<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: April 1, 1996
FIDELITY NATIONAL FINANCIAL, INC.
---------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 1-9396 86-0498599
- ---------------------------- -------------------------- ----------------------------
(State or other jurisdiction (Commission File Number) (IRS Employer Identification
of incorporation) Number)
</TABLE>
17911 Von Karman Avenue, Irvine, California 92714
---------------------------------------------------------------
(Address of principal executive offices)
(714) 622-5000
----------------------------------------
(Registrant's telephone number, including area code)
<PAGE> 2
Item 2. Acquisition or Disposition of Assets
On September 14, 1995, Fidelity National Financial, Inc. ("FNFI")
entered into an agreement with Nations Holding Group, a California corporation,
to acquire Nations Title Inc. and certain of its wholly-owned subsidiaries,
Nations Title Insurance Company, Nations Title Insurance of New York Inc. and
National Title Insurance of New York Inc. ("Nations Title Inc." or "NTI"). On
April 1, 1996, the acquisition closed. FNFI paid $19.3 million in cash and
176,000 shares of FNFI Common Stock.
Item 7. Financial Statements and Exhibits
Attached hereto as Exhibit A are the Consolidated Financial Statements
of Nations Title Inc. and Subsidiaries as of and for the year ended December
31, 1995, along with the manually signed report of KPMG Peat Marwick LLP
thereto. Attached hereto as Exhibit B is Combined Pro Forma Financial Data
with respect to FNFI and Nations Title Inc. as of and for the year ended
December 31, 1995.
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 hereunto duly authorized.
FIDELITY NATIONAL FINANCIAL, INC.,
a Delaware corporation
Date: June 13, 1996 By: /S/ CARL A. STRUNK
------------------ ----------------------------------
Carl A. Strunk
Executive Vice President and
Chief Financial Officer
<PAGE> 3
EXHIBIT A
[KPMG LOGO]
The Global Leader
NATIONS TITLE INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE> 4
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
of Nations Title Inc.:
We have audited the accompanying consolidated balance sheet of Nations Title
Inc. and subsidiaries (the Company) as of December 31, 1995 and the related
consolidated statements of operations, stockholder's equity and cash flows for
the year ended December 31, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1995
and the results of their operations and their cash flows for the year ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
April 19, 1996
<PAGE> 5
2
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments:
Debt securities available-for-sale, at fair value $32,913,566
Other long-term investments, at cost 782,190
-----------
Total investments 33,695,756
Cash and cash equivalents (including certificates of deposit of $120,000) 6,893,297
Accrued investment income 445,730
Accounts and notes receivable:
Premiums receivable (net of allowance for doubtful accounts of $1,687,363) 11,396,330
Note, premiums and accounts receivable from affiliates 3,163,150
Other receivables 1,597,663
Refundable income taxes 3,335,894
Property and equipment, at cost (net of accumulated depreciation of $1,978,260) 1,192,496
Title plants 3,632,493
Assets acquired in settlement of claims 7,416,197
Deferred income taxes 6,002,912
Other assets 1,520,318
-----------
Total assets $80,292,236
===========
Liabilities and Stockholder's Equity
Liabilities:
Reserve for claim losses $49,381,975
Accounts payable and accrued expenses 5,320,235
Notes payable 1,914,263
Negative goodwill 3,257,676
-----------
Total liabilities 59,874,149
-----------
Stockholder's equity:
Common stock, no par value; 30,000 shares authorized, issued and
outstanding 20,261,536
Unrealized gain on debt securities (net of deferred income tax effect of
$131,477) 255,220
Accumulated deficit (98,669)
-----------
Total stockholder's equity 20,418,087
-----------
Total liabilities and stockholder's equity $80,292,236
===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
3
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Revenues:
Premiums $164,959,157
Service charges for title searches and escrows 10,805,576
Investment income 2,755,457
Realized gains on sale of investments, net 140,256
Amortization of negative goodwill 1,085,892
Other, net 308,775
------------
Total revenues 180,055,113
------------
Expenses:
Premiums retained by agents 134,015,122
Provision for title losses and other claims 13,577,326
Salaries and other personnel costs 18,411,082
Other operating expenses 21,545,198
Premium taxes 1,551,961
Depreciation and amortization 511,159
------------
Total expenses 189,611,848
------------
Loss before income tax benefit (9,556,735)
------------
Income tax benefit:
Current 4,000,924
Deferred 114,188
------------
Total income tax benefit 4,115,112
------------
Net loss $ (5,441,623)
============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
4
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Unrealized Retained
gain (loss) earnings
Common on debt (accumulated
stock securities deficit) Total
----- ---------- ------- -----
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $20,261,536 (2,567,781) 5,342,954 23,036,709
Net loss - - (5,441,623) (5,441,623)
Net unrealized gains on investments - 2,823,001 - 2,823,001
----------- ---------- ---------- ----------
Balance, December 31, 1995 $20,261,536 255,220 (98,669) 20,418,087
=========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
5
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $(5,441,623)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment 511,159
Amortization of negative goodwill (1,085,892)
Gain on sale of investments (140,256)
Deferred income taxes (114,118)
Changes in assets:
Accrued investment income 258,862
Premiums receivable 3,369,626
Other receivables (2,172,264)
Refundable income taxes (3,204,895)
Assets acquired in settlement of claims (183,919)
Other assets 34,791
Changes in liabilities:
Reserves, net 3,050,982
Accounts payable and accrued expenses (2,148,769)
-----------
Net cash used in operating activities (7,266,316)
