<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 June 30, 1998
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)
(949) 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 23,524,058 shares as of August 11, 1998
Exhibit Index appears on page 14 of 15 sequentially numbered pages.
<PAGE> 2
FORM 10-Q
QUARTERLY REPORT
Quarter Ended June 30, 1998
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Part I: FINANCIAL INFORMATION Page Number
-----------
<S> <C>
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of June 30, 1998 3
and December 31, 1997
B. Condensed Consolidated Statements of Earnings for the 4
three-month and six-month periods ended June 30, 1998
and 1997
C. Condensed Consolidated Statements of Comprehensive 5
Income for the three-month and six-month periods
ended June 30, 1998 and 1997
D. Condensed Consolidated Statements of Cash Flows for the 6
six-month periods ended June 30, 1998 and 1997
E. Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Part II: OTHER INFORMATION
Items 1.-3. and 5 of Part II have been omitted because they are not
applicable with respect to the current reporting period.
Item 4. Submission of Matter to Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
</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 and
Chief Financial Officer Date: August 11, 1998
2
<PAGE> 3
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(Unaudited) (Restated)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities available for sale, at fair value..................... $233,704 $217,001
Equity securities, at fair value....................................... 82,363 70,418
Other long-term investments, at cost, which approximates fair value.... 14,565 16,464
Short-term investments, at cost, which approximates fair value......... 18,003 17,793
Investments in real estate and partnerships, net....................... 4,964 5,201
-------- --------
Total investments.................................................... 353,599 326,877
Cash and cash equivalents.................................................. 74,571 59,855
Leases and lease securitization residual interest.......................... 73,538 53,782
Trade receivables, net..................................................... 64,031 52,650
Notes receivable, net...................................................... 11,853 8,898
Prepaid expenses and other assets.......................................... 92,846 86,789
Title plants............................................................... 51,693 51,756
Property and equipment, net................................................ 39,827 38,985
-------- --------
$761,958 $679,592
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities............................... $ 85,428 $ 72,424
Notes payable.......................................................... 149,866 155,795
Reserve for claim losses............................................... 195,386 190,747
Deferred income taxes ................................................. 14,775 15,060
Income taxes payable................................................... 26,735 10,122
-------- --------
472,190 444,148
Minority interest...................................................... 4,232 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, 29,502,166 as of June 30, 1998 and
28,367,439 as of December 31, 1997.................................... 3 3
Additional paid-in capital............................................. 145,129 132,729
Retained earnings...................................................... 172,520 131,051
-------- --------
317,652 263,783
Accumulated other comprehensive income................................. 22,259 22,422
Less treasury stock, 6,041,352 shares as of June 30, 1998 and
as of December 31, 1997, at cost...................................... 54,375 54,375
-------- --------
285,536 231,830
-------- --------
$761,958 $679,592
======== ========
</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 Six months ended
June 30, June 30,
---------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited) (Unaudited)
(Restated) (Restated)
<S> <C> <C> <C> <C>
REVENUE:
Title insurance premiums...................... $ 195,503 $129,458 $ 356,417 $ 240,372
Escrow fees................................... 30,826 21,044 55,786 37,594
Other fees and revenue........................ 48,472 26,070 92,662 48,184
Interest and investment income,
including realized gains and losses.......... 14,255 5,742 20,873 11,837
--------- -------- -------- ---------
289,056 182,314 525,738 337,987
--------- -------- -------- ---------
EXPENSES:
Personnel costs............................... 87,707 60,492 164,375 115,898
Other operating expenses...................... 53,266 43,093 104,055 83,251
Agent commissions............................. 79,909 50,574 146,746 94,635
Provision for claim losses.................... 12,497 8,994 25,076 16,060
Interest expense.............................. 3,437 2,926 6,451 5,879
--------- -------- -------- ---------
236,816 166,079 446,703 315,723
--------- -------- -------- ---------
Earnings before income taxes.................. 52,240 16,235 79,035 22,264
Income tax expense............................ 22,206 6,418 33,594 8,871
--------- -------- -------- ---------
Net earnings .............................. $ 30,034 $ 9,817 $ 45,441 $ 13,393
========= ======== ======== =========
Basic net earnings ........................... $ 30,034 $ 9,817 $ 45,441 $ 13,393
========= ======== ======== =========
Basic earnings per share...................... $ 1.30 $ .55 $ 1.99 $ .75
========= ======== ======== =========
Weighted average shares outstanding,
basic basis.................................. 23,178 17,887 22,833 17,908
========= ======== ======== =========
Diluted net earnings.......................... $ 30,633 $ 10,625 $ 46,664 $ 15,008
========= ======== ======== =========
Diluted earnings per share.................... $ 1.08 $ .45 $ 1.66 $ .63
========= ======== ======== =========
Weighted average shares outstanding,
diluted basis................................ 28,392 23,693 28,057 23,673
========= ======== ======== =========
Cash dividends per share...................... $ .07 $ .06 $ .14 $ .13
========= ======== ======== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited) (Unaudited)
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net earnings.................................... $30,034 $ 9,817 $45,441 $13,393
------- ------- ------- -------
Other comprehensive income (loss):
Unrealized gains on investments, net (1)...... 5,900 7,899 6,873 5,814
Reclassification adjustments for gains
included in net income (2).................. (5,888) (1,372) (7,036) (2,297)
------- ------- ------- -------
Other comprehensive income (loss)............... 12 6,527 (163) 3,517
------- ------- ------- -------
Comprehensive income............................ $30,046 $16,344 $45,278 $16,910
======= ======= ======= =======
</TABLE>
(1) Net of income tax expense of $4,091 and $5,490, and $4,776 and $4,040 for
the three-month and six-month periods ended June 30, 1998 and 1997,
respectively.
