<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NO. 1-9396
FIDELITY NATIONAL FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
-----------------
<TABLE>
<S> <C> <C>
DELAWARE 86-0498599
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
17911 VON KARMAN AVENUE 92614 (714) 622-5000
IRVINE, CALIFORNIA (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE)
</TABLE>
-----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $.0001 par value New York Stock Exchange
Liquid Yield Option Notes, due 2009, New York Stock Exchange
zero coupon, convertible subordinated
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
As of March 26, 1998, 22,736,836 shares of Common Stock ($.0001 par value)
were outstanding, and the aggregate market value of the shares of the Common
Stock held by non-affiliates of the registrant was $672,838,000. The aggregate
market value was computed with reference to the closing price on the New York
Stock Exchange on such date.
================================================================================
-1-
<PAGE> 2
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The following table sets forth the range of high and low closing prices for
the common stock on the New York Stock Exchange. The high and low closing prices
and the amount of dividends declared for the periods indicated have been
retroactively adjusted for stock dividends and splits declared since the
Company's inception.
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW DECLARED
------ ------ ---------
<S> <C> <C> <C>
Year ended December 31, 1997
First quarter............................................. $14.09 $10.91 $.064
Second quarter............................................ 15.34 10.45 .064
Third quarter............................................. 21.59 14.44 .064
Fourth quarter............................................ 31.25 18.64 .070
Year ended December 31, 1996
First quarter............................................. $14.67 $12.39 $.058
Second quarter............................................ 12.91 10.33 .058
Third quarter............................................. 13.33 11.26 .058
Fourth quarter............................................ 13.98 12.60 .064
</TABLE>
On March 26, 1998, the last reported sale price of the common stock on the
New York Stock Exchange Composite Tape was $36.00 per share. As of March 26,
1998, the Company had approximately 900 stockholders of record.
Dividend Policy and Restrictions On Dividend Payments. Since the last
quarter of 1987, the Company has consistently paid cash dividends on a quarterly
basis, which payments have been made at the discretion of the Company's Board of
Directors. On March 19, 1998, the Company's Board of Directors declared a cash
dividend of $.07 per share which will be payable on May 1, 1998 to stockholders
of record on April 10, 1998. The continued payment of dividends will depend upon
operating results, business requirements, contractual restrictions, regulatory
considerations and other factors. The Company anticipates the continued payment
of dividends. See "Business -- Regulation" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Contractual Restrictions on Dividend Payments. The Company's ability to
pay dividends on its common stock and make certain payments is restricted by
provisions contained in the Company's various debt agreements. The Company
believes that amounts to fund currently anticipated dividends and certain
payments are available pursuant to the terms and conditions of its various debt
agreements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Notes G and O of
Notes to Consolidated Financial Statements.
12
<PAGE> 3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<PAGE> 4
1996, as well as a decrease in premiums retained by the Company on a year over
year basis. Commission rates paid to ATC are higher than average commission
rates paid to the 1996 agent base. The 1996 increase in agent commissions as a
percentage of agency premiums over 1995, resulting in a decrease in the
percentage of agency premiums retained by the Company, is attributable to the
fact that the average commissions paid to agents acquired in the Nations Title
Inc. acquisition exceed those paid to the former agent base. The combination of
higher agency commission rates and the significant agency revenue generated
since the sale of ATC and by the Nations Title Inc. acquisition has resulted in
higher overall commissions in 1997 and 1996.
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 Company loss development studies, the Company believes
that as a result of its underwriting and claims handling practices, as well as
the refinancing business of prior years, the Company will maintain the trend of
favorable claim loss experience. Based on this information, in 1997, 1996 and
1995, the Company recorded a provision for claim losses of 7.0% of title
insurance premiums prior to major claim expense, net of recoupments and the
impact of premium rates and Company 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. These factors resulted in a net provision for claim
losses of 7.3%, 7.0% and 6.7% in 1997, 1996 and 1995, respectively.