-----------
Cash flows from investing activities:
Purchase of debt securities (3,166,525)
Proceeds from maturity and sales of debt securities 15,760,610
Acquisition of title plants (690,805)
Change in minority interest (311,196)
Purchases of property and equipment (742,298)
-----------
Net cash flows provided by investing activities 10,849,786
-----------
Cash flows from financing activities:
Capital contributions pledged in 1994 and received during 1995 1,144,000
Repayment of notes payable (102,467)
-----------
Net cash flows provided by financing activities 1,041,533
-----------
Net increase in cash and cash equivalents 4,625,003
Cash and cash equivalents, beginning of year 2,268,294
-----------
Cash and cash equivalents, end of year $ 6,893,297
===========
Cash paid (refunded) during the year:
Interest $ 219,297
===========
Income taxes from parent $ (600,000)
===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 9
6
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Nations Title Inc. and its wholly-owned subsidiaries, Nations Title
Insurance Company, Nations Title Insurance of New York Inc. and
National Title Insurance of New York Inc., (Nations or the Company)
are primarily engaged in the business of underwriting and issuing
title insurance policies and performing other title-related services
such as escrow and trust activities in connection with real estate
transactions. Collectively, the three insurance companies are
licensed to write title insurance policies in forty-six states. The
Company generates a significant amount of its title premiums in
California (36%) and New York (15%). The consolidated statements also
include the accounts of Nations Appraisal Services, Inc. and Nations
Foreclosure Services, Inc., which are wholly-owned subsidiaries. The
Company is a wholly-owned subsidiary of Nations Holding Group (NHG).
On September 13, 1995, NHG entered into an agreement with Fidelity
National Financial, Inc. (Fidelity) to sell 100% of its outstanding
stock of the Company to Fidelity. Subsequent to this agreement, the
Company entered into a business consultant agreement whereby Fidelity
provided certain management services to the Company through March 31,
1996. Upon receiving regulatory approval from the states of Kansas
and New York and resolving certain conditions of the agreement, the
sale was closed effective April 1, 1996 for a sales price of
approximately $19,300,000 in cash plus 176,000 restricted shares of
Fidelity common stock, certain real estate assets and forgiveness of
certain intercompany indebtedness, less certain retained liabilities.
The market value of Fidelity common stock was $15.50 per share on
April 1, 1996.
Basis of Presentation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. Such statements
have been prepared in accordance with generally accepted accounting
principles. All significant intercompany accounts and transactions
have been eliminated.
Stockholder's equity as of December 31, 1994 differs from the amount
reported in the prior year primarily due to the application of
purchase accounting adjustments related to the purchase of the
Company by NHG on January 10, 1994.
(Continued)
<PAGE> 10
7
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company has classified its investment portfolio as
available-for-sale. The Company does not hold a trading portfolio.
Debt securities available-for-sale are carried at the estimated
market value, based on quoted market prices, with any unrealized
gains or losses recorded in stockholder's equity net of the related
income tax effect. Realized gains and losses, determined on a
specific identification basis, are included in income.
Investments are reviewed annually to determine if decreases in fair value,
if any, below amortized cost are other than temporary. If the decline
in fair value is other than temporary, the investments' carrying
value is reduced to a new cost basis which equals fair value with
such loss reported as a realized loss. Subsequent recoveries of fair
value from the new cost basis are recognized as realized gains at
date of sale.
Other long-term investments include real estate and equity securities.
Real estate is carried at the lower of cost or net realizable value.
Valuation reserves are provided, if necessary, at such time as
management determines it is probable that the value of the real
estate is other than temporarily impaired. Equity securities are
carried at fair value which approximates cost.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to include cash held at
depository institutions and all short-term investments with original
maturities of three months or less. Cash and cash equivalents are
carried at cost, which approximates fair value due to the short-term
maturity of these investments.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method based on the estimated useful life of
the related assets which range from three to ten years.
Title Plants
Title plants consist of title records relating to a particular region and
are generally stated at cost. Costs associated with current
maintenance such as salaries and supplies are charged to expense in
the year incurred. The costs to acquire title plants and the building
of new title plants, prior to the time that a plant is put into
operation, are capitalized. Properly maintained title plants are not
amortized unless there is an indication that the value of the title
plant has been impaired, at which time such impairment is recognized
in income.
(Continued)
<PAGE> 11
8
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets Acquired in Settlement of Claims
In connection with settlement of title insurance and other claims, the
Company may purchase or receive mortgages, deeds of trust, real
property or judgment liens. These assets are generally carried at
cost or lower of cost or market at time of settlement of the claim.
If an impairment in value is determined, these assets are adjusted to
fair market value, with that impairment recognized in income.
Judgment liens are primarily salvage assets representing funds
expended by the Company to purchase judgments to satisfy title
claims.
