDS) Cash and cash equivalents..................... $ 2,798 $ 1,370 $ 1,967 Fixed maturity securities..................... 13,014 11,256 10,384 Equity securities............................. 22,867 12,062 5,094 Short-term investments........................ 1,483 1,891 165 Notes receivable.............................. 1,913 2,486 2,801 Other......................................... (2,488) 6,741 (1,184) ------- ------- ------- $39,587 $35,806 $19,227 ======= ======= =======
Net realized gains included in interest and investment income amounted to $17,190,000, $16,839,000 and $2,476,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 1998 net realized gains include a gain of approximately $9,700,000 related to the conversion of the Company's investment in Data Tree Corporation common stock to common stock of First American Financial Corporation. Included in net realized gains for the year ended December 31, 1997, are net realized gains from the sales of investments of approximately $10,500,000, a net realized gain from the sale of the Company's former home office building of approximately $4,300,000, and net realized gains on the sale of 60% of American Title Company, a former wholly-owned underwritten title company subsidiary, and the sale of FNF Ventures, Inc., a small business investment company subsidiary of approximately $1,300,000 and $800,000, respectively. All amounts are before applicable income taxes. During the years ended December 31, 1998, 1997 and 1996, gross realized gains on sales of fixed maturity securities considered available for sale were $700,000, $798,000 and $453,000, respectively; and gross realized losses were $268,000, $468,000 and $719,000, respectively. Gross proceeds from the sale of fixed maturity securities considered available for sale amounted to $71,114,000, $143,085,000 and $94,214,000, during the years ended December 31, 1998, 1997 and 1996, respectively. During the years ended December 31, 1998, 1997 and 1996, gross realized gains on sales of equity securities considered available for sale were $32,603,000, $12,986,000 and $6,186,000, respectively; and gross realized losses were $10,999,000, $2,515,000 and $2,091,000, respectively. Gross proceeds from the sale of equity securities amounted to $108,554,000, $120,094,000 and $94,161,000 during the years ended December 31, 1998, 1997 and 1996, respectively. 53 26 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) D. LEASES AND RESIDUAL INTERESTS IN SECURITIZATIONS Direct Financing Leases Granite's direct financing leases at December 31, 1998 and 1997 consist of the following:
DECEMBER 31, 1998 ----------------------- DIRECT FINANCING DIRECT LEASES FINANCING ASSIGNED TO LEASES LENDER --------- ----------- (DOLLARS IN THOUSANDS) Minimum lease payments receivable....................... $ 57,501 $ 6,398 Estimated residual values of leased property............ 5,424 518 Lease acquisition costs and broker commissions.......... 3,046 45 Unearned income......................................... (16,300) (818) Allowance for credit losses............................. (10,221) (261) Security deposits....................................... (393) (64) -------- ------- $ 39,057 $ 5,818 ======== =======
DECEMBER 31, 1997 ----------------------- DIRECT FINANCING DIRECT LEASES FINANCING ASSIGNED TO LEASES LENDER --------- ----------- (DOLLARS IN THOUSANDS) Minimum lease payments receivable....................... $ 25,832 $13,525 Estimated residual values of leased property............ 3,480 709 Lease acquisition costs and broker commissions.......... 2,194 215 Unearned income......................................... (9,451) (2,232) Allowance for credit losses............................. (2,440) (200) Security deposits....................................... (275) (115) -------- ------- $ 19,340 $11,902 ======== =======
Scheduled collections of minimum lease payments receivable are as follows:
DIRECT FINANCING DIRECT LEASES FINANCING ASSIGNED TO LEASES LENDER --------- ----------- (DOLLARS IN THOUSANDS) Year Ending December 31, 1999.................................................. $ 15,782 $ 3,659 2000.................................................. 14,212 2,371 2001.................................................. 12,048 284 2002.................................................. 8,677 80 2003.................................................. 5,150 4 Thereafter............................................ 1,632 -- -------- ------- $ 57,501 $ 6,398 ======== =======
At December 31, 1998, the weighted average implicit rate of interest is approximately 13.0%. 54 27 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) The carrying value of the direct financing leases at December 31, 1998 and 1997 approximated fair value because of the short-term period that these leases are held before sale or securitization or, in certain cases, because the interest rate approximates current market rates. The fair value of the direct financing leases assigned to lender at December 31, 1998 and 1997 approximated the carrying value because the interest rate on the related Class A Term Note approximates current market rates. Asset Securitization The Company has completed six securitization facilities that provide for aggregate funding limits of approximately $354,000,000. Two of the securitization facilities, GF Funding IV and GF Funding V, are revolving facilities. In April 1996, the Company's wholly-owned subsidiary, GF Funding I, issued $21,689,000 of 6.33% Class A Lease-Backed Term Note ("GFI Note") due November 20, 2001 in a private placement. The GFI Note is collateralized by (i) payments to be made under leases contributed by Granite Financial, LLC to GF Funding I, (ii) all of GF Funding I's rights and interest in the leased equipment, (iii) a cash collateral account (which generally does not increase the overall level of credit enhancement, but rather accommodates changes that may occur from time to time in the form of credit enhancement from excess implicit principal balance of lease receivables to cash) and (iv) a financial guaranty insurance policy. Under the terms of the insurance policy, the monthly payments of interest and final payment of principal and maturity are unconditionally guaranteed. As this securitization was completed through the issuance of a debt security prior to the adoption of SFAS 125, the transaction is accounted for as a collateralized borrowing. Accordingly, the underlying lease assets, recorded as direct financing leases assigned to lender, and the related limited recourse note payable are reflected in the consolidated balance sheet. The underlying assets are comprised of the Company's net investment in the leases of $5,818,000 and $11,902,000 as of December 31, 1998 and 1997, respectively. The related limited recourse note payable was $5,930,000 and $11,719,000 as of December 31, 1998 and 1997, respectively. See Note H. In November 1996, GF Funding II was formed to establish the Company's second securitization facility. The facility provided for the issuance of up to $65 million in aggregate principal amount of Class A Lease-Backed Certificates due June 20, 2003 (the "1996 Certificates") in a private placement. For purposes of computing interest, the 1996 Certificates are issued in two tranches, consisting of the Floating Rate Tranche and the Fixed Rate Tranche. The principal amount of the Floating Rate Tranche will generally convert to the Fixed Rate Tranche on a quarterly basis. The Floating Rate Tranche bears interest at an annual rate equal to the LIBOR Rate, as adjusted from time to time, plus .50%. The Fixed Rate Tranche bears interest at an annual rate equal to the Treasury Rate, as adjusted form time to time, plus .70%. The annual interest rate on each tranche is subject to a maximum annual rate of 10%. The 1996 Certificates represent an undivided interest in a trust estate created by GF Funding II comprised of (i) payments to be made under leases contributed to GF Funding II, (ii) all of GF Funding II's right and interest in the leased equipment, (iii) a cash collateral account and (iv) a financial guaranty insurance policy. The securitization was fully funded in December 1997. The Company has recorded gains from the sales of leases with respect to this securitization of $5,656,000 and $864,000, respectively, during the years ended December 31, 1997 and 1996. In March 1997, GF Funding III was formed to establish the Company's third securitization facility. The facility provides for the issuance of up to $27,500,000 in the aggregate principal amount of 6.82% Class A Lease-Backed Certificates due December 20, 2002 (the "1997 Certificates") in a private placement. The 1997 Certificates represent an undivided interest in a trust estate created by GF Funding III comprised of (i) payments to be made under leases contributed to GF Funding III, (ii) all of GF Funding III's right and interest in the leased equipment, (iii) a cash collateral account, a capitalized interest account, a prefunding account and a collection account and (iv) a financial guaranty insurance policy. This securitization was fully 55 28 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) funded in June 1997. The Company has recorded gains from the sales of leases with respect to this securitization of $1,670,000 during the year ended December 31, 1997. In December 1997, GF Funding IV was formed to establish the Company's fourth securitization facility. The facility provides for the issuance of up to $150 million in aggregate principal amount of Class A Lease-Backed Certificates due September 2004 (the "GFIV Certificates") in a private placement. For purposes of computing interest, the GFIV Certificates are issued in two tranches, consisting of the Floating Rate Tranche and the Fixed Rate Tranche. The principal amount of the Floating Rate Tranche will generally convert to the Fixed Rate Tranche on a quarterly basis. The Floating Rate Tranche bears interest at an annual rate equal to the LIBOR Rate, as adjusted from time to time, plus .50%. The Fixed Rate Tranche bears interest at an annual rate equal to the Treasury Rate, as adjusted from time to time, plus .35%. The GFIV Certificates represent an undivided interest in a trust estate created by GF Funding IV comprised of (i) payments to be made under leases contributed to GF Funding IV, (ii) all of GF Funding IV's rights and interests in the lease equipment and (iii) a financial guaranty insurance policy. The Company is required to sell a minimum of $10,000,000 in leases to the securitization facility per quarter. The Company has recorded gains from the sales of leases with respect to this securitization of $6,456,000 and $1,418,000 during the years ended December 31, 1998 and 1997, respectively. In March 1998, GF Funding V was formed to establish the Company's fifth securitization facility. The facility provides for the issuance of up to $65 million in aggregate principal amount of Class A Lease-Backed Certificates due April 2005 (the "GFV Certificates") in a private placement. For purposes of computing interest, the GFV Certificates are issued in Fixed Rate Tranches which bear interest at an annual rate equal to the Treasury Rate, as adjusted form time to time, plus 1.20%. The GFV Certificates represent an undivided interest in a trust estate created by GF Funding V comprised of (i) payments to be made under leases contributed to GF Funding V and (ii) all of GF V's rights and interest in the leased equipment. The Company is required to sell a minimum of $15,000,000 in leases to the securitization facility per quarter. The Company has recorded gains from the sales of leases with respect to this securitization of $2,817,000 during the year ended December 31, 1998. In October 1998, GF Funding VI was formed to establish the Company's sixth securitization facility. The facility provides for the issuance of $30.3 million in Lease-Backed Certificates (the "GFVI Certificates"). The GFVI Certificates represent an undivided interest in a trust estate created by GFVI which is comprised of (i) all rights, title and interest in the subordinated interest in GF Funding I, GF Funding II, GF Funding III, GF Funding IV and GF Funding V, and the related purchase agreements, (ii) a cash collection account and (iii) a cash reserve account. The issuance of the GFVI Class A and Class B Certificates is accounted for as a collateralized borrowing. Accordingly, the subordinated interest, recorded as a residual interest in securitization, and the related Class A and B are reflected in the Company's Consolidated Balance Sheet. The outstanding Class A and B Certificates were $16,006,000 at December 31, 1998. The amounts due related to the Lease-Backed Notes and Certificates approximate fair value at December 31, 1998 and 1997 due to the fact that the interest rate paid on the Lease-Backed Notes and Certificates approximates market rates. Sale of Leases The Company entered into agreements with certain financial institutions to sell, on an ongoing basis, certain leases either on a recourse or non-recourse basis. The purchase price of the leases is determined on a transaction by transaction basis. A gain on sale is recognized on the date of sale based upon the present value of the payments to be received under the lease. The Company retains servicing of all leases under the agreements. During the years ended December 31, 1998, 1997 and 1996, the Company recognized a net gain on sale of leases of $857,000, $1,559,000 and $1,483,000, respectively. 56 29 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Servicing Asset The Company has not established any servicing asset or liability, although the Company retained the servicing rights on the leases securitized because management has determined that revenues from contractually specified servicing fees and ancillary services are just adequate to compensate the Company for its servicing responsibilities E. NOTES RECEIVABLE Notes receivable consist of the following:
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Mortgage notes, secured by various deeds of trust, installments due monthly including interest at rates ranging from 7.0% to 10.0%, due through 2022........... $ 1,316 $ 426 Promissory notes, secured by various assets and unsecured, installments due monthly including interest at rates ranging from 6.0% to 13.0%, due through 2014................................................... 9,711 10,074 Officer and employee secured and unsecured notes receivable at rates ranging from 7.0% to 10.0%, due through 2004........................................... 1,798 1,421 ------- ------- 12,825 11,921 Allowance for doubtful receivables....................... (2,064) (1,758) ------- ------- $10,761 $10,163 ======= =======
The allowance for doubtful receivables is primarily related to certain promissory notes at December 31, 1998 and 1997. Interest income is not recognized on the Company's non-performing notes receivable. There were no non-performing notes receivable at December 31, 1998. The carrying value and estimated fair values of the Company's notes receivable were as follows at December 31, 1998 and 1997 (dollars in thousands):
DECEMBER 31, ------------------------------------------ 1998 1997 ------------------- ------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Mortgage notes.............................. $ 1,199 $ 1,199 $ 426 $ 426 Other promissory notes...................... 7,999 7,999 8,563 8,563 Affiliated notes............................ 1,563 1,563 1,174 1,174 ------- ------- ------- ------- $10,761 $10,761 $10,163 $10,163 ======= ======= ======= =======
The fair values of significant notes receivable are established using discounted cash flow analyses based on current market interest rates and comparison of rates being received to interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. All other notes receivable are not significant individually or in the aggregate, or are current and at market rates, and their carrying value approximates fair value. 57 30 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) F. INVESTMENTS IN REAL ESTATE AND PARTNERSHIPS At December 31, 1998 and 1997, the Company had financial interests ranging from 22% to 50% in three real estate partnerships which were accounted for under the equity method. These partnerships are involved in the ownership and management of commercial office buildings, retail facilities and have acquired specific parcels of real property for investment purposes. The Company, through Manchester Development Corporation ("Manchester"), a wholly-owned subsidiary, had a general partnership interest in one of the three real estate partnerships at December 31, 1998 and 1997. Two of these partnerships, representing raw land investments, also have officers and directors of the Company as partners with ownership interests that are based on cash contributions. These two partnerships require that all of the partners, including the Company, make pro-rata capital contributions should the partnerships require additional funds to pay liabilities. The carrying value of the Company's interests in these partnerships totalled $1,214,000 and $1,208,000 at December 31, 1998 and 1997, respectively. Summarized combined financial information of the unconsolidated partnerships is as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ------ ------ ------ (DOLLARS IN THOUSANDS) Total assets, primarily land, development and improvement costs.................................................. $4,127 $3,922 $3,960 Total liabilities, primarily notes and mortgages payable................................................ 6 819 841 ------ ------ ------ Partners' equity......................................... $4,121 $3,103 $3,119 ====== ====== ====== Revenue.................................................. $1,094 $ 47 $ 378 ====== ====== ====== Net income (loss)........................................ $ 205 $ 22 $ (73) ====== ====== ======
At December 31, 1998, the Company had a 92.5% interest in a real estate partnership which is consolidated with the Company. At December 31, 1997, the Company had a 92.5% and 76.3% interest in real estate partnerships consolidated with the Company. Manchester is also presently a partner with Sussex Holdings, Ltd. (an affiliate of Folco) in Folco Mission Valley Partners Limited Partnership, a California limited partnership. Manchester owns a 22% limited partnership interest and Sussex Holdings, Ltd. owns a 78% general partnership interest. Fidelity Title is the sole tenant in the building and received an approximate 30% decrease in its annual rental rate based upon its lease with Folco Mission Valley. Manchester's carrying value of this partnership interest was $224,000 and $3,000 at December 31, 1998 and 1997, respectively. 58 31 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Investments in real estate and partnerships consist of the following:
DECEMBER 31, ---------------- 1998 1997 ------ ------ (DOLLARS IN THOUSANDS) Investments in real estate: Land..................................................... $4,337 $4,337 Commercial buildings, net of accumulated depreciation of $18 and $67........................................... 653 664 Investments in unconsolidated partnerships................. 1,435 1,714 ------ ------ 6,425 6,715 Valuation allowance........................................ (1,752) (1,514) ------ ------ $4,673 $5,201 ====== ======
During 1997 and 1996, the Company sold investments in real estate to third parties at an aggregate purchase price of $6.4 million and $917,000, respectively, which approximated the carrying value of the investments sold. There were no sales in 1998. G. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Land................................................... $ 1,724 $ 4,897 Buildings.............................................. 3,754 7,230 Leasehold improvements................................. 14,596 12,729 Furniture, fixtures and equipment...................... 121,272 102,517 -------- -------- 141,346 127,373 Accumulated depreciation and amortization.............. (95,276) (82,660) -------- -------- $ 46,070 $ 44,713 ======== ========
H. NOTES PAYABLE Notes payable consist of the following (dollars in descriptions in thousands):
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Bank revolving credit facility secured by common stock of certain Insurance Subsidiaries and a certain UTC, interest due monthly at LIBOR plus 1.15% (6.21% at December 31, 1998), unused portion of $53,698 at December 31, 1998, due September 2001............................................ $ 46,302 $ -- Bank revolving line of credit, warehouse line, secured by security interest in certain leases and the underlying equipment, interest due monthly at LIBOR plus 1.75% (6.81% at December 31, 1998), unused portion of $27,700 at December 31, 1998, due March 2000......................... 7,300 -- Bank revolving credit facility, unsecured, interest due monthly at LIBOR plus 1.15% (6.21% at December 31, 1998), no unused portion at December 31, 1998, due May 1999...... 25,000 --
59 32 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED)
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Credit agreement, secured by common stock of certain Insurance Subsidiaries, principal due quarterly, interest due monthly at LIBOR plus 2.0%, due September 2001, paid and terminated in March 1998.............................. $ -- $ 15,250 Bank revolving credit facility, secured by common stock of certain Insurance Subsidiaries, interest due quarterly at LIBOR plus 2.0%, principal due quarterly beginning April 1998, due September 2001, paid and terminated in March 1998...................................................... -- 5,000 Bank revolving line of credit, warehouse line, secured by security interest in certain leases and the underlying equipment, interest due monthly at Prime plus .625%, unused portion of $33,200 at December 31, 1997, subsequent to year end line of credit increased to $46,000 and maturity date extended, paid and terminated in October 1998...................................................... -- 2,784 Equipment line of credit, secured by equipment, interest due monthly at LIBOR plus 1.40% (6.46% at December 31, 1998), unused portion of $143 and $3,970 at December 31, 1998 and 1997, due May 1999........................................ 9,857 4,030 Bank revolving credit facility, secured by common stock of certain UTCs, semi-annual principal installments of $750 and interest due quarterly at LIBOR plus 1.0%, due June 2000, paid and terminated in December 1998................ -- 3,750 Bank revolving credit facility, secured by common stock of certain UTCs, principal installments of $35 and interest due quarterly at LIBOR plus 1%, due December 2001, paid and terminated in December 1998........................... -- 560 Bank line of credit, unsecured, interest due monthly at Bank's Reference Rate plus .75% (8.50% at December 31, 1998), no unused portion at December 31, 1998, paid and terminated January 1999................................... 3,000 3,000 Bank promissory note, secured by equipment, principal and interest due monthly at LIBOR plus 1.77% (6.83% at December 31, 1998) due July 2002.......................... 8,903 -- Bank promissory note, secured by equipment, principal and interest due monthly at LIBOR plus 1.77%, paid in September 1998............................................ -- 2,134 Bank promissory note, secured by equipment, principal and interest due monthly at LIBOR plus 2.10% (7.16% at December 31, 1998), due June 1999......................... 718 2,052 Bank promissory note, secured by equipment, principal and interest due monthly at 30 day commercial paper rate plus 2.44% (6.61% at December 31, 1998), due September 2000.... 3,281 5,000 Bank promissory note, secured by equipment, principal and interest due monthly at LIBOR plus 1.84% (6.90% at December 31, 1998), due May 2001.......................... 2,902 4,042 Bank promissory note, secured by equipment, principal and interest due monthly at LIBOR plus 1.84% (6.90% at December 31, 1998), due September 2001.................... 4,337 5,784 Promissory note, secured by real estate, principal and interest due monthly at 9.875%, paid in June 1998......... -- 1,693
60 33 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED)
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Note payable to bank, secured by common stock of certain subsidiaries, principal and interest due monthly at LIBOR plus 3.50% (9.468% at December 31, 1997), due within 30 days of change in control or April 1998................... $ -- $ 8,000 Note payable secured by certain leases and a security interest in underlying equipment, principal and interest due monthly at 9.80%, due January 2000.................... 347 638 Note payable to bank, secured by all tangible and intangible property of a certain subsidiary, principal and interest due monthly at 8.72%, due May 1999........................ 926 1,292 Promissory notes, unsecured, interest due quarterly at 8.00%, principal due at various dates through July 1999... 2,982 5,100 Convertible notes, secured by assets of a subsidiary, with interest of 9.5%; principal and interest due quarterly, due July 2001............................................. 2,900 -- Liquid Yield Option Notes, zero coupon, convertible subordinated notes due 2009 with interest at 5.5%, converted or redeemed in February 1999.................... 71,307 76,635 Other promissory notes with various interest rates and maturities................................................ 2,626 4,552 -------- -------- $192,688 $151,296 ======== ========