A summary of the reserve for claim losses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance.................................. $187,245 $146,094 $153,306
Reserves assumed from First Title Corp........... 284 -- --
Reserves relinquished due to the sale of American
Title Company................................. (160) -- --
Reserves assumed from Nations Title Inc.......... -- 45,171 --
Title claim loss provision related to:
Current year.................................. 36,404 32,505 23,901
Prior years................................... 2,257 797 (4,870)
-------- -------- --------
Total title claim loss provision................. 38,661 33,302 19,031
Title claims paid, net of recoupments related to:
Current year.................................. (2,376) (2,430) (2,818)
Prior years................................... (32,907) (34,892) (23,425)
-------- -------- --------
Total title claims paid, net of recoupments...... (35,283) (37,322) (26,243)
-------- -------- --------
Ending balance..................................... $190,747 $187,245 $146,094
======== ======== ========
Provision for title claim losses to title insurance
premiums......................................... 7.3% 7.0% 6.7%
Net claims paid ratio.............................. 6.6% 7.8% 9.2%
</TABLE>
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 due
2009 ("LYONs") issued in February 1994. Interest expense on non-LYONs debt
totalled $4.1 million, $4.2 million and $4.3 million for the years 1997, 1996
and 1995, respectively. The LYONs-related component of interest expense amounted
to $5.3 million, $5.2 million and $4.9 million for 1997, 1996 and 1995,
respectively. Interest expense was comparable over the three-year period
primarily as a result of slightly more favorable interest rates related to
outstanding non-LYONs debt, offset by an increase in the LYONs component of
interest expense. See "Extraordinary Item" and "Recent Developments."
22
<PAGE> 5
Income tax expense for 1997, 1996 and 1995, as a percentage of earnings
before income taxes, including the extraordinary losses in 1997 and 1995, was
43.6%, 40.0% and 16.9%, respectively. See "Extraordinary Item." The fluctuations
in income tax expense as a percentage of earnings before income taxes, including
the extraordinary item, are attributable to the effect of state income taxes on
the Company's wholly-owned underwritten title companies and ancillary service
companies; a change in the amount and characteristics of net income, operating
income versus investment income; and the tax treatment of certain items. See
Note H of Notes to Consolidated Financial Statements for additional information
regarding income taxes.
EXTRAORDINARY ITEM. In an effort to reduce the leverage of the Company
while taking advantage of the favorable environment relative to the Company's
common stock, on October 17, 1997, the Company, in a private transaction,
purchased $45 million aggregate principal amount at maturity of its outstanding
Liquid Yield Option Note due 2009 from Merrill Lynch, Pierce, Fenner & Smith
Incorporated for an aggregate purchase price of $27.2 million (or $605 per
$1,000 principal amount at maturity of LYONs), which exceeded the accreted value
recorded by the Company pursuant to the LYONs Indenture at that date. The
purchase price was paid in the form of 1,267,619 shares, $26.4 million, of the
Company's common stock and $790,000 in cash. The purchase of the LYONs increased
stockholders' equity by approximately $24.7 million while reducing outstanding
debt by approximately $24.3 million. An extraordinary loss due to the early
retirement of debt of approximately $1.7 million, net of applicable income
taxes, related to this transaction has been recorded in the Consolidated
Statement of Earnings for the year ended December 31, 1997. See "Recent
Developments."
In order to reduce interest expense incurred and interest rates paid, the
Company prepaid the Senior Secured Notes (the "Senior Notes") issued in March
1993. Pursuant to the terms and conditions of the Senior Note Agreement, the
Company provided for the Make Whole Provision, as defined, and related expenses
in 1995. This amount, $813,000, net of applicable income taxes, has been
reflected as an extraordinary item in the Consolidated Statement of Earnings for
the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements include debt service, operating expenses,
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 short-term 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. See "Overview." The Company's
Insurance Subsidiaries and UTCs collect premiums and pay claims and operating
expenses. 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 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 subsidiaries
collect revenue and pay operating expenses; however, they are not regulated by
insurance regulatory or banking authorities. Positive cash flow from the UTCs
and ancillary service subsidiaries is invested primarily in cash and cash
equivalents.