Negative Goodwill
Negative goodwill represents the unamortized fair value of assets acquired
in excess of purchase price of the Company by NHG on January 10, 1994
after writing off title plants and property and equipment of
$6,159,430. The initial amount of negative goodwill recorded was
$5,429,460 which is being amortized over five years.
Income Taxes
The Company's operations are included in the consolidated federal income
tax return of NHG. The Company entered into a tax-sharing agreement
with NHG effective January 1, 1994. Under its terms, the method of
allocation of income tax expense or benefit is based on the separate
income tax return method, except that the benefits attributable to
net operating losses are paid currently to the extent that benefits
are received from net operating losses in the consolidated return.
Deferred income taxes are provided for temporary differences between the
financial statement carrying values and the tax bases of assets and
liabilities in accordance with SFAS No. 109, "Accounting for Income
Taxes."
Reserve for Claim Losses
The Company provides for estimated title insurance losses based upon
historical and anticipated loss experience by a charge to expense
when the related premium revenue is recognized. The charges to
expense are determined by management in any particular year as a
percentage of revenue based on the nature of that year's business and
long-term expectations as to ultimate losses to be incurred.
Annually, the Company performs an actuarial evaluation of the
ultimate losses to be incurred and compares the recorded liability to
a range of ultimate losses determined by the actuaries. If necessary,
adjustments are made to the provision to ensure that the liability
remains within that range. Certain major claims, and losses related
to fraud and defalcations, are evaluated and charged to expense as
they become known, as the unique circumstances surrounding major
claims make it inherently impractical to predict the incidence and
amount of such losses. Escrow losses are expensed as they become
known.
(Continued)
<PAGE> 12
9
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management believes that the recorded amounts are reasonable and adequate;
however, due to the nature of the Company's business and the length
of time to resolve claims, the ultimate losses may vary significantly
from the estimated amounts included in the consolidated financial
statements. Loss estimates are continually reviewed and any periodic
adjustments required are reflected as a cost of operations in the
period in which they are determined. The reserve amounts have not
been discounted to reflect the time value of money.
Reinsurance
In the ordinary course of business, the Company reinsures certain risks
with other insurers for the purpose of limiting its maximum loss
exposure and also assumes reinsurance for certain risks of other
insurers for the purpose of earning additional premium. The Company
cedes a portion of certain policy liabilities under excess of loss
and case-by-case agreement. Reinsurance agreements provide that in
the event of a loss (including loss adjustment expenses) exceeding
the retained amounts, the reinsurer is liable for the excess amount
assumed. However, the ceding company remains primarily liable in the
event the reinsurer does not meet its contractual obligations.
Revenue Recognition
Title insurance premiums and service charges for title searches and escrow
services are recognized as revenue at the time of the closing of the
related real estate transaction. Premiums retained by agents are
recognized as expense concurrently with title premium revenue
recognition.
Escrow and Trust Deposits
As a service to its customers, the Company administered escrow and
deposits which amounted to approximately $4,626,000 at December 31,
1995, representing undisbursed amounts received for settlements of
mortgage loans and indemnities against specific title risks. These
funds are not considered assets of the Company and, therefore, are
excluded from the accompanying consolidated balance sheet. The
Company is entitled to interest income on these funds, in certain
states, to the extent depositors did not elect to have the balances
maintained in an interest-bearing account.
Management Estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(Continued)
<PAGE> 13
10
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Pronouncements
The Financial Accounting Standards Board (FASB) issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan Income Recognition
and Disclosures," which became effective for fiscal years beginning
after December 15, 1994. These statements require a lender to
consider a loan to be impaired if the lender believes it is probable
that it will be unable to collect all principal and interest due
according to the contractual terms of the loan. If a loan is
impaired, the lender will be required to record a loss valuation
allowance equal to the present value of the estimated future cash
flows discounted at the loan's effective rate. The provisions of SFAS
Nos. 114 and 118 were adopted by the Company and did not have a
significant impact on the accompanying consolidated financial
statements.
The FASB issued SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of," which became
effective for fiscal years beginning after December 15, 1995. SFAS
No. 121 provides guidance for recognition and measurement of
impairment of long-lived assets, certain identifiable intangibles and
goodwill related to assets to be held and used and assets to be
disposed of. The Company has not adopted the provisions of SFAS No.
121, however, the Company does not anticipate the adoption of SFAS
No. 121 will have a significant impact on the accompanying
consolidated financial statements.
Statement of Position 94-6 (SOP 94-6), "Disclosures of Certain Significant
Risks and Uncertainties," was issued in December 1994 and is
effective for fiscal years ending after December 15, 1995. SOP 94-6
requires disclosures about certain risks and uncertainties that could
significantly affect the amounts reported in an entity's financial
statements in the near term and relate to the nature of operations,
the necessary use of estimates in the preparation of financial
statements and significant concentrations of risk. The Company has
provided SOP 94-6 disclosures in the footnotes to the accompanying
consolidated financial statements. The most significant estimate made
by management is the reserve for claim losses, as discussed in note
6.
