<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 March 31, 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) 622-5000
- --------------------------------------------------------------------------------
(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 Stock 13,921,556 shares as of May 5, 1997
Exhibit Index appears on page 10 of 11 sequentially numbered pages.
1
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FORM 10-Q
QUARTERLY REPORT
Quarter Ended March 31, 1997
TABLE OF CONTENTS
Part I: FINANCIAL INFORMATION Page Number
-----------
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of 3
March 31, 1997 and December 31, 1996
B. Condensed Consolidated Statements of 4
Operations for the three-month periods
ended March 31, 1997 and 1996
C. Condensed Consolidated Statements of Cash 5
Flows for the three-month periods ended
March 31, 1997 and 1996
D. Notes to Condensed Consolidated Financial 7
Statements
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Part II: OTHER INFORMATION
Items 1.-5. of Part II have been omitted because they are
not applicable with respect to the current reporting
period.
Item 6. Exhibits and Reports on Form 8-K 10
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/ Carl A. Strunk
----------------------------
Carl A. Strunk
Executive Vice President,
Chief Financial Officer and Date: May 5, 1997
Treasurer
2
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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>
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value $159,800 $166,329
Equity securities, at fair value 48,695 43,578
Other long-term investments, at cost, which approximates fair value 5,650 5,542
Short-term investments, at cost, which approximates fair value 2,801 873
Investments in real estate and partnerships, net 7,081 11,352
-------- --------
Total investments 224,027 227,674
Cash and cash equivalents 49,711 63,971
Trade receivables, net 52,915 54,355
Notes receivable, net 11,043 11,317
Prepaid expenses and other assets 59,917 55,072
Title plants 51,099 50,701
Property and equipment, net 42,253 38,617
Income taxes receivable 5,590 7,589
-------- --------
$496,555 $509,296
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 45,100 $ 53,987
Notes payable 147,059 148,922
Reserve for claim losses 188,456 187,245
Deferred income taxes 5,436 7,604
-------- --------
386,051 397,758
Minority interest 1,224 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, 19,413,694 in 1997 and 19,412,694 in 1996 2 2
Additional paid-in capital 61,271 61,271
Retained earnings 93,058 91,019
-------- --------
154,331 152,292
Net unrealized gains on investments 9,324 12,334
Less treasury stock, 5,492,138 shares
in 1997 and 1996, at cost 54,375 54,375
-------- --------
109,280 110,251
-------- --------
$496,555 $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 OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1997 1996
---------- ---------
(Unaudited)
<S> <C> <C>
REVENUE:
Title insurance premiums $ 110,914 $ 89,823
Escrow fees 16,550 16,018
Other fees and revenue 19,633 16,443
Interest and investment income,
including realized gains (losses) 6,095 4,114
--------- ---------
153,192 126,398
--------- ---------
EXPENSES:
Personnel costs 54,988 50,683
Other operating expenses 39,438 33,328
Agent commissions 44,061 25,647
Provision for claim losses 7,066 6,241
Interest expense 2,517 2,199
--------- ---------
148,070 118,098
--------- ---------
Earnings before income taxes 5,122 8,300
Income tax expense 2,100 3,155
--------- ---------
Net earnings $ 3,022 $ 5,145
========= =========
Primary earnings per share $ .21 $ .36
========= =========
Fully diluted earnings per share $ .20 $ .32
========= =========
Primary weighted average shares outstanding 14,485 14,110
========= =========
Fully diluted weighted average shares outstanding 18,842 18,467
========= =========
Cash dividends per share $ .07 $ .06
========= =========
</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>
Three months ended
March 31,
---------------------------
1997 1996
---------- ----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,022 $ 5,145
Reconciliation of net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 3,304 2,802
Net increase (decrease) in reserve for claim losses 1,211 (644)
Net increase (decrease) in provision for possible
losses on real estate and notes receivable 150 (25)
Gain on sales of assets (1,567) (1,162)
Equity in (gains) losses of unconsolidated partnerships (63) 33
Amortization of LYONs original issue discount 1,374 1,273
Change in assets and liabilities, net of effects
from acquisition of subsidiaries:
Net (increase) decrease in trade receivables 1,440 (4,507)
Net increase in prepaid expenses and other assets (5,542) (4,683)