The short- and long-term liquidity requirements of the Company, Insurance
Subsidiaries, UTCs and ancillary service subsidiaries are monitored regularly to
match cash inflows with cash requirements. The Company, Insurance Subsidiaries,
UTCs and ancillary service subsidiaries forecast their daily cash needs and
23
<PAGE> 6
Company ("Alliance"), a California insurance company. Alliance sells home
warranty plans to buyers of resale homes, primarily in the Central and Southern
California markets. A home warranty contract generally promises the repair or
replacement of major operating systems and built-in appliances inside a home for
a period of one year. On July 3, 1997, the Company converted the outstanding
note balance in conjunction with the exercise of the warrants and now owns 51%
of the outstanding common stock of National Alliance, subject to certain
regulatory approvals. The outstanding balance of the notes receivable due from
National Alliance at conversion was approximately $1.6 million. See Note B of
Notes to Consolidated Financial Statements.
On May 16, 1996, the Company paid $3.1 million to acquire a first lien loan
of $3.4 million secured by a commercial office building owned by a real estate
partnership in which Manchester Development Corporation is the sole general
partner. During 1996, but prior to the Company's acquisition of the loan,
officers and directors of the Company assigned their ownership interests in the
real estate partnership to Manchester. The Company leases space in the
commercial office building.
On September 30, 1996, the Company accepted the assignment from a real
estate partnership of the right to redeem a retail shopping center valued at
$4.5 million in exchange for a net payment of $434,000. Officers and directors
of the Company who held ownership interests in the real estate partnership
assigned their rights to redeem to the Company. On November 21, 1996, the
Company redeemed the retail property at a price of $2.8 million. The Company
continues to collect rent from the retail tenants while actively marketing the
property for sale. The property is carried at cost, which approximates fair
value.
On November 1, 1996, the Company acquired 80% of the outstanding stock of
CRM, Inc. ("CRM") for a purchase price of $3.5 million, $1.0 million in cash and
191,169 shares, $2.5 million, of the Company's common stock. CRM provides real
estate information services with a heavy concentration in the areas of tax
services and flood certification. The Company combined its existing tax service
business with that of CRM. Under certain circumstances the Company can purchase
the remaining 20% of the outstanding stock of CRM. CRM, Inc. now operates as
Fidelity National Tax Service, Inc. This transaction has been accounted for as a
purchase. See Note B of Notes to Consolidated Financial Statements.
Effective July 1, 1997, the Company sold a majority interest (60%) of its
subsidiary American Title Company ("ATC"), an underwritten title company, to
certain members of ATC's management. ATC will function as an exclusive agent of
the Company. The sale price of the 60% interest was $6.0 million resulting in a
realized gain of approximately $1.3 million before applicable income taxes.
On July 10, 1997, the Company sold its former home office building in
Irvine, California for a purchase price of $16.2 million, resulting in a net
realized gain of $4.3 million, before applicable income taxes.
On July 22, 1997, the Company purchased 1,000,000 shares of common stock of
GB Foods Corporation, which represents approximately 15.5% of the outstanding
common stock of GB Foods Corporation, for a purchase price of $5.0 million.
Additionally, the Company purchased warrants to acquire an additional 3,500,000
shares of GB Foods Corporation at various prices ranging from $5.00 -- $7.50 for
a purchase price of $800,000; 1,500,000 warrants are exercisable at $5.00 per
share, 1,000,000 warrants are exercisable at $7.00 per share and 1,000,000
warrants are exercisable at $7.50 per share. In conjunction with the common
stock purchase, the Company gained control of three seats on the GB Foods
Corporation Board of Directors. The purpose of the investment is consistent with
the Company's strategic goal to diversify into noninterest rate sensitive
businesses. The Company has announced that it expects to exercise 1,000,000 of
the $5.00 warrants in conjunction with a previously announced GB Foods
Corporation acquisition, in order to provide GB Foods Corporation additional
capital. The GB Foods Corporation acquisition is expected to close during the
second quarter of 1998. The Company's investment in GB Foods Corporation is
accounted for under the equity method.
On August 22, 1997, the Company acquired the common stock of First Title
Corporation ("First Title"), a title company with fourteen offices throughout
the southeastern United States. First Title has been merged into a subsidiary of
the Company. First Title was acquired for $4.7 million; payable in 80% common
stock of the Company (253,398 shares or $3.8 million) and 20% cash
(approximately $900,000). This transaction has been accounted for as a purchase.
