10-Q 1 e10-q.txt FORM 10-Q QUARTER PERIOD JUNE 30, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2000 Commission File Number 1-9396 FIDELITY NATIONAL FINANCIAL, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 86-0498599 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 17911 Von Karman Avenue, Suite 300, Irvine, California 92614 ------------------------------------------------------ ---------------------- (Address of principal executive offices) (Zip Code) (949) 622-4333 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of August 9, 2000, 67,393,506 shares of the Registrant's Common Stock were outstanding. 2 FORM 10-Q QUARTERLY REPORT Quarter Ended June 30, 2000 INDEX Page ---- Part I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements A. Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 3 B. Condensed Consolidated Statements of Earnings for the three months and six months ended June 30, 2000 and 1999 4 C. Condensed Consolidated Statements of Comprehensive Earnings for the three months and six months ended June 30, 2000 and 1999 5 D. Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 6 E. Notes to Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosure About Market Risk 15 Part II: OTHER INFORMATION Item 1. Legal Proceedings 16 Items 2, 3 and 5 of Part II have been omitted because they are not applicable with respect to the current reporting period -- Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 2 3 Part I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
June 30, December 31, 2000 1999 ----------- ----------- (Unaudited) ASSETS Investments: Fixed maturities available for sale, at fair value, at June 30, 2000 includes $252,150 of pledged fixed maturity securities related to secured trust deposits $ 1,134,469 $ 347,051 Equity securities, at fair value 55,793 38,881 Other long-term investments, at cost, which approximates fair value 44,975 43,253 Short-term investments, at cost, which approximates fair value, at June 30, 2000 includes $114,328 of pledged short-term investments related to secured trust deposits 267,818 74,232 Investments in real estate and partnerships, net 2,896 3,499 ----------- ----------- Total investments 1,505,951 506,916 Cash and cash equivalents, at June 30, 2000 includes $262,978 of pledged cash related to secured trust deposits 362,705 38,569 Leases and residual interests in securitizations 147,187 142,141 Trade receivables, net 116,881 60,784 Notes receivable, net 18,209 18,304 Cost in excess of net assets acquired, net 765,450 53,576 Prepaid expenses and other assets 179,359 75,310 Title plants 263,872 59,914 Property and equipment, net 179,990 55,453 Deferred tax asset 150,177 31,579 ----------- ----------- $ 3,689,781 $ 1,042,546 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities $ 344,446 $ 135,943 Notes payable 783,398 226,359 Reserve for claim losses 910,646 239,962 Secured trust deposits 619,709 -- Income taxes payable 47,819 3,175 ----------- ----------- 2,706,018 605,439 Minority interests 4,660 4,613 Stockholders' equity: Preferred stock, $.0001 par value; authorized, 3,000,000 shares; issued and outstanding, none -- -- Common stock, $.0001 par value; authorized, 100,000,000 shares as of June 30, 2000 and 50,000,000 shares as of December 31, 1999; issued, 67,207,969 as of June 30, 2000 and 39,224,169 as of December 31, 1999 7 4 Additional paid-in capital 637,492 246,959 Retained earnings 347,607 327,785 ----------- ----------- 985,106 574,748 Accumulated other comprehensive loss (6,003) (5,975) Less treasury stock, cancelled in 2000 and 12,036,102 shares as of December 31, 1999, at cost -- (136,279) ----------- ----------- 979,103 432,494 ----------- ----------- $ 3,689,781 $ 1,042,546 =========== ===========
See Notes to Condensed Consolidated Financial Statements 3 4 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data)
Three months ended Six months ended June 30, June 30, ----------------------- ----------------------- 2000 1999 2000 1999 -------- ---------- ---------- -------- (Unaudited) (Unaudited) REVENUE: Title insurance premiums $535,004 $ 248,100 $ 795,404 $489,974 Escrow fees 78,917 34,213 111,200 67,008 Other fees and revenue 123,076 67,661 193,350 131,325 Interest and investment income, including realized gains (losses) 20,645 7,845 35,345 13,786 -------- ---------- ---------- -------- 757,642 357,819 1,135,299 702,093 -------- ---------- ---------- -------- EXPENSES: Personnel costs 241,764 105,761 352,471 214,306 Other operating expenses 168,375 83,727 278,938 160,032 Agent commissions 233,098 108,605 359,006 215,597 Provision for claim losses 25,185 15,099 39,770 30,330 Interest expense 18,112 2,853 24,691 5,689 -------- ---------- ---------- -------- Total expenses 686,534 316,045 1,054,876 625,954 -------- ---------- ---------- -------- Earnings before amortization of cost in excess of net assets acquired 71,108 41,774 80,423 76,139 Amortization of cost in excess of net assets acquired 11,874 1,536 13,528 2,397 -------- ---------- ---------- -------- Earnings before income taxes 59,234 40,238 66,895 73,742 Income tax expense 27,863 16,497 33,655 30,234 -------- ---------- ---------- -------- Net earnings $ 31,371 $ 23,741 $ 33,240 $ 43,508 ======== ========== ========== ======== Basic net earnings $ 31,371 $ 23,741 $ 33,240 $ 43,508 ======== ========== ========== ======== Basic earnings per share $ 0.47 $ 0.78 $ 0.67 $ 1.42 ======== ========== ========== ======== Weighted average shares outstanding, basic basis 66,846 30,423 49,559 30,594 ======== ========== ========== ======== Diluted net earnings $ 31,371 $ 23,741 $ 33,240 $ 43,771 ======== ========== ========== ======== Diluted earnings per share $ 0.46 $ 0.75 $ 0.65 $ 1.35 ======== ========== ========== ======== Weighted average shares outstanding, diluted basis 68,866 31,788 51,147 32,502 ======== ========== ========== ======== Cash dividends per share $ 0.10 $ 0.07 $ 0.20 $ 0.14 ======== ========== ========== ========
See Notes to Condensed Consolidated Financial Statements 4 5 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (In thousands)
Three months ended Six months ended June 30, June 30, ---------------------- ---------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (Unaudited) (Unaudited) Net earnings $ 31,371 $ 23,741 $ 33,240 $ 43,508 Other comprehensive earnings (loss): Unrealized gains (losses) on investments, net (1) (6,231) (4,023) 405 (10,031) Reclassification adjustments for (gains) losses included in net earnings (2) 1,245 (1,194) (433) (799) -------- -------- -------- -------- Other comprehensive loss (4,986) (5,217) (28) (10,830) -------- -------- -------- -------- Comprehensive earnings $ 26,385 $ 18,524 $ 33,212 $ 32,678 ======== ======== ======== ========
----------------- (1) Net of income tax expense (benefit) of $(4,154) and $(2,796) and $270 and $(6,971) for the three months and six months ended June 30, 2000 and 1999, respectively. (2) Net of income tax expense (benefit) of $(830) and $830 and $289 and $556 for the three months and six months ended June 30, 2000 and 1999, respectively. See Notes to Condensed Consolidated Financial Statements. 5 6 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six months ended June 30, ------------------------ 2000 1999 --------- --------- (Unaudited) Cash flows from operating activities: Net earnings $ 33,240 $ 43,508 Reconciliation of net earnings to net cash provided by operating activities: Depreciation and amortization 46,551 12,716 Net increase (decrease) in reserve for claim losses (61) 13,353 Net increase in provision for possible losses other than claims 565 282 Gain on sales of assets (1,970) (1,355) Equity (gains) losses of unconsolidated partnerships 273 (93) Amortization of LYONs original issue discount -- 485 Change in assets and liabilities, net of effects from acquisitions: Net increase in leases and lease securitization residual interest (5,046) (32,695) Net increase in cash pledged to secure trust and escrow deposits 156,908 -- Net increase in trade receivables (23) (1,850) Net (increase) decrease in prepaid expenses and other assets 17,578 (6,049) Net decrease in accounts payable and accrued liabilities (62,482) (7,328) Net increase (decrease) in income taxes 17,904 (7,250) --------- --------- Net cash provided by operating activities 203,437 13,724 --------- --------- Cash flows from investing activities: Proceeds from sale of real estate 7 946 Proceeds from sales and maturities of investments 463,575 211,869 Collections of notes receivable 8,675 1,787 Additions to title plants (56) (1,247) Additions to property and equipment (16,718) (13,105) Additions to investments (496,392) (202,836) Additions to notes receivable (8,364) (8,475) Sale of a subsidiary, net of cash -- 2,468 Acquisitions of businesses, net of cash acquired (389,819) -- --------- --------- Net cash used in investing activities $(439,092) $ (8,593) ========= =========
See Notes to Condensed Consolidated Financial Statements. 6 7 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six months ended June 30, ----------------------- 2000 1999 --------- -------- (Unaudited) Cash flows from financing activities: Borrowings $ 600,910 $ 42,152 Debt service payments (47,761) (7,074) Dividends paid (9,408) (4,392) Purchase of treasury stock (551) (33,812) Stock options exercised 16,601 2,532 -------- -------- Net cash used in financing activities 559,791 (594) --------- -------- Net increase in cash and cash equivalents 324,136 4,537 Cash and cash equivalents at beginning of period 38,569 51,309 --------- -------- Cash and cash equivalents at end of period $ 362,705 $ 55,846 ========= ======== Supplemental cash flow information: Income taxes paid $ 6,038 $ 35,878 ========= ======== Interest paid $ 22,988 $ 9,232 ========= ======== Noncash investing and financing activities: Dividends declared and unpaid $ 6,722 $ 2,147 ========= ======== See Notes to Condensed Consolidated Financial Statements 7 8 Fidelity National Financial, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements Note A - Basis of Financial Statements The financial information included in this report includes the accounts of Fidelity National Financial, Inc. and its subsidiaries (collectively, the "Company") and has been prepared in