<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1997
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, Irvine, California 92614
- ------------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(714) 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 ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
$.0001 par value common - 16,276,062 shares as of November 11, 1997
Exhibit Index appears on page 12 of 13 sequentially numbered pages.
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FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number
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<S> <C>
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of 3
September 30, 1997 and December 31, 1996
B. Condensed Consolidated Statements of Earnings 4
for the three-month and nine-month periods ended
September 30, 1997 and 1996
C. Condensed Consolidated Statements of Cash Flows 5
for the nine-month periods ended
September 30, 1997 and 1996
D. Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II: OTHER INFORMATION
Items 1.- 4. of Part II have been omitted because they are not
applicable with respect to the current reporting period.
Item 5. Omitted because it is not applicable with respect to
the current reporting period.
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
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/ Allen D. Meadows
--------------------------------
Allen D. Meadows
Executive Vice President
Chief Financial Officer Date: November 11, 1997
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Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value $174,008 $166,329
Equity securities, at fair value 84,438 43,578
Other long-term investments, at cost, which approximates fair value 8,866 5,542
Short-term investments, at cost, which approximates fair value 15,272 873
Investments in real estate and partnerships, net 7,175 11,352
-------- --------
Total investments 289,759 227,674
Cash and cash equivalents 80,329 63,971
Trade receivables, net 50,502 54,355
Notes receivable, net 8,659 11,317
Prepaid expenses and other assets 60,304 55,072
Title plants 51,661 50,701
Property and equipment, net 35,045 38,617
Income taxes receivable -- 7,589
-------- --------
$576,259 $509,296
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 52,154 $ 53,987
Notes payable 150,918 148,922
Reserve for claim losses 188,333 187,245
Deferred income tax liabilities, net 15,053 7,604
Income taxes payable 12,523 --
-------- --------
418,981 397,758
Minority interest 3,489 1,287
Stockholders' equity:
Preferred stock, $.0001 par value; authorized,
3,000,000 shares; issued and outstanding, none -- --
Common stock, $.0001 par value; authorized, 50,000,000 shares
in 1997 and 1996; issued, 19,855,014 as of September 30, 1997
and 19,412,694 as of December 31, 1996 2 2
Additional paid-in capital 68,376 61,271
Retained earnings 116,001 91,019
-------- --------
184,379 152,292
Net unrealized gains on investments 23,785 12,334
Less treasury stock, 5,492,138 shares as of September 30, 1997
and December 31, 1996, at cost 54,375 54,375
-------- --------
153,789 110,251
-------- --------
$576,259 $509,296
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Title insurance premiums $141,060 $126,757 $381,432 $346,543
Escrow fees 20,771 16,414 58,365 50,242
Other fees and revenue 22,148 19,824 63,995 56,009
Interest and investment income,
including realized gains and losses 13,936 3,697 25,773 11,924
-------- -------- -------- --------
197,915 166,692 529,565 464,718
-------- -------- -------- --------
EXPENSES:
Personnel costs 57,036 52,851 171,854 159,735
Other operating expenses 37,953 38,184 119,115 110,574
Agent commissions 63,285 53,429 157,919 131,773
Provision for claim losses 9,981 9,273 26,041 25,048
Interest expense 2,389 2,332 7,167 6,908
-------- -------- -------- --------
170,644 156,069 482,096 434,038
-------- -------- -------- --------
Earnings before income taxes 27,271 10,623 47,469 30,680
Income tax expense 11,414 4,306 19,484 12,272
-------- -------- -------- --------
Net earnings $ 15,857 $ 6,317 $ 27,985 $ 18,408
======== ======== ======== ========
Primary earnings per share $ 1.06 $ .44 $ 1.90 $ 1.29
======== ======== ======== ========
Fully diluted earnings per share $ .85 $ .38 $ 1.57 $ 1.11
======== ======== ======== ========
Primary weighted average shares
outstanding 14,999 14,321 14,692 14,249
======== ======== ======== ========
Fully diluted weighted average shares
outstanding 19,544 18,717 19,410 18,643
======== ======== ======== ========
Cash dividends per share $ .07 $ .06 $ .21 $ .19
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 27,985 $ 18,408
Reconciliation of net earnings to
net cash provided by operating activities:
Depreciation and amortization 10,816 8,478
Net increase (decrease) in reserve for claim losses 968 (1,277)
Provision for possible losses
on real estate and notes receivable 819 363
Gain on sales of investments, real estate and other assets (14,342) (2,600)