See Note B of Notes to Consolidated Financial Statements.
26
<PAGE> 7
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. Granite is a prominent consolidator in the $48 billion
small-ticket lease finance market with the acquisitions of Global Finance &
Leasing in March, 1997; SFR Funding, Inc., in June, 1997; and North Pacific
Funding, Inc. (dba C&W Leasing), a privately held corporation based in Seattle,
Washington, and its wholly-owned subsidiary, in December, 1997.
Under the original terms of the definitive agreement (as adjusted for the
Company's recent 10% stock dividend), 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 shareholders 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 shareholders of Granite approved the merger, and the Company
shareholders approved the issuance of shares in connection with the merger, at
special shareholders' meetings on Tuesday, February 24, 1998. The merger was
completed Thursday, February 26, 1998. Under the terms of the definitive
agreement, shareholders 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 Company believes that the acquisition of Granite Financial, Inc.
complements its core title operations and is a significant step in realizing its
previously stated goal of positioning the Company as a diversified financial
services company. See Note O of Notes to Consolidated Financial Statements.
On March 18, 1998, the Company announced that it had entered into an
agreement to sell National Title Insurance of New York Inc. to American Title
Company, 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. The Company will continue to own 40% of ATC,
and ultimately National, following the transaction. See Note O of Notes to
Consolidated Financial Statements.
On March 19, 1998, the Company's Board of Directors declared a cash
dividend of $.07 per share which will be payable on May 1, 1998, to stockholders
of record on April 10, 1998.
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. See Notes G and O of
Consolidated Financial Statements.
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 due diligence, regulatory
approvals and other customary conditions, and requires approval of the merger by
the
28
<PAGE> 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE> 9
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1996, the Company entered into one year employment
agreements with four of its key executives, whereby each was to receive a
minimum annual base salary and an annual bonus based on the Company's
performance. Bonuses in the form of cash or common stock could be paid to the
executives at the discretion of the Compensation Committee of the Board of
Directors. Certain terms of these contracts were subsequently amended/revised
effective January 1, 1997 and April 1, 1997. Additionally, effective September
15, 1997, the Company entered into a three year employment agreement with a
fifth key executive. Terms and conditions of the fifth executive's contract are
similar to the other four.
In the ordinary course of business, the Company is involved in various
pending and threatened litigation matters related to its operations, some of
which include claims for punitive or exemplary damages. Management believes that
no actions depart from customary litigation incidental to the business of the
Company and that resolution of all such litigation will not have a material
adverse effect on the Company.
In conducting its operations, the Company routinely holds customers' assets
in trust, pending completion of real estate transactions. Such amounts are
maintained in segregated bank accounts and have not been included in the
accompanying Consolidated Balance Sheets. The Company has a contingent liability
relating to proper disposition of these balances for its customers which
amounted to $608.6 million at December 31, 1997.
The Company leases certain of its premises and equipment under leases which
expire at various dates. Several of these agreements include escalation clauses
and provide for purchases and renewal options for periods ranging from one to
five years.
Future minimum operating lease payments are as follows (dollars in
thousands):
<TABLE>
<S> <C>
1998....................................................... $22,698
1999....................................................... 16,736
2000....................................................... 11,698
2001....................................................... 8,492
2002....................................................... 5,087
Thereafter................................................. 6,610
-------
Total future minimum operating lease payments.............. $71,321
=======
</TABLE>
Rent expense incurred under operating leases during the years ended
December 31, 1997, 1996 and 1995 was $24,929,000, $23,413,000 and $21,388,000,
respectively. Included in rent expense for 1997, 1996 and 1995 is $523,000 paid
to related parties.
K. STOCKHOLDERS' EQUITY
Title insurance companies, including underwriters, underwritten title
companies and independent agents, are subject to extensive regulation under
applicable state laws. Each insurance underwriter is usually subject to a
holding company act in its state of domicile which regulates, among other
matters, the ability to pay dividends and investment policies. The laws of most
states in which the Company transacts business establish supervisory agencies
with broad administrative powers relating to issuing and revoking licenses to
transact business, regulating trade practices, licensing agents, approving
policy forms, accounting principles, financial practices, establishing reserve
and capital and surplus requirements, defining suitable investments for
reserves, capital and surplus and approving rate schedules.
