<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, 1998
Commission File Number 1-9396
FIDELITY NATIONAL FINANCIAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 86-0498599
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17911 Von Karman Avenue, Suite 300, Irvine, California 92614
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(949) 622-5000
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(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 26,169,060 shares as of November 12, 1998
Exhibit Index appears on page 13 of 14 sequentially numbered pages.
<PAGE> 2
FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of 3
September 30, 1998 and December 31, 1997
B. Condensed Consolidated Statements of Earnings 4
for the three-month and nine-month periods ended
September 30, 1998 and 1997
C. Condensed Consolidated Statements of Comprehensive 5
Income for the three-month and nine-month periods
ended September 30, 1998 and 1997
D. Condensed Consolidated Statements of Cash Flows for the 6
nine-month periods ended September 30, 1998 and 1997
E. Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II: THER 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 13
</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.
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(Registrant)
By: /s/ Alan L. Stinson
------------------------------
Alan L. Stinson
Executive Vice President,
Financial Operations
(Chief Accounting Officer) Date: November 12, 1998
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 and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
(Restated)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value $297,889 $239,818
Equity securities, at fair value....................................... 56,626 77,553
Other long-term investments, at cost, which approximates fair value 26,376 18,008
Short-term investments, at cost, which approximates fair value 22,114 17,793
Investments in real estate and partnerships, net....................... 4,728 5,201
-------- --------
Total investments.................................................... 407,733 358,373
Cash and cash equivalents.................................................. 80,295 72,887
Leases and lease securitization residual interest.......................... 80,913 53,782
Trade receivables, net..................................................... 66,296 53,454
Notes receivable, net...................................................... 11,846 10,163
Prepaid expenses and other assets.......................................... 111,408 96,352
Title plants............................................................... 58,244 57,971
Property and equipment, net................................................ 43,282 44,713
-------- --------
$860,017 $747,695
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities............................... $101,725 $ 78,023
Notes payable.......................................................... 155,566 163,015
Reserve for claim losses............................................... 215,611 201,674
Deferred income taxes ................................................. 8,607 16,510
Income taxes payable................................................... 21,733 10,809
-------- --------
503,242 470,031
Minority interest...................................................... 2,007 3,614
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 1998 and 1997; issued, 31,920,681 as of September 30, 1998
and 30,329,276 as of December 31, 1997................................ 3 3
Additional paid-in capital............................................. 157,828 137,569
Retained earnings...................................................... 241,002 167,222
-------- --------
398,833 304,794
Accumulated other comprehensive income................................. 10,310 23,631
Less treasury stock, 6,041,352 shares as of September 30, 1998
and December 31, 1997, at cost........................................ 54,375 54,375
-------- --------
354,768 274,050
-------- --------
$860,017 $747,695
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
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,
----------------------- ------------------------
1998 1997 1998 1997
-------- --------- -------- ----------
(Unaudited) (Unaudited)
(Restated) (Restated)
<S> <C> <C> <C> <C>
REVENUE:
Title insurance premiums...................... $238,207 $163,378 $642,726 $440,149
Escrow fees................................... 33,915 22,111 92,850 61,958
Other fees and revenue........................ 50,866 28,538 149,089 80,694
Interest and investment income,
including realized gains and losses.......... 6,428 14,421 28,405 27,055
-------- -------- -------- --------
329,416 228,448 913,070 609,856
-------- -------- -------- --------
EXPENSES:
Personnel costs............................... 102,464 65,731 284,031 195,960
Other operating expenses...................... 62,373 44,267 177,634 137,732
Agent commissions............................. 101,003 73,106 268,148 184,119
Provision for claim losses.................... 14,626 10,916 41,383 28,938
Interest expense.............................. 2,740 3,006 9,414 9,190
-------- -------- -------- --------
283,206 197,026 780,610 555,939
-------- -------- -------- --------
Earnings before income taxes.................. 46,210 31,422 132,460 53,917
Income tax expense............................ 19,409 12,927 55,540 22,047
-------- -------- -------- --------
Net earnings .............................. $ 26,801 $ 18,495 $ 76,920 $ 31,870
======== ======== ======== ========
Basic net earnings ........................... $ 26,801 $ 18,495 $ 76,920 $ 31,870
======== ======== ======== ========
Basic earnings per share...................... $ 1.04 $ .87 $ 3.06 $ 1.57
======== ======== ======== ========
Weighted average shares outstanding,
basic basis.................................. 25,802 21,283 25,139 20,325
======== ======== ======== ========
Diluted net earnings.......................... $ 27,461 $ 19,313 $ 78,803 $ 34,302
======== ======== ======== ========
Diluted earnings per share.................... $ .90 $ .70 $ 2.60 $ 1.30