Principal maturities, including accretion of original issue discount, are as follows (dollars in thousands): 1999...................................................... $ 51,174 2000...................................................... 15,864 2001...................................................... 51,477 2002...................................................... 1,877 2003...................................................... 323 Thereafter................................................ 71,973 -------- $192,688 ========
Also included in notes payable in the Consolidated Balance Sheets as of December 31, 1998 and 1997 is the Class A Lease-Backed Term Note due 2001. See Note D. The amount due related to the GFI Class A Lease-Backed Term Note was $5,930,000 and $11,719,000 at December 31, 1998 and 1997, respectively. The GFI note bears interest at 6.33% and is due November 2001. The carrying value of the GFI Class A Lease-Backed term note approximates fair value at December 31, 1998 and 1997 due to the fact that the interest rate paid on the GFI Class A Lease-Backed Note approximates market rates. Notes payable in the Consolidated Balance Sheet as of December 31, 1998 also includes the GFVI Class A Certificates in the amount of $7,878,000 and the Class B Certificates in the amount of $8,128,000. See Note D. The Class A and Class B Certificates bear interest at 6.20%, and are due in September 2005 and December 2005, respectively. The carrying value of the Class A and Class B Certificates approximates fair value at December 31, 1998 due to the fact that the interest rate paid on the Class A and Class B Certificates approximates market rates. 61 34 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) The carrying value and estimated fair values of the Company's notes payable were as follows at December 31, 1998 and 1997:
DECEMBER 31, -------------------------------------------- 1998 1997 -------------------- -------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Short-term borrowings................... $ 13,400 $ 13,400 $ 19,483 $ 19,483 Long-term borrowings, variable rate..... 99,900 99,900 44,456 44,456 Long-term borrowings, fixed rate........ 79,388 97,443 87,357 122,477 -------- -------- -------- -------- $192,688 $210,743 $151,296 $186,416 ======== ======== ======== ========
Short-term borrowings approximate their fair value. The fair value of the Company's fixed rate and variable rate notes payable is estimated using discounted cash flow analyses based on current market interest rates and comparison of interest rates being paid to the Company's current incremental borrowing rates for similar types of borrowing arrangements. The LYON's fair value is calculated based on quoted market prices. The Company's credit agreement, dated as of September 21, 1995, included a $22 million term loan and a $13 million revolving credit facility, was secured by the common stock of certain Insurance Subsidiaries. This credit facility was terminated and paid in 1998 with the proceeds from a new revolving credit facility secured by the common stock of certain Insurance Subsidiaries and a certain UTC. Additionally, the Company must comply with certain affirmative and negative covenants related to its bank revolving lines of credit and other debt facilities, which require, among other things, that the Company maintain certain financial ratios related to liquidity, net worth, capitalization, investments, acquisitions, restricted payments and certain dividend restrictions. In February 1994, the Company issued zero coupon, convertible subordinated Liquid Yield Options Notes due February 2009 ("LYONs") at an interest rate of 5.5% with a principal amount at maturity of $235,750,000. Net proceeds to the Company were approximately $101,000,000. The proceeds were used for investment and general corporate purposes, including the repurchase of treasury shares. The conversion rate of the LYONs is 28.077 shares of common stock per $1,000 maturity value of LYONs. Conversion is at the option of the holder, at any time on or prior to maturity. Each holder, at its option, may put the LYONs to the Company as of February 15, 1999 and February 15, 2004 for a purchase price per LYON of $581.25 and $762.40, respectively. The Company at its option, may elect to pay the put in cash or shares of its common stock. The LYONs are redeemable by the Company for cash on or after February 15, 1999 at a price equal to the issue price of $441.31 plus accrued original issue discount through the date of redemption. The maturity value of LYONs outstanding at December 31, 1998 was approximately $124,113,000. On October 17, 1997, the Company in a private transaction, purchased $45 million aggregate principal amount at maturity of its outstanding Liquid Yield Option Notes due 2009 from Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") for an aggregate purchase price of $27.2 million (or $605 per $1,000 principal amount at maturity of LYONs). The purchase price was paid in the form of 1,394,381 shares, $26.4 million, of the Company's common stock (the "Exchange Shares"). The Company also paid Merrill Lynch the excess of a base price of $19.53 per Exchange Share over the actual sales price (less $0.05 per share in commissions) realized by Merrill Lynch for sales of up to 607,881 Exchange Shares. The Company also paid Merrill Lynch, for each day, an amount in cash to be determined by multiplying the Net Carry Amount (number of Exchange Shares multiplied by $19.53) by the Applicable Rate (LIBOR plus 2.50%). The Company's payment obligations were subject to reduction for dividends on Exchange Shares received by Merrill Lynch during the period. The Company paid the foregoing amounts to Merrill Lynch in cash of approximately $790,000 on November 7, 1997. The purchase of the LYONs increased stockholders' 62 35 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) equity by approximately $24.7 million while reducing outstanding debt by approximately $24.3 million. Additionally, an extraordinary loss due to the early retirement of debt of approximately $1.7 million, net of applicable income taxes, was recorded in the fourth quarter of 1997. On January 13, 1999, the Company announced that it was going to redeem, pursuant to the terms of the indenture, its outstanding Liquid Yield Option Notes due 2009 for $581.25 per $1,000 maturity value on February 15, 1999. Additionally, the LYONs holders had the right to convert the outstanding LYONs to 28.077 shares of Company common stock per $1,000 maturity value of LYONs at any time. As of February 15, 1999, $123,681,000 maturity value of LYONs had converted to 3,473,000 shares of common stock, adding approximately $70 million to equity while reducing outstanding note payable by a like amount. The remaining $432,000 of maturity value was redeemed for cash of approximately $251,000. I. INCOME TAXES Income tax expense (benefit) consists of the following:
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- ------- ------- (DOLLARS IN THOUSANDS) Current.............................................. $ 82,267 $33,729 $10,373 Deferred............................................. (12,825) 1,686 8,612 -------- ------- ------- $ 69,442 $35,415 $18,985 ======== ======= =======
Total income tax expense (benefit) for the years ended December 31, 1998, 1997 and 1996 was allocated as follows:
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (DOLLARS IN THOUSANDS) Income from continuing operations..................... $69,442 $36,595 $18,985 Extraordinary gain (loss)............................. -- (1,180) -- ------- ------- ------- $69,442 $35,415 $18,985 ======= ======= =======
The effective tax rate differs from the statutory income tax rate as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 ----- ----- ----- Statutory income tax rate................................... 35.0% 35.0% 35.0% Tax exempt interest income.................................. (1.6) (1.7) (1.1) Non-deductible expenses..................................... 1.7 5.8 2.4 State taxes, net of Federal deduction....................... 3.6 3.1 2.3 Other....................................................... 1.0 .6 .8 ---- ---- ---- 39.7% 42.8% 39.4% ==== ==== ====
63 36 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) The deferred tax assets and liabilities at December 31, 1998 consist of the following:
DEFERRED DEFERRED TAX TAX ASSETS LIABILITIES ---------- ------------ (DOLLARS IN THOUSANDS) Provision for claim losses in excess of statutory amounts.......................................... $65,191 $ -- Employee benefit accruals.......................... 11,339 -- Excess book over tax provision for bad debts....... 4,511 -- Accrued liabilities................................ 8,264 -- Deferred state income taxes........................ 5,423 -- Other assets....................................... 112 -- Statutory unearned premium reserve................. -- 60,024 Accelerated depreciation........................... -- 3,433 Investment securities.............................. -- 8,101 Investments in partnerships........................ -- 389 Investments in real estate......................... -- 153 Section 338(h)(10) gain deferral................... -- 1,670 Other acquisition accruals......................... -- 5,563 Lease accounting................................... -- 1,786 Other liabilities.................................. -- 4,995 Net operating loss available for carryovers........ 4,539 -- ------- ------- 99,379 86,114 Less: valuation allowance.......................... 2,300 -- ------- ------- Total deferred taxes..................... $97,079 $86,114 ======= =======
The deferred tax assets and liabilities at December 31, 1997 consist of the following:
DEFERRED DEFERRED TAX TAX ASSETS LIABILITIES ---------- ------------ (DOLLARS IN THOUSANDS) Provision for claim losses in excess of statutory amounts.......................................... $50,275 $ -- Employee benefit accruals.......................... 8,365 -- Excess book over tax provision for bad debts....... 4,217 -- Other assets....................................... 2,301 -- Statutory unearned premium reserve................. -- 52,411 Accelerated depreciation........................... -- 875 Investment securities.............................. -- 16,156 Investments in partnerships........................ -- 392 Investments in real estate......................... -- 154 Section 338(h)(10) gain deferral................... -- 2,046 Other acquisition accruals......................... -- 5,509 Lease accounting................................... -- 3,214 Other liabilities.................................. -- 2,012 Net operating loss available for carryover......... 1,812 -- ------- ------- 66,970 82,769 Less: valuation allowance.......................... 711 -- ------- ------- Total deferred taxes..................... $66,259 $82,769 ======= =======
64 37 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Based upon the Company's current and historical pretax earnings, management believes it is more likely than not that the Company will realize the benefit of its existing deferred tax assets, net of the recorded valuation allowance. Management believes the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. However, there can be no assurance that the Company will generate any earnings or any specific level of continuing earnings in future years. Certain tax planning or other strategies could be implemented, if necessary, to supplement income from operations to fully realize recorded tax benefits. The Company's 1995 and 1996 Federal income tax returns are currently under examination by the Internal Revenue Service. Based on information currently available, management does not believe the outcome of these examinations will have a material impact on the financial condition or results of operations of the Company. J. SUMMARY OF RESERVE FOR CLAIM LOSSES A summary of the reserve for claim losses follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- (DOLLARS IN THOUSANDS) Beginning balance.................................. $201,674 $196,527 $153,207 Reserves assumed from First Title Corp. ......... -- 284 -- Reserves transferred due to the sale of American Title Company................................. -- (160) -- Reserves assumed from Nations Title Inc.......... -- -- 45,171 Title claim loss provision related to: Current year.................................. 59,294 39,301 35,478 Prior years................................... -- 2,257 797 -------- -------- -------- Total title claim loss provision................. 59,294 41,558 36,275 Title claims paid, net of recoupments related to: Current year.................................. (1,045) (3,385) (2,749) Prior years................................... (35,389) (33,150) (35,377) -------- -------- -------- Total title claims paid, net of recoupments...... (36,434) (36,535) (38,126) -------- -------- -------- Ending balance..................................... $224,534 $201,674 $196,527 ======== ======== ========