The Insurance Subsidiaries are regulated by the insurance commissioners of
their respective states of domicile. Regulatory examinations usually occur at
three year intervals. Examinations are currently in progress for Fidelity Title
(1996), Fidelity New York (1996), Nations New York (1996), National (1996)
56
<PAGE> 10
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and ATIC (1994). The Company has not received preliminary reports of examination
for Fidelity Title, Fidelity New York, Nations New York or National, as the
examinations are currently ongoing.
The Department of Insurance of the State of Florida has completed the field
portion of their triennial examination of ATIC, which was merged into Fidelity
Pennsylvania as of November 21, 1996, which was in turn merged into Fidelity New
York as of April 11, 1997; as of and for the three-year period ended December
31, 1994. The Company has received a preliminary report of examination. The
preliminary report, as forwarded to the Company by the Department of Insurance
of the State of Florida, indicates that the examiners are proposing adjustments
that could materially impact the statutory capital and surplus of ATIC, Fidelity
Pennsylvania, its former parent company, and ultimately Fidelity New York.
Certain of these adjustments have not been included in the 1997 Fidelity New
York Statutory Annual Statement as filed with insurance regulatory authorities
as the Company does not agree with these findings and has requested support for
the examination report. These same adjustments have not been considered in the
calculation of dividend capability, statutory surplus and statutory income
(loss) reported below.
Examinations have been completed for Fidelity Pennsylvania (1995), Fidelity
Tennessee (1995) and Nations Title (1996). All adjustments proposed by the
examiners have been recorded by the Company for Fidelity Pennsylvania, Fidelity
Tennessee and Nations Title, and are included in the calculation of dividend
capability, statutory surplus and statutory income (loss) reported below.
Statutorily calculated net worth determines the maximum insurable amount
under any single title insurance policy. As of January 1, 1998, the Company's
self-imposed single policy maximum insurable amounts, which comply with all
statutory limitations, for Fidelity Title, Fidelity New York and Fidelity
Tennessee were $42.0 million, $80.0 million and $6.0 million, respectively. The
self-imposed single policy maximum insurable amounts for Nations New York and
National are $20.0 million and $6.7 million, respectively.
The Insurance Subsidiaries are subject to regulations that restrict their
ability to pay dividends or make other distributions of cash or property to
their immediate parent company without prior approval from the Department of
Insurance of their respective states of domicile. In the case of Fidelity Title,
the total amount of dividends made in any twelve-month period may not exceed the
greater of 10% of surplus as regards policyholders as of the last day of the
preceding year or net income for the twelve-month period ending the last day of
the preceding year. In the case of Fidelity New York, the total amount of
dividends and distributions is limited to surplus as regards policyholders,
excluding capital stock, less fifty percent of statutory premium reserve as of
the last day of the preceding year and capital contributions received in the
latest five-year period. As of January 1, 1998, Fidelity Title could pay
dividends or make other distributions to the Company of $6,823,000. Fidelity New
York does not have any dividend paying capability as of January 1, 1998.
The combined statutory capital and surplus of the Insurance Subsidiaries
was $94,101,000, $73,326,000 and $67,174,000 as of December 31, 1997, 1996 and
1995, respectively. The combined statutory income (loss) of the Insurance
Subsidiaries was $21,500,000, $6,052,000 and $(1,533,000) for the years ended
December 31, 1997, 1996 and 1995, respectively. These amounts do not include
certain of the proposed ATIC examination adjustments previously discussed.
As a condition to continued authority to underwrite policies in the states
in which the Insurance Subsidiaries conduct their business, the Insurance
Subsidiaries are required to pay certain fees and file information regarding
their officers, directors and financial condition. In addition, the Company's
escrow and trust business is subject to regulation by various state banking
authorities.
The UTCs are also subject to certain regulation by insurance regulatory or
banking authorities, primarily relating to minimum net worth and dividend
capability. Minimum net worth of $7.5 million and $2.5 million is required for
Fidelity National Title Company ("FNTC") and Fidelity National Title Company of
California ("FNCAL"), respectively. In addition, the Company has agreed to
notify the State of California Department
57
<PAGE> 11
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The counterparty to the agreement relating to the Company's interest rate
swap instrument consists of a major high credit quality financial institution.