(Continued)
<PAGE> 14
11
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) INVESTMENTS
Debt Securities
The amortized cost and estimated fair value of debt securities at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale:
U. S. treasury securities
and obligations of the
U. S. government and
agencies $ 4,839,755 142,731 - 4,982,486
Obligations of states and
political subdivisions 13,763,284 205,815 40,824 13,928,275
Special revenue and special
assessment bonds 9,933,628 49,234 28,782 9,954,080
Industrial and miscellaneous 3,990,202 65,645 7,122 4,048,725
----------- ------- ------ ----------
$32,526,869 463,425 76,728 32,913,566
=========== ======= ====== ==========
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1995 by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without
prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
cost value
---- -----
<S> <C> <C>
Due within one year $ 1,887,758 1,894,100
Due after one year through five years 10,953,473 10,988,428
Due after five years through ten years 9,226,335 9,379,591
Due after ten years 10,459,303 10,651,447
----------- ----------
Total $32,526,869 32,913,566
=========== ==========
</TABLE>
Investment Income
Major categories of investment income for the year ended December 31, 1995
are as follows:
<TABLE>
<S> <C>
Debt securities $1,960,999
Mortgage loans 136,466
Real estate 361,971
Other 296,021
----------
Total investment income $2,755,457
==========
</TABLE>
(Continued)
<PAGE> 15
12
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proceeds from the sales of investments were $11,639,291 in 1995. Gross
gains of $175,925 and gross losses of $35,669 were realized on the
sales.
(3) OTHER LONG-TERM INVESTMENTS
The Company owns a 50% interest in certain real estate which was acquired
from the parent for approximately $730,000 in 1994. The remaining 50%
is held by Fin-West, the majority shareholder of NHG. The real estate
interest consists of two buildings which are occupied by NHG and
Fin-West. Rent revenue of $196,000 was recognized from the related
parties during the year.
In addition, the Company holds $75,002 of equity securities carried at
fair value, which approximates cost.
(4) ASSETS ACQUIRED IN SETTLEMENT OF CLAIMS AND NOTES PAYABLE
Assets acquired in settlement of claims are comprised of the following:
<TABLE>
<S> <C>
Mortgage loans $2,559,733
Real estate 4,856,464
----------
$7,416,197
==========
</TABLE>
The more significant of the assets acquired in settlement of claims are
described below.
Martha's Vineyard
Assets acquired in settlement of claims includes $2,444,588 representing a
partial interest in a parcel of land on the island of Martha's
Vineyard held for development and related mortgages receivable of
$1,055,217 secured by the remaining interest in this parcel of land.
In addition, the Company capitalized improvements of $327,700 during
1995. The Company acquired satisfactory title to the lots from
transactions dated 1988 through 1992.
In connection with Martha's Vineyard, the Company is indebted under a note
payable with an unpaid principal balance of $1,746,265 at December
31, 1995 which accrues interest at 9.875% payable in monthly
installments of $16,168 through April 1998 and a lump-sum payment of
$1,687,648 in 1998. The note may be prepaid in whole or in part at
any time and is secured by the Company's partial interest in the
parcel of land, as mentioned above.
Las Vegas Properties
Mortgages acquired in settlement of claims includes a $682,713 mortgage
loan receivable secured by a residence located in Las Vegas, Nevada.
The asset was acquired by the Company in 1991 by foreclosure on a
collateral loan made to enable an agent to satisfy escrow obligations
and subsequently sold to an independent third party for $925,000. The
Company financed the sale and at December 31, 1995 holds an 8%
mortgage loan due in monthly installments of $7,956 with the
remaining balance due in 1997.
(Continued)
<PAGE> 16
13
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995, the Company owns a car wash and related real
estate located in Las Vegas Nevada. These properties were acquired by
the Company in 1991 in conjunction with the collateral loan discussed
above. The carrying value of this property is $734,269.
Illinois Properties
Real estate acquired in settlement of claims also includes three
properties located near Chicago, Illinois. The balances associated
with these properties as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
Schaumburg, Illinois office building $ 531,875
Palatine, Illinois office building 327,558
Palatine, Illinois residential 280,000
----------
$1,139,433
==========
</TABLE>
(5) INCOME TAXES
A reconciliation of the difference between income tax benefit at the
expected corporate tax rate and the actual income tax benefit
follows:
<TABLE>
<CAPTION>
Amount Percent
------ -------
<S> <C> <C>
Computed expected tax benefits $(3,249,289) 34.0%
Tax-exempt interest (428,114) 4.5
Amortization of negative goodwill (369,203) 3.9
Other (68,506) 0.7
----------- ----
$(4,115,112) 43.1%
=========== ====
</TABLE>
Pursuant to the tax-sharing agreement with NHG, intercompany credits for
income tax benefits were approximately $2,500,000 and refunds
received by the Company were $600,000 in 1995.