accordance with generally accepted accounting principles and the instructions to Form 10-Q and Article 10 of Regulation S-X. All adjustments considered necessary for a fair presentation have been included. This report should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and the Company's Reports on Form 8-K/A, dated March 20, 2000. Certain reclassifications have been made in the 1999 Condensed Consolidated Financial Statements to conform to classifications used in 2000. Note B - Chicago Title Corporation Merger On March 20, 2000, Chicago Title Corporation ("Chicago Title") was merged with and into the Company pursuant to an Agreement and Plan of Merger ("Merger Agreement") signed on August 1, 1999 and amended on October 13, 1999. Pursuant to the terms of the Merger Agreement, Chicago Title stockholders received aggregate merger consideration of approximately $1.1 billion. The merger consideration was paid in the form of 1.7673 shares of Company common stock and $26.00 in cash for each share of Chicago Title common stock, resulting in the issuance of approximately 38.8 million shares of Company common stock at an average price during the applicable trading period of $13.1771 per share and the payment of approximately $570.2 million in cash. The merger has been accounted for as a purchase. The Company has recorded certain preliminary purchase accounting adjustments, which are based on estimates utilizing available information. Such purchase accounting adjustments may be refined as additional information becomes available. Cost in excess of net assets acquired which has been recorded as a result of the merger will be amortized on a straight-line basis over 20 years. The Company's Condensed Consolidated Statements of Earnings include the results of operations of Chicago Title for the period subsequent to March 20, 2000, the merger date, through June 30, 2000. A roll-forward of consolidated stockholders' equity from December 31, 1999 to June 30, 2000, including the effect of the Chicago Title merger is as follows:
Accumulated Common Stock Additional Other Treasury Stock ---------------- Paid-in Retained Comprehensive -------------------- Shares Amount Capital Earnings Loss Shares Amount ------- ------ --------- --------- ------------- ------- --------- (In thousands) Balance, December 31, 1999 39,224 $ 4 $ 246,959 $ 327,785 $(5,975) 12,036 $(136,279) Purchase of treasury stock -- -- -- -- -- 39 (551) Exercise of stock options 1,298 -- 16,601 -- -- -- -- Other comprehensive loss - unrealized loss on investments and other financial instruments -- -- -- -- (28) -- -- Acquisition of Chicago Title Corporation 38,761 4 510,762 -- -- -- -- Retirement of treasury stock (12,075) (1) (136,830) -- -- (12,075) 136,830 Cash dividends -- -- -- (13,418) -- -- -- Net earnings -- -- -- 33,240 -- -- -- ------- --- --------- --------- ------- ------- --------- Balance, March 31, 2000 67,208 $ 7 $ 637,492 $ 347,607 $(6,003) -- $ -- ======= === ========= ========= ======= ======= =========
In connection with the merger, the Company entered into an $800.0 million syndicated credit agreement ("Credit Agreement"). The Credit Agreement provides for three distinct credit facilities: a $100.0 million, 18-month revolving credit facility, a $250.0 million, 6-year revolving credit facility and a $450.0 million term loan facility with a 6-year amortization period. The Credit Agreement bears interest at a variable interest rate based on the debt ratings assigned to the Company by certain independent agencies, and is unsecured. The initial interest rate is LIBOR plus 1.50%. Proceeds from the Credit 8 9 Notes to Condensed Consolidated Financial Statements, Continued Agreement are available and have been used to finance the cash portion of the merger consideration, to refinance certain previously existing indebtedness, to pay fees and expenses incurred in connection with the merger and to fund other general corporate purposes of the combined company. Selected unaudited pro forma combined results of operations for the six-month periods ended June 30, 2000 and 1999, assuming the merger occurred on January 1, 2000 and 1999 and using actual general and administrative expenses prior to the merger, are as follows:
Six months ended June 30, ------------------------- 2000 1999 ---------- ---------- (In thousands, except per share data) Total revenue $1,464,764 $1,702,617 Net earnings before merger-related expenses and non-recurring charges $ 43,065 $ 70,507 Basic net earnings $ 29,694 $ 70,507 Basic net earnings per share before merger-related expenses and non-recurring charges $ 0.65 $ 1.02 Basic net earnings per share $ 0.45 $ 1.02 Diluted net earnings $ 29,694 $ 70,770 Diluted net earnings per share before merger-related expenses and non-recurring charges $ 0.63 $ 0.98 Diluted net earnings per share $ 0.44 $ 0.98
