-----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, LZSGuSV2OB7R+XvYWtZEAvR4f/1Adv/RHt0X2EeN1L0ohVgV4T4K44CgS7ag5GSf MqkynsKm/Q9vmB5Fl77T1Q== /in/edgar/work/0001095811-00-004717/0001095811-00-004717.txt : 20001115 0001095811-00-004717.hdr.sgml : 20001115 ACCESSION NUMBER: 0001095811-00-004717 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIDELITY NATIONAL FINANCIAL INC /DE/ CENTRAL INDEX KEY: 0000809398 STANDARD INDUSTRIAL CLASSIFICATION: [6361 ] IRS NUMBER: 860498599 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09396 FILM NUMBER: 762858 BUSINESS ADDRESS: STREET 1: 17911 VON KARMAN AVE STREET 2: STE 300 CITY: IRVINE STATE: CA ZIP: 92614 BUSINESS PHONE: 9496225000 MAIL ADDRESS: STREET 1: MLISS JONES KANE STREET 2: 17911 VON KARMAN AVE STE 300 CITY: IRVINE STATE: CA ZIP: 92614 10-Q 1 a66987e10-q.txt FORM 10-Q QUARTERLY PERIOD ENDED SEPTEMBER 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 September 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 October 31, 2000, 68,169,668 shares of the Registrant's Common Stock were outstanding. 2 FORM 10-Q QUARTERLY REPORT Quarter Ended September 30, 2000 INDEX
Page Part I: FINANCIAL INFORMATION ---- Item 1. Condensed Consolidated Financial Statements A. Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 3 B. Condensed Consolidated Statements of Earnings for the three months and nine months ended September 30, 2000 and 1999 4 C. Condensed Consolidated Statements of Comprehensive Earnings for the three months and nine months ended September 30, 2000 and 1999 5 D. Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 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)
September 30, December 31, 2000 1999 ----------- ----------- (Unaudited) ASSETS Investments: Fixed maturities available for sale, at fair value, at September 30, 2000 includes $243,053 of pledged fixed maturity securities related to secured trust deposits ................................................. $ 1,146,080 $ 347,051 Equity securities, at fair value ........................................ 53,289 38,881 Other long-term investments, at cost, which approximates fair value ..... 43,835 43,253 Short-term investments, at cost, which approximates fair value, at September 30, 2000 includes $171,845 of pledged short-term investments related to secured trust deposits ...................................... 364,628 74,232 Investments in real estate and partnerships, net ........................ 512 3,499 ----------- ----------- Total investments ................................................... 1,608,344 506,916 Cash and cash equivalents, at September 30, 2000 includes $251,135 of pledged cash related to secured trust deposits .................................. 372,536 38,569 Leases and residual interests in securitizations ............................. 152,416 142,141 Trade receivables, net ....................................................... 126,566 60,784 Notes receivable, net ........................................................ 17,490 18,304 Cost in excess of net assets acquired, net ................................... 758,340 53,576 Prepaid expenses and other assets ............................................ 192,158 75,310 Title plants ................................................................. 264,175 59,914 Property and equipment, net .................................................. 178,014 55,453 Deferred tax asset ........................................................... 147,984 31,579 ----------- ----------- $ 3,818,023 $ 1,042,546 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities ................................ $ 362,650 $ 135,943 Notes payable ........................................................... 787,075 226,359 Reserve for claim losses ................................................ 908,440 239,962 Secured trust deposits .................................................. 659,630 -- Income taxes payable .................................................... 67,434 3,175 ----------- ----------- 2,785,229 605,439 Minority interests ...................................................... 4,668 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 September 30, 2000 and 50,000,000 shares as of December 31, 1999; issued, 68,058,757 as of September 30, 2000 and 39,224,169 as of December 31, 1999 ...................................................... 7 4 Additional paid-in capital .............................................. 654,347 246,959 Retained earnings ....................................................... 