Amortization of LYONs original issue discount
and debt issuance costs 4,742 3,899
Other (35) 127
Change in assets and liabilities, net of effects from
acquisition of subsidiaries:
Net (increase) decrease in trade receivables 532 (8,740)
Net (increase) decrease in prepaid expenses
and other assets (3,551) 2,573
Net decrease in accounts payable
and accrued liabilities (231) (1,788)
Net increase in income taxes 20,112 7,294
--------- ---------
Net cash provided by operating activities 47,815 26,737
--------- ---------
Cash flows from investing activities:
Proceeds from sales of property and equipment 15,742 1,521
Proceeds from sales of real estate 4,567 --
Proceeds from sales and maturities of investments 171,932 143,627
Collections of notes receivable 3,186 9,353
Additions to title plants (735) (695)
Additions to property and equipment (16,338) (8,340)
Additions to investments (205,082) (148,939)
Additions to notes receivable (2,324) (8,225)
Investments in real estate and partnerships (1,048) (700)
Acquisition of subsidiaries, net of cash acquired (1,128) (10,544)
Sale of subsidiary, net of cash 3,792 --
--------- ---------
Net cash used in investing activities (27,436) (22,942)
--------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(continued)
5
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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Borrowings $ 8,169 $ 10,897
Debt service payments (10,565) (6,030)
Reissue of treasury stock -- 2,109
Dividends paid (2,934) (2,602)
Stock options exercised 1,309 407
-------- --------
Net cash provided by (used in) financing activities (4,021) 4,781
-------- --------
Net increase in cash and cash equivalents 16,358 8,576
Cash and cash equivalents at beginning of period 63,971 47,431
-------- --------
Cash and cash equivalents at end of period $ 80,329 $ 56,007
======== ========
Supplemental cash flow information:
Income taxes (refunded) paid $ (642) $ 10,493
======== ========
Interest paid $ 3,149 $ 3,355
======== ========
Noncash investing and financing activities:
Dividends declared and unpaid $ 1,044 $ 888
======== ========
Value of stock issued in acquisition of First Title Corporation $ 3,760 $ --
Value of stock issued in acquisition of Ifland Credit Services 3,000 --
Value of stock issued in acquisition of Nations Title Inc. -- 2,130
-------- --------
$ 6,760 $ 2,130
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
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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, consisting of normal recurring accruals
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, 1996. Certain reclassifications have been made in
the 1996 Condensed Consolidated Financial Statements to conform to the
classifications used in 1997.
Note B - Dividends
- ------------------
On September 16, 1997, the Company's Board of Directors declared a cash dividend
of $.07 per share, payable on October 10, 1997, to stockholders of record on
September 26, 1997.
Note C - Sale of American Title Company
- ---------------------------------------
Effective July 1, 1997, the Company sold a majority interest (60%) of its
subsidiary American Title Company ("ATC"), an underwritten title company, to
certain members of ATC's management. ATC will function as an exclusive agent of
the Company. The sale price of the 60% interest was $6.0 million resulting in a
realized gain of approximately $1.3 million before applicable income taxes.
Note D - Acquisitions
- ---------------------
On April 4, 1996, the Company purchased 17% of the outstanding common stock of
National Alliance Marketing Group, Inc. ("National"), a California corporation,
for $566,667; together with a warrant to acquire an additional 14% of National
common stock. In addition, the company loaned $1,200,000 to National at closing
at a rate of prime plus one percent. Subsequently, the Company agreed to
increase the credit facility from $1,200,000 to $1,700,000. In consideration for
the increase in the credit facility National agreed to increase the warrant
shares which the Company can purchase. If the entire $1,700,000 was borrowed the
Company could purchase an additional 34% of the outstanding shares of National.
After receiving approval of the transaction from the California Department of
Insurance, the transaction closed on July 12, 1996. National is the parent
company of Alliance Home Warranty Company, a California insurance company.
Alliance sells home warranty plans to buyers of resale homes, primarily in the
Central and Southern California markets. A home warranty contract generally
promises the repair or replacement of major operating system and built-in
appliances inside a home for a period of one year. On July 3, 1997, the Company
converted the outstanding note balance in conjunction with the exercise of the
warrants and now owns 51% of the outstanding common stock of National. The
outstanding balance of the notes receivable due from National at conversion was
approximately $1.6 million.