======== ======== ======== ========
Weighted average shares outstanding,
diluted basis................................ 30,661 27,441 30,315 26,434
======== ======== ======== ========
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 COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- -----------------------
1998 1997 1998 1997
------- ------- ------- --------
(Unaudited) (Unaudited)
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net earnings.................................... $26,801 $18,495 $76,920 $31,870
------- ------- ------- -------
Other comprehensive income (loss):
Unrealized gains (losses) on investments, net(1) (11,680) 13,935 (5,391) 20,019
Reclassification adjustments for gains
included in net income (2).................. (1,139) (6,001) (7,930) (8,144)
------- ------- ------- -------
Other comprehensive income (loss)............... (12,819) 7,934 (13,321) 11,875
------- ------- ------- -------
Comprehensive income............................ $13,982 $26,429 $63,599 $43,745
======= ======= ======= =======
</TABLE>
- -------------------
(1) Net of income tax expense (benefit) of $(8,458) and $9,724, and ($3,888) and
$13,854 for the three-month and nine-month periods ended September 30, 1998
and 1997, respectively.
(2) Net of income tax expense of $825 and $4,195 and $5,787 and $5,778 for the
three-month and nine-month periods ended September 30, 1998, respectively.
See Notes to Condensed Consolidated Financial Statements.
5
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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,
--------------------------
1998 1997
--------- ----------
(Unaudited)
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net earnings .................................................. $ 76,920 $ 31,870
Reconciliation of net earnings to net cash provided
by operating activities:
Depreciation and amortization............................ 15,268 13,522
Net increase in reserve for claim losses................. 13,937 3,096
Net increase in provision for possible losses other
than claims............................................ 288 1,414
Gain on sales of assets.................................. (13,717) (13,922)
Equity in gains of unconsolidated partnerships........... (86) (35)
Amortization of LYONs original issue discount............ 3,337 4,742
Change in assets and liabilities, net of effects from
acquisition of subsidiaries...................................
Net increase in leases and lease securitization residual
interest............................................... (27,131) (25,572)
Net (increase) decrease in trade receivables............. (12,812) 1,095
Net increase in prepaid expenses and other assets........ (15,518) (4,937)
Net increase in accounts payable and accrued liabilities 21,912 1,253
Net increase in income taxes............................. 10,621 22,274
--------- ---------
Net cash provided by operating activities........................ 73,019 34,800
--------- ---------
Cash flows from investing activities:
Proceeds from sales of property and equipment.................. 6,968 17,588
Proceeds from sale of real estate.............................. -- 4,567
Proceeds from sales and maturities of investments.............. 162,949 175,695
Collections of notes receivable................................ 3,598 11,037
Additions to title plants...................................... (273) (2,127)
Additions to property and equipment............................ (16,483) (18,406)
Additions to investments....................................... (214,959) (209,847)
Additions to notes receivable.................................. (6,899) (2,770)
Additions to real estate....................................... -- (1,048)
Sale of subsidiaries, net of cash.............................. -- 3,792
Acquisitions of businesses, net of cash acquired............... (198) (4,468)
--------- ---------
Net cash used in investing activities............................ (65,297) (25,987)
--------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(continued)
6
<PAGE> 7
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------
1998 1997
--------- ---------
(Unaudited)
(Restated)
<S> <C> <C>
Cash flows from financing activities:
Borrowings..................................................... $ 17,607 $ 12,037
Debt service payments.......................................... (20,325) (18,497)
Proceeds from stock issuance................................... - 18,021
Dividends paid................................................. (4,494) (3,657)
Stock options exercised........................................ 6,898 1,426
-------- --------
Net cash provided by (used in) financing activities (314) 9,330
-------- --------
Net increase in cash and cash equivalents........................ 7,408 18,143
Cash and cash equivalents at beginning of period................. 72,887 81,108
-------- --------
Cash and cash equivalents at end of period....................... $ 80,295 $ 99,251
======== ========
Supplemental cash flow information:
Income taxes paid.............................................. $ 43,033 $ (240)
======== ========
Interest paid.................................................. $ 6,142 $ 5,172
======== ========
Noncash investing and financing activities:
Dividends declared and unpaid.................................. $ 1,820 $ 1,044
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 8
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. Additionally,
these financial statements include the financial position and results of
operations of Granite Financial, Inc. and Alamo Title Holding Company as of and
for each of the periods presented. See Note B. This report should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, Granite Financial, Inc.'s Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1997, Granite Financial, Inc.'s quarterly reports
on Form 10-QSB for the quarterly periods ended September 30, 1997 and December
31, 1997, the Company's Form 8-K/A dated June 24, 1998, the Company's Form S-4
dated July 22, 1998 and the Company's Form 8-K dated August 20, 1998.