Note C - Dividends On March 17, 2000, the Company's Board of Directors declared a cash dividend of $.10 per share, payable on May 30, 2000, to stockholders of record as of April 10, 2000. On June 28, 2000, the Company's Board of Directors declared a cash dividend of $0.10 per share, payable on July 24, 2000 to stockholders of record as of July 10, 2000. 9 10 Notes to Condensed Consolidated Financial Statements, Continued Note D - Segment Information During the first quarter of 2000, the Company restructured its business segments to more accurately reflect a change in the Company's current operating structure. All previously reported segment information has been restated to be consistent with the 2000 presentation. Summarized financial information concerning the Company's reportable segments is shown in the following table. The amounts reported for Chicago Title reflect only the period subsequent to March 20, 2000, the merger date, through June 30, 2000. Reportable segments are determined based on the organizational structure and types of products and services from which each reportable segment derives its revenue.
REAL ESTATE SIX MONTHS ENDED TITLE INFORMATION JUNE 30, 2000 INSURANCE SERVICES CORPORATE TOTAL ---------------- ---------- ----------- --------- ---------- (Dollars in thousands) Total revenue $ 994,522 $67,089 $ 73,688 $1,135,299 ========== ======= ========= ========== Operating earnings (loss) $ 105,576 $ 8,588 $ (11,372) $ 102,792 Interest and investment income, including realized gains (losses) 28,507 921 5,917 35,345 Depreciation and amortization expense 36,895 1,233 8,423 46,551 Interest expense 335 21 24,335 24,691 ---------- ------- --------- ---------- Earnings (loss) before income taxes 96,853 8,255 (38,213) 66,895 Income tax expense (benefit) 38,118 3,249 (7,712) 33,655 ---------- ------- --------- ---------- Net earnings (loss) $ 58,735 $ 5,006 $ (30,501) $ 33,240 ---------- ------- --------- ---------- Assets $3,329,006 $94,871 $ 265,904 $3,689,781 ========== ======= ========= ==========
REAL ESTATE SIX MONTHS ENDED TITLE INFORMATION JUNE 30, 2000 INSURANCE SERVICES CORPORATE TOTAL ---------------- ---------- ----------- --------- ---------- (Dollars in thousands) Total revenue $ 597,790 $39,068 $ 65,235 $ 702,093 ========== ======= ========= ========== Operating earnings (loss) $ 81,691 $ 4,268 $ (7,598) $ 78,361 Interest and investment income, including realized gains (losses) 12,260 167 1,359 13,786 Depreciation and amortization expense 8,722 159 3,835 12,716 Interest expense 43 18 5,628 5,689 ---------- ------- --------- ---------- Earnings (loss) before income taxes 85,186 4,258 (15,702) 73,742 Income tax expense (benefit) 32,714 1,663 (4,143) 30,234 ---------- ------- --------- ---------- Net earnings (loss) $ 52,472 $ 2,595 $ (11,559) $ 43,508 ========== ======= ========= ========== Assets $ 715,260 $50,119 $ 231,867 $ 997,246 ========== ======= ========= ==========
10 11 Notes to Condensed Consolidated Financial Statements, Continued 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 and ancillary service 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, home warranty insurance, credit reporting, real estate referral services, flood monitoring, and foreclosure publishing and posting. These services require specialized expertise and have been centralized for efficiency and management purposes. Corporate The corporate segment includes the operations of the parent holding company. These operations consist of certain investment activities, including Micro General Corporation, FNF Capital, Inc., Express Network, Inc. and the issuance and repayment of corporate debt obligations. The non-recurring charges of $13.4 million that were recorded during the first quarter of 2000 are included in the corporate segment. The accounting policies of the segments are the same as those used in the Condensed Consolidated Financial Statements. Intersegment sales or transfers which occurred in the ordinary course of consolidated operations, other than transactions between the Company (primarily the Title Insurance segment) and Micro General Corporation, have been eliminated from the segment information provided. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, hopes, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results could vary materially from those forward-looking statements contained herein due to many factors, including, but not limited to: general economic and business conditions, including interest rate fluctuations and general volatility in the capital markets; changes in the performance of the real estate markets; the impact of competitive products and pricing; success of operating initiatives; our ability to integrate the acquired business operations of Chicago Title and our ability to implement cost-saving synergies associated with the acquisition; adverse publicity; the ability to identify businesses to be acquired; availability of qualified personnel; employee benefits costs and changes in, or the failure to comply with government regulations and other risks detailed in our filings with the Securities and Exchange Commission. Factors Affecting Comparability Our Condensed Consolidated Statements of Earnings include the results of operations of Chicago Title for the period subsequent to March 20, 2000, the merger date, through June 30, 2000. As a result, quarter over quarter and year over year comparisons may not be meaningful. Excluding the effect of the Chicago Title merger, our title insurance premiums for the three and six months ended June 30, 2000 were $210.3 million and $405.3 million, respectively. 