On July 22, 1997, the Company purchased 1,000,000 shares of common stock of GB
Foods Corporation, which represents approximately 15.5% of the outstanding
common stock of GB Foods Corporation, for a purchase price of $5.0 million.
Additionally, the Company purchased warrants to acquire an additional 3,500,000
shares of GB Foods Corporation at various prices ranging from $5.00 - $7.50 for
a purchase price of $800,000, 1,500,000 million warrants are exercisable at
$5.00 per share, 1,000,000 million warrants are exercisable at $7.00 per share
and 1,000,000 million warrants are exercisable at $7.50 per share. In
conjunction with the common stock purchase, the Company gained control of three
seats on the GB Foods Corporation Board of Directors. The purpose of the
investment is consistent with the Company's strategic goal to diversify into
non-interest rate sensitive businesses. The Company's investment in GB Foods
Corporation will be accounted for under the equity method.
On August 22, 1997, the Company acquired the common stock of First Title
Corporation, a title company with fourteen offices throughout the southeastern
United States. First Title has been merged into a subsidiary of the Company.
First Title was acquired for $4.7 million; payable in 80% common stock of the
Company (230,362 shares or $3.8 million) and 20% cash (approximately $900,000).
This transaction has been accounted for as a purchase.
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On September 18, 1997, the Company acquired the common stock of Ifland Credit
Services ("ICS"), a credit reporting company headquartered in Lexington,
Kentucky, for a purchase price of $3.75 million. ICS has been merged with Credit
Reports, Inc. The purchase price was payable 80% in common stock of the Company
(154,686 shares or $3.0 million) and 20% cash ($750,000). This transaction has
been accounted for as a purchase.
Effective as of October 1, 1997, the Company acquired Bron Research, Inc.
("Bron"), a flood certification company headquartered in Austin, Texas. The
purchase price paid by the Company for the acquisition was $9.85 million, paid
in 475,702 shares of Company common stock. Bron now operates as Fidelity
National Flood, Inc. This transaction has been accounted for as a
pooling-of-interests.
On October 9, 1997, the Company acquired the common stock of Credit Reports,
Inc. ("CRI"), a credit reporting company headquartered in Scottsdale, Arizona,
with operations in California, Colorado, Nevada and Oregon. CRI has been merged
with ICS. The purchase price for CRI was $200,000, payable in 10,414 shares of
Company common stock. This transaction has been accounted for as a purchase.
Also on October 9, 1997, the Company acquired the common stock of Express
Network, Inc. ("ENI"), a provider of attorney services such as courier,
messenger, courthouse filing, process serving, investigation and reprographics.
ENI provides services to legal firms in Los Angeles, Orange County, San Diego,
Riverside and San Francisco, California. The purchase price for ENI was $10.55
million; payable in 50% common stock of the Company (274,689 shares or $5.275
million) and 50% cash (approximately $5.275 million). Approximately $2.8 million
of the cash portion of the purchase price will be paid in equal installments
over a four-year period. This transaction has been accounted for as a purchase.
Note E - Subsequent Events
- --------------------------
On October 17, 1997, Fidelity National Financial, Inc., in a private
transaction, purchased $45 million aggregate principal amount at maturity of its
outstanding Liquid Yield Option Notes due 2009 (the "LYONs") from Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") for an aggregate purchase
price of $27.2 million (or $605 per $1,000 principal amount at maturity of
LYONs). The purchase price was paid in the form of 1,152,381 shares of the
Company's common stock (the "Exchange Shares"). The Company also paid Merrill
Lynch, the excess of a base price of $23.625 per Exchange Share over the actual
sales price (less $0.05 per share in commissions) realized by Merrill Lynch for
sales of up to 502,381 Exchange Shares. The Company also paid Merrill Lynch, for
each day, an amount in cash to be determined by multiplying the Net Carry Amount
(number of Exchange Shares multiplied by $23.625) by the Applicable Rate (LIBOR
plus 2.50%). The Company's payment obligations were subject to reduction for
dividends on Exchange Shares received by Merrill Lynch during the period. The
Company paid the foregoing amounts to Merrill Lynch in cash of approximately
$790,000 on November 7, 1997. The purchase of the LYONs increased stockholders'
equity by approximately $24.7 million while reducing outstanding debt by
approximately $24.3 million. Additionally, an extraordinary loss due to the
early retirement of debt of approximately $1.7 million, net of applicable income
taxes, will be recorded in the fourth quarter of 1997.