The provision for claim losses includes an estimate of anticipated title claims and major claims. The estimate of anticipated title claims is accrued as a percentage of title premium revenue based on the Company's historical loss experience and other relevant factors. The Company monitors its claims experience on a continual basis and adjusts the provision for claim losses accordingly. K. COMMITMENTS AND CONTINGENCIES The Company's title insurance underwriting subsidiaries are, in the ordinary course of business, subject to claims made under, and from time-to-time are named as defendants in legal proceedings relating to, policies of insurance they have issued or other services performed on behalf of insured policyholders and other customers. The Company believes that the reserves reflected in its Consolidated Financial Statements are adequate to pay losses and loss adjustment expenses which may result from such claims and proceedings; however, such estimates may be more or less than the amount ultimately paid when the claims are settled. The Company has entered into various employment agreements with officers of the Company. These agreements provide for a specified salary to be paid to the officers and include incentive compensation 65 38 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) arrangements. The agreements contain non-compete provisions. The terms of the agreements range from three to five years and normally contain extension provisions. In the ordinary course of business, the Company is involved in various pending and threatened litigation matters related to its operations, some of which include claims for punitive or exemplary damages. Management believes that no actions depart from customary litigation incidental to the business of the Company and that resolution of all such litigation will not have a material adverse effect on the Company. In conducting its operations, the Company routinely holds customers' assets in trust, pending completion of real estate transactions. Such amounts are maintained in segregated bank accounts and have not been included in the accompanying Consolidated Balance Sheets. The Company has a contingent liability relating to proper disposition of these balances for its customers which amounted to $532.2 million at December 31, 1998. The Company leases certain of its premises and equipment under leases which expire at various dates. Several of these agreements include escalation clauses and provide for purchases and renewal options for periods ranging from one to five years. Future minimum operating lease payments are as follows (dollars in thousands): 1999...................................................... $ 29,999 2000...................................................... 24,776 2001...................................................... 20,418 2002...................................................... 14,856 2003...................................................... 9,992 Thereafter................................................ 24,590 -------- Total future minimum operating lease payments... $124,631 ========
Rent expense incurred under operating leases during the years ended December 31, 1998, 1997 and 1996 was $32,609,000, $29,730,000 and $28,117,000, respectively. Included in rent expense for 1998, 1997 and 1996 is $485,000, $523,000 and $523,000, respectively paid to related parties. L. STOCKHOLDERS' EQUITY Title insurance companies, including underwriters, underwritten title companies and independent agents, are subject to extensive regulation under applicable state laws. Each insurance underwriter is usually subject to a holding company act in its state of domicile which regulates, among other matters, the ability to pay dividends and investment policies. The laws of most states in which the Company transacts business establish supervisory agencies with broad administrative powers relating to issuing and revoking licenses to transact business, regulating trade practices, licensing agents, approving policy forms, accounting principles, financial practices, establishing reserve and capital and surplus requirements, defining suitable investments for reserves, capital and surplus and approving rate schedules. In 1998, the National Association of Insurance Commissioners approved codified accounting practices that changed the definition of what constitutes prescribed statutory accounting practices and will result in changes to the accounting policies that insurance enterprises use to prepare their statutory financial statements commencing in 2001. The Company is currently evaluating the impact of the rules. Pursuant to statutory accounting requirements of the various states in which the Insurance Subsidiaries are licensed, they must defer a portion of premiums earned as an unearned premium reserve for the protection of policyholders and must maintain qualified assets in an amount equal to the statutory requirements. The level of unearned premium reserve required to be maintained at any time is determined on a quarterly basis by 66 39 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) statutory formula based upon either the age, number of policies and dollar amount of policy liabilities underwritten or the age and dollar amount of statutory premiums written. As of December 31, 1998, the combined statutory unearned premium reserve required and reported for the Insurance Subsidiaries was $207.2 million. The Insurance Subsidiaries are regulated by the insurance commissioners of their respective states of domicile. Regulatory examinations usually occur at three year intervals. Examinations are currently in progress for Fidelity Title (1998, which was previously scheduled for 1997 but will now be as of 1998), Fidelity New York (1996), Nations New York (1996) and National (1996). The Company has not received preliminary reports of examination for Fidelity Title, Fidelity New York, Nations New York or National, as the examinations are currently ongoing. Additionally, the Auditor Division of the Controller of the State of California is currently conducting an audit of the funds due the State of California under various escheatment regulations for the years ended December 31, 1998 and prior. The Company does not believe that either the audits performed by the insurance regulators or the Controller of the State of California will have a material impact on its financial position, its results of operations or its combined statutory capital and surplus. Statutorily calculated net worth determines the maximum insurable amount under any single title insurance policy. As of January 1, 1999, the Company's self-imposed single policy maximum insurable amounts, which comply with all statutory limitations, for Fidelity Title, Fidelity New York and Alamo Title were $60.0 million, $90.0 million and $17.5 million, respectively. The self-imposed single policy maximum insurable amounts for Nations New York and National were $19.0 million and $5.0 million, respectively. The Insurance Subsidiaries are subject to regulations that restrict their ability to pay dividends or make other distributions of cash or property to their immediate parent company without prior approval from the Department of Insurance of their respective states of domicile. In the case of Fidelity Title, the total amount of dividends made in any twelve-month period may not exceed the greater of 10% of the surplus as regards policyholders as of the last day of the preceding year or net earnings for the twelve-month period ending the last day of the preceding year. In the case of Fidelity New York, the total amount of dividends and distributions is limited to surplus as regards policyholders, excluding capital stock and surplus resulting from unrealized gains on investments, less fifty percent of statutory premium reserve as of the last day of the preceding year and capital contributions received in the latest five-year period. In the case of Alamo Title, the total amount of dividends made in any twelve-month period may not exceed the greater of 20% of the surplus as regards policyholders as of the last day of the preceding year or net earnings for the twelve-month period ending the last day of the preceding year. As of January 1, 1999, Fidelity Title could pay dividends or make other distributions to the Company of $10,588,000, Fidelity New York could pay dividends or make other distributions to the Company of $13,325,000 and Alamo Title could pay dividends or make other distributions to the Company of $9,064,000. The combined statutory capital and surplus of the Insurance Subsidiaries was $164,953,000, $122,107,000 and $97,845,000 as of December 31, 1998, 1997 and 1996, respectively. The combined statutory earnings of the Insurance Subsidiaries were $37,771,000, $26,701,000 and $12,243,000 for the years ended December 31, 1998, 1997 and 1996, respectively. As a condition to continued authority to underwrite policies in the states in which the Insurance Subsidiaries conduct their business, the Insurance Subsidiaries are required to pay certain fees and file information regarding their officers, directors and financial condition. In addition, the Company's escrow and trust business is subject to regulation by various state banking authorities. Pursuant to statutory requirements of the various states in which the Insurance Subsidiaries are domiciled, they must maintain certain levels of minimum capital and surplus. Each of the Company's title underwriters have complied with the minimum statutory requirements as of December 31, 1998. 67 40 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) On March 18, 1998, the Company announced that it had entered into an agreement to sell National Title Insurance of New York Inc. to ATC for $3.25 million, subject to regulatory approval and certain other conditions. The purchase price is structured at a premium to book value. National was acquired in April 1996, as part of the Nations Title Inc. acquisition, and has not been actively underwriting policies since the transaction closed. This transaction has not yet received regulatory approval. See also Note C. The UTCs are also subject to certain regulation by insurance regulatory or banking authorities, primarily relating to minimum net worth. Minimum net worth of $7.5 million and $2.5 million is required for Fidelity National Title Company ("FNTC") and Fidelity National Title Company of California ("FNCAL"), respectively. FNTC and FNCAL are in compliance with their respective minimum net worth requirements at December 31, 1998. M. EMPLOYEE BENEFIT PLANS Employee benefits include an employee stock purchase plan, three stock option plans and a 401(k) plan. In 1987, stockholders approved the adoption of an Employee Stock Purchase Plan ("ESPP"). Under the terms of the ESPP and subsequent amendments, there are 8,785,000 shares of the Company's common stock available for purchase at current market prices by Company employees who meet certain vesting requirements. Pursuant to the ESPP, Company employees may contribute an amount between 5% and 15% of their base salary and certain commissions. The Company contributes varying amounts as specified in the ESPP. During the years ended December 31, 1998, 1997 and 1996, 282,216, 353,594 and 371,852 shares, respectively, were purchased and allocated to employees, based upon their contributions, at an average price of $29.42, $13.73 and $11.32 per share, respectively. The Company contributed $2.0 million or the equivalent of 67,407 shares for the year ended December 31, 1998, $1.7 million or the equivalent of 122,740 shares for the year ended December 31, 1997 and $1.2 million or the equivalent of 107,218 shares for the year ended December 31, 1996 in accordance with the employer's matching contribution. A total of 7,526,473 shares have been purchased by both the ESPP and employees since the adoption of the ESPP. In 1987, stockholders also approved the adoption of a Stock Option Plan ("1987 Option Plan"). Under the terms of the 1987 Option Plan, the Company may grant stock options to certain key employees and non-employee directors or officers. The number of shares issuable under the 1987 Option Plan is 1,812,000 shares of common stock at not less than fair market value on the date of grant. Employees are eligible to receive incentive stock options or non-qualified stock options and non-employee directors are eligible to receive non-qualified stock options. Options available to directors or officers may not exceed one-half of the aggregate number of shares available for grant. All options granted become exercisable at the discretion of the Board of Directors and expire five to eleven years from the date of grant. Options that lapse or are cancelled prior to exercise are added to the shares authorized for future grants. The 1987 Option Plan expired December 31, 1997. In 1992, stockholders approved the adoption of the 1991 Stock Option Plan ("1991 Option Plan"). Under the terms of the 1991 Option Plan, options may be granted to officers and key employees of the Company or any or all of its present or future subsidiaries. The number of shares reserved for issuance under the 1991 Option Plan and subsequent amendments is 1,953,000 shares of common stock, which may be newly issued or treasury shares. The per share option price is determined at the date of grant. The option price may be less than the fair market value of the common stock at the date of grant to reflect the application of the optionee's deferred bonus, if applicable. Options granted under the 1991 Option Plan shall be exercisable in such installments and for such periods as may be fixed at the time of grant, but in no event shall any stock options extend for a period in excess of 12 years from the date of grant. 