Net decrease in accounts payable and accrued liabilities (8,888) (1,239)
Net decrease in income taxes receivable 1,999 3,066
-------- --------
Net cash provided by (used in) operating activities (3,560) 59
-------- --------
Cash flows from investing activities:
Proceeds from sales of property and equipment 258 708
Proceeds from sale of real estate 4,320 --
Proceeds from sales and maturities of investments 67,584 74,768
Collections of notes receivable 1,429 4,317
Additions to title plants (398) --
Additions to property and equipment (6,742) (1,250)
Additions to investments (71,843) (76,657)
Additions to notes receivable (1,152) (1,885)
Acquisitions of businesses, net of cash acquired -- (498)
-------- --------
Net cash used in investing activities (6,544) (497)
-------- --------
</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
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Borrowings $ -- $ 1,494
Debt service payments (3,174) (2,508)
Dividends paid (982) (860)
--------- --------
Net cash used in financing activities (4,156) (1,874)
-------- --------
Net decrease in cash and cash equivalents (14,260) (2,312)
Cash and cash equivalents at beginning of period 63,971 47,431
-------- --------
Cash and cash equivalents at end of period $ 49,711 $ 45,119
======== ========
Supplemental cash flow information:
Income taxes paid $ 103 $ 224
======== ========
Interest paid $ 1,185 $ 902
======== ========
Noncash investing and financing activities:
Dividends declared and unpaid $ 983 $ 796
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
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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 1996 Annual Report on Form
10-K for the year ended December 31, 1996.
Note B - Dividends
On March 25, 1997, the Company's Board of Directors declared a cash dividend of
$.07 per share, payable on May 2, 1997, to stockholders of record on April 11,
1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Total revenue for the first quarter of 1997 increased $26.8 million, or 21.2%,
to $153.2 million from $126.4 million in the first quarter of 1996. The
increase can be attributed to an increase in agency title premiums resulting
from the Company's acquisition of Nations Title Inc., which closed April 1,
1996; an increase in other fees and income and an increase in investment
income. These increases were offset by a slight decrease in title premiums
generated by direct operations. The decrease in title premiums from direct
operations is primarily the result of real estate market seasonality and less
favorable mortgage interest rates in the 1997 period compared to the 1996
period.
The following table presents information regarding the components of title
premiums (dollars in thousands):
<TABLE>
<CAPTION>
March 31,
----------------------------------------------
1997 % of Total 1996 % of Total
-------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Title premiums from direct operations $ 54,575 49.2% $56,295 62.7%
Title premiums from agency operations 56,339 50.8% 33,528 37.3%
-------- ----- ------- -----
Total title premiums $110,914 100.0% $89,823 100.0%
======== ===== ======= =====
</TABLE>
The acquisition of Nations Title provided a balance to the Company's premium
revenue between direct and agency, as well as a hedge against future market
downturns. Traditionally, the Company had primarily focused on direct
operations which generate higher margins than agency operations.
The increase in other fees and revenue is related to 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 and exchange intermediary services.
Interest and investment income increased 48.8% to $6.1 million in the first
quarter of 1997 from $4.1 million in the first quarter of 1996. The increase in
interest and investment income earned during the 1997 period is primarily due to
an increase in invested assets acquired in connection with the Nations Title
acquisition and an improvement in net realized gains compared to the same period
in 1996. Net realized gains were $1.6 million in the first quarter of 1997 as
compared to net realized gains of $1.2 million in the corresponding 1996 period.
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. 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.
7
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Personnel costs include both base salaries and 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 35.9% for the three-month period ended March 31, 1997 from 40.1% for the
corresponding period in 1996. The fluctuation in personnel costs as a
percentage of total revenue can be attributed to the varying market conditions
in the title insurance industry and the mix of agency versus direct business.