378,369 327,785 ----------- ----------- 1,032,723 574,748 Accumulated other comprehensive loss .................................... (4,597) (5,975) Less treasury stock, cancelled in 2000 and 12,036,102 shares as of December 31, 1999, at cost ............................................. -- (136,279) ----------- ----------- 1,028,126 432,494 ----------- ----------- $ 3,818,023 $ 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 Nine months ended September 30, September 30, --------------------- ----------------------- 2000 1999 2000 1999 -------- ---------- ---------- ---------- (Unaudited) (Unaudited) REVENUE: Title insurance premiums .................. $561,705 $ 236,895 $1,357,109 $ 726,869 Escrow and other title-related fees ....... 134,595 50,011 325,337 157,343 Real estate related services .............. 49,309 17,387 116,256 56,455 Interest and investment income, including realized gains and losses ............... 26,618 5,961 61,963 19,747 Other income .............................. 17,876 31,583 64,737 83,516 -------- ---------- ---------- ---------- 790,103 341,837 1,925,402 1,043,930 EXPENSES: Personnel costs ........................... 247,900 96,831 600,371 311,137 Other operating expenses .................. 168,927 84,359 447,865 244,391 Agent commissions ......................... 254,079 109,638 613,085 325,235 Provision for claim losses ................ 28,085 14,864 67,855 45,194 Interest expense .......................... 16,821 4,358 41,512 10,047 -------- ---------- ---------- ---------- Total expenses ........................ 715,812 310,050 1,770,688 936,004 -------- ---------- ---------- ---------- Earnings before amortization of cost in excess of net assets acquired .................... 74,291 31,787 154,714 107,926 Amortization of cost in excess of net assets acquired ....................... 10,614 1,571 24,142 3,968 -------- ---------- ---------- ---------- Earnings before income taxes ................. 63,677 30,216 130,572 103,958 Income tax expense ........................... 26,107 11,609 59,762 41,843 -------- ---------- ---------- ---------- Net earnings .......................... $ 37,570 $ 18,607 $ 70,810 $ 62,115 ======== ========== ========== ========== Basic earnings per share ..................... $ 0.56 $ 0.62 $ 1.27 $ 2.05 ======== ========== ========== ========== Weighted average shares outstanding, basic basis .................................... 67,496 29,861 55,582 30,353 ======== ========== ========== ========== Diluted earnings per share ................... $ 0.54 $ 0.60 $ 1.23 $ 1.95 ======== ========== ========== ========== Weighted average shares outstanding, diluted basis ..................................... 69,971 31,169 57,467 32,037 ======== ========== ========== ========== Cash dividends per share ..................... $ 0.10 $ 0.07 $ 0.30 $ 0.21 ======== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements 4 5 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (In thousands)
Three months ended Nine months ended September 30, September 30, ------------------ -------------------- 2000 1999 2000 1999 ------- -------- -------- -------- (Unaudited) (Unaudited) Net earnings .................................... $37,570 $ 18,607 $ 70,810 $ 62,115 Other comprehensive earnings (loss): Unrealized gains (losses) on investments, net(1) ..................................... 1,391 (7,379) 1,796 (17,378) Reclassification adjustments for (gains) losses included in net earnings(2) ................. 15 692 (418) (139) ------- -------- -------- -------- Other comprehensive earnings (loss) ............. 1,406 (6,687) 1,378 (17,517) ------- -------- -------- -------- Comprehensive earnings .......................... $38,976 $ 11,920 $ 72,188 $ 44,598 ======= ======== ======== ========
- ---------- (1) Net of income tax expense (benefit) of $927 and $(4,600) and $1,197 and $(11,682) for the three months and nine months ended September 30, 2000 and 1999, respectively. (2) Net of income tax expense (benefit) of $(10) and $(431) and $279 and $93 for the three months and nine months ended September 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)
Nine months ended September 30, ---------------------- 2000 1999 --------- --------- (Unaudited) Cash flows from operating activities: Net earnings ............................................................... $ 70,810 $ 62,115 Reconciliation of net earnings to net cash provided by operating activities: Depreciation and amortization .......................................... 69,963 21,425 Net increase (decrease) in reserve for claim losses .................... (2,267) 19,031 Net increase in provision for possible losses other than claims ........ 911 89 Gain on sales of assets ................................................ (4,703) (232) Equity (gains) losses of unconsolidated partnerships ................... 281 (729) Amortization of LYONs original issue discount .......................... -- 552 Change in assets and liabilities, net of effects from acquisitions: Net increase in leases and lease securitization residual interests ..... (10,275) (34,887) Net increase in cash pledged to secure trust and escrow deposits ....... 