(2) Net of income tax expense of $4,099 and $954, and $4,890 and $1,596 for the
three-month and six-month periods ended June 30, 1998, respectively.
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
1998 1997
-------- --------
(Unaudited)
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net earnings .................................................. $ 45,441 $ 13,393
Reconciliation of net earnings to net cash used in
operating activities:
Depreciation and amortization............................ 8,629 7,343
Net increase in reserve for claim losses................. 4,639 1,106
Net increase in provision for possible losses other
than claims............................................ 292 1,192
Gain on sales of assets.................................. (11,926) (3,882)
Equity in (gains) losses of unconsolidated
partnerships........................................... 618 (35)
Amortization of LYONs original issue discount............ 2,030 2,755
Change in assets and liabilities, net of effects from
acquisition of subsidiaries:
Net increase in leases and lease securitization
residual interest...................................... (19,756) (10,138)
Net (increase) decrease in trade receivables............. (11,381) 2,784
Net increase in prepaid expenses and other assets........ (7,969) (3,157)
Net increase (decrease) in accounts payable and accrued
liabilities............................................ 11,437 (9,242)
Net increase in income taxes............................. 16,407 11,827
--------- ---------
Net cash used in operating activities............................ 38,461 13,946
--------- ---------
Cash flows from investing activities:
Proceeds from sales of property and equipment.................. 3,340 258
Proceeds from sale of real estate.............................. -- 4,320
Proceeds from sales and maturities of investments.............. 92,351 117,611
Collections of notes receivable................................ 2,017 7,571
(Additions to) deletions of title plants....................... 63 (732)
Additions to property and equipment............................ (10,194) (12,435)
Additions to investments....................................... (104,109) (128,444)
Additions to notes receivable.................................. (6,703) (1,665)
Additions to real estate....................................... -- (1,048)
Acquisitions of businesses, net of cash acquired............... 3,817 (3,340)
--------- ---------
Net cash used in investing activities............................ (19,418) (17,904)
--------- ---------
</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>
Six months ended
June 30,
-----------------------
1998 1997
-------- ---------
(Unaudited)
(Restated)
<S> <C> <C>
Cash flows from financing activities:
Borrowings..................................................... $ 5,379 $ 7,724
Debt service payments.......................................... (11,834) (10,908)
Dividends paid................................................. (2,872) (1,957)
Stock options exercised........................................ 5,000 147
-------- --------
Net cash used in financing activities............................ (4,327) (4,994)
-------- --------
Net increase (decrease) in cash and cash equivalents............. 14,716 (8,952)
Cash and cash equivalents at beginning of period................. 59,855 72,364
-------- --------
Cash and cash equivalents at end of period....................... $ 74,571 $ 63,412
======== ========
Supplemental cash flow information:
Income taxes paid.............................................. $ 16,077 $ 3,727
======== ========
Interest paid.................................................. $ 4,464 $ 3,098
======== ========
Noncash investing and financing activities:
Dividends declared and unpaid.................................. $ 1,622 $ 976
======== ========
</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. 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 and the Company's Form 8-K/A dated June 24, 1998. See
Note B.
Certain reclassifications have been made in the 1997 Condensed
Consolidated Financial Statements to conform to the classifications used
in 1998.