Effective October 23, 1997, the Company sold its small business investment
company subsidiary FNF Ventures, Inc., to certain members of FNF Ventures,
Inc.'s management. The sale price was $2.8 million, resulting in a realized gain
of approximately $800,000 before applicable income taxes.
Note F - Recent Accounting Pronouncements
- -----------------------------------------
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), effective for fiscal years ending after December 15, 1997. SFAS 128
introduces and requires the presentation of "basic" earnings per share which
represents net earnings divided by the weighted average shares outstanding
excluding all common stock equivalents. Dual presentation of "diluted" earnings
per share, reflecting the dilutive effects of all common stock equivalents, will
also be required. The diluted presentation is similar to the current
presentation of fully diluted earnings per share. Management has not determined
whether the adoption of SFAS 128 will have a material impact on the Company's
financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS 130 requires all items that are
necessary to be recognized under accounting standards as components of
comprehensive income to be reported in a
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financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 does not require a specific format for that
financial statement, but requires that an enterprise display an amount
representing total comprehensive income for the period covered by that financial
statement. SFAS 130 requires an enterprise to (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. Management has not determined whether the adoption of SFAS
131 will have a material impact on the Company's financial reporting.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for public business enterprises to
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
segment assets, information about the revenues derived from the enterprise's
products or services and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. Management has not determined whether the adoption of SFAS 131
will have a material impact on the Company's financial reporting.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Total revenue for the third quarter of 1997 increased 19.0% to $197.9 million
from $166.7 million for the third quarter of 1996. Total revenue for the
nine-month period ended September 30, 1997 increased 14.0% to $529.6 million
from $464.7 million for the comparable 1996 period. The quarter over quarter
increase can be attributed to increased title premiums, escrow fees, other fees
and revenue and investment income. The increase in title premiums for the
quarter and nine-month period ended September 30, 1997 compared to the 1996
period is primarily the result of the Company's expanded presence in agency
operations resulting from the Company's acquisition of Nations Title Inc., which
closed on April 1, 1996, and favorable market conditions. Additionally, agency
premiums were positively impacted by the sale of a majority interest of American
Title Company (formerly an underwritten title company subsidiary of the company,
to American Title Company Management). The sale of ATC, which was effective July
1, 1997, results in a shift of approximately $9.6 million of premiums from
direct operations to agency operations as ATC is now one of the Company's
largest agents.
The following table presents information regarding the components of title
premiums (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
----------------------------------------- ---------------------------------------
1997 % of Total 1996 % of Total 1997 % of Total 1996 % of Total
------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title premiums from direct operations $ 61,607 43.7% $ 58,919 46.5% $181,094 47.5% $178,982 51.6%
Title premiums from agency operations 79,453 56.3% 67,838 53.5% 200,338 52.5% 167,561 48.4%
-------- ----- -------- ----- -------- ----- -------- -----
Total title premiums $141,060 100.0% $126,757 100.0% $381,432 100.0% $346,543 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The increase in escrow fees and other fees and revenue can be attributed to
favorable title order openings and closings in our direct operations which began
to trend upward at the end of the first quarter and have remained strong, as
well as positive price and transaction trends in the real estate resale market,
particularly in California, the nation's largest title insurance market and an
area in which the Company has a strong presence. Additionally, the increase in
other fees and revenue has been favorably affected by increased contributions
made by the Company's title-related services subsidiaries, such as real estate
information and technology services, foreclosure publishing and posting,
recording services home-warranty and exchange intermediary services.
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Interest and investment income increased 275.7% to $13.9 million in the third
quarter of 1997 from $3.7 million in the third quarter of 1996. For the
nine-month period ended September 30, 1997, interest and investment income was
$25.8 million, a 116.8% increase over the $11.9 million of interest and
investment income earned in the comparable 1996 period. The increase in interest
and investment income earned during the 1997 periods is due to an increase in
net realized gains with a slight impact from an increase in the invested asset
base compared to the same periods in 1996. Net realized gains from the sale of
investments were $10.4 million in the third quarter of 1997 as compared to net
realized gains of $601,000 in the corresponding 1996 period. Included in the
quarter and nine-month periods net realized gains are a gain from the sale of
the Company's former home office building of $4.3 million, a gain from the sale
of ATC of $1.3 million and net gains from the sale of investment securities of
$5.0 million. These amounts are prior to applicable income taxes. Net realized
gains for the nine-month periods ended September 30, 1997 and 1996 were $14.3
million and $2.6 million, respectively. The Company has shifted the emphasis in
its fixed income portfolio from taxable to non-taxable securities during 1997.