196,829 -- Net (increase) decrease in trade receivables ........................... (9,708) 6,751 Net (increase) decrease in prepaid expenses and other assets ........... 3,172 (9,246) Net decrease in accounts payable and accrued liabilities ............... (47,115) (1,788) Net increase (decrease) in income taxes ................................ 38,769 (9,631) --------- --------- Net cash provided by operating activities ....................................... 306,667 53,450 --------- --------- Cash flows from investing activities: Proceeds from sale of real estate .......................................... 6,170 946 Proceeds from sale of title plant .......................................... -- 1,100 Proceeds from sales and maturities of investments .......................... 565,640 339,396 Collections of notes receivable ............................................ 10,839 2,116 Additions to title plants .................................................. (404) (1,799) Additions to property and equipment ........................................ (27,704) (19,233) Additions to investments ................................................... (700,867) (345,710) Additions to notes receivable .............................................. (10,155) (9,670) Additions to real estate and joint ventures ................................ -- (285) Sale of a subsidiary, net of cash .......................................... -- 2,468 Acquisitions of businesses, net of cash acquired ........................... (389,819) -- --------- --------- Net cash used in investing activities ........................................... (546,300) (30,671) --------- ---------
See Notes to Condensed Consolidated Financial Statements. 6 7 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine months ended September 30, --------------------- 2000 1999 --------- -------- (Unaudited) Cash flows from financing activities: Borrowings ................................... $ 606,885 $ 66,262 Debt service payments ........................ (50,061) (19,284) Dividends paid ............................... (16,129) (6,539) Purchase of treasury stock ................... (551) (62,273) Stock options exercised ...................... 33,456 2,772 --------- -------- Net cash provided by (used in) financing activities 573,600 (19,062) --------- -------- Net increase in cash and cash equivalents ......... 333,967 3,717 Cash and cash equivalents at beginning of period .. 38,569 42,492 --------- -------- Cash and cash equivalents at end of period ........ $ 372,536 $ 46,209 ========= ======== Supplemental cash flow information: Income taxes paid ............................ $ 7,098 $ 48,920 ========= ======== Interest paid ................................ $ 41,606 $ 14,606 ========= ======== Noncash investing and financing activities: Dividends declared and unpaid ................ $ 6,809 $ 1,858 ========= ========
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 Report on Form 8-K, dated March 20, 2000, as amended by filings on April 10, 2000, May 22, 2000 and June 7, 2000. Certain reclassifications have been made in the 1999 Condensed Consolidated Financial Statements to conform to classifications used in 2000. Note B - Merger with Chicago Title Corporation On March 20, 2000, Chicago Title Corporation ("Chicago Title") merged with and into the Company pursuant to an Agreement and Plan of Merger, dated August 1, 1999, as amended on October 13, 1999. Pursuant to the merger agreement, Chicago Title stockholders received aggregate merger consideration valued at 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 valued 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 was accounted for as a purchase. The Company has recorded certain preliminary purchase accounting adjustments, which were 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 in 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 from March 20, 2000, the merger date, through September 30, 2000. A statement of consolidated stockholders' equity from December 31, 1999 to September 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 Income (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 .. 2,149 -- 27,167 -- -- -- -- Tax benefit associated with the exercise of options ................ -- -- 6,288 -- -- -- -- Other comprehensive income -- unrealized gain on investments and other financial instruments ............ -- -- -- -- 1,378 -- -- Acquisition of Chicago Title Corporation ............ 38,761 4 510,762 -- -- -- -- Retirement of treasury stock .................. (12,075) (1) (136,829) -- -- (12,075) 136,830 Cash dividends ............. -- -- -- (20,226) -- -- -- Net earnings ............... -- -- -- 70,810 -- -- -- ------- --- --------- --------- ------- ------- --------- Balance, September 30, 2000 ... 68,059 $ 7 $ 654,347 $ 378,369 $(4,597) -- $ -- ======= === ========= ========= ======= ======= =========