68 41 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) This plan allows for exercise prices with a fixed discount from the quoted market price. 115,169 options were granted in 1996 at an exercise price of $9.39 to key employees of the Company who applied deferred bonuses expensed in 1995 amounting to $433,000 to the exercise price, reducing it to $5.64 if exercised within the first year of the grant. The exercise price of these options decreases approximately 5.0% per year through 2001 and $.16 per share from 2002 through 2007, at which time the exercise price will be $3.31. In 1997, 201,169 options were granted at an exercise price of $10.44 to key employees of the Company who applied deferred bonuses expensed in 1996 amounting to $876,000 to the exercise price, reducing it to $6.30 if exercised within the first year of the grant. The exercise price of these options decreases approximately 7% per year through 2002 and $.18 per share from 2003 through 2008, at which time the exercise price will be $3.74. In 1998, 388,123 options were granted at an exercise price of $24.26 to key employees of the Company who applied deferred bonuses expensed in 1997 amounting to $1,764,000 to the exercise price, reducing it to $19.72 if exercised within the first year of the grant. The exercise price of these options decreases approximately 7% per year through 2003 and $.20 per share from 2004 through 2009, at which time the exercise price will be $16.90. Additionally, the Company recorded compensation expense relating to the price decrease of $282,000, 194,000 and $111,000, for the years ended December 31, 1998, 1997 and 1996, respectively. In 1994, stockholders approved the adoption of the 1993 Stock Plan ("1993 Plan"). Under the terms of the 1993 Plan, options may be granted to officers, key employees and non-employee directors of the Company. The number of shares of common stock reserved for issuance under the 1993 Plan is 1,098,000. The per share option price is determined at the date of grant, provided that the price for incentive stock options shall not be less than 100% of their market value or award stock shares. The 1993 Plan also contains an automatic grant of non-qualified stock options to non-employee directors at an exercise price equal to 100% of fair value at date of grant, and the right to exercise such options shall vest equally over three years. Stock options granted under the 1993 plan are exercisable subject to the terms and conditions set by the Board of Directors, however, options shall be exercisable no earlier than six months nor later than ten years following the grant date. In 1996, Granite adopted a Stock Option Plan ("Granite Plan", now issuable in Company common stock) allowing for the issuance of qualified and non-qualified stock options to purchase an aggregate of 347,000 shares of common stock to directors, officers, employees, agents and consultants of Granite. The Granite Plan is administered by the Board of Directors. The Granite Plan provides that qualified stock options be granted at an exercise price equal to fair market value of the common shares of Granite on the date of the grant, and must be at least 110% of fair market value when granted to a 10% or more shareholder. The term of all qualified stock options granted under the Granite Plan may not exceed ten years, except the term of qualified stock options granted to a 10% or more shareholder, which may not exceed five years. The Granite Plan provides that non-qualified stock options be granted at an exercise price not less than 85% of the fair market value of the common shares of Granite on the date of grant. The term of all non-qualified stock options granted under the Granite Plan may not exceed ten years, except the term of non-qualified stock options granted to a 10% or more shareholder, which may not exceed five years. In April 1997, the Granite Plan was amended and restated in order to make certain technical modifications thereto and was further amended in June 1997 to increase the shares of common stock reserved for issuance to 695,000. During 1998, stockholders approved the adoption of the 1998 Stock Incentive Plan ("1998 Plan"). The 1998 Plan authorizes up to 1,100,000 shares of common stock, plus an additional 220,000 shares of common stock on the date of each annual meeting of the stockholders of the Company, for issuance under the terms of the 1998 Plan. The authorized number of shares is subject to adjustment in the event of stock splits, stock dividends or certain other similar changes in the capital structure of the Company. The 1998 Plan provides for grants of "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), non-qualified stock options and rights to purchase shares of common stock ("Purchase Rights"). Incentive stock options, non-qualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates. Non-qualified stock options and 69 42 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates, non-employee directors and officers, consultants and other service providers. The Board of Directors, or a committee consisting of two or more members of the Board of Directors, will administer the 1998 Plan (the "Administrator"). The Administrator will have the full power and authority to interpret the 1998 Plan, select the recipients of options and Purchase Rights, determine and authorize the type, terms and conditions of, including vesting provisions, and the number of shares subject to, grants under the 1998 Plan, and adopt, amend and rescind rules relating to the 1998 Plan. The term of options may not exceed 10 years from the date of grant (5 years in the case of a person who owns or is deemed to own more than 10% of the total combined voting power of all classes of stock of the Company). The option exercise price for each share granted pursuant to an incentive stock option may not be less than 100% of the fair market value of a share of common stock at the time such options is granted (110% of fair market value in the case of an incentive stock option granted to a person who owns more than 10% of the combined voting power of all classes of stock of the Company). There is no minimum purchase price for shares of common stock purchased pursuant to a Purchase Right, and any such purchase price shall be determined by the Administrator. The maximum number of shares for which options or Purchase Rights may be granted to any one person during any one calendar year under the 1998 Plan is 300,000 and in no event shall the aggregate number of shares subject to incentive stock options exceed 1,000,000. The aggregate fair market value of the common stock (determined as of the date of grant) with respect to incentive stock options granted under the 1998 Plan or any other stock option plan of the Company that become exercisable for the first time by any optionee during any calendar year may not exceed $100,000. A summary of the Company's stock option activity, and related information for the years ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996 ---------------------- --------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE ---------- --------- --------- --------- --------- --------- Stock options outstanding, beginning of year.............. 4,089,410 $ 7.49 3,254,645 $ 6.77 2,710,202 $ 6.25 Stock options granted............ 1,730,043 23.46 993,867 9.90 725,651 8.64 Stock options exercised.......... (1,290,640) 7.12 (159,101) 7.85 (67,412) 3.87 Stock options cancelled.......... -- -- (1) 5.31 (113,796) 8.11 ---------- ------ --------- ------ --------- ------ Stock options outstanding, end of year.................... 4,528,813 $13.72 4,089,410 $ 7.49 3,254,645 $ 6.77 Exercisable at end of year....... 3,180,984 9.31 3,451,363 6.98 2,831,914 6.37 Weighted-average fair value of options granted during the year........................... -- $26.63 -- $10.73 -- $10.11
The weighted average remaining contractual life of the options outstanding at December 31, 1998 is 7.68 years. 70 43 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) The following table sets forth options outstanding and exercisable by price range as of December 31, 1998:
DECEMBER 31, 1998 - ----------------------------------------------------------------------------- OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------- --------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OF SHARES LIFE PRICE OF SHARES PRICE - --------------- --------- ----------- --------- --------- --------- $ 0.48 - 5.31 472,159 7.24 $ 4.19 472,159 $ 4.19 6.01 - 6.49 524,269 7.18 6.34 524,269 6.34 6.83 - 9.48 687,834 6.00 7.88 687,834 7.88 9.58 - 10.02 485,973 7.60 9.72 385,140 9.64 10.13 - 10.43 646,840 6.44 10.41 646,840 10.41 10.85 - 19.40 475,042 9.13 17.96 454,742 17.98 24.26 - 24.26 706,200 9.03 24.26 -- -- 25.97 - 28.64 461,746 9.19 26.24 10,000 28.64 29.43 - 31.53 63,250 9.65 31.26 -- -- 34.77 - 34.77 5,500 9.30 34.77 -- -- - -------------- --------- ---- ------ --------- ------ $ 0.48 - 34.77 4,528,813 7.68 $13.72 3,180,984 $ 9.31
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25") and related Interpretations in accounting for its employee stock options. As discussed below, in management's opinion, the alternative fair value accounting provided for under Statement of Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under Opinion 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the value of an estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Pro forma information regarding net earnings and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions. The risk free interest rates used in the calculation is the rate on the date the options were granted. The risk free interest rate used for options granted during 1998, 1997 and 1996 were 5.7%, 6.0% and 6.5%, respectively. A volatility factor for the expected market price of the common stock of 50% was used for options granted in 1998, 1997 and 1996. The expected dividend yield used for 1998, 1997 and 1996 was 1.0%, 1.0% and 2.0%, respectively. A weighted average expected life of seven years was used in all years as the Company has little history of options being exercised. 71 44 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) For purpose of pro forma disclosures, the estimated fair value of the options is amortized into expense over the options' vesting period. The Company's pro forma information follows:
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Pro forma basic net earnings.................. $94,982 $44,056 $26,334 Pro forma diluted net earnings................ 97,445 47,198 29,530 Pro forma earnings per share Basic....................................... $ 3.40 $ 1.89 $ 1.29 Diluted..................................... 2.91 1.59 1.12
The Company also offers the Fidelity National Financial, Inc. 401(k) Profit Sharing Plan, a qualified voluntary contributory savings plan, available to substantially all employees. Eligible employees may contribute up to 15% of their pretax annual compensation, up to the amount allowed pursuant to the Internal Revenue Code. The Company may elect to make matching contributions. The Company has historically not made matching contributions. N. SUPPLEMENTARY CASH FLOW INFORMATION The following supplemental cash flow information is provided with respect to interest and tax payments, as well as certain non-cash investing and financing activities. See Notes B, H and I.
