10-Q 1 a74338e10-q.txt FORM 10-Q 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, 2001 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 2, 2001, 86,366,541 shares of the Registrant's Common Stock were outstanding. 2 FORM 10-Q QUARTERLY REPORT Quarter Ended June 30, 2001 INDEX
Page ---- Part I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements A. Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000 3 B. Condensed Consolidated Statements of Earnings for the three months and six months ended June 30, 2001 and 2000 4 C. Condensed Consolidated Statements of Comprehensive Earnings for the three months and six months ended June 30, 2001 and 2000 5 D. Condensed Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2001 6 E. Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000 7 F. Notes to Condensed Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosure About Market Risk 17 Part II: OTHER INFORMATION Item 1. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 19
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, 2001 2000 ---------- ------------ (Unaudited) ASSETS Investments: Fixed maturities available for sale, at fair value at June 30, 2001 includes $191,158 and, at December 31, 2000 includes $248,512 of pledged fixed maturity securities related to secured trust deposits ................................... $1,082,483 $1,188,681 Equity securities, at fair value ......................................... 38,673 39,959 Other long-term investments, at fair value ............................... 41,380 46,870 Short-term investments, at June 30, 2001 includes $270,921 and at December 31, 2000 includes $210,861 of pledged short-term investments related to secured trust deposits ............ 627,434 409,317 Investments in real estate and partnerships, net ......................... 441 504 ---------- ---------- Total investments ............................................... 1,790,411 1,685,331 Cash and cash equivalents at June 30, 2001 includes $184,418 and, at December 31, 2000 includes $132,141 of pledged cash related to secured trust deposits ................................................... 381,331 262,955 Leases and residual interests in securitizations .................................. 193,827 151,052 Trade receivables, net ............................................................ 151,258 127,633 Notes receivable, net ............................................................. 15,819 16,381 Income taxes receivable ........................................................... -- 22,343 Cost in excess of net assets acquired, net ........................................ 792,631 770,060 Prepaid expenses and other assets ................................................. 203,980 231,118 Title plants ...................................................................... 276,038 275,295 Property and equipment, net ....................................................... 166,155 172,838 Deferred tax asset ................................................................ 116,252 118,979 ---------- ---------- $4,087,702 $3,833,985 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities ................................. $ 377,658 $ 446,394 Notes payable ............................................................ 600,328 791,430 Reserve for claim losses ................................................. 894,063 907,482 Secured trust deposits ................................................... 639,304 576,350 Income taxes payable ..................................................... 74,714 -- ---------- ---------- 2,586,067 2,721,656 Minority interests ....................................................... 8,218 5,592 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; issued, 86,060,287 as of June 30, 2001 and 76,449,349 as of December 31, 2000 ..................................................... 9 8 Additional paid-in capital ............................................... 964,250 695,140 Retained earnings ........................................................ 522,655 409,216 ---------- ---------- 1,486,914 1,104,364 Accumulated other comprehensive earnings ................................. 6,503 2,373 ---------- ---------- 1,493,417 1,106,737 ---------- ---------- $4,087,702 $3,833,985 ========== ==========
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, --------------------------- --------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) REVENUE: Title insurance premiums ................................. $ 667,539 $ 535,004 $ 1,202,379 $ 795,404 Escrow and other title-related fees ...................... 187,573 132,517 328,972 190,742 Real estate related services ............................. 62,309 46,077 118,859 66,947 Interest and investment income, including realized gains and losses .............................. 28,102 20,645 55,950 35,345 Other income ............................................. 16,025 23,399 33,252 46,861 ----------- ----------- ----------- ----------- 961,548 757,642 1,739,412 1,135,299 ----------- ----------- ----------- ----------- EXPENSES: Personnel costs .......................................... 294,373 241,764 545,197 352,471 Other operating expenses ................................. 204,261 168,375 380,270 278,938 Agent commissions ........................................ 256,028 233,098 477,956 359,006 Provision for claim losses ............................... 33,714 25,185 60,455 39,770 Interest expense ......................................... 9,139 18,112 23,521 24,691 ----------- ----------- ----------- ----------- Total expenses .................................. 797,515 686,534 1,487,399 1,054,876 ----------- ----------- ----------- ----------- Earnings before amortization of cost in excess of net assets acquired ................................... 164,033 71,108 252,013 80,423 Amortization of cost in excess of net assets acquired ......... 