In connection with the merger, the Company entered into an $800.0 million syndicated credit agreement. The credit agreement provides for three distinct credit facilities: (i) a $100.0 million, 18-month revolving credit facility; (ii) a $250.0 8 9 million, 6-year revolving credit facility; and, (iii) 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%. Amounts borrowed under the credit agreement were used to finance the cash portion of the merger consideration, to refinance previously existing indebtedness, to pay fees and expenses incurred in connection with the merger and to fund other general corporate purposes. Selected unaudited pro forma combined results of operations for the nine-month periods ended September 30, 2000 and 1999, assuming the merger had occurred as of January 1, 2000 and January 1, 1999, and using actual general and administrative expenses prior to the merger, are set forth below:
Nine months ended September 30, ----------------------------- 2000 1999 ---------- ---------- (In thousands, except per share data) Total revenue.......................................... $2,257,662 $2,559,208 Net earnings before merger-related expenses and non-recurring charges............................ $ 81,833 $ 101,491 Net earnings........................................... $ 54,536 $ 101,491 Basic net earnings per share before merger-related expenses and non-recurring charges................... $ 1.23 $ 1.47 Diluted net earnings per share before merger-related expenses and non-recurring charges................... $ 1.19 $ 1.42 Basic net earnings per share........................... $ 0.82 $ 1.47 Diluted net earnings per share......................... $ 0.79 $ 1.42
Note C - Earnings Per Share The Company presents "basic" earnings per share, representing net earnings divided by the weighted average shares outstanding (excluding all common stock equivalents), and "diluted" earnings per share, representing the dilutive effect of all common stock equivalents. The following table illustrates the computation of basic and diluted earnings per share:
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2000 1999 2000 1999 ------- ------- ------- ------- (In thousands, except (In thousands, except per share amounts) per share amounts) Net earnings, basic basis .................. $37,570 $18,607 $70,810 $62,115 Plus: Impact of assumed conversion of the LYONs, net of applicable incomes taxes ............................... -- -- -- 263 ------- ------- ------- ------- Diluted earnings ........................... $37,570 $18,607 $70,810 $62,378 ======= ======= ======= ======= Weighted average shares outstanding during the period, basic basis .................. 67,496 29,861 55,582 30,353 Plus: Common stock equivalent shares assumed from conversion of options .......... 2,475 1,308 1,885 1,212 Common stock equivalent shares assumed from conversion of LYONs ............ -- -- -- 472 ------- ------- ------- ------- Weighted average shares outstanding during the period, diluted basis ................ 69,971 31,169 57,467 32,037 ======= ======= ======= ======= Basic earnings per share ................... $ 0.56 $ 0.62 $ 1.27 $ 2.05 ======= ======= ======= ======= Diluted earnings per share ................. $ 0.54 $ 0.60 $ 1.23 $ 1.95 ======= ======= ======= =======
9 10 Note D - Segment Information During the first quarter of 2000, the Company restructured its business segments to more accurately reflect 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 from March 20, 2000, the merger date, through September 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 NINE MONTHS ENDED: TITLE RELATED SEPTEMBER 30, 2000 INSURANCE SERVICES CORPORATE TOTAL - ------------------ ---------- ----------- --------- ---------- (Dollars in thousands) Total revenue ............... $1,736,037 $117,190 $ 72,175 $1,925,402 ========== ======== ========= ========== Operating earnings (loss) .................... $ 173,351 $ 15,800 $ (9,067) $ 180,084 Interest and investment income, including realized gains and losses . 53,591 934 7,438 61,963 Depreciation and amortization expense ...... 56,333 2,060 11,570 69,963 Interest expense ............ 1,077 22 40,413 41,512 ---------- -------- --------- ---------- Earnings (loss) before income taxes .............. 169,532 14,652 (53,612) 130,572 Income tax expense (benefit) ................. 65,189 6,297 (11,724) 59,762 ---------- -------- --------- ---------- Net earnings (loss) ......... $ 104,343 $ 8,355 $ (41,888) $ 70,810 ========== ======== ========= ========== Assets ...................... $3,341,090 $121,087 $ 355,846 $3,818,023 ========== ======== ========= ========== REAL ESTATE NINE MONTHS ENDED: TITLE RELATED SEPTEMBER 30, 1999 INSURANCE SERVICES CORPORATE TOTAL - ------------------ ---------- ----------- --------- ---------- (Dollars in thousands) Total revenue ............... $ 900,541 $ 56,739 $ 86,650 $1,043,930 ========== ======== ========= ========== Operating earnings (loss) .................... $ 117,279 $ 4,587 $ (6,183) $ 115,683 Interest and investment income, including realized gains and losses . 