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (DOLLARS IN THOUSANDS) Cash paid during the year: Interest.................................... $ 8,153 $ 6,923 $ 6,887 ======= ======= ======= Income taxes................................ $77,277 $17,325 $18,403 ======= ======= ======= Non-cash investing and financing activities: Dividends declared and unpaid............... $ 2,270 $ 1,254 $ 975 ======= ======= ======= Acquisitions................................ $ 6,250 $24,377 $ 4,650 ======= ======= ======= Retirement of LYONs......................... $ -- $26,422 $ -- ======= ======= ======= Conversion of LYONs......................... $ 9,202 $ 888 $ -- ======= ======= =======
O. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF RISK The Company generates a significant amount of title insurance premiums in California and Texas, 33.1% and 19.6% in 1998, 32.9% and 20.8% in 1997, and 33.1% and 21.1% in 1996, respectively. Granite's leases are originated through a network of approximately 73 independent lease originators located throughout the United States. No single lease originator accounted for more than 10% of the leases funded by the Company during the years ended December 31, 1998 and 1997. Transactions generated by the Company's ten largest independent lease originators accounted for approximately 26.0% and 53.9% of leases funded during the years ended December 31, 1998 and 1997. Granite approved contingent fundings of approximately $67,900,000 and $73,200,000 in leases at December 31, 1998 and 1997, respectively. 72 45 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, leases, residual interests in securitizations, trade receivables and notes receivable. The Company places its cash equivalents and short-term investments with high credit quality financial institutions and, by policy, limits the amount of credit exposure with any one financial institution. Investments in commercial paper of industrial firms and financial institutions are rated A1, P1 or better. Concentrations of credit risk with respect to trade receivables are limited because a large number of geographically diverse customers make up the Company's customer base, thus spreading the trade receivables credit risk. The Company controls credit risk through monitoring procedures. Concentrations of credit risk with respect to notes receivable are limited because a number of diverse entities make up the Company's notes receivable base, thus spreading the credit risk. The Company controls credit risk through credit approvals, credit limits and monitoring procedures. The Company performs in-depth credit evaluations for all notes and requires guarantees and/or collateral, if deemed necessary. P. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 requires all items that are necessary to be recognized under accounting standards as components of comprehensive earnings to be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial statement, but requires that an enterprise display an amount representing total comprehensive earnings for the period covered by that financial statement. SFAS 130 requires an enterprise to (a) classify items of other comprehensive earnings by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 became effective for fiscal years beginning after December 15, 1997. The adoption of SFAS 130 has not had a material impact on the Company's financial reporting. Also in June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the revenues derived from the enterprise's products or services and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 became effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial 73 46 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996 (RESTATED) statements for interim periods in the second year of application. The adoption of SFAS 131 has not had a material impact on the Company's financial reporting. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively, "derivatives") and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. It requires changes in the fair value of a derivative instrument and the changes in fair value of assets or liabilities hedged by that instrument to be included in earnings. To the extent that the hedge transaction is effective, earnings are equally offset by both investments. Currently the changes in fair value of derivative instruments and hedged items are reported in net unrealized gain (loss) on securities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of this Statement should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of this Statement. Earlier application of all of the provisions of SFAS 133 is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance of this statement. The Company does not believe the adoption of SFAS 133 will have a material impact on its financial reporting. Q. SUBSEQUENT EVENTS The Company's Board of Directors declared a cash dividend of $.07 per share on March 17, 1999, which will be payable on May 28, 1999 to stockholders of record on April 9, 1999. On March 17, 1999, the Company's Board of Directors approved an increase to the number of shares of outstanding Company common stock authorized for purchase under the Company's previously announced purchase program. The new authorization will permit the Company to purchase up to 4.0 million shares. Through March 25, 1999, the Company has purchased 1,202,050 shares at an average purchase price of $16.61 per share totalling $19,960,000. Purchases may be made from time to time by the Company in the open market or in block purchases or in privately negotiated transactions depending on market conditions and other factors. Also on March 17, 1999, the Company's Board of Directors approved the adoption of the Fidelity National Financial, Inc. Employee Stock Purchase Loan Plan ("Loan Plan"). The purpose of the Loan Plan is to provide key employees with further incentive to maximize shareholder value. The Company intends to offer an aggregate of $7,750,000 in loans. Loan Plan funds must be used to make private or open market purchases of Company common stock through a broker-dealer designated by the Company. All loans will be full recourse and unsecured, and will have a five year term. Interest will accrue on the loans at a rate of 5% per annum due at maturity. Loans may be prepaid at any time without penalty. Through March 25, 1999, loans have been made in the amount of $5,700,000 to purchase 382,650 shares of Company common stock at an average purchase price of $14.90 per share. 74 47 R. SEGMENT INFORMATION The Company's Consolidated Financial Statements as of December 31, 1998 and 1997 and for the three years ended December 31, 1998 include four reportable segments. Reportable segments are determined based on the organizational structure and types of products and services from which each reportable segment derives its revenue. As of and for the year ended December 31, 1998 (dollars in thousands):
REAL ESTATE TITLE INFORMATION INSURANCE SERVICES LEASING CORPORATE TOTAL ---------- ----------- --------- --------- ---------- Total revenue $1,138,239 $ 114,022 $ 24,939 $ 11,265 $1,288,465 ========== ========= ========= ======== ========== Operating earnings (loss) $ 182,381 $ 5,202 $ (5,773) $ (7,866) $ 173,944 Interest and investment income, including realized gains (losses) 27,940 288 94 11,265 39,587 Depreciation and amortization 16,390 3,173 1,810 -- 21,373 Interest expense 5,664 617 3,187 7,556 17,024 ---------- --------- --------- -------- ---------- Earnings (loss) before income taxes 188,267 1,700 (10,676) (4,157) 175,134 Income tax expense (benefit) 72,588 2,881 (4,378) (1,649) 69,442 ---------- --------- --------- -------- ---------- Net earnings (loss) $ 115,679 $ (1,181) $ (6,298) $ (2,508) $ 105,692 ========== ========= ========= ======== ========== Assets $ 696,071 $ 74,195 $ 115,505 $ 83,699 $ 969,470 ========== ========= ========= ======== ==========
As of and for the year ended December 31, 1997 (dollars in thousands):
REAL ESTATE TITLE INFORMATION INSURANCE SERVICES LEASING CORPORATE TOTAL ---------- ----------- ------- --------- --------- Total revenue $803,643 $41,066 $16,469 $ 1,881 $ 863,059 ======== ======= ======= ======== ========= Operating earnings (loss) $ 75,568 $ 4,676 $ 9,642 $ (9,645) $ 80,241 Interest and investment income, including realized gains (losses) 33,823 102 -- 1,881 35,806 Depreciation and amortization 15,366 842 1,967 -- 18,175 Interest expense 2,804 49 2,253 7,163 12,269 -------- ------- ------- -------- --------- Earnings (loss) before income taxes and extra- ordinary item 91,221 3,887 5,422 (14,927) 85,603 Income tax expense (benefit) 39,649 1,343 2,096 (6,493) 36,595 -------- ------- ------- -------- --------- Earnings (loss) before extraordinary item 51,572 2,544 3,326 (8,434) 49,008 Extraordinary item, net -- -- -- (1,700) (1,700) -------- ------- ------- -------- --------- Net earnings (loss) $ 51,572 $ 2,544 $ 3,326 $(10,134) $ 47,308 ======== ======= ======= ======== ========= Assets $569,831 $43,775 $79,033 $ 55,056 $ 747,695 ======== ======= ======= ======== =========
75 48 As of and for the year ended December 31, 1996 (dollars in thousands):
REAL ESTATE TITLE INFORMATION INSURANCE SERVICES LEASING CORPORATE TOTAL ---------- ----------- ------- --------- -------- Total revenue $705,222 $22,265 $ 5,464 $ 1,844 $734,795 ======== ======= ======= ======== ======== Operating earnings (loss) $ 49,693 $ 4,518 $ 3,694 $ (2,288) $ 55,617 Interest and investment income, including realized gains (losses) 17,560 50 -- 1,844 19,454 Depreciation and amortization 14,774 97 384 -- 15,255 Interest expense 2,923 -- 1,490 7,177 11,590 -------- ------- ------- -------- -------- Earnings (loss) before income taxes 49,556 4,471 1,820 (7,621) 48,226 Income tax expense (benefit) 19,898 1,505 630 (3,048) 18,985 -------- ------- ------- -------- -------- Net earnings (loss) $ 29,658 $ 2,966 $ 1,190 $ (4,573) $ 29,241 ======== ======= ======= ======== ======== Assets $499,846 $16,552 $39,107 $ 54,153 $609,658 ======== ======= ======= ======== ========