Note B - Acquisitions
- ---------------------
On November 17, 1997, Fidelity National Financial, Inc. signed an Agreement and
Plan of Merger ("Merger Agreement") to merge a newly-formed subsidiary of the
Company into Granite Financial, Inc. ("Granite"). Granite, located in Golden,
Colorado, is a rapidly expanding specialty finance company 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.
Under the terms of the definitive agreement, each share of Granite common stock
would be converted into the right to receive .771 shares of Company common stock
without interest, together with cash in lieu of any fractional share. The
exchange ratio was collared between $20.75 and $25.94. The adjustment factor was
designed to insure that the average market value of the shares of Company common
stock to be issued to the stockholders of Granite is neither less than $16.00
nor more than $20.00 per share of Granite common stock. The market value was
determined based on the average closing price of Company common stock during the
20 day trading period ending on the third business day prior to the date of the
shareholder meetings held to approve the transaction. Below $20.75 Fidelity
could make up the difference in additional shares of its common stock at its
option and above $25.94 Granite stockholders would have the exchange ratio
reduced pro rata. Such average closing price was determined to be $28.48,
resulting in an adjusted exchange ratio of .702 shares of Company common stock
for each share of Granite common stock. The merger has been treated as a
reorganization pursuant to Section 368(a)(1) of the Internal Revenue Code of
1986, as amended, and accounted for as a "pooling-of-interests" for accounting
purposes.
The stockholders of Granite approved the merger, and the Company stockholders
approved the issuance of shares in connection with the merger, at special
stockholders' meetings on Tuesday, February 24, 1998. The merger was completed
Thursday, February 26, 1998. Under the terms of the definitive agreement,
stockholders of Granite Financial, Inc. common stock receive .702 shares of
Fidelity National Financial, Inc. common stock for each share of Granite
Financial, Inc. common stock, with fractional shares to be paid in cash,
resulting in the issuance of approximately 4.5 million shares of Fidelity
National Financial, Inc. common stock. Fidelity National Financial, Inc. common
stock, as reported by the New York Stock Exchange, closed at $28.69 on February
26, 1998. The Condensed Consolidated Financial Statements include Granite's
financial position as of June 30, 1998 and December 31, 1997, and the results of
Granite's operations for the three-month and six-month periods ended June 30,
1998 and 1997.
On March 25, 1998, the Company closed a new credit facility, the proceeds of
which were used to terminate and pay the Company's credit agreement dated as of
September 21, 1995. Additional amounts available under the new credit facility
are available for general corporate purposes.
Also, on March 25, 1998, the Company announced that it had executed an agreement
to merge Matrix Capital Corporation ("Matrix") with a newly-formed subsidiary of
the Company. The merger is subject to regulatory approvals and other customary
conditions, and requires approval of the merger by the stockholders of Matrix
and approval of the issuance of Company common stock in connection with the
merger by the stockholders of the Company.
Under the terms of the definitive agreement, each share of Matrix stock will be
converted into the right to receive .80 shares of Company common stock without
interest, together with cash in lieu of any fractional share. The exchange ratio
has been
8
<PAGE> 9
collared between $28.75 and $35.00 per Company share. The market value
is to be determined based on the average closing price of Company stock during
the 20 day trading period ending on the third business day immediately prior to
the last of the stockholders' meetings held to approve the transaction (the
"Average Stock Price"). Below $28.75 the Company may make up the difference in
additional shares at its option and above $35.00 the exchange ratio would be
adjusted to a number equal to $28.00 plus fifty percent of the amount by which
the Average Stock Price exceeds $35.00 divided by the Average Stock Price. It is
intended that the merger be treated as a reorganization pursuant to Section
368(a)(1) of the Internal Revenue Code and be accounted for as a
"pooling-of-interests."
On May 7, 1998, the Company announced that it has entered into an agreement and
plan of merger to merge Alamo Title Holding Company with a newly formed
subsidiary of Fidelity National Financial, Inc. Alamo Title Holding Company is
the parent of Alamo Title Insurance, SWT Holdings, Inc., Alamo Title Company of
Tarrant County, Inc., Alamo Title of Travis County, Inc. and Alamo Title of
Guadalupe County, Inc. The merger has received regulatory approvals and is
subject to the approval of the Alamo Title Holding Company stockholders.