Certain reclassifications have been made in the 1997 Condensed Consolidated
Financial Statements to conform to the classifications used in 1998.
Note B - Acquisitions
The Company completed the acquisition of Granite Financial, Inc. ("Granite") on
February 26, 1998. Granite is engaged in the business of originating, funding,
purchasing, selling, securitizing and servicing equipment leases for a broad
range of businesses located throughout the United States. The acquisition was
effected by means of a merger of a wholly-owned subsidiary of the Company with
and into Granite, with Granite surviving the merger as a wholly-owned subsidiary
of the Company. Each of the approximately 6,417,000 shares of Granite's common
stock were converted into .702 shares of the Company's common stock,
approximately 4.5 million shares, plus cash in lieu of fractional shares. The
closing price of the Company's common stock, as reported by the New York Stock
Exchange, was $28.69 on February 26, 1998. This transaction has been accounted
for as a pooling-of-interests, as such, the financial position and results of
operations of Granite are included in the accompanying Condensed Consolidated
Financial Statements as of and for each of the periods presented.
On August 20, 1998, the Company completed the acquisition of Alamo Title Holding
Company ("Alamo"). Alamo, through its subsidiaries, is a regional underwriter of
title insurance policies and performs other title-related services. The
acquisition was effected by means of a merger of a wholly-owned subsidiary of
the Company with and into Alamo, with Alamo surviving the merger as a
wholly-owned subsidiary of the Company. Each of the approximately 1,357,000
shares of Alamo's common stock were converted into 1.491 shares of the Company's
common stock, approximately 2.0 million shares, plus cash in lieu of fractional
shares. The closing price of the Company's common stock, as reported by the New
York Stock Exchange, was $36.44 on August 20, 1998. This transaction has been
accounted for as a pooling-of-interests, as such, financial position and results
of operations of Alamo are included in the accompanying Condensed Consolidated
Financial Statements as of and for each of the periods presented.
Note C - Sale of National Title Insurance of New York Inc.
On March 18, 1998, the Company announced that it had entered into an agreement
to sell National Title Insurance of New York Inc. ("National") to American Title
Company ("ATC"), subject to regulatory approval and certain other conditions.
The purchase price is structured at a premium to book value. National was
acquired in April 1996, as part of the Nations Title Inc. acquisition and has
not been actively underwriting policies since the transaction closed. American
Title Company is an underwritten title company which was formerly a wholly-owned
subsidiary of the Company. Effective July 1, 1997, 60% of ATC was sold to
certain members of ATC's management. As a result of a tax-free reorganization of
American National Financial, Inc. ("ANFI"), the parent company of ATC and its
subsidiaries, the Company owns approximately 40% of ANFI, and as a result,
continues its proportionate ownership interest in ATC and National.
8
<PAGE> 9
Note D - Sale of ACS Systems, Inc.
The Company completed the sale of its wholly-owned subsidiary ACS Systems, Inc.
("ACS") to Micro General Corporation (OTCBB:MGEN) for 4.6 million shares of
Micro General common stock on May 14, 1998. ACS provides small to medium size
businesses within the real estate industry with software, systems integration
and communication services including telecommunications hardware, long distance
reselling, computer hardware and system software reselling, consulting services,
technical services, internet services, electronic commerce and title and escrow
software applications. The sales price was valued at $6,900,000 resulting in a
deferred gain to the Company of approximately $5,300,000. ACS will continue to
provide the above listed services to the Company at preferred customer rates.