The Company does not believe that there is significant risk of nonperformance by
this counterparty because the Company continually monitors the credit rating of
such counterparties and limits the financial exposure and the amount of
agreements entered into with any one financial institution. While the notional
amounts of financial instruments are often used to express the volume of these
transactions, the potential accounting loss on these transactions if the
counterparty failed to perform is limited to the amounts, if any, by which the
counterparty's obligation under the contract exceeds the obligation of the
Company to the counterparty.
O. SUBSEQUENT EVENTS
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 original terms of the definitive agreement (as adjusted for the
Company's recent 10% stock dividend), 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 shareholders 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 shareholders of Granite approved the merger, and the Company
shareholders approved the issuance of shares in connection with the merger, at
special shareholders' meetings on Tuesday, February 24, 1998. The merger was
completed Thursday, February 26, 1998. Under the terms of the definitive
agreement, shareholders 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.
63
<PAGE> 12
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<PAGE> 13
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
21 List of Subsidiaries
23 Independent Auditors' Consent
27 1997 Financial Data Schedule
27.1 1996 Financial Data Schedule -- Restated
27.2 1995 Financial Data Schedule -- Restated
27.3 1997 1Q Financial Data Schedule -- Restated
27.4 1997 2Q Financial Data Schedule -- Restated
27.5 1997 3Q Financial Data Schedule -- Restated
27.6 1996 1Q Financial Data Schedule -- Restated
27.7 1996 2Q Financial Data Schedule -- Restated
27.8 1996 3Q Financial Data Schedule -- Restated
</TABLE>
(b) REPORTS ON FORM 8-K. The Company filed reports on Form 8-K during the
fourth quarter ending December 31, 1997 as follows:
Current report on Form 8-K dated November 3, 1997, relating to Fidelity
National Financial, Inc.'s purchase of $45 million face amount of its
outstanding Liquid Yield Option Notes.
Current report on Form 8-K dated November 5, 1997, relating to the combined
financial results of Fidelity National Financial, Inc. and Bron Research, Inc.
for the month ended October 31, 1997.
Current report on Form 8-K dated November 21, 1997, relating to Fidelity
National Financial, Inc.'s signing of a Merger Agreement with Granite Financial,
Inc.
72
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.
By: /s/ WILLIAM P. FOLEY
----------------------------------
WILLIAM P. FOLEY, II
CHIEF EXECUTIVE OFFICER
Date: May 4, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ WILLIAM P. FOLEY, II Chairman of the Board and May 4, 1998
- ----------------------------- Chief Executive Officer
WILLIAM P. FOLEY, II (Principal Executive Officer)
/s/ PATRICK F. STONE
- ----------------------------- Chief Operating Officer May 4, 1998
PATRICK F. STONE
/s/ ALLEN D. MEADOWS
- ----------------------------- Executive Vice President May 4, 1998
ALLEN D. MEADOWS Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ FRANK P. WILLEY
- ----------------------------- Director May 4, 1998
FRANK P. WILLEY
/s/ DANIEL D. (RON) LANE
- ----------------------------- Director May 4, 1998
DANIEL D. (RON) LANE
/s/ J. THOMAS TALBOT
- ----------------------------- Director May 4, 1998
J. THOMAS TALBOT
/s/ STEPHEN C. MAHOOD
- ----------------------------- Director May 4, 1998
STEPHEN C. MAHOOD
/s/ DONALD M. KOLL
- ----------------------------- Director May 4, 1998
DONALD M. KOLL
/s/ WILLIAM A. IMPARATO
- ----------------------------- Director May 4, 1998
WILLIAM A. IMPARATO
/s/ CARY H. THOMPSON
- ----------------------------- Director May 4, 1998
CARY H. THOMPSON
/s/ GENERAL WILLIAM LYON
- ----------------------------- Director May 4, 1998
GENERAL WILLIAM LYON
/s/ WILLIAM W. WEHNER
- ----------------------------- Director May 4, 1998
WILLIAM W. WEHNER
</TABLE>