Under the terms of the definitive agreement, the Company will issue 2.1 million
shares of its common stock for 100% of the shares of Alamo. The transaction
value is collared between $75 million and $85 million. If the average price of
Company common stock during the pricing period multiplied by the 2.1 million
shares equates to less than $75 million in value, shares shall be added to total
a minimum of $75 million in value. If the average price of the Company common
stock multiplied by the 2.1 million shares totals more than $85 million, the
number of shares shall be reduced such that the total transaction value equals a
maximum of $85 million. If the transaction closes after November 15, 1998 and
the total transaction value equals more than $90 million based on the value of
the 2.1 million shares, the value above $90 million will be shared equally by
both the Company and Alamo. It is intended that the merger be treated as a
reorganization pursuant to Section 368(a)(1) of the Internal Revenue Code and be
accounted for as a "pooling-of-interests."
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 management. After a tax-free reorganization of ATC
Holdings, Inc., parent company of ATC and its subsidiaries, the Company will own
40% of ATC Holdings, Inc., and as a result, continue to own 40% of ATC and
National.
Note D - Sale of ACS Systems, Inc.
- ----------------------------------
On May 14, 1998, the Company completed the sale of its wholly-owned subsidiary
ACS Systems, Inc. ("ACS") to Micro General Corporation (OTCBB:MGEN) for
4,600,000 shares of Micro General common stock. 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 three-month and six-month periods ended June 30, 1998.
9
<PAGE> 10
Note F - Dividends
- ------------------
On June 17, 1998, the Company's Board of Directors declared a cash dividend of
$.07 per share, payable on July 24, 1998, to stockholders of record on July 13,
1998.
Note G - Subsequent Events
- --------------------------
On August 11, 1998, the Company announced that it has executed a letter of
intent to merge Five Star Holdings, Inc., a privately owned California
corporation ("FSHI") with a newly formed subsidiary of the Company. The merger
is subject to regulatory approvals.
FSHI is a licensed multi-line insurer covering most property and casualty
classes. FSHI sells homeowners' and dwelling fire insurance and is building a
book of commercial food and beverage business. FSHI also markets various
non-standard auto lines. FSHI has four wholly-owned subsidiaries: Five Star
Insurance Company, Inc., a property and casualty company which underwrites in
the States of California, Arizona and Nevada; Premier Claims Service, Inc. which
is FSHI's captive claims service company; FS Premium Finance Company which
provides alternative insurance financing; and Gateway Pacific Insurance Agency
which is the exclusive agency which markets all of the company's products,
Lloyds of London's products and those of the National Flood Insurance Program
written through the National Flood Service.
Under the terms of the letter of intent, each share of FSHI will be converted
into the right to receive 6.68151 shares of Company common stock together with
cash in lieu of any fractional shares. FSHI currently has 89,800 shares
outstanding which will convert into approximately 600,000 shares of Company
common stock subject to adjustments pursuant to the terms of the letter of
intent. It is intended that the merger be treated as a reorganization pursuant
to Section 368(a)(1) of the Internal Revenue Code and be accounted for as a
"pooling-of-interests" under generally accepted accounting principles.
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 1993 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 second quarter of 1998 increased 58.6% to $289.1 million
from $182.3 million for the second quarter of 1997. Total revenue for the
six-month period ended June 30, 1998 increased 55.5% to $525.7 million from
$338.0 million for the comparable 1997 period. The increases in total revenue
for both the three-month and six-month periods ended June 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. Additionally, the contribution of the Company's ancillary service
and finance subsidiaries has increased significantly.
10
<PAGE> 11
The following table presents information regarding the components of title
premiums (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 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 $ 94,653 48.4% $64,912 50.1% $172,755 48.5% $119,487 49.7%
Title premiums from agency operations 100,850 51.6% 64,546 49.9% 183,662 51.5% 120,885 50.3%
-------- ----- -------- ----- -------- ----- -------- -----
Total title premiums $195,503 100.0% $129,458 100.0% $356,417 100.0% $240,372 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The increases in title premiums of $66.0 million, or 51.0%, and $116.0 million,
or 48.3%, for the three-month and six-month periods ended June 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. The Company has experienced significant
premium growth in both its direct and agency operations, with a minor shift in
the mix of business resulting from the sale of 60% of American Title Company
("ATC") to its management in July 1997. ATC is now the Company's largest agent,
and does business primarily in California.
Escrow fees have followed the same trend as title premiums as would be expected.