The Company currently owns 81.4% of Micro General Corporation.
Note E - Conversion of Interest in Data Tree Corporation
On June 3, 1998, the Company announced that as a result of the closing of the
merger of Data Tree Corporation ("Data Tree") with Image Acquisition
Corporation, a wholly-owned subsidiary of First American Financial Corporation
(NYSE:FAF), the Company's 27.9% ownership position in Data Tree was converted
into approximately 176,600 shares of First American Financial Corporation common
stock, resulting in a gain of approximately $9.7 million, before applicable
income taxes. The Company's investment in Data Tree was approximately $3.0
million, including its percentage equity in Data Tree's earnings. The gain on
conversion has been reflected in the Condensed Consolidated Statements of
Earnings for the nine-month period ended September 30, 1998.
Note F - Dividends
On September 23, 1998, the Company's Board of Directors declared a cash dividend
of $.07 per share, payable on October 19, 1998, to stockholders of record on
October 5, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Factors That May Affect Operating Results
The statements contained in this report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
The reader should consult the risk factors listed from time to time and other
information disclosed in the Company's reports on Forms 10-Q, 10-K and filings
under the Securities Act of 1933, as amended.
Results of Operations
Total revenue for the third quarter of 1998 increased 44.2% to $329.4 million
from $228.4 million for the third quarter of 1997. Total revenue for the
nine-month period ended September 30, 1998 increased 49.7% to $913.1 million
from $609.9 million for the comparable 1997 period. The increases in total
revenue for both the three-month and nine-month periods ended September 30, 1998
are primarily the result of continuing strength in the Company's core title
operations, which have been positively impacted by favorable market conditions
leading to an increase in real estate activity and, in turn, increased order
inventory levels and closings. The current economic environment has led to one
of the strongest real estate markets in history with mortgage interest rates
approaching historical lows. Additionally, the contribution of the Company's
ancillary service subsidiaries has increased significantly as the demand for
services has increased consistent with the trend in real estate activity and the
Company continues the successful integration of businesses acquired in the
second half of 1997.
9
<PAGE> 10
The following table presents information regarding the components of title
premiums (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------------------- -----------------------------------------
1998 % of Total 1997 % of Total 1998 % of Total 1997 % of Total
-------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title premiums from direct operations $111,249 46.7% $ 72,710 44.5% $306,248 47.6% $209,959 47.7%
Title premiums from agency operations 126,958 53.3% 90,668 55.5% 336,478 52.4% 230,190 52.3%
-------- ----- -------- ----- -------- ----- -------- -----
Total title premiums $238,207 100.0% $163,378 100.0% $642,726 100.0% $440,149 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The increases in title premiums of $74.8 million, or 45.8%, and $202.6 million,
or 46.0%, for the three-month and nine-month periods ended September 30, 1998,
respectively, are consistent with the current real estate market environment.
Title orders and requests for real estate related services have continued to
react favorably to existing conditions.
Escrow fees have followed the same trend as title premiums, as would be
expected. Escrow fees have increased 53.4% and 49.9% for the three-month and
nine-month periods ended September 30, 1998, respectively. The increase in
escrow fees can also be attributed to current market conditions, the continuing
West Coast real estate recovery and the Company's efforts to expand its presence
in the southern California escrow market.
The Company has made a concerted effort to develop its ancillary service
segments with the acquisitions of ancillary service companies in the second half
of 1997. Ancillary services include real estate information, credit reporting,
flood certification, real estate tax services, home warranty protection, default
management services, exchange intermediary services and attorney services. The
growth of these subsidiaries has been significant. Third quarter 1998 revenue
increased 157.6% to $21.9 million compared to $8.5 million in the third quarter
of 1997, while pretax earnings increased 136.4% to $2.6 million in 1998 from
$1.1 million in 1997. The increases in the nine-month results were similarly
dramatic. Revenue increased 173.5% to $62.9 million for the nine-month period
ended September 30, 1998 compared to $23.0 million for the 1997 period while
1998 pretax earnings increased 204.2% to $7.3 million from $2.4 million in 1997.