The Company's operating expenses consist primarily of personnel costs and other
operating expenses which are incurred as title insurance orders are received and
processed by the Company's direct operations. Title insurance premiums and
escrow fees are recognized as income at the time the underlying real estate
transaction closes. As a result, revenue lags approximately 60-90 days behind
expenses and therefore gross margins may fluctuate.
Personnel costs include both base salaries and sales commissions (direct
operations) paid to employees and are the most significant operating expense
incurred by the Company. These costs generally fluctuate with the level of
direct orders opened and closed and with the mix of revenue between direct and
agency operations. Personnel costs, as a percentage of total revenue, have
decreased to 28.8% for the three-month period ended September 30, 1997 compared
to 31.7% for the corresponding period in 1996. Personnel costs as a percentage
of total revenue for the nine-month period ended September 30, 1997 have
decreased to 32.5% from 34.4% for the corresponding 1996 period.
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), escrow losses,
courier services, computer services, professional services, general insurance,
trade and notes receivable allowances and depreciation. Other operating expenses
decreased as a percentage of total revenue to 19.2% in the third quarter of 1997
from 22.9% in the third quarter of 1996. As a percentage of total revenue, other
operating expenses for the nine-month period ended September 30, 1997 decreased
to 22.5% from 23.8% for the same period in 1996.
The Company previously implemented and remains committed to aggressive cost
control programs which will help maintain operating expense levels consistent
with the levels of title-related revenue production; however, certain fixed
costs are incurred regardless of revenue levels, resulting in period over period
fluctuations.
The period over period fluctuations in personnel costs and other operating
expenses are primarily the result of the fluctuations in total revenue, as well
as the changes in the direct operation and agency operation title premium mix.
The addition of Nations Title Inc. title premiums, which are primarily
agency-related, has provided a balance between direct operations and agency
operations revenue. Additionally, the sale of ATC has shifted costs from
personnel costs and other operating expenses to agent commissions.
Agent commissions represent the portion of policy premiums retained by agents
pursuant to the terms of their respective agency contracts. Agent commissions
were 79.7% of agent policy premiums in the third quarter of 1997 compared to
78.8% of agency policy premiums in the third quarter of 1996. The fluctuation in
the third quarter of 1997 compared to the third quarter of 1996 is due to the
conversion of ATC to an agency operation and the related increase in commission
expense. Agent commissions were 78.8% of agency policy premiums in the first
nine months of 1997 compared to 78.6% in the first nine months of 1996. Agent
commissions and the resulting percentage of agency premiums retained by the
Company varies according to regional differences in real estate closing
practices and state regulations.
The provision for claim losses includes an estimate of anticipated title claims
and major claims. The estimate of anticipated title claims is accrued as a
percentage of title premium revenue based on 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 believes that as a result of its underwriting and
claims handling practices, as well as the refinancing business of prior years,
the Company will maintain a trend of favorable claim loss experience. The
Company has provided for claim losses at 7.0% of title insurance premiums prior
to the impact of major claims expense, recoupments
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and the impact of certain state promulgated title premium rates. Application of
these factors resulted in a net provision for claim losses as a percentage of
premiums of 7.1% and 7.3% for the three-month periods ended September 30, 1997
and 1996, respectively, and 6.8% and 7.2% for the nine-month periods ended
September 30, 1997 and 1996, respectively.
Interest expense is incurred by the Company in financing its capital asset
purchases and certain acquisitions. Interest expense consists of interest
related to the Company's outstanding debt and the amortization of original issue
discount and debt issuance costs related to the Liquid Yield Option Notes
("LYONs"). Interest expense of "non-LYONs" debt totaled $1.0 million and $1.0
million for the three-month periods ended September 30, 1997 and 1996,
respectively; and $3.1 million and $3.0 million for the nine-month periods ended
September 30, 1997 and 1996, respectively. The LYONs related component of
interest expense amounted to $1.4 million for the third quarter of 1997 and $1.3
million for the third quarter of 1996; and $4.1 million and $3.9 million for the
nine-month periods ended September 30, 1997 and 1996, respectively. Interest
rates being paid by the Company on certain "non-LYONs" debt in 1997 are lower
than those paid in 1996 as a result of decreases in certain rates (e.g., LIBOR)
to which certain of the interest rates being paid by the Company are indexed.