16,329 284 3,134 19,747 Depreciation and amortization expense ...... 14,500 135 6,790 21,425 Interest expense ............ -- 20 10,027 10,047 ---------- -------- --------- ---------- Earnings (loss) before income taxes .............. 119,108 4,716 (19,866) 103,958 Income tax expense (benefit) ................. 44,883 853 (3,893) 41,843 ---------- -------- --------- ---------- Net earnings (loss) ......... $ 74,225 $ 3,863 $ (15,973) $ 62,115 ========== ======== ========= ========== Assets ...................... $ 723,308 $ 53,855 $ 222,887 $1,000,050 ========== ======== ========= ==========
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. This segment coordinates its activities with those of the real estate related 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 Related Services This segment, consisting of various real estate related 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 ease of management. Corporate The corporate segment consists of the operations of the parent holding company, as well as the operations of Micro General Corporation, FNF Capital, Inc. and Express Network, Inc., which was sold in the second quarter of 2000, as well as 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 primarily relate to 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, have been eliminated from the segment information provided. Note E - 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. On July 25, 2000, the Company's Board of Directors declared a cash dividend of $0.10 per share, payable on October 27, 2000 to stockholders of record as of October 13, 2000. 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. 11 12 Factors Affecting Comparability Our Condensed Consolidated Statements of Earnings include the results of operations of Chicago Title for the period from March 20, 2000, the merger date, through September 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 nine-month periods ended September 30, 2000 were $220.0 million and $625.4 million, respectively. 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. ("ENI"), which was sold in the second quarter of 2000, and existing goodwill associated with ENI and the write-off of obsolete software. RESULTS OF OPERATIONS Net earnings for the third quarter of 2000 were $37.6 million, or $0.54 per diluted share, as compared with net earnings of $18.6 million, or $0.60 per diluted share, for the third quarter of 1999. Net earnings for the nine-month period ended September 30, 2000 were $70.8 million, or $1.23 per diluted share. Excluding the non-recurring, non-title related charges we recorded in the first quarter of 2000 of $13.4 million, or $0.23 per diluted share, net earnings for the nine-month period were $84.2 million, or $1.46 per diluted share, as compared with net earnings for the corresponding period in 1999 of $62.1 million, or $1.95 per diluted share. Excluding the effects of amortization of cost in excess of net assets acquired, net earnings were $47.9 million, or $0.68 per diluted share, for the third quarter of 2000, compared with $20.2 million, or $0.65 per diluted share, for the third 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 $107.7 million, or $1.87 per diluted share for the nine-month period ended September 30, 2000, as compared with $66.1 million, or $2.06 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 Nine months ended September 30, September 30, --------------------------- ---------------------------- 2000 1999 2000 1999 -------- ------- --------- ------- (In thousands, except (In thousands, except per share data) per share data) Net earnings ........................... $ 37,570 $18,607 $ 70,810 $62,115 Amortization of cost in excess of net assets acquired ................. 10,614 1,571 24,142 3,968 Tax effect of amortization of cost in excess of net assets acquired ....... (267) -- (583) -- Non-recurring charges, net of tax ...... -- -- 13,371 -- -------- ------- --------- ------- Net earnings before amortization of cost in excess of net assets acquired and non-recurring charges .. $ 47,917 $20,178 $ 107,740 $66,083 ======== ======= ========= ======= Diluted net earnings per share before amortization of cost in excess of net assets acquired and non-recurring charges ............................. $ 0.68 $ 0.65 $ 1.87 $ 2.06 ======== ======= ========= ======= Diluted weighted average shares outstanding ......................... 69,971 31,169 57,467 32,037 ======== ======= ========= =======