11,777 11,874 23,499 13,528 ----------- ----------- ----------- ----------- Earnings before income taxes and cumulative effect of a change in accounting principle ............... 152,256 59,234 228,514 66,895 Income tax expense ............................................ 62,425 27,863 93,691 33,655 ----------- ----------- ----------- ----------- Earnings before cumulative effect of a change in accounting principle ..................................... 89,831 31,371 134,823 33,240 Cumulative effect of a change in an accounting principle, net of income tax benefit of $3,035 ........... (5,709) -- (5,709) -- ----------- ----------- ----------- ----------- Net earnings .................................... $ 84,122 $ 31,371 $ 129,114 $ 33,240 =========== =========== =========== =========== Basic earnings per share before cumulative effect of a change in accounting principle ...... $ 1.04 $ 0.43 $ 1.59 $ 0.61 Cumulative effect of a change in accounting principle ............................ (0.06) -- (0.07) -- ----------- ----------- ----------- ----------- Basic earnings per share ................................. $ 0.98 $ 0.43 $ 1.52 $ 0.61 =========== =========== =========== =========== Weighted average shares outstanding, basic basis ........................................... 86,053 73,531 84,859 54,515 =========== =========== =========== =========== Diluted earnings per share before cumulative effect of a change in accounting principle ...... $ 1.02 $ 0.41 $ 1.55 $ 0.59 Cumulative effect of a change in accounting principle ............................ (0.07) -- (0.07) -- ----------- ----------- ----------- ----------- Diluted earnings per share ............................... $ 0.95 $ 0.41 $ 1.48 $ 0.59 =========== =========== =========== =========== Weighted average shares outstanding, diluted basis ....... 88,266 75,753 87,433 56,261 =========== =========== =========== =========== Cash dividends per share ................................. $ 0.09 $ 0.09 $ 0.18 $ 0.18 =========== =========== =========== ===========
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, ----------------------- ----------------------- 2001 2000 2001 2000 --------- --------- --------- --------- (Unaudited) (Unaudited) Net earnings ................................................ $ 84,122 $ 31,371 $ 129,114 $ 33,240 Other comprehensive earnings (loss): Unrealized gains (losses) on investments, net (1) ......... 273 (6,231) 5,029 405 Reclassification adjustments for (gains) losses included in net earnings (2) ............................ (1,795) 1,245 (899) (433) --------- --------- --------- --------- Other comprehensive earnings (loss) ......................... (1,522) (4,986) 4,130 (28) --------- --------- --------- --------- Comprehensive earnings ...................................... $ 82,600 $ 26,385 $ 133,244 $ 33,212 ========= ========= ========= =========
(1) Net of income tax expense (benefit) of $182 and $(4.2) million and $3.4 million and $270 for the three months and six months ended June 30, 2001 and 2000, respectively. (2) Net of income tax expense (benefit) of $1.2 million and $(830) and $599 and $289 for the three months and six months ended June 30, 2001 and 2000, respectively. See Notes to Condensed Consolidated Financial Statements 5 6 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands)
Accumulated Common Stock Additional Other ---------------------- Paid-in Retained Comprehensive Shares Amount Capital Earnings Earnings --------- --------- ---------- --------- ------------- (In thousands, except per share amounts) Balance, December 31, 2000 ............................. 76,449 $ 8 $ 695,140 $ 409,216 $ 2,373 Exercise of stock options ......................... 756 -- 8,234 -- -- Tax benefit associated with the exercise of options ....................... -- -- 6,872 -- -- Other comprehensive earnings-- unrealized gain on investments and other financial instruments ............... -- -- -- -- 4,130 Common stock offering, net ........................ 8,855 1 256,300 -- -- Capital transaction of investments accounted for under the equity method ................................. -- -- (2,296) -- -- Cash dividends declared ($0.18 per share) ......... -- -- -- (15,675) -- Net earnings ...................................... -- -- -- 129,114 -- --------- --------- --------- --------- --------- Balance, June 30, 2001 ................................. 86,060 $ 9 $ 964,250 $ 522,655 $ 6,503 ========= ========= ========= ========= =========
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, -------------------------- 2001 2000 --------- --------- (Unaudited) Cash flows from operating activities: Net earnings ............................................................................. $ 129,114 $ 33,240 Reconciliation of net earnings to net cash provided by operating activities: Cumulative effect of a change in accounting principle ................................ 8,744 -- Depreciation and amortization ........................................................ 54,357 46,551 Net decrease in reserve for claim losses ............................................. (13,419) (61) Net increase in provision for possible losses other than claims ...................... 1,537 565 Gain on sales of assets .............................................................. (5,298) (1,970) Change in assets and liabilities, net of effects from acquisitions: Net increase in leases and lease securitization residual interests ................... (48,875) (5,046) Net increase (decrease) in secured trust deposits .................................... 7,971 (11,160) Tax benefit associated with the exercise of stock options ............................ 6,872 -- Net increase in trade receivables .................................................... (24,498) (23) Net decrease in prepaid expenses and other assets .................................... 