11 12 In addition, during the first quarter of 2000 we recorded certain non-recurring charges totaling $13.4 million, after applicable taxes. These charges primarily relate to the revaluation of non-title assets, including our investment in Express Network, Inc. and certain existing goodwill and obsolete software. RESULTS OF OPERATIONS Net earnings for the second quarter of 2000 were $31.4 million, or $0.46 per diluted share, as compared with net earnings of $23.7 million, or $0.75 per diluted shared for the second quarter of 1999. Net earnings for the six months ended June 30, 2000 were $33.2 million, or $0.65 per diluted share. Excluding the non-recurring, non-title related charges we recorded in the first quarter of 2000 of $13.4 million, or $0.26 per diluted share, net earnings for the six-month period were $46.6 million, or $0.91 per diluted share as compared with net earnings for the corresponding period in 1999 of $43.5 million, or $1.35 per diluted share. Excluding the effects of amortization of cost in excess of net assets acquired, net earnings were $42.9 million, or $0.62 per diluted share for the second quarter of 2000 compared with $25.3 million, or $0.80 per diluted share for the second quarter of 1999. Net earnings before amortization of cost in excess of net assets acquired and before the non-recurring charges we recorded in the first quarter of 2000, were $59.8 million, or $1.17 per diluted share for the six months ended June 30, 2000 as compared with $45.9 million, or $1.41 per diluted share for the corresponding prior year period. We believe that earnings before amortization of cost in excess of net assets acquired and non-recurring charges better reflects the operational performance of our business. The following table presents the calculation of net earnings before amortization of cost in excess of net assets acquired and non-recurring charges:
Three months ended Six months ended June 30, June 30, -------------------------- -------------------------- 2000 1999 2000 1999 -------- ------- -------- ------- (In thousands, except (In thousands, except per share data) per share data) Net earnings $ 31,371 $23,741 $ 33,240 $43,508 Amortization of cost in excess of net assets acquired 11,874 1,536 13,528 2,397 Tax effect of amortization of cost in excess of net assets acquired (316) -- (316) -- Non-recurring charges, net of tax -- -- 13,371 -- -------- ------- -------- ------- Net earnings before amortization of cost in excess of net assets acquired and non-recurring charges $ 42,929 $25,277 $ 59,823 $45,905 ======== ======= ======== ======= Diluted net earnings per share before amortization of cost in excess of net assets acquired and non-recurring charges $ 0.62 $ 0.80 $ 1.17 $ 1.41 ======== ======= ======== ======= Diluted weighted average shares outstanding 68,866 31,788 51,147 32,502 ======== ======= ======== =======
Our acquisition of Chicago Title on March 20, 2000 has impacted the mix of business between our direct and agency operations as compared with the prior year periods. Economic conditions, including the continued volatility in mortgage rates, have shifted the mix of our core title and escrow business from a refinance-driven market in the first half of 1999 to a more traditional new home purchase and resale market. 12 13 The following table presents information regarding the components of title premiums:
Three months ended June 30, Six months ended June 30, -------------------------------------- ------------------------------------ % of % of % of % of 2000 Total 1999 Total 2000 Total 1999 Total -------- ----- -------- ----- -------- ----- -------- ----- (Dollars in thousands) (Dollars in thousands) Title premiums from direct operations $233,362 43.6% $111,683 45.0% $335,828 42.2% $219,642 44.8% Title premiums from agency operations 301,642 56.4% 136,417 55.0% 459,576 57.8% 270,332 55.2% -------- ----- -------- ----- -------- ----- -------- ----- Total $535,004 100.0% $248,100 100.0% $795,404 100.0% $489,974 100.0% ======== ===== ======== ===== ======== ===== ======== =====
The decrease in real estate activity has been more than offset by an increase in the average fee per file as well as the addition of the Chicago Title operations. The increase in fee per file is consistent with a return to more normalized levels of refinance activity and the continuing increase in housing values, as well as increased commercial activity as we continue to grow our National Commercial Division. Escrow fees for the three and six months ended June 30, 2000 were $78.9 million and $111.2 million, respectively as compared with $34.2 million and $67.0 million, respectively, for the corresponding periods of the prior year. The trend in escrow fees is generally consistent with that of our direct title premiums. Other fees and income represent revenue generated by our real estate information services business, the revenue of Micro General Corporation, our majority-owned