Our acquisition of Chicago Title on March 20, 2000, has impacted the mix of business between our direct and agency operations as compared with 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 in subsequent periods. As a result of the shift in mix of business along with steady increases in interest rates, total title premiums, on a pro forma basis, have decreased in 2000 as compared with pro forma 1999 total title premiums. 12 13 The following table presents information regarding the components of title insurance premiums:
Three months ended Nine months ended September 30, September 30, ------------------------------------------ -------------------------------------------- % of % of % of % of 2000 Total 1999 Total 2000 Total 1999 Total -------- ----- -------- ----- ---------- ----- -------- ----- (Dollars in thousands) (Dollars in thousands) Title premiums from direct operations ............. $235,279 41.9% $ 99,524 42.0% $ 571,107 42.1% $319,166 43.9% Title premiums from agency operations ............. 326,426 58.1% 137,371 58.0% 786,002 57.9% 407,703 56.1% -------- ----- -------- ----- ---------- ----- -------- ----- Total ........... $561,705 100.0% $236,895 100.0% $1,357,109 100.0% $726,869 100.0% ======== ===== ======== ===== ========== ===== ======== =====
The decrease in real estate activity from 1999 has been more than offset by the addition of the Chicago Title operations and an increase in the average fee per file. The increase in fee per file is consistent with a return to more normalized levels of refinance activity and the continuing increase in home prices, as well as increased commercial activity as we continue to grow our National Commercial Division. Escrow and other title-related fees for the three and nine-month periods ended September 30, 2000 were $134.6 million and $325.3 million, respectively, as compared with $50.0 million and $157.3 million, respectively, for the corresponding periods of the prior year. The trend in escrow and title-related fees is generally consistent with that of our direct title premiums. Revenues from real estate related services were $49.3 million in the third quarter of 2000 as compared with $17.4 million for the prior year quarter. On a year-to-date basis, revenues were $116.3 million in 2000 and $56.5 million in 1999. The increase in revenue for the three and nine-month periods is primarily the result of the acquisition of Chicago Title as well as increases in revenue from our credit reporting, flood monitoring, home warranty insurance and tax qualifying property exchange services. Interest and investment income was $26.6 million in the third quarter of 2000 as compared with $6.0 million in the third quarter of 1999. The increase in interest and investment income earned during the third quarter of 2000 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 in the third quarter of 2000 was partially due to net realized gains on the sale of assets of $2.7 million as compared with net realized losses of $1.1 million in the third quarter of 1999. Interest and investment income for the nine-month period ended September 30, 2000 was $62.0 million as compared with $19.7 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 $4.7 million as compared with net realized gains of $0.2 million for the corresponding 1999 period. Other income represents revenue generated by Micro General Corporation, our majority-owned information-services subsidiary, FNF Capital, Inc., our equipment leasing subsidiary and ENI, which was sold in the second quarter of 2000. Other income for the third quarter of 2000 was $17.9 million as compared with $31.6 million for the third quarter of 1999. On a year-to-date basis, other income was $64.7 million for the 2000 period as compared with $83.5 million in 1999. The decrease in other income is due to the sale of ENI in the second quarter of 2000 as well as decreases in externally generated revenue by Micro General Corporation. 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 and escrow and other title-related fees 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 third quarter of 2000 personnel costs were $247.9 million, or 31.4% of total revenue, compared with $96.8 million, or 28.3% of total revenue for the corresponding 1999 quarter. For the nine-month periods ended September 30, 2000 and 1999, personnel costs were $600.4 million, or 31.2% of total revenue, and $311.1 million, or 29.8% of total revenue, respectively. We have taken significant measures to maintain appropriate personnel levels and costs relative to the volume and mix of 13 14 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. 