25,995 17,578 Net decrease in accounts payable, accrued liabilities and minority interests ......... (73,913) (62,209) Net increase in income taxes ......................................................... 96,736 17,904 --------- --------- Net cash provided by operating activities .................................................... 165,323 35,369 --------- --------- Cash flows from investing activities: Proceeds from sale of real estate .................................................... -- 7 Proceeds from sales of investment securities available for sale ...................... 516,717 462,986 Proceeds from maturities of investment securities available for sale ................. 71,783 589 Proceeds from sale of assets ......................................................... 1,352 -- Collections of notes receivable ...................................................... 2,963 8,675 Additions to title plants ............................................................ (1,155) (56) Additions to property and equipment .................................................. (23,375) (16,718) Additions to investments ............................................................. (467,822) (583,460) Net additions from short-term investment securities .................................. (218,126) (7,842) Additions to notes receivable ........................................................ (4,211) (8,364) Acquisitions of businesses, net of cash acquired ..................................... (36,052) (389,819) --------- --------- Net cash used in investing activities ........................................................ (157,926) (534,002) --------- ---------
See Notes to Condensed Consolidated Financial Statements 7 8 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six months ended June 30, -------------------------- 2001 2000 --------- --------- (Unaudited) Cash flows from financing activities: Borrowings ...................................... $ 98,343 $ 600,910 Net proceeds from common stock offering ......... 256,301 -- Debt service payments ........................... (289,445) (47,761) Dividends paid .................................. (14,731) (9,408) Purchase of treasury stock ...................... -- (551) Stock options exercised ......................... 8,234 16,601 --------- --------- Net cash used in financing activities .................... 58,702 559,791 --------- --------- Net increase in cash and cash equivalents ................ 66,099 61,158 Cash and cash equivalents at beginning of period ......... 130,814 38,569 --------- --------- Cash and cash equivalents at end of period ............... $ 196,913 $ 99,727 ========= ========= Supplemental cash flow information: Income taxes paid (refunded) .................... $ (10,900) $ 6,038 ========= ========= Interest paid ................................... $ 23,288 $ 22,988 ========= ========= Noncash investing and financing activities: Dividends declared and unpaid ................... $ 7,925 $ 6,722 ========= =========
See Notes to Condensed Consolidated Financial Statements 8 9 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, 2000. Certain reclassifications have been made in the 2000 Condensed Consolidated Financial Statements to conform to classifications used in 2001. Note B - Recent Developments On January 3, 2001 the Company acquired International Data Management Corporation ("IDM"), a leading provider of real estate information services, for $20.8 million in cash. IDM's real estate information databases contain over 100 million real property ownership and sales records from the continental United States. The databases are updated daily to reflect new sales, mortgage information and other changes in real property ownership. The acquisition was accounted for as a purchase and the Company is amortizing cost in excess of net assets acquired in connection with the acquisition on a straight-line basis over 15 years. On June 19, 2001 the Company acquired Risco, Inc., the third largest multiple listing service vendor in the United States, for approximately $12.0 million. The acquisition was accounted for as a purchase and the Company is amortizing the cost in excess of net assets acquired in connection with the acquisition on a straight-line basis over 15 years. On August 1, 2001, the Company acquired approximately 77% of the outstanding common stock of Fidelity National Information Solutions, Inc. (NASDAQ:FNIS) ("FNIS"), formerly VISTA Information Solutions, Inc. (NASDAQ: VINF), a provider of real estate information products and services, including multiple listing services and environmental data and disclosure information businesses. In the transaction, the Company combined its tax, credit, flood, appraisal and property records businesses with FNIS's real estate information operations and products. Note C - 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 1.9440 shares of Company common stock and $26.00 in cash for each share of Chicago Title common stock, resulting in the issuance of approximately 42.6 million shares of Company common stock valued at an average price during the applicable trading period of $11.9792 per share and the payment of approximately $570.2 million in cash. The merger was accounted for as a purchase, and the Company is amortizing cost in excess of net assets acquired in connection with the merger on a straight-line basis over 20 years. The Company's Condensed Consolidated Statements of Earnings for 2000 include the results of operations of Chicago Title for the period from March 20, 2000, the merger date, through June 30, 2000. 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, which has been paid in full and terminated, see Note E; (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 the Company by certain independent agencies, and is unsecured. The current interest rate is LIBOR plus 1.125%. Amounts borrowed under the credit agreement were used to finance the cash portion of the merger consideration, to 9 10 Fidelity National Financial, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements 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 six-month period ended June 30, 2000, assuming the merger had occurred as of January 1, 2000, and using actual general and administrative expenses prior to the merger, is set forth below:
Six months ended June 30, 2000 --------------------- (In thousands, except per share data) Total revenue .................................................. $ 1,467,559 Net earnings before merger-related expenses and non-recurring charges .................................... $ 43,929 Net earnings ................................................... $ 10,141 Basic net earnings per share before merger-related expenses and non-recurring charges ........................... $ 0.60 Diluted net earnings per share before merger-related expenses and non-recurring charges ........................... $ 0.59 Basic net earnings per share ................................... $ 0.14 Diluted net earnings per share ................................. $ 0.14
Note D - 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 Six months ended June 30, June 30, -------------------------- ----------------------- 2001 2000 2001 2000 ----------- -------- -------- -------- (In thousands, except (In thousands, except per share amounts) per share amounts) Net earnings, basic and diluted basis ................ $ 84,122 $ 31,371 $129,114 $ 33,240 =========== ======== ======== ======== Weighted average shares outstanding during the period, basic basis ............................ 86,053 73,531 84,859 54,515 Plus: Common stock equivalent shares assumed from conversion of options ........................... 2,213 2,222 2,574 1,746 ----------- -------- -------- -------- Weighted average shares outstanding during the period, diluted basis .......................... 88,266 75,753 87,433 56,261 =========== ======== ======== ======== Basic earnings per share ............................. $ 0.98 $ 0.43 $ 1.52 $ 0.61 =========== ======== ======== ======== Diluted earnings per share ........................... $ 0.95 $ 0.41 $ 1.48 $ 0.59 =========== ======== ======== ========
Note E - Common Stock Offering On January 24, 2001, the Company issued 8,855,000 shares of its common stock at a public offering price of $30.45 per share. Proceeds from this offering, net of underwriting discounts and commissions and other estimated related expenses, were $256.3 million. Net proceeds of $100.0 million were used to repay in full and terminate the $100.0 million, 18-month revolving credit facility and net proceeds of $149.5 million were used to pay down in full the $250.0 million, 6-year revolving credit facility. The remainder of the cash proceeds are available for general corporate purposes. 10 11 Fidelity National Financial, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements Note F - Segment Information Summarized financial information concerning the Company's reportable segments is shown in the following table. The amounts reported for 2000 include the results of operations for Chicago Title for the period from 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 RELATED CORPORATE JUNE 30, 2001 INSURANCE SERVICES AND OTHER TOTAL ----------------- ----------- ------------ ----------- ----------- (Dollars in thousands) Total revenue .............................................. $ 1,581,226 $ 119,800 $ 38,386 $ 1,739,412 ----------- ----------- ----------- ----------- Operating earnings ......................................... $ 219,930 $ 15,941 $ 14,571 $ 250,442 Interest and investment income, including realized gains and losses .............. 49,875 941 5,134 55,950 Depreciation and amortization expense ...................... 45,527 5,105 3,725 54,357 Interest expense ........................................... 2,481 3 21,037 23,521 ----------- ----------- ----------- ----------- Earnings (loss) before income taxes and cumulative effect of a change in accounting principle ............... 221,797 11,774 (5,057) 228,514 Income tax expense (benefit) ............................... 90,937 4,827 (2,073) 93,691 ----------- ----------- ----------- ----------- Earnings (loss) before cumulative effect of a change in accounting principle ............................ 130,860 6,947 (2,984) 134,823 Cumulative effect of a change in accounting principle, net of tax benefit ......................................... -- -- (5,709) (5,709) ----------- ----------- ----------- ----------- Net earnings (loss) ........................................ $ 130,860 $ 6,947 $ (8,693) $ 129,114 =========== =========== =========== =========== Assets ..................................................... $ 3,424,269 $ 197,364 $ 466,069 $ 4,087,702 =========== =========== =========== ===========
REAL ESTATE SIX MONTHS ENDED: TITLE RELATED CORPORATE JUNE 30, 2000 INSURANCE SERVICES AND OTHER TOTAL ----------------- ----------- ------------- ----------- ----------- (Dollars in thousands) Total revenue .............................................. $ 1,016,453 $ 67,868 $ 50,978 $ 1,135,299 =========== =========== =========== =========== Operating earnings (loss) .................................. $ 98,621 $ 8,169 $ (3,998) $ 102,792 Interest and investment Income, including realized gains and losses ......................................... 30,307 921 4,117 35,345 Depreciation and amortization expense ...................... 36,899 1,233 8,419 46,551 Interest expense ........................................... 2,135 21 22,535 24,691 ----------- ----------- ----------- ----------- Earnings (loss) before Income taxes ............................................. 89,894 7,836 (30,835) 66,895 Income tax expense (benefit) ............................... 45,226 3,942 (15,513) 33,655 ----------- ----------- ----------- ----------- Net earnings (loss) ........................................ $ 44,668 $ 3,894 $ (15,322) $ 33,240 =========== =========== =========== =========== Assets ..................................................... $ 3,169,756 $ 94,771 $ 425,254 $ 3,689,781 =========== =========== =========== ===========