Deferred income tax benefit consists of the following:
<TABLE>
<S> <C>
Provision for claim losses $ 559,433
Changes in bad debt reserves (101,178)
Other, net (344,067)
---------
$ 114,188
=========
</TABLE>
(Continued)
<PAGE> 17
14
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The balances of net deferred income tax assets at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
Deferred income tax assets:
Difference in claims reserve $3,814,361
Basis difference on fixed assets due to purchase accounting 474,228
Basis difference on title plants due to purchase accounting 1,619,978
Difference in bad debts and other reserves 395,918
Basis difference on fixed assets 156,617
Bonus accrual difference 445,400
Other 378,855
----------
Total deferred tax assets 7,285,357
----------
Deferred income tax liabilities:
Basis difference on title plants 1,150,968
Unrealized gain on investments 131,477
----------
Total deferred tax liabilities 1,282,445
----------
Net deferred income tax assets $6,002,912
==========
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized.
Management of the Company believes the existing net deductible
temporary differences will reverse during periods in which the
Company generates net taxable income, therefore, a valuation
allowance has not been provided. However, there can be no assurance
that the Company will generate any earnings or any specific level of
continuing earnings in future years.
The insurance companies generally pay premium taxes rather than state
income taxes.
(6) RESERVE FOR CLAIM LOSSES
Activity in the liability for reserve for claim losses is summarized as
follows:
<TABLE>
<S> <C>
Balance at January 1, 1995 $43,489,500
-----------
Title claim loss provision related to:
Current year 10,722,345
Prior years 2,854,981
-----------
Total title claim loss provision 13,577,326
===========
Title claims paid, net of recoupments related to:
Current year 714,435
Prior year 6,970,416
-----------
Total title claims paid, net of recoupments 7,684,851
-----------
Balance at December 31, 1995 $49,381,975
===========
</TABLE>
(Continued)
<PAGE> 18
15
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for claim losses includes an estimate of anticipated title
claims and major claims. The estimate of anticipated title claims is
accrued as a percentage of title premium revenue based on the
Company's historical loss experience and other relevant factors. The
Company monitors its claims experience on a continual basis and
adjusts the provision for claim losses accordingly. The Company
incurred additional title claim losses related to prior years during
1995 primarily due to changes in estimates of ultimate losses
resulting from higher than anticipated reported and paid claims.
The Company had nonaffiliated reinsurance transactions in 1995 totaling
approximately $18,000 in premiums assumed and $514,000 in premiums
ceded. The Company incurred no losses relating to nonaffiliated
reinsurance assumed and had no recoveries of losses relating to
reinsurance ceded during 1995.
(7) STATUTORY RESTRICTIONS ON STOCKHOLDER'S EQUITY AND INVESTMENTS
Title insurance companies are subject to extensive regulation under
applicable state laws. Each insurance company is usually subject to a
holding company act in its state of domicile which regulates, among
other matters, the ability to pay dividends and investment policies.
The laws of most states in which the Company transacts business
establish supervisory agencies with broad administrative powers
relating to issuing and revoking licenses to transact business,
regulating trade practices, licensing agents, approving policy forms,
accounting principles, financial practices, establishing reserve and
capital and surplus requirements, defining suitable investments for
reserves, capital and surplus and approving rate schedules.
Pursuant to insurance and other regulations of the various states in
which the Company and its subsidiaries operate, the amount of
dividends, loans and advances available to the parent company from
its insurance subsidiaries is limited, principally for the protection
of policyholders. Under such statutory regulations, net assets of
consolidated subsidiaries are not available for dividends, loans or
advances to the parent company at December 31, 1995.
Pursuant to statutory accounting requirements of the various states in
which the insurance companies are qualified, they must defer a
portion of premiums earned as an unearned premium reserve for the
protection of policyholders and must maintain qualified assets in an
amount equal to the statutory requirements. The level of unearned
premium reserve required to be maintained at any time is determined
on a quarterly basis by statutory formula based upon the age and
dollar amount of policy liabilities underwritten and age and dollar
amount of statutory premiums written. As of December 31, 1995, the
combined statutory unearned premium reserve required and reported for
the insurance subsidiaries was $44.2 million. The combined qualified
assets maintained as of December 31, 1995 were $33.5 million.
The insurance companies prepare statutory financial statements on a basis
of accounting practices prescribed or permitted by the state in which
each company is domiciled. Prescribed statutory accounting practices
include a variety of publications of the National Association of
Insurance Commissioners, as well as state laws, regulations and
general administrative rules. Permitted statutory accounting
practices encompass all accounting procedures not so prescribed.
(Continued)
<PAGE> 19
16
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The combined capital and surplus of the insurance companies on a statutory
basis was $15,529,000 as of December 31, 1995. The combined loss of
the insurance companies on a statutory basis was $5,535,000 for the
year ended December 31, 1995. Nations Title Insurance of New York
Inc. received written approval from the State of New York Department
of Insurance to carry certain assets at their historical cost and not
at the lower of cost or fair market value. This differs from
prescribed statutory accounting practices. As of December 31, 1995,
this permitted accounting practice increased the combined statutory
capital and surplus of the insurance companies by approximately
$2,500,000 over what it would have been had the prescribed accounting
practice been followed.
As a condition to continued authority to underwrite policies in the states
in which the insurance companies conduct their business, the
insurance companies are required to pay certain fees and file
information regarding their officers, directors and financial
condition. In addition, the escrow and trust business is subject to
regulation by various state banking authorities.