information and telecommunication services subsidiary, and the revenue generated by FNF Capital, Inc., our equipment leasing subsidiary. Other fees and income for the second quarter of 2000 were $123.1 million as compared with $67.7 million for the second quarter of 1999. On a year-to-date basis, other fees and income were $193.4 million for the 2000 period as compared with $131.3 million in 1999. The increases in other fees and income is primarily the result of the acquisition of Chicago Title. Interest and investment income was $20.6 million in the second quarter of 2000 as compared with $7.8 million in the second quarter of 1999. The increase in interest and investment income earned during the 2000 quarter is primarily due to an increase in invested assets as a result of the Chicago Title acquisition. The increase in invested assets and interest earned thereon was partially offset in the second quarter of 2000 by net realized losses on the sale of assets of $2.6 million as compared with net realized gains of $2.0 million in the second quarter of 1999. Interest and investment income for the six months ended June 30, 2000 was $35.3 million as compared with $13.8 million for the corresponding period in 1999. The increase in the year-to-date numbers is consistent with that of the quarter; however we recorded net realized gains on the sale of assets in the 2000 period of $2.0 million as compared with net realized gains of $1.4 million for the corresponding 1999 period. Our operating expenses consist primarily of personnel costs, other operating expenses and agent commissions, which are incurred as orders are received and processed. Title insurance premiums, escrow fees and other fees and revenue are generally recognized as income at the time the underlying transaction closes. As a result, revenue lags approximately 60-90 days behind expenses and therefore gross margins may fluctuate. The changes in the market environment, mix of business between direct and agency operations and the contributions from our various business units have impacted margins and net earnings. We have implemented programs and have taken necessary actions to maintain expense levels consistent with revenue; however, a short time lag does exist in reducing variable costs and certain fixed costs are incurred regardless of revenue levels. Personnel costs include base salaries, commissions and bonuses paid to employees, and are one of our most significant operating expenses. These costs generally fluctuate with the level of orders opened and closed and with the mix of revenue. For the second quarter of 2000 personnel costs were $241.8 million, or 31.9% of total revenue, compared with $105.8 million, or 29.6% of total revenue for the corresponding 1999 quarter. For the six months ended June 30, 2000 and 1999, personnel costs were $352.5 million, or 31.0% of total revenue, and $214.3 million, or 30.5% of total revenue, respectively. We have taken significant measures to maintain appropriate personnel levels and costs relative to the volume and mix of business while maintaining customer service standards and quality controls. We will continue to monitor prevailing market conditions and will adjust personnel costs in accordance with activity. 13 14 Other operating expenses consist primarily of facilities expenses, title plant maintenance, premium taxes (which insurance underwriters are required to pay on title premiums in lieu of franchise and other state taxes), postage and courier services, computer services, professional services, advertising expenses, general insurance, depreciation and trade and notes receivable allowances. We continue to be committed to cost control measures. In response to market conditions, we have implemented aggressive cost control programs in order to maintain operating expenses at levels consistent with the levels of revenue; however, certain fixed costs are incurred regardless of revenue levels, resulting in period-over-period fluctuations. Our cost control programs are designed to evaluate expenses, both current and budgeted, relative to existing and projected market conditions. Total other operating expenses were $168.4 million, or 22.2% of total revenues for the second quarter of 2000 as compared with $83.7 million, or 23.4% of total revenues for the second quarter of 1999. For the six months ended June 30, 2000, these expenses were $262.4 million, excluding the non-recurring charges we took in the first quarter of 2000, and $160.0 million for the corresponding 1999 period. As a percentage of total revenue, other operating expenses for the 2000 period were 23.1% as compared with 22.8% for the 1999 period, excluding the non-recurring charges. Agent commissions represent the portion of policy premiums retained by agents pursuant to the terms of their respective agency contracts. Agent commissions were 77.3% of agent title premiums in the second quarter of 2000 as compared with 79.6% of agent title premiums for the second quarter of 1999. Agent commissions, as a percentage of agent title premiums, for the six months ended June 30, 2000 and 1999 were 78.1% and 