11 12 Fidelity National Financial, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements 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 and Other 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 G - Dividends and Stock Repurchase Program On January 13, 2001, the Company's Board of Directors declared a cash dividend of $.09 per share, payable on April 27, 2001, to stockholders of record as of April 13, 2001. On April 25, 2001, the Company's Board of Directors declared a cash dividend of $.09 per share, payable on July 27, 2001, to stockholders of record as of July 13, 2001. On July 24, 2001, the Company's Board of Directors declared a cash dividend of $.10 per share, payable on October 26, 2001, to stockholders of record as of October 12, 2001. On April 25, 2001, the Company's Board of Directors authorized the Company to purchase up to 5,500,000 shares of its common stock. Purchases may be made from time to time by the Company in the open market, in block purchases or in privately negotiated transactions. To date, no such purchases have been made. Note H - Share and Per Share Restatement On July 25, 2001, the Company declared a 10% stock dividend to stockholders of record on August 9, 2001, payable on August 23, 2001. All data with respect to earnings per share, dividends per share and share information, including price per share where applicable, in the Condensed Consolidated Financial Statements has been retroactively adjusted to reflect the stock dividend. Note I - Cumulative Effect of a Change in Accounting Principle During the second quarter of 2001, the Company adopted Emerging Issues Task Force No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets", ("EITF 99-20"). EITF 99-20 sets forth the rules for recognizing interest income on all credit-sensitive mortgage and asset-backed securities and certain prepayment-sensitive securities including agency interest-only strips, whether purchased or retained in 12 13 securitization, and determining when these securities must be written down to fair value because of impairment. Adoption of EITF 99-20 requires the valuation of residual interest in securitizations to be recorded as a reduction to the carrying value of the residual interests through a charge to earnings when any portion of the decline in fair value is attributable to an impairment loss, rather than an unrealized loss in stockholders' equity. As such, the Company recorded a charge of $5.7 million, net of income tax benefit of $3.0 million, in the second quarter of 2001. Note J - Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that all business combinations be accounted for under the purchase method. The statement further requires separate recognition of intangible assets that meet one of two criteria. The statement applies to all business combinations initiated after June 30, 2001. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. Existing goodwill will continue to be amortized through the remainder of 2001 at which time amortization will cease and the Company will perform a transitional goodwill impairment test. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001. The Company is currently evaluating the impact of the new accounting standards on existing goodwill and other intangible assets. While the ultimate impact of the new accounting standards has yet to be determined, goodwill amortization expense for the six months ended June 30, 2001 was $23.5 million. 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 for 2001 include a $5.7 million, after-tax charge, reflected as a cumulative effect of a change in accounting principle, as a result of adopting EITF 99-20 during the second quarter of 2001. See Note I of Notes to Condensed Consolidated Financial Statements. Our Condensed Consolidated Statements of Earnings for 2000 include the results of operations of Chicago Title for the period from March 20, 2000, the merger date, through June 30, 2000. As a result, year over year comparisons may not be meaningful. 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 2001 were $84.1 million, or $0.95 per diluted share, as compared with net earnings of $31.4 million, or $0.41 per diluted share, for the second quarter of 2000. Net earnings for the second quarter of 2001 include a $5.7 million, or $0.07 per diluted share, after tax charge, reflected as a cumulative effect of a change in accounting principle, as a result of adopting EITF 99-20. See Note I of Notes to Condensed Consolidated Financial Statements. Earnings before the cumulative effect of a change in accounting principle were $89.8 million, or $1.02 per diluted share. 13 14 Net earnings for the six months ended June 30, 2001 were $129.1 million, or $1.48 per diluted share compared with net earnings for the six months ended June 30, 2000 of $33.2 million, or $0.59 per diluted share. Excluding the cumulative effect of a change in accounting principle of $5.7 million, or $0.07 per diluted share, recorded in the second quarter of 2001, and excluding the non-recurring, non-title related charges we recorded in the first quarter of 2000 of $13.4 million, or $0.24 per diluted share, net earnings for the six-month 2001 period were $134.8 million, or $1.55 per diluted share, as compared with net earnings for the corresponding period in 2000 of $46.6 million, or $0.83 per diluted share. The following table presents the calculation of net earnings before the cumulative effect of a change in accounting principle, amortization of cost in excess of net assets acquired and non-recurring charges. We believe that earnings before these charges better reflect the operational performance of our business.