In April 1996, the National Association of Insurance Commissioners (NAIC)
adopted the Title Insurers Model Act (the Act). The purpose of the
Act is to provide guidance to the state insurance regulatory agencies
relative to the effective regulation and supervision of the title
insurance industry and title insurers. The Act addresses aspects of
the title insurance industry from corporate structure and financial
and accounting information to market conduct and legal standards.
Certain provisions of the Act will be phased in over a multiyear
period. The Company has not determined the impact of this Act, if
any, on its operations.
Short-term investments and bonds with a market value of $6,732,000 were
on deposit with state treasurers in accordance with statutory
requirements for the protection of policyholders at December 31,
1995.
Pursuant to Section 1307 of the New York Insurance Law, insurance
companies are permitted to enter into unsecured loans. With the
approval of the Superintendent of Insurance, these may be classified
as equity. Nations Title Inc. made such a loan in the amount of
$2,000,000 as part of the initial capitalization of its wholly-owned
subsidiary, National Title Insurance of New York Inc., in 1989. The
Superintendent must approve all payments made on this loan, and no
payments may be disbursed on the loan in liquidation until such time
as all statutory liability under existing policy commitments has been
satisfied. In accordance with the statute, no payments on the note
have been made. This loan is included in the statutory surplus of
National Title Insurance of New York Inc.
(Continued)
<PAGE> 20
17
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RELATED-PARTY TRANSACTIONS
Management Fee
Effective January 10, 1994, the Company entered into a management
agreement with NHG. Under the agreement, the Company incurred
expenses of $325,000, of which $212,000 was paid during 1995.
Pursuant to the acquisition agreement with Fidelity, the Company
ceased paying management fees to NHG effective May 31, 1995.
Additionally, during 1995 the Company received $11,700,000 of premiums
from, and paid agent retentions of $9,800,000 to, as agent, United
Title Company, an affiliated company. Premiums receivable of
$1,525,000 from United Title Company is recorded at December 31,
1995. In addition, the Company has outstanding receivables of
approximately $481,000 from United Title Company at December 31, 1995
related to office rental and other services provided by the Company.
Income Taxes
Included in refundable income taxes at December 31, 1995 is approximately
$2,900,000 refundable from NHG pursuant to the tax sharing agreement.
Refundable income taxes also include approximately $433,000 due as a
result of tax loss carrybacks to years that the Company filed a
consolidated federal income tax return with its former parent, TRW
Inc.
Common Stock
In connection with a bank loan obtained by NHG, the stock of Nations Title
Inc. has been pledged for the loan.
Other Transactions
On March 1, 1995, Nations Title Insurance of New York Inc. acquired
Network Title and Escrow Agency for $398,000 and changed the name to
Nations Title Insurance Agency of Arizona, Inc.
On November 1, 1995, Nations Title Insurance of New York Inc. sold its
interest in three title agencies to a director and officer of the
Company for $1,163,000, which was the net book value. The Company
obtained a note receivable for the purchase price. The note bears a
monthly variable interest rate of prime plus 2% and is amortized over
ten years with a balloon payment due November 1, 1998. The
outstanding principal balance at December 31, 1995 is $1,157,000.
On October 1, 1995, Nations Title Insurance Company sold three branch
offices of its direct operations to Fidelity for $235,000, which was
the net book value.
Quality Loan Service, acquired by Nations Title of New York Inc. in 1994
from NHG, was sold back to NHG on January 2, 1996 for approximately
$800,000, which was the net book value.
(Continued)
<PAGE> 21
18
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) CONTINGENCIES
In the ordinary course of business, the Company is subject to claims made,
and from time to time are named as defendants in legal proceedings,
relating to policies of insurance they have issued or other services
performed on behalf of insured policyholders and other customers. The
Company believes that the reserves reflected in its consolidated
financial statements are adequate to pay losses and loss adjustment
expense which may result from such claims and proceedings; however,
such estimates may be more or less than the amount ultimately paid
when the claims are settled.
(10) NOTES PAYABLE
In addition to the note payable described in note 4, the Company is
obligated under four notes payable aggregating $167,998 which bear
interest rates of 8-9% and are being paid through the year 2000. The
following table depicts the principal payments due under notes
payable:
<TABLE>
<S> <C>
1996 $ 74,488
1997 65,193
1998 1,726,758
1999 525,525
2000 22,309
---------
$1,914,263
==========
</TABLE>
(11) EMPLOYEE BENEFIT PLAN
The Company provides a Savings and Investment Plan sponsored by NHG, which
qualifies under Section 401(k) of the Internal Revenue Code.
Employees are eligible to participate after one year of service.
Participants' contributions are invested by the trustees for the plan
at the direction of the participant in any one or more of fifteen
investment funds. The Company matches employee contributions up to 2%
of the participant's qualified compensation not to exceed $200. The
Company's matching contributions amounted to $30,000 in 1995.
(12) COMMITMENTS
The Company has entered into various operating leases through 2000. Future
minimum lease payments under these noncancelable operating leases are
as follows:
<TABLE>
<S> <C>
1996 $1,884,212
1997 1,711,643
1998 1,257,039
1999 702,847
2000 50,539
Thereafter -
----------
$5,606,280
==========
</TABLE>
Rent expense incurred under operating leases was $2,939,000 for 1995.