Interest and investment income decreased to $6.4 million in the third quarter of
1998 from $14.4 million in the third quarter of 1997. For the nine-month period
ended September 30, 1998, interest and investment income was $28.4 million
compared to $27.1 million of interest and investment income earned in the
comparable 1997 period. The decrease in interest and investment income in the
third quarter of 1998 compared to the third quarter of 1997 is primarily related
to the timing of realized gains. Realized gains in the third quarter of 1998
were $2.0 million compared to $10.2 million in the third quarter of 1997.
Included in the third quarter of 1997 are realized gains of approximately $5.6
million related to the sale of the Company's former home office building ($4.3
million) and a gain on the sale of 60% of ATC ($1.3 million). The slight
increase in interest and investment income for the nine-month period ended
September 30, 1998 compared to the 1997 period is an increase in interest and
dividend income resulting from an increased invested asset base offset by lower
interest rates. Realized gains in 1998 were $13.7 million compared to $13.9
million in 1997. Included in 1998 realized gains is a gain from the conversion
of the Company's investment in Data Tree Corporation of approximately $9.7
million. See Note C.
The Company's operating expenses consist primarily of personnel cost, other
operating expenses and commissions paid to agents which are incurred as orders
are received and processed. Title insurance premiums, escrow fees and other fees
and revenue are recognized as income at the time the underlying transaction
closes. As a result, revenue lags approximately 60-90 days behind expenses and
therefore gross margins may fluctuate.
Personnel costs include base salaries, bonuses and sales commissions paid to
employees. These costs generally fluctuate with the level of orders opened and
closed and with the mix of revenue. Personnel costs, as a percentage of total
revenue, have increased to 31.1% for the three-month period ended September 30,
1998 compared to 28.8% for the corresponding period in 1997. Personnel costs as
a percentage of total revenue for the nine-month period ended September 30, 1998
have decreased to 31.1% from 32.1% for the corresponding 1997 period. Adjusting
for the increase in personnel costs of $6.3 million related to the acquisitions
made in 1997, personnel costs as a percentage of total revenue were 29.2% and
30.4% for the three-month and nine-month periods ended September 30, 1998,
respectively. These fluctuations reflect a continued emphasis on expense control
and an increase in productivity from our automation and electronic commerce.
10
<PAGE> 11
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 adjust personnel costs in accordance with activity.
Other operating expenses consist primarily of facilities expenses, title plant
maintenance, premium taxes (which insurance underwriters are required to pay on
title premiums in lieu of franchise and other state taxes), escrow losses,
courier services, computer services, professional services, general insurance,
trade and notes receivable allowances and depreciation. Certain of these fixed
costs are incurred regardless of revenue levels, resulting in period over period
fluctuations. Other operating expenses decreased as a percentage of total
revenue to 18.9% in the third quarter of 1998 from 19.4% in the third quarter of
1997. As a percentage of total revenue, other operating expenses for the
nine-month period ended September 30, 1998 decreased to 19.5% from 22.6% for the
same period in 1997. Adjusting for the increase in other operating expenses
related to the acquisitions made in 1997, other operating expenses as a
percentage of total revenue were 17.7% and 18.2% for the three-month and
nine-month periods ended September 30, 1998, respectively. The Company
previously implemented and remains committed to aggressive cost control programs
which will help maintain operating expense levels consistent with revenue
levels.
Agent commissions represent the portion of policy premiums retained by agents
pursuant to the terms of their respective agency contracts. Agent commissions
were 79.6% of agent policy premiums in the third quarter of 1998 compared to
80.6% of agent policy premiums in the third quarter of 1997; for the nine-month
periods ended September 30, 1998 and 1997 agent commissions as a percentage of
agent policy premiums were 79.7% and 80.0%, respectively. Agent commissions and
the resulting percentage of agency premiums retained by the Company vary
according to regional differences in real estate closing practices and state
regulations. The 1998 decrease in agent commissions as a percentage of agency
premiums from 1997 resulted in an increase in the percentage of agency premiums
retained by the Company.