Three months ended Six months ended June 30, June 30, --------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- (In thousands, (In thousands, except per share data) except per share data) Net earnings ............................................... $ 84,122 $ 31,371 $ 129,114 $ 33,240 Amortization of cost in excess of net assets acquired ................................... 11,777 11,874 23,499 13,528 Tax effect of amortization of cost in excess of net assets acquired ......................... (285) (316) (532) (316) Cumulative effect of a change in accounting principle, net of tax ...................... 5,709 -- 5,709 -- Non-recurring charges, net of tax .......................... -- -- -- 13,371 ----------- ----------- ----------- ----------- Net earnings before cumulative effect of a change in accounting principle, amortization of cost in excess of net assets acquired and non-recurring charges ............. $ 101,323 $ 42,929 $ 157,790 $ 59,823 =========== =========== =========== =========== Diluted net earnings per share before cumulative effect of a change in accounting principle, amortization of cost in excess of net assets acquired and non-recurring charges .................... $ 1.15 $ 0.57 $ 1.80 $ 1.06 =========== =========== =========== =========== Diluted weighted average shares outstanding ........................................... 88,266 75,753 87,433 56,261 =========== =========== =========== ===========
Economic conditions, including the steady increase in interest rates during the second half of 1999 through the first half of 2000, resulted in a significant decline in refinancing transactions in 2000, which shifted the real estate market during that period from a refinance-driven market to a more traditional market driven by new home purchases and resales. However, beginning in December 2000 and continuing through the second quarter of 2001, the Federal Reserve Board has reduced interest rates by 275 basis points, bringing interest rates down to their lowest level in nearly two years, which has significantly increased the volume of refinance activity. As a result of the steady decreases in interest rates, total title insurance premiums have increased for the six months ended June 30, 2001 as compared with the six months ended June 30, 2000 on a pro forma basis (assuming the Chicago Title merger occurred on January 1, 2000). The following table presents information regarding the components of title premiums:
Three months ended Six months ended June 30, June 30, -------------------------------------------------- ------------------------------------------------- % of % of % of % of 2001 Total 2000 Total 2001 Total 2000 Total ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) (Dollars in thousands) Title premiums from direct operations ........... 339,238 50.8% $ 233,362 43.6% $ 588,945 49.0% $ 335,828 42.2% Title premiums from agency operations ........... 328,301 49.2% 301,642 56.4% 613,434 51.0% 459,576 57.8% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total .......... $ 667,539 100.0% $ 535,004 100.0% $1,202,379 100.0% $ 795,404 100.0% ========== ========== ========== ========== ========== ========== ========== ==========
14 15 Total title premiums have increased in the second quarter of 2001 as compared with the second quarter of 2000 due to the increase in real estate and refinance activity as a result of decreasing interest rates. For the six-month period ending June 30, 2001, title premiums have increased as compared to the prior year period as a result of the increase in real estate and refinance activity as well as the inclusion of Chicago Title operations for a full year in 2001 versus a partial year in 2000. In both the three and six-month periods ended June 30, 2001, the increase in title premiums have been partially offset by a decrease in the average fee per file. The decrease in the average fee per file is consistent with the increased levels of refinance activity experienced during 2001. Escrow and other title-related fees for the three and six months ended June 30, 2001 were $187.6 million and $329.0 million, respectively, as compared with $132.5 million and $190.7 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. Revenues from real estate related services were $62.3 million in the second quarter of 2001, as compared with $46.1 million for the prior year quarter. On a year-to-date basis, revenues were $118.9 million in 2001 and $66.9 million in 2000. The increase in revenue for the three and six-month periods ended June 30, 2001 is primarily the result of increases in revenue from our market intelligence, credit reporting, field services, tax qualifying property exchange services and property records business (IDM), which was acquired in the first quarter of 2001. In addition, the increase in revenue for the 2001 year-to-date period is the result of the inclusion of Chicago Title operations for a full year in 2001 versus a partial year in 2000. Interest and investment income was $28.1 million in the second quarter of 2001, as compared with $20.6 million in the second quarter of 2000. The increase in interest and investment income earned during the second quarter of 2001 is primarily