Escrow fees have increased 46.5% and 48.4% for the three-month and six-month
periods ended June 30, 1998, respectively. The increase in escrow fees can 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 which closed 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. Second
quarter 1998 revenue increased 184.2% to $21.6 million compared to $7.6 million
in the second quarter of 1997, while pretax earnings increased 262.5% to $2.9
million in 1998 from $800,000 in 1997. The increases in the six-month results
were similarly dramatic. Revenue increased 183.4% to $41.1 million for the
six-month period ended June 30, 1998 compared to $14.5 million for the 1997
period and 1998 pretax earnings increased 261.5% to $4.7 million from $1.3
million in 1997. Additionally, the acquisition of Granite Financial, Inc. is the
first step in the Company's plan to diversify itself as a specialty finance
company.
Interest and investment income increased 150.9% to $14.3 million in the second
quarter of 1998 from $5.7 million in the second quarter of 1997. For the
six-month period ended June 30, 1998, interest and investment income was $20.9
million, a 77.1% increase over the $11.8 million of interest and investment
income earned in the comparable 1997 period. The increase in interest and
investment income earned during the 1998 periods is due to an increase in net
realized gains and an increase in the invested asset base, resulting in higher
interest and dividend income, compared to the same periods in 1997. Net realized
gains from the sale of investments were $10.0 million in the second quarter of
1998 as compared to net realized gains of $2.3 million in the corresponding 1997
period. Net realized gains for the six-month periods ended June 30, 1998 and
1997 were $11.9 million and $3.9 million, respectively. Included in the 1998
quarter and six-month periods net 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 costs and other
operating expenses which are incurred as orders are received and processed.
Title insurance premiums and certain other fees 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 both base salaries and sales commissions paid to
employees and are the most significant operating expense incurred by the
Company. 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 decreased to 30.3% for the three-month period ended June 30, 1998
compared to 33.2% for the corresponding period in 1997. Personnel costs as a
percentage of total revenue for the six-month period ended June 30, 1998 have
decreased to 31.3% from 34.3% for the corresponding 1997 period. The decreases
reflect a continued emphasis on expense control and an increase in productivity
from our automation and electronic commerce. 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 activity.
11
<PAGE> 12
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 18.4% in the second quarter of
1998 from 23.6% in the second quarter of 1997. As a percentage of total revenue,
other operating expenses for the six-month period ended June 30, 1998 decreased
to 19.8% from 24.6% for the same period in 1997. The Company previously
implemented and remains committed to aggressive cost control programs which will
help maintain operating expense levels consistent with revenue levels; however,
certain fixed costs are incurred regardless of revenue levels, resulting in
period over period fluctuations.
Agent commissions represent the portion of policy premiums retained by agents
pursuant to the terms of their respective agency contracts. Agent commissions
were 79.2% of agent policy premiums in the second quarter of 1998 compared to
78.4% of agent policy premiums in the second quarter of 1997; for the six-month
periods ended June 30, 1998 and 1997 agent commissions as a percentage of agent
policy premiums were 79.9% and 78.3%, 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 increase in agent commissions as a percentage of agency premiums over
1997 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 agents in California exceed those paid in
other areas of the country. The combination of higher agency commission rates
and the significant agency revenue generated has resulted in higher overall
commissions in 1998.
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 6.4% and 6.9% for the three-month periods ended June
30, 1998 and 1997, respectively, and 7.0% and 6.7% for the six-month periods
ended June 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 $2.4 million and $1.5 million for the three-month periods ended June 30,
1998 and 1997, respectively; and $4.4 million and $3.2 million for the six-month
periods ended June 30, 1998 and 1997, respectively. The LYONs related component
of interest expense amounted to $1.0 million for the second quarter of 1998 and
$1.4 million for the second quarter of 1997; and $2.1 million and $2.7 million
for the six-month periods ended June 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 increase
in interest expense is primarily due to the increase in outstanding notes
payable at June 30, 1998 compared to June 30, 1997 related to the financing of
Granite's increased funding volume, offset by the decrease in LYONs related
interest.
Income tax expense for the three-month periods ended June 30, 1998 and 1997, as
a percentage of earnings before income taxes was 42.5% and 39.5%, respectively.
Income tax expense for the six-month periods ended June 30, 1998 and 1997 was
42.5% and 39.8%, 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.
12
<PAGE> 13
Liquidity and Capital Resources
- -------------------------------
The Company's cash requirements include debt service, operating expenses, lease
fundings, lease securitizations, 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 finance 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 finance 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.
13
<PAGE> 14
Part II: OTHER INFORMATION
Item 4. Submission of Matter to Vote of Securities Holders
On June 17, 1997, the Company held its Annual Meeting of
Stockholders pursuant to a Notice and Proxy Statement dated May
13, 1998. At the meeting, stockholders elected William A.