Income tax expense for the three-month periods ended September 30, 1997 and
1996, as a percentage of earnings before income taxes was 41.9% and 40.5%,
respectively. Income tax expense for the nine-month periods ended September 30,
1997 and 1996 was 41.0% and 40.0%, respectively. The fluctuations in income tax
expense as a percentage of earnings before income taxes are attributable to the
characteristics of net income, i.e., operating income versus investment income;
and the components of investment income, taxable versus non-taxable.
Liquidity and Capital Resources
The Company's insurance subsidiaries and wholly-owned underwritten title
companies collect premiums and pay claims and operating expenses. Fluctuations
in operating cash flows are primarily the result of increases or decreases in
revenue. The insurance subsidiaries also have cash flow sources derived from
investment income, repayments of principal and proceeds from sales and
maturities of investments and dividends and distributions from subsidiaries.
Positive cash flow from the insurance subsidiaries is invested primarily in
short-term investments, medium-term bonds and certain equity securities. Cash,
cash equivalents and short-term investments held by the Company's insurance
subsidiaries and underwritten title companies ("UTCs") provide liquidity for
projected claims and operating expenses.
The Company's cash requirements include debt service, operating expenses, taxes
and dividends on its common stock. As a holding company, the Company receives
cash from its subsidiaries as reimbursement for operating and other
administrative expenses it incurs. The reimbursements are executed within the
guidelines of various management agreements between the holding company and its
subsidiaries. The Company also receives funds from dividend distributions from
its insurance subsidiaries and UTCs. The insurance subsidiaries and UTCs are
restricted by state regulations in their ability to pay dividends and make
distributions. Each state of domicile regulates the extent to which the
Company's title underwriters and UTCs can pay dividends or make other
distributions to the Company. The Company believes that all anticipated cash
requirements for current operations will be met from internally generated funds
and short-term bank borrowings through existing credit facilities.
The short- and long-term liquidity requirements of the Company and its
subsidiaries are monitored regularly to match cash inflows with cash
requirements. The Company and subsidiaries forecast their daily cash needs 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.
11
<PAGE> 12
Part II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11 -- Computation of Primary and Fully Diluted
Earnings Per Share
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K dated September 23, 1997 - Fidelity National
Financial, Inc. Announces Management Changes
Form 8-K dated November 3, 1997 - Fidelity National Financial,
Inc. Announces Purchase of its Liquid Yield Option Notes due
2009 for $27.2 Million
Form 8-K dated November 5, 1997 - Combined Revenue and Net
Earnings for Fidelity National Financial, Inc. and Bron
Research, Inc.
12
<PAGE> 1
EXHIBIT 11
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Primary net earnings $15,857 $ 6,317 $27,985 $18,408
Add: Amortization of original
issue discount and debt issuance
costs, net of income tax effect,
applicable to LYONs 818 785 2,432 2,322
------- ------- ------- -------
Fully diluted earnings $16,675 $ 7,102 $30,417 $20,730
======= ======= ======= =======
Weighted average shares outstanding
during the period 14,019 13,724 13,928 13,644
Common stock equivalent
shares - primary 980 597 764 605
------- ------- ------- -------
Common and common stock equivalent
shares for purpose of calculating
primary earnings per share 14,999 14,321 14,692 14,249
Incremental shares to reflect
full dilution 4,545 4,396 4,718 4,394
------- ------- ------- -------
Total shares for purpose of
calculating fully diluted earnings
per share 19,544 18,717 19,410 18,643
======= ======= ======= =======
Primary earnings per share $ 1.06 $ .44 $ 1.90 $ 1.29
======= ======= ======= =======
Fully diluted earnings per share $ .85 $ .38 $ 1.57 $ 1.11
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 174,008
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 84,438
<MORTGAGE> 0
<REAL-ESTATE> 7,175
<TOTAL-INVEST> 289,759
<CASH> 80,329
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 576,259
<POLICY-LOSSES> 188,333
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 150,918
0
0
<COMMON> 2
<OTHER-SE> 153,787
<TOTAL-LIABILITY-AND-EQUITY> 576,259
381,432
<INVESTMENT-INCOME> 11,431
<INVESTMENT-GAINS> 14,342
<OTHER-INCOME> 122,360
<BENEFITS> 26,041
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 456,055
<INCOME-PRETAX> 47,469
<INCOME-TAX> 19,484
<INCOME-CONTINUING> 27,985
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,985
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.57
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