due to an increase in net realized gains on the sale of investments of $7.1 million. For the second quarter of 2001, net realized gains on the sale of investments were $4.5 million, as compared with net realized losses of $2.6 million in the second quarter of 2000. Interest and investment income for the six-month period ended June 30, 2001 was $56.0 million, as compared with $35.3 million for the corresponding period in 2000. The increase in interest and investment income earned in the 2001 year-to-date period is primarily due to an increase in invested assets as a result of the Chicago Title acquisition and the inclusion of Chicago Title for a full year in 2001 versus a partial year in 2000, as well as an increase in net realized gains on the sale of investments. We recorded net realized gains on the sale of investments in the 2001 period of $5.3 million, as compared with net realized gains of $2.0 million for the corresponding 2000 period. Other income represents revenue generated by Micro General Corporation, our majority-owned information-services subsidiary, FNF Capital, Inc., our equipment leasing subsidiary and Express Network, Inc., which was sold in the second quarter of 2000. Other income for the second quarter of 2001 was $16.0 million, as compared with $23.4 million for the second quarter of 2000. On a year-to-date basis, other income was $33.3 million for the 2001 period as compared with $46.9 million in 2000. The decrease in other income is due to the sale of Express Network, Inc. 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 second quarter of 2001 personnel costs were $294.4 million, or 30.6% of total revenue, compared with $241.8 million, or 31.9% of total revenue, for the corresponding 2000 quarter. For the six-month periods ended June 30, 2001 and 2000, personnel costs were $545.2 million, or 31.3% of total revenue, and $352.5 million, or 31.1% of total revenue, respectively. On a year-to-date, pro forma basis (assuming the Chicago Title merger occurred on January 1, 2000), personnel costs as a percentage of total revenues have decreased in the 2001 year-to-date period as compared with the 2000 year-to-date period. 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. 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, 15 16 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 $204.3 million, or 21.2% of total revenues, for the second quarter of 2001 as compared with $168.4 million, or 22.2% of total revenues, for the second quarter of 2000. For the six-month periods ended June 30, 2001 and 2000, these expenses were $380.3 million and $278.9 million, respectively. As a percentage of total revenue, other operating expenses for the 2001 period were 21.9% as compared with 24.6% for the 2000 period. Agent commissions represent the portion of policy premiums retained by agents pursuant to the terms of their respective agency contracts. Agent commissions were 78.0% of agent title premiums in the second quarter of 2001 as compared with 77.3% of agent title premiums for the second quarter of 2000. Agent commissions, as a percentage of agent title premiums, for the six-month periods ended June 30, 2001 and 2000 were 77.9% and 78.1%, 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 escrow losses. The estimate of anticipated title claims and escrow losses 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 second quarter of 2001, as compared with 4.7% in the second quarter of 2000. On a year-to-date basis, our provision for claim losses as a percentage of total title premiums was 5.0% in 2001 and 2000. Interest expense for the three and six-month periods ended June 30, 2001 was $9.1 million and $23.5 million, respectively. Interest expense for the three and six-month periods ended June 30, 2000 was $18.1 million and $24.7 million, respectively. The decrease in interest expense for the 2001 periods is attributable to the decrease in outstanding notes payable, primarily as a result of the paydown of $249.5 million in notes payable in connection with our common stock offering in January 2001 (See Note E of Notes to Condensed Consolidated Financial Statements) and a decrease in certain indices on which our variable interest rates are based. Amortization of cost in excess of net assets acquired was $11.8 million in the second quarter of 2001, as compared with $11.9 million in the second quarter of 2000. These expenses totaled $23.5 million and $13.5 million for the six-month periods ended June 30, 2001 and 2000, respectively. In connection with the acquisition of Chicago Title on March 20, 2000, we recorded estimated cost in excess of net assets acquired of approximately $762.3 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 47.0% for the second quarters of 2001 and 2000, respectively. For the six-month periods ended June 30, 2001 and 2000, income tax expense, as a percentage of earnings before income taxes, was 41.0% and 50.3%, 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 in the first quarter of 2000 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. 