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 has provided for claim losses at 7.0% of title
insurance premiums prior to the impact of major claims 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 6.1% and 6.7% for the three-month periods ended
September 30, 1998 and 1997, respectively, and 6.4% and 6.6% for the nine-month
periods ended September 30, 1998 and 1997, respectively.
Interest expense is incurred by the Company in financing its capital asset
purchases, lease originations 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 $1.6 million for the three-month periods ended September 30, 1998 and
1997; and $6.3 million and $5.0 million for the nine-month periods ended
September 30, 1998 and 1997, respectively. The LYONs related component of
interest expense amounted to $1.1 million for the third quarter of 1998 and $1.4
million for the third quarter of 1997; and $3.2 million and $4.1 million for the
nine-month periods ended September 30, 1998 and 1997, respectively. The decrease
in LYONs related interest is attributable to the retirement of $45.0 million
maturity value of LYONs in October, 1997 and conversions. The fluctuation in
interest expense is primarily due to the increase in outstanding notes payable
at September 30, 1998 compared to September 30, 1997 offset by the decrease in
LYONs related interest and overall lower interest rates in 1998 compared to
1997.
Income tax expense for the three-month periods ended September 30, 1998 and
1997, as a percentage of earnings before income taxes was 42.0% and 41.1%,
respectively. Income tax expense for the nine-month periods ended September 30,
1998 and 1997 was 41.9% and 40.9%, respectively. The fluctuations in income tax
expense as a percentage of earnings before income taxes are attributable to the
Company's estimate of ultimate income tax liability and the characteristics of
net income, i.e., operating income versus investment income, taxable versus
non-taxable.
11
<PAGE> 12
Liquidity and Capital Resources
The Company's cash requirements include debt service, operating expenses, lease
fundings, lease securitizations, certain acquisitions, taxes and dividends on
its common stock. The Company believes that all anticipated cash requirements
for current operations will be met from internally generated funds, through cash
received from subsidiaries, cash generated by investment securities and bank
borrowings through existing credit facilities.
Two of the significant sources of the Company's funds are dividends and
distributions from its subsidiaries. As a holding company, the Company receives
cash from its subsidiaries in the form of dividends and as reimbursement for
operating and other administrative expenses it incurs. The reimbursements are
executed within the guidelines of various management agreements among the
Company and its subsidiaries. Fluctuations in operating cash flows are primarily
the result of increases or decreases in revenue. The Company's insurance
subsidiaries and underwritten title companies ("UTCs") collect premiums and pay
claims and operating expenses. The insurance subsidiaries and UTCs also have
cash flow sources derived from investment income, repayments of principal and
proceeds from sales and maturities of investments and dividends from
subsidiaries. Positive cash flow from the insurance subsidiaries is invested
primarily in short-term investments and medium-term bonds. Short-term
investments held by the Company's insurance subsidiaries provide liquidity for
projected claims and operating expenses. The insurance subsidiaries are
restricted by state regulations in their ability to pay dividends and make
distributions. Each state of domicile regulates the extent to which the
Company's title underwriters can pay dividends or make other distributions to
the Company. The UTCs are also regulated by insurance regulatory or banking
authorities. The Company's ancillary service and leasing subsidiaries collect
revenue and pay operating expenses; however, they are not regulated by insurance
regulatory or banking authorities.
The short- and long-term liquidity requirements of the Company, insurance
subsidiaries, UTCs, ancillary service and finance subsidiaries are monitored
regularly to match cash inflows with cash requirements. The Company, insurance
subsidiaries, UTCs, ancillary service and leasing 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.
Year 2000
The Year 2000 Issue ("Y2K") results from computer programs and computer hardware
that utilize only two digits to identify a year in the date field, rather than
four digits. If such programs or hardware are not modified or upgraded
information systems could fail, lock up, or in general fail to perform according
to normal expectations. The Company has implemented a program and committed both
personnel and other resources to determine the extent of potential Y2K issues.
Included within the scope of this program are systems used in title plants,
title policy processing, escrow production, claims processing, financial
management, human resources, payroll and infrastructure. In addition to a review
of internal systems, the Company has initiated formal communications with third
parties with which it does business in order to determine whether or not they
are Y2K compliant and the extent to which the Company may be vulnerable to third
parties' failure to become Y2K compliant. The Company is in the process of
identifying Y2K compliant issues in its systems, equipment and processes. The
Company is making changes to such systems, updating or replacing such equipment,
and modifying such processes to make them Y2K compliant.