Imparato (26,837,056 for and 315,444 withheld), Donald M. Koll
(26,837,816 for and 314,684 withheld), Cary H. Thompson
(26,660,328 for and 492,172 withheld), and General William Lyon
(26,833,171 for and 319,329 withheld) as Directors recommended by
management, approved by a vote of 8,774,734 for, 6,948,396
against, with 66,980 abstaining and 11,362,390 not voted, an
amendment to the Company's 1991 Employee Stock Option Plan ("1991
Plan") providing for an increase in the number of shares
available under the 1991 Plan and approved by a vote of 8,507,921
for, 7,203,676 against, with 78,513 abstaining and 11,362,390 not
voted, the adoption of the Company's 1998 Stock Option Plan.
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:
Current Report on Form 8-K, dated April 23, 1998 relating to the
completion of the merger of Granite Acquisition Corp., a
wholly-owned subsidiary of Fidelity National Financial, Inc.,
with and into Granite Financial, Inc. The merger has been
accounted for as a pooling-of-interests, and accordingly, the
combined revenue and net earnings were reported.
Current Report on Form 8-K, dated May 6, 1998 relating to
execution of a merger agreement by and among Fidelity National
Financial, Inc., Alamo Title Holding Company and a newly-formed
subsidiary of Fidelity National Financial, Inc.
Current Report on Form 8-K, dated May 12, 1998 relating to the
completion of the merger of Granite Acquisition Corp., a
wholly-owned subsidiary of Fidelity National Financial, Inc.,
with and into Granite Financial, Inc., includes required
financial statements of Granite Financial, Inc. and certain pro
forma financial information.
Current Report on Form 8-K, dated June 24, 1998 relating to the
completion of the merger of Granite Acquisition Corp., a
wholly-owned subsidiary of Fidelity National Financial, Inc.,
with and into Granite Financial, Inc. The merger has been
accounted for as a pooling-of-interests, and accordingly,
Fidelity National Financial, Inc. retroactively restated its
Consolidated Financial Statements and Notes thereto as of and for
each of the two years in the two-year period ended December 31,
1997 to include the financial position and results of operations
of Granite Financial, Inc.
14
<PAGE> 1
EXHIBIT 11
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY AND FULLY DILUTED
EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- --------------------
1998(1) 1997(1) 1998(1) 1997(1)
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings, basic basis.................. $30,034 $ 9,817 $ 45,441 $13,393
Plus: Impact of assumed conversion
of the LYONs, net of applicable
income taxes........................ 599 808 1,223 1,615
------- -------- -------- -------
Diluted earnings........................... $30,633 $ 10,625 $ 46,664 $15,008
======= ======== ======== =======
Weighted average shares outstanding
during the period, basic basis........... 23,178 17,887 22,833 17,908
Plus: Common stock equivalent shares
assumed from conversion of options.. 1,725 1,014 1,689 973
Common stock equivalent shares
assumed from conversion of LYONs.... 3,489 4,792 3,535 4,792
------- -------- -------- -------
Weighted average shares outstanding
during the period, diluted basis......... 28,392 23,693 28,057 23,673
======= ======== ======== =======
Basic earnings per share................... $ 1.30 $ .55 $ 1.99 $ .75
======= ======== ======== =======
Diluted earnings per share................. $ 1.08 $ .45 $ 1.66 $ .63
======= ======== ======== =======
</TABLE>
(1) Earnings and weighted average shares outstanding for both 1998 and 1997
include the full period results and impact of Fidelity and Granite combined, as
the merger has been accounted for as a pooling-of-interests.
15
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 233,704
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 82,363
<MORTGAGE> 0
<REAL-ESTATE> 4,964
<TOTAL-INVEST> 353,599
<CASH> 74,571
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 761,958
<POLICY-LOSSES> 195,386
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 149,866
0
0
<COMMON> 3
<OTHER-SE> 285,533
<TOTAL-LIABILITY-AND-EQUITY> 761,958
356,417
<INVESTMENT-INCOME> 8,947
<INVESTMENT-GAINS> 11,926
<OTHER-INCOME> 148,448
<BENEFITS> 25,076
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 421,627
<INCOME-PRETAX> 79,035
<INCOME-TAX> 35,594
<INCOME-CONTINUING> 45,441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,441
<EPS-PRIMARY> 1.99
<EPS-DILUTED> 1.66
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