16 17 LIQUIDITY AND CAPITAL RESOURCES In connection with the Chicago Title merger, we entered into a syndicated credit agreement. The credit agreement provides for three distinct credit facilities: - $100.0 million, 18 month revolving credit facility due September 30, 2001, repaid and terminated on January 24, 2001; - $250.0 million, 6 year revolving credit facility due March 19, 2006; and - $450.0 million term loan facility with a 6 year amortization period, due March 19, 2006. 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 current interest rate is LIBOR plus 1.125%. Amounts borrowed under the credit agreement were used to pay 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. The credit agreement and other debt facilities impose certain affirmative and negative covenants on us relating to current debt ratings, certain financial ratios related to liquidity, net worth, capitalization, investments, acquisitions and restricted payments, and certain dividend restrictions. On January 24, 2001, we issued 8,855,000 shares of our common stock at a public offering price of $30.45 per share. Proceeds from this offering, net of underwriting discounts and commissions and other estimated related expenses, were $256.3 million. Net proceeds of $100.0 million were used to repay in full and terminate the $100.0 million, 18 month revolving credit facility and net proceeds of $149.5 million were used to pay down in full the $250.0 million, 6 year revolving credit facility. The remainder of the cash proceeds are available for general corporate purposes. See Note E of Notes to Condensed Consolidated Financial Statements. 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. Our two significant sources of 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 management agreements among us and our subsidiaries. Our insurance subsidiaries are restricted by state regulation 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 and FNF Capital 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. 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, 2000. 17 18 Part II: OTHER INFORMATION Item 1. Legal Proceedings As previously disclosed in our prior Securities and Exchange Commission filings, we are named in class action lawsuits alleging irregularities and violations of law in connection with title and escrow practices. Four lawsuits are currently pending. Three previously filed lawsuits have been dismissed. One of the existing lawsuits is filed by the Attorney General of the State of California and others on behalf of the California Controller, the California Insurance Commissioner and the California general public against an alleged defendant class consisting of the entire title and escrow industry in California. The other three suits are filed by private parties in State court in Los Angeles. In February 2000, we reached a settlement of the claims alleged by the California Insurance Commissioner. Although the settlement required us to make a monetary payment, it did not require us to pay any fine or penalty. We are vigorously defending the existing lawsuits. Item 4. Submission of Matters to Vote of Security Holders Our Annual Meeting of Stockholders was held on June 19, 2001 for the purpose of electing certain members of the board of directors, to approve an amendment to increase the shares available under our 1998 Stock Option Plan, to approve our 2001 Stock Incentive Plan and to approve our Annual Incentive Plan. 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" ------------ ----------------- William A. Imparato 76,563,346 1,104,235 Donald M. Koll 66,697,896 10,969,690 Cary H. Thompson 75,977,128 1,690,458 General William Lyon 76,691,974 985,512
The proposal to approve the amendment to our 1998 Stock Option Plan received the following votes:
Votes Percentage ---------- ---------- Shares Voted "For" 36,478,603 56.9% Shares Voted "Against" 27,401,466 42.7% Shares Voted "Abstain" 238,466 0.4%
The proposal to approve the 2001 Stock Incentive Plan received the following votes:
Votes Percentage ---------- ---------- Shares Voted "For" 49,826,411 77.7% Shares Voted "Against" 14,005,237 21.8% Shares Voted "Abstain" 286,887 0.5%
The proposal to approve the Annual Incentive Plan received the following votes:
Votes Percentage ---------- ---------- Shares Voted "For" 72,235,689 93.0% Shares Voted "Against" 5,156,599 6.6% Shares Voted "Abstain" 277,497 0.4%
18 19 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 10.68 Fidelity National Financial, Inc. Amended and Restated 1998 Stock Incentive Plan. Exhibit 10.69 Fidelity National Financial, Inc. Amended and Restated 2001 Stock Incentive Plan. Exhibit 10.70 Fidelity National Financial, Inc. Employee Stock Purchase Plan, as Amended and Restated as of April 24, 2001. Exhibit 10.71 Employment Agreement by and between Fidelity National Financial, Inc. and William P. Foley, II as of March 22, 2001. Exhibit 10.72 Employment Agreement by and between Fidelity National Financial, Inc. and Patrick F. Stone as of March 22, 2000. Exhibit 10.73 Employment Agreement by and between Fidelity National Financial, Inc. and Alan L. Stinson as of March 22, 2001. Exhibit 10.74 Employment Agreement by and between Fidelity National Financial, Inc. and Peter T. Sadowski as of April 11, 2001. (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: August 3, 2001 19