The Company has developed a four phase program to become Y2K compliant. Phase I
is, "Plan Preparation and Identification of the Problem." This is an ongoing
phase that will continue beyond the year 2000 itself. Phase II is, "Plan
Execution and Remediation." Phase III is, "Testing." Phase IV is, "Maintaining
Y2K Compliance." The Company anticipates that its systems processes will be
substantially Y2K compliant by July 1999. The costs of the Y2K related efforts
incurred to date have not been material, and the estimate of remaining costs to
be incurred is not considered to be material. Due to the complexities of
estimating the cost of modifying applications to become Y2K compliant and the
difficulties in assessing third parties', including various local governments
upon which the Company relies upon to provide title-related data, ability to
become Y2K compliant, estimates may be subject to change.
Management of the Company believes that its electronic data processing and
information systems will be Y2K compliant; however, there can be no assurance
that all of the Company's systems will be Y2K compliant, that the costs to be
Y2K compliant will not exceed management's current expectations, or that the
failure of such systems to be Y2K compliant will not have a material adverse
effect on the Company's business.
12
<PAGE> 13
The Company has not yet completed a contingency plan in the event that any
systems are not Y2K compliant, but will do so once the Phase III process of its
compliance program is begun. We expect this contingency plan to be complete by
July 1999.
Part II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11 -- Computation of Basic and Diluted Earnings
Per Share
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K:
Current Report on Form 8-K, dated August 20, 1998 relating to the: a)
Termination of the Agreement and Plan of Merger by and among Fidelity
National Financial, Inc. and subsidiaries, and Matrix Capital
Corporation and the agreement between Fidelity National Financial, Inc.
and Matrix Capital corporation to enter into a depository and warrant
purchase agreement and; b) completion of the merger of Alamo Title
Holding Company and a wholly-owned subsidiary of Fidelity National
Financial, Inc., with and into Alamo Title Holding Company.
13
<PAGE> 1
EXHIBIT 11
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
COMPUTATION OF BASIC AND DILUTED
EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
1998(1) 1997(1) 1998(1) 1997(1)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings, basic basis.................. $26,801 $18,495 $76,920 $31,870
Plus: Impact of assumed conversion
of the LYONs, net of applicable
income taxes......................... 660 818 1,883 2,432
------- ------- ------- -------
Diluted earnings........................... $27,461 $19,313 $78,803 $34,302
======= ======= ======= =======
Weighted average shares outstanding
during the period, basic basis 25,802 21,283 25,139 20,325
Plus: Common stock equivalent shares
assumed from conversion of options... 1,654 1,366 1,753 1,317
Common stock equivalent shares
assumed from conversion of LYONs... 3,205 4,792 3,423 4,792
------- ------- ------- -------
Weighted average shares outstanding
during the period, diluted basis......... 30,661 27,441 30,315 26,434
======= ======= ======= =======
Basic earnings per share................... $ 1.04 $ .87 $ 3.06 $ 1.57
======= ======= ======= =======
Diluted earnings per share................. $ .90 $ .70 $ 2.60 $ 1.30
======= ======= ======= =======
</TABLE>
- ------------
(1) Earnings and weighted average shares outstanding for both 1998 and 1997
include the full period results and impact of Fidelity, Alamo and Granite
combined, as the mergers have been accounted for as poolings-of-interests.
14
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 297,889
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 56,626
<MORTGAGE> 0
<REAL-ESTATE> 4,728
<TOTAL-INVEST> 407,733
<CASH> 80,295
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 860,017
<POLICY-LOSSES> 215,611
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 155,566
0
0
<COMMON> 3
<OTHER-SE> 354,765
<TOTAL-LIABILITY-AND-EQUITY> 860,017
642,726
<INVESTMENT-INCOME> 14,688
<INVESTMENT-GAINS> 13,717
<OTHER-INCOME> 241,939
<BENEFITS> 41,383
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 739,227
<INCOME-PRETAX> 132,460
<INCOME-TAX> 55,540
<INCOME-CONTINUING> 76,920
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,920
<EPS-PRIMARY> 3.06
<EPS-DILUTED> 2.60
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