79.8%, respectively. Agent commissions and the resulting percentage of agent title premiums retained by us vary according to regional differences in real estate closing practices and state regulations. The provision for claim losses includes an estimate of anticipated title claims and major claims. The estimate of anticipated title claims is accrued as a percentage of title premium revenue based on our historical loss experience and other relevant factors. We monitor our claims loss experience on a continual basis and adjust the provision for claim losses accordingly. Based on our loss development studies, we believe that as a result of our underwriting and claims handling practices, as well as the refinancing business of prior years, we will maintain the favorable claim loss trends we have experienced over the past several years. As such, our claim loss provision as a percentage of total title premiums was 4.7% in the second quarter of 2000 as compared with 6.1% in the second quarter of 1999. On a year-to-date basis, our provision for claim losses as a percentage of total title premiums was 5.0% in 2000 as compared with 6.2% in 1999. Interest expense for the three and six months ended June 30, 2000 was $18.1 million and $24.7 million, respectively. Interest expense for the three and six months ended June 30, 1999 was $2.9 million and $5.7 million, respectively. The increase in interest expense for the 2000 periods is attributable to the increase in outstanding notes payable, primarily related to the Chicago Title merger financing, and an increase in certain indices, on which our variable interest rates are based. Amortization of cost in excess of net assets acquired was $11.9 million in the second quarter of 2000 as compared with $1.5 million in the second quarter of 1999. These expenses totaled $13.5 million and $2.4 million for the six months ended June 30, 2000 and 1999, respectively. In connection with the acquisition of Chicago Title, we recorded estimated cost in excess of net assets acquired of approximately $729.8 million. As a result, amortization of cost in excess of net assets acquired has increased accordingly. Income tax expense for the three-month and six-month periods ended June 30, 2000 and 1999, as a percentage of earnings before income taxes was 47.0% and 41.0%; and 50.3% and 41.0%, respectively. The fluctuation in income tax expense as a percentage of earnings before income taxes is attributable to our estimate of ultimate income tax liability, the impact of the non-recurring charges and the non-deductible goodwill recorded pursuant to the Chicago Title merger and the characteristics of net earnings, i.e. operating income versus investment income. LIQUIDITY AND CAPITAL RESOURCES On March 20, 2000 we acquired Chicago Title via merger. Pursuant to the terms of the Merger Agreement, Chicago Title stockholders received aggregate merger consideration of approximately $1.1 billion. The merger consideration was paid in the form of 1.7673 shares of our common stock and $26.00 in cash for each share of Chicago Title common stock, resulting in the issuance of approximately 38.8 million shares of our common stock at an average price during the applicable period of $13.1771 per share and the payment of approximately $570.2 million in cash. 14 15 In connection with the Chicago Title merger, we entered into an $800.0 million syndicated credit agreement ("Credit Agreement"). The Credit Agreement provides for three distinct credit facilities: a $100.0 million, 18-month revolving credit facility, a $250.0 million, 6-year revolving credit facility and a $450.0 million term loan facility with a 6-year amortization period. The Credit Agreement bears interest at a variable rate of interest based on the debt ratings assigned to us by certain independent agencies, and is unsecured. The initial interest rate is LIBOR plus 1.50%. Proceeds from the Credit Agreement are available and have been used to finance the cash portion of the merger consideration, to refinance certain previously existing indebtedness, to pay fees and expenses incurred in connection with the merger and to fund other general corporate purposes. We must comply with certain affirmative and negative covenants related to our Credit Agreement and other debt facilities, which require, among other things, that we maintain our current debt ratings and certain financial ratios related to liquidity, net worth, capitalization, investments, acquisitions, restricted payments and certain dividend restrictions. We are in compliance with all of our debt covenants as of June 30, 2000. Our cash requirements include debt service, operating expenses, lease fundings, lease securitizations, taxes and dividends on our common stock. We believe that all anticipated cash requirements for current operations will be met from internally generated funds, through cash dividends from subsidiaries, cash generated by investment securities and bank borrowings through existing credit facilities. Our short-and long-term liquidity requirements are monitored regularly to match cash inflows with cash requirements. We forecast the daily needs of