(Continued)
<PAGE> 22
19
NATIONS TITLE INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF NATIONS HOLDING GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company entered into employment agreements through 1996 with certain
executives which provide for management participation in profits and
annual salaries and bonuses. The management participation in profits
is primarily based on results of operations of the Company during
1996 subject to guaranteed minimums. During 1995, the Company
negotiated a settlement on one of these agreements which resulted in
a payment of $350,000 in 1995. The remaining estimated liability
related to these agreements recorded at December 31, 1995 is
$1,310,000.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments are estimates of fair values at a
specific point in time determined by the Company using available
market information and appropriate valuation methodologies. These
estimates are subjective in nature and involve uncertainties and
significant judgment in the interpretation of current market data.
Therefore, the fair values presented are not necessarily indicative
of amounts the Company could realize or settle currently.
Assets that, as a matter of accounting policy, are reflected in the
accompanying consolidated financial statements at fair value include
debt securities, cash and cash equivalents and accounts receivable.
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
specifically excludes the liability for loss and loss adjustment
expenses of insurance entities from fair value disclosures.
Accordingly, no fair value calculations have been made for the
reserve for claim losses.
For all other financial instruments, the Company estimates fair value to
approximate carrying value.
SFAS No. 119, "Disclosures About Derivative Financial Instruments,"
requires disclosures about amounts, nature and terms of derivative
financial instruments and modifies existing disclosure requirements
for other financial instruments. The Company does not engage in any
derivative trading or other speculative activities and does not hold
any derivative financial instruments at December 31, 1995.
<PAGE> 23
[KPMG LOGO]
<PAGE> 24
EXHIBIT B
PRO FORMA COMBINED FINANCIAL DATA
The following unaudited Pro Forma Combined Balance Sheet at December
31, 1995 gives effect to the acquisition of Nations Title Inc. and Subsidiaries
as if the transaction was consummated on that date. Certain balance sheet
accounts of Nations Title Inc. and Subsidiaries have been reclassified to
provide consistency with Fidelity National Financial, Inc.'s reporting format.
The following unaudited Pro Forma Combined Statement of Earnings for
the year ended December 31, 1995 gives effect to the acquisition of Nations
Title Inc. and Subsidiaries as if it were consummated on January 1, 1995.
The Pro Forma Combined Financial Data are provided for comparative
purposes only. They do not purport to be indicative of the results that
actually would have occurred if the acquisition had been consummated on the
dates indicated or the results that may be obtained in the future.
<PAGE> 25
Pro Forma Combined Balance Sheet
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------------------
Historical Unaudited Pro Forma
--------------------------- -----------------------------
Nations Adjustments
FNFI Title Inc. (a),(b) Combined
---------- ---------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets
Investments:
Fixed maturities available for
sale, at fair value $ 129,236 $ 32,914 $ (14,300) $ 147,850
Equity securities, at fair value 31,412 -- -- 31,412
Other long-term investments, at cost,
which approximates fair value 2,627 782 -- 3,409
Short-term investments, at cost,
which approximates fair value 8,148 -- -- 8,148
Investments in real estate and partnerships, net 8,659 4,856 (1,000) 12,515
---------- --------- --------- ----------
Total investments 180,082 38,552 (15,300) 203,334
Cash and cash equivalents 47,431 6,893 -- 54,324
Trade receivables, net 39,801 11,396 -- 51,197
Notes receivable, net 15,926 7,321 (2,400) 20,847
Prepaid expenses and other assets 43,908 1,967 (352) 45,523
Title plants 41,725 3,632 6,886 52,243
Property and equipment, net 33,740 1,192 (468) 34,464
Deferred income taxes -- 6,003 973 6,976
Income taxes receivable 2,450 3,336 (1,000) 4,786
---------- --------- --------- ----------
$ 405,063 $ 80,292 $ (11,661) $ 473,694
========== ========= ========= ==========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued liabilities $ 44,582 $ 8,578 $ 1,627 $ 54,787
Notes payable 136,047 1,914 5,000 142,961
Reserve for claim losses 146,094 49,382 -- 195,476
---------- --------- --------- ----------
326,723 59,874 6,627 393,224
Minority interest 393 -- -- 393
Stockholders' equity:
Preferred stock -- -- -- --
Common stock 2 20,262 (20,262) 2
Additional paid-in capital 58,098 -- 2,130 60,228
Retained earnings (accumulated deficit) 70,273 (99) 99 70,273
---------- --------- --------- ----------
128,373 20,163 (18,033) 130,503
Net unrealized gains on investments 5,866 255 (255) 5,866
Less treasury stock 56,292 -- -- 56,292
---------- --------- --------- ----------
77,947 20,418 (18,288) 80,077
---------- --------- --------- ----------
$ 405,063 $ 80,292 $ (11,661) $ 473,694
========== ========= ========= ==========
</TABLE>
The accompanying notes to the unaudited Pro Forma Financial Data are an
integral part of this financial data.