The activities of the reportable segments include the following: TITLE INSURANCE This segment, consisting of title insurance underwriters and wholly owned title insurance agencies; provides core title insurance and escrow services, including document preparation, collection and trust activities and certain real estate information services. This segment coordinates its activities with those of the real estate information services segment described below in order to offer the full range of real estate products and services required to execute and close a real estate transaction. REAL ESTATE INFORMATION SERVICES This segment, consisting of various real estate information subsidiaries, offers the complementary specialized products and services required to execute and close a real estate transaction that are not offered by the title insurance segment described above. These services include document recording services on a nationwide basis, tax qualifying property exchange services, property appraisal services, tax monitoring services, credit reporting, real estate referral services, flood monitoring, foreclosure publishing and posting and real estate information technology (Micro General Corporation). These services require specialized expertise and have been centralized for efficiency and management purposes. LEASING The leasing segment originates, funds, purchases, sells, securitizes and services equipment leases for a broad range of businesses. CORPORATE The corporate segment includes the operations of the parent holding company. These operations consist of certain investment activities and the issuance and repayment of corporate debt obligations. Expenditures for long-lived assets relate primarily to the title insurance segment. The accounting policies of the segments are the same as those described in Note A, Summary of Significant Accounting Policies. Intersegment sales or transfers which occurred in the ordinary course of consolidated operations have been eliminated from the segment information provided. 76 49
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.2.1 Amendment to Article VII, Section 7 of the Bylaws of Registrant dated April 22, 1988, incorporated by reference from Form 10-K filed January 29, 1990. 3.2.2 Amendment to Article III, Section 3(d) of the Bylaws of Registrant dated September 14, 1991, incorporated by reference from Form 10-K filed March 29, 1993. 3.2.3 Amendment to Article II, Section 1(b) of the Bylaws of Registrant dated October 29, 1991, incorporated by reference from Form 10-K filed March 29, 1993. 3.2.4 Amendment to Article II, Section 1(b) of the Bylaws of Registrant dated December 10, 1991, incorporated by reference from Form 10-K filed March 29, 1993. 3.2.5 Amendment to Article IV, Sections 1(a) and (b) and Section 4 of the Bylaws of Registrant dated June 9, 1992, incorporated by reference from Form 10-K filed March 29, 1993. 4 Instruments Defining Rights of Security Holders. 4.1 Specimen Certificate, incorporated by reference from Form S-1, Registration No. 33-11321. 4.2 Articles FOURTH and EIGHTH of Certificate of Incorporation of Registrant, with Amendments, incorporated by reference from Form S-1, Registration No. 33-11321. 4.2.1 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated February 2, 1989 and approved by the stockholders of the Company on March 24, 1989, incorporated by reference from Form 10-K filed January 29, 1990. 4.2.2 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated June 10, 1992 and approved by the stockholders of the Company on July 15, 1992, incorporated by reference from Proxy Statement on Schedule 14A dated June 17, 1992. 4.2.3 Amendment to Article FOURTH of Certificate of Incorporation of Registrant dated June 14, 1994 and approved by the stockholders of the Company on June 14, 1994, incorporated by reference from Proxy Statement on Schedule 14A dated May 11, 1994. 4.3 Articles II and IV of the Bylaws of the Registrant with Amendments, incorporated by reference from Form S-1, Registration No. 33-11321. 4.4 Subscription Documents, incorporated by reference from Form S-1, Registration No. 33-11321. 10 Material Contracts. 10.1 Employment Agreement effective as of April 1, 1991, between William P. Foley, II and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 23, 1992. 10.1.1 First amendment to Employment Agreement between William P. Foley, II and Fidelity National Financial, Inc., effective as of January 1, 1996, incorporated by reference from Form 10-K filed March 31, 1997. 10.1.2 Employment Agreements effective as of January 1, 1996 between four key executives and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 31, 1997. 10.1.2.1 First amendments and revisions to Employment Agreements between four key executives and Fidelity National Financial, Inc., effective January 1, 1997 and April 1, 1997, incorporated by reference from Form 10-K filed March 30, 1998.
77 50
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.1.3 Employment Agreement effective as of September 15, 1997 between a key executive and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 30, 1998. 10.1.4 Employment Agreement effective as of October 1, 1998 between a key executive and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 31, 1999. 10.4 Fidelity National Financial, Inc. 1987 Stock Option Plan, incorporated by reference from Form S-1, Registration No. 33-11321. 10.4.1 Amendments to Fidelity National Financial, Inc. 1987 Stock Option Plan approved by the stockholders of the Company on March 24, 1989, incorporated by reference from Form S-8, Registration No. 33-34300. 10.5 Fidelity National Financial, Inc. 1987 Employee Stock Purchase Plan, incorporated by reference from Form S-1, Registration No. 33-11321. 10.5.1 Amendments to Fidelity National Financial, Inc. 1987 Employee Stock Purchase Plan approved by the stockholders of the Company on March 24, 1989, incorporated by reference from Form S-8, Registration No. 33-15027. 10.5.2 Amendments to Fidelity National Financial, Inc. 1987 Employee Stock Purchase Plan, incorporated by reference from Form S-8, Registration No. 33-45709. 10.5.3 Amendments to Fidelity National Financial, Inc. 1987 Employee Stock Purchase Plan approved by the stockholders of the Company on June 15, 1993, incorporated by reference from Form S-8, Registration No. 33-64836. 10.5.4 Amendments to Fidelity National Financial, Inc. 1987 Stock Purchase Plan approved by the stockholders of the Company on June 20, 1995, incorporated by reference from Form S-8, Registration No. 33-61983. 10.6 Fidelity National Financial, Inc. 401(k) Profit Sharing Defined Contribution Plan and Trust adopted January 1, 1990, incorporated by reference from Form 10-K filed January 29, 1991. 10.6.1 Amendments to Fidelity National Financial, Inc. 401(k) Profit Sharing Plan, incorporated by reference from Form S-8, Registration No. 33-56514. 10.7 Fidelity National Financial, Inc. 1991 Stock Option Plan, approved by the stockholders of the Company on July 15, 1992, incorporated by reference from Form S-8, Registration No. 33-45272. 10.7.1 Amendments to Fidelity National Financial, Inc. 1991 Stock Option Plan approved by the stockholders of the Company on June 15, 1993, incorporated by reference from Form S-8, Registration No. 33-64834. 10.7.2 Amendment to Fidelity National Financial, Inc. 1991 Stock Plan, approved by the stockholders of the Company on June 14, 1994, incorporated by reference from Form S-8, Registration No. 33-83026. 10.7.3 Amendment to Fidelity National Financial, Inc. 1991 Stock Option Plan and the 1998 Stock Option Plan, approved by the stockholders of the Company on June 17, 1998, incorporated by reference from Form S-8, registration No. 333-61111.
78 51
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.10 Agreement of Limited Partnership of Folco Mission Valley Partners Limited Partnership, a California limited partnership, dated August 8, 1991, by Folco Development Corporation, an Arizona corporation, as general partner, and Fidelity National Title Insurance Company, an Arizona corporation, as limited partner, incorporated by reference from Form 10-K filed March 23, 1992. 10.10.2 Office Building Lease dated October 1, 1991 between Folco Mission Valley Partners Limited Partnership, a California limited partnership, as Landlord, and Fidelity National Title Insurance Company, an Arizona corporation, as Tenant, incorporated by reference from Form 10-K filed March 23, 1992. 10.12 Form of First Amendment to Office Building Lease between Folco Development Corporation, an Arizona corporation, as Landlord, and Fidelity National Title Insurance Company, an Arizona corporation, as Tenant, with respect to nine office buildings, and the schedule of such buildings, incorporated by reference from Form 10-K filed March 23, 1992. 10.14 Goodyear Investors Number II Partnership Agreement dated October 7, 1986 among Manchester Development Corporation, Folco Development Corporation Defined Benefit Pension Plan, Enfield Construction Company, et al., incorporated by reference from Form S-1, Registration No. 33-11321. 10.16 Agreement of Limited Partnership of Prospect Office Partners, a California limited partnership, dated September 1, 1988 by and among William P. Foley, II, Frank P. Willey, Max F. Hickman, Manchester Development Corporation, and James G. Watt Partnership, incorporated by reference from Form 10-K filed January 29, 1989. 10.16.1 Promissory Note dated October 1, 1988 in the original principal amount of $850,000 to Manchester Development Corporation by Prospect Office Partners, incorporated by reference from Form 10-K filed March 29, 1993. 10.16.2 Modification Agreement dated November 30, 1992 between Manchester Development Corporation and Prospect Office Partners, incorporated by reference from Form 10-K filed March 29, 1993. 10.18 Wilmac III Limited Partnership Certificate and Agreement of Limited Partnership, dated December 31, 1987 by and among Manchester Development Corporation, Stephen L. McCartney, Frank P. Willey and Robert P. Coluccio, incorporated by reference from Form 10-K filed January 29, 1989. 10.19 Agreement of Limited Partnership of Tustin Retail, a California limited partnership, dated April 1988 by and among Manchester Development Corporation and Vistar Financial Inc., incorporated by reference from Form 10-K filed January 29, 1989. 10.19.1 Amendment to Agreement of Limited Partnership of Tustin Retail by and among Manchester Development Corporation, Vistar Financial, Inc., William P. Foley, II, Frank P. Willey, John E. Hock, Robert A. Diemer, Gerald S. Misurek and Stuart R. Boesche, incorporated by reference from Form 10-K filed March 29, 1993. 10.19.2 Promissory Note dated May 1, 1988 in the original principal amount of $700,000 to Manchester Development Corporation by Tustin Retail, incorporated by reference from Form 10-K filed March 29, 1993. 10.19.3 Fixed Rate Promissory Note dated March 1, 1992 in the original principal amount of $303,500 to Manchester Development Corporation by Tustin Retail, incorporated by reference from Form 10-K filed March 29, 1993.