all of our subsidiaries and periodically review their short- and long-term projected sources and uses of funds, as well as the asset, liability, investment and cash flow assumptions underlying these projections. The two significant sources of our funds are dividends and distributions from our subsidiaries. As a holding company, we receive cash from our subsidiaries in the form of dividends and as reimbursement for operating and other administrative expenses they incur. The reimbursements are executed within the guidelines of various management agreements among us and our subsidiaries. Our insurance subsidiaries are restricted by state regulations in their ability to pay dividends and make distributions. Each state of domicile regulates the extent to which our title underwriters can pay dividends or make other distributions to us. Our underwritten title companies, real estate information service companies, Micro General Corporation and FNF Capital, Inc. collect revenue and pay operating expenses; however, they are not regulated to the same extent as our insurance subsidiaries. Positive cash flow from these subsidiaries are invested primarily in cash and cash equivalents. Year 2000 Issues We have not experienced any Year 2000 ("Y2K") compliance related issues to date. We believe that our electronic data processing and information systems are Y2K compliant; however, there can be no assurance that all of our systems are Y2K compliant, or the costs to be Y2K compliant will not exceed our current expectations, or that the failure of such systems to be Y2K compliant will not have a material adverse effect on our business. We believe that functions currently performed with the assistance of electronic data processing equipment could be performed manually or outsourced if certain systems are determined not to be Y2K compliant. Item 3. Quantitative and Qualitative Disclosure about Market Risk There have been no material changes in the market risks described in our Annual Report on Form 10-K for the year ended December 31, 1999. 15 16 Part II: OTHER INFORMATION Item 1. Legal Proceedings As previously disclosed in our prior Securities and Exchange Commission filings, we have been named as a defendant in four class action lawsuits alleging irregularities and violations of title and escrow practices. One of these suits was filed by the Attorney General of the State of California on behalf of the California Controller and the California Department of Insurance against the entire title and escrow industry in California. The other three were filed by private law firms in Federal Court in San Francisco and the State Court in Los Angeles. In February 2000, we reached a settlement of the lawsuit filed by the California Department of Insurance ("Department"). The settlement does not require us to pay any fine or penalty. We are vigorously defending the remaining lawsuits. We do not believe that the resolution of these lawsuits will have a material impact on us or on our results of operations. Item 4. Submission of Matters to Vote of Securities Holders Our Annual Meeting of Stockholders was held on June 12, 2000 for the purpose of electing certain members of the board of directors and to approve amendments to increase the shares available under our 1991 and 1998 Stock Option Plans. Nominees for directors, whose term expired as of the date of the Annual Meeting, were elected by the following vote: Shares Voted Authority to Vote "For" "Withheld" ------------ ----------------- Daniel D. Lane 58,122,130 2,173,289 J. Thomas Talbot 58,123,399 2,172,020 John F. Farrell, Jr. 58,170,495 2,124,924 Philip G. Heasley 58,170,495 2,122,948 The proposal to approve the amendment to our 1991 Stock Option Plan received the following votes: Votes Percentage ---------- ---------- Shares Voted "For" 49,794,519 82.6% Shares Voted "Against" 10,245,734 17.0% Shares Voted "Abstain" 255,166 0.4% The proposal to approve the amendment our 1998 Stock Option Plan received the following votes: Votes Percentage ---------- ---------- Shares Voted "For" 48,326,974 80.2% Shares Voted "Against" 11,738,359 19.5% Shares Voted "Abstain" 230,086 0.3% Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 11 -- Computation of Earnings Per Share Exhibit 27 -- Financial Data Schedule (included only with electronic filing) 16 17 (b) Reports on Form 8-K: A Current Report on Form 8-K, dated March 20, 2000, was filed during the second quarter of 2000 to announce that we completed our acquisition, by merger, of Chicago Title on March 20, 2000. Amendments No. 1, 2 and 3 to our Current Report on Form 8-K dated March 20, 2000 were filed during the second quarter of 2000 to report matters relating to our acquisition, by merger, of Chicago Title. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIDELITY NATIONAL FINANCIAL, INC. (Registrant) By: /s/ Alan L. Stinson ----------------------------------------- Alan L. Stinson Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) Date: August 13, 2000 17 18 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------- ----------- 11 Computation of Earning Per Share 27 Financial Data Schedule