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 (including personnel costs associated with information technology support), 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 $168.9 million, or 21.4% of total revenues for the third quarter of 2000 as compared with $84.4 million, or 24.7% of total revenues for the third quarter of 1999. For the nine-month period ended September 30, 2000, these expenses were $431.4 million, excluding the non-recurring charges we took in the first quarter of 2000, and $244.4 million for the corresponding 1999 period. As a percentage of total revenue, other operating expenses for the 2000 period were 22.4% as compared with 23.4% 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 77.8% of agent title premiums in the third quarter of 2000 as compared with 79.8% of agent title premiums for the third quarter of 1999. Agent commissions, as a percentage of agent title premiums, for the nine-month periods ended September 30, 2000 and 1999 were 78.0% 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 5.0% in the third quarter of 2000 as compared with 6.3% in the third 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 nine-month periods ended September 30, 2000 was $16.8 million and $41.5 million, respectively. Interest expense for the three and nine-month periods ended September 30, 1999 was $4.4 million and $10.0 million, respectively. The increase in interest expense for the 2000 periods is attributable to the increase in outstanding notes payable, primarily related to the financing of the Chicago Title merger, and an increase in certain indices on which our variable interest rates are based. Amortization of cost in excess of net assets acquired was $10.6 million in the third quarter of 2000 as compared with $1.6 million in the third quarter of 1999. These expenses totaled $24.1 million and $4.0 million for the nine-month periods ended September 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 $731.8 million. As a result, amortization of cost in excess of net assets acquired has increased accordingly. Income tax expense, as a percentage of earnings before income taxes, was 41.0% and 38.4% for the third quarters of 2000 and 1999, respectively. For the nine-month periods ended September 30, 2000 and 1999, income tax expense, as a percentage of earnings before income taxes was 45.8% and 40.2%, 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 valued at 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, 14 15 resulting in the issuance of approximately 38.8 million shares of our common stock valued at an average price during the pplicable period of $13.1771 per share and the payment of approximately $570.2 million in cash. In connection with the merger, we entered into an $800.0 million syndicated credit agreement. The credit agreement provides for three distinct credit facilities: (i) a $100.0 million, 18-month revolving credit facility; (ii) a $250.0 million, 6-year revolving credit facility; and, (iii) 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 us by certain independent agencies, and is unsecured. The initial interest rate is LIBOR plus 1.50%. Amounts borrowed under the credit agreement were used to finance the cash portion of the merger consideration, to refinance 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 September 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 we 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 related 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 five 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 four were filed by private law firms in State and Federal Courts in San Francisco and Los Angeles. In February 2000, we reached a settlement of the lawsuit filed by the California Department of Insurance. The settlement does not require us to pay any fine or penalty. Two of the other lawsuits brought by private firms have been dismissed. We are vigorously defending the remaining lawsuits. Chicago Title was named as a defendant in three similar private lawsuits and is a member of the defendant class alleged in the action filed by the California Attorney General. Two of the private lawsuits against Chicago Title have been dismissed and we are vigorously defending the remaining lawsuit. We do not believe that the resolution of these lawsuits will have a material impact on us. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 27 Financial Data Schedule (included only with electronic filing) (b) Reports on Form 8-K: None 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: November 10, 2000 16 EX-27 2 a66987ex27.txt FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from Fidelity National Financial, Inc. Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Earnings as of and for the nine months ended September 30, 2000 and is qualified in its entirety by reference to such Form 10-Q for the quarterly period ended September 30, 2000. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 1,146,080 0 0 53,289 0 512 1,608,344 372,536 0 0 3,818,023 908,440 0 0 0 787,075 0 0 7 1,028,119 3,818,023 1,357,109 57,260 4,703 506,330 67,855 0 1,726,975 130,572 59,762 70,810 0 0 0 70,810 1.27 1.23 0 0 0 0 0 0 0
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