<PAGE> 26
Pro Forma Combined Statement of Earnings
<TABLE>
<CAPTION>
Year Ended December 31, 1995
--------------------------------------------------------------
Historical Unaudited Pro Forma
---------------------------------- ---------------------------
Nations Adjustments
FNFI Title Inc. (c) Combined
------------ ------------ --------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue:
Title insurance premiums $285,552 $164,959 $ -- $450,511
Escrow fees 49,723 2,400 -- 52,123
Other fees and revenue 56,954 9,800 (1,086)(d) 65,668
Interest and investment income,
including realized gains and losses 17,616 2,896 (55)(e) 20,457
-------- -------- ------- --------
409,845 180,055 (1,141) 588,759
-------- -------- ------- --------
Expenses:
Personnel costs 165,514 18,411 (5,000)(f) 178,925
Other operating expenses 123,888 23,609 (5,000)(g),(h) 142,497
Agent commissions 82,713 134,015 -- 216,728
Provision for claim losses 19,031 13,577 -- 32,608
Interest expense 9,239 -- 413 (i) 9,652
-------- -------- ------- --------
400,385 189,612 (9,587) 580,410
-------- -------- ------- --------
Earnings (loss) before income taxes
and extraordinary item 9,460 (9,557) 8,446 8,349
Income tax expense (benefit) 1,828 (4,115) 3,241 954
-------- -------- ------- --------
earnings (loss) before extraordinary item 7,632 (5,442) 5,205 7,395
Extraordinary item - loss on early
retirement of Senior Notes, net of
applicable income tax benefit of $437 (813) -- -- (813)
-------- -------- ------- --------
Net earnings (loss) $ 6,819 $ (5,442) $ 5,205 $ 6,582
======== ======== ======= ========
Primary earnings per share
before extraordinary item $ .59 $ .56
Extraordinary item - loss on early
retirement of Senior Notes, net of
applicable income tax benefit (.06) (.06)
-------- --------
Primary earnings per share $ .53 $ .50 (k)
======== ========
Weighted average outstanding shares 12,970 13,146 (k)
======== ========
</TABLE>
The accompanying notes to the unaudited Pro Forma Financial Data are an
integral part of this financial data.
<PAGE> 27
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(a) The Pro Forma Combined Balance Sheet as of December 31, 1995 has been
prepared to reflect the acquisition by FNFI of NTI which occurred on
April 1, 1996, and will be accounted for using the purchase method.
The purchase price was $19.3 million in cash and 176,000 shares of
FNFI Common Stock.
(b) In connection with the acquisition, FNFI reversed the impact of the
former parent's prior acquisition purchase accounting adjustments,
which included the write down of certain long-term assets and the
establishment of negative goodwill, resulting in an NTI net book value
of $27.2 million. Concurrent with the acquisition, NTI distributed
certain real estate of $0.7 million to its former parent. In
addition, NTI forgave $2.4 million of intercompany receivables and
$1.0 million of income taxes receivable due from its former parent,
thereby reducing the net book value of NTI to $23.1 million, or $1.7
million in excess of the purchase price.
A portion of the purchase price was funded by a drawdown of the FNFI
line of credit in the amount of $5.0 million, at an interest rate of
8.25%.
The estimate of the excess of the net book value over the purchase
price has been allocated as follows:
<TABLE>
<S> <C>
Reduce the value of fixed and other assets to market value (1.517 million)
Increase the value of title plants to market value 2.121 million
Reduce the value of real estate to market value (.300 million)
Increase accounts payable and accrued expenses for acquisition costs, various
restructuring costs, excess lease costs and certain other liabilities (4.885 million)
Establish deferred income tax assets related to the acquisition 2.949 million
</TABLE>
FNFI has not yet completed its study of the fair value of assets
acquired and liabilities assumed. Upon completion of such study, to
the extent that the allocation of purchase price results in goodwill,
such amount will be amortized on a straight-line basis over fifteen
years.
(c) The Pro Forma Combined Statement of Earnings has been prepared to
reflect the April 1, 1996 acquisition by FNFI of NTI which will be
accounted for using the purchase method.
(d) NTI amortization of negative goodwill, $1,086,000, has been eliminated
for the year ended December 31, 1995.
(e) NTI investment income has been reduced by $55,000 for the accretion of
discount on bonds which would not have occurred had the bonds been
adjusted to fair value on January 1, 1995.
(f) Personnel costs have been reduced $5,000,000 in order to reflect
expected savings resulting from the economies of scale to be attained
as a result of the combination of FNFI and NTI and the elimination of
staff redundancies.
(g) Other operating expenses have been reduced for depreciation and
amortization expense of $410,000 which would not have been incurred
had the related assets been adjusted to fair market value in the
purchase accounting adjustments.
(h) Other operating expenses have been reduced $4,590,000 in order to
reflect expected savings resulting from the economies of scale to be
attained as a result of the combination of FNFI and NTI and the
anticipated savings resulting from the consolidation of operations.
(i) FNFI interest expense has been increased by $413,000 for interest on
the $5,000,000 credit line drawdown assumed to have been outstanding
since January 1, 1995.
(j) Tax adjustment to produce an effective tax rate on the pro forma
adjustments equal to the statutory income tax rate of 34%.
(k) The pro forma earnings per share calculation assumes the 176,000
shares of FNFI Common Stock were outstanding for all of 1995.