The Company has taken significant measures to maintain personnel costs at
levels consistent with revenues. The Company continues to monitor the
prevailing market conditions and will attempt to adjust personnel costs in
accordance with title order 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), 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 25.7% in the first
quarter of 1997 from 26.4% in the first quarter of 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 operation and agency revenue. In
previous periods the majority of title premiums and total revenue were generated
by direct operations, which resulted in higher personnel costs and other
operating expenses.
Agent commissions represent the portion of policy premiums retained by agents
pursuant to the terms of their respective agency contracts. Agent commissions
were 78.2% of agent policy premiums in the first quarter of 1997 compared to
76.5% of agent policy premiums in the first quarter 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 1997 increase in agent commissions as a percentage of agency
premiums over 1996 resulted in a decrease in the percentage of agency premiums
retained by the Company. This decrease in retained agency premium can be
attributed to the fact that the average commissions paid to the former Nations
Title Inc. agents exceed those paid to agents existing prior to the
acquisition. The combination of higher agency commission rates and the
significant agency revenue generated by the Nations Title Inc. acquisition
have resulted in higher overall commissions in 1997.
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. Based on recently completed loss development studies, the Company
believes that as a result of its underwriting and claims handling practices it
will maintain the 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 claim expense, recoupments, and premium rates and loss
experience in the state of Texas. (Premiums are generally higher in Texas for
similar coverage than in other states, while loss experience is comparable. As
a result, losses as a percentage of premiums are lower.) Application of these
factors resulted in a net provision for claim losses as a percentage of
premiums of 6.4% and 6.9% for the three-month periods ended March 31, 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 $1.1 million and
$900,000 for the three-month periods ended March 31, 1997 and 1996,
respectively. The LYONs related component of interest expense amounted to $1.4
million for the first quarter of 1997 and $1.3 million for the first quarter of
1996. The increase in interest expense is primarily related to the increase in
outstanding notes payable at March 31, 1997 compared to March 31, 1996.
Income tax expense for the three-month periods ended March 31, 1997 and 1996,
as a percentage of earnings before income taxes was 41.0% and 38.0%,
respectively. The fluctuations in income tax expense as a percentage of
earnings before income taxes are attributable to the effect of state income
taxes on the Company's wholly-owned underwritten title companies ("UTCs") and
the characteristics of net income, i.e., operating income versus investment
income.
8
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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 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 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.
One of the additional significant sources of the Company's funds is 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 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.
9
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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:
None
10
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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
March 31,
--------------------------
1997 1996
---------- ---------
(Unaudited)
<S> <C> <C>
Primary net earnings $ 3,022 $ 5,145
Add: Amortization of original issue discount
and debt issuance costs, net of income
tax effect, applicable to LYONs 808 840
-------- --------
Fully diluted earnings $ 3,830 $ 5,985
======== ========
Weighted average shares outstanding during the period 13,921 13,500
Common stock equivalent shares - primary 564 610
-------- --------
Common and common stock equivalent shares for purpose
of calculating primary earnings per share 14,485 14,110
Incremental shares to reflect full dilution 4,357 4,357
-------- --------
Total shares for purpose of calculating fully diluted
earnings per share 18,842 18,467
======== ========
Primary earnings per share $ .21 $ .36
======== ========
Fully diluted earnings per share $ .20 $ .32
======== ========
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 159,800
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 48,695
<MORTGAGE> 0
<REAL-ESTATE> 7,081
<TOTAL-INVEST> 224,027
<CASH> 49,711
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 496,555
<POLICY-LOSSES> 188,456
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 147,059
0
0
<COMMON> 2
<OTHER-SE> 109,278
<TOTAL-LIABILITY-AND-EQUITY> 0
110,914
<INVESTMENT-INCOME> 4,528
<INVESTMENT-GAINS> 1,567
<OTHER-INCOME> 36,183
<BENEFITS> 7,066
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 141,004
<INCOME-PRETAX> 5,122
<INCOME-TAX> 2,100
<INCOME-CONTINUING> 3,022
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,022
<EPS-PRIMARY> .21
<EPS-DILUTED> .20
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