79 52
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.19.4 Modification Agreement dated November 30, 1992 between Manchester Development Corporation and Tustin Retail, incorporated by reference from Form 10-K filed March 29, 1993. 10.35 Fidelity National Financial, Inc. 1993 Stock Plan, approved by stockholders of the Company on June 14, 1994, incorporated by reference from Form S-8, Registration No. 33-83026. 10.43 Stock Purchase Agreement dated as of August 18, 1995 by and among William D. Rothenberg, Marshall D. Wexler, Southern California Title Company and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 25, 1996. 10.44 Acquisition Agreement dated September 13, 1995 by and among Fidelity National Financial, Inc. and Nations Holding Group, Inc. and its wholly-owned subsidiary Nations Title Inc. to acquire all of the issued and outstanding shares of Nations Title Inc., incorporated by reference from Form 10-K filed March 25, 1996. 10.45 Agreement for purchase and sale of stock dated November 4, 1996 by and between Fidelity National Financial, Inc. and the stockholders of CRM, Inc., incorporated by reference from Form 10-K filed March 31, 1997. 10.46 Stock Purchase and Loan Agreement by and among ATC Holdings, Inc., Fidelity National Financial, Inc. and American Title Company, incorporated by reference from Form 10-K filed March 30, 1998. 10.47 Agreement and Plan of Reorganization dated as of August 15, 1997 by and among Fidelity National Financial, Inc., First Title Corporation, Ernest N. Moore, Jeanene S. Moore and T. Frank Jordan and First Title Acquisition Corporation, incorporated by reference from Form 10-K filed March 30, 1998. 10.48 Agreement and Plan of Reorganization dated September 1997 by and among Fidelity National Financial, Inc., ICS Ifland Credit Services, Inc., Rick W. Ifland and ICS Acquisition Corporation, incorporated by reference from Form 10-K filed March 30, 1998. 10.49 Agreement and Plan of Reorganization by and among Fidelity National Financial, Inc.; Bron Acquisition Corporation, Bron Research, Inc., and the Shareholders of Bron Research, Inc., dated as of September 24, 1997, incorporated by reference from Form 10-K filed March 30, 1998. 10.50 Agreement and Plan of Reorganization dated as of September 12, 1997, by and among Fidelity National Financial, Inc., Credit Reports, Inc., Colin Howard Friedman and Hedy Kramer Friedman, as trustees of the Friedman Family Trust UDT, dated July 23, 1987, Colin H. Friedman, Farid Meshkatai and CRI Acquisition Corporation, incorporated by reference from Form 10-K filed March 30, 1998, 10.51 Agreement and Plan of Reorganization dated as of September 12, 1997 by and among Fidelity National, Inc., Express Network, Inc., Colin Howard Friedman and Hedy Kramer Friedman, as trustees of the Friedman Family Trust UDT, dated July 23, 1987, Farid Meshkatai, and Anita Kramer Meshkatai, as Trustee of the Anita Kramer Living Trust, dated July 23, 1987, Colin H. Friedman, and ENI Acquisition Corporation, incorporated by reference from Form 10-K filed March 30, 1998.
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.52 Fidelity National Financial, Inc. Liquid Yield Option Notes, due 2009 (zero coupon-subordinated) Exchange Agreement dated October 17, 1997, incorporated by reference from Form 10-K filed March 30, 1998. 10.53 Stock and Asset Purchase Agreement dated as of May 22, 1997, by and between Randall F. Zurbach and John C. Wilbur, Jr. and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 30, 1998. 10.54 Agreement and Plan of Merger, dated November 17, 1997 by and among Fidelity National Financial, Inc.; Granite Acquisition Corporation and Granite Financial, Inc., incorporated by reference from Form S-4, Registration No. 333-44153. 10.55 Securities Purchase Agreement, dated April 8, 1998, by and among Walter W. Cruttenden, III, Cruttenden Roth Incorporated, and Fidelity National Financial, Inc., incorporated by reference from Form 10-K filed March 31, 1999. 10.56 Agreement and Plan of Merger, dated May 6, 1998 by and among Fidelity National Financial, Inc.; AT Merger, Inc. and Alamo Title Holding Company, incorporated by reference from Form S-4, Registration No. 333-58573. 10.57 Agreement and Plan of Reorganization, dated May 14, 1998, by and among ACS Systems, Inc., a California Corporation, ACS Merger, Inc., a Delaware Corporation, Micro General Corporation, a Delaware Corporation, and Fidelity National Financial, Inc., a Delaware Corporation, incorporated by reference from Form 10-K filed March 31, 1999. 10.57.1 Agreement of Merger, dated May 14, 1998, by and among ACS Systems, Inc., a California Corporation, ACS Merger, Inc., a Delaware Corporation, Micro General Corporation, a Delaware Corporation, and Fidelity National Financial, Inc., a Delaware Corporation, incorporated by reference from Form 10-K filed March 31, 1999. 10.58 Credit Agreement, dated as of August 1, 1998, by and among Fidelity National Financial, Inc., Sanwa Bank California as the Agent and the Lenders from time to time party thereto, incorporated by reference from Form 10-K filed March 31, 1999. 10.58.1 First Amendment, dated as of December 31, 1998, to the Credit Agreement, dated as of August 1, 1998, by and among Fidelity National Financial, Inc., Sanwa Bank California as the Agent and the Lenders from time to time party thereto, incorporated by reference from Form 10-K filed March 31, 1999. 10.59 Stock Purchase Agreement, dated as of August 31, 1998, by and among Granite Financial, Inc., Fidelity National Financial, Inc., Lexington Capital Corporation, and the Shareholders of Lexington Capital Corporation, incorporated by reference from Form 10-K filed March 31, 1999. 11 Computation of Basic and Diluted Earnings per Share, incorporated by reference from Form 10-K filed March 31, 1999. 21 List of Subsidiaries, incorporated by reference from Form 10-K filed March 31, 1999. 23 Independent Auditors' Consent. 27 Financial Data Schedule -- December 31, 1998, incorporated by reference from Form 10-K filed March 31, 1999. 27.1 Financial Data Schedule -- September 30, 1998 (Restated), incorporated by reference from Form 10-K filed March 31, 1999. 27.2 Financial Data Schedule -- June 30, 1998 (Restated), incorporated by reference from Form 10-K filed March 31, 1999. 27.3 Financial Data Schedule -- March 31, 1998 (Restated), incorporated by reference from Form 10-K filed March 31, 1999. 27.4 Financial Data Schedule -- December 31, 1997 (Restated), incorporated by reference from Form 10-K filed March 31, 1999. 27.5 Financial Data Schedule -- September 30, 1997 (Restated), incorporated by reference from Form 10-K filed March 31, 1999. 27.6 Financial Data Schedule -- June 30, 1997 (Restated), incorporated by reference from Form 10-K filed March 31, 1999.
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 27.7 Financial Data Schedule -- March 31, 1997 (Restated), incorporated by reference from Form 10-K filed March 31, 1999. 27.8 Financial Data Schedule -- December 31, 1996 (Restated), incorporated by reference from Form 10-K filed March 31, 1999.
(b) REPORTS ON FORM 8-K. The Company filed reports on Form 8-K during the fourth quarter ending December 31, 1998 as follows: Current report on Form 8-K dated October 22, 1998, relating to the combined financial results of Fidelity National Financial, Inc. and Alamo Title Holding Company for the quarter ended September 30, 1998. 82 55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIDELITY NATIONAL FINANCIAL, INC. By: /s/ ALAN L. STINSON ------------------------------------ Alan L. Stinson Executive Vice President, Chief Financial Officer and Treasurer Date: December 20, 1999 83 56 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------- ----------- ------------- 23 Independent Auditors' Consent...............................
EX-23 2 INDEPENDENT AUDITORS' CONSENT 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Fidelity National Financial, Inc.: We consent to incorporation by reference in the Registration Statements (No. 33-32853, 33-15027, 33-34300, 33-45709, 33-45272, 33-15008, 33-56514, 33-64834, 33-64836, 33-83026, 33-61983, 333-48411, 333-61111, 333-64229) on Form S-8 of Fidelity National Financial, Inc. of our reports dated February 17, 1999, except as to Note Q to the Consolidated Financial Statements, which is as of March 25, 1999, relating to the Consolidated Balance Sheets of Fidelity National Financial, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related Consolidated Statements of Earnings, Comprehensive Earnings, Stockholders' Equity and Cash Flows and related schedules for each of the years in the three-year period ended December 31, 1998 which reports appear in the December 31, 1998 Annual Report on Form 10-K of Fidelity National Financial, Inc. KPMG LLP Los Angeles, California December 20, 1999 -----END PRIVACY-ENHANCED MESSAGE-----